Forensic auditing has become a necessary tool in uncovering fraud within specific industries of the corporate world today, especially real estate and manufacturing industries, whose investments are usually very huge. This case study takes you through forensic auditing, how it could unveil fraud at the UAE-based manufacturing firm, and presents how the judiciary intervened to ensure justice in this case. Conclusions drawn from the case of Qabalan Fund, Al Shandaqawi Fund, and United Investors Fund all throw significant light on the effectiveness of forensic auditing to detect fraud.
Introduction to Forensic Auditing
Forensic auditing is a branch of accounting dealing with investigating financial records to reveal illegal activities such as fraud, money laundering, and embezzlement. A forensic auditor works closely with legal teams to develop evidence to present in court. A forensic auditor is not simply a reviewer of financial statements but seeks out significant irregularities, anomalies, and various patterns that may indicate fraud.
The Case of Fraud in a UAE Manufacturing Firm
In this case, we shall analyze how the forensic auditing of fraudulent practices discovered within a manufacturing firm in the UAE parallels the Court’s consideration from the cases of Qabalan Fund, Al Shandaqawi Fund, and United Investors Fund.
The accused in these cases were primarily involved in real estate schemes, but the methodology of using illegal funds and falsifying documents can similarly be used in other sectors like manufacturing. Fraudulent activities in manufacturing firms revolve around the misappropriation of funds, manipulation of inventory records, and falsification of financial documents.
Identifying the Problem: Suspicion of Fraud
The management of the manufacturing firm began to suspect some anomalies when some discrepancies started appearing in the company’s financial records. Large sums of money were missing, and sales figures did not match up with inventory data. As the discrepancies grew, the management decided to institute a forensic audit to determine the cause of these irregularities.
It involved calling forensic auditors to audit the firm’s account, management practice, and internal control with a detailed comprehensive investigation. The reason was to determine whether any employee or outsider had been involved in fraudulent activity, as suspected by the company.
Investigation Process by Forensic Auditors
Forensic auditors began with the analysis of the company’s financial accounts and transactions over the past few years. This included:
- To determine financial statement analysis: The auditor compared financial statements against the exact bank statement balance and found differences between recorded revenues and expenditures.
- Inventory Audit: They conducted an exhaustive audit of the inventory records, cross-checking them with sales figures related to the company to be aware of any fraudulent manipulation.
- Tracing Transactions: Using data analytics, all the major transactions were traced, though the auditors concentrated mainly on transactions made to unknown or suspicious entities.
- Review of Internal Controls: They reviewed the company’s internal controls and management practices. This helps in determining the weak areas and how the fraudsters exploited them by committing fraud.
As a result, forensic auditors conducted a deep analysis and indeed found there was an embezzlement pattern. Funds were diverted to fictitious accounts of suppliers created by employees who collaborated with external parties. The investigation further revealed incorrect financial documents, most of which were falsified revenue accounts used to cover up missing funds.
Discovery of Fraudulent Activity
The forensic audit revealed that some employees in the finance department made deals with different suppliers to produce invalid invoices. Such suppliers did not bring any goods in, but they received huge amounts of money from company accounts. Supporting internal documents were also forged to prove these transactions as valid ones.
This was largely similar to the case of the Qabalan Fund where, upon being made accountable, the prime accused was proved to have forged documents and swindled other unsuspecting depositors. In this case, too, employees of the manufacturing firm had tampered with official documents that led the company to bear a heavy loss.
Legal Proceedings and Court Verdict
After the forensic auditors presented their findings, the company filed its case against the suspected employees. In the court proceedings, the evidence collected by the forensic auditors became a crucial element, as in the United Investors Fund case, where the court acquitted the accused because the evidence was not found. But in this manufacturing fraud case, the forensic audit report became more real to convict the suspected employees.
The employees were jailed by the court for having a role in embezzlement, similar to the case of Al Shandaqawi Fund, where the suspects were jailed and fined for deceiving investors of money. The fake documents that were found during the audit were ordered to be destroyed by the court, as was practiced in the case of the Qabalan Fund.
The court further advised the company to file civil claims to recover the lost funds, as seen in the Qabalan Fund case, where complainants were advised to approach the civil court to reclaim their investments.
The Role of Forensic Auditing in Fraud Detection
This case highlights why forensic auditing is crucial in discovering and solving fraudulent transactions within a company. The forensic auditors played a pivotal role in finding the embezzlement scam; they produced solid evidence that pinned the victims and led them to imprisonment.
They detected fraudulent patterns, identified who was behind the embezzlements, and finally, all the techniques that those committing the crime had mastered were uncovered. Without the forensic auditor, that case would never have been unearthed, and embezzlement might have lasted even longer with further financial losses to the company.
Conclusion and Importance of Strong Internal Controls
This fraud case in the company’s manufacturing firm indicates that a healthy internal control system and proper financial audits are indeed critical preventive measures against fraud. Companies need to ensure their records of finance are transparent and that internal processes are reviewed frequently for any discrepancies. Forensic auditing is therefore a necessary aspect of risk management in companies with sectors of operations known to include high-risk businesses in terms of fraud.
How Farahat & Co. Can Assist You
Farhat & Co. an audit firm in Dubai acknowledges that forensic auditing is fundamentally an essential part of protecting your business. Our professional forensic auditors are cognizant of their experiences in conducting real estate investigations and fraud detection in manufacturing and finance. Depending on whether you actually believe it has occurred or not, your expert investigators can be offered solutions to deter or detect fraud.
Contact Farahat & Co. today to learn how we can help you protect your business and stay on the right side of UAE’s financial legal requirements pertaining to transparency.
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