With the current financial crisis, and foreign currency gap at the central bank of Lebanon Banque du Liban (BDL), the demand for an auditing of the Lebanese State and state-related institutions such as the BDL. ministries, regional funds and others, has been a key demand of many reformist agendas and some political parties, including lately the President of the Lebanese republic, as well as various foreign countries and international institutions.
The Lebanese government, in the past, had requested the assistance of financial services firm Kroll in order to conduct a forensic audit of the BDL, before difficulties resulted in the hiring of Alvarez & Marsal, a New York based restructuring consultancy, to conduct said audit. The BDL, nevertheless, submitted approximately only 43 percent of requested documents to the latter firm, due to the limitations imposed by the Banking Secrecy Law of 1956, which resulted in a public spat with the Ministry of Justice.
FORENSIC VS. FINANCIAL AUDIT
This key demand for an auditing of the BDL requires an understanding as to the differences between a “typical” financial audit and a forensic audit. Financial audit: In general, a typical financial audit is an audit of the financial statements of a firm or institution, conducted by professionals, in order to make sure that the financial records are an accurate reflection of the financial position and situation of the institution. Companies usually submit. a yearly audit of the financial statements: their balance sheet, their income statement and their cash flow statement. Such auditing is conducted either by an external auditing firm, or by internal auditing teams. External audits enable the verification of the soundness of the firm’s financial position, and the identification of any financial misstatements in the financial records. Such external auditors usually issue opinions to provide financial statement users with confidence that the financials are both accurate and complete. Internal auditors, on the other hand, are employed by the company or organization for which they are performing an audit, and the resulting audit report is given directly
to management and the board of directors. Unlike external auditors, they only follow the company’s standards while auditing, whereas external auditors follow more generally applied principles, such as the Generally Accepted Auditing Standards (GAAS).
Forensic auditing: A forensic audit, on the other hand, refers to an investigative audit in which accountants, specialized in both accounting and investigation, seek to uncover frauds, missing money and negligence. In this case, the auditor is not only concerned with assessing the financial situation of a company or institution, but also with uncovering fraud. This audit is usually carried during legal procedures and trials, in order to determine the responsibility of parties, should illegal transactions have taken place. A forensic audit would
then seek to uncover such transactions by checking if compliance standards were applied, and who the beneficiaries of these transactions were. In cases where the BDL had engaged in specific transactions with a counter party, a forensic audit would not only determine the date and amount of the transaction, but also whether it was in conformity with laws, whether due diligence was applied, and whether it was in conformity with the Code of Money and Credit. A forensic audit would also seek to determine the official and “real” beneficiaries of transactions, and whether such transactions violated any laws.
SCHEDULING THE AUDIT
The forensic audit has been a key demand of the International Monetary Fund, the French initiative
and foreign institutions, and also of some Lebanese political parties. Other parties, such as the Future
Movement, have asked that all ministries and public institutions be audited. In addition, the government had previously hired Alvarez & Marsal to conduct a financial audit. The firm pulled out in November 2020, stating that it had not received the information it required. Back in July, the government had hired the financial firm Kroll, though it did not receive the political backing to do so. On April 6, 2021, the BDL issued a statement highlighting it was ready to discuss such forensic audit with Alvarez & Marsal, following Parliament’s decision last December to lift the banking secrecy for one year. By late December, Lebanon decided to
contact Alvarez & Marsal once again to conduct an audit of the BDL.
As of June 2021, there is no clear view yet as to whether this forensic audit, or any audit, will take place. At this stage, a forensic audit is much needed, as it would allow not only to establish a clear and transparent balance sheet of the BDL, to evaluate its assets and liabilities, but also to establish if any corrupt and/or negligent practices have taken place, and who its beneficiaries were, hopefully leading to some accountability. This audit is also considered a prerequisite for any financial aid that would come from international institutions, including the “French Initiative,” noting that such aid is increasingly needed in in light of the acute economic crisis Lebanon is still struggling with.