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APPLICATION OF FORENSIC ACCOUNTING SKILLS AND DETECTIONS OF FINANCIAL CRIME IN NIGERIA
ABSTRACT
The first decade of the twenty-first century experienced a tsunami or blizzard in the number of reported corporate scandals, frauds, and failures (Ball, 2009). According to Oseni (2017) the nature of such fraud rendered traditional auditing and investigation inefficient and ineffective in fraud detection and prevention. Statutory audit appears to have shown a lack of concern and reflective attitude towards fraud fighting, thereby failing to offer the public desirable assurance to handle corruption and fraud (Akhidime & Ugbale-Ekatah, 2014). The scandals contributed to loss of confidence by financial statements users on the ability of traditional auditing and investigation to contribute viable solutions (Huber, 2012). Fraud includes all the multifarious means human ingenuity can devise, that are resorted to by individuals to get an advantage over another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated (Black’s Law Dictionary, 2016). According to Mukoro, Yamusa, and Faboyede (2013) the first and most sophisticated way of carrying out the fraudulent activities in many organizations is through the accounting and financial records, as witnessed in the cases of Enron, WorldCom, Global Crossing, Tyco, Cadbury Nig. Plc., Oceanic Bank Plc., Afri Bank, among others. Thus, the need to counter, stop and prevent the perpetration of frauds in modern organization led to the development of forensic accounting (Mazunder, 2011). One of the modern approaches that can be used from the prevention to detection is called forensic accounting. It touches almost all disciplines especially, accounting, auditing, investigation, law and psychology (Enofe, Agbonkpolor & Edebiri, 2015) Forensic accounting is that branch of accounting that deals with recovering proceeds of fraud, money laundering and other related corrupt practices that may occur in an organization. Forensic accounting utilizes accounting, auditing and investigative skills (Zysman, 2004). The phase ‘Forensic Accounting’ was first coined by Peloubet in 1946. Peloubet was the first man to publish in his book the phase ‘Forensic Accounting’. The first form of forensic accounting can be traced to an 1817 court decision. Joshi (2003) traced the history of forensic accounting to Kutilya, the first economist to openly recognize the need for the forensic accountants. Globally, the occurrence of fraud in corporate organizations is becoming rampant and this can be shown in the large number of reported cases of bribery, corruption, embezzlement, money laundering, racketeering, fraudulent financial reporting, tax evasion, forgery and other means through which both financial and economic dishonesty are being perpetrated (Ofiafoh & Otalor, 2013).
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Forensic accounting is the specialty area of the accountancy profession which describes engagements that result from actual or anticipated disputes or litigation. “forensic” means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work (Crumbley, Heitger, and Smith, 2005). Forensic accounting can also be seen as an aspect of accounting that is suitable for legal review and offering the highest level of assurance (Apostolou, Hassell, and Webber, 2000). The unrelenting series of embarrassing audit failures over the last 52 years has prompted a paradigm shift in accounting. Interestingly, in the mid – 20th century, when the flight from fraud detection was at its height, a few observers predicted that in the future there will be acceptance of the general responsibility of the auditor to perform tests to detect material defalcations and errors if they exist (Brown, 1962). The rise in corporate crimes has forced the developed and developing economies to look for possible way of tackling the scandals. Nowadays, fraud has become a norm in most organisations and as result of its widespread, conventional auditing and investigations have become unproductive in its prevention and detection. Oyejide (2008) opines that fraud is a subject that has received a lot of attention both globally and in Nigeria specifically. Fraud is something that internal and external auditors are supposed to guard against through their periodic audits. However, the auditors can only check for the compliance of a company’s books to Generally Accepted Accounting Principles (GAAP), auditing standards, and company policies. According to Owolabi (2010) bank failures are as old as banking industry itself. The Dictionary of Economics and Commerce confirmed that 200 banks failed in England between 1815 and 1850 just a period of 35 years, and one of the reasons attributed to the failure is fraud. Therefore, fraud is not limited to one economy but is a general problem. The origin of bank failure in Nigeria can be traced to the 1930s bank failure and crises. Nwankwo (1992) stated that “the crises of confidence in Nigerian banking industry is not a new one, it has been with us for quite a long time. It occurred in the 1930s when all indigenous banks, except one (National Banks), collapsed. It occurred again during the banking boom and crash of the late 1940s when all but four indigenous banks escaped the liquidators’ hammers”. Also between 1952 and 1954, 16 out of 21 indigenous banks failed. In the late 1990s, 26 failed banks were liquidated at once while others went through various surgical operations ranging from, restructuring, renaming, acquiring and complete sales to new investors (Owolabi, 2010). As a consequence of capital inadequacies, Nigerian banks experienced liquidity problem which led to the raising of minimum capital base of N25 billion in 2004. The recapitalization brought the number of banks to 25 in 2006, a considerable reduction from the 89 which existed in 2004. In 2009, Nigerian banks witnessed sacking of the management of five banks; Intercontinental, Oceanic, Union, Afri, and First Inland banks over alleged fraudulent mismanagement which tremendously heightened public anxiety about the health of these banks and to some extent created doubts about the audit function being performed in these banks. Fraud constitutes a problem to banks in their operations and their roles in the economy at large. Evidence therefore shows that out of the 25 big banks operating in Nigeria after recapitalization, three international accounting firms have been their auditors. Forensic accounting is a rapidly growing field of accounting that describes the engagement that results from actual or anticipated dispute or litigations. “Forensic” means “suitable for use in a court of law”, and it is to that standard Forensic Accountants generally work. Forensic Accounting is an investigative style of accounting used to determine whether an individual or an organization has engaged in any illegal financial activities. Professional Forensic Accountant may work for government or public accounting firm. Although, forensic accounting has been in existence for several decades, it has evolved over time to include several types of financial information scrutiny. Employee and management fraud, theft embezzlement, and other financial crimes are increasing, therefore accounting and auditing personnel must have training and skills to recognize those crimes, both at the state level and the grassroots (local) level to better ensure the states prospect in the area of fraud prevention, deterrence, detection, investigation and remediation. In making reference outside the scope of this research to enhance better need of the service of forensic accounting in Kogi State is the news reports following the September 11 attacks depicted how terrorists used the international banking system to fund their activities, transfer money, and hide their finances, and signaled a need for investigators to understand how financial information can provide clues as to future threats. These events raised public awareness of fraud and forensic accounting. Forensic accounting includes the use of accounting auditing, and investigative skills to assist in legal matters. It consists of two major components. Litigations services that recognized the role of an accountant as an expert consultant, and investigative service that uses a forensic accountant’s skills and may required possible court room testimony. According to the definition developed by the Association of Institute of Certified Public Accountants (AICPA’s) forensic and litigation services committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law and research. It also involves quantitative skill to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. Fraud includes all the multifarious means human ingenuity can devise that are resorted to by be individual to get an advantage over another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated (Black’s Law Dictionary, 1979). Forensic accounting is said to bring significant improvement in the quality of fraud detection and prevention. This study meant to help and remind the public sector organization of Kogi State, in the affected ministries to design an integrated approach to preventing and controlling fraud and corruption within the workplace through an establish service of Professional Forensic Accountants.
1.2 STATEMENT OF THE PROBLEM
Forensic accounting includes the use of accounting auditing, and investigative skills to assist in legal matters. It consists of two major components. Litigations services that recognized the role of an accountant as an expert consultant, and investigative service that uses a forensic accountant’s skills and may require possible court room testimony. According to the definition developed by the Association of Institute of Certified Public Accountants (AICPA’s) forensic and litigation services committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law and research. It also involves quantitative skill to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. It is in view of this that the researcher intends to investigate the usefulness of forensic audit in the prevention and detection of fraud.
1.3 OBJECTIVE OF THE STUDY
The main objective of the study is to ascertain the usefulness of forensic audit in the prevention and detection of fraud. But for the successful completion of the study the researcher intends to achieve the following objective;
i) To ascertain the usefulness of forensic audit in fraud detection
iii) To investigate the relationship between forensic audit and fraud prevention
iv) To investigate the effect of forensic audit on the transparency of the financial statement.
1.4 RESEARCH HYPOTHESES
To aid the completion of the study, the following research hypotheses were formulated by the researcher;
H0: forensic audit does not play any significant role in fraud detection in an organization.
H1: forensic audit does play a significant role in fraud detection in an organization.
H02: there is no significant relationship between forensic audit and fraud detection
H2: there is a significant relationship between forensic audit and fraud detection
1.5 SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study, the findings will be useful to the management of organizations as the study seek to emphasis on the usefulness of forensic audit in fraud prevention and detection in organizations. The study will also be of great importance to the audit profession as the study seek to elaborate on the importance and role of forensic audit in crime prevention and detection. The study will also be of great importance to student who intend to embark on a study in similar topic as the findings of the study will serve as a pathfinder to them. Finally the study will be of great importance to students, teachers and the general public as the finding will add to the pool of existing literature
1.6 SCOPE AND LIMITATION
The scope of the study is centered on the usefulness of forensic audit in the prevention and detection of fraud, but in the cause of the study there are some factors which limited the scope of the study,
a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study.
c) FINANCE: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover
1.7 DEFINITION OF TERMS
Fraud
In law, fraud is deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud itself can be a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compensation), a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities) or it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong.
Forensic
A forensic audit is an examination and evaluation of a firm's or individual's financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.
Audit
An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law.
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows. Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter. Chapter three is a research methodology covers deals on the research design and methods adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
ABSTRACT
The first decade of the twenty-first century experienced a tsunami or blizzard in the number of reported corporate scandals, frauds, and failures (Ball, 2009). According to Oseni (2017) the nature of such fraud rendered traditional auditing and investigation inefficient and ineffective in fraud detection and prevention. Statutory audit appears to have shown a lack of concern and reflective attitude towards fraud fighting, thereby failing to offer the public desirable assurance to handle corruption and fraud (Akhidime & Ugbale-Ekatah, 2014). The scandals contributed to loss of confidence by financial statements users on the ability of traditional auditing and investigation to contribute viable solutions (Huber, 2012). Fraud includes all the multifarious means human ingenuity can devise, that are resorted to by individuals to get an advantage over another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated (Black’s Law Dictionary, 2016). According to Mukoro, Yamusa, and Faboyede (2013) the first and most sophisticated way of carrying out the fraudulent activities in many organizations is through the accounting and financial records, as witnessed in the cases of Enron, WorldCom, Global Crossing, Tyco, Cadbury Nig. Plc., Oceanic Bank Plc., Afri Bank, among others. Thus, the need to counter, stop and prevent the perpetration of frauds in modern organization led to the development of forensic accounting (Mazunder, 2011). One of the modern approaches that can be used from the prevention to detection is called forensic accounting. It touches almost all disciplines especially, accounting, auditing, investigation, law and psychology (Enofe, Agbonkpolor & Edebiri, 2015) Forensic accounting is that branch of accounting that deals with recovering proceeds of fraud, money laundering and other related corrupt practices that may occur in an organization. Forensic accounting utilizes accounting, auditing and investigative skills (Zysman, 2004). The phase ‘Forensic Accounting’ was first coined by Peloubet in 1946. Peloubet was the first man to publish in his book the phase ‘Forensic Accounting’. The first form of forensic accounting can be traced to an 1817 court decision. Joshi (2003) traced the history of forensic accounting to Kutilya, the first economist to openly recognize the need for the forensic accountants. Globally, the occurrence of fraud in corporate organizations is becoming rampant and this can be shown in the large number of reported cases of bribery, corruption, embezzlement, money laundering, racketeering, fraudulent financial reporting, tax evasion, forgery and other means through which both financial and economic dishonesty are being perpetrated (Ofiafoh & Otalor, 2013).
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Forensic accounting is the specialty area of the accountancy profession which describes engagements that result from actual or anticipated disputes or litigation. “forensic” means “suitable for use in a court of law”, and it is to that standard and potential outcome that forensic accountants generally have to work (Crumbley, Heitger, and Smith, 2005). Forensic accounting can also be seen as an aspect of accounting that is suitable for legal review and offering the highest level of assurance (Apostolou, Hassell, and Webber, 2000). The unrelenting series of embarrassing audit failures over the last 52 years has prompted a paradigm shift in accounting. Interestingly, in the mid – 20th century, when the flight from fraud detection was at its height, a few observers predicted that in the future there will be acceptance of the general responsibility of the auditor to perform tests to detect material defalcations and errors if they exist (Brown, 1962). The rise in corporate crimes has forced the developed and developing economies to look for possible way of tackling the scandals. Nowadays, fraud has become a norm in most organisations and as result of its widespread, conventional auditing and investigations have become unproductive in its prevention and detection. Oyejide (2008) opines that fraud is a subject that has received a lot of attention both globally and in Nigeria specifically. Fraud is something that internal and external auditors are supposed to guard against through their periodic audits. However, the auditors can only check for the compliance of a company’s books to Generally Accepted Accounting Principles (GAAP), auditing standards, and company policies. According to Owolabi (2010) bank failures are as old as banking industry itself. The Dictionary of Economics and Commerce confirmed that 200 banks failed in England between 1815 and 1850 just a period of 35 years, and one of the reasons attributed to the failure is fraud. Therefore, fraud is not limited to one economy but is a general problem. The origin of bank failure in Nigeria can be traced to the 1930s bank failure and crises. Nwankwo (1992) stated that “the crises of confidence in Nigerian banking industry is not a new one, it has been with us for quite a long time. It occurred in the 1930s when all indigenous banks, except one (National Banks), collapsed. It occurred again during the banking boom and crash of the late 1940s when all but four indigenous banks escaped the liquidators’ hammers”. Also between 1952 and 1954, 16 out of 21 indigenous banks failed. In the late 1990s, 26 failed banks were liquidated at once while others went through various surgical operations ranging from, restructuring, renaming, acquiring and complete sales to new investors (Owolabi, 2010). As a consequence of capital inadequacies, Nigerian banks experienced liquidity problem which led to the raising of minimum capital base of N25 billion in 2004. The recapitalization brought the number of banks to 25 in 2006, a considerable reduction from the 89 which existed in 2004. In 2009, Nigerian banks witnessed sacking of the management of five banks; Intercontinental, Oceanic, Union, Afri, and First Inland banks over alleged fraudulent mismanagement which tremendously heightened public anxiety about the health of these banks and to some extent created doubts about the audit function being performed in these banks. Fraud constitutes a problem to banks in their operations and their roles in the economy at large. Evidence therefore shows that out of the 25 big banks operating in Nigeria after recapitalization, three international accounting firms have been their auditors. Forensic accounting is a rapidly growing field of accounting that describes the engagement that results from actual or anticipated dispute or litigations. “Forensic” means “suitable for use in a court of law”, and it is to that standard Forensic Accountants generally work. Forensic Accounting is an investigative style of accounting used to determine whether an individual or an organization has engaged in any illegal financial activities. Professional Forensic Accountant may work for government or public accounting firm. Although, forensic accounting has been in existence for several decades, it has evolved over time to include several types of financial information scrutiny. Employee and management fraud, theft embezzlement, and other financial crimes are increasing, therefore accounting and auditing personnel must have training and skills to recognize those crimes, both at the state level and the grassroots (local) level to better ensure the states prospect in the area of fraud prevention, deterrence, detection, investigation and remediation. In making reference outside the scope of this research to enhance better need of the service of forensic accounting in Kogi State is the news reports following the September 11 attacks depicted how terrorists used the international banking system to fund their activities, transfer money, and hide their finances, and signaled a need for investigators to understand how financial information can provide clues as to future threats. These events raised public awareness of fraud and forensic accounting. Forensic accounting includes the use of accounting auditing, and investigative skills to assist in legal matters. It consists of two major components. Litigations services that recognized the role of an accountant as an expert consultant, and investigative service that uses a forensic accountant’s skills and may required possible court room testimony. According to the definition developed by the Association of Institute of Certified Public Accountants (AICPA’s) forensic and litigation services committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law and research. It also involves quantitative skill to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. Fraud includes all the multifarious means human ingenuity can devise that are resorted to by be individual to get an advantage over another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or dissembling, and any unfair way by which another is cheated (Black’s Law Dictionary, 1979). Forensic accounting is said to bring significant improvement in the quality of fraud detection and prevention. This study meant to help and remind the public sector organization of Kogi State, in the affected ministries to design an integrated approach to preventing and controlling fraud and corruption within the workplace through an establish service of Professional Forensic Accountants.
1.2 STATEMENT OF THE PROBLEM
Forensic accounting includes the use of accounting auditing, and investigative skills to assist in legal matters. It consists of two major components. Litigations services that recognized the role of an accountant as an expert consultant, and investigative service that uses a forensic accountant’s skills and may require possible court room testimony. According to the definition developed by the Association of Institute of Certified Public Accountants (AICPA’s) forensic and litigation services committee, forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law and research. It also involves quantitative skill to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. It is in view of this that the researcher intends to investigate the usefulness of forensic audit in the prevention and detection of fraud.
1.3 OBJECTIVE OF THE STUDY
The main objective of the study is to ascertain the usefulness of forensic audit in the prevention and detection of fraud. But for the successful completion of the study the researcher intends to achieve the following objective;
i) To ascertain the usefulness of forensic audit in fraud detection
iii) To investigate the relationship between forensic audit and fraud prevention
iv) To investigate the effect of forensic audit on the transparency of the financial statement.
1.4 RESEARCH HYPOTHESES
To aid the completion of the study, the following research hypotheses were formulated by the researcher;
H0: forensic audit does not play any significant role in fraud detection in an organization.
H1: forensic audit does play a significant role in fraud detection in an organization.
H02: there is no significant relationship between forensic audit and fraud detection
H2: there is a significant relationship between forensic audit and fraud detection
1.5 SIGNIFICANCE OF THE STUDY
It is believed that at the completion of the study, the findings will be useful to the management of organizations as the study seek to emphasis on the usefulness of forensic audit in fraud prevention and detection in organizations. The study will also be of great importance to the audit profession as the study seek to elaborate on the importance and role of forensic audit in crime prevention and detection. The study will also be of great importance to student who intend to embark on a study in similar topic as the findings of the study will serve as a pathfinder to them. Finally the study will be of great importance to students, teachers and the general public as the finding will add to the pool of existing literature
1.6 SCOPE AND LIMITATION
The scope of the study is centered on the usefulness of forensic audit in the prevention and detection of fraud, but in the cause of the study there are some factors which limited the scope of the study,
a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study.
c) FINANCE: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover
1.7 DEFINITION OF TERMS
Fraud
In law, fraud is deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud itself can be a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compensation), a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities) or it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong.
Forensic
A forensic audit is an examination and evaluation of a firm's or individual's financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims.
Audit
An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law.
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows. Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter. Chapter three is a research methodology covers deals on the research design and methods adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
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