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| Chapters: 1-5
| Pages: 72
EFFECTS OF FORENSIC ACCOUNTING IN FRAUD DETECTION
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial irregularity is a severe global problem. It is the major concern to developing nations. It is so endemic that fraud and corruption is gradually becoming a normal way of life. Financial irregularities are so common that almost every individual cannot wash his or her hands, clean of it; starting from the public sector to the private sector, from the presidential villa of a nation, down the political office-holding ladder, to the ward councilors; from managing directors of a company, through middle management cadre and to as low as messengers (Kasum, 2007).
Individual perpetrates fraud and corrupt practice according to the capacity of their office. Although financial irregularities affects private and public sector, the magnitude of public office fraud, together with the extent to which citizens are affected, calls for alarm (Kasum, 2007).
No money is entirely free and consequently misuse of any amount will impact negatively, on where it should legally be used. The effect of these can be on an organization or a whole nation. If the effect is not direct it may be indirect as it may affect facilities and infrastructure that is supposed to be beneficial to the concerned.
Unless it is impossible, individual or establishment affected negatively by the fraudulent or corrupt practices will want to seek redress. Individual, corporate body and interested government organs takes action towards seeking redress using divergent institutions like the police and the law court. Whatever an investigator wants to do, will not be complete if the extent to which the affected person is affected is not quantified.
From business, government, regulatory authorities, and the courts the world over, evidence indicates that a higher level of expertise is necessary to analyze current complicated financial transactions and events (Emmanuel et al., 2010).This and other pecuniary areas are where the service of the experts “forensic accountant” are been engaged for a very long time worldwide and probably, recently, in Nigeria (Kasum, 2007).
Investigation of fraud and corruption is confirmed thus, not to be new, even in Nigeria. It is only gaining prominence because of the growing wave of the crime under the seemingly new nomenclature the last five years (Emma, 2009).
Research continuously confirms that preventing fraud and uncovering deceptive accounting practices are in strong demand as companies and government alike, respond to closer scrutiny of their financial activities by shareholders and government agencies (Emma, 2009).
The Nigeria Deposit Insurance Corporation (NDIC) Annual Report for 2007 revealed that the banking sector alone lost N10 billion to fraudsters in that year. Many of these crimes are difficult to identify because the perpetrators have concealed their activities through a series of complex transactions (Emmanuel et al., 2010).
From business, government, regulatory authorities, and the courts the world over, evidence indicates that a higher level of expertise is necessary to analyze current complicated financial transactions and events. As a result, forensic accounting has been thrown into the forefront of the crusade against financial deception.
In addition, according to a paper presented at the 2008 Accountants Conference organized by the Institute of Chartered Accountants of Nigeria (ICAN), it was stated that the use of forensic accounting procedures to detect financial reporting fraud should be adopted. The article argued thatforensic accountants and financial statement auditors have different mindsets. Hence, lCAN should enhance its plan to have specialists in forensic accounting and auditing and the paper encourages professional accountants to obtain membership of International Fraud Investigation and Forensic Accountancy Bodies so that they can face and withstand the emerging challenges in the area (Emmanuel et al., 2010).
Forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting. Forensic science according to Crumbley (2003) “may be defined as application of the laws of nature to the laws of man”. He refers to forensic scientists as examiners and interpreters of evidence and facts in legal cases that also offers expert opinions regarding their findings in court of law. The science in question here is accounting science, meaning that the examination and interpretation will be of economic information.
Marianne (2005) stated that forensic accounting involves the application of accounting concepts and techniques to legal problem. It demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding.
It provides an accounting analysis that is suitable to the court, which will form the basis of discussion, debate and ultimately dispute resolution (Marianne, 2005).
These means that forensic accounting is a field of specialization that has to do with provision of information that is meant to be used as evidence especially for legal purposes. The persons practicing in this field (i.e. forensic accountants) investigate and document financial fraud and white-collar crimes such as embezzlement and investigate allegations of fraud, estimates losses damages and assets and analyses complex financial transaction (Marianne, 2005).
This research will be considering the role of forensic accountants in detecting fraud in the petroleum industry using Nigeria National Petroleum Corporation (NNPC) as a case study.
NNPC was established on April 1, 1977 as a merger of the Nigerian National Oil Corporation and the Federal Ministry of Mines and Steel. NNPC by law manages the joint venture between the Nigerian federal government and a number of foreign multinational corporations, which includeRoyal Dutch Shell, Agip, ExxonMobil, Chevron, and Texaco (now merged with Chevron). Through collaboration with these companies, the Nigerian government conducts petroleum exploration and production. In 2007, the head of the Nigerian wing of Transparency International said salaries for NNPC workers were too low to prevent graft. The NNPC Towers in Abuja is the headquarters of NNPC. Consisting of four identical towers, the complex is located on Herbert Macaulay Way, Central Business District Abuja. NNPC also has zonal offices in Lagos, Kaduna, Port Harcourt and Warri. It has an international office located in London, United Kingdom (Google.com)
1.2 Statement of the Problem
Some people believe that the incorporation of modern forensic auditing techniques in an audit in Nigeria is needed to arm the accounting profession to deal effectively with the problem of unearthing ingenious fraud schemes arising from audit failure to detect frauds. According to Hassan (2012), the level of corruption in NNPC is so high that it is affecting the economic well being of the nation. The control system adopt in all Nigerian parastatals is so porous that it gives room for corruption (Marwan, 2013). Previous report on activities in NNPC have shown that the corporation has the highest level of fraud in the oil sector, no good internal control system is in place to reveal these fraudulent practices and most auditors auditing the account of NNPC have no knowledge on modern techniques of discovering fraud (Adeola, 2011).
Though, studies on forensic accounting are very few in Nigeria, this study intend to reveal how forensic accounting can be used in tackling fraudulent practices in NNPC.
1.3 Aim and objectives of the Study
This study is aimed at ascertaining the effect of forensic accounting in fraud detection, while specific objective of the study include:
i. To determine the chances of fraud discovery through forensic accounting in the petroleum sector.
ii. To ascertain the extent to which motive evidence stem the tide of unlawful withdrawal of fraud.
iii. To ascertain how audit trail has reduced inconsistency in entries.
1.4 Relevant Research Questions
The following research questions were formulated for the purpose of this study.
i. How has forensic accounting be useful in fraud detection?
iii. Does audit trail is sufficient to reduce inconsistency in entries?
1.5 Relevant Research Hypothesis
For the purpose of this study, the following research hypotheses were framed and tested in this study:
HYPOTHESIS 1
H0: There is no significant relationship between forensic accounting and fraud detection.
H1: There is significant relationship between forensic accounting and fraud detection.
HYPOTHESIS II
H0: There is no significant relationship between motive evidence and unlawful withdrawal of fund.
H1: There is significant relationship between motive evidence and unlawful withdrawal of fund.
1.6 Significance of the Study
The importance of this study can be drawn from the statement of the problems and objectives above:
1. To contribute to the growing literatures on the use of forensic accounting system in detection of fraud.
2. To further expose to the management of Nigeria National Petroleum Corporation (NNPC) the importance of forensic accounting toward fraud detection.
1.7 Scope of the Study
This study focus on the effects of forensic accounting techniques to discover fraud, restricting the scope of the study to Nigeria National Petroleum Corporation (NNPC). This restriction will enable the researcher to comprehensively handle the research topic effectively and efficiently well.
1.8 Definition of Terms
For the purpose of this report, I do not define different concepts as forensic accounting. These concepts are already well established in the literature and elsewhere and do not need further explanations.
However, the following definitions were considered necessary for this project:
External audit - An audit performed by an auditor engaged in public practice leading to the expression of a professional opinion which lends credibility to the assertion under examination.
Forensic audit - An examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court. An example would be a Forensic Audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.
Internal audit - An audit performed by an employee who examines operational evidence to determine whether prescribed operating procedures have been followed.
Investigative accounting - Is often associated with investigations of criminal matters. A typical investigative accounting assignment would be an investigation of employee theft. Other examples include securities fraud, insurance fraud, kickbacks and proceeds of crime investigations.
REFERENCES
Adeola, F. Y (2011). The need to deregulate the Nigerian oil sector. Social science journal, 3(2), 40 – 45.
Emma I. O and Okaro S. C (2011) “Forensic Accounting and Audit Expectation Gap – The Perception of Accounting Academics” Department of Accountancy, Nnamdi Azikiwe University, Awka, Nigeria.
Google.com:https://en.m.wikipedia.org/wiki/Nigerian_National_Petroleum_Corporation
Hassan, L.O (2012). Forensic accounting; a new tool for fraud detection. Social science journal, 3(5), 56 – 60.
Kasum, A.S (2007) “The relevance of forensic accounting to financial crimes in private and public sectors of third world economies: a study from Nigeria” Department of Accounting and Finance University of Ilorin, Nigeria.
Marianne O (2011) “Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness”http://ssrn.com/abstract=2026071
Marwan, K.O (2013). The level of corruption in government corporations. Social science journal, 6(2), 45 - 60
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial irregularity is a severe global problem. It is the major concern to developing nations. It is so endemic that fraud and corruption is gradually becoming a normal way of life. Financial irregularities are so common that almost every individual cannot wash his or her hands, clean of it; starting from the public sector to the private sector, from the presidential villa of a nation, down the political office-holding ladder, to the ward councilors; from managing directors of a company, through middle management cadre and to as low as messengers (Kasum, 2007).
Individual perpetrates fraud and corrupt practice according to the capacity of their office. Although financial irregularities affects private and public sector, the magnitude of public office fraud, together with the extent to which citizens are affected, calls for alarm (Kasum, 2007).
No money is entirely free and consequently misuse of any amount will impact negatively, on where it should legally be used. The effect of these can be on an organization or a whole nation. If the effect is not direct it may be indirect as it may affect facilities and infrastructure that is supposed to be beneficial to the concerned.
Unless it is impossible, individual or establishment affected negatively by the fraudulent or corrupt practices will want to seek redress. Individual, corporate body and interested government organs takes action towards seeking redress using divergent institutions like the police and the law court. Whatever an investigator wants to do, will not be complete if the extent to which the affected person is affected is not quantified.
From business, government, regulatory authorities, and the courts the world over, evidence indicates that a higher level of expertise is necessary to analyze current complicated financial transactions and events (Emmanuel et al., 2010).This and other pecuniary areas are where the service of the experts “forensic accountant” are been engaged for a very long time worldwide and probably, recently, in Nigeria (Kasum, 2007).
Investigation of fraud and corruption is confirmed thus, not to be new, even in Nigeria. It is only gaining prominence because of the growing wave of the crime under the seemingly new nomenclature the last five years (Emma, 2009).
Research continuously confirms that preventing fraud and uncovering deceptive accounting practices are in strong demand as companies and government alike, respond to closer scrutiny of their financial activities by shareholders and government agencies (Emma, 2009).
The Nigeria Deposit Insurance Corporation (NDIC) Annual Report for 2007 revealed that the banking sector alone lost N10 billion to fraudsters in that year. Many of these crimes are difficult to identify because the perpetrators have concealed their activities through a series of complex transactions (Emmanuel et al., 2010).
From business, government, regulatory authorities, and the courts the world over, evidence indicates that a higher level of expertise is necessary to analyze current complicated financial transactions and events. As a result, forensic accounting has been thrown into the forefront of the crusade against financial deception.
In addition, according to a paper presented at the 2008 Accountants Conference organized by the Institute of Chartered Accountants of Nigeria (ICAN), it was stated that the use of forensic accounting procedures to detect financial reporting fraud should be adopted. The article argued thatforensic accountants and financial statement auditors have different mindsets. Hence, lCAN should enhance its plan to have specialists in forensic accounting and auditing and the paper encourages professional accountants to obtain membership of International Fraud Investigation and Forensic Accountancy Bodies so that they can face and withstand the emerging challenges in the area (Emmanuel et al., 2010).
Forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting. Forensic science according to Crumbley (2003) “may be defined as application of the laws of nature to the laws of man”. He refers to forensic scientists as examiners and interpreters of evidence and facts in legal cases that also offers expert opinions regarding their findings in court of law. The science in question here is accounting science, meaning that the examination and interpretation will be of economic information.
Marianne (2005) stated that forensic accounting involves the application of accounting concepts and techniques to legal problem. It demands reporting, where the accountability of the fraud is established and the report is considered as evidence in the court of law or in the administrative proceeding.
It provides an accounting analysis that is suitable to the court, which will form the basis of discussion, debate and ultimately dispute resolution (Marianne, 2005).
These means that forensic accounting is a field of specialization that has to do with provision of information that is meant to be used as evidence especially for legal purposes. The persons practicing in this field (i.e. forensic accountants) investigate and document financial fraud and white-collar crimes such as embezzlement and investigate allegations of fraud, estimates losses damages and assets and analyses complex financial transaction (Marianne, 2005).
This research will be considering the role of forensic accountants in detecting fraud in the petroleum industry using Nigeria National Petroleum Corporation (NNPC) as a case study.
NNPC was established on April 1, 1977 as a merger of the Nigerian National Oil Corporation and the Federal Ministry of Mines and Steel. NNPC by law manages the joint venture between the Nigerian federal government and a number of foreign multinational corporations, which includeRoyal Dutch Shell, Agip, ExxonMobil, Chevron, and Texaco (now merged with Chevron). Through collaboration with these companies, the Nigerian government conducts petroleum exploration and production. In 2007, the head of the Nigerian wing of Transparency International said salaries for NNPC workers were too low to prevent graft. The NNPC Towers in Abuja is the headquarters of NNPC. Consisting of four identical towers, the complex is located on Herbert Macaulay Way, Central Business District Abuja. NNPC also has zonal offices in Lagos, Kaduna, Port Harcourt and Warri. It has an international office located in London, United Kingdom (Google.com)
1.2 Statement of the Problem
Some people believe that the incorporation of modern forensic auditing techniques in an audit in Nigeria is needed to arm the accounting profession to deal effectively with the problem of unearthing ingenious fraud schemes arising from audit failure to detect frauds. According to Hassan (2012), the level of corruption in NNPC is so high that it is affecting the economic well being of the nation. The control system adopt in all Nigerian parastatals is so porous that it gives room for corruption (Marwan, 2013). Previous report on activities in NNPC have shown that the corporation has the highest level of fraud in the oil sector, no good internal control system is in place to reveal these fraudulent practices and most auditors auditing the account of NNPC have no knowledge on modern techniques of discovering fraud (Adeola, 2011).
Though, studies on forensic accounting are very few in Nigeria, this study intend to reveal how forensic accounting can be used in tackling fraudulent practices in NNPC.
1.3 Aim and objectives of the Study
This study is aimed at ascertaining the effect of forensic accounting in fraud detection, while specific objective of the study include:
i. To determine the chances of fraud discovery through forensic accounting in the petroleum sector.
ii. To ascertain the extent to which motive evidence stem the tide of unlawful withdrawal of fraud.
iii. To ascertain how audit trail has reduced inconsistency in entries.
1.4 Relevant Research Questions
The following research questions were formulated for the purpose of this study.
i. How has forensic accounting be useful in fraud detection?
iii. Does audit trail is sufficient to reduce inconsistency in entries?
1.5 Relevant Research Hypothesis
For the purpose of this study, the following research hypotheses were framed and tested in this study:
HYPOTHESIS 1
H0: There is no significant relationship between forensic accounting and fraud detection.
H1: There is significant relationship between forensic accounting and fraud detection.
HYPOTHESIS II
H0: There is no significant relationship between motive evidence and unlawful withdrawal of fund.
H1: There is significant relationship between motive evidence and unlawful withdrawal of fund.
1.6 Significance of the Study
The importance of this study can be drawn from the statement of the problems and objectives above:
1. To contribute to the growing literatures on the use of forensic accounting system in detection of fraud.
2. To further expose to the management of Nigeria National Petroleum Corporation (NNPC) the importance of forensic accounting toward fraud detection.
1.7 Scope of the Study
This study focus on the effects of forensic accounting techniques to discover fraud, restricting the scope of the study to Nigeria National Petroleum Corporation (NNPC). This restriction will enable the researcher to comprehensively handle the research topic effectively and efficiently well.
1.8 Definition of Terms
For the purpose of this report, I do not define different concepts as forensic accounting. These concepts are already well established in the literature and elsewhere and do not need further explanations.
However, the following definitions were considered necessary for this project:
External audit - An audit performed by an auditor engaged in public practice leading to the expression of a professional opinion which lends credibility to the assertion under examination.
Forensic audit - An examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court. An example would be a Forensic Audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.
Internal audit - An audit performed by an employee who examines operational evidence to determine whether prescribed operating procedures have been followed.
Investigative accounting - Is often associated with investigations of criminal matters. A typical investigative accounting assignment would be an investigation of employee theft. Other examples include securities fraud, insurance fraud, kickbacks and proceeds of crime investigations.
REFERENCES
Adeola, F. Y (2011). The need to deregulate the Nigerian oil sector. Social science journal, 3(2), 40 – 45.
Emma I. O and Okaro S. C (2011) “Forensic Accounting and Audit Expectation Gap – The Perception of Accounting Academics” Department of Accountancy, Nnamdi Azikiwe University, Awka, Nigeria.
Google.com:https://en.m.wikipedia.org/wiki/Nigerian_National_Petroleum_Corporation
Hassan, L.O (2012). Forensic accounting; a new tool for fraud detection. Social science journal, 3(5), 56 – 60.
Kasum, A.S (2007) “The relevance of forensic accounting to financial crimes in private and public sectors of third world economies: a study from Nigeria” Department of Accounting and Finance University of Ilorin, Nigeria.
Marianne O (2011) “Forensic Accounting and the Law: The Forensic Accountant in the Capacity of an Expert Witness”http://ssrn.com/abstract=2026071
Marwan, K.O (2013). The level of corruption in government corporations. Social science journal, 6(2), 45 - 60
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