FORENSIC ACCOUNTING AS A TOOL FOR FRAUD DETECTION AND PREVENTION (A CASE STUDY OF ETI OSA LOCAL GOVERNMENT COUNCIL, LAGOS STATE)
CHAPTER ONE INTRODUCTION 1.1 \ BACKGROUND OF THE STUDY
The issue of fraud, money laundering, and other corrupt practices in business and government organizations has necessitated the application and practice of forensic or investigative accounting. Forensic or investigative 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. Once fraud is perceived or detected, a professional set of people-the forensic accountants- is called upon to help detect the fraud and furnish management with substantial evidence to be presented in the court of law, when prosecuting the suspects involved in the fraud. ‘Forensic’ which means evidence or material(s) to be used in court has been incorporated into accounting and finance as a result of an increase in white-collar crimes (Mazunder, 2011). Mazumder also remarked that law enforcement personnel in recent years have become more aware of white-collar crimes, but lacked expertise and training in combating such crimes. According to Zysman (2004), forensic accounting utilizes accounting, auditing, and investigative skills. Enyi (2012) also asserted that it takes an accountant to catch a corrupt of a fraudulent accountant, a man is expected to know the trick of a monkey in order to catch it. Strict ethical conduct must be applied by an auditor in order to carry out forensic accounting successfully. An auditor must be fully independent and must be aware of the tricks of management staff and employees in perpetrating fraud in an organization.
Joshi (2003) traced the history of forensic accounting to Kautilya, the first economist to openly recognize the need for forensic accountants. The first form of forensic accounting can be traced to an 1817 court decision. The phase ‘Forensic Accounting’ was first coined by Puloubet in 1946. Publoubet was the first man to publish in his book the phase ‘Forensic Accounting’. Since Nigeria gained its independence in 1960, forensic accounting has existed due to an increase in fraud, money laundering, and other forms of economic and financial crimes in the country (Enyi, 2012). The term ‘forensic accounting’ is not new in Nigeria as auditors, police, and intelligence units apply it every day in the discharge of their duties.
The growing demand for forensic accounting is a known characteristic of most companies in the world. Forensic accounting arises from the effect and cause of fraud and technical errors made by a human. Forensic accounting is quite new in Nigeria as companies has realized that the service of a forensic accountant is needed as fraud cases have substantially increased in number. Forensic accounting is the application of financial skills and investigative mentality to unsettled issues, conducted within the context of the rules of evidence (Arokiasamy and Cristal, 2009).
Bologna and Lindquistn (1987) assert that forensic accounting as a discipline encompasses fraud knowledge, financial expertise, and a sound knowledge and understanding of business reality and the working of the legal system. Forensic accounting may be one of the most effective and efficient ways to decrease and check accounting fraud. Presently, forensic accounting is gaining popularity worldwide. It is been taught as a major course in many educational institutions in various countries, Howard, and Sheetz, (2006). It has been noted that “Government spending has always been a big business, but it has become so massive today that the public through its legislators is demanding to know whether the huge outlays of money are being spent wisely or whether they should be spent at all.” Officials and employees who manage public sector activities are by virtue of that duty, required to render adequate accounts of their activities to the public (Ribadu, 2005).
The incidence of fraud continues to increase across private and public sector organizations and across nations. Fraud is a universal problem as no nations are immuned, although developing countries and their various states suffer the most pain.
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 established service of Professional Forensic Accountants.
1.2 STATEMENT OF THE PROBLEM
Recently, a series of frauds have been committed both in the public sector and the private sector of the economy. These in no doubt are perpetrated under the supervision of the internal auditors of the organization. It suffices to say that the independence of the internal auditor is not guaranteed because he works as an employee of the government or organization. Then comes the idea of external auditors, yet frauds are still being committed on a daily basis. The above scenario indicated that as more and more development both in the information Communication Technology (ICT) world and other fields, so fraudsters continue to groom their own tactics towards fraudulent practices. It now becomes pertinent that forensic accounting be introduced and practices since the external auditors do not or may not have the required training to be able to tackle modern frauds like white-collar crimes such as security fraud, embezzlement, bankruptcies, contract disputes, and possibly criminal financial transaction; including money laundering by organized criminals, also is the ability of the forensic accountant to provide litigation support and investigative accounting. These areas have become a complex area of concern for the accounting profession.
1.3 OBJECTIVES OF THE STUDY
The objective of the study is to find out the following:
To examine the role of Forensic Accountant in an organization. To examine the possibility of reducing the occurrence of fraud cases using Forensic Accounting. To find out whether a Forensic Accountant can help in detecting and preventing fraud in the Public Sector To examine if there is a significant difference between Forensic Accountants and External Auditors.
1.4 RESEARCH QUESTIONS
What is the role of Forensic Accountant play in an organization? Is there any possibility of reducing the occurrence of fraud cases using Forensic Accounting? Can a Forensic Accountant help in detecting and preventing fraud in the Public Sector? Is there any significant difference between Forensic Accountants and External Auditors?
1.5 RESEARCH HYPOTHESES
HYPOTHESIS 1 H0: Forensic Accountant does not play a role in an organization. H1: Forensic Accountant plays a significant role in an organization HYPOTHESIS 11 H0: The uses of Forensic Accounting do not significantly reduce the occurrence of fraud cases in the public sector. H1: The uses of Forensic Accounting do significantly reduce the occurrence of fraud cases in the public sector. HYPOTHESIS 111 H0: There is no significant difference between Professional Forensic Accountants and Traditional External Auditor. H1: There is a significant difference between Professional Forensic Accountants and Traditional External Auditor.
1.6 SIGNIFICANCE OF THE STUDY
The study will aid in laying a solid framework for the design and implementation of forensic accounting practices in Nigeria. Since forensic accounting is still new in developing countries such as Nigeria, this study will aid policymakers and other stakeholders to draft adequate policies to guide the practice of forensic accounting in Nigeria. The study will also serve as a guide to students and independent researchers who may have an interest in the subject matter. Findings and recommendations from this study will serve as a guide in carrying out other research studies in forensic accounting and fraud detection in organizations.
1.7 SCOPE OF THE STUDY
The study concerns forensic accounting as a tool for fraud detection and prevention in Nigeria with a particular reference to Eti Osa local government council, Lagos State.
1.8 LIMITATION OF THE STUDY
The study limitation was the inability of management to divulge certainly information that they consider sensitive and fear of publication which might be detrimental to their operation. Distance and its attendant cost of travel in order to obtain information on which to write this study was also a major limitation. Another limitation of the study is a short time factor that did not give time for thorough research work, hence gathering adequate information becomes very difficult. Finally, the lack of materials on the topic. This is new in the area of forensic accounting for the detection and prevention of fraud in Nigeria. Therefore, the researcher resolved to seek a friendly approach in order to obtain the needed materials or information from the organization understudy through the administration of the questionnaire.
1.9 DEFINITION OF TERMS AND ACRONYMS
FORENSIC ACCOUNTING: According to Manning (2002) defined forensic accounting as the application of financial accounting and investigative skills at a standard acceptable by the courts, to address issues in dispute in the context of civil and criminal litigation. ACCOUNTING: This is defined as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information (Frank Wood & A. Sangster, 2005). ACCOUNTING FRAUD: Accounting fraud is an act of knowingly falsifying accounting records, such as sales or cost records, in order to boost the net income or sales figures; accounting fraud is illegal and subjects the company and the executives involved in civil lawsuits (Arokiasamy and Cristal, 2009). FRAUD: fraud is an act or course of deception, deliberately practiced to gain unlawful or unfair advantage; such deception directed to the detriment of another (Anyanwu, 1993). DETECTIVE CONTROLS: These controls are designed to detect and report the occurrence of omission, an error, or a malicious act (Adeniji, A. 2004). PREVENTIVE CONTROLS: These are controls that predict potentials problems before they occur and make adjustments (Adeniji, A. 2004). CORPORATE FRAUD: These are the activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company (Investopedia, 2015).
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