THE FORENSIC ACCOUNTANTS AND

CORPORATE FRAUD REDUCTION

Akinyomi Oladele John
Department of Financial Studies,
Redeemer’s University, Nigeria

Abstract

The world has witnessed several instances of corporate scandals and failure in resent past. This has brought

to the fore the inadequacy of the statutory audit in the prevention and detection of fraud and financial

mismanagement. The professional accountancy bodies are beginning to have a new perception that goes

beyond the scope of the statutory audit. Forensic accounting seems to provide the needed solution to the

problem of fraud and financial mis-management in corporate organizations. This article discusses the

concept of forensic accounting, the need for it and its role in providing solution to the problem of fraud in

corporate organizations.

Key Words: Statutory Audit, Forensic accounting and Financial Mismanagement

Introduction

The growth of the public limited liability companies and large increase in the number of investors owing

share and the divorced of ownership from control of companies has called for regular auditing of corporate

financial reports. The objectives of the ordinary audit of financial statement by the independence auditor

according to American Institute of Certified Public Accountants (1992) is the expression of an opinion

on the fairness or otherwise in all materials respect financial position, results of operation and its cash flows

in compliance with generally accepted accounting principles.

However, modern organized corporate frauds are sophisticated, and well organized by managers,

entrepreneur and politicians to mention but few. There is the need to respond to this changing criminal threat

and the skills of non-traditional investigators like accountant and legal experts are needed to combat the

corporate ill, this has arouse the call for forensic accountant. It is on this background that we set out the

objectives of this study which include the examination of the concept of forensic accounting, the need for it

and its role in providing solution to the problem of fraud in corporate organizations.

Statement of Problem

The failure of statutory audit to prevent and reduce mis-appropriation of corporate fund and an increase in

corporate crime has put pressure on the professional accountant and legal practitioner in find a better way of

exposing fraud in business world. A nationwide study conducted by Kessler International showed that 39

percent of organizations have considered the need for a forensic accountant. This study intends to find out

how the knowledge of forensic accounting can reduce corporate fraud and mismanagement.

Methodology

The study being a theoretical analysis of the role of forensic accountant in solving the problem of fraud and

mis-management in the corporate world, it employed the secondary source of data collection by making use

of available literature on forensic accounting and its application in modern corporate world.
Theoretical Framework

Joshi (2003) ascribed the origination of forensic accounting to Kutilya, the first economist to openly

recognize the need for the forensic accountant whom he said, mentioned 40 ways of embezzlement centuries

ago. He, however, stated that the term “forensic accounting was coined by Peloubet in 1946. Crumbley

(2001) wrote on same when he stated that a form of forensic accounting can be traced back to an 1817 court

decision. He stated also that a “young Scottish accountant issued a circular advertising his expertise in

arbitration support in 1824” but that Peloubet was probably the first to publish the phrase forensic

accounting. 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 (Coenen 2005).

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.

Joshi (2003) defined Forensic accounting as the application of specialized knowledge and specific skill to

stumble up on the evidence of economic transactions. Zysman (2001) put Forensic accounting as the

integration of accounting, auditing, and investigative skills. Simply put, forensic accounting is accounting

that is suitable for legal review offering the highest level of assurance and including the now generally

accepted connotation of having been arrived at in a scientific fashion (Crumbley, 2006)

Coenen (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 (Zysman, 2001).

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. They provide those services for corporation, attorneys, criminal investigators

and the Government (Coenen, 2005). Their engagements are usually geared towards finding where money

went, how it got there, and who was responsible. They are trained to look beyond the numbers and deal with

business reality of the situation (Zysman, 2001).

Investigative and forensic accounting engagements are those that: -require the application of professional

accounting skills, investigative skills, and an investigative mindset; and -involve disputes or anticipated

disputes, or where there are risks, concerns or allegations of fraud or other illegal or unethical conduct,

(Canadian Institute of Chartered Accountant, 2006).

U.S. news and world report listed “Forensic accountant” as one of the 20 “hot job tracks” of the future and

has made this branch of accounting trendy. But Kessler International experts said that the field’s popularity

has attracted many in-experienced accountants who lack the skills to carefully and cost effectively conduct

inquiries. However, Forensic Accounting is different from the old debit or credit accounting as it provides an

accounting analysis that is suitable to the organization which will help in resolving the disputes that arise in

the organization.
Forensic accountants utilize accounting, auditing and investigation skills while conducting an investigation.

These accountants are trained to look into the dispute in a number of ways. They are often retained to

analyze, interpret summarize and present a complex manner which is understandable and probably

supported. Also they are often involved in various activities such as investing and analyzing financial

evidence, developing computerized exhibit documents and presenting the evidence obtained.

Composition of Forensic Accounting

Forensic accounting encompasses both litigation support and investigative accounting. Litigation support

provides assistance of all nature in a matter involving existing or pending litigation. It deals primarily with

issues related with the quantification of economic damages, while investigative accounting is associated to

the investigation of criminal matters (Zysman, 2001). Under litigation support, forensic accountant assist in:

(i) Obtaining document necessary to support or refute a claim;

(ii) Reviewing of the relevant documentation to form an initial assessment of the case in an identified

area of loss;

(iii) Examination for discovering, including the formulation of the act regarding the financial residence;

(iv) Attendance at the examination for discovery to review the testimony, assist with understanding the

financial issues and to formulate additional questions to be asked.

Investigative accountant on the other hand;

(i) Reviews factual situation and provides suggestions regarding possible courses of action;

(ii) Assist with the protection and recovery of assets;

(iii) Co-ordinate other experts (Zysman, 2001).

Forensic Accounting Engagements

Coenen (2005) identify the following as areas of specialty in forensic accounting:

(a) Investigating corporate fraud

(b) Litigation services

(c) Business valuation

(d) Computer forensic.

However, Zysman (2004) in a more elaborate form captured the assignment performed by forensic

accountant as including:

(a) Criminal investigation, which are usually on behalf of the police with the aim of presenting evidence

in a professional and concise manner.

(b) Shareholders and partnership dispute that involve analysis of numerous year financial record for

valuation and qualification of the issue in dispute;

(c) Personal injury claim, where for example economic losses from motor accident or wrongful

dismissal may need to be quantified.

(d) Business interruption and other type of insurance claim. These assignments involve a detailed review

of the policy to investigate coverage issues and the appropriate methods of calculating the loss.

(e) Business/employee fraud investigations which can involve fraud tracing, asset identification and

recovery, forensic intelligence gathering and due diligence review.

(f) Matrimonial dispute involving the tracing, locating and evaluation of asset.

(g) Business economic losses, where contract disputed, construction claims, expropriation, product

liability claim and trade mark are the issues.

(h) Professional negligence, to ascertain the breach and quantify the loss involved, and

(i) Mediation and arbitration, as a form of alternative dispute resolution.

Need for Forensic Accounting

The need for forensic accounting aroused because of the failure of audit system in the organization (both

internal and external audit) to figure certain errors in the managerial system.

Experts in the field pointed out that the intense economic pressure, with more companies facing distress;

jobs and careers are at risk and employee feel pressured to maintain and support performance levels, forcing

many to commit fraud. Never the less, whatever the reasons may be, more and more forensic accountants are

been called upon to meticulously search through documents, discover new information and help in putting

together the irregular pieces of company’s financial puzzle to solve the vexing problems.

The following are the important reasons for the growth of forensic accounting.
• Internal audit and audit committee as a point of the management function could not throw light on the

different fact and other hidden aspects of corporate fraud.

• Rotation of the statutory auditor touches as part of the problem while it refuses emphasis but it adversely

needs longer duration. The method of appointing the statutory auditors is characterized with lobbying which

may hamper the auditors’ independence.

• The certificates of the auditors are hardly scrutinized carefully especially when the reports are unclean and

qualified.

• The internal auditors can surely detect what was happening but they are hardly in a position to initiate

proper action in proper time.

The Skill Needed by Forensic Accountant

Arising from the needs for forensic accountant is the quality and skill require for the performance of his

duties. Aderibigbe (2000) suggested that a forensic accountant require high level of competence, integrity

and honesty to perform his job. He is of the opinion that a forensic accountant must be thoroughly trained

and must prove his competence by passing all relevant examination to become a member of a recognized

accountancy body. He maintained that a forensic accountant should always stand out with integrity, honesty

and probity and must maintain a professional attitude in the performance of his responsibilities.

The skills which are requires are numerous but mainly they must be developed during the training years.

Wallace (2001) listed the minimum requirement a forensic accountant must process to include:

• An ability to review a large volume of documentation ranging from the more usual accounting records and

management information systems to memos, correspondence and other less obviously financial data and to

extract the key issues quickly.

• A sound understanding of peculiarity of various business methods.

• A sense of urgency and commitment which will ensure prompt response when required however slow civil

litigation may appear to the on looker or even to the participant’s in a dispute.

• Adherence of strict timetable even when needs arises to work for more hours to meet targeted time.
• An ability to communicate complex theoretical ideas in a manner which is readily understandable by the

layman supporting with facts and figures when necessary without giving an impression of superiority.

• Most essentially, an ability to appear objective and professional even when taking part in the inherently

partisan process of a court case.

The Role of Forensic Accountant

A forensic accountant is often retained to analyze interpret summarize and present complex financial and

business in a manner, which is both understandable and properly supported. A forensic accountant is time

and again involved in the investigating and analyzing financial evidence, development of computerized

application to assist in the analysis and presentation of financial evidence, communicating their findings in

the firm of reports, exhibits and collection of document and assisting in legal proceedings, including

testifying in court as an expert witness and preparing visual aids to support trial evidence.

Thus, a forensic accountant can be of assistance in various ways that include:

• Giving preliminary advice as an initial appraisal of the pleading and evidence available at the start of

proceedings.

• Identifying the key documents which should be made available as evidence. This is important when the

forensic accountant is acting for the defense and lawyers are preparing lists of documents to tender in court.

• Preparing a detailed balanced report on quantum of evidence, written in a language readily understood by a

non-accountant and dealing with all issue, irrespective of whether o not they are favourable to the client.

• Reviewing expert accounting reports submitted by the other party which may have impact on the quantum

of evidence and advising lawyers on these reports.

• Briefing legal counsels on the financial and accounting aspects of the case during pre-trial preparation.

• The other plane of the forensic accountant can initiate measure for introduction of environmental

accounting to highlight the damage done to the environment by the possible recoupment of such damages or

replenishment of lost properties through environmental management continually. The occupational fraud

committed by employees usually involves the theft of assets and embezzlement and the involvement of

employees in kickback schemes or conversion of corporate assets for personnel use. The forensic accountant
when call upon, carry out some activities such as the examination of assets, invigilation, inspection of

documents and interview of those involved, so as to control such practices Experience has shown that this

type of engagement enables the forensic accountant to offer suggestions with respect to the internal controls

that owners could implement to reduce the likelihood of fraud.

Besides, the forensic accountant will also engage himself in criminal investigation on behalf of police force,

where his report is prepared with the objectives of presenting evidence in a professional and concise manner.

These assumptions often involve a detailed analysis of numerous years accounting records to quantify the

issues in dispute. He does need an understanding of legal issue of business activities.

The forensic accountant can thus be of assistance in various ways that include investigation accounting,

review of the financial situation and provision of suggestion, regarding possible courses of actions, assisting

with the professional and recovery of assets and co-ordination of other experts, viz private investigators,

forensic document examiners, consulting engineers and so on.

Summary and conclusion

This study is on the forensic accountants and corporate fraud reduction. The objectives set out at the

beginning include the examination of the concept of forensic accounting, the need for it and its role in

providing solution to the problem of fraud in corporate organizations. In this study, we considered the

various definitions of forensic accounting, composition of forensic accounting, the need for forensic

accounting and the role of the forensic accountants among others. The finding revealed that forensic

accounting is one of the newest ever growing areas in accounting that enhances the chances of success in the

day to day life of corporate firm. Thus various agencies fighting corruption world-wide will need to engage

the service of forensic accountants to compliment the efforts of other professionals in reducing fraudulent

activities and installing fraud proof internal control system in corporate organization. It is beyond doubt that

the role of forensic accountant will become very major in corporate field; public accounting and in all areas

of governance in the days to come.

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