FORENSIC ACCOUNTING AND AUDIT AS A PANACEA FOR PREVENTING CORPORATE FRAUD IN NIGERIA (A CASE STUDY OF DIAMOND BANK PLC, AWKA, ANAMBRA STATE).
According to Allberch (2003) defines fraud as a representation about a material fact which is false and intentionally or recklessly so, which is believed and acted upon by the victim to the victims damage.
Fraud according Adenyi (2004) and ICAN (2006) defines it as an intentional act by one or more individuals among management, employees or their parties which result in misrepresentation of financial statements; fraud can also be seen as illegal act or series of illegal act ICAN (20060 defines it as an intentional act be one or more individuals among managements, employees or third parties which result in misrepresentation of financial statements.
Fraud can also be seen as illegal act or series of illegal act committed or gules to obtain money or property or to avoid the payment of loss of money / property or obtain business or personal advantage at the expense of somebody else.
The Western dictionary defines it as deceit or tricky, specifically intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right (it focuses on 419).
According to Brink and Witt (1992) fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management.
ISA 240 “the auditors responsibilities is to consider fraud of an internal act by one or more individual among management, those changed with governance, employees or third parties involving the issues f deception to obtain an unjust or illegal advantage.
According to Aderigbe and Dadon (2007) defines fraud as a deliberate deceit planned with the intent to deprive another person his property or right directly or indirectly regardless of whether the proprietor’s benefit from his / her actions.
According to Okoye (2004) fraud can be referred to as irregularities involving the act of criminal deception to obtain an unjust or financial statement for whatever purpose and also misappropriation of assets it accomplished and not by distortion of financial statement.
According to Pollick (2006) regard fraud as a deliberate misrepresentation which causes one to suffered damages usually monetary losses.
2.2 RED FLAGS AND NATURE OF CO-OPERATIVE FRAUD
Fraud is not an openly visible crime. It cannot be detected only through redflags that indicates that ethics and integrity has been compromised within the company, such redflags can be from the accounting system lack of segregation of duties and other crucial internal control features. Lack of integrity in top management behaviours on the point of employees and numerous complaints on the hotline tips, all these indicators that fraud may exist not necessarily for profit of fraud.
According to fraud examination Loy w. Steve Albecht, they stated some redflags on employees and organization.
Employee red flags involves he following;
i Overlooking of employees
ii Unserious ness of employees
iii Over time payment
iv Over-personalized business matters
v Anti-social lone personality.
vi Inappropriate life style change.
Some organizational red flags involves the following:
i Unrealistic performance compensation packages
ii Inadequate board oversight
iii Poor segregation of duties
iv Poor computer security
v Low moral and high staff turnover.
It must be noted that for reasonable suspicious to be ascertained, it has to be coded as red flags plus audit result, plus whistle blowing is equal to reasonable suspicious.
NATURE OF CO-OPERATIVE FRAUD
Co-operative fraud especially in bank and government agencies according to trust violation detected in Nigeria from 1994 till date includes the following in recent time are:
i Fraudulent transfer and withdrawals
ii Use of unauthorized overdrafts posting of fraction credits.
iii Presentation of forged cheques
iv Conversion of banks money into personal use
v Granting of unauthorized loans
vi Abuse of medical scheme
vii Suppression of cash vouchers and cheques.
viii Insiders using their office positions to defraud the organization.
ix Illegal conversion of personal fund in various agencies and ministries.
x Ghost working fraud results into millions of mama period into private pockets.
xi Abuse of political office leading to contract over bittings and over invoicing.
Categories of fraud and malpractices for which bank workers are involved are divided into two thus:
1 Cash fraud
2 Forgeries fraud
Cash fraud can be either outright cash theft from unsuspecting cashiers by their colleagues or suppression of each cashiers themselves. The offence can be committed by the manager wither by stealing cash from the strong room or replacing strong room money with counter foil currency.
According to Coldface / Irokable (1996), the highest ranked fraud is through suppression of subsequent conversion of cash lodgment by cashier.
Forged cheques may involves the illegal and unauthorized adjustment of:
i The amount of chegues.
ii The signature of the owner or even
iii The alteration of the date and otherwise state cheque or other negotiable instruments.
Iv sometimes parallel cheques are ranked high on the fraud bill board.
Other malpractices by employees includes:
i Unauthorized printing of security documents.
Ii Illegal causing of organizations, agencies, rubber stamp
iii Illegal cleaning of cheques
vi Illegal issuing of cheques books by colliding banks officials.
v Profiting on insider knowledge (conflict of interest)
vi Disclosing security transactions to others.
vii Distinction or disappearance of records or assets.
viii Counterfeiting.
Annual reports against its level of 98.2 million in 1989, the involved fraud are forgeries in commercial banks which showed an increase of 703.1 percent in 1990-1991 a total sum of 360.2 million was reported as acted expected loss. This showed an increase of 13.9% above the 24.4 million in 1990 reported by bank frauds and forgeries 1989-1991.
| Year | Amount involved | Amount of forgeries |
| 1989 | 567,388.70 | 16,441.2 |
| 1990 | 704,186.80 | 21,482.5 |
| 1991 | 455,512.60 | 24,678.5 |
(source: NDIC Annual account report)
This is not given saying that such statistics summonsing report or prospected crime are inaccurate measure of the scale and scope of the corporate fraud. Estimates suggest that less than 20% of discovered cases are reported for a number of reasons which includes:
- a) the reluctance of victims to admit that they have been defrauded.
- b) Fear of loss in management time associated with court attendance.
- c) A belief that the fund cannot be recovered
- d) Fear of the impact of adverse publicity on the institutions and possibility of run on institution due to lack of public confidence. Nigeria deposit insurance corporation, (NDIC 1990) aloes*** state that prevalence of frauds and forgeries out indication of weakness in the back internal control system.
2.4 THE ROLE FORENSIC ACCOUNTING IN A CO-OPERATE ENVIRONMENT
Forensic accounting has been defined as accounting analysis that can uncover possible fraud that is suitable for presentation in court. Such analysis will form the basis of discussion, debate and dispute resolution. A forensic accountant uses his knowledge of accounting, law investigative auditing and criminology to uncover fraud, find evidence in court if required.
According to Crumbly (2003) a forensic accountant can be used in any of the following areas:
– Shareholders / partnership disputes
– Personal injury claims / Accidents.
– Business interruption / insurance claims
– Employee fraud
– Divorce / Bankruptcy
– Professional negligence
– Financial statement fraud
– Retained by lawyers, law enforcement, banks and companies.
According to Grippo (2003) effective forensic accounting requires the following:
– Education and training
– Advanced and continued education in appropriate disciplines
– Diversified accounting and auditing experience
– Communication skills, oral and written
– Practical business experience
– Ability to work in a team environment and people skills and flexibility.
However, the most important skills is experience. This experience is gained through natural maturity in the profession. In experience, the forensic accountant acquires skills in accounting and auditing, taxation, business operation and management, internal controls, interpersonal relationship, communications and knowing how a business operates and effective types of internal control in a critical part of being of forensic accountant.
A forensic accountant is often retain to analyze, interpret,
ix Lepping of fund
x Overtime abuse by employees
xi Creation of fictions accounts
xii Swapping cheques for cash
2.3 SOURCES AND CAUSES OF CO-OPERATIVE FRAUD
Like any other crime, fraud can be analyzed using the three elements: motive, means and opportunity.
Motive: Why do people commit fraud?
Fraud is usually committed to benefit oneself or benefit an organization, personal agreed which includes financial pressure, grumbling or drugs and works related pressure where an employee feels over worked and under paid and unrecognized. For an organization financial statement fraud is usually for obtaining clear capital or for increasing stock value and therefore the value of stock option to management.
Means; like a smoking gun, fraud can be committed using computers, telephones, the internet annual report, bank accounts and things as simple as such register.
Opportunity: Within an organization, lack of adequate internal controls, provides a prime opportunity for fraud. Lack of audits trait and failure to punish the perpetrators also send signals encouraging fraud. In other cases, lack of access to important information and ignorant and apathy can breed fraud. (source; journal of college teaching and leaving September 2007).
According to Wasic 91975) when controls are inadequate, loop holes also facilitates the tenor of fraudulent activities. This has opened p a new frontier and more opportunities for fraud. These are more pronounced in computer and information technology. The volume and value of payment traffic carried through the interbank payment system, the use of automated teller machine (ATM) and electronic fund transfer (EFT) system has resulted to big increase in fraud, many of the new products and services that has been credited have their birth ot development in technology, the risk of computer fraud has increased. The vastness and complexity of its operations are sometimes difficult ot imagine.
An extremely human desire for wealth is another cause of fraud. Added to these are social and economic conditions of the society, some of these are roles of unemployment, wide spread poverty. A more service aspect of fraud in our society is the absence of social sanction.
According to London base monthly intelligence, bulleting for senior management in banking financial and non banking financial institution in the year (2002).
Culprits in the society form the lowly manual workers to the highest managements’ levels in companies’ government establishment etc victims span the whole spectrum. This fact is simple demonstrated by the recent edition mentioned above. According to the report, the affairs was one of the biggest bank in history. It entails the use of creative accounting method ot book fictitious loan deals in groups own shares through monies etc, institutions defrauded by new fraud (bank) groups include: central bank of Nigeria (CBN), Apex Bank Institution the world bank and international monetary fund (IMF) now here is the incidence of fraud more serious and pressure then th financial industry. It is the biggest single cause of bank failure and greatest source of erosion to the foundation of the banking system. in the united states for instance, it was discovered that the 75 commercial banks, between 1980-1998, 60% involved inside and 40% of these have criminal misconducts a major contributing factors. In Nigeria, the frequent and magnitude of frauds are equally as disturbing. This has ben high lightened by the Nigeria deposit insurance corporation (NDIC) in its various summarize and present, complex financial and business related issues in a manner which is both understandable and properly supported.
Forensic accountant can be engaged in public practice oremployed by insurance companies, banks, polie force, governemtn agencies and other organization. A forensic accountant if often involved in following.
– Investigating and analyzing financncial evidnce.
– Developing computerized applications to assist in the analyses and presentation of financial evidence.
– Communicating their findings in the form of reports exhibits and collection documents.
– Assisting in legal proceeding including testifying in court as an expert witness and preparing visual aids to support trial evidence. In other ot properly perform these services forensic content must be familiar with legal concept and procedures.
In addition, forensic accountant must be able to identify substance over form when dealing with an issue. Among he series offered by forensic accountant are:
– Litigation support
– Export witness engagement
– Divorce business valuation
– Lost earning engagement
2.5 THE TECHNIQUE IN FORENSIC ACCOUNTING
According to Obasi O.C. (2004) Some of the techniques involved in the forensic accounting are:
1 Benford’s Law: It is a mathematical tool and one of he various ways to determine whether variable under study is a case of international errors of fraud on detecting any such phenomenon, the variable under study is subjected to a detailed scrutiny. The law states that fabricated figures (as indicated of fraud) possesses a different pattern form the random (or valid) figures. The steps of Benfor’d Law out very simple. Once the variable of financial importance is decided, the left most digit of variable under study extracted art summarized for entire population.
2 Theory of relative size factor (RSF) it highlights all usual fluctuations which may be moved form fraud or geneive error. RSF is measured as ration of the largest number to the second largest number of the given set. In practices there exist certain limits for each entity such as vendor, customers, employees etc. These limits may be defined or analyzed from the available data if not defined. If there is any stray instance of single transaction that is beyond the normal range, then there is a need to investigate it further. It helps in better detection of anomalies or outlines. In this method, the records that fall outside the prescribed range out suspected of errors or fraud. Their records and fields needs to relate to other variable or factors in order to find the relationship thus establishing the truth.
3 Computer Assisted Auditing Tools (CAAT): These are computer programme that the auditor use as point of the audit procedure to process date of audit significance contained in a client information systems without depending on him. CAAT helps auditors ot perform various auditing procedures such as:
– Testing details of transactions and balances.
– Identifying inconsistencies or significant fluctuations.
– Testing general as well as application and control of computer systems.
– Sampling programmes to extract that for audit testing
– RE-doing calculations performed by accounting system.
4 Data mining technique: It is set of computer assisted techniques designed to automatically mine large volume of new, hidden or unexpected information or patters. Data mining techniques are categorized in three ways: discovery, predictive, modeling and deviation and link analysis. It discovers the usual knowledge or pattern in data with a predefined idea or hypothesis about what he patern may be i.e without any prior knowledge of fraud. It emplanins various affinities, associations, trends and variation in the form of conditional logic. In predictive modeling, patterns discovered from data – base are used to predict the outcome and to guess data from new value items. In deviation analysis the norm is formed first and then those items that deviate form the usual norm are detected.
5 Ratio Analysis: Another useful fraud detection techniques is the calculation of data analysis ratios for key numeric field like financial health of a company. Data analysis ratios report on the fraud health by identifying possible symptom of fraud.
Three commonly employed ratios are:
– The ratio of the highest value to the lowest value
– The ratio of the highest value to the second highest value
– The ratio of the current year
Ratio analysis may help in forensic accounting to estimate expenses. For example, one’s a company cost goods sold (i.e cost of production plus profit margin).
2.6 NEED OF FOR FORENSIC ACCOUNTING
Forensic accounting have involved wide range of investigation, spanning many different industries. He practical and in-depth analysis that uncovers the trends that brought to light the relevant issues. Detailed below out various areas in which a forensic accounting will often become involved.
- a) Criminal investigation; forensic investigation often relate to criminal investigation on behalf of the police force. A forensic accountings report is prepared with the objective of presenting evidence in a professional or concise manner.
- b) Shareholders and partnership disputes: these assignment often involve a detailed analysis of numerous years of accounting records to qualify the issue in dispute, for example, a common issue that often arises in compensation and benefits received by each of the disputing shareholders or partners.
- c) Business Interruption: Other types of insurance claim insurance policies differ significantly as to their terms and conditions. Accordingly, their assignment involves detailed review of the policy, to investigate coverage issues and the appropriate methods of calculating the loss. A forensic accountant is often asked to assist from either an insured or insurers perspective in the settlement of case.
- d) Business / Employee Fraud Investigation: Business investigations can involve funds tracing asset identification and recovery, forensic intelligence gathering and due diligence reviews. Employee’s frauds investigation often involve procedures to determine the existence, nature and extent of fraud and may concern the identification of perpetrator.
These investigations often enact reviews of payment who had access to the funds and a detailed review of the documentary endivence.
e Business economic losses: Example of assignments in dividing business economic losses includes: contract disputes, construction claims, expirations, product liability claims, trade mark and patent infringement and losses steaming from a breach of a non-competitive agreement.
2.7 THE ROLE OF AUDITORS IN A CORPORATE ENVIRONMENT
Fraud is no longer a thing that internal or external auditors can guard against with their periodic audits. The auditing profession has taken the position that it did not the responsibility of external auditor to detect fraud. In settlement of auditing standard (SAS), the AICPA states the following “the ordinary examination directed to the expression of an opinion on financial statement is to primary or specifically designed and cannot be relied upon to disclose defalcations and other similar irregularities or deliberate misrepresentation by management. At the beginning of any assignments however the auditor should asses the possibility of materials misstatement that could exist due to unintentional errors of fraudulent irregularities based on the initial assessments, auditors should design an audit that provides reasonable assurance of detecting material errors and irregularities.
The new regulation encouraged conditions to:
i Discus all possibilities of fraud that could take place within and organization so that an appropriate audit program could e designed.
ii Discuss with management and employees about the risk f fraud within the organization.
iii Designed unpredictable fraud test so that the surprise element could aid in uncovering fraud.
iv Pay special attention to any management overriding of the existing internal control system.
In forensic accounting, to the fore front by Wolosky in (2004) one of the investigative accountants about a significant difference between auditing and forensic accounting, the most important concern in auditing is materiaty.*****
An internal audit is the audit performed by an employee mainly to determine whether prescribed procedures are being followed. While doing this, many frauds can be discovered by internal auditors. But management has significant influence over an internal auditor’s commitment to detect fraud. By limiting available resource of the scope of the audit, top management can effectively conceal fraud. Therefore the external auditor has a key role to play in uncovering fraud and presenting evidence.
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