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SEMINAR PAPER
ON
FORENSIC AUDITING
PRESENTED BY GROUP 8
DEPARTMENT OF ACCOUNTANCY
FACULTY OF MANAGEMENT SCIENCES
NNAMDI AZIKIWE UNIVERSITY, AWKA
JUNE, 2010.
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ABSTRACT
The menace of fraud, corruption, and misfeasance are commonplace and are the
increase globally and, indeed, in Nigeria. Thus forensic accounting or forensic
auditing has emerged as a result of the surge in fraud. Accordingly, the aim of this
conceptual paper is threefold. First, this paper sought to imbibe the art of forensic
thinking among accountants; second, it aimed at stimulating and promoting the
understanding of basic forensic skills; and third, it aimed at expanding the stock of
literature in forensic accounting and audit. Given this broad spectrum of objectives
of this paper, characteristics of a forensic auditor were examined and skills as well
as objectives of forensic audit were discussed. In the discus of the application of
forensic audit, both reactive and proactive accountings were examined. This was
followed by a highlight on the distinction between statutory audit and forensic
audit. Detection techniques and steps in conducting forensic audit were also
discussed. We concluded that forensic audit practice can reduce the incidence of
fraud.
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TABLE OF CONTENTS
Cover page - - - - - - - - - - 1
Abstract - - - - - - - - - - 2
Table of Content - - - - - - - - - 3
1.0 INTRODUCTION - - - - - - - - 5
1.0.1 Overview and Definition of forensic auditing - - 5
1.0.2 Objectives of the Paper - - - - - - 8
1.0.3 Historical Background of Forensic Audit - - - 9
1.2 CHARACTERISTICS OF A FORENSIC AUDITOR - - - 11
1.3 SKILLS FOR FORENSIC AUDIT - - - - - 12
1.4 OBJECTIVES OF FORENSIC AUDIT - - - - - 13
1.5 APPLICATION OF FORENSIC AUDIT - - - - 13
1.5.1 Reactive Forensic Accounting - - - - - 13
1.5.2 Proactive Forensic Accounting - - - - - 15
1.6 ADVANTAGES AND DISADVANTAGES OF FORENSIC AUDIT 15
1.6.1 Advantage of Forensic Audit - - - - - 15
1.6.2 Disadvantages of Forensic Audit- - - - - 16
1.7 DISTINCTION BETWEEN STATUTORY AUDIT AND FORENSIC AUDIT
- - - - - - - - - - 17
1.8 DETECTION TECHNIQUES IN FORENSIC AUDITING - - 18
1.9 TYPES OF INVESTIGATION IN FORESIC AUDITING- - 19
1.9.1Corruption - - - - - - - - 19
1.9.2 Asset Misappropriation- - - - - - - 20
1.9.3 Financial Statement Fraud- - - - - - 20
1.10 HIGHLIGHTS OF SOME COMPANIES WHERE FORENSIC
INVESTIGATION HAS TAKEN PLACE - - - - 21
1.10.1 Enron Scandal (2001) - - - - - - 21
1.10.2 Sumbean (1997) - - - - - - - 21
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1.0 INTRODUTION
1.0.1 Overview and Definition of Forensic Audit
Agreeably, the incidence of fraud, corruption, misfeasance, crimes and
terrorism are not only on the increase, but also, they pervade every sector of our
society and the globe at large. The need to identify the sources and uses of money
in illegal activity is a sine qua non in every investigation, including terrorism and
counterintelligence. Through the development of forensic accounting, accountants
now have one more tool to effectively and efficiently deal with the challenges
faced in detecting financial crimes and tracing ill-gotten gains from illegal
activities.
Fraud is a driving force behind a surge in demand for forensic accountants:
trained to perform accounting autopsies. Thus forensic accountants dissect
financial records and sniff out the deception of embezzling employees, conniving
corporations, sneaky spouses and serve as expert witnesses in resulting trials.
Forensic accounting has become a hot profession as a result of the wave of
economic crimes, a swarm of corporate scandals, an increase in bankruptcies and
occupational fraud. In these days, detectives and attorneys have to team up with
forensic accountants to track down clues in financial records or to find victims and
suspects.
Fraud and forensic accounting affect the accounting profession on a daily
basis. The Federal Government of Nigeria, through the development and
implementation of various Acts, Laws, and Fraud-fighting agencies, have paid her
dues in the overall attempt across the world to curb the menace of corruption, fraud
and misfeasance. Notable amongst these attempts is the establishment of agencies
such as: The Economic and Financial Crimes Commission (The EFCC); The
Independent Corrupt Practices’ Commission (The ICPC); The National Drug Law
Enforcement Agency (The NDLEA) etc.
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whether the fraud involved collusion between several suspects; any physical
evidence at the scene of the crime or contained in documents comments made by
the suspect during interviews and/or at the time of arrest attempts to destroy
evidence, among others.
himself a “forensic auditor”, a term coined by Kessler, and now widely used within
the industry. He found the result was as he had hoped and he was quickly accepted
when the announced himself in the health care community.
The rest is history and today forensic accounting is one of the fastest
growing professions in the nation. With worldwide offices and on staff specialists
in forensic Accounting, Computer forensic, Risk management and corporate
investigation, Kessler international provides solution to difficult business problem.
Auditors need to be alert for situations, control weaknesses , inadequacies in record
keeping, errors and unusual transactions or results which could be indicative of
fraud, improper or unlawful; expenditure, unauthorized operations, waste,
inefficiency or lack of probity.
The last decade or so the words forensic auditing have become part and
parcel of our vocabulary but under the general population the only association the
make is that it is just another “accounting” or “auditing” procedure or process.
But let us start at the very beginning; Accounting is the process of
identifying, measuring, recording and communicating economic information about
an organization or entity, in order to permit informed judgments by users of the
information. On the other side of the coin is forensic auditing which is a new
discipline under the umbrella auditing.
It is crime, and especially economic crime that gave birth to forensic
auditing. Economic crime is an unpleasant fact and has escalated into a monster. It
touches every country, every industry, and has no signs of stopping. During the
past decade, the number of reported cases of fraud and corruption has continued to
grow dramatically.
Compounding that is the challenges faced by the criminal justice system and
a general absence of the necessary skills to gather the proper audit evidence so
vital to criminal investigations. Information from law enforcement and criminal
justice agencies about corruption and fraud cases is that generally speaking, the
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success rate for convictions are not satisfactory – the reason being that prosecuting
authorities lacked skills and knowledge to provide effective investigation and
prosecution of corruption and fraud cases. Enter forensic auditing!
Therefore, forensic accounting draws its name from association with a court
of law. It is performed to accomplish an objective that involves a judicial process.
Examples of forensic accounting objectives include: computation of asset values in
a divorce proceeding; assessment of damages caused by an auditor’s negligence;
fact-finding to see whether embezzlement has taken place, in what amount, and
whether criminal proceedings are to be initiated; and the collection of evidence in a
criminal proceeding. Forensic accounting is focused upon both the evidence of
financial transactions and reporting as contained within an accounting system, and
the legal framework which allowed such evidence to be suitable to the purpose of
establishing accountability. Forensic accountants are typically Chartered
Accountants that specialize in those types of cases where there is need for such
evidence.
Their job is to detect and interpret the evidences of both normal (non
fraudulent) and abnormal (fraudulent) transactions in the books and records of an
accounting system and the subsequent effect upon the accounts, inventories, and
the presentation thereof. It is imperative: therefore, that forensic accountant first
understand what normal accounting procedures and processes are – remember they
are first and foremost chartered accountants. Just as forensic dentists and forensic
anthropologists are dentists or anthropologists first (that is, they are foremost
professionals in the underlying discipline and are specialists in its forensic
aspects), so too forensic accountants are accountants first.
i. Curiosity
ii. Persistence;
iii. Creativity;
iv. Discretion;
v. Organization;
vi. Confidence; and
vii. Sound professional judgment.
Diagnostic Tool
Forensic auditing can be used either by management or by auditors to carry
out general reviews of activities to highlight risks arising either out of fraud or
from any other source with the purpose of initiating focused reviews of particular
areas targeting specific threats to the organization.
• Forensic auditing can play an important role for companies under review by
regulatory authorities and can also be invaluable to ensure regulatory
compliance. For example, forensic auditing can be useful in helping
companies to ensure that their anti-money laundering procedures are both
effective and robust.
• Forensic auditing can help protect organizations from the long-term damage
to reputation caused by the publicity associated with insider crimes. A
forensic audit also provides a sound base of factual information that can be
used to help resolve disputes, and can be used in court should the victim
seek legal redress.
• Forensic auditing can improve efficiency by identifying areas of waste
• Forensic auditing can help with the detection and recording of potential
conflicts of interest for executives by improving transparency and probity in
the way resources are used, in both private and public entities.
conducting the propriety audit “Value for money audit” technique aims at
lending assurance that economy, efficiency and efficacy have been achieved
in the transactions for which expenditure has been incurred or revenue
collected is usually applied. The same analogy, with modifications to the
principles of propriety of public finance, applied in forensic audit to
establish fraudulent intentions if any, on the part of the management.
Financial frauds are results of wasteful, unwarranted and unfruitful
expenditure or diversion of funds by the investigated entity to another entity.
1.9.1 Corruption
There are three types of corruption fraud: conflicts of interest, bribery and
extortion. Research shows that corruption is involved in around one third of all
frauds. In conflict of interest fraud, the fraudsters exert their influence to achieve a
personal gain which detrimentally affects the company. The fraudsters may not
benefit financially, but rather receive an undisclosed personal benefit as a result of
the situation. For example a manager may approve the expenses of an employee
who is also a personal friend in order to maintain that friendship, even if the
expenses are inaccurate.
Bribery is when money (or something else of value) is offered in order to
influence a situation.
Extortion is the opposite of bribery and happens when money is demanded
(rather than offered) in order to secure a particular outcome.
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1.10.4 Cadbury
The executives of Cadbury were accused of bloating the company’s account
to deceive investors, while presenting it as a very healthy stock. The executives
were first suspended to forestall any attempts to jeopardize the ongoing enquiry
into the companies’ financial misstatement.
Price Water House Coopers were brought in to re-audit the firm and they
submitted its report, showing a hole of about N15 billion in the books of the
company, apart from that it was actually in a loss position rather than the
soundness portrayed by the erstwhile managers. Akintola Williams, Cadbury’s
external auditors were fined N20 million “for its failure to handle the accounts of
the company with high level of professional diligence.
However, the pursuit of these reforms gave rise to such measures in
government, as the fashioning of the Fiscal Responsibility Bill, implementation of
the new oil and gas unit, parastatal’s support unit, the setting up of Economic and
Financial Crimes Commission (EFCC), the Independent and Corrupt Practices
Commission (ICPC) and the Nigerian Extractive Industries Transparency Initiative
(NEITI).
STEP 4: Reporting
The client will expect a report containing the findings of the investigation,
including a summary of evidence and a conclusion as to the amount of loss
suffered as a result of the fraud. The report will also discuss how the fraudster set
up the fraud scheme, and which controls, if any were circumvented. It is also likely
that the investigative team will recommend improvements to controls within the
organization to prevent any similar frauds occurring in the future.
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1.12 CONCLUSION
There is no gainsaying the fact that our audits as currently executed and
reported do bring out in a wealth of detail, instances of individual or systematic
fraud and corruption. There is, however, a need to provide a comprehensive
framework involving the use of Foreseen Auditing Methodology, particularly in
the areas of audit planning and execution, and for a uniform reporting practice that
would very explicitly spell out the implications of control failures including failure
of senior management in implementing prescribed controls.
This could over a period of time assuage public concern about the existence
of systematic audit operations addressed pacifistically to unearth fraud and
corruption.
Forensic auditing combines legalities along-side the techniques of propriety
(VFM audit), regularity, investigative, and financial audits. The main aim is to find
out whether or not true business value has been reflected in the financial statements
and whether any fraud has taken place.
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REFERENCES
Chatterji A.N. (1996), Conference of Commonwealth Auditor General
Chatterji A.N. (1996), The role of SAI’s in Preventing and Detecting Fraud and
Corruption, Montavideo.
http://www.asosai.org/asosaiold/journal2001/forensicauditing.htm
http://www.ehow.com/about5070210forensicaudit.htmf.
Hhp://bizocovering.com/accounting/forensic-auditing
/#ixzzBcwkosiqu
Michael G.K. (2001); Investigating Audit
Nnamdi Dum, Icon Graduates First Forensic Accountant 2010.