THE RELEVANCE OF FORENSIC AUDIT AND INVESTIGATION IN

RESOLVING TAX RELATED FRAUD AND MALFEASANCE

By
Cordelia Onyinyechi Omodero B.Sc., M.Sc., ACA, Doctoral Student of Accounting
(Michael Okpara University of Agriculture, Umudike, Umuahia, Abia State,
Nigeria Affiliation: Medonice Consulting and Research Institute, Port Harcourt.

Abstract
The incessant tax related fraud and malfeasance resulting to corporate collapse and
the failure of the statutory audit to detect and prevent fraudulent activities which had led
to the impoverishment of investors had given rise to the need for forensic audit and
investigations. In view of the above, this paper considers the application of forensic
audit and investigation in resolving tax related fraud and malfeasance. The study is a
theoretical research which considers the roles of forensic auditors in combating
fraudulent activities, distinction of forensic auditor and statutory auditor, and impact of
forensic auditor on corporate governance. Based on the findings; this paper concludes
that forensic auditing has improved management accountability, strengthened external
auditors independence and assisting audit committee members in carrying out their
oversight function by providing them assurance on internal audit report have impacted
positively to corporate governance, thereby reducing tax related fraud and malfeasance.
Therefore the study recommends that; the service of forensic auditors should be
employed in Nigerian organisations.

Keywords:

Forensic Audit, External Auditor, Tax Evasion, Tax Avoidance,

Fraud, Malfeasance, Corporate Governance.

Introduction
The incessant tax related fraud & malfeasance and its impact on corporate
performance has led to the need for multi-dimensional relationship (that is interrelationship between the audit committee, the external auditor and the management) in
corporate governance as to protecting the interest of shareholders and other market
participants with the common goal of improving oversight function and ensuring good
corporate governance (Deloitte and Touch 2006). However, in spite of the multi
dimensional relationship between the three major groups in corporate governance, tax
related fraud & malfeasance which had led to poor performance and most times to
corporate collapse resulting to huge lost of investment and impoverishment of many
investors has continued to be on increase (Rezae 2005). Ramaswamy (2009) in line with
the above statement there is a great need for skilled professionals that can identify,
expose and prevent weaknesses in three key areas: poor corporate governance, flawed
internal controls and fraudulent financial statements. Owojori and Asoula (2009) states
that the Failure of Statutory audit to prevent and reduce misappropriation of corporate
fraud and increase in corporate crime has put pressure on the professional
accountant and legal practitioner to find a better way of exposing fraud in business
world .
The above problems have posed serious concern to the accounting
profession, and users of accounting information, thus giving rise to the call for
forensic auditors. In view of the above, this paper aims at examining the relevance of
forensic audit and investigation in resolving tax related fraud and malfeasance.
Objectives of the Study
In view of the above problem this study considers the following:
i.
Examining the application of forensic audit and investigation in combating
fraudulent activities in corporate organization.
ii.
Determining the characteristics required by forensic auditors as to combat
fraudulent activities.
iii. Differentiating between Forensic Auditor and Financial Auditor.
Methodology
This paper is a theoretical study on the application of forensic audit and
investigation in resolving tax related fraud and malfeasance and it which employed the

secondary source of data collection by making use of available literature on forensic

auditing and investigations with respect to resolving tax related fraud and malfeasance.
Literature Review
The Concept of Fraud
Different scholars have varied definitions of fraud. Adewumi (1986) defined fraud
as a conscious premeditated action of a person or group of persons with the intention of
altering the truth and or fact for selfish personal monetary gain. It involves the use of
deceit and trick and sometimes highly intelligent cunning and know-how. Watoseninyi
(1996) views fraud as irregularity involving criminal deception to obtain an unjust or
illegal advantage. He further explains that fraud is the deviation of a persons or
organisations money or goods for satisfaction of personal or selfish desires using
criminal deception techniques which are identified to include defalcation by way of
misappropriation of money or goods or manipulation of accounts. From the legal point
of view, fraud situates itself as generic term which embraces all multifarious means,
which human ingenuity can devise, that are resorted to by one individual to get an
advantage over another by false pretences (Nigerian Criminal Code, 1990). According to
Chambers Universal Learners Dictionary (1985), a The defunct Common Law Manual
(Masango, 1998) argues that fraud is an unlawful making, with intention to defraud, a
misrepresentation which causes actual prejudice or which is potentially prejudicial to
another. It identifies essential elements as follows: unlawfulness, misrepresentation
(which could be in the form of words, conduct, or failure to disclose); prejudice (which
could either be actual or potential), and intention.
The United States Association of Fraud Examiners (1999), in a rather conservative
fashion, identifies fraud as the fraudulent conversion and obtaining of money or property
by false pretences; included are larcenies by bailee and bad cheque. Ihiagarajah (2008)
views fraud to mean any of a number of actions carried out with the intent of defrauding
an institution or organisation. Similarly, the concept has been stated to mean the use of
fraudulent means to obtain money, assets, or other property owned or held by an
organisation (Wikipedia, 2013). One thing stands out from the various definitions above
which is the fact that fraud vary widely in nature, character and method of perpetration.

The Concept Misfeasance

Misfeasance in public office is a cause of action in the civil
courts of England and Wales and certain Commonwealth countries. It is an action
against the holder of a public office, alleging in essence that the office-holder has
misused or abused his power. The tort can be traced back to 1703 when Chief Justice Sir
John Holt decided that a landowner could sue a police Constable who deprived him of
his right to vote (Ashby v White), (Hill and Hill,2005). The tort was revived in 1985
when it was used so that French turkey producers could sue the Ministry of
Agriculture over a dispute that harmed their sales.
In theory, misfeasance is distinct from nonfeasance. Nonfeasance is a term that
describes a failure to act that results in harm to another party. Misfeasance, by contrast,
describes some affirmative act that, though legal, causes harm. In practice, the
distinction is confusing and un-instructive. Courts often have difficulty determining
whether harm resulted from a failure to act or from an act that was improperly
performed.
Malfeasance is a comprehensive term used in both civil and Criminal
Law
to
describe any act that is wrongful. It is not a distinct crime or TORT, but may be
used generally to describe any act that is criminal or that is wrongful and gives
rise to, or somehow
contributes to, the injury of another person, (West's
Encyclopedia of American Law, 2008).
Malfeasance is an affirmative act that is illegal or wrongful. In tort law it is
distinct from misfeasance, which is an act that is not illegal but is improperly
performed. It is also distinct from Nonfeasance, which is a failure to act that
results in injury.
Malfeasance is intentionally doing something either legally or morally wrong
which one had no right to do. It always involves dishonesty, illegality, or knowingly
exceeding
authority
for
improper reasons. Malfeasance
is distinguished
from "misfeasance," which is committing a wrong or error by mistake, negligence
or inadvertence, but not by intentional wrongdoing.
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The Concept of Forensic Auditing

The concept forensic auditing and forensic accounting are used interchangeably.
The concept has been enunciated by several authors and scholars. According to Dahli
(2008), forensic comes from the Latin word for public and specifically to forum. The
forum was where the Ancient Romans were taught to do business and settle disputes
among other things. He further buttressed that forensic relates to the application of
knowledge to legal problems such as crimes. This definition traces the history of
forensic accounting and its application in litigation support. Forensic is as old as history
but its usage got little attention in the past. It is now becoming prominent because of
increase in financial scandals. Joshi (2003) ascribed the origination of forensic
accounting to Kutilya, the first economist whom he said mentioned 40 ways of
embezzlement centuries ago.
However, he stated that the term forensic accounting was coined by Peloubet in
1946, when he defined forensic accounting as the application of accounting knowledge
and investigative skills to identify and resolve legal issues. Crumbley (2003) defined
forensic auditing as an accounting analysis that can uncover possible fraud that is
suitable for presentation in court. A forensic accountant uses his knowledge of
accounting, law, investigative auditing, criminology, and psychology to uncover fraud,
find evidence and present such evidence in court if required. According to him person
who pretends to be something that he is not is fraud, a snare, a deceptive, trick, cheat and
a swindler. 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 are often retained to analyze, interpret, summarize and
present complex financial and business related issues in a manner, which is both
understandable and properly supported. Albretch and Albretch (2001), described forensic
auditing as the utilization of specialized investigative skills in carrying out an enquiry
conducted in such a manner that the outcome will have application to the court of law.
They further stated that the primary aim of forensic auditing is fraud detection, unlike
the traditional auditing that focuses on review of internal control system, error
identification and prevention. Forensic auditors are experienced auditors, accountants,
and investigators of legal and financial documents that are hired to look into possible
suspicion of fraudulent activity within a company; or are hired by a company who may
just want to prevent fraudulent activities from occurring. It demands reporting, where
5

accountability of the fraud is established and the report is considered as evidence in the
court of law or in administrative proceedings.
Also known as investigative accounting, forensic accounting is a detailed
examination and analysis of financial documents and records for use as evidence in a
court of law. The term forensic accounting can refer to anything from the execution of a
fraud analysis to the recreation of true accounting records after the discovery that they
have been manipulated.
Conceptual Definition of Strategic Tax Behaviors: Tax Evasion, Tax Avoidance and
Licit Savings of Taxes
For the purpose of this study, strategic tax behaviors (or aggressive tax planning
strategies) are all those actions designed solely to minimize corporate tax obligations
whose legality may be under doubt. Three categories of tax behaviors can be identified:
tax evasion, tax avoidance and licit saving of taxes, (Akindele, 2011). Tax evasion can
be synthetically defined as intentional illegal behavior, (behavior involving a direct
violation of tax law, in order to escape payment of taxes).
Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax
evasion often entails taxpayers deliberately misrepresenting the true state of their affairs
to the tax authorities to reduce their tax liability and includes dishonest tax reporting,
such as declaring less income, profits or gains than the amounts actually earned, or
overstating deductions.
In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden.
Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they
describe a range of activities that intend to subvert a state's tax system, although such
classification of tax avoidance is not indisputable, given that avoidance is lawful, within
self-creating systems.
Licit saving of taxes can be defined as commonly accepted forms of behaviors
which are neither against the law nor against the spirit of the law. The scope of each of
these concepts varies from country to country depending on governments policies, court
decisions, tax authorities attitudes and public opinion. In this study, strategic tax
behaviors are therefore all behaviors identified as tax evasion or tax avoidance.
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Activities being carried out by Forensic Auditors

Institute of forensic auditors (IFA) defines forensic activity as the activity
that consists of gathering, verifying, processing, analyzing of and reporting on data
in order to obtain facts and or evidence in a predefined context in the area of legal
financial disputes and or regulative (including fraud) and giving preventative
advice. From the above one can say that a forensic auditor is an expert in
accounting with experiences and special skill in Auditing, Fraud detection and
criminology that carries out investigation which is usable in the Law Court. In
order to understand activities been carried out by the forensic auditor there is need
to know the objective of forensic audit. The objectives of forensic audit will help
us to understand the role of forensic auditor and its impact on corporate
governance. These objectives are:
To improve management accountability.
To improve corporate governance and the statutory audit function.
To improving financial reporting system.
Help in detecting tax related fraud & malfeasance.
Help in strengthening auditors independence
Providing additional assurance for audit committees.
Financial statement auditors to take greater responsibility for the detection of fraud
and illegal acts when auditing financial statement due to the fact that another set of
auditors (forensic auditors) would be critically evaluating their role.
Forensic audits conceivably could give the audit committees tool to better evaluate
the quality of the financial statement audited by the external auditor.
Table 1. Differences between Forensic Auditing and Financial Auditing
Forensic Auditor
Financial Auditor
Forensic auditor or Non-statutory auditor Financial auditor or statutory auditor is
is employed or appointed by organization usually appointed to carryout statutory
to resolve allegations and detect or audit. The financial audit is usually
prevent fraudulent activities suspected or carried
out
to
satisfy statutory
envisaged in the organization. Thus, requirements, and ensure that accounts
Forensic auditors carry out investigation prepared/maintained are in line with
as to resolve allegations on fraudulent GAAP. Millichamp (1990) states that the
7

financial matters through court. Thus, it is

not a normal audit but audit which may or
may not follow auditing procedures and
GAAP in carrying out its function.
Zimbeldam etal (2012) states that, such
audit is a proactive audit which goes
beyond normal audit procedures.
Forensic audit is directed at specific
allegations- Forensic Auditors carries out
investigation
on specific allegations.
Hence he has much time to investigate and
analyze thoroughly specific fraudulent
financial issue with emphasis of using such
as evidence in law court in case of dispute
(Albrecht and Albrecht 2009).
Forensic Auditor is not apt to accept
explanations and documents at face value
Forensic Auditors is not apt to
accept explanations and documents at face
value, (Cole 2009). From the above the
forensic auditor is expected to always go
beyond the normal audit and search for
fraud which are to be reported to who so
ever have appointed the forensic auditor
or to be used as expert evidence in the law
courts.

statutory audit is a compulsory audit which

ensures that financial statement are in line
with GAAP. From the above, it can be said
that statutory auditor may or may not go
beyond the procedural audit since he is not
compelled by law to search for fraud but
rather in carrying out its audit function if
fraud is detected he will unveil it.
Financial audit carried out by the financial
auditor is general in nature. According to
Millucky and Mac (2013) Financial audit
is carried out on general financial
matters.(that means the auditor considers
all issues which concerns all relating to
accounting).
Financial auditors usually do not burrow
deeper into documents and explanations
This means that financial auditor
usually do not carry out detailed
analytical study of financial documents and
explanations rather the try to lay credence
that accounts prepared by management
and their employees are in line with
GAAP and statutory regulation, (Cole
2009)

Responsibilities of Forensic Auditors in combating Fraudulent Activities and

Malfeasance
The forensic auditors or fraud auditors have the responsibilities that are listed
below:
i. Conducting Investigation: The forensic auditor does not carry out procedural audit,
but carries an audit which conducts investigation as to detect fraud or crime using
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computer programs or scientific knowledge. This means the forensic auditor should
have the capability to use computer forensic tools that could be both software and
hardware in carrying out its function as to detect or prevent fraudulent activities. Thus
by using the computer forensic tools in carrying out his responsibilities, sophisticated
fraudulent activities can be combated.
ii. Analyzing Financial Transaction:
Forensic auditor in carrying out his
function analyzes financial transaction involving unauthorized transfers of cash
between companies. (Owojori and Asolu 2009). Cole (2009) states that the forensic
auditors are required to have special skills in inspecting documents for
authenticity, alteration, forgery or counterfeiting. Hence, by possessing such skills, the
forensic auditor in carrying out his duties can easily detect errors, fraudulent
activities and omissions thereby preventing and reducing fraudulent activities.
zimbleman et-al (2012) states that the forensic auditor is responsible for analyzing,
identifying the kinds of fraud that could occur and their symptoms.
iii. Reconstruction of incomplete accounting records: The forensic auditor in
carrying out his function reconstructs incomplete accounting records as to settle
insurance claims, over inventory valuation, proving money laundering activities by
reconstructing cash transactions. (Owojori and Asaolu 2009). In order to combat
fraudulent activities, the forensic auditor with his skills (Technological, communication
and expertise skills) in accounting knowledge can reconstruct incomplete accounting
records, hence helping to detect and prevent fraud and ensuring good internal control
system and good corporate governance.
iv. Embezzlement investigation:
In carrying out embezzlement investigation and
providing documentation, and negotiation of insurance settlements the forensic auditor
uses his special skill and experience, thus helping to detect the culprit and amount
embezzled.
Cabole (2009) states that what forensic auditors do includes:
a.
Fraud detection, documentation and presentation in criminal trials and claims.
b.
Calculate economic damages; trace income and assets, often in an attempt to find
hidden assets or income,
c
Reconstruction of financial statement that may have been destroyed or
manipulated. iv. Expert witness.
The above responsibilities listed by Cabole (2009) and Wallace (2009) show that
the forensic auditors must be specialist (experts) in financial matters and must have legal
knowledge which could enable him detect fraudulent activities which are to be presented
9

in the law suit.

Detecting Tax related fraud & malfeasance
With the use of analytical and technological skill, the forensic auditor can
easily detect tax related fraud and malfeasance perpetrated by management thereby
preventing corporate failure and ensuring good corporate governance. Cleary and
Thibodean, (2005) states that the forensic auditor knows how to detect and prevent
business fraud using Benford law (a fraud analytical digital tool). Thus, from the above,
it could be said that forensic auditors in helping to detect and prevent fraudulent
activities could be seen to have helped organizations in reducing tax related fraud
& malfeasance which most time had led to corporate collapse.
Conclusion and Recommendations
The capability to detect fraud or tax evasion is crucial to tax compliance. As it
would not be practical to audit all cases, the fear of being caught would be sufficient to
act as a deterrent. Tax officials should be exposed to adequate and continuous training;
both at home and abroad, for a better understanding of recent domestic and international
tax issues, which could then be utilized, to formulate successful tax compliance
strategies. The importance of forensic auditing cannot be underestimated as a result of
global persistent perpetration of fraud in organisations. This indeed has made researchers
and management of companies to look into other means of tackling and reducing the
menace of fraud. The following recommendations are therefore made:
1. The service of forensic auditors should be employed in Nigerian organisations. This
could be done by amending the existing statutes, thereby making forensic auditors one of
the audit team.
2. Forensic auditing should be taught in tertiary institutions to better train accountants in
the field.
3. There should be ethical campaign among employees towards developing high moral
standards.
4. Practicing Accountants should also specialize in forensic auditing.
5. Fraud perpetrators should be properly sanctioned without any fear or favour

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