AHMADU BELLO UNIVERSITY, ZARIA

DISTANCE LEARNING CENTER

DEPARTMENT OF ACCOUNTING

ACCT 327- RESEARCH METHODOLOGY

NJOKU VEOAN
U21DLAC20020

24th APRIL, 2024

 Introduction

The prerequisite for forensic accounting was created by the increased number of

corporate scandals in the world. As the consequence of the global meltdown of collapses of

Enron, World.Com and Parmalat, the necessity for the establishment of procedures and controls

designed by the forensic accountants and auditors in detecting, preventing and responding to

frauds was arisen (Popoola, et al., 2015). These corporate scandals led to erosion of investor

confidence on financial markets. The frequency of number of incidents of Accounting/ Financial

Statements frauds in the global context was 28% during the two years period of 2018 and 2019.

Further, the total losses reported as a consequence of the frauds during the years 2018 and 2019

is, USD 42 Billion (PricewaterhouseCoopers, 2020). After the major corporate scandals of

Enron, World.Com, many standards, rules and regulations including Sarbanes-Oxley Act in 2002

were introduced to reduce or eliminate the occurrence of corporate scandals. Regardless of the

efforts that were taken to prevention and investigation of frauds, every day a new kind of a fraud

is appearing (Prabowo, 2013). This has created a forensic accountant and the forensic accounting

skills globally (Kranacher, et al., 2008). Detecting and preventing frauds was identified as part of

accounting function and the internal or external auditors were supposed to detect and prevent

frauds. However, later it was noted that auditors do not have a responsibility to fraud prevention

and detection, and they can only check the compliance of the company’s financial statements to

accounting and other relevant rules and regulations for financial reporting. As a result, the new

category of accounting emerged, which is, “Forensic Accounting”. The emergence of Forensic

Accounting was to detect the fraudulent transactions taking place in business organizations

(Bhasin, 2007).
 In recent years, banks, police agencies and even insurance companies have increased the

use of experts from forensic accounting field. The increase in white collar crime and the

difficulties faced by enforcement agencies in uncovering fraud have increased the importance of

this profession. In the coming near future, forensic accounting may evolve as a separate branch

of accounting. Forensic accountant can be in different roles like mediator, a consultant arbitrator,

referee or a court-appointed expert. The report submitted by forensic accountant may be taken as

a key piece of evidence. The objective of this study is to systematically analyze the existing

literature on forensic accounting and thereby identifying the existing gap in the forensic

accounting literature. In the era of increasing accounting scandals, the importance of forensic

accounting is also increasing.

What is Forensic Accounting?

Forensic is a technique used for detection of a crime and forensic accounting is a method

for detecting and investigating fraud. It is the integration of investigative skills with accounting

and auditing practices. Forensic accounting is used to detect white-collar crimes like

embezzlement, tax evasion, money laundering, financial exploitation and hidden assets. Some of

the leading definitions of forensic accounting are;

1. Hopwood, Leiner and Young: Forensic accounting is the use of analytical and

investigative skills for the purpose of resolving financial issues that meets standards

required by courts of law.

2. Kranacher, Riley and Wells: Financial forensics is the application of financial theories

and principles to facts in a legal dispute and consists of two primary functions -

investigative services and litigation advisory services.

 3. Crumbley, Heitger and Stevenson Smith: Forensic accounting is the application of

accounting for legal purposes.

History of Forensic Accounting

Archaeological studies disclose that accountants of Egypt (during 3300-3500BC) were

involved in the detection and prevention detection of fraud. During 18th century close

relationship developed between legal profession and accountancy. The earliest known evidence

of forensic accounting has been traced to an advertisement in a newspaper in Glasgow, Scotland,

appearing in 1824. At that time, counsels, courts and arbiters used forensic accountants to

investigate fraudulent activity. In the early 1900s, due to income tax evasion and the adoption of

Federal Income Tax created demand for forensic accountants. One of the first income tax

evasion cases uncovered by forensic accountants was that of the infamous gangster, Al Capone

during World War II, the Federal Bureau of Investigation (FBI) employed over 500 forensic

accountants who were used to monitor and examine financial transactions. Due to the growth of

the profession, the American Board of Forensic Accountants was founded in March of 1997

Why Forensic Accounting?

Forensic accounting is essential not only because they have a special skill and trained in

the investigation and expertise in accounting records, but also because of the evidence found

playing a significant role in judicial decision making. This job is quite different from the auditor.

Their responsibility is not investigating and quantifying the fraud that happens in the company,

and also, the evidence found by the auditor might not be used by the court. However, the

evidence found by forensic accounting could be used by the court as expert evidence. For
example, the FBI also has a forensic accounting team to work for them in investigating any

matter related to accounting.

Qualities of Forensic Accountants

There is a definite need for forensic accountants in the business world today, but not everyone

possesses those characteristics and qualities that comprise a high quality forensic accountant.

Forensic accountants need to possess the following characteristics and qualities:

1. Strong written and oral communication skills.

2. A thorough knowledge of auditing, risk assessment and fraud detection.

3. A basic understanding of the legal system.

4. Should possess the ability to interview and effectively elicit information from people who

may not be willing to give truthful answers.

5. Knowledge and experience in financial planning and management techniques.

6. Advanced computer skills.

7. Ability to work in a team environment

How does Forensic Accounting Work?

Forensic accounting takes into account a wide range of documents to uncover crimes, including:

1. Examining financial statements.

2. Talking to associated parties.

3. Collaborating with government officials or lawyers.

4. Examining internal data.

5. Examining credit statements, bank statements.

 6. Examining correspondence like letters, invoices, and emails.

7. Examining court records.

8. Conducting interviews.

9. Observing and proving changes in the lifestyle of the accused, i.e., increased spending.

Forensic accountant professionals also need to employ their traditional accounting skills to

determine whether the company's expected revenues match their actual revenues. They must then

make this digestible to a court using graphs, sheets, or other visualization methods.

Forensic Accounting Investigation skills

Investigation is the act or process of investigating or the condition of being investigated.

It is a searching inquiry for ascertaining facts; detailed or careful examination. Investigation is a

vital part of forensic accounting and auditing process but only applied when the event or

transaction is beclouded. It is carried out when lapse has been established to ascertain who is

responsible, the reason for the action including the extent of damage if any. It could be referred

to as a detailed verification and clarification of doubt about a transaction or event (Oyedokun,

2013). According to Oyedokun (2013) “The forensic accountant or fraud examiner must have

skills in many areas. Some forensic accountants, of course, specialize in certain areas such as

information technology. However, all well-trained forensic accountants have at least a minimum

level of knowledge and skills in the following areas”:

1. Auditing skills are of paramount importance to the forensic accountant because of the

information-collecting and verification nature of forensic accounting. Well-trained

forensic accountants must be able to collect and analyze relevant information so that the

cases on which they are working will be well supported in court.

2. Investigative knowledge and skills, such as surveillance tactics and interviewing and

interrogation skill, assist the forensic accountant beyond the skills related to auditing and

blend the financial and legal aspects of forensics.

3. Particularly the study of the psychology of criminals is important to the forensic

accountant because effective investigative skills often rely on knowledge of the motives

and incentives experienced by the perpetrator.

4. Accounting knowledge helps the forensic analyze and interpret the financial information

necessary to build a case in a financial investigation, whether it is a bankrupt setting, a

money-laundering operation, or an embezzlement scheme. This includes knowledge of

proper internal controls such as those related to corporate governance.

5. Legal knowledge is critical to the success of the forensic accountant. Knowledge of laws

and court procedures enables the forensic accountant to identify the type of evidence

necessary to meet the legal standards of the jurisdiction in which the case is to be

adjudicated and preserve evidence in a manner that meets the criteria of the court.

6. Information technology (IT) knowledge and skills are necessary tools of the forensic

accountant in word filled with paperless crimes. At a minimum, forensic accountants

must know the point at which they should contact an expert in computer hardware or

software. Forensic accountants use technology skills to quarantine data, extract data

through data mining, design and implement controls over data manipulation, accumulate

baseline information for comparison purpose, and analyse data.

7. Communication skills are required of forensic accountants so that the results of their

investigation/analysis can be correctly and clearly conveyed to users of their services.

Bronner (2014) concluded that Forensic Accounting Techniques such as interviewing,

 computer assisted reviews such as data mining, and document review techniques are also

useful to detect fraud. Because of the unique legal aspects of forensic accounting

investigations, there are special auditing protocols that must be followed since the audit’s

conclusions and findings may be subject to challenge in an adjudication proceeding, or in

more formal court proceedings

Theoretical Framework

The three major theories that are of interest to this study (theory of fraud triangle, theory of fraud

diamond) are presented below:

1. Theory of Fraud Triangle- Cressey (1940) focused his research on embezzlers. His

findings resulted in a theory which, over the years, has become known as the fraud

triangle. One leg of the triangle represents a perceived non-sharable financial need. The

second leg is for perceived opportunity, and the final is for rationalization. The role of the

non-sharable problem is important. In his view, Cressey (1940) opined that there were

two components of the perceived opportunity to commit a trust violation: general

information and technical skill. General information is simply the knowledge that the

employee’s position of trust could be violated. This knowledge might come from hearing

of other embezzlements, from seeing dishonest behaviour by other employees, or just

from generally being aware of the fact that the employee is in a position where he could

take advantage of his employer’s faith in him. Technical skill refers to the abilities

needed to commit the violation. These are usually the same abilities that the employee

needs to obtain and keep his position in the first place. (Fraud examiner manual, 2014).

While concluding their work on “an analysis of the fraud triangle” Turner, Mock, and
 Srivastava (2003) believes that their models and related analyses provide a method of

incorporating objectively the factors in the fraud triangle and to assess their impact on

audit risk and opined that this type of assessment should help an audit team plan and

appropriately modify audit procedures to control audit risk to an acceptable level. The

results of their analyses support the concept of the fraud triangle in that the relationships

between the three components are shown to have a substantial impact on audit risk.

2. Theory of Fraud Diamond- Wolf and Hermanson (2004) believe that the fraud triangle as

postulated by Cressey (1940) could be enhanced to improve both fraud prevention and

detection by considering a fourth element referred to as “Capability”. They stated that in

addition to address incentive, opportunity, and rationalization, the four-sided “fraud

diamond” also considers an individual’s capability such as personal traits and abilities

that play a major role in whether fraud may actually occur even with the presence of the

other three elements by Cressey. These four elements certainly overlap (Wolf and

Hermanson, 2004); the primary contribution of the fraud diamond is that the capabilities

to commit fraud are explicitly and separately considered in the assessment of fraud risk.

By doing so, the fraud diamond moves beyond viewing fraud opportunity largely in terms

of environmental or situational factors, as has been the practice under current and

previous auditing standards.

Conceptual Framework

Joshi (2003) sees forensic accounting as the applications of specialized knowledge and

specific skills to stumble up on the evidence of economic transactions. Zysman (2004) puts

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) states that forensic accounting involves the

application of accounting concepts and techniques. It demands reporting, where the

accountability or the fraud is established and the report is considered as evidence in the court of

law or in the administrative proceedings (Joshi, 2003). It provides an accounting analysis that is

suitable to the court, which will form the basis of discussion, debate and ultimately dispute

resolution (Zysman, 2004). This 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 the business reality of the situation (Zysman, 2004).

Previous studies indicate that auditors are able to identify Management Fraud Risk

factors, but may not be able to translate this knowledge into an audit plan that effectively takes

them into account and enhances chances of detecting Management Fraud if it exists. Forensic

accountants may be able to compensate for such limitations. Academics and practitioners may be

over-estimating what Forensic accountants can contribute to the effectiveness of an audit plan.

They may be able to investigate a known fraud, but may not be able to design audit tests to detect

a hypothesized fraud as well as auditors can. Oliver (2004) is of the opinion that, because the

complexity and scope of commerce has expanded throughout the world, the need to track money
and financial information has grown. There has been a corresponding increase in illegal financial

activity, according to separate surveys by the U.S department of Justice, Price Water House

Coopers, and the Association of Certified Fraud Examiners (ACFE). Ironically, illegal

businesses and perpetrators of financial crimes also need to keep track of their cash flow and

manage their operational performance to generate profits, fund activities and avoid detection and

seizure of their assets. 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 requires

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. Zysman, (2004) the forensic accountant’s 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. According to the Black’s law

Dictionary, (1979) fraud (sometimes referred to as fraudulent act) includes all the multifarious

means human ingenuity can devise that are resorted to by one individual to get an advantage over

another by false suggestions or suppression of the truth. It includes surprises, tricks, cunning or

dissembling and any unfair way by which another is cheated. Dandago (1997), fraud is an

intentional misrepresentation of financial information by one or more individuals among

management, employees or third parties. It involves the use of criminal deception to obtain an

unjust or illegal advantage. It is a deliberate cheating or deception intended to gain an undue

advantage. Michael, (2004)

Conclusion

The main objective of forensic accounting is to find proof of a fraud and to present it as

evidence in a court of law. Thus, the purpose of forensic accounting is to prevent financial

crimes as well as to anticipate future crimes. Forensic accountant requires investigative and

communication skills apart from the basic accounting and audit knowledge. Amendments in the

law are required to be undertaken to establish the importance of forensic accounting in general

and forensic accountants in specific. Audits and investigations are considered to be complex but

as necessary skills for the Forensic Accountants. Audit exercise aims at expression an opinion as

to the true and fair view of the financial statement examined. Audit is statutorily required while

investigation process would only be activated when the situation is beclouded. Investigation on

the other hands is tailored towards a particular cause of event which could be financial or non-

financial in nature. There are both local and international standards on auditing; there is no

convergence of standards on investigation so also forensic accounting. Forensic accounting is a

scientific accounting method of uncovering, resolving, analyzing and presenting fraud matters in

a manner that is acceptable in the court of law” (Oyedokun 2013): The integration of accounting,

auditing and investigative skills yields the specialty known as forensic accounting. Forensic

accounting, thus, provides an accounting analysis that is suitable to the court which will form the

basis for discussion, debate and ultimately dispute resolution. Forensic Accounting encompasses

both litigation support and investigative accounting (Zysman, 2004).

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