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SEMINAR PAPER

ON

FORENSIC AUDITING

(ACC 615: AUDITING & INVESTIGATOR)

PRESENTED BY GROUP 8

NAMES: REG NO:

1. UKENNA STEPHEN I. M.Sc./2009/406033F

2. OKOH ALEX C. M.Sc./2009/406026F

3. EZEJIOFOR RAYMOND A. M.Sc./2009/406024F

4. MEDUOYE OLANIDE MOFOLUSHO

5. IGBOKWE UCHENNA M.Sc./2009/406043F

6. IFEYINWA OZOEMENE M.Sc./2009/406009F

7. ANYAFULU CHINYERE M.Sc./2009/406048P

8. OKORO RAYMOND M.Sc./2009/406010P

9. OZUOMBA CHIDINMA M.Sc./2009/406007F

DEPARTMENT OF ACCOUNTANCYFACULTY OF MANAGEMENT SCIENCESNNAMDI AZIKIWE UNIVERSITY, AWKA

LECTURER: PROF. EMMA OKOYE

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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1.10.3 Banks declared technically insolvent by CBN - - 22

1.10.4 Cadbury Nig Plc - - - - - - - 23

1.11 STEPS IN CONDUCTING INVESTIGATION IN FORENSIC AUDIT

- - - - - - - - - - - 23

1.12 CONCLUSION - - - - - - - - - 27

1.13 REFERENCES - - - - - - - - 28

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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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Forensic auditing covers a broad spectrum of activities, with terminology

not strictly defined in regulatory guidance. Generally, the term forensic accounting

is used to describe the wide range of investigative work which accountants in

practice could be asked to perform. The work would normally involve an

investigation into the financial affairs of an entity and is often associated with

investigations into alleged fraudulent activity. Forensic accounting refers to the

whole process of investigating a financial matter, including potentially acting as an

expert witness if the fraud comes to trial. Although this article focuses on

investigations into alleged frauds, it is important to be aware that forensic

accountants could be asked to look into non-fraud situations, such as the setting of

monetary disputes in relations to a business closure or matrimonial disputes under

insurance claims.

The process of forensic accounting as described above includes the forensic

investigation itself which refers to the practical steps that the forensic accountant

takes in order to gather evidence relevant to the alleged fraudulent activity. The

investigation is likely to be similar in many ways to an audit of financial

information, in that it will include a planning stage, a period when evidence is

gathered, a review process, and a report to the client. The purpose of the

investigation, in the case of an alleged fraud, would be to discover if a fraud had

actually taken place, to identify those involved, to quantify the monetary amount of

the fraud (i.e. the financial loss suffered by the client), and to ultimately present

findings to the client and potentially to court.

Finally, forensic auditing refers to the specific procedures carried out in

order to produce evidence. Audit techniques are used to identify and to gather

evidence to prove, for example, how long the fraud has been carried out and how it

was conducted and concealed by the perpetrators. Evidence may also be gathered

to support other issues which would be relevant in the event of a court case. Such

issues could include: The suspect’s motive and opportunity to commit fraud;

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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.

What is Forensic Audit or Forensic Accounting?

According to Wikipedia (2010), the term “forensic” means “suitable for use

in the court of law”. Forensic, according to the Webster’s Dictionary means,

“Belonging to, used in or suitable to courts of judicature or to public discussion

and debate”.

Forensic audit or forensic accounting can be used interchangeably. Forensic

accounting is defined as that aspect of accounting that provides an accounting

analysis that is suitable to the court which will form the basis for discussion, debate

and ultimately dispute resolution. Furthermore, forensic accounting comprises the

use of accounting, auditing, and investigative skills to assist in legal matters. It

consist of two (2) major components – a. litigation support and services, which

recognize the role of the accountant as an expert consultant; b. investigative

services, that use a forensic accountant’s skills and may require possible courtroom

testimony.

Forensic audit involves examination of legalities by blending the techniques

of propriety (VFM audit), regularity and investigative and financial audits. The

objective is to find out whether or not true business value has been reflected in the

financial statements and in the course of examination to find whether any fraud has

taken place.

Forensic audits are performed by special class of financial experts know as

forensic accountants. This class includes certified fraud examiners (people with

bachelor’s degrees or equal professional experience who have a background in

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accounting, prosecuting fraud, loss prevention or criminology/sociology who pass

the CFE test); CPAs, or Chartered Accountants.

Forensic auditors begin by taking all the accounts, inventories, assets, capital

and other economic elements and determining how they should work together. To

use a hypothetical example, if an auditor sees that a business grosses $10 million a

year, he assumes that the profits, cash, new capital, inventories, taxes, payroll, rent

and other costs add up to $10 million. He then looks at the profits, cash, et al and

checks how they ought to interact (e.g. in some cases, there is a systemic overlap

between certain values, which the accountant would make note of so as not over

count). Once he had collected all of the reported values (as well as caveats), he

would establish an ideal model for how the each side of the balance sheet should

read.

Once completed, the report is sent to the appropriate authorities and

recorded as evidence. While its completeness and objectivity are certainly

important, a forensic audit report’s most useful attribute is the summary of results.

Finance is a highly technical disciple; to accommodate this complexity,

accountancy has adopted an precise lexicon. As such, an unscrupulous defense

attorney could exploit the average juror’s ignorance of such terminology to

discount audit results that are actually compelling. Luckily, chartered accountants

specializing in forensic understand finance as well as criminal law. This allows

them to translate audit results into language useful to prosecutors trying to build a

case.

1.0.2 The Objectives of this paper

The objectives of this paper include:

1. To imbibe the art of forensic thinking among accountants;

2. To stimulate and promote the understanding of basic forensic skills;

3. To further expand the stock of literature in forensic accounting and audit.

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1.0.3 Historical Background of Forensic Audit/Forensic Accounting

Kessr international, a world renowned forensic accounting and investigative

consulting firm, began his lifelong career as a forensic accountant in the early

1970’s.

Kessler’s first job out of college was that of a field auditor for associated

hospital services of New York. His job was to ferret out fraud and abuse

committed by health care institutions and its employees against the Medicare. In

those days health care facilities received reimbursement for the services they

rendered based on a calculated rate derived from cost reports submitted to an

insurance carrier. Kessler’s job was to visit hospitals and health care facilities to

review and compare the original documentation of the facility reported on the cost

report and ascertain if it properly reflected the actual revenue and expenses of the

facility.

Mr. Kessler’s audits began uncovering significant fraud by the facilities he

audited, so he was designated as one of the companies first field auditors

specializing in investigative audits. Mr. Kessler’s, wanting t to distinguish his role

from other field auditors and the accountants whose job was to certify the books

and records of a facility, began calling himself an “Investigative accountant”, a

term he heard while working closely with the government’s accountants assigned

to analyze his fraud findings. Kessler quickly realized that this title would not be

accepted by individuals in the health care industry. It seemed no one felt

comfortable in the hands of an “investigative Auditor”. Kessler was now faced

with a dilemma Kessler’s inspiration came from a very unlikely source. One night

after watching his favorite show, “Columbo”, he found the resolution to his

problem. To some viewers Columbo’s most memorable attribute was his crumple

raincoat, but for Michael G. Kessler, it was much more. Kessler realized the peter

Falk could quickly solicit the cooperation of defendants and solve cases using a

gentle approach and the use of “forensic evidence”. Kessler thus began calling

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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.

1.2 CHARACTERISTICS OF A FORENSIC AUDITOR.

According to Ngozi (2010), a capable forensic accountant or auditor should have

the following characteristics:

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i. Curiosity

ii. Persistence;

iii. Creativity;

iv. Discretion;

v. Organization;

vi. Confidence; and

vii. Sound professional judgment.

1.3 SKILLS FOR FORENSIC AUDIT

a. Knowledge of entity’s business and legal environment

b. Awareness of computer assisted audit procedures

c. Innovative approach and skeptic of routine audit practices

According to Ngozi (2010), the skills or competencies required of a forensic

auditor, can be divided into two broad classifications, namely:

1. General competencies/skills:

i. Communications

ii. Self or life management

iii. Interpersonal skills

iv. Leadership

v. Organisational

vi. Management Skills

vii. Stakeholder communications and development

viii. Knowledge.

2. Technical competencies/skills

i. Legal, safety and soundness or compliance analysis;

ii. Technical communication

iii. Data collection and analysis

iv. Financial analysis.

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1.4 OBJECTIVES OF FORENSIC AUDIT

Forensic auditing aims at legal determination of whether fraud has actually

occurred. In the process, it also aims at naming the person(s) involved (with a view

to take legal action).

Objective of forensic audit is to find whether or not a fraud has taken place.

Forensic auditor shall have to examine voluminous and in totality, records and

witnesses, if permitted b y law. Proper documentation is vital in following, in case

of frauds:

Proving the loss

Proving the responsibility for the loss

Proving the method/motive

Establishing guilty knowledge

Identifying other beneficiaries

1.5 APPLICATION OF FORENSIC AUDIT

An obvious example of forensic auditing is the investigation of a fraud or

presumptive fraud with a view to gathering evidence that could be presented in a

court of law. However, there is an increasing use of auditing skills to prevent fraud

by identifying and rectifying situations which could lead to frauds, being

perpetrated (i.e. risks). It might be useful, therefore, to discuss forensic auditing as

being either ‘Reactive’ or ‘Proactive’.

1.5.1 Reactive Forensic Auditing

The objective in case of reactive forensic audit is to investigate cases of suspected

fraud so as to prove or disprove the suspicions, and if the suspicions are proves, to

identify the persons involved, support the findings by evidence and to present the

evidence in an acceptable format in any subsequent disciplinary or criminal

proceedings.

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In such cases it is important to keep in view the following:

Working relations with the investigating and prosecuting agencies

Authorization and control of audit investigation

Documentation of relevant information and safeguarding all prime records

pertaining to the case

Rules of evidence governing admissibility authentication of records

Confidentially

Evaluation of the evidence to assess whether the case is sustainable

Legal advice where appropriate

Reporting the findings in a manner that meets legal requirements

Forensic accounting and audit may be applied in the following areas besides fraud

detection:

a. Conducting due-diligence (especially for segment wise profitability analysis)

b. Business valuation

c. Management auditing

d. Assessing loss before setting insurance claims

Forensic audits are used whenever lawyers or law enforcement officials need

reliable data on a party’s financial status or activities. For example, while reaching

a divorce settlement, a lawyer may request the presiding judge to permit a forensic

audit to uncover assets that one spouse is trying to hide.

If you want to sue and auditor (or the accounting firm) for negligence, you

would request separate forensic audit to determine how much the botched job cost

you. In business, if an elected official is accused of accepting bribes, the FBI could

set up a forensic auditing team. Forensics audits are sought by CEOs, Chief

financial officers or board members who suspect embezzlement with the company.

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1.5.2 Proactive Forensic Auditing

Forensic auditing in this sense could be viewed from different aspects

depending on its application, some of which are discussed below.

Regulatory Compliance

Government Departments/Agencies could themselves use the techniques of

forensic auditing to assess compliance with regulations governing payments of

grants/subsides. Performance auditors could also use these techniques while

auditing such governmental programs. To a large extent we in SAI India have

applied such techniques in some of our major audits of large government programs

such as Integrated Child Development Scheme; Public Distribution Scheme (for

food grains), to customs duty drawbacks and export subsidies.

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.

1.6 ADVANTAGES AND DISADVANTAGES OF FORENSIC AUDIT

1.6.1 Advantages of Forensic Audit

Forensic auditing strengthens control mechanisms, with the objective of

protecting the business against financial crimes, be they potential

catastrophic one-off events that could threaten the viability of the business,

or smaller-scale but repetitive misappropriations of company assets over a

number of years.

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

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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.

1.6.2 Disadvantages of Forensic Audit

A poorly managed forensic audit could consume excessive amounts of

management time and could become an unwelcome distraction for the

business

Forensic audits can have wide-ranging scope across the business. Under

certain circumstances, the scope of the audit may need to e extended, with a

corresponding increase in the budget.

Some employees can interpret a proactive forensic audit as a slight on their

integrity, rather than as a means to improve control procedures for the

benefit of the business.

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1.7 DISTINCTION BETWEEN STATUTORY AUDIT AND FORENSIC

AUDIT

S/n Particulars Statutory audit Forensic audit

1 Objective Express opinion as to true &

fair presentation

Determine correctness

of the accounts or

whether any fraud has

actually taken place

2 Techniques Substantive and compliance

procedures

Analysis of past trend

and substantive or in

depth checking of

selected transactions.

3 Period Normally all transactions for

the particular accounting

period

No such limitations,

accounts may be

examined in detail

from the beginning

4 Verification of stock,

estimation of realization

value of current assets,

provisions / liability

estimation, etc

Relies on the transactions for

the particular accounting

period

No such limitations.

Accounts may be

examined in detail

from the beginning

5 Off balance-sheet items

(like contracts)

Used to vouch the arithmetic

accuracy & compliance with

procedures

Regularity and

propriety of these

transactions / contracts

are examined.

6 Adverse findings, if any Negative opinion or qualified

opinion expressed, with /

without quantification.

Legal determination of

fraud naming persons

behind such frauds.

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1.8 DETECTION TECHNIQUES IN FORENSIC AUDITING.

Forensic auditing should focus on significant transactions – both as reflected

in financial statements and off balance sheet items. The techniques mainly are

‘Critical Point Auditing and Propriety Auditing.

A. Critical Point Auditing: Critical point auditing techniques aims at filtering

out the symptoms of fraud from regular and normal transactions in which

they are mixed or concealed. For this purpose, financial statements, books,

records, etc are analyzed mainly to find out:

i. Trend-analysis by tabulating significant financial transaction

ii. Unusual debits/credits in accounts normally closing to credit/debit balance

respectively

iii. Discrepancies in receivable or payable balances / inventory as evidence from

the non-reconciliation between financial records and corresponding

subsidiary records (like physical verification statement, priced stores

ledgers, personal legers etc).

iv. Accumulation of debit balances in loosely controlled accounts (like deferred

revenue expenditure accounts, mandatory spares account – capitalized as

addition to respective machinery item etc)

v. False credits to boost sales with corresponding debits to non-existent

(dummy) personal accounts.

vi. Cross debits and credits and inter-account transfers

vii. Weaknesses / inadequacies in internal control / check systems, like delayed /

non-preparation of bank reconciliation statements etc.

B. Propriety Audit: Propriety audit is conducted by supreme audit institutions

(SAI) to report on whether government accounts, i.e. all expenditure

sanctioned and incurred are need-based and all revenues due to government

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have been realized in time and credited to the government account. In

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 TYPES OF INVESTIGATION IN FORENSIC AUDITING

The forensic auditor could be asked to investigate many different types of

fraud. It is useful to categories these types into three groups to provide an overview

of the wide range of investigations that could be carried out. The three categories

of frauds are corruption, asset misappropriation and financial statement fraud.

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.

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Extortion is the opposite of bribery and happens when money is demanded

(rather than offered) in order to secure a particular outcome.

1.9.2 Asset misappropriation

By far the most common frauds are those involving asset misappropriations,

and there are many different types of fraud which fall into this category. The

common feature is the theft of cash or other assets from the company for example:-

Cash theft: This is the stealing of physical cash, for example petty cash,

from the premises of a company.

Fraudulent disbursements: Company funds being used to make fictitious

payments. Common examples include billing schemes, where payments are made

to a fictitious employee (often known as ghost employees).

Inventory frauds: The theft of company goods, stocks, over and

undervaluation of assets and liabilities.

Misuse of assets: This is a case of employees using company assets for their

own personal interest.

1.9.3 Financial Statement Fraud.

This is also known as fraudulent reporting and is a type of fraud that causes

a material misstatement in the financial statements. It can include deliberate

falsification of accounting records, omission of transactions, balances or

disclosures from the financial statements, or the misapplication of financial

reporting standards. This is often carried out with the intention of presenting the

financial statements with a particular bias, for example concealing liabilities in

order to improve any analysis of liquidity and gearing.

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1.10 HIGHLIGHTS OF SOME COMPANIES WHERE FORENSIC

INVESTIGATION HAS TAKEN PLACE.

1.10.1 Enron Scandal (2001)

Enron was a successful energy company established in 1985 in Omaha,

Nebraska. As the company grew, it moved its headquarters to Houston and became

a multibillion – dollar publicly traded company. It had more than 20,000

employees and an income of more than $100 billion. Enron was named as the

America’s most innovative company in 2000. Unfortunately, as Enrons wealth

increased, so did its corruption. Through the 1990s, Enron started making deals

with limited liability corporations that it controlled, allowing them to hide many of

their debts and losses from their financial statements. In reality, Enron was close to

bankruptcy, but no one knew but its accounting firm Arthur Anderson and its

executives. In 2001 the scandal was exposed, causing its stock to drop from nearly

$100 a share to less than $1 a share. The Enron scandal put into light the shady

practices of many corporations and helped to give birth to the modern version of

forensic accounting.

1.10.2 Sunbeam (1997)

This is a company that manufactures small appliances. It followed a practice

called Bill and hold which is when a company records sales of its products as

profits while waiting to deliver the products: on paper, the company appeared to

have had high sales; however, Sunbeam’s warehouses were full of unsold products.

This practice was uncovered by a financial analyst. Sunbeams accounting

firm, Arthur Anderseen performed an audit and reported that Sunbeam’s books

were accurate and in accordance with federal guidelines.

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The board was unsatisfied and hired Deloitte and Touche to review Arthur

Andersen’s audit. This follow – up uncovered the proof that the numbers has been

manipulated. The Securities and Exchange Commission investigated Sunbeam and

its CEO Afred Dunlap was fired and forced to pay millions of dollars to settle

investment lawsuits.

Coming back to what is happening to our country Nigeria we have the

following:-

1.10.3 Five prominent banks in Nigeria declared technically insolvent by CBN.

(2009)

The Governor of Central Bank of Nigeria, Mr Lamido Sanusi on August

2009 made a breath – taking presentation on the state of some banks operations

and provided to the Nigerian people the sordid details of some part of the banking

system. Five prominent banks were declared technically insolvent, chronically

illiquid, with the revelation that they had largely eroded their shareholders funds

and practically breached all the ratios in banking. CBN unfolded the list of debtors

comprising companies and their directors who secured loans worth N747 billion

from the affected banks.

The question still awaiting answers remain that some auditors approved

these bank’s financials which were presented to shareholders at the annual general

meetings, refusing to disclose their debt portfolio. What a misinformation price

water house coopers and Akintola Williams Delliotte – are the auditors of the five

troubled banks.

Questions were being raised about their accountant’s competence and integrity,

apart from doubts on the exact standards of corporate governance. Before the CBN

announced its findings on the conditions of the five banks and their activities in the

Expanded Discount Window (EDW), their auditors were unable to properly

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scrutinize and bring to public domain the true state of these reports including their

loans portfolio which CBN now put at N2.8 trillion.

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).

1.11 STEPS IN CONDUCTING AN INVESTIGATION IN FORENSIC AUDIT

The process of conducting a forensic investigation is, in many ways, similar

to the process of conducting an audit, but with some additional considerations. The

various stages are briefly described below:

STEP 1: Accepting the Investigation

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The forensic accountant must initially consider whether their firm has the

necessary skills and experience to accept the work. Forensic investigations are

specialist in nature, and the work requires detailed knowledge of fraud

investigation techniques and the legal framework. Investigators must also have

received training in interview and interrogation techniques, and in how to maintain

the safe custody of evidence gathered. Additional considerations include whether

or not the investigation is being requested by an audit client. If it is, this poses

extra ethical questions, as the investigating firm would be potentially exposed to

self-review, advocacy and management threats to objectivity. Unless robust

safeguards are put in place, the firm should not provide audit and forensic

investigation services to the same client. Commercial considerations are also

important, and a high fee level should be negotiated to compensate for the

specialist nature of the work, and the likely involvement of senior and experienced

members of the firm in the investigation.

STEP 2: Planning the Investigation

The investigating team must carefully consider what they have been asked to

achieve and plan their work accordingly. The objectives of the investigation will

include: identifying the type of fraud that has been operating, how long it has been

operating for, and how the fraud has been concealed identifying the fraudster(s)

involved quantifying the financial loss suffered by the client gathering evidence to

be suffered by proceedings providing advice to prevent the reoccurrence of the

fraud.

The investigators should also consider the best way to gather evidence – the

use of computer assisted audit techniques, for example, is very common in fraud

investigations.

STEP 3: Gathering Evidence

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In order to gather detailed evidence, the investigator must understand the

specific type of fraud that has been carried out, and how the fraud has been

committed. The evidence should be sufficient to ultimately prove the identity of

the fraudster(s), the mechanics of the fraud scheme, and the amount of financial

loss suffered. It is important that the investigating team is skilled in collecting

evidence that can be used in a court case and in keeping a clear chain of custody

until the evidence is presented in court. If any evidence is inconclusive or there are

gaps in the chain of custody, then the evidence may be challenged in court, or even

become inadmissible. Investigators must be alert to documents being falsified,

damaged or destroyed by the suspect(s).

Evidence can be gathered using various techniques such as: testing controls

to gather evidence which identifies the weaknesses, which allowed the fraud to be

perpetrated using analytical procedures to compare trends over time or to provide

comparative between different segments of the business applying computer

assisted audit techniques, for example to identify the timing and location of

relevant details being altered in the computer system discussion and interviews

with employees substantive techniques such as reconciliations, cash counts and

reviews of documentation.

The ultimate goal of the forensic investigation team is to obtain a confession

by the fraudster, if a fraud did actually occur. For this reason, the investigators are

likely to avoid deliberately confronting the alleged fraudster(s) until they have

gathered sufficient evidence to extract a confession. The interview with the suspect

is a crucial part of evidence gathered during the investigation.

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

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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.

STEP 5: Court Proceedings

The investigation is likely to lead to legal proceedings against the suspect

and members of the investigative team will probably be involved in any resultant

court case. The evidence gathered during the investigation will be presented at

court, and team members may be called to court to describe the evidence they have

gathered and to explain how the suspect was identified. It is imperative that the

members of the investigative team called to court can present their evidence clearly

and professionally, as they may have to simplify complex accounting issues so that

non-accountants involved in the court case can understand the evidence and its

implication.

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

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out whether or not true business value has been reflected in the financial statements

and whether any fraud has taken place.

In summary, a forensic investigation is a very specialist type of engagement,

which requires highly skilled team members who have experience not only of

accounting and auditing techniques, but also of the relevant legal framework.

There are numerous different types of fraud that a forensic accountant could

be asked to investigate. The investigation is likely to ultimately lead to legal

proceedings against one or several suspects, and members of the investigative team

must be comfortable with appearing in court to explain how the investigation was

conducted, and how the evidence has been gathered. Forensic accountants must

therefore receive specialist training in such matters to ensure that their credibility

and professionalism cannot be undermined during the legal process.

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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.