audit, investigation & forensic accounting: exploring the nexus

AUDIT, INVESTIGATION AND FORENSIC ACCOUNTING:

Exploring the Nexus

Compiled and Presented

BY

Chief Godwin Emmanuel OYEDOKUN HND (Acct.), BSc. (Acct. Ed), MBA (Acct. & Fin.), MSc. (Acct.), (MSc. Fin.), MTP (SA), ACA, FCTI,

ACIB, AMNIM, CNA, FCFIP, FCE, CICA, CFA, CFE, CPFA, ABR, CertIFR, FILEX, (PhD – In view)

Chief Technical Consultant/CEO

OGE Professional Services Ltd

DL: +2348033737184, +2348095491026

[email protected]

Practical Approach to Fraud Investigation/Forensic Accounting Course

OGE Professional Services

July 20- 21, 2016

This presentation will cover the following major sub topics as follows:

Introduction

Audit, Investigation, and other Terminologies

Fraud Triangle

Forensic Accounting

Qualities and Qualifications of a Forensic Accountant

Differences & Similarities between Auditors and Forensic Accountants

Differences between Audit and Investigation

How to distinguish between Forensic Accountants and Auditors

Conclusion

2

Contents

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• Audit, Investigations and Forensic Accounting are though similar but to some

extent, they are different and they cannot be used interchangeably.

• By Audit, one evaluate thing, record, process, person, organization, system,

project or product to ascertain the correctness of the assertion there off, this

will be in form of how valid and reliable the assertion are. In accounting

palace; audit is conducted to provide an assessment of a system's internal

control and the goal is to express an opinion on same.

• Investigation on the other hands is an inquiry that is commissioned for a

specific purpose.

• Forensic accounting, utilize the skills in audit and investigation in achieving a

set goal.

• The aim of forensic accounting exercise is to perform the exercise such that

the outcome can stand the test of the court of law.

• This paper address the major similarities and differences in audit,

investigation and forensic accounting with respect to their objective, scope,

extent of regulation, timing, expected degree of care, depth of enquiry,

qualification and the skill set.

• Methodology use in arriving at the conclusion was content analysis, which

employ review of relevant books and articles on the subject of discussion.

Introduction

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product.

Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control.

The goal of an audit is to express an opinion of the person / organization / system (etc.) in question, under evaluation based on work done on a test basis.

Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error.

An audit must adhere to generally accepted standards established by governing bodies.

These standards assure third parties or external users that they can rely upon the auditor's opinion on the fairness of financial statements, or other subjects on which the auditor expresses an opinion.

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Audit & Auditing

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Auditors can be classified into the following categories:

External auditor/ Statutory auditors

Internal auditors

Consultant auditors

Quality auditors

What about Forensic auditors?

Auditors

Friday, July 22, 2016 6

Internal Auditing is an independent, objective assurance and

consulting activity designed to add value and improve an

organization's operations.

Managers are responsible for designing control processes that

provide reasonable assurance for the following business objectives:

•Effective and efficient operations •Compliance with laws and regulations •Reliable financial reporting

Internal auditors evaluate how well the control processes designed by

managers’ function, and therefore the extent to which managers can

have reasonable assurance business objectives will be realized.

Internal Auditing


• to assist members of the organization in the effective

discharge of their responsibilities.

• promoting effective control at reasonable cost.

• The members of the organization assisted by internal auditing

include those in management and the board of directors.

Objective of Internal Auditing

Investigations Investigation is a vital part of 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.

The search and examination of the particulars of an event to determine the hidden, unique, or complex facts surrounding the event.

A deliberate search and review of records in accordance with the laid down and agreed policies in order to ascertain if and why the keeping of the records resulted in a gap and the responsible person.

Investigation is a structured gathering of documentary evidence and testimony to resolve an allegation of improper activity.

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If you think you may need a fraud investigator, start right away. As soon as you

suspect that you may be the victim of fraud, start gathering any evidence you have.

Fraud investigations can be complicated and difficult for a few reasons:

First, criminals take great care to cover their tracks and escape prosecution.

Secondly, in order for an investigation to be useful in a legal case, an investigator

must be able to prove that fraud was intended.

Dear all, you and I know that it is not possible to prove fraudulent Intent

Only a qualified investigator can successfully complete these facets of a fraud

investigation.

You will be one as soon as you complete all modules of this program

Need for Fraud Investigation

Interview and Interrogation

Interview and interrogation as evidence-gathering techniques involve asking people questions.

The basic difference is that interrogation is confrontational while interviewing is not.

In either case, the interviewer records both the answers to the questions and physical behaviors; these may include the interviewed person looking at the floor rather than making eye contact.

Key information to gather centers on the suspect’s pressures: Being deep in debt; Perceived opportunities such as having access to the organization’s assets; and Rationalization due to being passed over for a promotion.

Effective interviewing is a skill that can be enhanced with continuous education and practice.

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Fraud Investigations & Govt. Agencies


• A fraud investigator tries to determine whether fraud has taken place and tries to detect

evidence if fraud has occurred.

• Most fraud investigations begin with a meeting between the investigator and the client.

• The person launching the investigation explains to their investigators why they suspect

fraud has taken place and hand over any evidence they have to the investigator.

• A good fraud investigator will use this initial information to find more evidence and more

facts.

• A fraud investigator may use surveillance, asset searches, background checks, employee

investigations, business investigations, and other types of methods to get to the bottom of a

case.

• In most cases, fraud investigations are investigations of white collar crime, which involves

surveillance and careful consideration of complicated financial records.

Fraud Investigation

Forensic Accounting

Forensic accounting has been defined as "accounting analysis that can uncover possible fraud that is suitable for presentation in court.

Such analysis will form the basis for discussion, debate, and dispute resolution."

Forensic accounting, sometimes referred to as investigative accounting, is a unique career field that combines accounting with information technology.

A Forensic Accountant uses his knowledge of accounting, law, investigative auditing and criminology to uncover fraud, find evidence and present such evidence in court if required to.

According to Oyedokun (2013), 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

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Why is forensic accounting

Because of the struggling stock market and lack of investor confidence which has forced many organizations to take a long, hard look at their financial statements.

A sluggish economy with its attendant problems

The increase in white collar crime and the difficulties faced by law enforcement agencies in uncovering

Many accounting firms believe that the market is sufficiently large to support an independent unit devoted strictly to forensic accounting.

The need to use investigative skills to seek out irregularities in companies’ financial statements

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Uses sophisticated computer programs

Performs investigative accounting as well as litigation support.

Use both accounting and investigating skills to interpret financial evidence

Expert witnesses

Review financial records for mergers and acquisitions.

Serve as advisers to a corporation’s audit committee

Work to resolve shareholder disputes within a company.

Calculate economic damages

In a criminal case, a Forensic Accountant may be asked to present evidence of insurance fraud, identity theft, money laundering, terrorist financing, embezzlement, price fixing, stock market manipulation, or other related offences.

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Forensic Accountant

To be successful as a forensic accounting, forensic investigator/anti-fraud professional, you must be:

detail oriented,

persistent,

ambitious, and

highly organized.

a great deal of creativity,

Several well-known case investigations around the world have involved forensic accounting.

These accountants are often able to follow a criminal's money trail which can help lead to a subsequent arrest.

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Forensic Accountant cont’

Forensic Accountant help at a number of different levels in the litigation process including:

Assisting in initial discovery

Applying our commercial knowledge and expertise

Providing expert evidence both written and oral

Independence

Criminal Investigations

Shareholders' and Partnership Disputes

Personal Injury Claims / Motor Vehicle Accidents

Business Interruption / Other Types of Insurance Claims

Business/Employee Fraud Investigations

Matrimonial Disputes

Business Economic Losses

Professional Negligence

Mediation and Arbitration

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Role of Forensic Accountant

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The Word ‘Forensic’ :

The word forensic is derived from the Latin adjective “forensis”, meaning "of or before the

forum." In early Roman times, a criminal charge against a person meant presenting the

case before a group of public individuals in the forum.

Forensic Investigation

Forensic investigation is the utilization of specialized investigative skills in carrying out an

inquiry in such a manner that the outcome will have application to a court of law.

Forensic Accounting Investigation.

Forensic accounting investigation is an aspect of forensic accounting that refers to the

practical steps Certified Fraud Examiners take in order to gather evidence relevant to

alleged fraudulent activities.

Forensic Auditing

Forensic auditing is an aspect of forensic accounting that applies auditing, accounting and

investigative skills to situations that have legal consequences

Forensic Accounting and other Terminologies

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Investigative Accounting

"Investigative Accounting", is often associated with investigations of criminal matters. A

typical investigative accounting assignment would be an investigation of employee theft.

Other examples include securities fraud, insurance fraud, kickbacks and proceeds of

crime investigations.

Litigation Support

"Litigation Support", provides assistance of an accounting nature in a matter involving

existing or pending litigation.

It deals primarily with issues related to the quantification of economic damages. A typical

litigation support assignment would be calculating the economic loss resulting from a

breach of contract.

Fraud Examination

According to the Association of Certified Fraud examiners’ manual, “Fraud

examination is the methodology of resolving allegations from inception to

disposition including obtaining evidence, interviewing suspects, writing reports

and assisting in detection and deterrence of fraud”.

Forensic Accounting and Other Terminologies cont.

Qualities and Qualifications of Forensic Accountants

Characteristics

• Curiosity;

• Persistence;

• Creativity;

• Discretion;

• Organization;

• Confidence; and

• Sound professional judgment.

A capable Forensic Accountant should have the following characteristics (Zysman, 2011):

• A Forensic Accountant must be open to consider all alternatives, scrutinize the fine details and at the same time see the big picture. In addition, a Certified Fraud Examiner must be able to listen effectively and communicate clearly and concisely.

Forensic Accountant

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Qualities and Qualifications of Forensic Accountants

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According to Enyi (2012) in Dada (2013), in forensic accounting, a man

is expected to know the trick of the monkey in order to catch it, but he

should ensure that he did not become the monkey in the process.

Impeccable character must be weaved around ethical considerations in

forensic accounting for it to succeed.

This implies that for effective investigation to be carried out, the

investigator must understand the tricks being employed by the

perpetrator, hence forensic accounting skill is required.

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Definition of Fraud: intentional

(deliberate) deception resulting in injury to

another person

In a broad strokes definition, fraud is a deliberate

misrepresentation which causes another person to suffer damages, usually

monetary losses.

Most people consider the act of lying to be

fraudulent, but in a legal sense, lying is only one small element of actual

fraud.

Fraud usually involves lying for a specific gain that causes someone

loss while lying does not always include hurt.

Fraud and lying


Lie is to bridge a gap???????????.

Strangers lies 10 times in 10mins when

they first meet.

In fact, Men lie 8 times to boost self up.

Godwin: Please give practical examples in

class

Fraud and lying

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Which of these can organization control and how?

Fraud Triangle Fraud Examiners relies on the Fraud Triangle to find weak points in

business processes and identify possible suspects in cases of fraud.

It consists of three core concepts that together create a situation ripe for fraud; incentive, opportunity and rationalization.

People must have the incentive and opportunity to commit financial fraud as well as the ability to justify it.

Recent analysis has suggested adding a fourth concept to make a diamond: capability.

Just because someone has the opportunity or incentive to steal, it doesn't mean that they have the capability to do so.

For example, if someone doesn't understand how to do journal or ledger entries, they wouldn't know how to manipulate the numbers no matter what the incentive or opportunity.

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Triangle of Fraud Action Albrecht et al (2006) and Kranacher et al (2011) described the

action an individual must perform to perpetrate fraud as follows (Dada 2013):

The Action - the execution of the fraud, embezzlement, cheque kiting or material fraudulent financial reporting.

Concealment- hiding of the fraud action by raising false journal, falsification of bank reconciliation and destroying files

Conversion – this is the process of turning the gains from fraud into something useable by the perpetrator for instance, money laundered, cars or house.

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Triangle of Fraud Action The Triangle of Fraud Action can be documented, controlled and detected by anti

fraud professionals.

Where Fraud Triangle points investigator to why people might commit fraud, the

evidentiary trail might be weak or non existent for instance, pressure and

rationalization are not directly observable.

According to Ramamoorti (2008), a lack of fraud evidence is not a proof that fraud

had not occur hence, anti fraud professionals need an evidence based approach to

conduct investigation.

The Triangle of fraud Action therefore helps in detecting white collar crimes and

obtaining prosecutorial evidence where it makes it difficult to argue that the

fraudulent act was accidental. This is where Forensic Accounting Technique is

relevant (Dada 2013).

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Is your tool sophisticated enough to

Investigate or fight fraudsters?


Theories related to Forensics:

Agency Theory - Jensen, C. M., and Meckling, W. H. (1976)

Theory of Triangle of Fraud Triangle- Cressey, D. (1940)

Theory of Triangle of Fraud diamond- Wolfe, D. T., and Hermanson, D. R.

(2014)

Theory of Triangle of Fraud Action- Wolfe, D. T., and Hermanson, D. R. (2014).

and Kranacher et al (2011)

Fraud scale theory- (personal integrity” instead of rationalization)- Albrecht,

Howe, and Romney (1984)

Theory of Triangle of Crime and Corruption- criminogenic- Gross (1963)

Deterrence theory

Theory of Ear and Mouth- Oyedokun (2016)

Theory of profession- Pollock & Amernic, (1981), Larson, (1977), Canning &

O’Dwyer, (2001)

Skills Forensic Accounting


Theory of profession- Framework- Attributes:

test of competence;

further study and relevant training;

a register of qualified members;

enforcement of a high standard of professional conduct;

and

organisation within a specific occupation.



Theory of profession- Framework- Attributes


Source: (Canning & O’Dwyer, 2001) and Robust Model of Profession (Candilis 2009)

Source: (Canning & O’Dwyer, 2001) and Robust Model of Profession (Candilis 2009)


Reasoning skills- Let do it together in class



Take Home- 151, 131, 51


38

Forensic accountants are mix of accountants and private investigators. While auditing

knowledge and skills are extremely helpful to the forensic accountant, he also possesses the

ability to think “out of the box”. Audit of financial statements does not uncover frauds.

So what is the difference between financial statement auditors and forensic accountants

who investigate fraud?

Financial statement auditors (i.e., external auditors) determine whether the financial statements

present fairly, in all material respects, financial position, results of operations, and cash flows of

the entity being audited.

Forensic accountants who are performing a search for fraud concentrate their efforts in areas

most likely to contain the fraud and often examine the entire population rather than sample the

population in targeted areas.

These accountants are likely to follow leads suggested by immaterial items whereas financial

statement auditors often must restrict their efforts to searching for material misstatements.

In addition to these differences, the forensic accountant uses some investigative techniques

that differ from those used by auditors.

Also, forensic accountants who conduct fraud examinations do not give an opinion on whether

fraud was committed; this is the function of the court.

Differences Between Financial Auditors and Forensic Accountants

39

Forensic accountants are mix of accountants and private investigators. While auditing

knowledge and skills are extremely helpful to the forensic accountant, he also possesses the

ability to think “out of the box”. Audit of financial statements does not uncover frauds.

So what is the difference between financial statement auditors and forensic accountants

who investigate fraud?

Financial statement auditors (i.e., external auditors) determine whether the financial statements

present fairly, in all material respects, financial position, results of operations, and cash flows of

the entity being audited.

Forensic accountants who are performing a search for fraud concentrate their efforts in areas

most likely to contain the fraud and often examine the entire population rather than sample the

population in targeted areas.

These accountants are likely to follow leads suggested by immaterial items whereas financial

statement auditors often must restrict their efforts to searching for material misstatements.

In addition to these differences, the forensic accountant uses some investigative techniques

that differ from those used by auditors.

Also, forensic accountants who conduct fraud examinations do not give an opinion on whether

fraud was committed; this is the function of the court.

Differences Between Financial Auditors and Forensic Accountants

40

• Forensic accounting techniques are useful in prevention,

detection, and deterrence in the area of fraud, money

laundering, investigations, crime and terrorist financing.

• These techniques includes, investigative skills, audit skills,

legal skill etc.

• It is now clear that audit, investigation and forensic

accounting are much related but they cannot be used

interchangeably.

• It is hereby recommended that all would be forensic

accountants/investigators, fraud/forensic auditors,

statutory auditors, and investigative accountants, should

be well equipped with forensic accounting techniques in

obtaining admissible evidence suitable for litigation

purposes.

Conclusion

42

• Albrecht W. S (2006), Fraud Examination, Thomson South-Western Publishing, 2006.

• Association of Certified Fraud Examiners’ Manual, (2012)

• Association of Certified Fraud Examiners, www.acfe.com

• America institute of CPAs :

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/CPA/June/R

ole.jsp

• Crubley, Heiger and Smith (2003),Forensic and Investigative Accounting, CC Publishing

• Enyi, E. P. (2012). Ethical conduct for forensic accountants. Being a lecture delivered at the Institute of

Chartered Accountants of Nigeria (ICAN) forensic accounting certification programme

• Hopwood, Leiner and Young (2009); Forensic Accounting, McGraw-Hill International.

• New Frontiers: Training Certified Fraud Examiners within the Accounting Program; Journal of College of

Teaching & Learning – September, 2007.

• Owojori, A.A & T. O. Asaolu (2009) European Journal of Scientific Research ISSN 1450-216X Vol.29 No.2

(2009), pp.183-187 http://www.eurojournals.com/ejsr.htm

• Owolabi ‘Doyin, (2013). Annual Report. Being 48th ICAN President speech delivered on 31st Dec. 2013 on

the Institute of Chartered Accountants of Nigeria’s forensic accounting certification programme

• Oyedokun, G.E (2012). Audit, investigation and forensic accounting: Similarities and differences. Being a

lecture delivered at the Institute of Chartered Accountants of Nigeria’s forensic accounting certification

programme

• Oyedokun, G.E (2012). Emergence of Forensic Accounting and the Role in Nigeria Economy. Being a

lecture delivered at the Annual NUASA Week 2012 of Nigerian Universities Accounting Students'

Association Obafemi Awolowo University Ile-Ife, Osun State.

• Oyedokun, G.E (2012). Emergence of Forensic Accounting and the Place of Chartered Accountants .

Being a lecture delivered at the Monthly General Meeting of all Members of the ICAN Lagos Mainland

District & Society

References

43

• Oyedokun, G.E (2012). Emergence of Forensic Accounting and the Place of Chartered

Accountants . Being a lecture delivered at the Monthly General Meeting of all Members of

the ICAN Lagos Mainland District & Society. Being a lecture delivered at the Monthly

General Meeting of all Members of the ICAN Lagos Mainland District & Society

• Oyedokun, G.E (2012). Emergence of Forensic Accounting in Nigeria: The Role of Certified

Fraud Examiners. Being a paper presented at the Continue Professional Development

Training of Association of Certified Fraud Examiners (ACFE- Nigerian Chapter)

• Oyedokun, G.E (2013). Taking your Professional Practice beyond Statutory Auditing: Fraud

& Forensic Accounting Perspective, Being a paper presented at the Entrepreneurship

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Lagos

• http://blog.rpc.co.uk/tax-law/criminal-guidance/note-9-the-role-of-the-forensic-accountant

• http://www.dolmanbateman.com.au/1323/the-role-of-forensic-accountants/

• Litigation Support - Accounting for Damages, A Framework for Litigation

• Mark Warshavsky (2013) The Forensic Accountant’s Role in Litigation

http://www.accountingtoday.com/news/Forensic-Accountant-Role-Litigation-66287-1.html

donloaded on May 21, 2013

• Nobes C. and Parker R. (2008) ‘Comparative International Accounting’: (10th ed). Prentice

Hall, FT

• Support by Ronald T. Smith and Cynthia R.C. Sefton published by Carswell (ISBN 0-459-

55789-0) available at 1-800-387-5164.

• Zysman, A., (2004). Forensic accounting demystified. World investigators network standard

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References

audit, investigation & forensic accounting: exploring the nexus

Economy & Finance