Correlative Influence of External Auditors and Forensic Accountants on Effective Management of Fraud

Vol. 7, No. 5, 2016, 264-272 Correlative Influence of External Auditors and Forensic Accountants on Effective Management of Fraud Sunday A. Effiong 1, Chinenyenwa B. Emechebe 2, Grace O. Edet 3, Ogar L. Ogbeche 4 Abstract Countries are presently faced with serious economic and social crises where corruption is the order of the day. In recent times, fraud has infected many companies in Nigeria of which Cadbury and formerafribank Plc. are few of them.the study examined the complementary services of forensic accountants in annual audit exercises in reducing fraudulent activities in companies and equally determined the correlative influence of external auditors and forensic accountants on effective management of frauds in organizations. The study adopted the descriptive research method in the collection and analyses of data obtained from the studied companies. A survey design was used, where the researcher gathered practical and dependable information by utilizing both primary and secondary data. The findings of the study revealed that complementary services of forensic accountants in the annual audit exercise of the companies considerably reduced the incidence of fraud cases in Nigerian companies and there was a significant correlative influence of forensic accountants and external auditors on effective management of fraud in Nigerian companies.the study concluded that fraud rate could be reduced in Nigerian companies with the complementary services of the forensic accountants during external audit processes. Keywords: correlative influences, forensic accountants, external auditors, complementary services, fraud management, companies, annual audit exercise 1. Introduction In today s society, many persons and agencies outside management are concerned with the economic life of the company. These persons frequently require financial data (Walgenbach, Hanson and Dittrich 1978:4) they want to know the resources controlled by an organization and the claims against those resources; how the management is allocating the scare resources provided them by the owners and the creditors (Welsch and Anthony, 1977:9). Financial statements have historically been one of the main ways in which such information has been provided to shareholders, investors and the general public (Millichamp, 2002:1). Since, these categories of persons are outside the organization, there exist a need for an independent person, who is independent in appearance and in mind, to provide an independent and accurate report on the true state of the organizations affairs with which they are concerned. These groups of financial users are with high expectations as to what the role or functions of an auditor should be than what it is, leaving a gap, which is known as audit expectation gap. 1 Department of Accounting, Faculty of Management Sciences, University of Calabar, PMB 1115, Calabar, Cross River State, Nigeria. 2 Department of Accounting, Faculty of Management Sciences, University of Calabar, PMB 1115, Calabar, Cross River State, Nigeria. 3 Department of Accounting, Faculty of Management Sciences, University of Calabar, PMB 1115, Calabar, Cross River State, Nigeria. 4 Department of Accounting, Faculty of Management Sciences, University of Calabar, PMB 1115, Calabar, Cross River State, Nigeria. 2016 Research Academy of Social Sciences http://www.rassweb.com 264

The oxford dictionary of accounting defines audit expectation gap, as the gap between the role of an auditor, as perceived by him and the expectations of the users of financial statements. While some think that auditors are responsible for preparing the accounts and/or dealing with fraud or tax and keeping the books of accounts. It is only a few people that really understand how restricted the role of an auditor is. Obviously people generally expect more from an auditor than he/she is actually statutorily required to do and that is the real course of the expectation gap (ICAN, 2009:50). For instance, many companies have failed few months after the auditors have given clean reports. This has cast doubt on the relevance of auditing leading to intensified efforts by many countries to review and address issues such as corporate governance, accounting standards and auditors performance, and at the international level to develop enhanced standards to guide the national process change. A typical example of such effort is the establishment of financial stability forum. The report of this forum focused on the international standards setters and on the developments at the national level, some of the more significant developments in recent years of which Nigeria is not left out as it has adopted some and SEC, CAC and CBN are still working on more in order to ensure reliability of the external auditors report. These regulations have so far acted as a check on the activities of external auditors because of the restrictions on the role of auditors, whose primary function is not to investigate fraud, but may only discover it in the course of his work. It becomes necessary to employ the services of the forensic accountant whose duty it is to investigate fraud and prosecute accordingly. This gave rise to the need to study the collaborative influence of external auditors and forensic accountants on effective management of fraud in Nigerian companies. 2. Theoretical Perspective The Association of Certified Fraud Examinations(ACFE), reported that fraud is very costly considering the amount of fraud perpetuated around the world, as approximately $3.5 trillion was lost worldwide from fraudulent monetary statements, embezzlement, and corrupt practices in 2011 (ACFE, 2012). Due to the fact that high profile personalities are usually involved in advanced fraudulent practices, a more sophisticated trained specialist such as accountant is required to curb the menace. Some companies in Nigeria where forensic investigation has taken place include five prominent banks in Nigeria declared technically insolvent by Central Bank of Nigeria (CBN) (2009), Cadbury Nigeria Plc.,The Nigerian Stock Exchange and the Nigerian National Petroleum Corporation (NNPC). The governor of central bank of Nigeria, Mr. Lamido Sanusi in August 2009 disclosed a shocking and actual report of financial standing of some of Nigerians banks to the people. He revealed that 5 well-known banks were practically out of fund, basically eating deep into their shareholders funds and virtually breached all the banking rules. The Central Bank of Nigeria published the names of the company s debtor s with their top managers, who obtained loan to the tune of about 747 billion naira from those banks. Amazingly, the external auditors gave a good financial standing of these banks during their annual financial report, thereby giving a false financial standing of these banks thus misled the shareholders and the people. The chairman of the Nigerian EFCC (Economic and Financial Crimes Commission) disclosed in a report thatit is likely that the external auditors usually collaborate with the top managers to perpetuate fraud in the banks. He also said that their investigations revealed that external auditors connived with bank executives to give them a good supportive report, cover fraud and were paid for it (This Day Newspaper, 2009). The executives of Cadbury Plc. were accused of bloating the company s account to mislead shareholders. A forensic accounting firm, PWC (Price water house coopers) was employed to re-audit the firm and they reported a fraud of about 15 billion naira in the company and that the company made losses rather than the juicy financial report presented by management. The Cadbury s external auditors were fined 20 million naira for their inability to give a professional true financial standing of the company. 265

Fraud Management S. A. Effiong et al. Fraud is a universal phenomenon, which has become perpetual and its perpetrators are sophisticated and swift in their approach. Fraudulent activities have led to the collapse and falsified account reporting in so many organizations including companies. Fraud is of two types namely; i. Defalcations involving misappropriations either of money or goods. ii. Manipulation of accounts without defalcations. The conduct of investigations where fraud is suspected or known to have taken place very much with the particular circumstance and accordingly, it is not possible to generalize. The fraudulent manipulation of accounts without Defalcation usually takes the form of inflation of assets or the exclusion, if liabilities. The purpose being to make the position of a business appears to be better than it really is or to enable dividends to be paid. Investigation of this type will involve the verification of the assets and liabilities and the income and expenses for the relevant products of which this kind of investigation skills is carried out by a forensic accountant and the work involved is a kin to the audit examination (Nwoha: 2010). Internal auditing is a professional activities involved in assisting organizations realize their stated goals. This is achieved by using systematic methods for analyzing businesses processes and activities with the aim of highlighting organizational challenges and recommending solutions, thereby facilitating the work of an external auditor. In other words, a good internal control system makes the work of an external auditor easier. In carry out an audit work, the external auditor is not expected to carry out his work with a suspicious state of mind or to investigate fraud, but to ascertain whether, proper books of account have been kept by the firm and proper returns adequate for his audit have been received from branches not visited by him. He is also expected to state whether the company s balance sheet and profit and loss account are in agreement with the books of account and returns as provided for in section 360, CAMA 2004. It is only if in the course of his work (external auditor), he discoversfraud, that services of a forensic accountant may be required. The forensic accountant will now approach his work with a critical and perhaps suspicious state of mind. He the forensic accountant may deeply be concerned about what should have been done rather than confirmation what has been done. At this point, it is important to establish the fact that the output of an external auditor becomes the input of a forensic accountant, even though the both profession can be carried out by one person at different situations and circumstances. Forensic Accountants Involvements Forensic accounting can simple be defined as the use of accounting skill to examine fraud or misappropriation and to analyze financial information for use in legal trial. Forensic means suitable for use in a court of law, and it is to that standard and potential outcome that forensic accountants generally have to work (Crumbley, Heitger and Smith 2005). This profession employs accounting, auditing and investigative skills, In other words, forensic accounting reports go extra miles to form a useful platform in dispute resolution perhaps, this was why Consuelo 2008 argues that forensic accountants see where and what others do not see, that is they see beyond financial records and numbers to deal with the business reality of the day. In my own view, I see forensic accounting as an assessment of accounts of a business for a particular purpose, which will provide useful evidence during litigations and a rational basis for dispute resolutions.a forensic accountant maybe intensely interested in questions of policy, a problem that is legally outside the scope of an auditor s liability. Approaches/Stages of Investigation These are processes to be followed in carry out investigation though investigations may be carried out for various purposes, and procedures rightly depends upon the type of investigation, these are some 266

identifiable stages, which are common to all investigations and are used in commencing and carrying on investigation in any organization: 1. Obtaining the terms of reference from the client 2. Establishing contact with the auditors of the business under investigation 3. Organizing the investigation 4. Obtaining background information concerning the environment in which the business operates 5. Obtaining preliminary information concerning the enterprises organizations under investigation. 6. Preparing the report outline 7. Conducting the investigation proper and analyzing the information obtained 8. Preparing the draft for discussion with client 9. Discussing the report with the client 10. Take care of other relevant points. 11. Carrying out further work that the client may require after discussing the report 12. Finalizing and submitting the report to the client and then feedback. Difference Between Auditing/Investigations and Forensic Accounting Investigation is a systematic examination or enquiry into the affairs of an organization in order to establish a fact and to evaluate a situation (Nwoha, 2010). Professional accountants are often assigned to investigate the accounts or the related records of a business in cases of fraud. But the word auditing entails an independent examination of an expression of opinion on the financial statements of an enterprise by an approved auditor in pursuance of his appointment and in compliance with any relevant statutory obligations (Nwoha, 2010). From the above definitions, it can easily be seen that these fraud control tools differ substantially. i. Audit aims at collection of sufficient evidence in support of the credibility of financial statement. Investigation, on the other hand, requires a special examination of the particular records or transactions for particular purposes. ii. An auditor is merely concerned with prima facie evidence while an investigator, in the approach of his work looks for substantive and conclusive evidence. iii. An auditor assumes that if there is nothing suspicious then the figures and facts are necessarily correct and true. An investigator does not accept a situation unless it is supported with facts. iv. An investigation/forensic accountant primary motive is to be able to detect possible fraud, so he is not bound to conduct his work merely based on accounting information, policies and disclosures of factual information and, has to see whether the methods of valuation and adoption of accounting policies have been consistently followed. v. The responsibility of the investigator is to the management who have appointed him to carry out the investigation, but In audit, the auditor is responsible to the shareholders. Skills of Forensic Accountants Forensic accountant ought to acquire a high level of competency, probity, decency and truthfulness. He must be an affiliate of a recognized accountancy organization. In the course of his training, he must possess the following requirement. a) Ability to identify fraud with minimal initial information. b) Identification of financial issues; c) Knowledge of investigation techniques d) Knowledge of evidence; e) Interpretation of financial information; 267

S. A. Effiong et al. f) Presentation of financial findings; g) Investigation skills and mentality. 3. Methodology This study was descriptive in approach. It made use of a survey design, which relate to data collected from the population for in-depth analysis. The study gathered both primary and secondary data to evaluate correlative influence of both external auditors and forensic accountants on fraud management. The tests of hypotheses were done using SPSS. Questionnaire was used as the instrument to obtain primary data through well directed questions. The secondary data were obtained from the records of Nigerian companies on audit and forensic outputs published in annual report and accounts, newspapers, journals, magazines and internet. Although some of the records and forensic outputs were incomplete and somewhat biased, they nevertheless provided figures of fraudulent practices. The researcher encountered substantial problems in data collection because fraud is masked with secrecy and it was very difficult for auditors to disclose details of their financial practices. For the above reasons, this research utilized only available and accessible evidences which provided a proportion of the bigger picture. Qualitative method, specifically in-depth interview method was employed to elicit additional relevant information that helped to complement the quantitative information collected from respondents through structured questionnaire from the companies. Hypotheses H o1the Complementary services of Forensic Accountants in annual audit exercise of companies will not reduce the cases of fraudulent activities in Nigerian companies. H o2there is no significant correlative influence of forensic accountants and external auditors on effective management of fraud in Nigerian companies. Primary data presentation of the mean scores of the respondents and the results of hypothesis testing of the primary data were examined. Analysis of variance (ANOVA) statistic was used in testing Hypothesis one.two questions were used to measure the effect of complementary services of Forensic Accountants on annual audit report of companies and occurrence of Fraud. 4. Results Two items were meant to elicit information on the effect of complementary services of forensic Accountants in annual audit of companies in reduction of fraud in companies as shown in table 2 Table 1: Mean comparison of the effect of complementary services of Forensic Accountants in annual audit of companies in the reduction of fraud in Nigerian companies. Mean Standard deviation Forensic accounting is effective as a fraud detection tool and can locate diverted funds or assets 4.2 0.846 Considering the fees paid to auditors, services of both external auditor and forensic accountant are required in the annual audit of companies for more effective reduction of fraud. 4.0 0.761 H 0i: The complementary services of Forensic Accountants in annual audit exercise of companies will not reduce cases of fraudulent activities in Nigerian companies. 268

H Ai: The complimentary services of Forensic Accountants in the annual audit exercise of companies will significantly reduce the cases of fraudulent activities in Nigerian companies. Decision Table 2: Summary of Analysis of Variance Source SS DF MS F-ratio Between 1169 4 292.25 208.75 Within 7 5 1.4 Total 1176 9 The critical value at significant level of 5% with degree of freedom (df) 4 to 5 = 5.19. Since the calculate value of 208.75 was greater than the critical value of 5.19, the alternative hypothesis was accepted and the Null hypothesis rejected. This shows that the complementary services of forensic Accountants in the annual audit exercise of companies will significantly reduce the cases of fraudulent activities in Nigerian companies. The second section covers data presentation and analysis of secondary data collected from Nigerian companies, records on audit and forensic outputs. Table 4 and 5 were adapted from the audit and forensic report of NNPC, oceanic bank and Intercontinental bank. It shows disparity in the available external audit report and forensic reports of Nigerian companies. Table 3: Forensic Audit Report of Nnpc 2015 Nature NNPC submission B$ verified B$Disparity B$ Equity Crude 14.00 14.290.29 Domestic Sales 28.00 28.220.22 FIRS 15.00 16.001.00 DPR 2.00 1.58 0.42 NPDC 6.00 6.820.82 Third party financing 2.00 2.43043 Total 67.00 69.342.34 B$--billion dollars Source: NNPC forensic audit report, 2015 A total of $2.34 billion was under reported based on the NNPC Forensic Report of 2015. The total revenue generated from the analysis from all revenue streams amounted to $69.34 billion as shown on Table 3. Table 4: Forensic Report of Discrepancies in Audited Accounts of NNPC, Oceanic and Intercontinental Banks S/N Description Audit Report x10 6 $ Forensic Report x10 6 $ Variance x10 6 $ 1 NNPC Total revenue generated 67000 67340 2340 2 NNPC Total crude oil/product loses 761.86 835.75 73.89 3 NNPC total revenue remitted 47000 49330 2330 4 NNPC total pipeline maintenance / 905.32 558.41 346.91 management costs 5 NNPC Total subsidy computation 9970 8990 980 6 Oceanic Bank annual report of 288 2200 1912 nonperforming loans 7 Intercontinental Bank annual report of nonperforming loans 132.8 1690 1557.2 269

S. A. Effiong et al. Adopted from NNPC forensic report 2015, Oceanic bank Annual Report, 2008(p. 53), Otusanya, 2010, ThisDay Newspaper 25 August, 2009 andnewswatch, 24 August 2009. H o2 There is no significant correlative influence of forensic accountants and external auditors on effective management of fraud. H i2 There is significant correlative influence of forensic accountants and external auditors on effective management of fraud. Model Summary b Model Adjusted R Std. Error of the Estimate R R Square Square 1.893 a.798.697 506.35761 1 Regression Residual Total a. Predictors: (Constant), Forensic Report, Audit Report b. Dependent Variable: Variance/Fraud Table 5: Regression values derived from table 5 Model Sum of Squares df Mean Square F Sig. 4044072.856 2 2022036.428 7.886.041 a 1025592.121 4 256398.030 50696643.977 6 a. Predictors: (Constant), Forensic Report, Audit Report b. Dependent Variable: Variance/Fraud From table 5, the F * calculated value, 7.886 was greater than F-tabulated value of 6.59 of 6.59 at 5% significant level and df 2 and 4, the null hypothesis was reject and the alternate hypothesis accepted. This shows a significant correlative influence of forensic accountants and external auditors on effective management of fraud in nigerian companies. Table 6: Correlations between the External Auditors and Forensic Accountant on Effective Management of Fraud Audit Report Forensic Report Spearman s rho Audit Report Correlation Coefficient Sig. N 1.000. 7.679 *.047 7 Forensic Correlation.679 * 1.000 Report Coefficient Sig. N.047 7. 7 *. Correlation is significant at the 0.05 level It can be seen from Table 6 that there is a correlative influence of external auditors and forensic accountants on effective management of fraud. 5. Discussion of Findings Based on the empirical result, the study revealed that forensic accounting is effective as a fraud detection tool and can locate diverted funds or assets. A total of 83.3% of the respondents believed that forensic accounting is effective as a fraud detection tool and can locate diverted funds or assets. Another 13.4% of the respondents did not agree that forensic accounting is effective as a fraud detection tool and can 270

locate diverted funds or assets. The mean score of those who believed that forensic accounting is effective as a fraud detection tool and can locate diverted funds or assets was 4.2 and the standard deviation was 0.846. This implies that, on the average, forensic accounting is effective as a fraud detection tool and can locate diverted funds or assets. In view of the results from the study, it was discovered in the first hypothesis that the complimentary services of forensic Accountants in the annual audit exercise of companies significantly reduced the incidence of fraud in Nigerian companies. Therefore, employing the services of Professional Forensic Accountants is required in the annual audit exercise of the companies to reduce cases of fraud. Also, the study revealed that Nigerian companies does not use the services of professional forensic accountants in the annual company reports and that services are provided by the Traditional External Auditor, yet fraud are still being perpetrated in the companies. Forensic Accounting combines the skills of accounting, auditing and investigation; and as such has a much wider scope than any of its constituent components. This result corroborates with the findings of Udeh, Ugwu and Ugwanyi (2010), that Forensic Accountants often get involved in a wide range of investigations that span different industries and sectors of the economy. Considering the fees paid to auditors, the services of both external auditor and forensic accountants are required in the annual audit exercise of companies for more effective reduction of fraud. The result shows that 76.7% of the respondents agree that the services of both external auditor and forensic accountant are required in the annual audit exercise of banks for more effective reduction of fraud while 18.2% of the respondents disagreed and 5.0% nonetheless remained neutral and undecided.also, the mean score of respondents who believed that the services of both external auditor and forensic accountants are required in the annual audit exercise of companies for more effective reduction of fraud was 4.0 with a standard deviation of 0.761. This indicates that the services of both external auditor and forensic accountants are required in the annual audit exercise of companies for more effective reduction of fraud. The second hypothesis equally shows that there is a significant correlative influence of forensic accountants and external auditors on effective management of fraud. Therefore, both the services of the Forensic Accountants and the external auditors are needed in the effective management of fraud in Nigeria. It was deduced that employing the skills of Forensic Accountants is certainly essential in Nigerian companies, since currently the services are being provided by the external auditors and frauds are still common. 6. Conclusion and Recommendations Economic crimes have become so rampant and sophisticated that prevention and detection now require special investigation skills and collaborative efforts of auditors and forensic accountants. Corporate fraud in Nigeria has affected the growth and development of the economy in the past decades. In the banking industry, various measures have been adopted to minimize fraud perpetration without success, including reforms in the sector and prudential guidelines stipulated by the Banking Act. The study has demonstrated why forensic accounting should be used as a tool for fraud detection and prevention in Nigerian companies. It is recommended that the complementary services of Forensic Accountants should be employed in the annual audit exercise of companies to reduce the rate of fraud cases in companies since it has been shown that the skill and techniques applied in Fraud detection and prevention stuck among Professional Forensic Accountants and Traditional External Auditors differ. Also, government and institutions of higher learning should intensify effort in training forensic accountants to render the services at a lower fee because, at the moment, there is acute shortage of forensic experts in Nigeria and in most cases such experts services are acquired at very exorbitant fees. References Association of Certified Fraud Examiner (ACFE) (2012). Report to the Nations on Occupational Fraud and Abuse. Austin, TX: Association of Certified Fraud Examiners. 271

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