General Overview of forensic accounting and forensic audit

A general approach to Forensic Accounting

and Forensic Audit

Compiled and Presented

By:

Godwin Emmanuel OYEDOKUN(HND, BSc. Ed, MBA, MTP (SA), ACA, ACIB, FCTI, AMNIM, ACCA-CertIFR, CFA, CFE, CNA, FCFIP, FCE, CICA, ABR, CPFA)

[email protected] +2348033737184, +2348055863944

Assistant Director (Head) Education, Research & Technical

The Chartered Institute of Taxation of Nigeria

And

Chief Technical Consultant

OGE Professorial Services Ltd

Being a lecture delivered at 2-Day Capacity Building Workshop for the Staff of

Internal Audit Department of Niger Delta Development Commission (NDDC)

Held at Limpopo Spring Hotel, Aba Road, Port-Harcourt, Rivers State

on March 6 - 7, 2015

Organized by Gexim Nigeria Limited

3

The Facilitator- “Nemo Dat Quod Non Habet” Godwin Emmanuel Oyedokun, HND, BSc.Ed, MBA, MSc., MTP (SA), ACA, FCTI, ACIB, AMNIM, CAN, FCFIP, CICA, CFA,CFE, CPFA, ABR,

CertIFR

Assistant Director (Head) – Education, Research & Technical Directorate of The Chartered Institute

of Taxation of Nigeria (CITN)

Godwin is an Experience Certified Fraud Examiner, Chartered Accountant, Chartered Tax Professional,

Certified Forensic Accountant, Chartered Banker, Chartered Manager, Insolvency Practitioner, and Financial

Analyst of good repute.

He also holds a Certificate in International Financial Reporting (CertIFR) of Association of Certified

Chartered Accountant (ACCA)

He is a seasoned professional who is currently serving as an Advisory Council Member of Association of

Fraud Examiner (ACFE), Austin, USA, and Vice President of Nigeria Chapter of same Association

Godwin is a leader in Forensic Accounting and Fraud Investigation, he is a sought after intellectual, who has

presented over 35 technical papers in various Training/Seminars on Forensic Accounting, Fraud

Investigation, Internal Audit & Control, Risk Management, IFRS, ICT, Strategic Management, Finance &

Accounting related subjects. He is also an Examiner to The Chartered Institute of Bankers of Nigeria (CIBN)

on “Introduction to Financial Accounting (FA)” and “Information Communication Technology (ICT)”

He has been trained on Forensic Accounting, Accountancy and Fraud Investigation and other Finance &

Accounting related courses, in Ghana, Senegal, Liberia, Cote d’Ivore, Canada- Toronto, at some States in

United State of American and in Nigeria including Lagos Business School of Pan Atlantic University.

He was the Assistant Director (Head) – Finance & ICT of The Chartered Institute of Taxation of Nigeria

(CITN).

He is the Chief Technical Consultant to OGE & CO Professional Services Ltd. (www.ogecops.com) and A &

D Forensic Consults Ltd. Nigeria (www.adforensicconsults.com).

This presentation will cover the following major sub topics :

• Definition and Concept of Forensic and Forensic Accounting

• Definition and Concept of Forensic Audit

• Other Forensic Terminologies

• Distinction/Similarities between Statutory Audit and Forensic Audit.

• Approaches/Steps and Techniques to Forensic Audit engagement

• Functions of a Forensic Auditor

• Conclusion

Contents

Oyedokun Godwin Emmanuel

Saturday, March 7, 20156

“The hardest thing in the world to

understand is income tax”

Albert Einstein

Quotes

“The reasonable man adapts himself to the world; the

unreasonable man persists in trying to adapt the world to

himself. Therefore, all progress depends on theunreasonable man.”

GEORGE BERNARD SHAW

You need not worry as I am not here today to discuss tax


“The illiterate of the 21st century will not be those who cannot read or

write but those who cannot learn, unlearn and relearn.”

ALVIN TOFFLER

Quotes

“The incidence of fraud is now so common that its

occurrence is no longer remarkable, only its scale.”The ACFE says.

“By failing to protect your organization, you can expect to become a

victim of fraud at some point in the future and become a statistic in

our next study.”

……………

Introduction Many cases of financial statement misrepresentation have been reported, and to that

extent, affected companies like Enron, WorldCom, Adelphia, Global Crossing, Xerox,Qwest, and many others like Cendant, Lincoln Savings, ESM, Anicom, Waste Management,and Sunbeam, (Albrecht, 2005), and their auditors have gone down.

In effect, stakeholders, most especially the shareholders were greatly affected.

There have also been instances where forensic accountants were called to determine thecause(s) of the collapse of the companies, who are involved and what (monetary value) wasinvolved (Albrecht, 2005).

The field of forensic accounting is not a new concept, though it has grown in popularity inrecent years as it is founded upon understanding the mind of the fraudster in order tounderstand why frauds are committed (Hecht and Redmond 2010).

This paper thus explore various definitions and concept of forensic accounting, forensicaudit, distinction between statutory audit and forensic audit, approaches and techniques toforensic audit, steps in forensic audit engagement, functions of a forensic auditors andrelevant other forensic terminologies.

Readers of this paper would fully understand the science and approaches to forensicaccounting and forensic auditing and also learn various techniques available to forensicaccountant/auditors could be applied in internal control functions of businessorganizations (Oyedokun 2014).

Concept of Forensic and Forensic Accounting Forensic means, "belonging to, used in or suitable to courts of judicature or to

public discussion and debate" (Webster's Dictionary).

Forensic Accounting, provides an accounting analysis that is suitable to the courtwhich will form the basis for discussion, debate and ultimately dispute resolution(Zysman 2004).

Forensic to the-free-dictionary.com means “relating to, used in, or appropriate forcourts of law or for public discussion or argumentation”.

It’s also means “relating to, or used in debate or argument; rhetorical. It was alsofurther stated to mean; relating to the use of science or technology in theinvestigation and establishment of facts or evidence in a court of law: e.g. aforensic laboratory. (thefreedictionary.com)

Forensics is pertaining to or used in courts of law or in public debate, adapted orsuited to argumentation; rhetorical.

Forensics is the art or study of argumentation and formal debate(dictionary.com).

Forensic is used or applied in the investigation and establishment of facts orevidence in a court of law; "forensic photograph"; "forensic ballistics"

Concept of Forensic and Forensic Accounting Forensic to dictionary.reference.com means:

1. pertaining to, connected with, or used in courts of law or public discussion and debate.

2. Adapted or suited to argumentation; rhetorical.

Forensic accounting is a science dealing with the application of accounting facts andconcepts gathered through auditing methods, techniques and procedures to resolve legaland related problems which requires the integration of investigative, accounting, andauditing skills (Arokiasamy and Cristal, 2009, Dhar and Sarkar, 2010).

Forensic accounting has existed for many years. With the growing complexity of thebusiness environment and the growing number of business related investigations, forensicaccounting professionals are increasingly asked to assist in the investigation of financialand business related issues (Oyedokun, 2011, Zysman, 2004).

Example of, Enron, Tyco, and WorldCom scandals resulted in the loss of public trust andhuge amounts of money.

In order to avoid fraud and theft, and to restore the badly needed public confidence,several companies took the step to improve the infrastructure of their internal control andaccounting systems drastically.

It was this development which increased the importance of accountants who have chosen tospecialize in forensic accounting and who are consequently referred as forensic accountants(Shanikat and Khan 2013).

WHAT WILL YOU SAY ABOUT THESE?

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Other Forensic Terminologies The Word ‘Forensic’

The word forensic is derived from the Latin adjective “forensis”, meaning "of or before theforum." In early Roman times, a criminal charge against a person meant presenting the casebefore a group of public individuals in the forum.

Forensic Accounting Investigation.

Forensic accounting investigation is an aspect of forensic accounting that refers to thepractical steps Certified Fraud Examiners take in order to gather evidence relevant toalleged fraudulent activities.

Forensic Investigation

The utilization of specialized investigative skills in carrying out an inquiry conducted insuch a manner that the outcome will have application to a court of law. A ForensicInvestigation may be grounded in accounting, medicine, engineering or some otherdiscipline.

Forensic Audit

An examination of evidence regarding an assertion to determine its correspondence toestablished criteria carried out in a manner suitable to the court. An example would be aForensic Audit of sales records to determine the quantum of rent owing under a leaseagreement, which is the subject of litigation.

Other Forensic Terminologies Forensic Auditing

Forensic auditing is an aspect of forensic accounting that applies auditing, accounting and investigative skills to situations that have legal consequences

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”.

Characteristics of Forensic accounting

According to Zysman (2009) a capable Forensic Accountantshould have the following characteristics:

curiosity;

persistence;

creativity;

discretion;

organization;

confidence; and

sound professional judgment.

Characteristics of Forensic accounting 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 Forensic Accountant must be able tolisten effectively and communicate clearly and concisely.

Forensic accounting activities include (According to Zysman (2001):

1. Criminal investigation, which are usually on behalf of the police with the aim of presentingevidence in a professional and concise manner.

2. Shareholders and partnership dispute that involve analysis of numerous year financialrecords for valuation and qualification of the issue in dispute;

3. Personal injury claim, where, for example, economic losses from a motor accident orwrongful dismissal may need to be quantified.

4. Business interruption and other types of insurance claim. These assignments involve adetailed review of the policy to investigate coverage issues and the appropriate methods ofcalculating the loss.

5. Business/employee fraud investigations which can involve fraud tracing, assetidentification and recovery, forensic intelligence gathering and due diligence review.

6. Matrimonial dispute involving the tracing, locating and evaluation of assets.

7. Business economic losses, where a disputed contract, construction claims, expropriation,product liability claims and trademarks are the issues.

8. Professional negligence ascertains the breach and quantifies the loss involved, andmediation and arbitration, as a form of alternative dispute resolution.

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Forensic Accountants– What We Are Neglecting

Do You Really Know Your Business?

What risks currently impact your

ability to perform as a conventional

Accountant/Auditor?

How can Forensic Accounting

Certification, knowledge & skills

help deliver better shareholder

returns, draw more investors?

Accelerated Financial Close. How?

Strategy vs. Execution?

How does the organization govern

itself? Managing, Monitoring and

Analyzing Internal Controls. How?

Major milestones in forensic accounting 1942: Maurice E. Peloubet published “Forensic Accounting: It’s place in

today’s economy.”

1982: Francis C. Dykman wrote “Forensic Accounting: The Accountant as

an Expert Witness.”

1986: The AICPA issued Practice Aid #7, outlining six areas of litigationservices – damages, antitrust analysis, accounting, valuation, general

consulting and analyses.

1988: Association of Certified Fraud Examiners established

1988: A new genre of detective novels where the Certified Fraud

Examiner was the star.

1992: The American College of Forensic Examiners was founded.

1997: The American Board of Certified Fraud Examiners was founded

2000: The Journal of Forensic Accounting, Auditing, Fraud and Taxation

was founded.

2009: The Institute of Chartered Accountants of Nigeria (ICAN)

commenced certification programme in forensic accounting, leading to

the award of Certified Forensic Accountant(CFA) certificate. (298 CFAs asof March 25, 2013 in 3 sets)

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Forensic Accounting….

21

Forensic Accounting…

22

Forensic

Accountants

Forensic Accounting

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

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

Forensic accounting, sometimes referred to as investigative accounting, isa unique career field that combines accounting with informationtechnology.

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

According to Oyedokun (2013), Forensic Accounting is a ScientificAccounting method of uncovering, resolving, analyzing andpresenting fraud matters in a manner that is acceptable in thecourt of law

23

Why is forensic accounting

Because of the struggling stock market and lack of investorconfidence which has forced many organizations to take a long, hardlook at their financial statements.

A sluggish economy with its attendant problems

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

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

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

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A Forensic Accountant uses sophisticated computer programs to analyze financialdata and find evidence that would be legally valid during a court proceeding.

A Forensic Accountant is a specialized Professional who performs investigativeaccounting as well as litigation support.

Those in the forensic accounting field generally use both accounting andinvestigating skills to interpret financial evidence and are often called upon toanalyze and present this evidence to others in a clear manner.

They may be called upon as expert witnesses in a court of law or to providedocumented proof of financial misdeeds.

Forensic Accountant are often asked to review financial records for mergers andacquisitions.

They may also serve as advisers to a corporation’s audit committee or work toresolve shareholder disputes within a company.

In a civil case, a forensic accounting professional may be asked to calculateeconomic damages that occurred as the result of a breach of contract or provideinsight into a case based on a claim of professional negligence.

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

25

Forensic Accountant

To be successful as a forensic accounting/Anti-Fraud professional, youmust be:

detail oriented,

persistent,

ambitious, and

highly organized.

Forensic accounting also requires a great deal of creativity, since you mustoften explain complex financial concepts to an audience that lacks basicaccounting knowledge.

Several well-known case investigations around the world have involvedforensic 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 thelitigation 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

27

Role of Forensic Accountant

28

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 forfraud; incentive, opportunity and rationalization.

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

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

Just because someone has the opportunity or incentive to steal, it doesn'tmean that they have the capability to do so.

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

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Saturday, March 7, 2015 30

Is your tool sophisticated enough to fight

fraudsters?

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

32

According to Enyi (2012) in Dada (2013), in forensicaccounting, a man is expected to know the trick of themonkey in order to catch it, but he should ensure that hedid not become the monkey in the process.

Impeccable character must be weaved around ethicalconsiderations in forensic accounting for it to succeed.

This implies that for effective investigation to be carriedout, the investigator must understand the tricks beingemployed by the perpetrator, hence forensic accountingskill is required.

33

A Forensic Accounting must have skills in many areas However, all well-

trained Forensic Accounting should have at least a minimum level

knowledge and skills in the following areas:

Auditing skills

Investigative knowledge and skills

Criminology

Accounting knowledge

Legal knowledge

Information technology (IT) knowledge and skills

Communication skills

Report Writing Skill

Knowledge and Skill Set for Forensic Accountants

Professional Accountant’s Evidence on Cross-examination

In 1926, Albert S. Osborn described 14 possible attacks against an accountant’s evidence on cross-examination (which were summarized by Max Lourie)

Insufficient preparation and experience to qualify as an expert witness.

Inadequate examination of the issues presented.

Improper presentation of the issues to the witness.

Suspicion upon the testimony, based upon the witness’s personal record and character.

Use of misleading illustrations, selection of unfair examples, drawing of inferences not justified by facts, and improper emphasis or exaggeration.

Impossibility of reaching a conclusion meriting serious consideration on an issue not permitting adequate inquiry.

Expression of an opinion unjustified by the reasons given.

Basing the opinion upon vague and trivial facts insufficient to sustain any opinion, and arriving at a conclusion by guesswork.

A biased and unfair attitude of the witness in the examination of the facts.

The possibility that the problem is so difficult or unusual even a competent and careful witness may be mistaken.

Influence of other things rather than technical findings on the opinion of the witness and basing conclusions on reasons other than those given.

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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


On Tuesday June 19, 2012, at ACFE 23rd Annual Conference in Orland FL, Pamela

Meyer, CFE, author of the best-selling book, "Liespotting: Proven Techniques to

Detect Deception," during her Tuesday working lunch keynote, pointed out the

followings for our education:

1. A lie has no power whatsoever by its mere utterance. Its power emerges when

someone else agrees to believe that lie.

2. "We would all live a life of horror and social decay if we insisted on absolute

honesty at the expense of social dignity.

3. Lying is "as old as breathing. It's part of our history and culture." She said we're

hard-wired to be deceptive from childhood, and by the time we're breadwinners

we've entered a world cluttered "with spam, fake digital friends, partisan media,

ingenious identity thieves, world-class Ponzi schemers — a post-truth society.“

4. Knowing all this, fraud examiners, she said, must further sharpen their interview

skills. "And though we will never become mind readers with 100 percent

accuracy, with the right training we can get a little closer to the truth."

Fraud and lying


Pamela Meyer, CFE, gave several body language indicators:

•Lip smacking /biting.

•Grooming gestures.

•Hand wringing.

•Excessive sweating.

•Closed eyes.

•Slumped posture.

•Lowered voice.

After providing numerous other liespotting techniques, she said that "the truths

about lying are very hard truths. It's prevalent, it's dangerous.

We have mixed feelings about it. Without training we're not very good at detecting it.

"All you really need are your eyes, your ears, your absolute objectivity and sense of

fairness," Meyer said.

"That's enough. When you start to signal everyone around you … our world is going

to be one that's strengthened, and falsehood is identified and marginalized."

Fraud and lying

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 Accountants in Court

A key piece of evidence is the report of the Forensic Accountant.

The report should not be accusatory or conclusive as to guilt. It is

critical to ensure that the tone of the report is not inflammatory or

prejudicial.

•The fraud trial can be a civil or a criminal trial.

•In either case, the role of the Forensic Accountant is to study

relevant materials documents, and the authoritative literature

relating to the case on hand.

•Direct and cross examination questions will be asked, and the

Forensic Accountant has the responsibility to answer these

questions clearly and concisely.

41

Forensic Accountant in Court

In court, the Forensic Accountant can be:

• an expert witness,

•a consultant, or

•play other roles such as Trier of fact,

•special master,

•court-appointed expert,

•referee,

•arbitrator, or mediator

•Godwin, explain types of witness and their roles

Concept of Forensic Audit

Forensic Audit is the examination of evidence regarding an assertion todetermine its correspondence to established criteria carried out in amanner suitable to the court.

An example would be a Forensic Audit of sales records to determine thequantum of rent owing under a lease agreement, which is the subject oflitigation (ACFE 2014).

Based on their financial-economical and audit backgrounds, forensicauditors are involved in finding facts in order to resolving commercial orlegal disputes, often a suspicion of fraud.

As legislation and culture varies per country there exists not one singledefinition of forensic audit.

In Belgium, forensic audit is defined as follows:

“Forensic audit is the activity that consists of gathering, verifying,processing, analysing of and reporting on data in order to obtain factsand/or evidence - in a predefined context - in the area of legal/financialdisputes and or irregularities (including fraud) and giving preventativeadvice”.

Distinction/Similarities between Statutory Audit and Forensic Audit

Auditing to Messier (2000), is a systematic process of objectively obtaining andevaluating evidence regarding assertions about economic actions and events toascertain the degree of correspondence between those assertions and establishedcriteria and communicating the result to interested users.

Hayes, Dassen, Schilder, and Wallage (2005), stated that by the audit process, theauditor enhances the usefulness and value of the financial statements as well asincreases the credibility of other non-audited information released bymanagement.

An Audit is a systematic approach that follow a structured, documented plan. Anaudit is an independent, objective and expert examination and evaluation ofevidence (Hayes, Dassen, Schilder and Wallage 2005, p.11).

The objective of an audit of financial statements is to enable the auditor to expressan opinion whether the financial statements are prepared, in all material respects,in accordance with an applicable financial report framework. The phrases used toexpress an auditor’s opinion are ‘give a true and fair view’ or ‘present fairly in allmaterial respect which are equivalent terms.

The ‘applicable financial reporting framework’ comprises those requirements ofaccounting standards, law and regulations applicable to the entity determine theform and content of its financial statements (Millichamp and Taylor 2008, p.4).

Distinction/Similarities between Statutory Audit and Forensic Audit

Financial statement audit determines whether the overall financial statement present fairly inaccordance with specified criteria.

This type of audit usually covers the basic set of financial statements (balance sheet, incomestatement, statement of stockholders’ equity, and a statement of cash flows), and generallyaccepted accounting principles (GAAP) services as the criteria.

However, certain financial statement audit may entail the use of other criteria, such as cashbasis or income tax basis. For example, many real estate partnerships prepare financialstatement using an income tax basis (Messier 2000, p. 11)

Audit of financial statements examine financial statement to determine if they give a true andfair view or fairly present the financial statements in conformity with specified criteria.

The criteria may be International Financial Reporting Standards (IFRS), generally acceptedaccounting principles (GAAP), National company laws or tax laws (Hayes, Dassen, Schilderand Wallage 2005, p.14).

Statutory audit must now take the garb of forensic investigations.

The problem with the present system of forensic investigation is that it is focused more onfinancial transactions than on the totality of the entity's operations and often time neglectsareas where there have been constant leakages of other organizational resources that are offinancial consequences but which are not easily detected with a normal analysis of thefinancial statement (Enyi, 2008).

Similarities between Audit and Forensic Accounting

To Richter (2010), the most notable differences between financial statement auditand forensic accounting are the objectives of the tasks performed.

He noted that certain similarities may be present, but the differences create a widegap which justifies the need for specialization in forensic accounting.

The users of financial audit and forensic examination reports are the keydifferences between the objectives of a financial audit and forensic examination.

According to Richter (2010), the financial audit report will aid management as atool for:

Determining the efficiency of its marketing strategies.

Evaluating the soundness of its internal control policies to safeguard the company’sassets.

Reviewing compliance with company policies as well as governmental rules andregulations.

Forensic accounting on the other hand is more concerned in:

Establishing the existence of fraud.

Determining the extent of damage or losses involved as a result of the fraud or crime.

The gathering of sufficient evidence for use by the courts of law to come up with a fair andjudicial ruling for indemnification and/or prosecution.


In the opinion of Butne, forensic accounting is one of the most in-demandfields of accounting, especially following the losses suffered by victims offraudsters such as Bernie Madoff.

Forensic accountants commonly specialize in uncovering fraud.

He asserts that soft skills such as conducting effective interviews are vital toany forensic accountant, and that the volume of data produced by moderncompanies requires analytical tools to direct the forensic accountant’sattention toward suspicious transactions or accounts.

This then means that in forensic accounting engagement, the use ofmodern analytical tools is key.


Forensic accounting is then the application of investigative, auditing,procedure and analytical skills for the purpose of resolving financial issuesscientifically and in a manner that meets standards required by courts oflaw.

Forensic accounting methods is not limited to the use of financialinvestigations that result in legal prosecution; however, if this is thepurpose, the investigation and analysis must meet the standards requiredin the court of law that has jurisdiction (Hopwood, Leiner and Young, 2012,Oyedokun 2014).

Approaches/Steps and Techniques to Forensic Audit engagement

Typical approach to a Forensic Accounting assignment

Each forensic accounting assignment is unique. the actual approach adopted and theprocedures performed will be specific to it viz:

1. Meet with the client

2. Perform a conflict check

3. Perform an initial investigation

4. Develop an Action Plan

5. Obtain the relevant evidence

6. Perform the analysis

7. Prepare the report

The actual analysis performed will be dependent upon the nature of the assignment and mayinvolve:

1. calculating economic damages;

2. summarizing a large number of transactions;

3. performing a tracing of assets;

4. performing present value calculations utilizing appropriate discount rates;

5. performing a regression or sensitivity analysis;

6. utilizing a computerized application such as a spread sheet, data base or computer model;and

7. utilizing charts and graphics to explain the analysis.

Approaches/Steps and Techniques to Forensic Audit engagement

In other climes, it’s believed that each forensic audit assignment is unique,so also approach to be adopted and the procedures performed will bespecific to such.

In general the following steps are followed (cpajerseycitynj.com):

1. Meet with the Client

2. Engagement letter

3. Perform an initial investigation

4. Determine whether any allegation requires immediate remedialaction

5. Obtain the relevant evidence

6. Perform an analysis of the audit findings (cpajerseycitynj.com)

Phased Engagement Approach to Forensic Accounting

Renick (2007) in his article “a Phased Engagement Approach to Forensic Accounting” opinethat there are several approaches to a forensic investigation. He recommended a phasedengagement approach in managing the investigation efficiently as its controls the engagementwith decision points throughout the process.

A phased engagement is a step-by-step methodology that manages time and fees, and yieldsconclusions based upon parameters defined by the client (often an attorney) and the forensicaccountant.

Costs for each phase and, therefore, the cost of the entire engagement, can be controlled.

A phased engagement also allows faster response and completion times because all time andenergy are devoted to the completion of each phase before the next phase is commenced.

The phases are as listed below:

Phase 1: Exploration and Evaluation

Phase 2: Expansion of Scope

Preparing the analysis1. Reconstruction of books and records.

2. Third-party verification and confirmation

3. Conclusion of Phase 2.

Functions of Forensic Auditor

A forensic accountant/auditor/investigator is often retained to analyze, interpret, summarizeand present complex financial and business related issues in a manner which is bothunderstandable and properly supported.

Forensic accountant/auditor/investigator can be engaged in public practice or employed byinsurance companies, banks, police forces, and government agencies like EFCC, ICPC, NDLEAand other organizations for any of the following functions:

Investigating and analyzing financial evidence;

Developing computerized applications to assist in the analysis and presentation of financialevidence;

Communicating their findings in the form of reports, exhibits and collections of documents;and

Assisting in legal proceedings, including testifying in court as an expert witness and preparingvisual aids to support trial evidence.

In order to properly perform these services, a Forensic Accountant must be familiar with legalconcepts and procedures.

In addition, a Forensic Accountant must be able to identify substance over form when dealingwith an issue.

Functions of Forensic Auditor A Forensic Accountant can also be of assistance in various ways, including:

Investigative Accounting

Review of the factual situation and provision of suggestions regarding possible courses of action.

Assistance with the protection and recovery of assets.

Co-ordination of other experts, including:

Private investigators;

Forensic document examiners;

Consulting engineers.

Assistance with the recovery of assets by way of civil action or criminal prosecution.

Litigation Support

Assistance in obtaining documentation necessary to support or refute a claim.

Review of the relevant documentation to form an initial assessment of the case and identify areas of loss.

Assistance with Examination for Discovery including the formulation of questions to be asked regardingthe financial evidence.

Attendance at the Examination for Discovery to review the testimony, assist with understanding thefinancial issues and to formulate additional questions to be asked.

Review of the opposing expert's damages report and reporting on both the strengths and weaknesses of thepositions taken.

Assistance with settlement discussions and negotiations.

Attendance at trial to hear the testimony of the opposing expert and to provide assistance with cross-examination.

Conclusion

Although a forensic investigation can be approached in many ways, thephased engagement permits a forensic accountant and client to divide theinvestigation into distinct phases, allowing for the control of theinvestigation and its costs (Renick, 2007).

In practice, whereas the possible results of ordinary financial audit is prettymuch predictable (e.g. unqualified, qualified, disclaimer or adverseopinion), the outcome of a forensic audit is far more unpredictable.


"... the dilemma is that as professionals, we do something and

preach something else. But once punitive regime is effective,

everybody becomes perfect and we would operate an efficient

financial system...“ - Prof. Yemi Osinbajo (SAN)

"...we are not peculiarly corrupt, the problem is that we do not

have a system that is able to deal with offenders" Prof. Yemi

Osibanjo (SAN)

"... the reason why we are where we are now is break in

value...” - Prof. Yemi Osinbajo (SAN)

Conclusion - Quotes


"... Value are essential ingredient in National

development..." Dr Ezekwesili (Madam Due Process)

“ILLEGALITY can never be a NORM. Even though it subsists it is

still illegal and one day the illegality will find out the perpetrators.

That is why the Bible says that we should not envy evildoers

because their end will come suddenly. That is what we are now

experiencing as a people. Hence we must repent and ask God for

mercy and forgiveness. (2Chro 7:14). He is just and merciful to

forgive us. God bless Nigeria.” …….Joel

Conclusion - Quotes

Thank you

See the full paper for references

References & Further Reading

PRACTICAL PROBLEM Loan Fraud Exercise

You are performing an audit in your institution andfind the following situation. What red flags or factorsexist that may indicate a potential for fraud? Identifythe potential fraud(s) that may be occurring andindicate how you would proceed to determine what, ifanything, actually occurred.

Your financial institution hired bill, a new seniorlending officer, 18 months ago (your financialinstitution does not have a practice of performingcriminal background checks on new employees). Billhas brought a lot of growth to the financial institutionsince he was hired. He specializes in unsecured loans toindividuals with high net worth.

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The growth in this type of loan has brought significantprofits to the financial institution, which had beenexperiencing a lack of loan demand prior to hiring him.

In addition to making loans (he has a lending limit of$100,000 on unsecured loans), Bill’s responsibilitiesinclude overseeing the loan operations areas, whichinvolves maintaining loan files, updating customercomputer information, and preparing reports for seniormanagement and the board on new or delinquent loans.You hear from the loan operations manager, Al, that Billhas made their lives pretty easy in loan operations. Hekeeps track of loan files for his own customers, is verydiligent about calling customers whose payments are late,and keeps customer computer records updated for addresschanges and the like without Al or his staff having toprompt him. 59

Furthermore, Al says that Bill is a stickler for accuracyand does not like to be questioned because he is busyproducing profits for the financial institution. Bill is alsoin charge of the loan review function, where he reviews aportion of loans granted by other officers.

During a routine audit, you select a sample of new loansto check for documentation adequacy. You select 50loans, 10 of which were made by Bill. 8 of these 10 loanfiles do not contain credit bureau reports. You bring thisto Bill’s attention and he says that he is familiar with allof the customers from his previous employer. He says hedidn’t want to incur the expense of ordering creditreports on someone he knows so well.

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General Overview of forensic accounting and forensic audit

Economy & Finance

Transcript of General Overview of forensic accounting and forensic audit