Audit, investigation & forensic accounting: Exploring the nexus

1. 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
godwinoye@yahoo.com
Practical Approach to Fraud Investigation/Forensic Accounting Course
OGE Professional Services
July 20- 21, 2016

2. 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

3. 3
• 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

4.  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.
4
Audit & Auditing

5. 5
Auditors can be classified into the
following categories:
External auditor/
Statutory auditors
Internal auditors
Consultant
auditors
Quality auditors
What about
Forensic auditors?
Auditors

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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

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• 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

8. 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.
8

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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

10. 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.
10

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Fraud Investigations & Govt. Agencies

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• 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

13. 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
13

14. 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
14

15.  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.
15
Forensic Accountant

16.  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.
16
Forensic Accountant cont’

17.  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
17
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

19. 19
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.

20. 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
20

21. 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.

22. 22
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

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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

24. 24
Which of these can organization control and how?

25. 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.
25

26. 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.
26

27. 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?

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 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

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 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.
Skills Forensic Accounting

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 Theory of profession- Framework- Attributes
Skills Forensic Accounting
Source: (Canning & O’Dwyer, 2001) and Robust Model of Profession (Candilis 2009)
Source: (Canning & O’Dwyer, 2001) and Robust Model of Profession (Candilis 2009)

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 Reasoning skills- Let do it together in class
Skills Forensic Accounting

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 Reasoning skills- Let do it together in class
Skills Forensic Accounting

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 Reasoning skills- Let do it together in class
Skills Forensic Accounting

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 Reasoning skills- Let do it together in class
Skills Forensic Accounting

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 Reasoning skills- Let do it together in class
Skills Forensic Accounting

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 Take Home- 151, 131, 51
Skills Forensic Accounting

38. 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. 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. 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. 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. 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
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http://www.accountingtoday.com/news/Forensic-Accountant-Role-Litigation-66287-1.html
donloaded on May 21, 2013
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References