1

SEMINAR PAPER
ON
FORENSIC AUDITING

(ACC 615: AUDITING & INVESTIGATOR)

PRESENTED BY GROUP 8

NAMES: REG NO:

1. UKENNA STEPHEN I. M.Sc./2009/406033F
2. OKOH ALEX C. M.Sc./2009/406026F
3. EZEJIOFOR RAYMOND A. M.Sc./2009/406024F
4. MEDUOYE OLANIDE MOFOLUSHO
5. IGBOKWE UCHENNA M.Sc./2009/406043F
6. IFEYINWA OZOEMENE M.Sc./2009/406009F
7. ANYAFULU CHINYERE M.Sc./2009/406048P
8. OKORO RAYMOND M.Sc./2009/406010P
9. OZUOMBA CHIDINMA M.Sc./2009/406007F

DEPARTMENT OF ACCOUNTANCY
FACULTY OF MANAGEMENT SCIENCES
NNAMDI AZIKIWE UNIVERSITY, AWKA

LECTURER: PROF. EMMA OKOYE

JUNE, 2010.
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ABSTRACT
The menace of fraud, corruption, and misfeasance are commonplace and are the
increase globally and, indeed, in Nigeria. Thus forensic accounting or forensic
auditing has emerged as a result of the surge in fraud. Accordingly, the aim of this
conceptual paper is threefold. First, this paper sought to imbibe the art of forensic
thinking among accountants; second, it aimed at stimulating and promoting the
understanding of basic forensic skills; and third, it aimed at expanding the stock of
literature in forensic accounting and audit. Given this broad spectrum of objectives
of this paper, characteristics of a forensic auditor were examined and skills as well
as objectives of forensic audit were discussed. In the discus of the application of
forensic audit, both reactive and proactive accountings were examined. This was
followed by a highlight on the distinction between statutory audit and forensic
audit. Detection techniques and steps in conducting forensic audit were also
discussed. We concluded that forensic audit practice can reduce the incidence of
fraud.
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TABLE OF CONTENTS
Cover page - - - - - - - - - - 1
Abstract - - - - - - - - - - 2
Table of Content - - - - - - - - - 3
1.0 INTRODUCTION - - - - - - - - 5
1.0.1 Overview and Definition of forensic auditing - - 5
1.0.2 Objectives of the Paper - - - - - - 8
1.0.3 Historical Background of Forensic Audit - - - 9
1.2 CHARACTERISTICS OF A FORENSIC AUDITOR - - - 11
1.3 SKILLS FOR FORENSIC AUDIT - - - - - 12
1.4 OBJECTIVES OF FORENSIC AUDIT - - - - - 13
1.5 APPLICATION OF FORENSIC AUDIT - - - - 13
1.5.1 Reactive Forensic Accounting - - - - - 13
1.5.2 Proactive Forensic Accounting - - - - - 15
1.6 ADVANTAGES AND DISADVANTAGES OF FORENSIC AUDIT 15
1.6.1 Advantage of Forensic Audit - - - - - 15
1.6.2 Disadvantages of Forensic Audit- - - - - 16
1.7 DISTINCTION BETWEEN STATUTORY AUDIT AND FORENSIC AUDIT
- - - - - - - - - - 17
1.8 DETECTION TECHNIQUES IN FORENSIC AUDITING - - 18
1.9 TYPES OF INVESTIGATION IN FORESIC AUDITING- - 19
1.9.1Corruption - - - - - - - - 19
1.9.2 Asset Misappropriation- - - - - - - 20
1.9.3 Financial Statement Fraud- - - - - - 20
1.10 HIGHLIGHTS OF SOME COMPANIES WHERE FORENSIC
INVESTIGATION HAS TAKEN PLACE - - - - 21
1.10.1 Enron Scandal (2001) - - - - - - 21
1.10.2 Sumbean (1997) - - - - - - - 21
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1.10.3 Banks declared technically insolvent by CBN - - 22

1.10.4 Cadbury Nig Plc - - - - - - - 23
1.11 STEPS IN CONDUCTING INVESTIGATION IN FORENSIC AUDIT
- - - - - - - - - - - 23
1.12 CONCLUSION - - - - - - - - - 27
1.13 REFERENCES - - - - - - - - 28
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1.0 INTRODUTION
1.0.1 Overview and Definition of Forensic Audit
Agreeably, the incidence of fraud, corruption, misfeasance, crimes and
terrorism are not only on the increase, but also, they pervade every sector of our
society and the globe at large. The need to identify the sources and uses of money
in illegal activity is a sine qua non in every investigation, including terrorism and
counterintelligence. Through the development of forensic accounting, accountants
now have one more tool to effectively and efficiently deal with the challenges
faced in detecting financial crimes and tracing ill-gotten gains from illegal
activities.
Fraud is a driving force behind a surge in demand for forensic accountants:
trained to perform accounting autopsies. Thus forensic accountants dissect
financial records and sniff out the deception of embezzling employees, conniving
corporations, sneaky spouses and serve as expert witnesses in resulting trials.
Forensic accounting has become a hot profession as a result of the wave of
economic crimes, a swarm of corporate scandals, an increase in bankruptcies and
occupational fraud. In these days, detectives and attorneys have to team up with
forensic accountants to track down clues in financial records or to find victims and
suspects.
Fraud and forensic accounting affect the accounting profession on a daily
basis. The Federal Government of Nigeria, through the development and
implementation of various Acts, Laws, and Fraud-fighting agencies, have paid her
dues in the overall attempt across the world to curb the menace of corruption, fraud
and misfeasance. Notable amongst these attempts is the establishment of agencies
such as: The Economic and Financial Crimes Commission (The EFCC); The
Independent Corrupt Practices’ Commission (The ICPC); The National Drug Law
Enforcement Agency (The NDLEA) etc.
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Forensic auditing covers a broad spectrum of activities, with terminology

not strictly defined in regulatory guidance. Generally, the term forensic accounting
is used to describe the wide range of investigative work which accountants in
practice could be asked to perform. The work would normally involve an
investigation into the financial affairs of an entity and is often associated with
investigations into alleged fraudulent activity. Forensic accounting refers to the
whole process of investigating a financial matter, including potentially acting as an
expert witness if the fraud comes to trial. Although this article focuses on
investigations into alleged frauds, it is important to be aware that forensic
accountants could be asked to look into non-fraud situations, such as the setting of
monetary disputes in relations to a business closure or matrimonial disputes under
insurance claims.
The process of forensic accounting as described above includes the forensic
investigation itself which refers to the practical steps that the forensic accountant
takes in order to gather evidence relevant to the alleged fraudulent activity. The
investigation is likely to be similar in many ways to an audit of financial
information, in that it will include a planning stage, a period when evidence is
gathered, a review process, and a report to the client. The purpose of the
investigation, in the case of an alleged fraud, would be to discover if a fraud had
actually taken place, to identify those involved, to quantify the monetary amount of
the fraud (i.e. the financial loss suffered by the client), and to ultimately present
findings to the client and potentially to court.
Finally, forensic auditing refers to the specific procedures carried out in
order to produce evidence. Audit techniques are used to identify and to gather
evidence to prove, for example, how long the fraud has been carried out and how it
was conducted and concealed by the perpetrators. Evidence may also be gathered
to support other issues which would be relevant in the event of a court case. Such
issues could include: The suspect’s motive and opportunity to commit fraud;
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whether the fraud involved collusion between several suspects; any physical
evidence at the scene of the crime or contained in documents comments made by
the suspect during interviews and/or at the time of arrest attempts to destroy
evidence, among others.

What is Forensic Audit or Forensic Accounting?

According to Wikipedia (2010), the term “forensic” means “suitable for use
in the court of law”. Forensic, according to the Webster’s Dictionary means,
“Belonging to, used in or suitable to courts of judicature or to public discussion
and debate”.
Forensic audit or forensic accounting can be used interchangeably. Forensic
accounting is defined as that aspect of accounting that provides an accounting
analysis that is suitable to the court which will form the basis for discussion, debate
and ultimately dispute resolution. Furthermore, forensic accounting comprises the
use of accounting, auditing, and investigative skills to assist in legal matters. It
consist of two (2) major components – a. litigation support and services, which
recognize the role of the accountant as an expert consultant; b. investigative
services, that use a forensic accountant’s skills and may require possible courtroom
testimony.
Forensic audit involves examination of legalities by blending the techniques
of propriety (VFM audit), regularity and investigative and financial audits. The
objective is to find out whether or not true business value has been reflected in the
financial statements and in the course of examination to find whether any fraud has
taken place.
Forensic audits are performed by special class of financial experts know as
forensic accountants. This class includes certified fraud examiners (people with
bachelor’s degrees or equal professional experience who have a background in
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accounting, prosecuting fraud, loss prevention or criminology/sociology who pass

the CFE test); CPAs, or Chartered Accountants.
Forensic auditors begin by taking all the accounts, inventories, assets, capital
and other economic elements and determining how they should work together. To
use a hypothetical example, if an auditor sees that a business grosses $10 million a
year, he assumes that the profits, cash, new capital, inventories, taxes, payroll, rent
and other costs add up to $10 million. He then looks at the profits, cash, et al and
checks how they ought to interact (e.g. in some cases, there is a systemic overlap
between certain values, which the accountant would make note of so as not over
count). Once he had collected all of the reported values (as well as caveats), he
would establish an ideal model for how the each side of the balance sheet should
read.
Once completed, the report is sent to the appropriate authorities and
recorded as evidence. While its completeness and objectivity are certainly
important, a forensic audit report’s most useful attribute is the summary of results.
Finance is a highly technical disciple; to accommodate this complexity,
accountancy has adopted an precise lexicon. As such, an unscrupulous defense
attorney could exploit the average juror’s ignorance of such terminology to
discount audit results that are actually compelling. Luckily, chartered accountants
specializing in forensic understand finance as well as criminal law. This allows
them to translate audit results into language useful to prosecutors trying to build a
case.
1.0.2 The Objectives of this paper
The objectives of this paper include:
1. To imbibe the art of forensic thinking among accountants;
2. To stimulate and promote the understanding of basic forensic skills;
3. To further expand the stock of literature in forensic accounting and audit.
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1.0.3 Historical Background of Forensic Audit/Forensic Accounting

Kessr international, a world renowned forensic accounting and investigative
consulting firm, began his lifelong career as a forensic accountant in the early
1970’s.
Kessler’s first job out of college was that of a field auditor for associated
hospital services of New York. His job was to ferret out fraud and abuse
committed by health care institutions and its employees against the Medicare. In
those days health care facilities received reimbursement for the services they
rendered based on a calculated rate derived from cost reports submitted to an
insurance carrier. Kessler’s job was to visit hospitals and health care facilities to
review and compare the original documentation of the facility reported on the cost
report and ascertain if it properly reflected the actual revenue and expenses of the
facility.
Mr. Kessler’s audits began uncovering significant fraud by the facilities he
audited, so he was designated as one of the companies first field auditors
specializing in investigative audits. Mr. Kessler’s, wanting t to distinguish his role
from other field auditors and the accountants whose job was to certify the books
and records of a facility, began calling himself an “Investigative accountant”, a
term he heard while working closely with the government’s accountants assigned
to analyze his fraud findings. Kessler quickly realized that this title would not be
accepted by individuals in the health care industry. It seemed no one felt
comfortable in the hands of an “investigative Auditor”. Kessler was now faced
with a dilemma Kessler’s inspiration came from a very unlikely source. One night
after watching his favorite show, “Columbo”, he found the resolution to his
problem. To some viewers Columbo’s most memorable attribute was his crumple
raincoat, but for Michael G. Kessler, it was much more. Kessler realized the peter
Falk could quickly solicit the cooperation of defendants and solve cases using a
gentle approach and the use of “forensic evidence”. Kessler thus began calling
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himself a “forensic auditor”, a term coined by Kessler, and now widely used within
the industry. He found the result was as he had hoped and he was quickly accepted
when the announced himself in the health care community.
The rest is history and today forensic accounting is one of the fastest
growing professions in the nation. With worldwide offices and on staff specialists
in forensic Accounting, Computer forensic, Risk management and corporate
investigation, Kessler international provides solution to difficult business problem.
Auditors need to be alert for situations, control weaknesses , inadequacies in record
keeping, errors and unusual transactions or results which could be indicative of
fraud, improper or unlawful; expenditure, unauthorized operations, waste,
inefficiency or lack of probity.
The last decade or so the words forensic auditing have become part and
parcel of our vocabulary but under the general population the only association the
make is that it is just another “accounting” or “auditing” procedure or process.
But let us start at the very beginning; Accounting is the process of
identifying, measuring, recording and communicating economic information about
an organization or entity, in order to permit informed judgments by users of the
information. On the other side of the coin is forensic auditing which is a new
discipline under the umbrella auditing.
It is crime, and especially economic crime that gave birth to forensic
auditing. Economic crime is an unpleasant fact and has escalated into a monster. It
touches every country, every industry, and has no signs of stopping. During the
past decade, the number of reported cases of fraud and corruption has continued to
grow dramatically.
Compounding that is the challenges faced by the criminal justice system and
a general absence of the necessary skills to gather the proper audit evidence so
vital to criminal investigations. Information from law enforcement and criminal
justice agencies about corruption and fraud cases is that generally speaking, the
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success rate for convictions are not satisfactory – the reason being that prosecuting
authorities lacked skills and knowledge to provide effective investigation and
prosecution of corruption and fraud cases. Enter forensic auditing!
Therefore, forensic accounting draws its name from association with a court
of law. It is performed to accomplish an objective that involves a judicial process.
Examples of forensic accounting objectives include: computation of asset values in
a divorce proceeding; assessment of damages caused by an auditor’s negligence;
fact-finding to see whether embezzlement has taken place, in what amount, and
whether criminal proceedings are to be initiated; and the collection of evidence in a
criminal proceeding. Forensic accounting is focused upon both the evidence of
financial transactions and reporting as contained within an accounting system, and
the legal framework which allowed such evidence to be suitable to the purpose of
establishing accountability. Forensic accountants are typically Chartered
Accountants that specialize in those types of cases where there is need for such
evidence.
Their job is to detect and interpret the evidences of both normal (non
fraudulent) and abnormal (fraudulent) transactions in the books and records of an
accounting system and the subsequent effect upon the accounts, inventories, and
the presentation thereof. It is imperative: therefore, that forensic accountant first
understand what normal accounting procedures and processes are – remember they
are first and foremost chartered accountants. Just as forensic dentists and forensic
anthropologists are dentists or anthropologists first (that is, they are foremost
professionals in the underlying discipline and are specialists in its forensic
aspects), so too forensic accountants are accountants first.

1.2 CHARACTERISTICS OF A FORENSIC AUDITOR.

According to Ngozi (2010), a capable forensic accountant or auditor should have
the following characteristics:
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i. Curiosity
ii. Persistence;
iii. Creativity;
iv. Discretion;
v. Organization;
vi. Confidence; and
vii. Sound professional judgment.

1.3 SKILLS FOR FORENSIC AUDIT

a. Knowledge of entity’s business and legal environment
b. Awareness of computer assisted audit procedures
c. Innovative approach and skeptic of routine audit practices
According to Ngozi (2010), the skills or competencies required of a forensic
auditor, can be divided into two broad classifications, namely:
1. General competencies/skills:
i. Communications
ii. Self or life management
iii. Interpersonal skills
iv. Leadership
v. Organisational
vi. Management Skills
vii. Stakeholder communications and development
viii. Knowledge.
2. Technical competencies/skills
i. Legal, safety and soundness or compliance analysis;
ii. Technical communication
iii. Data collection and analysis
iv. Financial analysis.
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1.4 OBJECTIVES OF FORENSIC AUDIT

Forensic auditing aims at legal determination of whether fraud has actually
occurred. In the process, it also aims at naming the person(s) involved (with a view
to take legal action).
Objective of forensic audit is to find whether or not a fraud has taken place.
Forensic auditor shall have to examine voluminous and in totality, records and
witnesses, if permitted b y law. Proper documentation is vital in following, in case
of frauds:
• Proving the loss
• Proving the responsibility for the loss
• Proving the method/motive
• Establishing guilty knowledge
• Identifying other beneficiaries

1.5 APPLICATION OF FORENSIC AUDIT

An obvious example of forensic auditing is the investigation of a fraud or
presumptive fraud with a view to gathering evidence that could be presented in a
court of law. However, there is an increasing use of auditing skills to prevent fraud
by identifying and rectifying situations which could lead to frauds, being
perpetrated (i.e. risks). It might be useful, therefore, to discuss forensic auditing as
being either ‘Reactive’ or ‘Proactive’.

1.5.1 Reactive Forensic Auditing

The objective in case of reactive forensic audit is to investigate cases of suspected
fraud so as to prove or disprove the suspicions, and if the suspicions are proves, to
identify the persons involved, support the findings by evidence and to present the
evidence in an acceptable format in any subsequent disciplinary or criminal
proceedings.
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In such cases it is important to keep in view the following:

• Working relations with the investigating and prosecuting agencies
• Authorization and control of audit investigation
• Documentation of relevant information and safeguarding all prime records
pertaining to the case
• Rules of evidence governing admissibility authentication of records
• Confidentially
• Evaluation of the evidence to assess whether the case is sustainable
• Legal advice where appropriate
• Reporting the findings in a manner that meets legal requirements
Forensic accounting and audit may be applied in the following areas besides fraud
detection:
a. Conducting due-diligence (especially for segment wise profitability
analysis)
b. Business valuation
c. Management auditing
d. Assessing loss before setting insurance claims
Forensic audits are used whenever lawyers or law enforcement officials need
reliable data on a party’s financial status or activities. For example, while reaching
a divorce settlement, a lawyer may request the presiding judge to permit a forensic
audit to uncover assets that one spouse is trying to hide.
If you want to sue and auditor (or the accounting firm) for negligence, you
would request separate forensic audit to determine how much the botched job cost
you. In business, if an elected official is accused of accepting bribes, the FBI could
set up a forensic auditing team. Forensics audits are sought by CEOs, Chief
financial officers or board members who suspect embezzlement with the company.
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1.5.2 Proactive Forensic Auditing

Forensic auditing in this sense could be viewed from different aspects
depending on its application, some of which are discussed below.
Regulatory Compliance
Government Departments/Agencies could themselves use the techniques of
forensic auditing to assess compliance with regulations governing payments of
grants/subsides. Performance auditors could also use these techniques while
auditing such governmental programs. To a large extent we in SAI India have
applied such techniques in some of our major audits of large government programs
such as Integrated Child Development Scheme; Public Distribution Scheme (for
food grains), to customs duty drawbacks and export subsidies.

Diagnostic Tool
Forensic auditing can be used either by management or by auditors to carry
out general reviews of activities to highlight risks arising either out of fraud or
from any other source with the purpose of initiating focused reviews of particular
areas targeting specific threats to the organization.

1.6 ADVANTAGES AND DISADVANTAGES OF FORENSIC AUDIT

1.6.1 Advantages of Forensic Audit
• Forensic auditing strengthens control mechanisms, with the objective of
protecting the business against financial crimes, be they potential
catastrophic one-off events that could threaten the viability of the business,
or smaller-scale but repetitive misappropriations of company assets over a
number of years.
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• Forensic auditing can play an important role for companies under review by
regulatory authorities and can also be invaluable to ensure regulatory
compliance. For example, forensic auditing can be useful in helping
companies to ensure that their anti-money laundering procedures are both
effective and robust.
• Forensic auditing can help protect organizations from the long-term damage
to reputation caused by the publicity associated with insider crimes. A
forensic audit also provides a sound base of factual information that can be
used to help resolve disputes, and can be used in court should the victim
seek legal redress.
• Forensic auditing can improve efficiency by identifying areas of waste
• Forensic auditing can help with the detection and recording of potential
conflicts of interest for executives by improving transparency and probity in
the way resources are used, in both private and public entities.

1.6.2 Disadvantages of Forensic Audit

• A poorly managed forensic audit could consume excessive amounts of
management time and could become an unwelcome distraction for the
business
• Forensic audits can have wide-ranging scope across the business. Under
certain circumstances, the scope of the audit may need to e extended, with a
corresponding increase in the budget.
• Some employees can interpret a proactive forensic audit as a slight on their
integrity, rather than as a means to improve control procedures for the
benefit of the business.
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1.7 DISTINCTION BETWEEN STATUTORY AUDIT AND FORENSIC AUDIT

S/n Particulars Statutory audit Forensic audit
1 Objective Express opinion as to true & Determine correctness
fair presentation of the accounts or
whether any fraud has
actually taken place
2 Techniques Substantive and compliance Analysis of past trend
procedures and substantive or in
depth checking of
selected transactions.
3 Period Normally all transactions for No such limitations,
the particular accounting accounts may be
period examined in detail
from the beginning
4 Verification of stock, Relies on the transactions for No such limitations.
estimation of realization the particular accounting Accounts may be
value of current assets, period examined in detail
provisions / liability from the beginning
estimation, etc
5 Off balance-sheet items Used to vouch the arithmetic Regularity and
(like contracts) accuracy & compliance with propriety of these
procedures transactions / contracts
are examined.
6 Adverse findings, if any Negative opinion or qualified Legal determination of
opinion expressed, with / fraud naming persons
without quantification. behind such frauds.
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1.8 DETECTION TECHNIQUES IN FORENSIC AUDITING.

Forensic auditing should focus on significant transactions – both as reflected
in financial statements and off balance sheet items. The techniques mainly are
‘Critical Point Auditing and Propriety Auditing.
A. Critical Point Auditing: Critical point auditing techniques aims at filtering
out the symptoms of fraud from regular and normal transactions in which
they are mixed or concealed. For this purpose, financial statements, books,
records, etc are analyzed mainly to find out:
i. Trend-analysis by tabulating significant financial transaction
ii. Unusual debits/credits in accounts normally closing to credit/debit balance
respectively
iii. Discrepancies in receivable or payable balances / inventory as evidence from
the non-reconciliation between financial records and corresponding
subsidiary records (like physical verification statement, priced stores
ledgers, personal legers etc).
iv. Accumulation of debit balances in loosely controlled accounts (like deferred
revenue expenditure accounts, mandatory spares account – capitalized as
addition to respective machinery item etc)
v. False credits to boost sales with corresponding debits to non-existent
(dummy) personal accounts.
vi. Cross debits and credits and inter-account transfers
vii. Weaknesses / inadequacies in internal control / check systems, like delayed /
non-preparation of bank reconciliation statements etc.
B. Propriety Audit: Propriety audit is conducted by supreme audit institutions
(SAI) to report on whether government accounts, i.e. all expenditure
sanctioned and incurred are need-based and all revenues due to government
have been realized in time and credited to the government account. In
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conducting the propriety audit “Value for money audit” technique aims at
lending assurance that economy, efficiency and efficacy have been achieved
in the transactions for which expenditure has been incurred or revenue
collected is usually applied. The same analogy, with modifications to the
principles of propriety of public finance, applied in forensic audit to
establish fraudulent intentions if any, on the part of the management.
Financial frauds are results of wasteful, unwarranted and unfruitful
expenditure or diversion of funds by the investigated entity to another entity.

1.9 TYPES OF INVESTIGATION IN FORENSIC AUDITING

The forensic auditor could be asked to investigate many different types of
fraud. It is useful to categories these types into three groups to provide an overview
of the wide range of investigations that could be carried out. The three categories
of frauds are corruption, asset misappropriation and financial statement fraud.

1.9.1 Corruption
There are three types of corruption fraud: conflicts of interest, bribery and
extortion. Research shows that corruption is involved in around one third of all
frauds. In conflict of interest fraud, the fraudsters exert their influence to achieve a
personal gain which detrimentally affects the company. The fraudsters may not
benefit financially, but rather receive an undisclosed personal benefit as a result of
the situation. For example a manager may approve the expenses of an employee
who is also a personal friend in order to maintain that friendship, even if the
expenses are inaccurate.
Bribery is when money (or something else of value) is offered in order to
influence a situation.
Extortion is the opposite of bribery and happens when money is demanded
(rather than offered) in order to secure a particular outcome.
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1.9.2 Asset misappropriation

By far the most common frauds are those involving asset misappropriations,
and there are many different types of fraud which fall into this category. The
common feature is the theft of cash or other assets from the company for example:-
Cash theft: This is the stealing of physical cash, for example petty cash,
from the premises of a company.
Fraudulent disbursements: Company funds being used to make fictitious
payments. Common examples include billing schemes, where payments are made
to a fictitious employee (often known as ghost employees).
Inventory frauds: The theft of company goods, stocks, over and
undervaluation of assets and liabilities.
Misuse of assets: This is a case of employees using company assets for their
own personal interest.

1.9.3 Financial Statement Fraud.

This is also known as fraudulent reporting and is a type of fraud that causes
a material misstatement in the financial statements. It can include deliberate
falsification of accounting records, omission of transactions, balances or
disclosures from the financial statements, or the misapplication of financial
reporting standards. This is often carried out with the intention of presenting the
financial statements with a particular bias, for example concealing liabilities in
order to improve any analysis of liquidity and gearing.
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1.10 HIGHLIGHTS OF SOME COMPANIES WHERE FORENSIC

INVESTIGATION HAS TAKEN PLACE.

1.10.1 Enron Scandal (2001)

Enron was a successful energy company established in 1985 in Omaha,
Nebraska. As the company grew, it moved its headquarters to Houston and became
a multibillion – dollar publicly traded company. It had more than 20,000
employees and an income of more than $100 billion. Enron was named as the
America’s most innovative company in 2000. Unfortunately, as Enrons wealth
increased, so did its corruption. Through the 1990s, Enron started making deals
with limited liability corporations that it controlled, allowing them to hide many of
their debts and losses from their financial statements. In reality, Enron was close to
bankruptcy, but no one knew but its accounting firm Arthur Anderson and its
executives. In 2001 the scandal was exposed, causing its stock to drop from nearly
$100 a share to less than $1 a share. The Enron scandal put into light the shady
practices of many corporations and helped to give birth to the modern version of
forensic accounting.

1.10.2 Sunbeam (1997)

This is a company that manufactures small appliances. It followed a practice
called Bill and hold which is when a company records sales of its products as
profits while waiting to deliver the products: on paper, the company appeared to
have had high sales; however, Sunbeam’s warehouses were full of unsold products.
This practice was uncovered by a financial analyst. Sunbeams accounting
firm, Arthur Anderseen performed an audit and reported that Sunbeam’s books
were accurate and in accordance with federal guidelines.
The board was unsatisfied and hired Deloitte and Touche to review Arthur
Andersen’s audit. This follow – up uncovered the proof that the numbers has been
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manipulated. The Securities and Exchange Commission investigated Sunbeam and

its CEO Afred Dunlap was fired and forced to pay millions of dollars to settle
investment lawsuits.
Coming back to what is happening to our country Nigeria we have the
following:-

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

(2009)
The Governor of Central Bank of Nigeria, Mr Lamido Sanusi on August
2009 made a breath – taking presentation on the state of some banks operations
and provided to the Nigerian people the sordid details of some part of the banking
system. Five prominent banks were declared technically insolvent, chronically
illiquid, with the revelation that they had largely eroded their shareholders funds
and practically breached all the ratios in banking. CBN unfolded the list of debtors
comprising companies and their directors who secured loans worth N747 billion
from the affected banks.
The question still awaiting answers remain that some auditors approved
these bank’s financials which were presented to shareholders at the annual general
meetings, refusing to disclose their debt portfolio. What a misinformation price
water house coopers and Akintola Williams Delliotte – are the auditors of the five
troubled banks.
Questions were being raised about their accountant’s competence and integrity,
apart from doubts on the exact standards of corporate governance. Before the CBN
announced its findings on the conditions of the five banks and their activities in the
Expanded Discount Window (EDW), their auditors were unable to properly
scrutinize and bring to public domain the true state of these reports including their
loans portfolio which CBN now put at N2.8 trillion.
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1.10.4 Cadbury
The executives of Cadbury were accused of bloating the company’s account
to deceive investors, while presenting it as a very healthy stock. The executives
were first suspended to forestall any attempts to jeopardize the ongoing enquiry
into the companies’ financial misstatement.
Price Water House Coopers were brought in to re-audit the firm and they
submitted its report, showing a hole of about N15 billion in the books of the
company, apart from that it was actually in a loss position rather than the
soundness portrayed by the erstwhile managers. Akintola Williams, Cadbury’s
external auditors were fined N20 million “for its failure to handle the accounts of
the company with high level of professional diligence.
However, the pursuit of these reforms gave rise to such measures in
government, as the fashioning of the Fiscal Responsibility Bill, implementation of
the new oil and gas unit, parastatal’s support unit, the setting up of Economic and
Financial Crimes Commission (EFCC), the Independent and Corrupt Practices
Commission (ICPC) and the Nigerian Extractive Industries Transparency Initiative
(NEITI).

1.11 STEPS IN CONDUCTING AN INVESTIGATION IN FORENSIC AUDIT

The process of conducting a forensic investigation is, in many ways, similar
to the process of conducting an audit, but with some additional considerations. The
various stages are briefly described below:

STEP 1: Accepting the Investigation

The forensic accountant must initially consider whether their firm has the
necessary skills and experience to accept the work. Forensic investigations are
specialist in nature, and the work requires detailed knowledge of fraud
investigation techniques and the legal framework. Investigators must also have
 24

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

the safe custody of evidence gathered. Additional considerations include whether
or not the investigation is being requested by an audit client. If it is, this poses
extra ethical questions, as the investigating firm would be potentially exposed to
self-review, advocacy and management threats to objectivity. Unless robust
safeguards are put in place, the firm should not provide audit and forensic
investigation services to the same client. Commercial considerations are also
important, and a high fee level should be negotiated to compensate for the
specialist nature of the work, and the likely involvement of senior and experienced
members of the firm in the investigation.

STEP 2: Planning the Investigation

The investigating team must carefully consider what they have been asked to
achieve and plan their work accordingly. The objectives of the investigation will
include: identifying the type of fraud that has been operating, how long it has been
operating for, and how the fraud has been concealed identifying the fraudster(s)
involved quantifying the financial loss suffered by the client gathering evidence to
be suffered by proceedings providing advice to prevent the reoccurrence of the
fraud.
The investigators should also consider the best way to gather evidence – the
use of computer assisted audit techniques, for example, is very common in fraud
investigations.

STEP 3: Gathering Evidence

In order to gather detailed evidence, the investigator must understand the
specific type of fraud that has been carried out, and how the fraud has been
committed. The evidence should be sufficient to ultimately prove the identity of
the fraudster(s), the mechanics of the fraud scheme, and the amount of financial
 25

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

evidence that can be used in a court case and in keeping a clear chain of custody
until the evidence is presented in court. If any evidence is inconclusive or there are
gaps in the chain of custody, then the evidence may be challenged in court, or even
become inadmissible. Investigators must be alert to documents being falsified,
damaged or destroyed by the suspect(s).
Evidence can be gathered using various techniques such as: testing controls
to gather evidence which identifies the weaknesses, which allowed the fraud to be
perpetrated using analytical procedures to compare trends over time or to provide
comparative between different segments of the business applying computer
assisted audit techniques, for example to identify the timing and location of
relevant details being altered in the computer system discussion and interviews
with employees substantive techniques such as reconciliations, cash counts and
reviews of documentation.
The ultimate goal of the forensic investigation team is to obtain a confession
by the fraudster, if a fraud did actually occur. For this reason, the investigators are
likely to avoid deliberately confronting the alleged fraudster(s) until they have
gathered sufficient evidence to extract a confession. The interview with the suspect
is a crucial part of evidence gathered during the investigation.

STEP 4: Reporting
The client will expect a report containing the findings of the investigation,
including a summary of evidence and a conclusion as to the amount of loss
suffered as a result of the fraud. The report will also discuss how the fraudster set
up the fraud scheme, and which controls, if any were circumvented. It is also likely
that the investigative team will recommend improvements to controls within the
organization to prevent any similar frauds occurring in the future.
 26

STEP 5: Court Proceedings

The investigation is likely to lead to legal proceedings against the suspect
and members of the investigative team will probably be involved in any resultant
court case. The evidence gathered during the investigation will be presented at
court, and team members may be called to court to describe the evidence they have
gathered and to explain how the suspect was identified. It is imperative that the
members of the investigative team called to court can present their evidence clearly
and professionally, as they may have to simplify complex accounting issues so that
non-accountants involved in the court case can understand the evidence and its
implication.

1.12 CONCLUSION
There is no gainsaying the fact that our audits as currently executed and
reported do bring out in a wealth of detail, instances of individual or systematic
fraud and corruption. There is, however, a need to provide a comprehensive
framework involving the use of Foreseen Auditing Methodology, particularly in
the areas of audit planning and execution, and for a uniform reporting practice that
would very explicitly spell out the implications of control failures including failure
of senior management in implementing prescribed controls.
This could over a period of time assuage public concern about the existence
of systematic audit operations addressed pacifistically to unearth fraud and
corruption.
Forensic auditing combines legalities along-side the techniques of propriety
(VFM audit), regularity, investigative, and financial audits. The main aim is to find
out whether or not true business value has been reflected in the financial statements
and whether any fraud has taken place.
 27

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

which requires highly skilled team members who have experience not only of
accounting and auditing techniques, but also of the relevant legal framework.
There are numerous different types of fraud that a forensic accountant could
be asked to investigate. The investigation is likely to ultimately lead to legal
proceedings against one or several suspects, and members of the investigative team
must be comfortable with appearing in court to explain how the investigation was
conducted, and how the evidence has been gathered. Forensic accountants must
therefore receive specialist training in such matters to ensure that their credibility
and professionalism cannot be undermined during the legal process.
 28

REFERENCES
Chatterji A.N. (1996), Conference of Commonwealth Auditor General
Chatterji A.N. (1996), The role of SAI’s in Preventing and Detecting Fraud and
Corruption, Montavideo.
http://www.asosai.org/asosaiold/journal2001/forensicauditing.htm
http://www.ehow.com/about5070210forensicaudit.htmf.
Hhp://bizocovering.com/accounting/forensic-auditing
/#ixzzBcwkosiqu
Michael G.K. (2001); Investigating Audit
Nnamdi Dum, Icon Graduates First Forensic Accountant 2010.