forensic accounting
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Abstract
This paper reviews the current field in business operations, known as forensic accounting. Companies from all over the globe are translating from old fashioned platforms of business transactions and are now moving into virtual trends. In the first part, the paper highlights the various kinds of cybercrimes that impose a risk for companies today. Traditionally, financial auditors were responsible for analyzing data of organizations. However, there has emerged a new set of auditors, better referred to as forensic auditors. Forensic auditors are seemingly better because they incorporate more rigorous scientific investigative methods and analyses to scrutinize data for any loopholes. In research conducted, it is clear that the better part of the population is unfamiliar with, but appreciate the necessity of forensic accounting in improving organizational efficiency. This text provides recommendations that will enable forensic auditing to bring a more significant impact on businesses.
Keywords: Forensic accounting, cybercrimes, forensic auditing.
Introduction
Background
Various companies around the globe have been incorporating accounting operations as part of their standard procedures in the business. Accounting is a practice through which a business can identify its state of stability, whether it is making profits or losses. Lin et al. state that accounting is a system of recording and summarizing marketing and financial transactions and analyzing, verifying, and recording the results (2018, 53). Accountants, the core practitioners in this practice, help businesses to identify their financial stability. In first accounting, however, a lot of consideration went to the analysis of the records to determine irregularity or dishonesty. However, organizations continue to suffer in circumstances where periodic data, monthly, quarterly, or annually, do not add up to what they are supposed to. The prevalence of fraudulent activities, even with auditors in the profession, stimulated the development of a new concept into the business world, forensic accounting.
As the world enters into an era of modernization with technological advancements, accounting techniques have to fasten up so that they are not left out. Currently, various organizations, regardless of whether they directly involved in business activities or not, are looking for better ways to give an analysis of their revenues and returns. An example of a non-economic firm is a law enforcement agency like the FBI, which is beginning to accept that forensic accounting is a crucial factor in detecting and unraveling fraud activities (Umar et al. 140). Judicial proceedings allow forensic accountants to give their rationale in case they detect any business activity that is out of the ordinary. Ideally, the dealings of a forensic accountant involve identifying, analyzing, interpreting, and presenting evidence of economic fraud for debate in a court of law (Lin et al. 144). Traditional practices of accounting are no longer sufficient to cater to the growing need for accounting practices beyond the book. Therefore, forensic accounting combines a lot of procedures to bring forth evidence of fraud that judges can use to prosecute fraudsters.
Cyber Crimes and Fraud
Virtual business environments have positive and negative effects on enterprises. Businesses that have adopted the new electronic way of operation are already benefiting. For example, companies can perform numerous transactions more efficiently, which results in higher revenues (Moid 92). However, virtual platforms also come with the severe threat of cyberattacks. Every year companies lose millions of dollars when fraudsters interfere with their virtual records (Moid 92). Illegal access to private information through electronic means, and using it for one’s benefit is called cybercrime (Moid 92). Therefore, enterprises that operate virtually should be cautious because cybercrimes appear in many forms.
Definition of Accounting Fraud
Forensic accountants have a broader knowledge compared to accountants. Accountants usually focus on the statistical area of business. Forensic accountants deal in complex analyses, which in most cases, goes beyond mere numerical calculations (Lin et al. 144). If there is a breach of financial data, then a forensic accountant will analyze and provide detailed information regarding the source of violation (Geiger and Taylor 367). Forensic accountants will use their knowledge of internal systems, government laws, investigation skills, and interpersonal skills so that they can testify in trial courts concerning fraud (Lakshmi and Ganesh 455). Forensic accountants have a broad understanding of accounting techniques.
Internal auditing is necessary for fraud detection and prevention. Continuous auditing refers to the use of information technology to audit accounting data regularly (Mangala and Kumari 123). Internal auditors are people who are very much familiar with all the rules of their organization. Internal auditors are in a better position to detect and deter fraud in any company. For example, the internal audit identified more than half of fraud incidents were successfully identified (Mangala and Kumari 123). The company needs to employ permanent internal auditors to increase the proficiency level of fraud prevention. Therefore, the first line of defense for any enterprise out there is an internal auditor, better known as a forensic accountant.
Rational
The problem stems up from the fact that forensic accounting is a new concept to the business people all around the globe. People who work in different aspects of the world are unaware that there does exist a system that deals with investigative accounting. Such a scenario ultimately leads people to get confused when the matter is on the discussion. In the same manner, the importance of the sector is not apparent to those who have not heard or familiarized themselves with the idea appropriately. Therefore, there arose the necessity to initiate a study that would raise assess the level of awareness about forensic accounting and show the impact on the business world. For example, studies conducted in Austria have revealed that more than half of the respondents assessed accepted that fraud was a significant drawback in most businesses. Therefore, this research will improve the level of understanding, awareness, and acceptance level of forensic accounting. Furthermore, the findings would depict the role of judicial accounting discipline. The study operates with the best interest of protecting any shareholder out there.
Aims
Previous scholars have articulated the contribution and need for accounting in the business environment. This study aims to specify the concept of forensic accounting in the modern business environment.
Objectives
Primary Objective
Generally, this research focuses on whether forensic accounting adds value to businesses in the world we live in today.
Specific Objectives
- To reveal the level of public awareness regarding forensic accounting.
- To identify the level of appreciation of forensic accountants and their contribution to increasing the operational efficiency of a business.
LITERATURE REVIEW
Forensic Accounting’s Function
Forensic accountants are people who are designated two areas of specialty. The first sector is the one to do with investigative techniques or accounting practices, while the other one focuses on litigation support. Investigative accounting practices deal with investigative mechanisms, which are the financial operations of a business, as well as the whole business environment. In this approach, forensic accountants are responsible for investigating all the financial reports of an organization to discover any vital information that may suffice as evidence in a judicial and civil court case (Koh et al., 2009). In the modern context, forensic accountants will either scrutinize business documents of finance or provide evidence in a court of law. The primary role of forensic accountants arises.
The world should note the purposes of forensic accounting. Notably, forensic accounting is one of the forms of auditing combined with some investigative skills, knowledge, and experience (Speaker and Fleming 60). When a company builds up the urge to scrutinize their financial data and reports, then they need to employ forensic accountants. Forensic accounting comes in handy in the occurrence of fraudulent activity in the organization. Since forensic accounting is a separate entity, then incorporating it into all parts of a firm is not a problem (Koh et al., 2009). hIn view of the allegations herein, forensic accounting should not only come up when there is a misalignment o property. Instead, the concept should apply in the daily activities of any designated firm in question.
Fraudulent practices are on the rise in different parts of the globe. Developing states are the ones who suffer most when it comes to fraud, given that they are not aware of the many ways fraudsters leak into the systems. For example, in Malaysia, the problem of fraud is an ever-growing hindrance to the operations of many organizations in the business environment (Koh et al., 2009). In the same manner, the public needs to be aware of the concept of forensic accounting so that such a menace does not derail the meaning and importance of entrepreneurship. On the brighter side, forensic accounting is a concept that growing and established entities can adapt to the practice. Ultimately, forensic accounting should be taken as the barrier to prevent and protect all enterprises in the business world regardless of the size.
Forensic accounting protects the goodwill of investors in the economy. Corrupt dealings and uncalled for practices in the business world are what can lead to the collapse of a business. The professional accountancy acknowledges that most investors value the credibility and reliability of the financial information of any stipulated company. For example, the European Federation of Accountants (FEE) illustrated that in case a company is written off due to malingerer practices. Investors would often withdraw their effort (Koh et al., 2009). A company is listed on the stock exchange forum to protect the best interest of investors so that they do not suffer in the hands of investors. For instance, a company like Enron, which has substantial fraud scandals resulting in billions of dollars, is due to collapse out of the withdrawal of investors. Therefore, the incorporation of forensic accounting protects all stakeholders of the economy, companies, and investors.
Forensic Accounting Education
Corporate governance should also strengthen practices. In the dealings of corporate investors, there are times when financial information needs to reach the capital markets. As a pre-requisite, thorough auditing and verification are essential so that the stakeholders who rely on the information build their trust (Koh et al., 2009). Under normal operations, the corporate entities send financial record and statements to the audit companies which analyze and provide feedback. However, the level of corporate scandals persists despite the existence of such objects. Given such setbacks, the public is concerned about the level of integrity of such companies and even the management, too—forensic accounting steps in during such scenarios where fraud is persistent so that primary stakeholders coexist in harmony. Conclusively, the corporate world needs to incorporate the forensic accounting concept so that it can protect the interest of investors.
In a society currently, there is a lot of misunderstanding concerning the concept of forensic accounting. Previous scholars have stated that there are generally kinds of gaps that do exist in public. These situations include (1) the role and responsibilities of forensic accountants, (2) the root meaning of forensic reports, and (3) the setting of the profession (Koh et al., 2009). The constant issue that prevails is how the public misunderstands that auditors are the primary investigators of financial statements. On the contrary, financial accountants are the big fish protecting the interest of the stakeholders. Concurrently, forensic accountants are the people who will thoroughly scrutinize the financial statements of an organization to detect any misleading information.
Fraud
Businesses are adopting policies that prevent any kind of fraud. Surprisingly, most of the fraud activities in a company come from the employees themselves (Mangala and Kumari 122). Some companies have introduced ethical policies of operating. Other companies are trying to implement further techniques to curb cybercrimes further than setting legal jurisdictions. Preventative methods help to minimize risk, but if they fail, then detection becomes paramount (Mangala and Kumari 122). There are many anti-fraud mechanisms like audit, code of conduct, whistleblowing, fraud risk assessment, data mining, firewall, reference check, and anti-fraud policies (Mangala and Kumari 122). Therefore, companies should enact proper ways of preventing fraudulent activities.
Forensic Accounting Education
Forensic accounting education is limited to continuing professional practitioners. Given the rising cases of fraudulent activities in the industry, a concern arises. Forensic accounting education is vital at such a time. The discipline needs to start in the early stages of accounting school. In a previous survey, students had a close relationship with auditors only after they completed their coursework. Education is an effective way to increase the level of awareness and acceptance of the concept of forensic accounting. Further research shows that students have basic perceptions of the idea. This evidence suffices that forensic accounting education could be just one of the many gateways to enlighten the public on the issue of proper forensic accounting.
Summary
Forensic accountants are individuals who scrutinize the financial statements of businesses and organizations so that they detect any kind of misalignment of information. Forensic accountants can use the evidence from such investigations to provide a basis for an argument in courts of law. Currently, there is a reduced proportion of the public that is aware of such a concept very individual mistakes the functions of a forensic accountant to those of an auditor. Taking a look at the education sector shows that the idea is not well envisioned in the curriculum. Student forensic accountants develop a close relationship with the practitioners in the field when they are in the later years of their studies. The educative forum is an area of the gap in developing the level of awareness and knowledge of the concept of forensic accounting. Therefore, the education forum, if well utilized, can bring meaning to the issue of forensic accounting as well as its importance.
RESEARCH METHOD
Forensic accounting is a new phenomenon in the evolving virtual business world. This study used a research survey method. The research included four ministries with a total of 70 respondents of accountants, auditors, and top executives. The survey method assists in collecting massive amounts of data while focusing on the research question. Primary data came from respondents in the four ministries who filled a total of fifty questionnaires. The research involved a summary and presentation of the data in the form of frequencies and percentages. The analysis improvised two techniques, weighted mean and the Z-test statistics, to give a proper and detailed summary of the feedback.
RESULTS
From the response, 14% strongly agree to be aware of forensic accounting. 4% agree, 12% remained undecided, 30% strongly disagree, and 40% disagree. In terms of knowledge of the concept, 36% strongly agree, 46% disagree, 2% were undecided, 6% strongly agree, and 10% disagree. Concerning the necessity of forensic accounting, 42% strongly agree, 36% agree, 4% undecided, 6% strongly disagree, and 10% disagree.
In the standard curve table, the calculated value -8.68 is less than +/-1.96. This value fails to reject the null hypothesis that there is no significant application of forensic accounting in the public sector organization. Under the two-tailed test, the calculated value is less than the Z-value. The value rejects the null hypothesis that forensic accounting does not prevent fraud in the public sector organization.
DISCUSSION OF FINDINGS
The research provides enough evidence based on the respondents’ feedback and z-test calculations. The findings reveal that the public sector is not fully aware of the concept of forensic accounting. However, forensic accounting is essential in the public sector because there is a lot of embezzlement of federal funds. This claim supports the literature review, where fraud is a common malpractice, especially by employees. Although forensic accounting is an ancient concept, not many companies have not yet incorporated it into their systems.
CONCLUSION
Many companies are at risk of cyberattacks due to electronic platforms. Forensic accounting is a vital tool that enterprises can embrace to minimize the risk of cybercrimes. Forensic accounting mainly deals with the investigation of company information to detect and prevent fraud. Some theories explain the causal factors of fraud, including fraud, Diamond, fraud Triangle, and White-collar. The research conducted as a result of this shows that the population has is not adequately informed concerning forensic accounting. Conversely, people recognize the importance of such knowledge because of the rampant cases of embezzlement and fraud. Therefore, the most promising savior of business enterprises from cybercrimes like a fraud is forensic accounting.
Recommendations
The current trends in business operations require the incorporation of forensic accounting. Also, through the research survey, it is wise to create awareness so that the public familiarizes itself with the concept of forensic accounting. Organizations should train their staff regarding forensic accounting. Following the high fraud levels, this would be a mega step towards achieving enterprise success. In the case of fraud, firms should enact proper forensic accounting techniques that will help gather the evidence. Institutions of higher learning should also invite forensic accounting into the curriculum so that the world gets more workforce in the field.
Works Cited
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Lin, I-Long, Kuang-Heng Shish, and Su-Li Lin. “Following the Money-Constructing the prototype of Digital Evidence Forensic Accounting Standard Operation Procedure for Government Audits.” Journal of Accounting, Finance & Management Strategy, vol. 13, no. 2, 2018, pp. 141-162
Geiger, M A. and Taylor, P. “CEO and CFO Certifications of Financial Information.” Accounting Horizons, vol. 17, no. 4, 2003, pp. 357-368.
Koh, Adrian Nicholas, Arokiasamy, Lawrence, and Suat Cristal Lee Ah. “Forensic accounting: Public acceptance of the occurrence of fraud detection.” International journal of business management, vol. 4, no. 11, 2009, pp. 144-149, httpswww.ccsenet.org/journal.html
Mangala, Deepa, and Pooja Kumari. “Auditors’ Perceptions of the Effectiveness of Fraud Prevention and Detection Methods.” Indian Journal of Corporate Governance, vol. 10, no. 2, 2017, pp. 118-142, DOI: 10.1177/0974686217738683
Moid, Sana. “Fighting Cyber Crimes Using Forensic Accounting: A Tool to Enhance Operational Efficiency.” Fighting Cyber Crimes Using Forensic Accounting: A Tool to Enhance Operational Efficiency, vol. 7, no. 3, 2018, pp. 92-99.
Speaker, Paul and Fleming, Anna S. “Monitoring Financial Performance: An Approach for Forensic Crime Labs.” The CPA Journal, vol. 79, no. 3, 2009, pp. 60-65
Umar, Ibrahim, Samsudin, Rose S, and Mohamed Mudzamir. “Adoption of Forensic Accounting in Fraud Detection Process by Anti-Corruption Agency: A Conceptual Framework.” International Journal of Management Research and Review, vol. 6, no. 2, 2016, pp. 139-148, ISSN: 2249-7196