Research Key

FINANCIAL STATEMENT FRAUD: THE NEED FOR A PARADIGM SHIFT TO FORENSIC ACCOUNTING

Project Details

Department
ACCOUNTING
Project ID
ACC293
Price
5000XAF
International: $20
No of pages
67
Instruments/method
QUANTITATIVE
Reference
YES
Analytical tool
DESCRIPTIVE
Format
 MS Word & PDF
Chapters
1-5

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INTRODUCTION

1.1    Background of the Study

Over the years, the primary concepts of accounting and auditing have not changed (Silverstone, et al., 2012). Surprisingly, in this age of information revolution the accounting profession still relies on audit techniques that were utilized before the industrial period. This has resulted to an unrelenting series of embarrassing audit failures, corporate collapse and financial statement fraud which calls for greater concern by the accounting profession.

At the turn of the millennium, they have been some high-profile companies around the world like Enron, WorldCom, Xerox and other companies engaged in financial statement fraud. Moreover, more recently we saw Tesco of 2014 and Toshiba of 2015 among others repeating the same accounting scandal that brought down Enron, the 7th largest company in America history (Farrell, 2015). While some of these companies that have engaged in financial statement fraud collapsed entirely, others filed applications to restate their financial statements or were forced by the accounting regulatory authorities to restate their financial statements (Smith, 2015).

These kinds of occurrence are severe threats to the integrity of financial reporting and corporate governance systems and often result in a loss of public confidence in the financial reporting process by investors and other shareholders.

In Cameroon, like across the globe, the notion fraud in the public and private sector is as old as the origin of man but as a notion.

In the public and private sector of the economy like in the day-to-day affairs of life (social or business) fraud has become not just a practice by fraudsters but it is more of an industry where people of low conscience exhibit their talents in deceiving, siphoning, misappropriating and carrying out money laundering for self-enrichment.

That notwithstanding, there is ever growing literature in varying perspectives on the subject. Within this backdrop, therefore, this study is very specific on a particular interest area that is Financial Statement Fraud: “The Need for a Paradigm Shift to Forensic Accounting’’. Indeed fraud (financial or otherwise) committed in the public or private sectors of the economy is a testament to the fact that “the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory”. This study therefore, focuses on examining whether a paradigm shift to forensic accounting will prevent and reduce financial statement fraud in the public and private sectors in the economy. Financial statement fraud has now become a global phenomenon that can occur in any organization regardless of size. Some auditors’ failure in detecting fraud in organizations (public or private) has negative impact not only threatening the going concern of the company, but impacting other stakeholders in various ways including loss of jobs and pension, reduction in stock prices and shareholders value, and corporate reputational damage such as distrust and adverse public opinion. The auditor by the Companies Acts, the OHADA(Organisation for the Harmonisation of Corporate Law in Africa) Uniform Acts, the Finance Law of the Republic of Cameroon (2021), the CEMAC( Economic and Monetary Community of Central Africa) Code and the Professional Codes of Conduct, IFAC (The International Federation of Accountants) play a fundamental role in the prevention, detection and deterrence of fraud in client organizations (public or private), and giving credibility to clients’ financial reports.

Currently, manipulations in financial reports are difficult to detect, generally, and by distorting the accounting records, for every transaction or misapplication of accounting principle will impact the accounting and financial information results and decisions thereafter. However, financial scandals are not the only caused by crisis of accountability, transparency and confidence prevailing in the private or public sectors of the economy as the risk of fraud involves several theories like the agency theory and fraud triangle theory.

 An accounting paradigm can be viewed as those set of principles, concepts, regulations, standards and conventions that for a time governs how financial information are prepared, presented, reported and verified by the actors in the business community. As society changes, so does businesses conduct around the world subject to changes. Hence, there is need for the accounting profession to respond to the current realities of the event in this age of globalization and information revolution and step up the fight against financial deception.

1.2         Statement of the Problem

The embarrassment that financial statement fraud has brought to the accounting profession is a huge one as the median loss to financial statement fraud is over $400 billion (ACFE, et la., 2014). Over the last decades, the unrelenting series of embarrassing audit failures has brought doubt about the competence of the present-day accountants and this should stimulate a paradigm shift in accounting (Awolowo, et la., 2014).

Virtually all the financial statement fraud that has occurred were audited financial statements and yet this fraud was not spotted in the process of the audit. The key concern of this study is how long will the accounting profession keep shying away from the responsibility of providing credible financial reporting, just as the court have often argued in most accounting scandal cases that the cardinal objective of a financial statement audit is to certify that the financial statements are free from material misstatement resulting from either errors or fraud.

The failure of statutory audit to detect and prevent financial statement fraud gives reasons to find better ways of exposing such schemes and preventing them in the business world. With increasing popularity and the demand for forensic accounting services with respect to fraud prevention, detection and investigation, time may have come for a paradigm shift in accounting to forensic accounting.

In order to protect the integrity of the profession, there is need to look for a more robust way of reducing the incident of fraudulent financial reporting in the financial statement. As such, there is need to move from arguments and contention to practicality. For this to happen, there is need to understand the perception of various stakeholders (especially financial statement auditors) within the accounting profession. Hence, it is on this ground that this study is based on assessing the perception of some stakeholders within the accounting profession on whether a paradigm shift from mere reporting and procedural auditing to forensic accounting can help to reduce financial statement frauds. These need to be done in order to protect the integrity and future of the accounting profession and to meet the expectation and yarning of stakeholders (users of accounting information) in providing credible financial reporting.

1.3         Research Question

 The following research questions will enable the development of a forensic accounting system and a smooth transition from the current accounting system of reporting and procedural auditing to a forensic accounting system.

 

Main Research Question

What is the need for a paradigm shift to forensic accounting with regard to financial statement fraud?

Specific Research Questions

Q1. Is there any relationship between forensic accounting and fraud detection in financial statement analysis?

Q2. Has the current audit practice been able to fulfil the assurance and investigative role of audit? 

Q3.  Should auditors transit from the current accounting system of reporting and procedural auditing to a forensic accounting?

1.4         Objective of the Study

Main Objective

To examine the need for a paradigm shift to forensic accounting with regard to financial statement fraud.

Specific Research Objectives

  1. To develop the forensic accounting system and its fraud detection capacity in financial statement analysis.
  2. To ascertain if the current audit practice been able to fulfil the assurance and investigative role of audit.
  3. To evaluate the need for a transition from current auditor’s responsibility of reporting and procedural auditing to forensic accounting procedures and training.
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