AN OVERVIEW OF FORENSIC ACCOUNTING IN NIGERIA, EVIDENCE FROM THE BANKING INDUSTRIES

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial irregularity is a severe problem of concern globally. It is a major concern to developing nations. It is so endemic that fraud and corruption are gradually becoming a normal way of life. Financial irregularities are so common that almost every individual cannot wash his or her hands, clean of it, starting from the public sector to the private sector; from the presidential villa of the nation, down the political office—holding ladder, to the ward councilors; from managing directors of a company, through middle management cadre and to as low as messengers. Individuals perpetrate fraud and corrupt practices according to the capacity of their office. Although financial irregularities affect the private and public sector, the magnitude of public office fraud, together with the extent to which citizens are affected, calls for alarm. No money is entirely free, every Naira and Kobo has its legal use, and consequently, misuse of any amount will impact negatively, on where it should legally be used. The effect of these can be on an organization or a whole nation. If the effect is not direct it may be indirect as it may affect facilities and infrastructure that is supposed to be beneficial to the concerned. The widespread frauds in modern organizations have made traditional auditing and investigation inefficient and ineffective in the detection and prevention of the various types of frauds confronting businesses world-wide. Oyejide (2008) opine that fraud is a subject that has received a lot of attention both globally and in Nigeria. This interest has been heightened by several high profile cases involving several organizations. Issues relating to fraud have also been the subject of rigorous theoretical and empirical analysis in the academic literature (Appah and Appiah, 2010). According to Karwai (2002) maintains that the increasing wave of fraud is causing a lot of havoc in Nigeria. This is because fraud has eaten deep into every aspect of Nigerian society to the extent that many organizations have lost the confidence of their customers. In the words of Adesola (2008), the threat of Fraud to the global economy is better illustrated by the statistics released by Criminologists at a consultancy: over two hundred thousand cases of online frauds were committed in the United Kingdom in 2006, doubled the number of real-world robberies. The study revealed that 75% of the card, not present fraud was committed online in 2006. The global market is concerned about fraud in high and low places. We are very familiar with Enron, WorldCom, etc. We are also experiencing more and more fraud committed in society. Okunbor and Obaretin (2010) reported that the spates of corporate failures have placed greater responsibility and function on accountants to equip themselves with the skills to identify and act upon indicators of poor corporate governance, mismanagement, fraud and other wrongdoings. It has become imperative for accountants at all levels to have the requisite skills and knowledge for identifying, discovering as well as preserving the evidence of all forms of irregularities and fraud. Therefore, fraud requires a more sophisticated approach from preventative to detection. One of the modern approaches that can be used from the prevention of detection is called forensic accounting. According to Hansen (2009), computer forensics is currently the investigator’s best tool in detecting and implementation white-collar investigations. Degboro and Olofinsola (2007) described forensic accounting as the application of criminalistic methods, and integration of accounting investigative activities and law procedures to detect and investigate financial crimes and related accounting misdeeds. According to Dhar and Sarkar (2010), forensic accounting, also called investigative accounting or fraud audit, is a merger of forensic science and accounting. Crumbley (2003) defined forensic science as the application of laws of nature to the laws of man. He described forensic scientists as examiners and interpreters of evidence and facts in legal cases that also offers expert opinions regarding their findings in a court of law. Baird and Zelin (2009) say that forensic accounting is an important investigative tool for the detection of fraud. Gray (2008) reported that a forensic accountant’s investigation includes identification fraud. Gottschalk (2010) stated that the focus of forensic accounting is on evidence revealed by the examination of financial documents. The evidence collected or prepared by a forensic accountant may be applied in different contexts. According to Curtis (2008), forensic accountants are essential to the legal system, providing expert services such as fake invoicing valuations, suspicious bankruptcy valuations, and analysis of financial documents in fraud schemes. Unless it is impossible, individuals or establishments affected negatively by the fraudulent or corrupt practices will want to seek redress. Individual, corporate body and interested government organs take action towards seeking redress using divergent institutions like the police and the law court. Whatever an investigator wants to do, will not be complete if the extent to which the affected person is affected is not quantified. This and other pecuniary areas are where the service of the experts “forensic accountant” is been engaged for a very long time worldwide and probably, recently, in Nigeria. It is not that financial misappropriation is nonexistence, in-fact in a sophisticated form, in developed economies. Fraud and corruption are often reported in their private and public sectors too. The problems of developing third world nations are that it is common in the public sector, which affects a lot of citizens and in most cases, perpetrators get away with the act. This is to say that, only on few instances are the nefarious act uncovered on-time, investigated, prosecuted and adequate punishment awarded for them. Consequently, many involved are left free and hence there is no deterrent from future acts. Although the Central Bank, as a regulatory authority, came in handy by appointing forensic auditors to investigate and determine the financial losses to the banks and clients and the resultant curatorship of the financial institutions, the damage had already been occasioned. Clients, potential investors, and the public have lost confidence and trust in the banking sector. The aftermath of the financial crisis evidenced the inexorable withdrawal of savings from the banking institutions by clients who had the worst belief and fear that their hard-earned cash would be swindled. The risk was evidently high among the new and emerging black-owned financial institutions. Apart from the occupational frauds committed from within, the advent of new communication technologies has ushered in a plethora of other challenges, which emanate from without. Among the challenges are threats of computer fraud, cheque initiated frauds, identity frauds, credit card frauds, ‘missing in the post’ frauds, the use of fraudulent Real Time Gross Settlement (RTGS), and advance fee frauds, to name a few. The incidences of such frauds committed by outsiders in connivance with insiders have markedly compromised the security and risk of several banks. It is within these challenges faced by banks that this research has been carried to determine the effectiveness of the forensic auditors whether outsourced or within in detecting, investigating, and preventing bank frauds. The study seeks to explore forensic auditing techniques adopted by the banking fraternity and how they can be effectively used to assist the departments to achieve their objectives in detecting, investigating, and preventing bank frauds. Forensic auditing should be responsible for digging out frauds committed through the application of auditing, accounting, and investigative techniques in order to come up with sufficient evidence that can be used in court proceedings (Albrecht et al, 2001).

1.2 STATEMENT OF THE PROBLEM

i.   The unprecedented cases of fraud in the Nigerian banking sector underscore the effect of forensic accounting in the prevention and detection of fraud in Nigerian banks.

ii.  Forensic auditing departments suffer from different forms of bank fraud and multiple challenges such as lack of material resources, technical know-how, interference from management, and unclear recognition of the profession.

iii. The impact of forensic auditing in banking operations has not been effective because the role of forensic auditors has not been well articulated by several banking institutions.

iv. Financial scandals characterize the Nigerian banking environment as a result of the inadequacy of risk management systems occasioned by the absence or ineffective forensic audit.

1.3 RESEARCH OBJECTIVES

The study seeks to explore forensic auditing techniques adopted by the banking fraternity and how they can be effectively used to assist the departments to achieve their objectives in detecting, investigating, and preventing bank frauds. However, the specific objectives of the study are:

i.  To examine the effect of forensic accounting in the prevention and detection of fraud in Nigerian banks.

ii. To know the different forms of bank fraud that need the attention of the forensic auditors.

iii. To ascertain the impact of forensic auditing in banking operations and effectiveness.

iv.  To find out the effect of forensic auditing on the Nigeria banking environment.

1.4 RESEARCH QUESTIONS

The research study thus strives to answer the following research questions:

i. What is the effect of forensic accounting in the prevention and detection of fraud in Nigerian banks?

ii. What are the different forms of bank fraud that need the attention of the forensic auditors?

iii.  What is the impact of forensic auditing on banking operations and effectiveness?

iv.   What is the effect of forensic auditing on the Nigeria banking environment?

1.5 RESEARCH HYPOTHESES

1.   Hi: Forensic accounting is effective in the prevention and detection of fraud in Nigerian banks.

Ho: Forensic accounting is not effective in the prevention and detection of fraud in Nigerian banks.

2.  Hi: Forensic auditing enhances banking operations and effectiveness.

Ho: Forensic auditing does not enhance banking operations and effectiveness.

1.6 SIGNIFICANCE OF THE STUDY

Forensic accounting in our economy today is a welcome development and its impacts in the financial institutions are over-whelming, so this research is significant in so many ways. Forensic accounting is the use of accounting; auditing and investigative skills to determine whether fraud has occurred in any organization. Forensic accounting services provide banks with the necessary tools to deter fraudulent activities. Apart from contributing to the knowledge of the cashless transactions, it forms a reference for future research in this area.

1.7 SCOPE /LIMITATION OF THE STUDY

This research study dwelt on the effectiveness of forensic auditing in detecting, investigating, and preventing bank frauds. The study sought to find out to what level the forensic auditors are able to fulfill this mandate and investigate problems that hinder forensic auditors to make progress in their operations in developing countries. It also established the role of forensic auditing in banking operations.  Time is a major factor to the researcher as research of this kind requires enough time in the gathering data. Some banks hoard information from students who desire such information in other to maintain the bank’s secrecy thereby making it difficult for students to gather information for their research. Finally, finance was, in fact, the most limiting factor, in spite of these the researcher had to travel out to the sampled organization to interview some of the managers and supervisors.

1.8 Definition of Terms

Access Products — Products that allow consumers to access traditional payment instruments electronically, generally from remote locations.

ATM Card – UB Debit Card is a Chip device consisting of a circuit element on a single silicon chip. The Card a complex circuits that process microprocessors with single chips that contain the complete arithmetic and logic unit of computers. It provided for Bank customers to perform a balance inquiry, mini statement, and cash withdrawal as well as transfers through the use of Automated Teller Machines. This green card can also be used for Internet/Online and POS transactions.

Chip Card — Also known as an Integrated Circuit (IC) Card. A card containing one or more computer chips or integrated circuits for identification, data storage or special purpose processing used to validate personal identification numbers, authorize purchases, verify account balances and store personal records.

Electronic Data Interchange (EDI) — The transfer of information between organizations in the machine, readable form.

Electronic Money — Monetary value measured in currency units stored in electronic form on an electronic device in the consumer’s possession. This electronic value can be purchased and held on the device until reduced through purchase or transfer.

Electronic Recruitment —This is an online recruitment service to all kinds and categories of clients such as (Army, Navy, Police and the Paramilitary) through customizable web portals and the use of scratch cards/PINs for Prospective applicants simply buy the scratch cards, visit the portal and fill relevant information. Information collected about applicants could then be analyzed appropriately using ‘what if’ capabilities and filtered according to several criteria to be set by the client. Shortlisted applicants could then be contacted automatically via email or SMS or both.

Electronic Web Collection — This enables the flank partner with Universities and higher institutions of learning to handle Admission, Registration, Examination Managements, and Fees Collection needs. Electronic Admission by Prospective Candidates, Electronic School Fees Payment, Automated Registration, Examination, and Results Publication/Management.

Internet Banking— This is a product that enables the bank leverage on the Internet Transaction System Module in-built on the new Transaction

Application (BANKS) implemented by the Bank to serve the Internet Transaction needs of the Bank’s customers.

Mobile Transaction -This is a product that offers Customers of a Bank to access services as you go. Customers can make their transactions anywhere such as account balance, transaction inquiries, stop checks, and other customer’s service instructions, Balance Inquiry, Account Verification, Bill Payment, Electronic fund transfer, Account Balances, updates and history, Customer service via mobile, Transfer between accounts, etc.

Payment System — A financial system that establishes that means for transferring money between suppliers and of the fund, usually by exchanging debits or Credits between financial institutions.

Point of Sale (POS) Machine – A Point-of-Sale machine is the payment device that allows credit/debit cardholders to make payments at sales/purchase outlets. It allowed customers to perform the following services Retail Payments, Cashless Payments, Cash Back Balance Inquiry, Airtime Vending, Loyalty Redemption, Printing mini statement, etc.

Smart Card — A Card with a computer chip embedded, on which financial health, educational, and security information can be stored and processed.

Transaction Alert — Our customers carry out debit/credit transactions on their accounts and the need to keep track of these transactions prompted the creation of the alert system by the Bank to notify customers of those transactions. The alert system also serves as a notification system to reach out to customers when necessary information needs to be communicated.

Western Union Money Transfer (WUMT) – Western union money transfer is a product that allowed people with relatives in Diaspora who may be remitting money home for family up-keep, Project financing, School fees, etc.

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