Full Project – IMPACT OF FORENSIC ACCOUNTING ON THE PROFITABILITY OF QUOTED COMPANIES IN NIGERIA

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ABSTRACT

The study examined impact of forensic accounting on the profitability of quoted companies in Nigeria using selected quoted banks in Lagos. The objectives of the study are to: Determine how forensic accounting reduce and prevent fraud in the Nigerian banking industry; Ascertain impact of forensic accounting on treasury and forex operation in quoted Nigeria banks; Examine the role of forensic accounting on loan processing and cash management in quoted Nigerian banking industry; ascertain the extent to which ratio analysis affects fraudulent loans in deposit money banks; Evaluate the efficacy of Forensic Accounting in improving faithful representation of annual audit report of quoted commercial banks; and Determine the differences between the roles of forensic accountants and conventional accountants in curbing fraud and financial crimes in quoted Nigeria banks. The researcher adopts field survey research design and percentage method while carrying out the study. Linear regression and Analysis of variance (ANOVA) mode was usedthe in testing the hypothesis at 5% significant. Research study concluded that application of forensic accounting provides banking firms with the necessary automated tools to clearly identify ways by which fraud detection, fraud prevention, and fraud reduction (control) can be achieved. The study recommended that the internal control system of every institution must be strengthened so as to be able to check major bankruptcy fraud occurrence.

CHAPTER ONE

INTRODUCTION

• BACKGROUND TO THE STUDY

Business performance has increased over several years in the world and this performance is mainly measured in the terms of profitability. Businesses contain transactions which generate information for better analysis of business performance and forensic accounting is a delivery system for accounting.Banking industry are seen as a driving force for the promotion of large part of the economy (Khan and Jawaid, 2004) and they contribute immensely to the economic growth and development of any country.

With an upsurge in financial accounting fraud in the current economic scenario experienced, prevention and detection of fraud has become an emerging topic of great importance for academic, research and industries. In this age of high technology, fraud investigators can no longer be satisfied with just auditing or accounting skills, these investigators should be trained as forensic accountants and this training should include an extensive knowledge of  accounting information systems (Bressler, 2006; Manning, 2005; Ramaswamy, 2005).  The failure of internal auditing system of the organization in identifying the accounting frauds has led to use of specialized procedures to detect financial fraud, collective known as forensic accounting (Kranacher and Stern 2004).

The incidence of bankruptcy, fraud and solvency in major financial institution in Nigeria especially those quoted on the Nigeria Stock Exchange in recent time poses a threat accounting profession because of its perennial nature.  This has resulted to unending questions as to whether forensic accounting actually play any significant role towards the attainment of accountability, transparency, ,prevention of insolvency and fraud, and increase in profit making ability of quoted banks especially that which is currently happening in our major or key financial institution and other corporate organizations in the recent case of Skye Bank.

According to AICPA (2004) Forensic Accounting is the application of accounting principles, theories and discipline to facts or hypothesis at issues in a legal dispute and encompasses every branch of accounting knowledge. Forensic accounting is the tripartite practice of utilizing accounting, auditing and investigative skills to assist in legal matters. It is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation.

The integration of accounting, auditing and investigative skills yield the specialty known as Forensic Accounting. Forensic Accounting provides an accounting analysis that is suitable to the court which forms the basis for discussion, debate and ultimately dispute resolution. It encompasses both litigation support and Investigative Accounting. It is a specially practiced area of accounting that describes engagement that result from actual or anticipated disputes or litigation.

Forensic Accounting is sufficiently thorough and complete so that an accountant, in his/her considered independent professional judgment, can deliver a finding as to accounts, inventories or the presentation thereof that is of such quality that it would be sustainable in some adversarial legal proceeding, or within some judicial or administrative reviews.

The increasing frauds, decline in financial performances, financial malpractices, solvency and other fraudulent activity cases in quoted business firms have placed forensic accounting issues as top concern for both the international community and policy makers (Jonathan et al., 2010). Forensic Accountants who also act as Liquidation Officers may be expected to report irregularities in company’s accounts by enhancing transparency, accountability and developing techniques for it early detection and also proffers a way of preventing it occurrence.

The primary orientation of forensic accounting is explanatory analysis (cause and effect) of phenomena, including the discovery of deception (if any), and its effects introduced into an accounting system’s domain (Silverstone, 2004). Forensic accountants are called upon to play important pre-emptive roles, offering independent assurance in such diverse areas as audit committee advisory services, merger and underwriting due diligence, investment analyst research and enterprise risk management.

Profitability on the other hand refers to the positive gain from an investment or business operation after subtracting for all expenses opposite of loss (Proimos, 2009). Profitability on a company is the difference between the income of the business and all its costs/expenses. He also notes that it is normally measured over a period of time. Profits are an important source of investment funds (Külter and Demirgünes, 2007). Profit can be used to buy more stock, improve technology or expand the premises. A business than does not make a profit will fail, potentially affecting employees, suppliers and the local community because their overall operations depend on profits.

In this age of high technology, fraud investigators can no longer be satisfied with just auditing or accounting skills, these investigators should be trained as forensic auditors and this training should include an extensive knowledge of  accounting information systems (Bressler, 2006; Manning, 2005; Ramaswamy, 2005).

However, it is needless to say that, the failure of internal auditing system of the organization in identifying the accounting frauds has led to use of specialized procedures to detect financial fraud, collective known as forensic accounting (Kranacher and Stern 2004).

• STATEMENT OF PROBLEM

Corporate financial fraud could be drawn from recent bank failure in Nigeria where management has fraudulently given loans without board approval and yet such bank annual report has been unqualified (Eyisi&Ezuwore, 2014), and when these loans cannot be recovered it tends to lead to decrease in profit making ability of organization and well affect their liquidity position. Though, the use of forensic accounting is not yet common in Nigeria, the rate at which financial irregularities in Nigeria is spreading especially in the banking sector has put the focus on the need for forensic accounting techniques to be utilized. The large number of financial statement fraud in the banking industry has become a concern to the nation as evidence in the inability of the law enforcement agents to successfully track down perpetrators. Several activities of Nigerian banks are not efficiently subjected to forensic analysis, and in order to response to these changing fraudulent activities that is going on in quoted corporate firmsthe skills of forensic accountants which include investigators and legal experts to combat this corporate menace is paramount.

The accounting profession has in the recent past been challenged with entrenching quality in the financials reports which is perceived as the hallmark of the profession. Recent developments tend to establish the contrary. The banking sector in Nigeria has had several reasons to be overhauled in the recent past, the basic reasons being that they do not worth what they claim (Sanusi,2010). The case of Enron and Worldcom as earlier cited also lay credence to this assertion and brought to the fore the extent of damage that poor quality financial reports can do.

From recent development, globally, electronic (e) banking e-business, e-… possibly e-fraud, e-corruption and e-financial scandals, it is almost obvious that the Traditional or Conventional Accountant may not be able to meet up with the level of sophistication of the financial crimes. It calls for equally sophisticated e-techniques to be able to prevent the occurrence of financial crimes and fraudulent practices in various organization concern.

According to a recent ranking by the Transparency International (2007), Nigeria is perceived as a very corrupt nation. This ranking emanated from the avalanche of cases of frauds, corruptions and financial scandals in which many Nigerians are suspected to be involved. These fraudulent practices are suspected to be perpetrated by highly skilled fraudsters, employing sophisticated methods – thus requiring equally highly skilled and versatile accountants to unravel the fraudulent schemes. This is where the Forensic Accountant comes in, with his/her scientific, evidence-based accounting, auditing and investigations, to assist in the judicial process, to avoid the miscarriage of justice in fraud-related judgments.

Finally, previous studies have showed a relationship between forensic accounting and detection and prevention of frauds, some have even research on role of forensic accounting on bankruptcy proceeding and other related constructs, these studies are from the developed nations and had looked mostly at incidence of fraud without looking deeply on the multiplicative effect of forensic accounting on profitability of these corporate firms, i.e. Forensic accounting, financing, investing, fraud, financial reporting and corrupt practice  systems   and   how   all   these   affect profitability and quoted firm business performance.

The study is also further necessitated by the divergent views of scholars on the effectiveness of forensic accounting on quality assurance of financial statements while many anchor theirs on other potential variables.

In view of the above problems, this study therefore seeks to determine the impact of forensic accounting on the profitability of quoted banks in Nigeria.

1.3. OBJECTIVES OF THE STUDY

Generally, this study is intended to ascertain the impact of forensic Accounting on the profitability of quoted companies in Nigeria

Other Specific objectives of the study are to;

1. Determine how forensic accounting reduce and prevent fraud in the Nigerian banking industry
2. Ascertain impact of forensic accounting on treasury and forex operation in quoted Nigeria banks
3. Examine the role of forensic accounting on loan processing and cash management in quoted Nigerian banking industry.
4. To ascertain the extent to which ratio analysis affects fraudulent loans in deposit money banks
5. Evaluate the efficacy of Forensic Accounting in improving faithful representation of annual audit report of quoted commercial banks.
6. Determine the differences between the roles of forensic accountants and conventional accountants in curbing fraud and financial crimes in quoted Nigeria banks.

1.4. RESEARCH QUESTION:

In order to achieve the objective of the study, the following research questions have been raised in the project study, providing answers to them will help achieve the aim of this work. These questions include the following;

1. Does forensic accounting helps to reduce and prevent fraud in the Nigerian banking industry?
2. To what extent does forensic accounting impact on treasury and forex operation in quoted Nigeria banks?
3. What are the role of forensic accounting on loan processing and cash management in quoted Nigerian banking industry?
4. To what extent does the ratio analysis affects fraudulent loans in deposit money banks?
5. Are there any efficacy of Forensic Accounting in improving faithful representation of annual audit report of quoted commercial banks?
6. What are the differences between the roles of forensic accountants and conventional accountants in curbing fraud and financial crimes in quoted Nigeria banks?

1.5. STATEMENT OF RESEARCH HYPOTHESIS

A hypothesis is a conjectural statement of the relationship between two or more variables. Hypotheses are guides for the investigator in the entire process of research endeavour and they keep the researcher on the main line of his/her study. They tend to serve as assumed answer to his/her principal questions, the correctness of which he/she assesses in the course of the study.

Hence for the purpose of this research to be achieved, the following null stated hypotheses will help in verifying the research statement.

HYPOTHESIS ONE

Ho1 -There is no significant relationship between Forensic Accounting and profitability of quoted commercial banks in Nigeria.

HYPOTHESIS TWO

Application of Forensic Accounting does not significantly reduces fraudulent practices in quoted commercial banks.

• SIGNIFICANCE OF THE STUDY

With an upsurge in financial accounting fraud in the global economy, forensic accounting has become an emerging topic of great importance for academic, research and industries.

This study will continue to be of interest to management of companies, auditors and other users of financial statements, It will also give them positive insight on the conceptual and theoretical review of forensic accounting practices and skills and how it can help increase the business performance of quoted financial institutions in Nigeria, as well as improving potential investor trust in the activities of corporate firms.

Stemming the tide of fraud by forensic accountants will go a long way in alleviating the economic hardship being experienced currently by the general publics, and would also help again in reassuring the stakeholders and also raising their confidence level in the financial institution which they have controllable interest in.

For Researchers/Analyst: Finally this study will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic.

1.7 SCOPE OF THE STUDY

The study examines impact of forensic accounting on the profitability of quoted companies in Nigeria.

Limitation

The study is limited to selected quoted banks in Lagos, Nigeria.

1.8 OPERATIONAL DEFINITION OF TERMS

1. IMPACT: This term generally refers to the effect or influence that an event, situation, or action has on something or someone. In different contexts, it can have more specific meanings. For example, in business, it might refer to the effect of a decision on a company’s performance.

2. FORENSIC ACCOUNTING: This is a specialized field of accounting that involves investigating financial discrepancies and fraudulent activities. Forensic accountants may be employed by public accounting firms, corporations, government agencies, or law enforcement agencies. They often work on legal cases involving financial fraud, providing evidence that can be used in court.

3. PROFITABILITY: This is a financial metric that is widely used to measure a firm’s ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. In other words, it’s a measure of how much profit a company makes. It’s often expressed as a percentage, known as the profit margin.

4. QUOTED COMPANIES: These are public companies whose shares are listed on a stock exchange and can be bought and sold by the public. The term “quoted” refers to the fact that the prices of their shares are quoted on a stock exchange. These companies are subject to regulations and must disclose certain information to the public.

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Full Project – IMPACT OF FORENSIC ACCOUNTING ON THE PROFITABILITY OF QUOTED COMPANIES IN NIGERIA