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UTILIZATION OF FORENSIC ACCOUNTING AND ITS EFFECT ON FINANCIAL REPORTING QUALITY IN SMALL AND MEDIUM ENTERPRISES IN NIGERIA
CHAPTER ONE
INTRODUCTION
Background of the study
The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic entities to achieve useful economic decision making (FASB, 2008; IASB, 2008). Providing qualitative financial reports is important because it will positively influence capital providers and other stakeholders in making investments, credit and similar resource allocation decision enhancing overall market efficiency. According to Warshavsky, Marcus and Woodbury (2012) Financial Reporting Quality relates to the ability of a company’s reported performance to best symbolize its true earnings. The writer argues that analysts, investors and management have deployed dozens of forensic indices that aid the forensic accountant in assessing the probability of performance index manipulation by a suspect company observing that because the financial statement are the responsibility of company’s management, transactions can be structured to best achieve a desired accounting result by reporting key financial transactions to the company’s advantage (Enron, World Com, Cadbury Plc and so on). The author argued that the quality of a company’s earnings is one facet of an investigation that is often overlooked in the financial forensic process. The banking sector which is considered very volatile and sensitive has gone through some moments of deep rooted crisis with the recent being the abrupt removal and even trial of five Chief Executive Officers and spontaneous dissolution of their board. The issues that led to this action by the apex bank the CBN was blamed on poor corporate governance which saw some insider abuses that led the affected banks actually having negative balance in their shareholders’ funds. Following this, the CBN conducted a forensic examination on their financial reports which confirmed that the Chief Executives have filed very misleading financial reports both to the CBN and other stakeholders. The report reveals that out of the loan portfolio of N2.8 trillion, the aggregate non-performing loans were 40.81%.
The recently widely reported case of police pension scam also points to the need to revamp the current trend of quality assurance approach on financial statements by incorporating forensic accounting (Ahamad, Zayyad and Rasak, 2013). The process has heralded a new era demanding total disclosure of facts that would enable financial statement play the key role of educating and informing existing and potential investors on the true financial position of any organization, hence the study of forensic accounting. Kasum (2009) defines Forensic Accounting as the application of specialized skills to stumble upon evidence of economic transaction. It is an integration of accounting, auditing and investigation skills. Ramaswamy (2007) submits that Forensic Accounting is an accounting analysis that can uncover possible financial reporting manipulations that is suitable for presentation in court. The place of Forensic Accounting in entrenchment of quality assurance of financial statement cannot be overemphasized. The issue of quality is very critical to the usefulness that financial reports could serve and Forensic Accounting which looks beyond mere adherence of financial reports to policies and principles but goes further to verify the underlying facts that could be tendered as evidence even in the courts has been veritable in the strengthening of quality of reports being issued by accountants.
Most financial statements are produced to meet the basic needs of ensuring compliance with the auditing laws and GAAP (Generally Accepted Accounting Principle), that is, it does not portend any material misstatement without paying attention to some of the purportedly small issues. To this end, Ramaswamy (2007) argues that in investigative accounting, one small transaction that looks suspicious could be the thread that unravels a big accounting misdemeanor hence the need for forensic accounting. Okoye and Akamobi (2009); Owojori and Asaolu (2009), Izedomin and Mgbame (2011) in Modugu and Anyaduba (2013) acknowledge the increasing incidence of fraud and fraudulent activities in Nigeria perpetrated through financial statements manipulations and regretted it is gradually becoming a normal way of life. Kasum (2009) observes that perpetration of financial irregularities are becoming the specialty of both private and public sector in Nigeria as individuals perpetrate fraud and corrupt practices according to the capacity of their office. Enofe, Mgbame, Ayodele and Okunbo (2013) regret that the specific problem with fraud in Nigeria business environment is the negative effect on corporate earnings and a loss of investors’ confidence. More often than not, financial crimes are perpetrated by falsifying financial statements to reflect what it is not. Inaccurate financial statements provide incorrect picture of earning capacity and financial position of an enterprise on which basis users, including all classes of stakeholders make their decision and consequently get exposed to fraud. In most cases of financial crime investigation, the services of lawyers and police would be required because the reason for most fraud investigation is that suspicion of fraud or accounting misstatement (Gray and Moussalli, 2006). However, they noted that the lawyer may be incapable of understanding the rudiments of accounting as it diverges widely from their profession (Telpner and Mostek, 2003).
1.2 Statement of the problem
Despite, a considerable interest in the effectiveness of accounting standards on the quality of financial reporting empirical literature emerged that offers contradictory findings about the questions to what extent accounting standards contribute to the decision usefulness of financial reporting information (Beest, Braam and Boelens 2009). From the foregoing, it is evident that researches have been done on the impact of forensic accounting on prevention of financial statement while little or no extant one has been on the need to incorporate forensic accounting/audit to enhance quality assurance of financial statements and hence the justification for this study. 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 earning quality. This study specifically seeks to x-ray the potency of forensic accounting in entrenching qualitative financial reporting in Nigeria.
1.3 Objectives of the study
The primary objectives of this study are to:
(i) Examine the effectiveness of Forensic Accounting in enhancing the relevance of financial statements in commercial banks in Nigeria.
(ii) Evaluate the efficacy of Forensic Accounting in entrenching faithful representation of the financial reports in Nigeria’s commercial banks.
(iii) Examine the effectiveness of Forensic Accounting in enhancing the understandability of financial statements in Nigeria’s commercial banks.
To further provide solutions to the problems, the study formulated the following null hypotheses for guidance.
(i) Forensic Accounting does not significantly enhance the relevance of financial statements among commercial banks in Nigeria.
(ii) Faithful representation of the financial reports is not significantly enhanced through Forensic Accounting in Nigeria’s commercial banks.
(iii) Understandability of financial statements will not be significantly enhanced through Forensic Accounting in commercial banks in Nigeria.
1.4 Research Questions
(i) What is the effectiveness of Forensic Accounting in enhancing the relevance of financial statements in commercial banks in Nigeria.
(ii) What is the efficacy of Forensic Accounting in entrenching faithful representation of the financial reports in Nigeria’s commercial banks.
(iii) What is the effectiveness of Forensic Accounting in enhancing the understandability of financial statements in Nigeria’s commercial banks.
1.5 Research Hypothesis
H0: There is no relationship between forensic accounting and financial reporting quality in small and medium enterprises in Nigeria
H1: There is no relationship between forensic accounting and financial reporting quality in small and medium enterprises in Nigeria
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