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CHAPTER ONE

INTRODUCTION

1.1  Background of the study

Forensic accounting provides an accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution. It encompasses litigation support, expert witnessing and investigative accounting. Akintoye (2008) said forensic accounting is accounting that is suitable for legal review, offering the highest level of assurance, and including the new generally accepted connotation of having been arrived at in a scientific fashion and providing the needed findings in settling disputes. He said the primary orientation of forensic accounting is explanatory (cause and effect) analyses of phenomena including the discovery of deception (if any) and its effects introduced into an accounting system. Crumbley et al. (2009) define forensic accounting as the action of identifying, recording, settling, extracting, sorting, reporting and verifying past financial data or other accounting activities for settling current or prospective legal disputes or using such past financial data for projecting future financial data to settle legal disputes. Mehta and Mathur (2007) posited that forensic accounting involves a financial detective with a suspicious mind, a financial bloodhound, someone with a „sixth sense‟ that enables reconstruction of past accounting transactions and an individual who looks beyond the numbers. Bhasin (2007) noted that the objectives of forensic accounting include: assessment of damages caused by an auditors‟ negligence, fact finding to see whether an embezzlement has taken place, in what amount, and whether criminal proceedings are to be initiated; collection of evidence in a criminal proceedings; and computation of asset values in a divorce proceedings. He argues that the primary orientation of forensic accounting is explanatory analysis (cause and effect) of phenomenon including discovery of deception (if any), and its effects introduced into the accounting domain. Forensic accountant may apply certain examination techniques similar to those used in financial audits but the objective of these procedures is quite different. The forensic accountant may examine a trail of paperwork to corroborate the calculations needed to meet the specific goal of the engagement. This could be a useful instrument to prosecute cases of corruption in Nigeria too. 

1.2  Statement of problem 

Financial irregularity is a severe problem of concern globally. It is the major concern to developing nations. It is so endemic that fraud and corruption is gradually becoming a normal way of life. Financial irregularities are so common that almost every individual financial irregularly hands cannot be washed. 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. Individual perpetrates fraud and corrupt practice according to the capacity of their office. Although financial irregularities affects 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. Unless it is impossible, individual or establishment affected negatively by the fraudulent or corrupt practices will want to seek redress. Individual, corporate body and interested government organs takes 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” are been engaged for a very long time worldwide and probably, recently, in Nigeria.

1.3  Objectives of the study

The main aim of this study is to assess problems and prospect of forensic accounting on financial performance. The specific objectives are to assess the significant relationship between;

1.       Forensic accounting and return on asset.

2.       Forensic accounting and return on equity.

3.       Forensic accounting and net profit margin

1.4 Hypotheses

This study came-up with three null hypotheses.  

1.       There is no significant relationship between forensic accounting and return on asset.

2.       There is no significant relationship between forensic accounting and return on equity.

3.                   There is no significant relationship between forensic accounting and net profit margin.

1.5   Significance of the study

Audits can improve a company’s efficiency and profitability by helping the management better understand their own working and financial systems. The management, as well as shareholders, suppliers and financer, is also assured of risks in their organization and effective system is put in place to handle them.

It also helps to uncover inaccuracies and discrepancies within an organization’s records which may be indications of weak financial organization or even internal fraud, although fraud detection is not the main purpose of an audit.

Other researchers, who will also want to work on the same or similar topic, might need a base from which to start their work.

1.6   Scope of the study:

The scope of the study centered on the effect of forensic auditing expenditure on the profitability of Innoson motors.

1.7 Limitations of the study

In carrying out a research of this nature, it is not uncommon to encounter a number of constraints in the course of completion of this study. Some of the limitations of the study include;

Financial constraint: The huge cost involved in carrying out a complete study is too much and cannot be affordable by the student.

Time constraint: The time required for this research work was not enough. This is because the research was done at the same time a serious academic work was going on in school.

Attitude of respondents: Some of the respondents refuse to answer the questions asked to them while some refuse out rightly to grant interview. This poses limitation to the completion of the work.

Data gathering restriction: The difficulty of gathering data was compounded by the reluctance on the part of the respondents to divulge relevant and important information relating to the study, just like information which were available on the internet were mostly restricted to registered members.

The researcher’s inability to hold talk with all the auditors and managers whom she tended to have interviewed on issue relating to company with regards to the roles of external auditors. The refusal of some university libraries and polytechnic libraries to conduct a library research on the above topic. Lastly, our ill-equipped library, which provided little or no information on this topic, is worth mentioning.

1.8 Definition of Terms

1. Auditing: ‘The independent examination of the financial examination of the financial statements of an organization with a view to expressing an opinion as to whether these statements give a true and fair view and comply with the relevant statutes and the international financial Reporting Standards”.

2. Auditor: This is a person appointed to examine the accuracy of the accounts and records of a business organization and to report on the financial aspect at a particular time.

3. Audit report: This is a statement issued by the auditor of an enterprise at the end of an audit assignment, in which the auditor expresses his opinion on the financial statement prepared by the directors of an enterprise.

4. Bankruptcy: This is a situation where an unincorporated business i.e. sole proprietorship and partnership has been legally declared as not being able to meet its short term obligation as at when due.

5. Financial report: This is a statement that shows the summarized business transactions and the financial position of an organization for the period under consideration.

6. GAAP: General accepted accounting principle.

7. Stewardship accounting: Stewardship accounting is the process whereby managers of a business, account or report to the owners on the state of affairs of the business.

8. Audit evidence:  Are all the relevant and reliable data or information obtained and recorded by the auditor in arriving at conclusion of the Audit work bases is independent opinion on financial statement.

9. Verification: This means establishing the existence, ownership, valuation, and presentation of assets and liabilities at the balance sheet date.

10. Fraud: Fraud is  referred to those acts, which include the use of deception to obtain an illegal or unjust financial advantage and is also all international his statements in or omission of accounts or disclosure from an entity’s accounting records of financial statements.