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The Relevance of Forensic Audit and Investigation in Resolving Tax Related Fraud and Malfeasance
The Relevance of Forensic Audit and Investigation in Resolving Tax Related Fraud and Malfeasance
By
Cordelia Onyinyechi Omodero B.Sc., M.Sc., ACA, Doctoral Student of Accounting
(Michael Okpara University of Agriculture, Umudike, Umuahia, Abia State,
Nigeria Affiliation: Medonice Consulting and Research Institute, Port Harcourt.
Abstract
The incessant tax related fraud and malfeasance resulting to corporate collapse and
the failure of the statutory audit to detect and prevent fraudulent activities which had led
to the impoverishment of investors had given rise to the need for forensic audit and
investigations. In view of the above, this paper considers the application of forensic
audit and investigation in resolving tax related fraud and malfeasance. The study is a
theoretical research which considers the roles of forensic auditors in combating
fraudulent activities, distinction of forensic auditor and statutory auditor, and impact of
forensic auditor on corporate governance. Based on the findings; this paper concludes
that forensic auditing has improved management accountability, strengthened external
auditors independence and assisting audit committee members in carrying out their
oversight function by providing them assurance on internal audit report have impacted
positively to corporate governance, thereby reducing tax related fraud and malfeasance.
Therefore the study recommends that; the service of forensic auditors should be
employed in Nigerian organisations.
Keywords:
Introduction
The incessant tax related fraud & malfeasance and its impact on corporate
performance has led to the need for multi-dimensional relationship (that is interrelationship between the audit committee, the external auditor and the management) in
corporate governance as to protecting the interest of shareholders and other market
participants with the common goal of improving oversight function and ensuring good
corporate governance (Deloitte and Touch 2006). However, in spite of the multi
dimensional relationship between the three major groups in corporate governance, tax
related fraud & malfeasance which had led to poor performance and most times to
corporate collapse resulting to huge lost of investment and impoverishment of many
investors has continued to be on increase (Rezae 2005). Ramaswamy (2009) in line with
the above statement there is a great need for skilled professionals that can identify,
expose and prevent weaknesses in three key areas: poor corporate governance, flawed
internal controls and fraudulent financial statements. Owojori and Asoula (2009) states
that the Failure of Statutory audit to prevent and reduce misappropriation of corporate
fraud and increase in corporate crime has put pressure on the professional
accountant and legal practitioner to find a better way of exposing fraud in business
world .
The above problems have posed serious concern to the accounting
profession, and users of accounting information, thus giving rise to the call for
forensic auditors. In view of the above, this paper aims at examining the relevance of
forensic audit and investigation in resolving tax related fraud and malfeasance.
Objectives of the Study
In view of the above problem this study considers the following:
i.
Examining the application of forensic audit and investigation in combating
fraudulent activities in corporate organization.
ii.
Determining the characteristics required by forensic auditors as to combat
fraudulent activities.
iii. Differentiating between Forensic Auditor and Financial Auditor.
Methodology
This paper is a theoretical study on the application of forensic audit and
investigation in resolving tax related fraud and malfeasance and it which employed the
accountability of the fraud is established and the report is considered as evidence in the
court of law or in administrative proceedings.
Also known as investigative accounting, forensic accounting is a detailed
examination and analysis of financial documents and records for use as evidence in a
court of law. The term forensic accounting can refer to anything from the execution of a
fraud analysis to the recreation of true accounting records after the discovery that they
have been manipulated.
Conceptual Definition of Strategic Tax Behaviors: Tax Evasion, Tax Avoidance and
Licit Savings of Taxes
For the purpose of this study, strategic tax behaviors (or aggressive tax planning
strategies) are all those actions designed solely to minimize corporate tax obligations
whose legality may be under doubt. Three categories of tax behaviors can be identified:
tax evasion, tax avoidance and licit saving of taxes, (Akindele, 2011). Tax evasion can
be synthetically defined as intentional illegal behavior, (behavior involving a direct
violation of tax law, in order to escape payment of taxes).
Tax evasion is the illegal evasion of taxes by individuals, corporations and trusts. Tax
evasion often entails taxpayers deliberately misrepresenting the true state of their affairs
to the tax authorities to reduce their tax liability and includes dishonest tax reporting,
such as declaring less income, profits or gains than the amounts actually earned, or
overstating deductions.
In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden.
Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they
describe a range of activities that intend to subvert a state's tax system, although such
classification of tax avoidance is not indisputable, given that avoidance is lawful, within
self-creating systems.
Licit saving of taxes can be defined as commonly accepted forms of behaviors
which are neither against the law nor against the spirit of the law. The scope of each of
these concepts varies from country to country depending on governments policies, court
decisions, tax authorities attitudes and public opinion. In this study, strategic tax
behaviors are therefore all behaviors identified as tax evasion or tax avoidance.
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computer programs or scientific knowledge. This means the forensic auditor should
have the capability to use computer forensic tools that could be both software and
hardware in carrying out its function as to detect or prevent fraudulent activities. Thus
by using the computer forensic tools in carrying out his responsibilities, sophisticated
fraudulent activities can be combated.
ii. Analyzing Financial Transaction:
Forensic auditor in carrying out his
function analyzes financial transaction involving unauthorized transfers of cash
between companies. (Owojori and Asolu 2009). Cole (2009) states that the forensic
auditors are required to have special skills in inspecting documents for
authenticity, alteration, forgery or counterfeiting. Hence, by possessing such skills, the
forensic auditor in carrying out his duties can easily detect errors, fraudulent
activities and omissions thereby preventing and reducing fraudulent activities.
zimbleman et-al (2012) states that the forensic auditor is responsible for analyzing,
identifying the kinds of fraud that could occur and their symptoms.
iii. Reconstruction of incomplete accounting records: The forensic auditor in
carrying out his function reconstructs incomplete accounting records as to settle
insurance claims, over inventory valuation, proving money laundering activities by
reconstructing cash transactions. (Owojori and Asaolu 2009). In order to combat
fraudulent activities, the forensic auditor with his skills (Technological, communication
and expertise skills) in accounting knowledge can reconstruct incomplete accounting
records, hence helping to detect and prevent fraud and ensuring good internal control
system and good corporate governance.
iv. Embezzlement investigation:
In carrying out embezzlement investigation and
providing documentation, and negotiation of insurance settlements the forensic auditor
uses his special skill and experience, thus helping to detect the culprit and amount
embezzled.
Cabole (2009) states that what forensic auditors do includes:
a.
Fraud detection, documentation and presentation in criminal trials and claims.
b.
Calculate economic damages; trace income and assets, often in an attempt to find
hidden assets or income,
c
Reconstruction of financial statement that may have been destroyed or
manipulated. iv. Expert witness.
The above responsibilities listed by Cabole (2009) and Wallace (2009) show that
the forensic auditors must be specialist (experts) in financial matters and must have legal
knowledge which could enable him detect fraudulent activities which are to be presented
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References
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Journal of forensic and Investigation accounting vol.1 No.1, pp. 1-24.
Association of Fraud Examiners Report (1999).
Cabole, N. (2009), Forensic Accounting: A paper presented in the Hilton Hotel Lagos,
2nd June, 2009
Chambers Universal Learners Dictionary (1985), Ibadan Nigeria, Spectrum book ltd.
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Cole, C. (2009), Forensic Audit, paper presented Hilton Hotel Lagos 2nd June, 2009.
Unpublished
Crumbley, D. L (2003). Forensic and Investigative Accounting. CCH Publishing.
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