FORENSIC AUDITING SKILLS AND QUALITY OF FINANCIAL REPORTING IN FOOD AND BEVERAGE COMPANIES IN NIGERIA

FORENSIC AUDITING SKILLS AND QUALITY OF FINANCIAL REPORTING IN FOOD AND BEVERAGE COMPANIES IN NIGERIA

The aim of this study is to determine whether forensic auditing skills have a significant impact on the quality of financial reporting in Nigeria. Specifically, the study will:

1. Investigate whether auditing skills have a significant effect on the relevance of financial statements.
2. Evaluate if auditing skills have a significant consequence on the faithful representation of financial statements.
3. Explore whether investigative skills have a significant bearing on the relevance of financial statements.
4. Ascertain if investigative skills have a significant effect on faithful representation of financial statements.
5. Examine whether litigation skills have a significant influence on the relevance of financial statements.
6. Determine if litigation skills have a significant effect on the faithful representation of financial statements.

CHAPTER ONE: INTRODUCTION

1.1 Background to the study

Business organizations have been fraught with the menace of fraud for as long as records have been kept. However, recent history has recorded an unprecedented increase in fraud and fraudulent practices as a result of greater size and complexities in the business environment. Fraud has grown to a point where its perpetration poses a threat not only to the concerned organization but also to the entire economy. For example, the fallout of some high profile fraudulent practices  in the Nigeria financial system caused panics the effects of which were felt for yer

According to Golden, Skalak, and Clayton (2006), all acts of fraud can be distilled into four basic elements which are: a false representation of material nature; knowledge that the representation is a false or reckless disregard for the truth; the person receiving the representation reasonably and justifiably relied on it for decision making and financial damages resulting from all of the above. Thus, fraud is a deliberate act with the intention to deceive those who rely on the information and would normally cause loss especially of a financial nature to victims. It is an act of deception carried out for the purpose of unfair, undeserved, and /or unlawful gain. The assumption of a false identity to such deceptive end.

Fraud can be internal or external to the organization however, the most damaging of frauds are those perpetrated by members of the organization. According to Shouter (2001), financial statement fraud (a type of fraud perpetrated by insiders) has a higher negative impact on the victim organization and its shareholders and the investing public. This type of fraud according to the researcher is characterized by intentional misstatements or omissions of amounts or disclosures in financial reporting to deceive financial statement users. More specifically, financial statement fraud involves manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared.

In addition to causing losses of a financial nature to the organization, fraud when uncovered will lead to loss of confidence by the investing public which will likely starve the organization of needed funding for future activities. In numerous cases, fraud has led to the liquidation of business organizations that were initially thought financially healthy. Hence, business organizations have over the years taken great pains in trying to investigate and prevent the occurrence of fraud. One of the many methods employed by organizations to check the menace is the use of the services of forensic accountants to investigate suspected and confirmed cases of fraud in order to catch the perpetrators and make financial recoveries where possible.
Forensic accounting includes the use of accounting, auditing, and investigative skills to assist in legal matters. It consists of two major components. Investigative services that recognized the role of an accountant as an expert consultant, and litigation service that uses a forensic auditor’s skills and may require possible courtroom testimony (Okoye and Gbegi, 2013). According to Silverstone and Sheetz (2007), forensic auditors utilize an understanding of business information and financial reporting systems, accounting and auditing standards and procedures, evidence gathering and investigative techniques, and litigation processes and procedures to perform their work. Forensic accountants are also increasingly playing more proactive risk reduction roles by designing and performing extended procedures as part of statutory audit, acting as advisers to audit committees, fraud deterrence engagements, and assisting in investment analyst research. Forensic auditors use various methods in the performance of their roles. These include the analyses of financial statements and other relevant financial records, data mining, assessing, testing data for completeness and accuracy as well as interviewing those suspected of fraud. This research paper proposes to investigate the relationship between the activities of forensic auditors and the quality of Financial Report in Food and Beverages companies in Nigeria.

1.2 Statement of the Problem

According to Golden, Skalak, and Clayton (2006), fraud is a feature of every organized culture in the world. It affects many organizations, regardless of size, location, or industry. Amahalu, Ezechukwu, and Obi (2017); and Enofe, Olorunnuho, and Okporua (2016) also confirm that the situation is not much different in Nigeria where they noted the alarming increase in the frauds and fraudulent practices both in public and private organizations. Fraud has been blamed for the failure of a good number of business organizations causing hardship for the firm’s stakeholders. In such cases, investors lose their investments, jobs are lost and investors become jittery about committing funds in other viable businesses as they become overly cautious. In law, fraud is deliberate deception to secure unfair or unlawful gain or to deprive a victim of a legal right. Fraud itself can be a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compensation), a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities) or it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong.

In Nigeria, Cadbury Nigeria Plc whose books were criminally manipulated by management was credited to have lost $15million. This is a case of financial statement fraud in the form of misstatement.

Consequently, there is a general expectation that forensic auditing may be able to combat falsified financial reporting through the right skills and thus entrench quality financial reporting. Importantly also, the category of fraud committed in most corporate settings by managers, financial statement frauds cause the highest amount of losses at the company level and aim to distort the financial truth in order to obtain certain advantages or to hide the possible losses or negative performance (Rezace, 2010). Thus the need for forensic auditing training and skills is currently an issue of concern as a survey by Marczewski & Akers (2005) & Beasley and Jenkins (2003) revealed that most accountants and auditors had difficulty in identifying falsified financial reports. External auditors have continued to certify fraudulent financial statements as qualified credit reports, thus resulting in the impoverishment of investors and most times corporate collapse and economic crisis. Since the external auditors have refused to accept the responsibility of falsified financial records and fraud, but rather have claimed to be only responsible for laying credence to financial statements and this has created a gap hence the need for Forensic Auditing Skills to be imbibed in accountants and auditors.

Numerous research efforts have been made in assessing the importance of the services of forensic accountants to business organizations especially in improving the quality of financial statements and uncovering fraud. However, most of these research efforts have been focused on fraud and forensic accounting activities in banks and other financial institutions. This paper has identified this lacuna in forensic accounting research especially in the Food and Beverages sector where very little research has been done on the subject matter. This research paper is set to investigate the impact of forensic auditing skills on the quality of financial reporting in the Food and Beverages companies in Nigeria.

1.3 Aim and Objectives

The aim of this study is to determine whether forensic auditing skills have a significant impact on the quality of financial reporting in Nigeria. Specifically, the study will:

1. Investigate whether auditing skills have a significant effect on the relevance of financial statements.
2. Evaluate if auditing skills have a significant consequence on the faithful representation of financial statements.
3. Explore whether investigative skills have a significant bearing on the relevance of financial statements.
4. Ascertain if investigative skills have a significant effect on faithful representation of financial statements.
5. Examine whether litigation skills have a significant influence on the relevance of financial statements.
6. Determine if litigation skills have a significant effect on the faithful representation of financial statements.

1.4 Research Questions

The study addresses the following research questions:

1. How do auditing skills affect the relevance of financial statements?
2. What is the consequence of auditing skills on the faithful representation of financial statements?
3. What is the bearing of investigative skills on the relevance of financial statements?
4. How do investigative skills affect the faithful representation of financial statements?
5. What is the influence of litigation skills on the relevance of financial statements?
6. How do litigation skills affect the faithful representation of financial statements?

1.5 Research Hypotheses

This study has the following null hypotheses:

H0₁:  Auditing skills do not have a significant effect on the relevance of financial statements.

H0₂: Auditing skills do not have significant consequences on the faithful representation of financial statements.

H0₃: Investigative skills do not have a significant bearing on the relevance of financial statements.

H0₄: Investigative skills do not have a significant effect on faithful representation of financial statements

H0₅: Litigation skills do not have a significant influence on the relevance of financial statements.

H0₆: Litigation skills do not have a significant effect on faithful representation of financial statements

1.6 Significance of the Study

This study is very important and most significant at this period when companies with impressive income statements and statements of financial position are still faced with a continuity threat. The financial account is “Prima Facie” evidence on the state of affairs of companies as well as its performance and could be relied upon as a certificate because it has the auditors’ certification. This study offers solutions to the above-raised questions, it is my belief that the result of this finding will go a long way to help other researchers in this area of study. It will also enhance the understanding of the structure of published financial accounting information and accounts by the users. The various user groups of published financial statements will benefit from this study as follows:

1. The potential investors: These are groups who are interested in committing their
   financial resources to the purchase of the company’s share. This set of people will benefit from this study as the result of this study will arm them with the necessary tools with which to evaluate the financial accounting of a business organization as it affects them.
2. The general public: This group shall benefit from this report by the knowledge that the business organization exists for them not against them and as such has to live up to its full responsibilities.
3. The regulators of financial Accounting Report: This group includes the Nigerian Accounting Standard Board (NASB), the Corporate Affairs Commission (CAC). The study will help them to standardize and harmonize their operations.
4. The employee group: This includes existing, potential, and past employees
5. The government including the Tax Authorities Department who has an interest in the financial accounts of companies: The result of this work shall be of immense assistance to these user groups in the advancement of their interest.
6. The Food and Beverage Companies: This work will be of immense importance to these people to help them understand if forensic auditing skills should be entrenched optimally by them.

1.7 Scope of the Study

This study could have covered the impact of forensic auditing skills on business performance of all sectors of the Nigerian economy but due to the challenges of such a task especially the financial resources with which to execute it, this study is now limited to Food and Beverages industry. The study of Food and beverage industries in Rivers State.

1.8 Limitation of the Study

The limitations encountered are as follows:

1. The research work is limited by the lack of sufficient funds to take as many case studies as possible.
2. The confidential nature of financial accounting information in the business organization posed a problem to this study.

1.9 Operational Definition of Terms

1. AUDITOR: An auditor is someone who is responsible for evaluating the validity and reliability of a company or organization’s financial statements.
2. AUDIT: An audit is an act of testing the accuracy, validity, and reliability of financial statements and source documents.
3. FINANCIAL STATEMENTS: A formal record of all relevant financial information of a business, person, or other entity, presented in a structured and standardized manner to allow easy understanding. Any of the four basic elements above, that is, statement of financial positions, income statement, cash flow statement, and statement of changes in equity.
4. GOVERNMENT: An institution of the state whose responsibility is to maintain law and order in society.
5. PRIMA FACIE: Sufficient to establish something legally until disproved later.
6. RESEARCHER: An enquirer basically concerned with search knowledge.
7. ACCOUNTING: Accounting is the systematic and comprehensive recording of financial transactions pertaining to the business, and it also refers to the process of summarizing, analyzing and reporting, these transactions to oversight agencies and tax collection entities.
8. GOING CONCERN THREAT: This is an accounting assumption that states that a business will be in operation for the foreseeable future.
9. GAAP (Generally Accepted Accounting Principles): Is a framework of accounting standards, rules, and procedures defined by the professional accounting industry.
10. FINANCIAL REGULATOR: This is an institution that supervises and controls a financial system. Their objective is to guarantee fair and efficient markets and financial stability.
11. FOOD AND BEVERAGE COMPANIES: Those companies involved in processing raw food materials, packaging, and distributing them. These include fresh, prepared foods as well as packaged foods and alcoholic and nonalcoholic beverages.

1.10 Organization of the study

The study is organized into five chapters.

Chapter one provides a brief background to the study, discusses the research problem, reason(s) for the research, and significance of the study.

Chapter two reviews previous research on forensic auditing skills and quality of financial reporting, the frame of reference discusses the research area and investigates what has not been attended to or given little attention.

Chapter three is the methodology and explains the process of the project work. This chapter aims at describing the type of research which was conducted, description and measurement of variables in the study, study sample, and the instrument used in data collection. The detailed sampling method and the sample size were discussed.

Chapter four aims at presenting the findings of the current study. The data was analyzed in this stage using statistical techniques.

The final chapter summarizes the findings of the study. The implications of the findings are also discussed here. The study draws conclusions and provides recommendations to the problems raised.