Integrity of Financial Statements and Forensic Accounting Techniques in Internal Control of Business Organisations

Abstract

Financial statements reflect the financial position of business transactions and events on such business entity, internal control system, if adequate, it will help in reducing the activities of fraudulent stakeholders. Forensic accounting’s focus is on both evidence of economic transactions and reporting which is as contained within an accounting system. Cases of financial statement misrepresentation have been reported, affected companies and their auditors have gone down while shareholders were greatly affected. This study examined the relevance of forensic accounting techniques in internal control functions of business organisations and how it can ensure the integrity of the financial statements. The dependent variable of this study is “Integrity of financial statement” with internal control system; sound ethical culture; competent management and staff as proxies. While forensic accounting techniques is the independent variable with the following proxies: fraud prevention, detection and deterrence skills; forensic audit, investigation, and interviewing skills; litigation, mediation and arbitration skills; computer assisted reviews and document reviews. Integrity of financial statements is important when bridging the communication and performance expectation gaps in the work of auditors of financial statement while expressing their audit opinion.

Stakeholders who are members of the Institute of Chartered Accountants of Nigeria (ICAN) were requested to answer the research questions. This study adopts survey research method with the use of primary data and purposive random sampling techniques. Sample size was calculated with the formula by Krejceie and Morgan (1970). 350 copies of questionnaires were administered and 321 questionnaires were returned, representing 92% of the entire questionnaire. Nominal scale method was used in the demographic section while Likert scale was used in other sections of the questionnaire. Hypotheses were formulated, tested, and analysed using multiple regression analysis.

It was found that forensic accounting techniques “FAT” (FPDDS, FAIIS, LMAS, and CARDR) have positive influence on the integrity of financial statements (IFS) of business organisations, as evidenced from the individual level of significance of 0.006, 0.045, 0.000, and 0.047 which are less than the 5% acceptable level of significance and the coefficient of determination of the main model of 0.23 meaning that about 23% variation of the IFS is attributable to FAT while the remaining 77% change in the IFS can be attributed to other factors not covered in the model. It was also found that the inclusion of forensic accounting techniques will strengthen the activities of internal control functions. This is also evidenced in the sign and size of the coefficients, that is β4 - 7 are 0.203, 0.256, 0.270, and 0.134 respectively > 0.

In conclusion, this study established that forensic accounting techniques are; fraud prevention, detection and deterrence skills, forensic audit, forensic investigation, and forensic interviewing skills, litigation, mediation and arbitration skills, and computer assisted reviews and document reviews. The key recommendation is that business organisations should consider setting up forensic accounting unit within the internal control department; this will lend credence to the integrity of financial statement of business organisations.

Keywords: Integrity, Financial Statement, Internal Control, Forensic Accounting, Forensic Accounting Techniques

JEL Classification: M41, M47, M49