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A forensic accounting theory is an explanation for observed forensic accounting practices. Past and recent accounting scandals in financial and non-financial firms have shown that expertise in forensic accounting is crucial to detect financial fraud that originates from a firm’s financial accounting process. The accounting scandals involving Enron, WorldCom, Global Crossing and other companies have put accountants and auditors in a sensitive case as it never-before in history (Omar, Mohammed & Haron, 2013). The impact of these accounting scandals is enormous, causing lateral damages (Bhasin, 2013). The confidence in the accounting profession has severely been undermined. However, these scandals have created new business for an accountant and developed opportunities for the forensic and investigative accounting field (Omar et al., 2013). Following the globalization of businesses in the early 1900s and the American Stock Market Crash of 1929, auditors moved their focus from fraud detection and prevention to financial statement reporting. The change created a gap between accountants and the users of financial statements, who viewed auditors as the first person of defense against fraud (Islam, Rahman & Hassan, 2011).

Accounting scandals and frauds are perennial. The instances of scandals and frauds have affected our society ever since before the Industrial Revolution. They occurred in all eras and all countries (Bhasin, 2013).Accounting has been perceived as a medium to provide information necessary for economic decision-making. However, a lot of accounting and business scandals occurred around the globe have attracted criticism on the role of accounting. The media have reported financial reporting scandals and bankruptcies in many companies. Such as Sunbeam, Kmart, Enron, Global Crossing (USA), BCCI, Maxwell, Polly Peck (UK) and HIH Insurance (Australia). Apart from scandals in developed countries, which have sophisticated capital markets and regulations, similar cases also have occurred in developing countries with emerging capital markets. As reported by Johnson, Boone, Breach, and Friedman (2000), Asian countries have experienced similar cases like developed countries. Such companies in developing countries are PT Bank Bali, and Sinar Mas Group in Indonesia. Bangkok Bank of Commerce in Thailand, United Engineers Bhd in Malaysia, Samsung Electronics and Hyundai in Korea (Chariri, 2007). Nigerian companies also experience the cases of fraud as occurred in developed and developing countries. Such companies are Union Dicon Salt, Lever Brothers (now known as Unilever). And more recently Cadbury as well as the sack of the management and board of Oceanic Bank, Intercontinental and Afribank in 2011 by Central Bank of Nigeria (CBN)due to frauds and financial abuses (Okunbor & Arowoshegbe,2012).


As a student of accounting department, we need to know areas of differences and relationships between a forensic accounting, auditing and financial accounting engagements. A forensic accounting engagement applies accounting, auditing, and investigative skills to examine, analyze, and report on financial information in a manner suitable to the court. An audit is performed by an internal or external auditor, who must adhere to a certain set of standards established by the American Institute of Certified Public Accountants. Financial accounting is the process of recording, summarizing and reporting a company’s business transactions through financial statements. These statements are the income statement, the balance sheet, the cash flow statement and the statement of retained earnings.

Forensic accounting is perceived to have evolved rather inorganically in response to certain emerging fraud related challenges and has been precipitated by the surging number of white-collar crimes pressures. The scandals that recently rocked the corporate world with classical examples being the often-cited Enron and WorldCom cases have also brought the field of forensic accounting to the forefront. Forensic accounting is seen as encapsulating all the other areas in the use of accounting for investigative purposes. The increasing sophistication of certain crimes requires that forensic accounting be added to the tools necessary to bring about the successful investigation and prosecution of those individuals involved in criminal activities.


According to AICPA (2004) Forensic Accounting is the application of accounting principles, theories and discipline to facts or hypothesis at issues in a legal dispute and encompasses every branch of accounting knowledge. Forensic accounting is the tripartite practice of utilizing accounting, auditing and investigative skills to assist in legal matters. It is the specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or litigation. Forensic accounting can therefore, be seen as an aspect of accounting that is suitable for legal review, offering the highest level of assurance and including the generally accounted connotation of having been arrived at in a scientific fashion (Apostolou, Hassell, and Webber, 2000).

Ojaide (2000) noted that there is an alarming increase in the number of fraud and fraudulent activities in Nigeria emphasizing the visibility of forensic accounting services. According to the Centre for Forensic Studies (2010) report, the increasing need for forensic and investigative accounting in the banking sector results from the nature of modern-day banking that involve large volume of complex data, which makes it difficult to monitor those transactions by applying manual audit processes. This in turn makes the control utility of auditing ineffectual. Virtually all the weaknesses and challenges identified in the banking industry in Nigeria’s post consolidation, and criminal investigations and prosecutions arising from them, are issues for forensic accounting. The general expectation is that forensic accounting may offer some respite to the seeming vulnerability of conventional accounting and audit systems to financial fraud. Consequently, the incorporation of modern forensic auditing techniques in an audit in Nigeria is seen as timely in order to prepare the accounting profession to deal effectively with the problem of unearthing ingenious fraud schemes arising from audit failure to detect frauds in Nigeria. According to the Centre for Forensic Studies (2010) report in Nigeria; “If well applied, forensic accounting could be used to reverse the leakages that cause corporate failures. This can be attributed to the fact that proactive forensic accounting seeks out errors, operational vagaries and deviant transactions before they crystallize into fraud. The focus of this study therefore is to examine the role and prospects of forensic accounting in curbing financial crimes in Nigeria with emphasis on the banking sector.



The study seeks to address the relationship and differences between forensic accounting, auditing and financial accounting engagements and roles played in instilling confidence in financial reporting information in Nigeria.

However, the study identifies the following objectives of the study: 

  1. To identify major relationships and differences between the three aspects of accounting viz forensic, audit and financial accounting.
  2. Reveals how forensic accounting prove and prevent financial crime.
  3. Relevance of accounting in investment decision



For the purpose of this research work, the definitions of terms used in the course of this study include the following:

  1. Accounting

This is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing and reporting these transactions to oversight agencies, regulators and tax collection entities.

  1. Auditing

It is an examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organisation.

  1. Accounting Information

This has to do with data about a business entity’s transactions. Accounting is a method of identifying and recording this data and using it to generate useful reports for a variety of users. These users are generally classified into two groups: internal users and external users.

  1. Investor

This is a person or an organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit or return.

  1. Investigation

It is a systematic, minute, and thorough attempt to learn the facts about something complex or hidden; it is often formal and official: an investigation of a bank failure. Investigative Auditing involves the examination of accounts and the use of accounting procedures to discover financial irregularities and to follow the movement of funds and assets in and out of organisations. … Identification of financial activity; Tracing of financial assets.

  1. Fraud

This is an intentional deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim. Types of fraud include tax fraud, credit card fraud, wire fraud, securities fraud, and bankruptcy fraud

  1. Error

An error is a non-fraudulent discrepancy in the financial statement.

  1. Accounting Standards

An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. … In the United States, the Generally Accepted Accounting Principles form the set of accounting standards widely accepted for preparing financial statements


Different concepts as it relates to the different classes of accounting will be depicted here.

Financial accounting is the process of recording, summarizing and reporting a company’s business transactions through financial statements. These statements are the income statement, the balance sheet, the cash flow statement and the statement of retained earnings. Financial accounting serves the following purposes: producing general purpose financial statements. producing information used by the management of a business entity for decision making, planning and performance evaluation. A key factor of accounting involves the transmission of financial information to anyone who may need the information. These people then use the accounting information to make business and investment decisions. However, in order to make proper decisions, the information being provided needs to be reliable and relevant. In financial reporting, we commonly encounter a phenomenon called information asymmetry. This is a situation in which one party has information than another party. There are two types of information asymmetry pertinent to financial accounting theory: In an ideal world, the economy would be characterized by perfect markets with a lack of information asymmetry. Financial statements issued by companies could then be said to be 100% relevant and 100% reliable. Relevant in the fact that the information will prove to be useful to external users, and reliable in the fact that they will be completely free from bias or error.

The lesson here is that in the world we live in today, we must be aware of the fact that no set of financial statements are 100% reliable and 100% relevant. In accounting and in today’s markets, there will always be a trade-off between reliability and relevance.

According to IFRS, the objective of financial reporting is to “provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit.”

IFRS also states that these decisions depend on the user’s expectations of the risk, amount, and timing of future net cash inflows of the reporting entity. Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions. Scientists have still not sufficiently explored the institutional and social aspects of financial accounting. One of the reasons is financial accounting form harmonization or standardization problems, most countries still use diverse forms of accounting, which depend at national level (Hopwood, 2000). Therefore, it is complicated to make business management decisions at international level. Countries are striving for harmonization and since 2016.

Various authors and scientists, such as Boudreau, Ramstad (1997), Zabielavičienė (2009), Černius (2012), Gliaubicas (2012), Akhmetshin, Osadchy (2015), Salako, Yusuf (2016) and others discussed the concept of financial accounting. Most definitions reveal the same criteria of financial accounting, just a few show different meanings of financial accounting. Financial accounting definition discloses that financial accounting is not only a system of transaction classification and recording, but it  is  also  important  for  business  decision  making  process.

However, it needs to be specified what financial accounting information for a user is necessary for a decision-making process. Accordingly, financial accounting information could disclose the information regarding the economic viability of the company, the performance of the company, the development stage of the company, as well as the risks the company is facing (Florin, 2014). Therefore, traditional financial accounting must assure true and fair view of the company’s performance (Zambon, Del Bello, 2005; Yadav, Kumar, Bhatia, 2014). This is necessary for users of financial reporting, as well as for the investors to reduce the risk (Yadav, Kumar, Bhatia, 2014) or “as a management tool for strategic deci-sion making” (Zambon, Del Bello, 2005). To sum up the literature analysis about the im-portance of financial accounting information, it can be concluded that financial accounting has various goals. The most important goal is financial accounting information use for business decisions. Depending on various information, users’ purpose can be different, but they expect true and fair image of a company. Nowadays, sustainable accounting, which plays the main role in the decision making, can ensure true and fair image of a company. This is where audit accounting comes into play.


Audit accounting involves financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. Audit is an important term used in accounting that describes the examination and verification of a company’s financial records. It is to ensure that financial information is represented fairly and accurately.


Also, audits are performed to ensure that financial statements are prepared in accordance with the relevant accounting standards. The three primary financial statements are; income statement, balance sheet and cash flow statement. Financial statements are prepared internally by management utilizing relevant accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). Audit  today  involves  the   scrutiny of  the accounts  of  an enterprise by  a suitably qualified auditor, in sufficient detail, to enable the auditor form an opinion  on  their ‘truth and  fairness’.  It is  this  expression  of  opinion that provides either the needed assurance that all is well or the signs that there is danger.  Brierley (1981)  argued that  under  the  provisions of   1844  Act in Great Britain,  the company’s auditor was  required to examine and report on the  balance  sheet which  the  company presented  to the  shareholders.  It is important  at  this  juncture  to  ask:  who  prepare  the  accounts?  It  is  the management team otherwise known as Board of Directors and the Company Chairman that are responsible for the preparation and presentation of reports to  the shareholders as  well  as to  all  stakeholders.  However,  discovery of errors  and  fraud  even after auditors have certified accounting  records has generated heated debates since 1859.  In fact, the judgement in Nicho’s case in 1859, confirm  that it was part of appointed  auditor’s duties  to discover fraudulent  misrepresentation.  This  judicial  pronouncement/precedent remained public view of what should  be the paramount duty of  an auditor until 1895 in the case of London and General Bank Ltd. Lindley, L. J. Said, “He  (the auditor) is not an insurer; he does not guarantee that the books do correctly show the true position of the company’s affair … and he (only) must be honest; that is, he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes what he certifies is true”. This assertion changed the land scape.         Aside judicial precedents Cook and Winkle (1976) gave a holistic view of  audit.  They  saw  audit  as  a  systematic  investigation  and  appraisal  of transactions,  procedures,  operations,  and  resulting  financial  statements. Accounting role is to manage finance and prepare reports that will reflect all the financial  transactions of any establishment. Audit will take a  wholistic look at an organisation’s system that will impact either directly or indirectly on the reported financial statements. It is the effective system’s  appriasal that will breed corporate good governance in  the corporate world. In  Nigeria  now,  as  we  proceed  from  the  predominance  of  state-owned enterprises to market-based economy, Okeke (2002) proferred that the only assurance  that  the  populace  will  benefit  from  the  professed  gains  of  the market-based economy is the institution of corporate good governance. The survival  of  both  private and  public sectors of  the  economy  will  strongly depend on proper understanding of corporate governance standards. Anameje (2007) quoted The Basel  Committee on  Banking Supervision which stated that ‘corporate governance involves the manner in  which the  business and affairs  of  banks  are  governed  by  their  boards  of  directors  and  senior management’.          It is  obvious from  the foregoing  that corporate good governances can become  a  way  of  life  in  Nigeria  if  Accountants/Auditors  are  ready  to effectively carry out their responsibilities to the letter. Note that auditors do not examine all the books and systems before forming an opinion. In addition to accounting records, they examine the effectiveness of internal accounting control system which has been designed to ensure maintenance of accurate records,  protection  of  assets  and preparation  of reliable  reports.  This will require  institution  of  internal  audit  and  internal  check.  Corporate  good governance revolves around these two internally built systems. It is these that monitor day to day activities of a firm and organization as to safeguard the assets,  ensure  conformity  to  the  organization’s  internal  procedures  and provide timely report on any established deviation. The effectiveness of this will influence the scope of external auditors’ operations during audit. Beside  the  internal  accounting  control  system,  various  statutes  have been  instituted  to  ensure  corporate  good  governance.  These  include prudential guideline for banking industry, establishment of audit committee by  all  public  liability  limited  companies  operating  in  Nigeria.  It  is  the responsibility  of  auditors to  check  through  an  organization’s  system  and establish departure or level of compliance to these statutes. The core issues in corporate governance in  any country  are the composition  of the  Board of Directors  (BODs),  the  activities/responsibilities  of  members,  the  roles  of nominal  directors  and  the  use  of  independent  auditors.  Yakasai  (2000) identified  the  problem  associated  with  the  BODs  that  “they  work  to  the answer, mark their own scripts, score themselves and initiate the applause”. This  is  where  the  duties  of  both  internal  and  external  auditors  become paramount to the establishment and promotion of corporate good governance in Nigeria.  It is  expected that auditors will conduct thorough check on  the activities of the BODs to  ascertain the level of departure  from established rules (both internal and external) as this is the easiest means of guaranteeing compliance  with  procedures  and  ultimately  lead  to  good  corporate governance.

Forensic accounting is changing in response to the growing needs of corporations. The main trust of forensic accounting is fraud detection and reporting. Forensic accounting was not formally defined until the 1940s. Originally Frank Wilson is credited with the birth of Forensic Accounting in the 1930s. When Wilson was working as a CPA for the US Internal Revenue Service, he was assigned to investigate the transactions of the infamous gangster Al Capone. Capone was known for his involvement in illegal activities, including violent crimes. However, it was Capone’s Federal Income Tax fraud that was discovered by Forensic Accountants. Wilson’s diligent analysis of the financial records of Al Capone indicted him for Federal Income tax evasion. Capone owed the government $215,080.48 from illegal gambling profits and was guilty of tax evasion for which he was sentenced to 10 years in Federal Prison. This case established the significance of Forensic Accounting. Bologna and Lindquist have defined forensic accounting as “the application of financial skills, and an investigative mentality to unresolved issues, conducted within the context of rules of evidence. As an emerging discipline, it encompasses financial expertise, fraud knowledge, and a sound knowledge and understanding of business reality and the working of the legal system.” According to the definition developed by the AICPA’s Forensic and Litigation Services Committee, “forensic accounting may involve the application of special skills in accounting, auditing, finance, quantitative methods, the law, and research. It also requires investigative skills to collect, analyze, and evaluate financial evidence, as well as the ability to interpret and communicate findings. Forensic accounting encompasses litigation support, investigation, and dispute resolution and, therefore, is the intersection between accounting, investigation and the law.” Forensic accounting includes the use of accounting, auditing and investigative skills to assist in legal matters. According to Houck: “It consists of two major components: litigation services that recognize the role of an accountant as an expert consultant, and investigative services that use a forensic accountant’s skills and may require possible courtroom testimony.” This implies that the forensic accountant should be skilled not only in financial accounting, but also in internal control systems, the law, other institutional requirements, investigative proficiency, and interpersonal skills.

Forensic accounting has also been defined as the application of financial skills and investigative mentality to unresolved issues conducted within the context of the rules of evidence (Bolgna and Linquist, 1995). Forensic accounting is also defined as  the  application  of  accounting  and  auditing,  financial  and  investigative  skills,  to  unsettled  issues conducted within the  context of the rules of  evidence (Arokiasamy and Cristal-Lee, 2009;  Ozkul and Pamukc, 2012). Forensic accounting may also be defined as the application of auditing methods, techniques or procedures to resolve legal issues that require the integration of investigative, accounting, and auditing skills (Arokiasamy and Cristal-Lee, 2009; Dhar and Sarkar, 2010). Forensic accounting may also be defined as the process of gathering, interpreting, summarizing and presenting complex financial issues in a clear, succinct and factual manner often in a court of law as an expert (Howard and Sheetz, 2006; Stanbury and Paley-Menzies, 2010). Some scholars agree that forensic accounting can help to uncover fraud (Singleton, 2010; Silverstone et al, 2004), but such consensus depends on how fraud is defined. Some studies define fraud and identify the motivations to commit fraud (Rezaee, 2005; Crumbley, 2003; Zahra et al, 2005; Ozili, 2015; Calavita et al, 1997). Fraud in financial reporting may be defined as a deliberate attempt by corporations to deceive or mislead  users of  published  financial  statements, especially  investors  and  creditors, by  preparing  and disseminating materially misstated financial statements (Rezaee, 2005: p.279). Fraud can be committed by employees, former employees and outright outsiders (Crumbley, 2003; Zahra et al, 2005; Ozili, 2015), and there is  a general consensus  that fraud involves the  intentional alteration or  manipulation  of material financial records and supporting documents (Ozili, 2015). Fraud schemes vary in scope and context, and some types of fraud are industry-specific (Calavita et al, 1997, Ozili, 2020).

Other studies emphasize the need for forensic accounting to be incorporated in the accounting curriculum taught in tertiary institutions or universities (e.g. Rezaee and Burton, 1997; Peterson and Reider, 1999, 2001; Rezaee, 2002; Crumbley et al, 2003). Buckhoff and Schrader (2000) argue that incorporating forensic accounting as a course of study in the accounting curriculum benefits three major stakeholders in accounting education which are the academic institutions, students and employers of accounting graduates.  These studies  show  that  the  study  of  forensic  accounting  requires  broad  multi-disciplinary  knowledge, particularly, knowledge  of business activities,  human behaviour (or  psychology) and a  good working knowledge of the legal system, and that students of forensic accounting will be able to interact with other disciplines in order to be well knowledgeable about forensic accounting.

Some studies identify some issues in the literature such as the “false positive” problem (i.e., reported fraud red flags that turn out to  be false). This problem occurs mostly because forensic investigators tend to associate fraud symptoms with actual fraud. In practice, we know that not all fraud red-flags turn out to be actual fraud (Albrecht and Romney, 1986, Ozili, 2015). Another issue is the cost and benefit of undertaking a forensic investigation exercise. Investigation into every reported fraud case may be too costly, for this reason, not all reported fraud cases will be given top priority coupled with the unwillingness to commit funds to investigate financial crime that do not lead to the recovery of proportionate proceeds from financial fraud.

Here are some of the broad areas of useful expertise for a forensic accountant:

  1. An in-depth knowledge of financial statements and the ability to critically analyze them. These skills help forensic accountants to uncover abnormal patterns in accounting information and recognize their source.
  2. A thorough understanding of fraud schemes, including butnot limited to asset misappropriations, money laundering, bribery, and corruption.
  3. The ability to comprehend the internal control systems of corporations, and to set up a control system that assesses risks, achieves management objectives, inform employees of their control responsibilities, and monitors the quality of the program so that corrections and changes can be made.
  4. Proficiency in computer and knowledge of network systems. These skills help forensic accountants to conduct investigations in the area of e-banking and computerized accounting systems.
  5. Knowledge of psychology in order to understand the impulses behind criminal behavior and to set up fraud prevention programs that motivate and encourage employees.
  6. Interpersonal and communication skills, which aid indisseminating information about the company’s ethical policies and help forensic accountants to conduct interviews and obtain crucially needed information.
  7. Thorough knowledge of company’s governance policies and the laws that regulate these policies.
  8. Command of criminal and civil law, as well as, of the legal system and court procedures. With this background, the forensic accountant is distinctly positioned to explore the design of CG systems, the role of the financial reporting system in CG, the effect of the governance board on employee and managerial behavior, and the efficacy of the internal control system. So, what personal skills are required to become a forensic accountant? In addition to the specialized knowledge about the techniques of finding out the frauds, one needs patience and analytical mindset. One has to look beyond the numbers and grasp the substance of the situation. It is basically the work of the intelligent professionals. There is a need for the same basic accounting skills that it takes to become a good auditor, plus the ability to pay attention to the smallest detail, analyze data thoroughly, think creatively, possess common business sense, be proficient with a computer, and have excellent communication skills. A “sixth” sense that can be used to reconstruct details of past accounting transactions is also beneficial. A photographic memory helps when trying to visualize and reconstruct these past events. The forensic accountant also needs the ability to maintain his composure when detailing these events on the witness stand during a trial in a Court. Finally, a forensic accountant should be insensitive to personal attacks on his professional credibility. As Wells aptly remarked: “A fraud observe and listen carefully. By this, you can improve your ability to detect lies whether they involve fraud or not. This is so because not all liars are fraudsters, but all fraudsters are liars.”




The relevant theory with respect to the relationships between the three classes of accounting is the law of supply and demand of accounting information. The Theory of Demand and Supply is a central concept in the understanding of the Economic system and its function. The quantity demanded of a good or service is the amount that consumers plan to buy during a period, and at a price. We know that a market is an arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price. The money price of a good is the amount of money needed to buy it. The relative price of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.

The existence of information asymmetry creates a supply and demand for financial reporting. Financial reporting is the preparation of information about the reporting entity and the transmission of that information from those who have it (supply) to those who need it (demand). Suppliers of accounting information refer to accountants and the regulatory body that guides the production of the financial statements. Those who demand the information refers to internal/external users who require that information to make investment decisions.

Given the inefficient market that we live in today, it is only natural that management will try to take advantage of this information asymmetry. Although fair and objective reporting is important, managers are often concerned with ways of maximizing their perks and their compensation. This is commonly referred to as earnings management and involves management’s efforts to influence financial information in one way or another. Therefore, there is a theory called positive accounting theory that tries to understand the manager’s motivations, accounting policy choices, and reactions to different accounting standards.


Financial accounting theories identified include stakeholder’s theory, decision usefulness, positive accounting theory and normative for situating the study. Stakeholders theory which is the focus of the study considers all those who had one input or the other towards achieving organization goals and objectives. These groups are all interested in the overall performance of the business and in its financial reports to ensure proper accountability and profitability. Many users, especially external, use annual reports to make investment and other decisions. Investors, creditors, lenders must assess the earnings prospects of companies by examining the implications of the different accounting procedure (Jawahar, 2017). All the users are interested to know the effect of alternative reporting methods, on their decisions (welfare). For example, corporate executives want to know how straight-line method of depreciation affects their welfare vis-a-vis accelerated depreciation. Similarly, if a company is concerned about the market value of its shares, the accounting methods effects on share prices are to be analyzed.


Audit accounting has been present for years in different stage of development following the evolution of accounting. Starting since the epoch when the records were approved after a public reading, to the era when government’s officials were measured by their honesty. Followed by the times of the industrial revolution were the ownership of companies started separating from management; when owners required more protection of their investments increasing the use of auditors, consequently; to the times were an auditor was always searching for frauds or errors (Whittington & Pany, 2004, p. 7) and then “to ascertain the actual financial condition and earnings of an enterprise” (Montgomery, 1913, p. 9). However, the acceptance of auditing as an academic discipline is not old and just after the development of different concepts and techniques within the audit model such as the use of sampling, the study of the internal control environment, and the risk assessment, is when more focus to the theoretical and conceptual framework of auditing it is been devoted. Andrew Sayer (1992) discussed the concept of theories in social science from the perspective of “theory as an ordering-framework (p. 50)”, indicating that theory allows the use of the observed data and their relationships to predict and explain empirical events. Additionally, Cooper and Schindler (1998) define theory as “a set of systematically interrelated concepts, definitions, and propositions that are advanced to explain and predict phenomena (facts) (p. 47)”. Another concept is expressed by Singleton and Straits (2005) explaining theory as a “set of interconnected propositions” (p. 19). The success in the explanations or predictions of any phenomena depends on the level that the theory holds and do not fails fitting in the situation, and the challenge is to perfect the process of matching theory and fact (Cooper and Schindler (1998). Different authors have started the development of the audit theory such as Mautz and Sharaf (1961) with their publication titled The Philosophy of Auditing; also Tom Lee (1986) with his approach in the book Company Auditing, and later David Flint (1988) with his book Philosophy and principles of auditing (as cited in Moizer, 1989). The auditing analysis in this demonstration will be framed on the postulates proposed by David Flint (1988) as a foundation for the theory of auditing. Flint (1988) stated that there is a matter of public accountability demanding an independent audit for its demonstration with clear definition and intention, based on evidence that only skilled auditors gather, measure it, and compare it against the standards, which generates economic or social benefit (as cited in Moizer, 1989). Following are the seven postulates or assumptions stated by Flint (1988):

  1. There is a relationship of accountability or a situation of public accountability.
  2. Accountability cannot be demonstrated without an audit.
  3. An audit requires independence and freedom.
  4. The subject matter of audit is susceptible to verification by evidence.
  5. Auditors are skilled judges who can measure and compare actual performance against standards of accountability.
  6. The meaning, significance, and intention of statements to be audited must be clear.
  7. An audit produces an economic or social benefit.

Forensic accounting theory looks at how the accounting and non-accounting decisions made at the start, during or at the  end of the investigation process affects  the choice of forensic detection methods and techniques used, and the interpretation of the findings of forensic investigation. Forensic accounting theory states that the techniques and  methods used to detect fraud  reflect the accounting and non-accounting decisions that were taken into consideration by the forensic investigator. In other words, the main premise of forensic accounting theory is that the choice of forensic detection methods is not merely a result of the forensic investigator’s experience, skills or knowledge but  rather depends on the accounting and non-accounting considerations made by the forensic investigator at the start, during, or at the end of fraud detection process.  Thus, forensic accounting theory suggest that the choice of methods or techniques used to detect creative accounting or manipulations in financial reporting, and the outcome of using such methods or techniques, reflect the accounting and non-accounting decisions that were taken into consideration by the forensic accountant or investigator. Some working assumptions.

  • A humane objective of a forensic investigation exercise is to  identify and uncover unresolved issues and recommend corrective actions that discourage such behavior from occurring again.
  • Such corrective actions may include the imposition of fines, imprisonment, etc.
  • The outcome and findings of a forensic investigation exercise should not lead to the collapse of the convicted firm  or  the  death  of  the  convicted 

Without  this  assumption,  forensic investigators may seek the downfall of the corporation or the individual they are investigating for criminal  suspicion.  Therefore,  this  assumption  is  crucial  because  it  eliminates  the  personal judgmental bias of the forensic investigator, and prevents the personal bias of forensic investigators from interfering with the forensic investigation Given  the  assumptions  above,  let’s  develop  some  hypotheses  that  explain  the  accounting  and  non-accounting considerations that influence the choice of methods and outcomes of a forensic investigation activity.

Forensic accounting is the integration of accounting, auditing and investigative skills (Zysman, 2004). Dhar and Sarkar (2010) define forensic accounting as the application of accounting concepts and techniques to legal problems. It demands reporting, where accountability of the fraud is established, and the report is considered as evidence in the court of law or in administrative proceedings.


Degboro and Olofinsola (2007) noted that forensic investigation is about the determination and establishment of fact in support of a legal case. That is, to use forensic techniques to detect and investigate a crime is to expose all its attendant features and identify the culprits. In the view of Howard and Sheetz (2006), forensic accounting is the process of interpreting, summarizing and presenting complex financial issues clearly, succinctly and factually often in a court of law as an expert. It is concerned with the use of accounting discipline to help determine issues of facts in business litigation (Okunbor and Obaretin,



3.1      FINDINGS

The following were the findings from the study:

  1. Accounting is broadly classified into the following:
  • Financial accounting
  • Audit accounting
  • Forensic accounting
  • Cost accounting
  • Management accounting


  1. Both audit and forensic accounting apply accounting standards and policies in their procedures.
  2. Investigation is a major task of forensic accounting.
  3. Auditors need an eagle eye to spot anomalies in reams of accounts.
  4. Both financial accounting and auditing are integral functions of the finance aspect of an enterprise. Financial accounting and auditing complement each other – with accounting being meaningless without auditing to verify its reliability and auditing being impossible without completion of accounting functions.




Accounting can be understood as the language of financial decisions. It is an ongoing process of performance measurement and reporting the results to decision makers. The discipline of accounting can be traced back to very early times of human civilization. With the advancement of industry, modern day accounting has become formalized and structured. A person who maintains accounts is known as the account. The information generated by accounting is used by various interested groups like, individuals, managers, investors, creditors, government, regulatory agencies, taxation authorities, employee, trade unions, consumers and general public. Depending upon purpose and method, accounting can be broadly classified into five types; financial accounting, forensic accounting, audit accounting cost accounting and management accounting. Financial accounting is primarily concerned with the preparation of financial statements. It is used on certain well-defined concepts and conventions and helps in framing broad financial policies. However, it suffers from certain limitations.

A forensic investigation is a very specialist type of engagement, which requires highly skilled team members who have experience not only of accounting and auditing techniques, but also of the relevant legal framework. There are numerous different types of fraud that a forensic accountant could be asked to investigate. The investigation is likely to ultimately lead to legal proceedings against one or several suspects, and members of the investigative team must be comfortable with appearing in court to explain how the investigation was conducted, and how the evidence has been gathered. Forensic accountants must therefore receive specialist training in such matters to ensure that their credibility and professionalism cannot be undermined during the legal process.

Accounting is the function of measuring and recording financial transactions of an entity in its books of accounts. Auditing involves verifying the accuracy and correctness of these accounting entries and financial statements prepared on their basis. In other words, it inspects financial statements to verify whether they show true and fair view as well as reliability of financial statements.


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at <a href=” removed link “> removed link oxley


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The Internal Auditor’s Perspective”: Altamonte springs, FL: The Institute of    International Auditors Research Foundation.


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Reforms,” Review of Business, Volume 26, Spring 2007, pp. 8-14.




  1. Bolgna, G & Linquist, R. (1995). Fraud Auditing and Forensic Accounting:

New Tools and Technique. 2nd Ed. New York, NY: John Wiley & Sons.


  1. Buckhoff, T. A. & Schrader, R. W. (2000). The Teaching of Forensic

Accounting. Journal of Forensic Accounting, 1 (1), 135-146.


  1. Trivedi, Shilpa M., (2010), “An Analysis of Financial Performance of

State Road Transport Corporation in Gujarat” Ph.D Thesis,

Department of Business Management, Saurashtra University, Rajkot


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                   Gordon      Institute of Business Science, November.

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Fraud Auditing and Forensic Accounting. (3. baskı) John Wiley&Sons, Inc.,Hoboken, New Jersey.

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