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In today's global environment there is a greater need to strengthen corporate requirements and in this respect Forensic Accountant, corporate Governance and internal auditors play important role to detect and deter fraud. In this paper the importance of these three main tiers of corporate is being highlighted.
Investors, businessmen and share holders are over valuing Forensic Accounting than ever before. Forensic Accounting investigation has become important to the investors, businesses and to the public. This importance of Forensic Accounting is duly because of the disastrous failure of big businesses such as Enron, WorldCom and Adelphia etc (Marry jo et al 2008). The disastrous business failure (in shape of Enron, WorldCom, Adelphia) of the early 21st century have been revealing since after. So there is a need across much of the business for a best grab of the scope and skills of accounting investigator in the form of Forensic to prevent such massive frauds in the future.
Most people seems to be struggling and want to know, how could these massive frauds have happened , how these frauds can be prevented, if not prevented completely what should be happening to the future business? Who should take the responsibility to deter and investigate these frauds? What methods are effective? What should an investigator (auditors), managements and corporate directors look for?
In this regard FORENSIC ACCOUNTING INVESTIGATON had a mere importance to detect these problems, deter future happening, look for new standards and report information. But still auditors have much to be trained and learn about relatively new rules and regulation of forensic accounting.
We live in a post Enron, World com, Adelphia and much more era. It had given us that we thought on new legislations and regulation to strengthen corporate governess and new oversights of the auditors. So that the investors keep trust and have confidence on corporate information's.
Investors are looking to managements, auditors and corporate directors and expecting from them (managements, auditors, corporate directors) to keep the company honest profitable and act responsibly. For these reasons Government regulatory and company boards (Public Company Accounting Oversight Board PCAOB ) reviewing and trying the need for a the new fraud standards continuously.
In a wider logic, "corporate governance is about how firms should be directed so that works effectively and effectively." Corporate governance makes certain that supplementary resource is allocated adequately productively to maintain all stakeholders pleased. By the same time, when resources are not in sufficient, good governance attains sufficient cost reductions. Though whatever the conditions of economy, efficient governance facilitate firms to maintain and create returns that are enough to retain the obligation of related stakeholders.
in a wider sense the responsibilities and duties of corporate governance in term of shareholders is to act on the role and nature of owner, the role of outside directors, and boards of directors, the distinguish of CEOs and Board Chairs, financial reporting, executive remuneration and the market for corporate control. concentrated rights can steer clear of the free-riding problems connected with observing in corporations with disperse shareholdings, but may gave their own interest of control the company which are totally against the interest of shareholders. The directors are accountable and it is their responsibility to take care of the interest of their shareholders in running the business.
The problems created in the accounting of Enron's are in front of auditors and Governance and therefore governance had to take step in and had to give complete independence to internal auditors to strengthen the role of auditors in the process of governance. The problem created at the Enron and other publicized auditing failures were dangerous for the profession of accounting, but after that it had given an opportunity to know the importance of the independent auditors' role in the organization. To greater extent, now boards and audit teams are giving importance to internal auditors for assessing with corporate governance issues. Now internal auditors had an opportunity to create their value in the organization and make stronger position of internal auditing in that area. The distinctive complete attention of internal auditors' on controls and risk is essential to reliable governance process and to good and reliable financial reporting. If we look at the disaster failure of the corporate, external auditors did not give any hint in their annual reports of their financial statements before the companies get bankrupt and the biggest bankruptcy in so far, including, Global Crossing Ltd., Enron and Kmart Corp showed a clean external auditors report before they bankrupt.(Strange et al 2009) These show us that greater the complexity of a business greater will be the requirements for the board, management and external auditors to have and access the complete picture of risk and control. In this regard there is a greater need of independent and inside observers like internal auditors in the organization and the internal auditor participate a major responsibility in the governance procedure by informing senior management, the boards and external auditors the control and risk issues and keeping an eye on the effectiveness of the risk management throughout the year.
Actuality, there is no guarantee by anyone, that all fraud can be deter, detected or prevented in a timely manner. Yet if there is a proper knowledge to preparers of financial information for the capital market, fraud can be reduced and investors will regain confidence. And for this reason corporate governance, forensic accountant and internal auditors have to work closely and independently for the sake of organisation.
Hoopwood, Leiner and Young (2006, p3) define fraud as "Fraud is the result of misleading, intentional actions or inactions (including making misleading statements and omitting relevant information)." Fraud is such an activity when it takes place in the organisation then it affects badly the economy, business as well as individuals. Silverstone and Sheetz (2007,2nd editon, p 9,) called " Enron, WorldCom, Global crossing scandals as new era and emphasis more on real time reporting because of the progress in media." Bad reputation damages the success of the company. Now we are living in a digital world where technology has made progress and it's very easy to access the daily news, the other factor is that news spreads very quickly. So it had created a lot of pressure on the corporations to review their strategy and fill any deficit in the company by best internal control. "Types of fraud are that are greatest relevance to accountants and auditors are Employee fraud, misappropriation of assets and financial statements fraud." (Golden, Skalak, Clayton 2006, p5,). Due to high scandals in the recent years and losses of billions of dollars had made a lot of concern which gain a lot of attention from public and regulatory authorities. Corporate governance and auditors are in great pressure and their focus is now more on all aspects of the financial reporting. The major role of internal auditors is the detection and deterrence of a fraud but now auditors are not alone in fraud deterrence " management, board of directors, standard setters are key participant in corporate governance and each one has the responsibility to ensure that financial reporting are well served." (Golden, Skalak, Clayton, p11, 2006)
CORPORATE GOVERNANCE AND THE ROLE OF CORPORATE GOVERNANCE
According to the Institute of Internal Auditors (IIA) "the combination of processes and structures implemented by the board in order to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives." is a definition of corporate governance.
The modern corporate governance began from 1992 when Cadbury published its ninety (90) pages report, which then became the combined code of corporate governance which attempted to address legal and ethical questions. In 1980s companies did a great economic growth but during 1990s all things suddenly change, companies like Coloroll, Polly Peck and Maxwell communication corporations which were successful in 1980s but collapse in 1990s (millichamp,taylor 2008, p11) .
These were huge failure of corporation and blames were on weak corporate governance but Sir peter Cadbury (1992) reacted very quickly and come up with the responsibilities of corporate governance and good proposals which include;
- "The responsibilities of executive directors
- The role of independent (non-executive) directors should be strengthen
- Make the case for audit committee of the board
- Restate the principal responsibilities of the auditors and
- Reinforce the links between shareholders, boards and auditors" (millichamp,taylor, 2008 , p 11)
The success of Cadbury report was followed by several others like Greenbury 1995 which dealt mostly with disclosure matters, Hampel 1998 dealt with combine code, Turnbull 1999 which helps in guidance to Hampel report, Higgs 2003 explains the non-executive directors, Smith report dealt with audit committees and OECD's principles of corporate governance. All these reports were prepared to strengthen corporate governance in the company. Due to the failure of Enron, WorldCom and certain others firms in the USA produced Sarbanes Oxley Act 2002. This act was designed to strengthen the accountability requirements of corporations and dealt with auditor independence, conflict of interest, corporate responsibility and enhance financial disclosures, by not following these rules will result in hard sentence. These rules were only for the USA and the listed companies in that country. Accordingly chief executive and chief financial officer will be responsible for the accuracy of financial statements means they will confirm the correctness of financial statements. Combined Code and corporate governance 2003, companies act 2006 also attempted to strengthen the corporate governance
ROLE OF CORPORATE GOVERNANCE
Corporate governance involves relations among the management, the board, and the investors but in relation with this it also involves the public and other stakeholders that are not directly involve in the organisation but have influence on the organisation. An efficient corporate governance is one in which all related stakeholders like the above mentioned connect in the company can have clear understanding of the role of these stakeholders, their position and the relation with each other in the structure of the corporation. Good corporate governance can explain whether a company is well managed, whether it can provide evidence that efficient governance has occurred and whether shareholders have been put in a position to have a meaningful dialogue with executive management.(strange et al 2009)
According to (Bankel, Mather, and Ramsay 2006) "the important role of a board is to establish different committees which deals with specific matter in the organisation" it is important for the board to have understanding of different stakeholders and the responsibilities of each stakeholders. They further suggest that "monitoring management is the main role of the board" control is vital area in the organisation and corporate governance have to assign a committee to look after the activities and development of the organisation within the board. Usually the board consists of internal and external directors. Internal directors will not effectively monitor the whole situation as they are part of the management team. It will be best for the organisation that non executives handle the monitoring procedure of the organisation. In the current environment media plays important role in the reputation of the company. "An egregious corporate gave violation is more likely to be covered by newspapers regardless of any effort by hedge fund managers" (Dyck. Vokhkava, Zingales, 2008). One of the major role of corporate governance to have bias free relationship with media and if there arises any risk in the corporation the directors should explain that to the stakeholders and general public otherwise in today's quickly responded media will destroy the reputation of the company. Independence audit committee is necessary for the shareholder trust on the company. According to (Spira 1999 ) "the committee has an important function as an arena with which displays of independence may take place" further (spira 1999) suggests "that the only conception of independence that were of practical important is the auditor personal quality independence in fact, the rules that might establish the distance which underpins independence in appearance" the one way to communicate with ordinary shareholders is the annual report of the company so corporate reporting should be more accessible and informative to ordinary shareholders as well as all the stakeholders who directly or indirectly effect the company so for these reason corporate governance should pay greater attention to the annual report. According to a letter to Sir David Walker from report leadership group (2009) who point out the key areas that corporate governance should explain in their annual reports are the board agenda, the board balance, performance evaluation, internal control and risk management and the remuneration of the directors and executives. The main objective of the business is to maximise shareholders equity and gain the trust of their existing and potential shareholders. So it is the duty of the governance is to explain the whole scenarios that take place in the organisation and the potential risk attached to the business. They should give the exact information which is available to the directors so that investors take their own decision of investing in the company. The structure of corporate governance defined by Mac (2003) in his report and suggests that "the chairman of the board and the CEO will have separate functions in the organization. The external auditor should be change periodically. Strict limits should be imposed on the board members to improve efficiency. Makes sure that board is closely involve in the company success and have a close look on the misstatement of the company. There must be a separate officer for risk management. Superior accounting control should be maintained. Internal auditors should have full independence in the control risk program and external auditors should get full cooperation from the company." Corporate governance will not only involve in the effectiveness of the company but it should be involved in every decision of the organization. Corporate governance is no about maximizing shareholder value alone. It is not also just about financial control and disclosures. It is not also just about complying with certain thrust upon regulation and norms. It is about leadership values and shared culture. It is about being fair to all stakeholders not just to shareholders and investors. It is about beliefs that guide behavior. It is abut human values in workplace. It is about being truthful and transparent that creates a climate of trust. It is a reflection of a culture that transcends national boundaries.
FORENSIC ACCOUNTING AND THE ROLE OF FORENSIC ACCOUNTANTS
Accountants are increasingly been called upon by law enforcement, lawyers, governance to use their accounting skills to access investigation of financial crime. Forensic accounting provides legislation support for fraud cases and sometimes for complex insurance and evaluation engagements in response to cast tropics events. With distinguish forensic accounting from traditional accounting are that the basic skills of accounting, finance and auditing are used in congestion with detective skills such as interviewing, legislation, compliance, law and most importantly a broad knowledge based on fraud concept. This special combination of skills enables the ordinary accounting profession to help determent if financial crime has taken place. Forensic accounting is not only the analysis of financial statements but rather it requires in depth process of investigative tool, proper understanding of the GAAP and have good knowledge of the law to investigate fraud and other misstatement in the organization. Forensic accounting defines (Hoopwood, Leiner and Young 2008) as "Forensic accounting is the application of investigation and analytical skills for the purpose of resolving financials issues in a manner that meets standards required by courts of law." Due to some high corporate scandals in the early 2000 had created higher demand for external professionals to step in and investigate in-depth of the company to deter, detect fraud, strengthen the corporate governance process and safeguard the integrity and trust of the shareholders. Auditors do not have any complete responsibility to look for fraud. Their major duty is that company follows GAAP in preparing financial statements. As SAS 99 though required for auditors to have planned and ensure to implement their duties in a way that sensibly addresses fraud concern. So for these reasons the requirement of specialist fraud investigator as forensic accountant is necessary in the organization.
In the recent years forensic accountants had gain greater importance of their professional investigative, accounting auditing and legal skills. Although forensic accountant are specialist in these fields yet there is a greater demand to understand the fast moving organizations requirements. Some of the skills and role that forensic account must have are defined (Ramaswamy 2005) as "an in-depth knowledge and ability to critical analyse the financial statements, detailed understanding of fraud investigation, the ability to understand control risk access and monitor the risk, monitor the quality of a program for correction of changes. Understanding and use of information technology and computer skills, great knowledge and understanding of psychology, interpersonal and communication skills, complete knowledge of company's governance, great command in criminal and civil law and understanding and dealing with legal legislation." Sometimes it is difficult to detect money laundering in the financial statements. One of the important role of forensic accountant is to what (Abel and Gerson 2001) that "forensic accountant are necessary in organization to detect, deter and prevent money laundering." Technology is playing a vital role in the success of the business and understanding of forensic computing is the important key to forensic accountant to perform efficiently and effectively of their duties. Three issues highlighted by Yigal (2006) that "forensic accountant should be aware and expert in analysing and finding electronically data, archival date and looking for hidden data in computers and softwares."
INTERNAL AUDITING AND THE ROLE OF INTERNAL AUDITIORS
The accomplishment of a successful business is in internal control of the company. Better internal control means better business is getting progress. But the question arises how better internal control can be maintained and achieved. Hirth (2008) explains better control in this way "that the companies having best internal audit functions and that are working and planning according to the anticipation of the strategic objective of their management and board have best controls." Well best control can only be achieved once audit committee is independent and bias free. Internal controls are useful in achieving the goals of the management and board. Governance has now more expectation from auditors to add value to the organization by knowing best risk management and control which off course will be helpful in maximizing shareholders equity. The Institute of Internal Auditors defines internal auditing as "independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes."
The main role of internal auditor is to look in the continuous evaluation of the financial statements and for effective control of the company is in progress. But now it is much more than that, big organizations have now a group of auditors so they must work in team for the purpose to minimize risk and maximize shareholder's wealth by effective control and planning. Hirth (2008) and Jeffery (2008) appraise "the need of auditors with different profession like accounting, finance, and technology and risk management specialist to work in group for effective audit purpose." Jeffery (2008) further narrates that "group of auditors can work efficiently only once they understand the strategic and operational goals of the company along with a core knowledge of the industry as a whole." The objective of the internal auditor is to give support and information to the board about the identification of risk and suggestion how risk can be overcome according to IIA (2004) report on the Role of Internal Auditing in Enterprise-wide Risk Management says "it is not the responsibility of the internal auditors to set risk appetite, impose risk management process and taking a decision on risk response." Risk management is a vital role of the auditors in the organization and it is the duty of auditor to look for how corporations manage their risk. Their primary objective is the identification of risk, planning to conquer the risk and finally report to management. IIA (2004) report, Alan and Taylor (2008p, 262,) and Jeffery (2008) emphasis on this that the key role of internal auditor is to give assurance and report to the management about identification and evaluation of the risk and about the efficiency of their strategy to manage risk appropriately."
RELATION AMONG CORPORATE GOVERNANCE, INTERNAL AUDITOR AND FORENSIC ACCOUNTANTS
The role of the board is not only to run a business but its main role is to guide and oversee the executive management. Report leadership group narrates the importance of such as "directors must be in a position to know the direction of travels, business model, key risk and relationship on which business depends." (reportleadership.com) shareholders have the right to know and understand the business well so that they take the correct decision to invest in the business. For such reasons the board should include the information of boardrooms meeting to the shareholders. They should give the information of key performance indicators, risk management and the remuneration of directors as it plays a vital role in the success of the business. "Higher proportions of independent directors and audit committee is associated with reduce level of earning management."(Benkel,Mether,Ramsay,2006) corporate social responsibility gain greater attention of the public in recent years. Public are now only looking to the financial statements of the company but also valuing now the company overall effect on the environment. Kurihama (2007) says that "now markets are not only affected by economic efficiency rather now it is affected by social, human and environmental aspects as well." Nike and shell Plc () were affected badly by their anti environment and social behaviour. So it is the responsibility of corporate governance to prevent corporations from corporate scandals. In this regard Kurihama (2007) give emphases on the issues that "the system of corporate governance is designed such as to ensure the implementations of CSR which functions effectively of the style of corporate governance structure." Due to huge demand of corporate social responsibility, auditors are now in great pressure to change their style of looking to financial statements only, but to respond to the every day change such as corporate social responsibility and how to report and evaluate the performance of organisation against these best practices of corporate social responsibility Kurihama (2007), Millichamp and Taylor (auditing2008, p243,) and Alexander (international financial reporting p, 2008) emphasis that auditing plays a key role in the corporate social responsibility and there is a need to response in the change due to corporate social responsibility in the corporations. Ethics plays a vital role and one of the goal of corporate governance is to develop the value of a company through ethics and ensure bias free decision making for the purpose of maximizing profit of the organisation. But some high corporate scandals in the recent years destroyed the reputations of the company and blame was weak corporate governance process which requires professionals to step in and hence gain the trust of investors and other shareholders. "Forensic accountants are required in the corporate governance system that can identify, expose and deter weakness in three key areas such as poor corporate governance, flawed internal control and fraudulent financial statements." (Ramaswamy, 2005) Corporate governance is defined as the system by which companies are directed and controlled (BNET Business Dictionary). Basically, governance of the entity is primarily dealt with the board of director and latest occurrences may have underscored their decisive role of upholding good corporate governance. The board then is responsible for the hiring of auditors to assure to themselves that there are in the right track in governing the company.
Internal audit carries out customary checking of key controls and methods and assuring that the audit function is sufficiently resourced and had been keenly subsisting within the organization. It considers independently how effective the internal control is. It is important for the board to keep an eye on the monitoring of the internal control so they could foresee or correct errors in management and which areas in the organization needs improvement or pose immediate course of action to whatever problems that may occur. Moreover, the internal audit function also offers the management the monitoring and implementing internal control framework.
COMPARE AND CONTRAST IN FORENSIC ACCOUNTING AND INTERNAL AUDITTING
Internal auditing and forensic accounting skills are almost same. Both forensic accountant and internal auditors need to understand the basic skill of in depth understanding and analysis of financial statements. Internal auditing can be helpful in understanding fraud. The major role of internal auditors is to look for financial statements and strengthen internal control system. SAS 99 do require internal auditors to plan and ensure to implement their duties in a way that to ensure sensible address to fraud concern. Pollock and Sumner (2009) "do realise that a well planed and updated investigative strategy can ensure that organisation is able to launch an appropriate, effective and timely response." Further highlighted the different techniques and approaches followed by internal auditor and forensic accountants such as " objective of internal auditors are to ensure policies being followed and find out for operational improvements whereas gathering data to prove or disprove fraud allegation is objective of forensic investigation. Timing and work plan are schedule in advance in internal auditing while forensic accountants reacts to the situation when it occurred and their work plan can be changed over time. Internal auditors only use company documentation whereas forensic accountants can include personal documentation, reviews and email checked as well. The style of interview in internal auditing is fact finding but in forensic investigators also include interrogation. Sampling are used frequently in internal auditing whereas rarely used in forensic investigation." (Pollock and Sumner, 2009) Traditional internal auditing is more focus on the financial statements. Their main responsibilities are to find out and prevent errors plus ensure effective internal control system. Whereas forensic accountant scope is much more than that of internal auditors. Forensic accounts must have knowledge of dealing with legal issues, court procedures, investigative tools, interviewing, money laundering and knowledge of different types of fraud and how to conquer them. "The goal of forensic accountants and internal auditors are same in the corporation as both are there to strengthen the internal control system. But both possess different role, knowledge and skills." (Gray 2008)
Fraud is such a thing when it occurs in the organisation; it not only destroys the organisation financially but also socially as the reputation of the company falls. Prevention and detection of fraud is not only the responsibility of internal auditors in fact according to Golden, Skalak and Clayton (2006, p161) it is the responsibility of management to detect and defend the wrongdoing of the corporation and to strengthen and implement the internal control system. For today's fast growing organization success, it is very important now for accountant to not only concentrate to compliance with the local GAAP but also focus on the investigative part in detecting and preventing fraud in the organization. Financial reporting is good links of organization communicate to the shareholders and public. Good and sound report can increase the reputation of a company and hence increase the confidence level of shareholders . the governance committee should make such a strategy that ensure effectiveness of internal control. In short to detect and deter fraud the governance committee also have to keep in mind when preparing organization strategy;
- Board and management must keep an eye on the internal control system
- Financial reporting must be presented transparently
- Board of directors and management should inform about key performance indicators and potential risk in the annual report and also on daily bases on the web.
- Board of directors and management should explain their strategy and also explain that what they are doing for the company
- Internal auditors should given full independence
- In addition the governance should also bring forensic accountant in the company
- Like external auditors, regulatory authorities have to make it compliance by law to carry out internal auditing and forensic investigation.