Fraud and forensic accounting in today’s society
Nowadays, the moral decadence and the quest to acquire wealth through “every means” in our societies have put every business or organisation, including non-profit-making organisations, at risk of being defrauded or shortchanged.
Even religious bodies are not spared in this regard. In the book titled “Fraud Auditing and Forensic Accounting”, Tommie Singleton et al. posit that almost all businesses of medium to large size are prone to fraudulent activities, which may even be ongoing currently, or about to be carried out on them. (Tommie Singleton et al., 2006, pp. 12).
Research conducted by Association of Certified Fraud Examiners (ACFE) indicate that the U. S. economy has experienced an estimated level of fraudulent activities equal to 6% of annual incomes between the period of 1996 and 2004.
This suggests that, day in day out, fraudulent activities are being perpetuated regardless of the type of organisation.
These fraudulent activities are taking varied forms and are getting sophisticated, making it very difficult to detect using the traditional methods of checks and balances.
Fraud thrives in certain conditions just as the outbreak of diseases in unhygienic environments.
In unhygienic environments, diseases can spread at a very fast pace and by the time authorities put in place measures to curb its spread, a lot of harm may have been caused, most of which are irreparable.
It is the same with fraud taking place in organisations.
According to Tommie Singleton et al. (2006), conditions that serve as appetite for fraud in organisations are where there are insufficient controls or lack of internal controls, no future, lack of trust, and absence of ethical standards.
The prevalence of these conditions serves as breeding ground where fraud flourishes.
THE ROLE OF FORENSIC ACCOUNTING IN MITIGATING FRAUD
Forensic accounting is like a microscope which sees beyond the ordinary eye.
Forensic accounting delves deeper into financial activities and transactions than the traditional audit investigations.
The forensic accountant investigates transactions not just to establish the fact that something untoward has gone on or not, but also to provide a proof beyond reasonable doubts, a proof that should be admissible in the law courts, when cases of fraud, financial malfeasance, misapplication and misappropriation of funds are brought before a court of competent jurisdiction.
In order to better appreciate the differences in the above-mentioned key words, the four key terms are briefly explained below.
Fraud
An act intended to deceive the victim of the fraud (a person or institution) who believes and relies upon the information provided by the perpetrator, which benefits the perpetrator or an institution.
The Association of Certified Fraud Examiners (ACFE) defines fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets”.
Misappropriation of Funds
This has to do with the deliberate and unlawful taking of property or money that a person has been entrusted with within the organisation.
Simply put, it involves the theft, or misuse of organisation’s resources, by an employee for his/her personal benefit.
Misapplication of Funds
It involves the use of funds by a person who in actual fact has been given the mandate to see to the management of those funds, but who uses or applies those funds without authorization from the appropriate authority.
This act becomes illegal as far as the use has not received approval from authorities, but may not always involve stealing.
Financial Malfeasance
It encompasses any act of wrongdoing by a person entrusted with responsibility for the use of funds but who engages in wrongful financial transactions to the detriment of the employer or institution.
The Four key terms in real-world scenarios
There is often an overlap of these terms, (fraud; misappropriation of funds; misapplication of funds; and financial malfeasance), in real world situations, specifically in business settings.
For instance, if a Finance Officer (FO) deceives the company board about where funds are going or where the funds are applied, it constitutes fraud.
This is because, the three broad categories of occupational or corporate fraud are financial statements fraud, asset misappropriation and corruption.
A fraudulent statement could be financial or non-financial.
It is an intentional misrepresentation or omission of financial or non-financial information with the aim of deceiving or manipulating users of financial information.
If the FO engages in transfer of funds belonging to the company’s customers into his or her personal accounts, it constitutes misappropriation of funds.
Misapplication of funds sets in when, say, a company’s FO pays a supplier who the company owes with company funds but without authorization.
Even though this act appears not to be a direct theft, the funds could have been earmarked for other very important business activities and authorization is necessary for such payments to be made.
More so, there could be some ulterior motives that necessitated the transfer of funds to be made by the FO without authorization.
The three terms above in their respective scenarios could be considered as financial malfeasance.
That is, they constitute wrongdoing or misconduct which may cause damage to the institution.
Watchout for the concluding part…
• Charles Ekornunye Ansah is a member of Chartered Institute of Tax Law and Forensic Accountants – Ghana (CITLFAG), and an Employee of Ghana TVET Service. email:
