A systematic review on forensic accounting and its contribution towards fraud detection and prevention
| DOI | https://doi.org/10.1108/JFRC-02-2022-0015 |
| Published date | 07 June 2022 |
| Date | 07 June 2022 |
| Pages | 60-95 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Baljinder Kaur,Kiran Sood,Simon Grima |
A systematic review on forensic
accounting and its contribution
towards fraud detection
and prevention
Baljinder Kaur and Kiran Sood
Chitkara Business School, Chitkara University, Chandigarh, India, and
Simon Grima
Department of Insurance and Risk Management, University of Malta, Msida, Malta
Abstract
Purpose –This paper aims to determine how forensic accounting contributes to fraud detection and
preventionand answer the following research questions: What are the standard techniquesfor fraud detection
and prevention; and What are the significantchallenges that hinder the application of forensic accountingin
fraud preventionand detection?
Design/methodology/approach –The authors use the Preferred Reporting Items for Systematic
Reviews and Meta-Analyses(PRISMA) method to carry out a systematic literature review(SLR) to identify
and assessthe existing literature on forensic accounting.
Findings –There exists a positive correlation between forensic accounting and fraud detection and
prevention. Moreover, in both the empirical and non-empirical findings, the authors note that fraud is
complex,and in carryingout fraud investigations, one must be aware of its complexity.
Practical implications –Although drug counterfeitingis a sector where forensic accountants have paid
less attention, it is a rapidly expanding fraudarea. This paper finds that to detect fraud at an early stage, one
must increase consumer understanding of basic forensic accounting techniques by implementing accurate
supply chain monitoringsystems and inventory management controls and conductingadequate and effective
regulatory,honest and legitimate customs inspections.
Social implications –The major factors that restrict forensic accounting are a lack of awareness and
education. Hence, it is essential to incorporate forensic accounting in undergraduate and post-graduate courses.
Originality/value –From the existing literature, it has been observed that very few studies have been
conducted in this field using the PRISMA and SLR techniques. Also, the authors carried out a holistic study that
focuses onthree different areas –fraud detection, fraud prevention and the challenges in forensic accounting.
Keywords Forensic accounting, Fraud, Fraud detection, Fraud prevention, PRISMA,
Systematic literature review
Paper type Literature review
1. Introduction
Across the globe, the number of fraudulent and suspicious financial activities are rising
(PricewaterhouseCoopers, 2022). Consequently, businesses are in danger of unethical and
dishonest practices (Wijerathna and Perera, 2020). The increasing amount of business scandals
worldwide has created a need for forensic accounting (Islam et al.,2011;Okoye and Gbegi, 2013a).
Financial fraud has emerged as the world’s most severe economic threat, necessitating
professional forensic accountants and traditional auditors (Abdullahi and Mansor,2018).
JFRC
31,1
60
Received10 February 2022
Revised20 April 2022
Accepted28 April 2022
Journalof Financial Regulation
andCompliance
Vol.31 No. 1, 2023
pp. 60-95
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2022-0015
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
As a result of the global breakdown caused by the collapses of Enron, WorldCom and
Parmalat, the need for forensic accountants and auditors to build systems and controls for
identifying, preventing and dealing with fraud has increased (Huber et al., 2015), (Bezzina
and Grima, 2012). During 2018 and 2019, the number of accounting/financial fraud cases in
the global economy was around 28%. Moreover, the total losses reported due to fraud
during 2018 and 2019 was around US$42bn.The four major fraud types included:
(1) customer fraud;
(2) cybercrime;
(3) asset misappropriation;
(4) bribery; and
(5) corruption (PricewaterhouseCoopers,2015, 2022;Grima et al., 2017).
According to Power (2013), although there is a difference between fraud and the risk
associated with fraud, the terms “fraud”and “fraud risk”are used interchangeably.
However, fraud is always associated with some form of probability. He notes that this
“regime of truth”comprises of a typeof managerial and regulatory knowledge governed by
a“grammar”of rules for discussing and acting on risky subjects and organisations. In the
21st century, the emergence of “fraud risk”management and its importance within the
corporate governance field is symptomatic of a neoliberal goal of individualisation and
responsibility.
Following the Enron and WorldCom corporate scandals, different standards, rules and
regulations were put in place to avoid or eradicate corporate scandals. These included,
amongst others, the Sarbanes-OxleyAct of 2002. However, regardless of all the efforts made
by the authorities and governments in the preventionand investigation of fraud, a new type
of fraud emerges every day (Prabowo,2013), (Grima and Thalassinos, 2020).
In their study on crime in Nigeria, Ehioghiren and Atu (2016) highlight that fraudulent
practices act as an obstacle to the developmentof countries. They further note that forensic
accounting and anti-corruption practices are important in managing the risk of financial
crime and detecting forgeries in Nigeria. Their study shows that the management and
detection of fraud are enhanced when forensic accountants are present at an audit’s
introductory and planningstages.
Moreover, because businesses are generating a large amount of financial data and
becoming more complex, fraud and crime are becoming a challenge to tackle using
traditional methods. In theirstudy on Nigerian accountants, Okoye and Gbegi (2013a) argue
about the importance of training and accreditation of accountants to strengthen theirability
to tackle fraud and crime. At the same time, Sharma and Panigrahi (2013)suggest that data
mining techniques can help manage the data and detect fraud. They note that logistic
models, neural networks, Bayesian belief networks and decision trees are some of the
frequently used datamining techniques to solve problems related to fraudulentdata.
According to Okpako and Atube (2013), Nigerian firms focus on the positive impact of
forensic accounting in preventing and detecting fraud. They find that forensic accounting
services affect firms’level of fraudulent activities. Hence, this explains the importance of
understanding the correlationbetween forensic accounting and fraud.
Bhavani et al. (2016) believethat to curtail the practice of financial fraud, there is the need
to approach the universities in the UAE and understand what curriculum enhancements
need to be made. They note that a system based on policies and procedures plays an
important role in reducing financial crimes and the associated fraud. They suggest
providing training in ethicsand standards for professionals and explaining that educational
Forensic
accounting
61
awareness and training in audit, accounting standards and regulations will curtail firms’
fraudulent activities(Awolowo, 2019). On the same note, Chui and Pike (2013) highlight that
proper training in forensics can minimisethe gap between the skill sets and the objectives of
the fraudulent investigation tasks assigned to auditors. In fact, as Chui (2010) note, there
exists a positive relationship between the mindsets of the fraud detector and the risk
assessment skills to provide a fair presentation of company accounts. Bhasin(2013) further
explains that financial scams areone of the greatest examples of poor corporate governance
and suggest enhancing the skills of forensic accountants by introducing the subject of
forensics in the educationcurriculum.
Alabdullah et al. (2014) attempted to establish the influence of forensic accounting
services on financial corruptionin Iraq. They concluded that forensic accounting procedures
and the efficacy of accounting professional bodies in detecting financial misconduct are
linked. Conversely, it was found that thereis a failure of accounting and control methods in
the methodology taught at Iraqi collegesto uncover financial corruption cases. On the other
hand, most Iraqi audit and accounting employees have a poor understanding and
knowledge of forensic accounting methodologies. Therefore, they suggested that forensic
accounting methods be added to the curricula of accounting departments in Iraqi
universities at both the preliminary and advanced levels via theoretical and practical
classes.
Also, on the same note of education, Rezaee et al. (1992) highlight the need to introducea
module of 150 h on ForensicAccounting as a subject in the curriculum to meet the growing
demands of experts. Moreover, they discuss the growing concerns related to fraud
pertaining to savings and loansand the increased demand for forensic accounting services.
Hitchcock (2018) also noted the need for training of forensic accountants, the need for a
degree specialising in forensic accounting and the need to address cyber security. He
suggests various types of techniques for managing crimes, such as the Analytical
Procedures and Ratio Analysis, the Direct/Transaction Method, the Cash T Method, the
Source and Application of FundsMethod, the Net Worth Method, the Bank Deposit Method,
the Benford’s Law and the Theory of Relative Size Factor (RSF). He notes that the main
objective behind all the techniques was focusing on various issues related to liquidity,
leverage ratios, the identificationof various sources of finance, company valuations and the
probability of fraud.
Gray et al. (2011) note that organisations must satisfy their various stakeholders (users,
bankers, investors, shareholders, auditors, non-professional investors and chief financial
officers) concerned withgovernance and the quality of reports prepared by the organisation.
They, therefore, suggestthat Governments should be actively involved in the strive to detect
fraudulent activities. Mohd Nassir et al. (2016) provide that classifying scams based on the
degree of risk for the structured and less structured tasks make detecting crime and fraud
less complex.
According to Garner (2004),fraud can be defined as “A knowing misrepresentation of the
truth or concealmentof a material fact to induce another to act to his or her detriment”Fraud
is described as manipulating another person to generateincome or commodities illegally. It
can be defined as the different methods discovered by human intelligence to maintain an
advantage over another person bymaking false suggestions or concealing the truth (Okoye
and Gbegi, 2013a).
Financial fraud, a subcategory of economic fraud, has negatively impacted the world’s
economy and significantly impacted the socio-economic environment (Akinbowale, 2020).
Detecting and preventing fraud was identified as one of the significant components of the
accounting function, and internal and external auditors were expected to do this. On the
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