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Strengthening corporate governance with forensic accounting

Mohobbot Ali and Sanjida Ahmed | Published: June 18, 2019 20:49:22 | Updated: June 24, 2019 20:57:27


In recent times the term corporate governance has become a buzzword in the corporate world across the globe. It is not a new concept in the business arena, yet the areas of its application are changing with evolving needs. In the 1970's, this concept was first introduced in the USA to mitigate the agency problem. According to the strict sense of its definition, corporate governance includes the process through which corporation's objectives are set and pursued in the context of the social, regulatory and market environment. These include monitoring the actions, policies and practices and decisions of corporations, their agents and affected stakeholders. Corporate governance practices can also be seen as an attempt to align the interests of the different stakeholders. Although application of corporate governance is important to all types of business organisations, it is seen more relevant and appropriate to publicly listed limited companies where minority shareholders' interest needs to be protected. Incidences of financial crimes that got into public domain accentuated the need for bringing about substantial modification in corporate governance system as a whole.

Corporate governance comprises of three intervening pillars which are transparency, accountability and reliability in professional relationships. Therefore, co-existence of these three reinforcing pillars is deemed to be a precondition to forming an opinion that the corporation is working in the best interest of each and every stakeholders.

The colossal scale of frauds starting from Eron (2001), WorldCom(2002), Satyam Computer Service (2009), Bombay Dyeing and Manufacturing Company Limited (2005), Sonali Bank-Hallmark (2012) to Bangladesh Bank Reserve heist (2016) ultimately affect the general public who are to bear the brunt of failure in corporate governance. If we delve deep into the inside story of the aforesaid cases of financial misappropriations, we will find that these are the consequences of weak corporate governance practices where flawed internal control or fraudulent financial reporting prevailed. The requirement for good corporate governance is thus critical to regain general investors' confidence calling for full length corporate governance Codes and Acts passed by countries to be followed by corporate bodies.  For instance, the USA enacted Sarbanes-Oxley Act 2002, Australia CLERP 9, Italy Paramalat and Bangladesh enacted Corporate Governance Code (Revised on June 03, 2018). In these codes of corporate governance, emphasis has been laid on the roles and responsibilities of the auditors in detecting frauds and discrepancies to mitigate conflict of interest. Indeed, auditors have certain limitations to effectively detect the frauds beforehand.

As evidenced in real life, financial frauds did not decline much even with the enactment of such acts and codes. As a matter of fact, written codes of conducts are merely guidelines to be acted upon where implementation of the same and proper monitoring by competent professionals are far more important. There are many factors which lead such fraud to culminate in lack of auditors' independence, weak enforcement of law, poor internal control, and lack of integrity of management and also inability of corporate governance codes to detect them.

Forensic accounting tools thus lend a strong hand to corporate governance framework towards plugging its loopholes. Forensic accounting, which is still considered to be an evolving discipline, is an integration of multiple disciplines mainly incorporating accounting, auditing, investigation and law. According to a research (Golden, 2011), forensic accounting consists of two major components: litigation services that recognise the role of accountant as an expert and may require consultant and investigative services that use a forensic accountant's skill and may also require possible courtroom testimony. Thus, forensic accountants are skilled professionals in financial accounting, internal control systems, law, investigation and interpersonal skills. Forensic accounting's inherent characteristics aid in establishing integrated corporate governance system, which will eventually help prevention, mitigation and detection of fraud in the corporations. Forensic accountant's investigative characteristics can thus sniff out the presence of latent or potential irregularities that may eventually surface in the affairs of corporate bodies. The beneficial contributions of forensic accounting towards effective corporate governance are summarised as under:

CONTRIBUTION TOWARDS INTERNAL CONTROL SYSTEM: Internal control code and genre are to be formulated and controlled by the management of companies but the application of forensic accounting will indeed strengthen the accountability at each stage of the hierarchy. Increasing accountability will not only add a check point to potential fraud, but also will establish communication and synergy effect throughout the corporation. However, Internal control system is seen breaking down when any external party succeeds in eliciting an undeserved favour from an organisation indulging in corrupt practices like bribing, and also when internal stakeholders resort to corrupt practices in order to derive unlawful or unethical benefits from their organisation. Both the cases amount to failure of the spirit of corporate governance. Digging deep into the motives behind such acts may lead the accountant to detect prevalence of either compensative deprivation by employer or unethical mindset of the employees or a mix of both. Thus, forensic accounting helps create a positive working condition which may indirectly dissuade fraudsters to carry out such acts. Sceptic characteristic of forensic accounting framework is also capable of foreseeing the unethical intentions of the top level management which are at times beyond the scope of corporate governance framework alone to portend.

FINANCIAL STATEMENT FRAUD: Accounting and auditing skills aided by the investigative eye of forensic accounting can raise the red flag beforehand in case of severe anomalies. Accounting conceptual framework based on which financial statements are prepared and audited coincides with three pillars of corporate governance. Thus, transparency, accountability and reliability of the policies, practices and intentions are reflected in the financial statements of a corporation. However, auditors' rigorous checking of double entry system and documentation can, at times, unearth those anomalies provided that the auditors have the much needed leeway in exercising complete independence. The inherent constraints of the profession may content only with indicating signals of fraud without taking due action to prevent those potential fraud. Forensic accountants thus detect financial manipulation through creative accounting as well as provide litigation service where necessary. Forensic accounting, being a specialised branch of accounting, aims primarily at overcoming the limitations of conventional practices of accounting and auditing

On the whole, forensic accounting possesses all the characteristics to contribute to the ultimate goal of corporate governance. Given the ground realities of our country, neither the prevailing standards of accounting and auditing nor the corporate governance codes formulated by the Bangladesh Securities and Exchange Commission (BSEC) can ensure corporate governance in its true spirit. It is, therefore, high time to incorporate forensic accounting into the corporate governance system which will ensure better governance climate.

 

Professor Dr. Mohobbot Ali and Sanjida Ahmed are respectably Director, Bureau of Business Research, Dhaka University and Senior Accounting Teacher, Maple Leaf International School.

mohobbot70@yahoo.com

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