Forensic Accounting Is a Necessity in Today's Corporate World and Not an Extra Option: A Conceptual Framework

Introduction

Global economic activity has never been subject to such rapid and widespread disruptions and frauds as organizations are experiencing today. Such a situation had never occurred before in modern history. It is reasonable to expect a wide range of economic and risk outcomes as the world adjusts to the new normal. It is likely that some organizations will succeed, some will return to pre-pandemic levels of business activity, and some businesses will not be able to recover. Today's risk executives need more than ever to be able to assess fraud risks in real time so that they can make efficient sensible economic decisions while optimizing strategies and preventing fraud (Association, 2021).

Fraud risks which are faced by the organizations are internal and or external. Internal frauds are conducted by the employees of the organization and external fraud are conducted by the external parties such as vendors or other outside parties. These frauds can be managed and mitigated by the control activities available within the organization. However, till date very few organizations have the forensic accounting (FA) function available as a permanent feature of their operation. FA is only called upon as and when required and is treated as outside consultant or expert witness for the court.

In the recent past many external auditors were penalized due to their involvement in fraudulent acts with the organization or they were not able to detect the fraud as they lack the expertise (Browning, 2021; Team, 2011; Nicodemus, 2020). Similar is the situation with the internal audit function where it is stated in International Professional Practicing Framework (IPPF) that internal auditors are not required to have the knowledge and expertise of the fraud expert and it is not the responsibility of internal audit to detect or prevent the fraud (Auditors, 2019). In a recent survey on internal audit function, 41% of internal auditors informed that the effectiveness of fraud risk programs is not good in their organizations and 61% informed that they are not involved in risk management at all or they are slightly involved (Weitz, 2020). Moreover, International Standards of Auditing and other reporting standards label fraud detection and prevention as organizational management responsibility and exclude auditors from such obligations (IFAC, 2009). In this given scenario organizational management can only prevent and detect fraud once they have the capability and knowledge which can be provided only by FA.

Financial fraud investigations and asset misappropriation receive little academic attention (Zagera, Malis, & Novak, 2016) and majority of the available studies/ work is conducted by professional organizations and provide reports on the types of fraud and their related controls. Furthermore; FA is operating without any standards or guidelines which are available for the internal and external auditors. In the absence of these standards or guidelines, FA is considered as part of the audit section and despite FA’s capabilities, it is not considered as part of governance or organizational management. The purpose of FA is to prevent fraud by utilizing both accounting and auditing skills to produce productive reports. For the prevention of fraud and for the implementation of fraud risk, FA also utilizes investigative mentalities related to auditing, possesses knowledge of laws and regulations and can be considered as an expert in criminology, communication, victimology, psychology, accounting, and other related matters (Fadilah, Maemunah, Nurrahmawati, Lim, & Sundary, 2019).