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Financial Statement Fraud Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting AWOLOWO, Ifedapo Available from Sheffield Hallam University Research Archive (SHURA) at: http://shura.shu.ac.uk/25470/ This document is the author deposited version. You are advised to consult the publisher's version if you wish to cite from it. Published version AWOLOWO, Ifedapo (2019). Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting. Doctoral, Sheffield Hallam University. Copyright and re-use policy See http://shura.shu.ac.uk/information.html Sheffield Hallam University Research Archive http://shura.shu.ac.uk Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting Ifedapo Francis Awolowo A thesis submitted in partial fulfilment of the requirements of Sheffield Hallam University For the degree of Doctor of Philosophy April 2019 DECLARATION I hereby declare that: 1. I have not been enrolled for another award of the University, or other academic or professional organisation, whilst undertaking my research degree. 2. None of the material contained in the thesis has been used in any other submission for an academic award. 3. I am aware of and understand the University's policy on plagiarism and certify that this thesis is my own work. The use of all published or other sources of material consulted have been properly and fully acknowledged. 4. The work undertaken towards the thesis has been conducted in accordance with the SHU Principles of Integrity in Research and the SHU Research Ethics Policy. 5. The word count of the thesis is 78,332. Name Ifedapo Francis Awolowo Date April 2019 Award PhD Faculty Sheffield Business School Director(s) of Studies Dr Dora Chan ii ABSTRACT The main aim of this study is to develop a forensic accounting system that will help in reducing financial statement fraud through not only its predictive properties; but also, the recommended forensic accounting procedures and policies which the accounting profession should adopt. This study through a neo-empiricist inductive approach, that is premised on an objective collection of qualitative empirical data, has developed a forensic accounting system by exploring the perception of Accounting Academics, Forensic Accountants, External Auditors and Finance Directors using a purposive sampling method. The findings revealed that the training of professional accountants’, particularly external auditors, in forensic accounting skills, ethics, principles and procedures can increase their fraud detection capabilities which can, in turn, increase the chances of fraud detection in the financial statements and equally serve as a fraud deterrence mechanism. The main output from this study was developed into a model called the "Forensic Accounting system". This model has three elements; Audit Concerns, Education, Accounting Standards and Regulations. These three elements are not mutually exclusive, but one element can be addressed per time. This new system stipulates that in order to reduce financial statement fraud, audit concerns (agency concern, role and responsibility of auditors, management responsibility and odd agency situation) need to be addressed. Of importance in the audit concerns element is the mandate of the auditors. The mandate of external auditors needs to include the detection of fraud in the financial statement. Once the audit concerns have been addressed how auditors are educated will need to change. The changes that are required are some elements of forensic accounting to be incorporated into the curriculum and professional development of auditors. The last element of the new system is the accounting standard and regulations. Those grey areas that allow for the manipulation of the financial statements will need to be closed down by the standard setters. Two key issues here are the concept of materiality and auditors’ responsibility. This study has implication for standard setters on the need to make accounting and auditing standards fit for purpose to complement the corporate governance codes. Higher education and professional bodies should work along the changes in accounting standards and integrate some elements of forensic accounting into the education curriculum of professional accountants in order to increase their chances of detecting fraud in the financial statement and reduce financial statement fraud. iii ACKNOWLEDGEMENT This thesis is dedicated to my family; to my Mum, I thank you for believing in my dreams and ability, and you never hold back support all through this process. I remain indebted to you till eternity. To my lovely wife, Bukola Gladys Awolowo, thank you for believing in the future I told you about. We started this journey on hope, believing by faith, that the future will be good. To my lovely kids, Martins Obafemi Awolowo and Victoria Ikeoluwa Awolowo, thank you for coming into my world. You both made me complete. We Did It To my siblings, Oluwatobi and Itunuoluwa Awolowo, I really treasure you both. My profound appreciation goes to my award-winning supervisory team – Professor Nigel Garrow, Dr Murray Clark and Dr Dora Chan. Thank you for your unrelenting mentorship, guidance, and support all through this journey. Thank you for creating the platform for me to grow and develop. My appreciation also goes to Sheffield Hallam University for providing the facility and for their administrative support. I specifically want to thank Mrs Lesley Buick and Dr Lucian Tipi for their support and encouragement. I also like to thank all the participants used in this study. I would also like to thank Dr Gabriel & Mrs Isy Mba for their encouragement and support all through this journey. My appreciation also goes to Joseph Okoroafor, Tayo Surakat, Dr George & Dr Abimbola Yerima, Taiwo & Kehinde Olaomo, Oredola &Tobi Oni, Abiola & Adeola Adebayo, Modupe Ariwoola, Michael Apanisile, Olukemi Ogunjimi, Dr Khaled Kessaba, Dr Fazila Husain and other friends for their contribution and support in making this journey a success. I bless the Almighty God who has made my dream come through. I have not been able to help myself; God helped me. …For He Himself has said, I will never leave you nor forsake you, so that you may boldly say: The Lord Is My Helper… (Hebrew 13:5-6). iv TABLE OF CONTENTS DECLARATION ......................................................................................................... ii ABSTRACT .............................................................................................................. iii ACKNOWLEDGEMENT ........................................................................................... iv TABLE OF CONTENTS ............................................................................................. v LIST OF ABBREVIATIONS ...................................................................................... xi LIST OF TABLES .................................................................................................... xii LIST OF FIGURES.................................................................................................. xiii LIST OF PUBLICATIONS ....................................................................................... xiv CHAPTER ONE: BACKGROUND AND RATIONALE .............................................. 1 1.1 Purpose Statement ....................................................................................... 1 1.2 Personal Motivation ....................................................................................... 1 1.3 General Background of the Study ................................................................. 3 1.3.1 Financial Statement fraud definition ....................................................... 5 1.3.2 Accounting Paradigm/System ................................................................. 5 1.3.3 Definition of Forensic Accounting ........................................................... 9 1.4 Rationale for the Study ................................................................................ 10 1.4.1 Why is financial statement important? .................................................. 10 1.5 Theoretical Framework ............................................................................... 14 1.6 Research Questions .................................................................................... 15 1.7 Research Objectives ................................................................................... 16 1.7.1 Specific Research Objectives ............................................................... 16 1.8 Research Methodology ............................................................................... 16 1.9 Thesis Outline ............................................................................................. 17 CHAPTER TWO: LITERATURE REVIEW ............................................................... 18 2.1 Theoretical Framework ............................................................................... 18 2.1.1 The Fraud Triangle in Agency Theory .................................................. 18 2.1.2 Agency Theory ..................................................................................... 19 v 2.1.3 Why Do Management Commit Financial Statement Fraud? ................. 25 2.1.4 The Fraud Triangle Theory ................................................................... 25 2.1.5 Fraud Diamond ..................................................................................... 32 2.1.6 The Fraud Scale ..................................................................................
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