Forensic accounting in fraud detection and prevention: A qualitative investigation of microfinance institutions

Eghe-Ikhurhe, Grace Osariemen; Roni, Naheed Nawazesh; Bonsu, Mandella Osei Assibey Article Forensic accounting in fraud detection and prevention: A qualitative investigation of microfinance institutions International Journal of Management, Economics and Social Sciences (IJMESS) Provided in Cooperation with: International Journal of Management, Economics and Social Sciences (IJMESS) Suggested Citation: Eghe-Ikhurhe, Grace Osariemen; Roni, Naheed Nawazesh; Bonsu, Mandella Osei Assibey (2024) : Forensic accounting in fraud detection and prevention: A qualitative investigation of microfinance institutions, International Journal of Management, Economics and Social Sciences (IJMESS), ISSN 2304-1366, IJMESS International Publishers, Jersey City, NJ, Vol. 13, Iss. 3/4, pp. 116-133, https://doi.org/10.32327/IJMESS/13.3-4.2024.6 This Version is available at: https://hdl.handle.net/10419/304340 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc/4.0/ 116 International Journal of Management, Economics and Social Sciences 2024, Vol. 13(3-4), pp. 116 – 133. ISSN 2304 – 1366 https://www.ijmess.com Forensic Accounting in Fraud Detection and Prevention. A Qualitative Investigation of Microfinance Institutions *Grace Osariemen Eghe-Ikhurhe 1 Naheed Nawazesh Roni 1 Mandella Osei-Assibey Bonsu 1 1 Tessside University International Business School, Tessside University, Middlesbrough, United Kingdom Despite authorities and governments’ efforts in fraud prevention and investigation, new types of fraud emerge daily. In fact, the rise in global business scandals has heightened the need for forensic accounting, as financial fraud is the world’s most severe economic threat. Forensic accounting combines accounting, auditing, and investigative skills to detect and prevent accounting fraud. Research on fraud investigations and forensic accounting has predominantly employed quantitative methods, with relatively few studies utilizing qualitative research approaches. Therefore, this study fills the gap and examined the role of forensic accounting in fraud detection and prevention of microfinance in Nigeria. A qualitative approach was employed using a sample of eighteen participants working in Nigerian microfinance firms. The results show that advanced technological skills in forensic accounting can enhance the integrity of microfinancing institutions in Nigeria, preventing fraud and gain investor and shareholder confidence. In addition, the results reveal that, the future of microfinance forensic accounting is expected to prioritize technological advancements like data analytics, machine learning, artificial intelligence, and blockchain in its procedures. By implication, forensic accounting is crucial for Nigerian microfinance institutions; management must recognize its importance in implementing proactive measures to prevent fraud. Keywords: Forensic accounting, microfinance institutions, fraud, technology, Nigeria JEL: M41, M42, N27 Globally, fraudulent and suspicious financial activities are increasing, posing a threat to businesses due to unethical and dishonest practices (Wijerathna and Perera, 2020). The rise in global business scandals has heightened the need for forensic accounting, as financial fraud is the world’s most severe economic threat (Abdullahi and Mansor, 2018). The global collapses of Enron and WorldCom have increased the need for forensic accountants to develop systems and controls for fraud identification, prevention, and management (Popoola et al ., 2015). Between 2018 and 2019, 28 percent of global accounting/financial fraud cases occurred, resulting in approximately $42 billion in losses (Kaur et al ., 2023). These events have led to the implementation of various standards, rules, and regulations like US Sarbanes-Oxley Act (2002) enacted to prevent or eliminate such incidents. New types of fraud occur daily despite firms and countries effort to prevent and investigate fraud (Grima et al ., 2016). According to Ehioghiren and Atu (2016), forensic accounting and anti-corruption DOI:10.32327/IJMESS . 1 3 . 3 - 4 .202 4 . 6 Manuscript received May 28, 2024; revised August 16, 2024; accepted September 10, 2024. © The Author(s); CC BY-NC; Licensee IJMESS Publisher: UCHPRO & National D.B.A Society, USA *Corresponding author: [email protected] International Journal of Management, Economics and Social Sciences 117 practices manage financial crime risk and detect forgeries during audits. Indeed, because organisations generate a vast amount of financial data and become more complicated, combating fraud and crime using standard approaches becomes increasingly difficult. Nigerian accountants emphasize the importance of training and accreditation in combating fraud and crime (Okoye and Gbegi, 2013). Similarly, Sharma and Panigrahi (2013) suggest that data mining techniques like logistic models, neural networks, Bayesian belief networks, and decision trees can help manage and detect fraud. Garner (2004) defines fraud as knowingly misrepresenting or concealing a material fact to deceive another into acting to their detriment. Fraud is defined as fraudulently manipulating others to gain income or commodities, making misleading suggestions, or concealing the facts to keep an edge over others (Kaur et al ., 2023). Accounting is crucial for detecting and preventing fraud, with both internal and external auditors playing a significant role in this process. However, auditors evaluate a firm’s financial statements’ compliance with accounting standards and relevant rules and regulations, and further detect fraud and draw attention. Forensic accounting is a method that combines accounting, auditing, and investigation to detect and prevent accounting fraud, particularly in identifying unethical financial or economic activities due to increased fraud frequency (Okoye and Gbegi, 2013). It is the application of science and technology to uncover fraudulent accounting, finance, and business practices (Rezaee et al ., 2016). Forensic accountants are primarily responsible for investigating illegal activities such as fraud, corruption, money laundering, computer fraud, conversion, and theft. Management is responsible for preventing and detecting fraud within an organization, working closely with auditors and other members of the corporate governance and reporting ecosystem. However, forensic accounting was developed due to extant gaps in traditional accounting systems (Bierstaker et al ., 2006; Sahiti and Bektashi, 2015). Accounting, auditing, and investigative skills are employed to identify, prevent, and combat financial crimes, reduce corruption, and provide legal assistance (Mohd-Nassir et al ., 2016). Forensic accounting solutions are widely recognized as the most effective method for detecting and preventing fraud (Kranacher, 2006), with Delarue (2020) emphasizing the importance of incorporating these techniques for effective fraud prevention and detection. The study explores the increasing importance of forensic accounting in fraud detection and prevention considering its rapid development. Several studies have examined forensic accounting in fraud detection and prevention (Ehioghiren and Atu, 2016; Okoye and Mbanugo, 2020; Okpako and Atube, 2013). However, limited studies have qualitatively examined this phenomenon with microfinance institutions. In addition, studies studied fraud investigations and forensic accounting in Nigeria adopted quantitative research method (Ahmadu et al ., 2013, Bassey, 2018, Chukwunedu and Okoye, 2011), indicating limited study in qualitative research. Hence, this study enhances the literature to examine the role of forensic accounting in fraud detection Eghe-Ikhurhe et al. 118 and prevention and further investigates the challenges faced by microfinancing institutions on the evolving nature of fraud schemes. We focus on microfinance institutions in Nigeria based on the below compelling reasons. First, Nigeria, Africa’s largest economy with approximately $510 billion GDP faces financial fraud, especially in microfinance institutions, necessitating the development of effective fraud detection and prevention strategies like forensic accounting. Additionally, Nigeria’s microfinance sector faces unique challenges due to limited resources and inadequate internal controls, increasing their vulnerability to fraud. Second, microfinancing institutions have emerged as essential catalysts for financial inclusion in Nigeria, offering microloans, savings, and insurance services to the economically vulnerable population (Samson et al ., 2013). However, the sector’s rapid growth and decentralized operations have exposed it to various risks, including financial fraud (Samson et al ., 2013). Thus, forensic accounting, that has an investigative and preventive capabilities, plays a pivotal role in safeguarding the integrity of microfinancing operations (Bassey, 2018, Ikpe and Uwah, 2023). This paper provides threefold significant contributions. Firstly, the study indicates that advanced technological skills in forensic accounting can enhance the integrity of Nigerian microfinancing institutions, prevent fraud, and boost investor and shareholder confidence. Therefore, we present fresh evidence into how forensic accounting contributes to fraud detection and prevention in the Nigerian microfinance institutions. Secondly, literature has studied fraud investigations and forensic accounting adopted quantitative research method, evidencing limited studies in qualitative research. Therefore, this study fills the gap and examined the role of forensic accounting in fraud detection and prevention of microfinance in Nigeria. Finally, our findings shed light on the field, guiding stakeholders, policymakers, and practitioners in adopting effective forensic accounting skills and strategies for fostering transparency, security, and sustainable growth within the microfinance sector in Nigeria. The remaining sections of the article are structured as follows. The review of extant literature and theoretical underpinning are presented in section 2. The third section discusses the methodology employed in the study. The study results have been discussed in Section 4. Our paper concludes the paper with both theoretical and practical implications. LITERATURE REVIEW The increasing incidence of corporate scandals and organizational failures, primarily due to fraudulent management and public fund misappropriation, has highlighted the necessity of forensic accounting for business legitimacy and dependability (Izedonmi and Ibadin, 2012; Kaur et al ., 2023). Forensic accounting involves expert accounting in civil and criminal legal proceedings, analysing lost earnings, International Journal of Management, Economics and Social Sciences 119 income, assets, damages, internal controls review, fraud, and other legal system matters (Afriyie et al ., 2023). Forensic accounting involves a comprehensive understanding of accounting, auditing, and investigative skills to investigate theft and fraud, requiring a thorough understanding of evidence collection. In this section, we explore the role of forensic accountants in fraud detection and prevention, focusing on fundamental principles like data analysis, evidence gathering, and fraud risk assessment. Data Analytics and Financial Statement Analysis Data analytics is a powerful tool for fraud detection. Microfinancing institutions collect vast amounts of data related to transactions, client profiles, and financial activities. By employing data analysis techniques, including anomaly detection and pattern recognition, forensic accountants with analytical skills can identify irregularities or suspicious trends that may indicate fraudulent activities (Hossain, 2023; Okoye, 2009). This includes unusual transaction patterns, discrepancies in client information, or unexpected changes in financial behaviour. Financial statement analysis can identify inconsistencies or red flags that indicate potential fraud. Forensic accountants scrutinize balance sheets, income statements, and cash flow statements to detect discrepancies, unexplained fluctuations, or unusual transactions (Kranacher and Riley, 2019). This analysis can uncover issues like asset misappropriation, fictitious loans, or financial statement manipulation. Assessment of Internal Control, Documentation and Audit Trails Assessing the effectiveness of internal controls is essential in fraud detection. Forensic accountants review the internal control framework within microfinance institutions to identify weaknesses or gaps that may be exploited by fraudsters (Abei, 2021; Bassey, 2018; Ikpe and Uwah, 2023). Strengthening internal controls can deter fraud and ensure that any fraudulent activities are detected more easily. Additionally, maintaining comprehensive audit trails and documentation of financial transactions is also a fundamental in fraud detection practice (Abei, 2021; Kranacher and Riley, 2019). Every financial transaction should leave a trace, and these records can be highly valuable in reconstructing activities in case of suspected fraud (Abei, 2021). Regularly reviewing and reconciling these records can help identify discrepancies or missing information by the forensic accountant (Ogunode and Dada, 2022). Whistle Blower Programs and Transaction Monitoring Encouraging and rewarding a culture of reporting and transparency through whistle blower programs can be an effective means of fraud detection. Employees, clients, or other stakeholders who suspect fraudulent activities can report them anonymously, allowing for early intervention could be initiated by Eghe-Ikhurhe et al. 120 the forensic accountants (Singleton and Singleton, 2010). Continuous and regular monitoring of financial transactions is crucial for early fraud detection. Microfinance institutions can implement real-time transaction monitoring systems that flag unusual or high-risk transactions for further investigation. Such systems can help identify unauthorized withdrawals, forged signatures, or unusual account activity promptly (Akinbowale et al ., 2021). Technology Enabled Solutions Leveraging technology, such as fraud detection software and biometric authentication systems such as the two way identification and multi facet identification, can enhance fraud prevention and detection efforts (Aziz and Andriansyah, 2023). Biometric identification methods can also be used to reduce the risk of identity theft, while advanced software can identify fraudulent patterns and trends (Rodgers, 2020). The dynamic nature of fraud requires a multifaceted approach to detection within the microfinancing sector in Nigeria. Employing a combination of data analytics, financial statement analysis, transaction monitoring, internal controls assessment, and technology-enabled solutions is essential for staying ahead of increasingly sophisticated fraud schemes. Additionally, fostering a culture of vigilance and reporting through whistles blower programs can empower stakeholders to play an active role in fraud detection and prevention within microfinance. Microfinancing in Nigeria The Nigerian microfinancing sector has expanded significantly over the years, with hundreds of microfinance banks and institutions operating across the country. This section provides an overview of the sector’s growth, regulatory framework, and its role in alleviating poverty and promoting economic development. The microfinancing sector in Nigeria faces a range of fraud risks, including loan fraud, identity theft, embezzlement, and insider fraud and these various forms of fraud that is prevalent in the sector, has had their impact on microfinancing institutions and their clients (Bassey, 2018; Samson et al ., 2013). In their survey research, Bassey (2018) highlighted that forensic accounting affected the management of fraud in microfinance institutions in Cross River State. The data were collected from both primary and secondary sources and was analysed using the ordinary least square technique. The study revealed that audit failures, over time, have prompted a paradigm shift in accounting. Forensic accounting is a critical tool for identifying, investigating, and preventing fraud in microfinancing (Bassey, 2018). This section discusses the fundamental principles of forensic accounting in fraudulent act in the microfinance spheres in Nigeria, including data analysis, evidence gathering, and fraud risk assessment. It also outlines the key roles of forensic accountants in fraud detection and prevention (Bassey, 2018; Chukwunedu and Okoye, 2011; Ikpe and Uwah, 2023; Ogunode and Dada, 2022). Forensic accounting International Journal of Management, Economics and Social Sciences 121 is an indispensable tool for detecting and investigating fraud in the microfinancing sector in Nigeria. However, this specialized field is not without its challenges and limitations, which can pose significant obstacles in the quest to uncover financial misconduct and protect the integrity of microfinance institutions. For the purpose of this study, we review and discuss the below challenges and limitations on fraud investigation as it affects microfinancing. (1) Microfinance institutions in Nigeria often operate with limited financial and human resources (Abubakar et al ., 2015). Forensic accounting investigations can be resource-intensive, requiring specialized skills and technology (Bassey, 2018). The scarcity of resources can hinder the ability to conduct thorough and timely investigations. (2) Microfinance institutions may not always have effective systems for reporting and documenting potential fraud incidents (Abubakar et al ., 2015). A lack of clear reporting mechanisms can result in underreporting or delayed reporting of fraud, hampering timely intervention. (3) According to studies conducted by Abubakar et al . (2015) and Anyanwu (2004), Nigeria’s regulatory environment for microfinance institutions may not always align with best practices in fraud prevention and investigation. Ambiguities or gaps in regulations can limit the authority and scope of forensic accountants in conducting thorough investigation. They further added that navigating the legal framework surrounding fraud investigations can be complex. Forensic accountants should ensure that their investigative procedures and evidence gathering comply with Nigerian laws and regulations. Legal hurdles can slow down the investigative procedure. (4) The shortage of qualified forensic accountants in Nigeria is a notable challenge (Okoye, 2009). Expertise in forensic accounting techniques and methodologies is essential for effective fraud investigation (Bassey, 2018; Ogunode and Dada, 2022; Okoye, 2009). Addressing the skills gap through training and education is crucial for enhancing fraud detection and prevention. (5) Microfinance institutions may struggle with data quality and availability (Tucker, 2001). Incomplete or inaccurate records can impede the investigation process. Additionally, some fraudsters take deliberate steps to manipulate or destroy financial data, making it challenging for forensic accountants to trace fraudulent activities. (6) While technology can aid in fraud detection, it can also pose challenges (Chukwunedu and Okoye, 2011; Ikpe and Uwah, 2023). Fraudsters often adapt to technological advancements, becoming more sophisticated in concealing their activities. Keeping up with evolving fraud schemes and countermeasures is a constant challenge for forensic accountants (Chukwunedu and Okoye, 2011; Kranacher and Riley, 2019). (7) Obtaining cooperation from all stakeholders, including employees, clients, and law enforcement agencies, is essential in fraud investigations. Resistance or lack of collaboration can hinder the progress Eghe-Ikhurhe et al. 122 of investigations and limit the forensic accountant’s access to critical information (Skalak et al ., 2011). Cultural factors and ethical considerations can impact fraud investigations. In some cases, individuals may be hesitant to report fraud due to fear of retaliation or cultural norms that discourage whistleblowing (Hwang et al ., 2008). This can hinder the timely discovery of fraud schemes. Despite these challenges and limitations, forensic accounting remains an essential tool for addressing fraud in microfinancing in Nigeria (Bassey, 2018; Ikpe and Uwah, 2023; Kranacher and Riley, 2019). To mitigate these challenges, it is crucial for microfinance institutions to invest in training, technology, and internal controls, and for regulatory bodies to establish clear guidelines and support effective fraud investigation practices (Abubakar et al ., 2015; Ahmadu et al ., 2013). Additionally, fostering a culture of transparency and ethical behaviour can help address some of the cultural and ethical barriers that forensic accountants may encounter in their efforts to combat fraud in the microfinancing sector. Fraud Triangle Limited qualitative research gap exists in understanding the impact of forensic accounting on fraud detection and prevention, especially in microfinance institutions (Kaur et al ., 2023; Firmansyah et al ., 2024). Given this gap, the fraud triangle, comprising pressure, opportunity, and rationalisation, is a validated model used to comprehend the reasons behind individuals’ fraudulent behaviour. The framework’s selection helps researchers in organising qualitative insights, thereby tackling the complexities of fraud in microfinance institutions. The connection between dearth of qualitative studies on investigations into fraud and the adoption of the fraud triangle in this context is based on the need for a robust, established theoretical framework to guide forensic accounting research. In 1950, criminologist Donald Cressey discovered the fraud triangle, consisting of a problem not shared, an opportunity capitalized on, and excuses used to justify their actions, which has been used in various studies on fraud (Homer, 2020). The fraud triangle, first proposed by Cressey in 1950 and later revisited by Schuchter and Levi (2016), is a widely recognized concept in fraud examination and forensic accounting. The fraud triangle model identifies three key elements: pressure, opportunity, and rationalisation, which contribute to fraudulent behavior. Pressure refers to the financial or personal pressure that drives an individual to commit fraud, often influenced by factors such as financial difficulties, addiction, or personal issues. The higher the pressure, the higher the likelihood of someone engaging in fraudulent activities. On the other hand, opportunity refers to the circumstances and access that enable someone to commit fraud without being detected (Kassem and Higson, 2012). Weak internal controls, lack of oversight, and limited checks and balances increase fraud opportunities, increasing the likelihood of individuals committing such crimes. Finally, rationalization is the psychological aspect of the fraud triangle, involving an individual’s capacity to justify their fraudulent actions. Rationalization International Journal of Management, Economics and Social Sciences 123 helps individuals reconcile their fraudulent behavior with their personal values and ethics by presenting the fraud as temporary, repayable, or victimless. The fraud triangle posits that a lack of pressure, opportunity, or rationalization can significantly decrease the likelihood of fraudulent activities within an organization. Fraud prevention strategies aim to minimize opportunities for fraud while fostering an ethical culture that discourages rationalization. METHODOLOGY In this paper, we adopted qualitative research method considering its capability to capture the depth, complexity and context of our research (Ritchie and Lewis, 2003). Qualitative methods are being utilized by scholars to comprehend and interpret human experiences, behaviors, and phenomena, providing valuable insights to their respective fields (Ormston et al ., 2014; Ritchie and Lewis, 2003; Williams, 2007). Specifically, the study utilized a case study design to examine the fraud detection and prevention strategies employed by select microfinance institutions in Nigeria. In particular, we used semi-structured interview (Chang et al ., 2020; McAlearney, 2006), suitable to get clear explanation from participants recruited for the study. By conducting interviews with microfinance institutions, the research provided a comprehensive understanding of how these institutions manage fraud. Population and Sampling We selected Microfinance institutions, mostly positioned in West and South State in Nigeria. The sample included eighteen respondents including forensic accountants, chartered accountants, and internal control personnel from Microfinance institutions located in West and South State. The participants had extensive experience ranging between one to over fifteen years. Out of the eighteen respondents, eleven were males, and seven were females. Table 1 depicts a comprehensive profile of the participants. A purposeful sample strategy was utilized to get data from participants. Creswell (2009) emphasized that an examiner intentionally selects individuals and a specific location to study the primary phenomenon. Data Collection The data were obtained qualitatively using semi-structured online interviews with the respondents of the selected companies. The interview questions were designed based on insights from the research questions and the theoretical framework of the fraud triangle, focusing on its three key components. The focus of the interview questions was based on the role of forensic accounting in fraud detection and prevention. The main questions were supported through a series of open-ended and followed-up questions. Respondents were able to freely expand questions and provide unique and interesting content Eghe-Ikhurhe et al. 130 their efforts in detecting and preventing fraud. Finally, managers should foster cooperation and communication among departments to detect and prevent fraud, promoting openness and responsibility to ensure timely identification and resolution of potential issues. LIMITATIONS AND FUTURE DIRECTIONS We acknowledge the limitations of our research. First, we focused on microfinance institutions in Nigeria. Hence, our findings cannot be generalized to all firms in Nigeria. Secondly, the study overlooked the evolving nature of fraud tactics, the capacities of different institutions, and potential challenges in accessing comprehensive and timely data. Finally, further research can explore the use of forensic accounting in fraud detection and prevention, particularly in developed countries. We call for further studies to examine the effect of forensic accounting in fraud detection and prevention by considering other sectors including the manufacturing. Further research could address the changing nature of fraud techniques by conducting a longitudinal study that monitors changes in fraud methods over time, allowing for the discovery of developing patterns and novel tactics. 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Could you explain your understanding of forensic accounting and its role in the detection and prevention of fraud? 2. How does forensic accounting contrast from traditional accounting practices based on your experience within microfinance institutions in Nigeria? 3. How could you define the relevance of forensic accounting in microfinance institutions context in Nigeria? Section 2: Practices of Fraud Detection and Prevention in Microfinance institutions in Nigeria 4. What are the types of fraudulent happenings that are most predominant in Nigerian microfinance institutions and what group of employees are usually involved? 5. How does your institution assess and managed fraud risks? 6. Can you explain the present tools or methods your institution used in detecting and preventing fraud? 7. Have your firm had any instance of fraud where forensic accounting played a significant role in resolving the issue? Can you elaborate? Section 3: Forensic Accounting Techniques and Tools and challenges 8. How has your firm’s internal control been able to help in detecting fraud? 9. Which forensic accounting methods are most commonly used in detecting fraud within your firm? 10. How do you think the Nigerian forensic accountants are utilizing technology and data analytics to improve fraud detection and investigation within microfinance institutions? 11. Is there any existing specific software or digital tools that your firm uses for forensic accounting purposes? 12. How could you assess the effectiveness of these tools in uncovering and preventing fraudulent activities? 13. Are there barriers, either regulatory or operational, that pose a limitation on the use of forensic accounting in microfinance institutions in Nigeria? 14. What is the kind of training or capacity building do you believe will be necessary to advance the use of forensic accounting for fraud prevention in microfinance institutions? 15. What is the role play by government regulations and policies in the promotion or hindering forensic accounting practices in your firm? 16. How can you ensure ethical standards are being maintained in conducting forensic accounting investigations? 17. What recommendations could you make on the future of technology and the use of forensic accounting in microfinance institutions, how it is expected to evolve in response to emerging fraud challenges and technological advancement in Nigeria?