EFFECT OF FORENSIC AUDIT ON PROFITABILITY OF CONSUMER GOODS MANUFACTURING COMPANIES FROM 2011- 2018

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

Forensic auditing, which is likewise called investigative accounting or extortion review, is a merger of criminological science and accounting. Legal science as per Crumbley (2013) "might be characterized as utilization of the laws of nature to the laws of man" and alludes to measurable researchers as analysts and mediators of proof and realities in lawful cases and offers specialists' feelings with respect to their discoveries in the courtroom. The science being referred to here is accounting science, implying that the examination and understanding will be of monetary data. Joshi (2013) characterized forensic accounting as the "utilization of particular information and particular aptitude to stagger up on the confirmation of monetary exchanges." Zysman (2001) puts scientific accounting as the joining of accounting, inspecting, and investigative abilities. Basically, forensic accounting is accounting that is reasonable for lawful survey, offering the most abnormal amount of confirmation and including the now by and large acknowledged meaning of having been touched base at in a logical manner (Crumbley 2011). Coenen (2015) expressed that scientific accounting includes the use of accounting ideas and strategies to legitimate issues. It requests announcing where the responsibility of the misrepresentation is set up, and the report is considered as proof in the official courtroom or in the regulatory continuing (Joshi). It gives an accounting examination that is appropriate to the court, which will frame the premise of exchange, face off regarding, and eventually question determination (Zysman 2001). This implies forensic accounting is a field of specialization that needs to do with the arrangement of data that is intended to be utilized as proof, particularly for legitimate purposes. The people honing in this field (i.e., legal accountants) explore and report money related misrepresentation and professional wrongdoings, for example, embezzlement and research charges of extortion; appraise misfortunes, harms, and resources; and break down complex monetary exchanges. They give these administrations to corporation, lawyers, criminal examiners, and the Government (Coenen 2015). Their commitment is generally designed for finding where the cash went, how it arrived, and who was dependable. They are prepared to look past the numbers and manage business reality of the circumstance (Zysman 2001). The sustainability of consumer goods manufacturing companies is highly dependent on the financial and accounting operations that relay the transparency, accountability, and profitability, which attracts investors (Bradford et al., 2016). In certain instances, manufacturing companies may incur significant financial failure, lawsuits, and bankruptcy following accounting fraud involving manipulation of financial statements to imply excessive profitability. Despite the possible short-term economic benefits derived from accounting fraud, the outcomes for culpable firms involve a decline in financial profitability, massive fines, and bankruptcy (Huber, 2017). For instance, the penalties imposed on Waste Management Scandal of 2013, Enron Scandal of 2001 and Tyco Scandal of 2008 demonstrate the final dangers of accounting fraud and the need for proper intervention measures (Huber, 2017). In this regard, forensic auditing is the ultimate solution that consumer goods manufacturing companies should practice to help avoid financial manipulations and related risks. Profit is the basic objective of a business (Nimalathasan, 2009). In point of view of the heavy investment which is paramount for the success of most companies. Profit in the area of accounting seems to become a long term objective which evaluates not only the success of the consumer goods, but also of the development of the market for it. It is determined by aligning revenue against cost associated with it. Only those costs are placed against revenue, which have contribution in the generation of such revenue. An enterprise should earn profits to survive and grow over a long period of time. It provides evidence concerning the earnings potential of a manufacturing company and how effectively a firm is being managed. If the enterprise fails to make profit, capital invested is eroded and if this situation prolongs the enterprise ultimately ceases to exist. Profit means as an accurate evaluation of earning capacity, while profitability is relative measure of earning capacity. Profit is defined by Iyer (2009) as “excess of return over outlay” (Nimalathasan, 2009) while profitability is defined as “the ability of given investment to earn a return from its use’. The words profitability is made of two words profit and ability. The word profit has already been defined but the meaning of profit differs according to the use and purpose of the enterprise to earn the profits. Thus the word profitability may be defined as the ability of given investment to earn a return from its use. Profitability ratios measure the companies’ ability to generate profits and central investment to security analysis, shareholders, and investors. Profitability is the primary measure of the overall success of enterprise. The analysis of profitability ratios is important for the Shareholders, creditors, prospective investors and government alike. Profitability is expected to show how well a business is doing. Therefore the research seeks to fill up a fissure in examining the effect of forensic audit on profitability of selected consumer goods manufacturing industry.

1. STATEMENT OF PROBLEM

The failure of the major consumer goods manufacturing companies mechanism to reduce poor financial performance and the increasing sophisticated financial fraud has posed serious threat to investors, government, and general public (Eyisi and Agbaeze 2009). More so, the Stakeholders of most companies are worried over the unqualified audit report being certified by external auditors and few weeks after such reports are been certified such companies are found to be in serious financial crisis leading to bankruptcy and most times liquidation, thereby impoverishing the investors and affecting the economy (Aneto 1993). Also, Ojaide (2014) submits that there is an alarming increase in the number of fraud and fraudulent activities in Nigeria emphasizing the visibility of forensic accounting services. Mgbame (2011), acknowledge that the increasing incidence of fraud and fraudulent activities in Nigeria and these studies have argued that in Nigeria, financial fraud is gradually becoming a normal way of life.  As Kasum (2009) notes, the perpetuation of financial irregularities are becoming the specialty of both private and public sector in Nigeria as individual perpetrates fraud and corrupt practice which leads to poor profitability of organizations. Consequently, there is a general expectation that forensic accounting may be able to stem the tide of financial malfeasance witnessed in most consumer goods manufacturing companies. This study is therefore intends to evaluate the effect of forensic audit on profitability of selected consumer goods manufacturing industry.

1. AIMS OF THE STUDY

The major aim of the study is to examine effect of forensic audit on profitability of selected consumer goods manufacturing industry. Other specific objectives of the study include;

1. To examine forensic audit in consumer goods manufacturing companies.
2. To examine the effectiveness of forensic auditing in improving profitability in consumer goods manufacturing companies.
3. To examine the relationship between forensic audit and the profitability of selected consumer goods manufacturing companies.
4. To investigate the effectiveness of forensic auditing in fraud detection in consumer goods manufacturing companies.
5. To examine the challenges facing forensic audit in consumer goods manufacturing companies.

RESEARCH QUESTIONS

1.  What is forensic audit in consumer goods manufacturing companies?
2. What is the effectiveness of forensic auditing in improving profitability in consumer goods manufacturing companies?
3. What is the effect of forensic audit on the profitability of selected consumer goods manufacturing companies?
4. What is the effectiveness of forensic auditing in fraud detection in consumer goods manufacturing companies?
5. What is the relationship between forensic audit and the profitability of selected consumer goods manufacturing companies?
6. What are the challenges facing forensic audit in consumer goods manufacturing companies?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

1. : There are is no significant effect of forensic audit on the profitability of selected consumer goods manufacturing companies.
2. : There is a significant effect of forensic audit on the profitability of selected consumer goods manufacturing companies.

Hypothesis 2

H0: There is no significant relationship between forensic audit and the profitability of selected consumer goods manufacturing companies.

H1: There is a significant relationship between forensic audit and the profitability of selected consumer goods manufacturing companies.

1. SIGNIFICANCE OF THE STUDY

The study will be of profound benefits to enlighten people on forensic and investigative accounting which is the application of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence. As a discipline, it encompasses fraud knowledge, financial expertise, and a sound knowledge and understanding of business reality and the working of the legal system (Bologna & Lindquist, 1987). Forensic accounting is the tripartite practice of utilizing accounting, auditing and investigative skills to assist in legal matter (Olola, 2016). It is a specialized field of accounting that describes engagements that result from litigation. Forensic accounting can, therefore be seen as an aspect of accounting that is suitable for legal review and offering the highest level of assurance (Apostolou, Hassell & Webber, 2014). This study would also be of immense benefit to students and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to effect of forensic audit on profitability of selected consumer goods manufacturing industry.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 OPERATIONAL DEFINITION OF TERMS

Profitability: is defined as “the ability of given investment to earn a return from its use’

Forensic Audit: The term “forensic audit was coined by Peloubet in 1946, he said, forensic accounting is the application of accounting knowledge and investigative skills to identify and resolve legal issues. It is the science of using accounting as a tool to identify and develop proof of money flow. These tools and/or techniques, skills and knowledge can be invaluable for fraud and forensic accounting investigators.”

A Consumer: a person who purchases goods and services for personal use.

Goods: In economics, goods are materials that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods that are tangible property, and services, which are non-physical.