Forensic Accounting in Malaysian Public Sector

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Forensic Accounting in Malaysian Public Sector: The Future and Beyond. Henny Hazliza Mohd Tahir1, Nafsiah Mohamed2, Rosmawati Haron1 and Moh ...
RESEARCH ARTICLE Copyright © 2017 American Scientific Publishers All rights reserved Printed in the United States of America

Advanced Science Letters Vol. 23 No.8

Forensic Accounting in Malaysian Public Sector: The Future and Beyond Henny Hazliza Mohd Tahir1, Nafsiah Mohamed2, Rosmawati Haron1 and Moh Mahsun3 1Faculty of Accountancy, Universiti Teknologi MARA, Johor Branch, Malaysia 2Faculty of Accountancy and Accounting Research Institute, Universiti Teknologi MARA, Malaysia 3STIE Widya Wiwaha, Jogjakarta, Indonesia

Corruptions and other financial economic crimes are intrusions of Malaysian development efforts. Most of the crimes and wrong doing harm Malaysian economy in no small measure. The integrity of government agencies is questioned and hence transparency measures became doubtful and meaningless. Call for professional expertise to undertake proper procedures are supposed to minimise the percentage of corruption and fraud. There are two main objectives of this paper, i.e to investigate the awareness of the government agencies administrator on their understanding the role of forensic accountants, and secondly, to determine the relevance of the implementation of forensic accounting in public sector. 120 questionnaires were distributed but only 42 replied. The results shows positive acceptance towards the existence and involvement of forensic accountant in public sector and the administrators believe that the existence of forensic accounting is a financial strategy to curb and resolve the financial fraud and crime in Malaysian economy. Keywords: Forensic Accounting, Public Sector, Auditor, Fraud.

1. INTRODUCTION In the wake of catastrophes of fraud and corruptions that shook the world, the accounting debacle scandals involving Enron, WorldCom, have put accountants in the public spotlight as it never before in history. The impacts of these accounting scandals are huge, causing tonnes of lateral damages. The public confidence in the accounting profession has been severely undermined. New regulations and laws resulting from these scandals have taken the role of forensic accountants more significant than ever before, hence creating new business for forensic accountant and developed opportunities in forensic accounting and investigative accounting field1. The functions of Forensic Accountants are not new. It has been used in conducting specialised accounting activities where a form of higher trusted professional results are needed. The need of forensic accountant is more in public sector because government spending is substantial that the public Email Address: [email protected] 1

through legislators demands to know where the money is spent2. In Malaysian public sector, financial irregularities, fraud and corruptions become major concern to the nation which subsequently the endemic of these issues have become common sight since the government employees have vague understanding in policy and procedures 3,4. Symptoms like Malaysia position in Corruption Perception Index (CPI) is slipping; bold media reports on corruptions and fraud, negative reactions from the public demanding corrective measures to be taken to correct the flaws are suffice to illustrate that government image and integrity are at risk. These problems have demonstrated that there is a need for forensic accounting services to tackle governance practices in Malaysian public sector. In the current economic climate, where there is pressure to cut and justify public expenditure, the financial and reputational impact of any fraud affecting a public sector body will be intensified. To the untrained eye, an auditor and a Forensic Accountant are the same job with different titles. But while both positions work with financial records and analysis, the fields are different and should not be confused.

Adv. Sci. Lett. 23, 7728-7732(5), 2017 Public tend to confuse between the roles and responsibilities of the external auditor with Forensic Accountant. The role of Forensic Accountant is different from other conventional accountants in particular, the auditor. They should hold good education training and in depth experiences. In addition, Forensic Accountant, are nearer to being the investigators, economists who do economic and market estimation and appraisers, who are characteristically trained in finance or valuation theory in business2. The above discussion on the research issue and the problem statement lead to the following main research objective, that is, to examine the understanding on the role of Forensic Accounting between academicians and non – academicians. Hence, it brings to a research question whether there is any differences on the understanding between academicians and non-academicians of the role the Forensic Accounting. By having to know this, Forensic Accountant can serve as a tool to mitigate the risk of fraudulent occurrence therefore confirming the importance of requiring the Forensic Accountant in an organization or institution. Since public tend to confuse between the Forensic Accountant and the auditor, this may reflects that the organization or institution might not be ready to implement this post. 1.0 LITERATURE REVIEW Forensic accounting is the combination of accounting; auditing and investigative skills defined forensic accounting as the application of accounting concepts and techniques to legal complications. It demands reporting, where liability of the fraud is recognized and the report is considered as evidence in the court or in administrative proceedings5. It has its own models and methodologies of investigative procedures that search for assurance, attestation and advisory perspective to produce legal evidence. It is concerned with the evidentiary nature of accounting data, and as a practical field concerned with accounting fraud and forensic auditing. Scholars argued that fraud can be subjected to forensic accounting, since fraud involves the acquisition of property or economic advantage by means of sham, through either a misrepresentation or suppression6,7. The objectives of forensic accounting include assessment of damages instigated by an auditor’s negligence, investigating to see whether embezzlement has taken place, in what amount, and whether criminal proceedings are to be initiated; and gathering of evidence in a criminal proceedings6,7. The role of Forensic Accountant could be both proactive and responsive. They help in detecting and preventing fraud inside companies. However, a question might upsurge about the difference between audit and forensic accounting. Here we can recall the Judgment of a case of re Kingston Cotton Mill Company (No.2) (1896) where it was concluded “Auditors are watchdogs not bloodhounds”. At this position Forensic Accountants are latter one in nature. If it is being scrutinize deeply, it can trace out the following difference between audit & forensic accounting8. Forensic Accounting is completed in response to a definite events occurred in the organizations. They ought to possess the investigative mentality which is much needed in performing investigation and the findings obtained used as evidence in court or to resolve such disputes9.

RESEARCH ARTICLE Traditional audits keep an eye on the accounting principle of materiality. Inaccuracies, omissions or ostensible mistakes which do not bring sufficient monetary impact the overall financial health of a company are considered immaterial by auditors and will not be tracked. On the other hand, Forensic Accountants, are not constrained by generally accepted accounting concepts like materiality. Irrespective of monetary amount, any discrepancy and contradiction can be the start of a bigger problem in fraud terms. Auditors involved in an independent audit may refer to the indicator of misstatements observations for investigation by forensic specialists. While, audit is made mandatory to all companies, the auditor should possess the “professional skepticism”. They measure compliance of the financial reports prepared by the management to reporting standards and other relevant standards or guidelines applicable to the company under review. The main focus of an auditor is to obtain reasonable assurance that the financial statements are free of material misstatement and they basically focuses on material transactions. Audits are also customarily conducted to assess the effectiveness of internal controls or compliance with regulations. Independent audits are conducted with the goal of providing a reasonable assurance of the accuracy of financial statements. Companies awarded with government contracts are subject to government audits to verify the contractor has established a system of internal controls to deter fraud in the workplace. Nevertheless, independence has an equal importance to Forensic Accountants as well as to auditor10. A Forensic Accountant will be considered independent if they are intellectually honest, ready to make impartial decisions and have no interests or obligations in relation to the client, management or the owner. Independence is usually considered the pre - requisite for objectivity. It is asserted on objectivity when it comes to the proofs that support the claims of the management and belong to the area that make greater subjectivity possible. It is estimated that in the following years, in developed market economies, a forensic accounting investigator will be one of the 20 most wanted professions10. 3.0 RESEARCH METHODOLOGY The objectives of the study are to examine the understanding on the role of Forensic Accounting between academicians and non-academicians. A series of questions were asked in the survey to indicate their understanding on the differences between an Auditor and Forensic Accountant. It is expected that there is a significant difference between academicians and non-academicians on the understanding on the role of Forensic Accounting. H1: there is a significant difference between academicians and non-academicians on the understanding of the role of forensic accountant. A total of 120 set of survey were sent and 42 replied. The sampling was done using simple random sampling. The population of the study comprises of two (2) different groups, which consist of non – academician (staffs of the treasury office) and academician from local universities. The 2

RESEARCH ARTICLE justification for the choice of these group is based on prior studies11,12. The groups have been identified as having separate views on the effect of non-audit fees on auditor independence and are involved at one stage or another in the preparation, analysis and usage of financial reports and are thus expected to be knowledgeable about the focus of the study. The data was derived using well-structured Likert scale survey. Independent sample t – Test employed to test and identify if there is any significant differences between the two (2) groups on the understanding on the role of Forensic Accountants. There are some general assumptions that apply to all of the parametric techniques discussed here (e.g. t-tests, analysis of variance), and additional assumptions associated with specific techniques. The dependent variable is measured at interval or ratio value. It gives wider range of possible technique when analyzing the data. This parametric test assumed that the sample is obtained randomly from the population and also it is based on independent observation. The observations that make up the data must be independent of one another, that is, each observation or measurement must not be influenced by any other observation or measurement. It is assumed that the population, from which the samples are taken, are normally distributed and the samples are of equal variances. 4.0 DISCUSSIONS ON FINDINGS Figure 1 below indicates the distribution of respondents in the study. Of 42 questionnaires received, 50% (21 respondents) were academicians and the remaining were non – academicians. Non – academicians are represented by the staffs from the treasury department.

Figure 1: Distribution of respondents Distribution of respondents

Accounting while 10 of the respondents with a percentage of 24% do not understand the concept of Forensic Accounting. It therefore implies that the percentages of those who understand the concept of Forensic Accounting were drawn from the 35 who initially agree that they are aware of Forensic Accounting. Figure 3: Understanding of respondents on the concept of Forensic Accounting Understanding on the concept of Forensic Accounting

No, 24%

Yes , 76%

Cronbach's alpha is a measure of internal consistency, that is, how closely related a set of items are as a group. A "high" value of alpha is often used (along with substantive arguments and possibly other statistical measures) as evidence that the items measure an underlying (or latent) construct. However, a high alpha does not imply that the measure is onedimensional. If, in addition to measuring internal consistency, you wish to provide evidence that the scale in question is onedimensional, additional analyses can be performed. Based on the Table 1 presented below, the Cronbach’s Alpha for the items included in the questionnaires is 0.876 which indicate that the set of items are closely related as a group. Table 1: Cronbach's Alpha for reliability test Reliability Statistics Cronbach's Alpha

Cronbach's Alpha Based on Standardized Items

.876

.884

non-academicians 50% academicians 50%

Figure 2 reflects on how well aware were the respondents on Forensic Accounting. 35 of the total respondents or 83% are aware of Forensic Accounting while 7 of the respondents or 17% respondents are not aware of Forensic Accounting. Figure 2: Awareness on Forensic Accounting Awareness on Forensic Accounting

Yes, 17% No, 83%

Figure 3 show that 32 respondents, constituting 76% of the total respondents do understand the concept of Forensic 3

N of Items

17

Based on Table 2 below, it is revealed that both groups of respondents agreed that the service of Forensic Accountant differs to a traditional external auditor, and the analysis conducted by the Forensic Accountant is different from an audit. Conversely, the respondents slightly agree on the fact that the service of Forensic Accountants are preferable than of external auditor. From the survey, it was found that the respondents seemed to misunderstand the roles and responsibility of an auditor as they responded that the auditor’s responsibility is to search for fraud and should act as “police” or “detective” when conducting the audit although in fact it is not. Series of questions were asked on the respondents understanding of the roles of Forensic Accountant. The result is presented by Table 3. It was alarming to see that the respondents tend to mixed up of the concept of Forensic Accountant and the traditional auditor. It is evidenced by a mean between 3.05 to 4.05 for both group of respondents.

RESEARCH ARTICLE

Adv. Sci. Lett. 23, 7728-7732(5), 2017

Table 2: Differences between Forensic Accountant and Auditor NO

ITEM The service of Forensic Accountant differs to a traditional external auditor The service of Forensic Accountants are preferable to the services of traditional external auditor

1

2

3 4 5

MEAN A N-A 1.71 2.33

A 1.07

N-A 1.16

3.05

1.36

1.32

3.43

SD

The analysis conducted by Forensic Accountant is different from an audit Auditors’ responsibility include searching for fraud

2.38

2.67

1.32

1.06

3.33

3.38

1.98

1.80

Auditors should act as “Police” or “Detective” when conducting an audit

3.57

4.05

1.74

1.56

*A: Academicians, N-A: Non – Academicians They agreed that Forensic Accountant is to conduct comprehensive audit, which they are not. Both of the groups also agreed on the statement that Forensic Accountant should reconstruct financial statements that may have been destroyed and manipulated and it is the duty of the Forensic Accountant to obtain reasonable assurance that the financial statements are free of material misstatements of which it is clearly the duty of the external auditor.

Table 4: Forensic Accountant and Public Sector NO

ITEM

MEAN A N-A 1.71 2.05

A .956

N-A 1.53

2.05

1.10

1.02

1.81

.814

.680

3.10

1.53

1.70

2.48

.995

1.28

2.86

1.07

1.42

2.33

.894

1.07

2.62

1.35

1.32

The service of Forensic Accountants are required in Malaysia The service of Forensic 1.86 8 Accountants are needed more in the public sector Forensic Accountants can help 1.81 9 in detecting and preventing fraud in Public Sector Forensic Accountants guarantee 2.57 10 the well-being of the organization Forensic Accounting helps 2.10 11 organization in presenting credible and transparent financial reports Forensic Accountant is needed 2.05 12 in every department of Public Sector to prevent financial crime Forensic Accountant is able to 2.00 13 uncover economic fraud in the public sector Forensic Accountant is needed 2.33 14 in every department of Public Sector to control financial fraud. *A: Academicians, N-A: Non – Academicians 7

SD

To test the hypothesis 1 (H1) which to examine the understanding on the role of Forensic Accounting between academicians and non – academicians, the study employed Independent Sample t – Test to perform the analysis.

Table 3: Understanding on Forensic Accountants Table 5: Independent sample t - Test analysis

.15171

Upper

95% Confidence Interval of the Difference .15225

df

Lower

Sig. t

-.81837

*A: Academicians, N-A: Non – Academicians Subsequently, question no 7 to 14 asked on the need to have Forensic Accountant in the Public Sector. The respondents strongly agreed that the service of Forensic Accountants is required in Malaysia particularly in the public sector. It is also found that the respondents agreed on the fact that Forensic Accountant is able to uncover the economic fraud in the public sector and they agreed Forensic Accountant is very much needed in every department of Public Sector to control financial fraud.

F

-.81892

1.76

Std. Error Difference

1.80

.239

3.71

.239

2.81

Mean Difference

1.28

-.333

1.98

-.333

2.48

.173

2.86

t-test for Equality of Means

.173

.995 1.23

40

.676 1.64

38.606

2.10 2.67

-1.38

1.57 2.71

Sig. (2-tailed)

N-A

-1.38

A

.231

SD

Levene's Test for Equality of Variances

What do you think a Forensic Accountants do? a. fraud detection b. conduct comprehensive audit c. reconstruct financial statements that may have been destroyed and manipulated. d. obtain reasonable assurance that the financial statements are free from material misstatements.

MEAN A N-A

1.481

6

ITEM

Understanding Equal Equal variances variances not assumed assumed

NO

An independent-samples t-test was conducted to compare the awareness scores for academician and non-academicians. There was no significant difference in scores for academician (M = 2.38, SD = 0.699) and non-academicians (M = 2.71, SD = 0.848; t (40) = -1.38, p = .17, two-tailed). The magnitude of the differences in the means (mean difference = -0.333, 95% CI: –0.818 to 0.152) was (eta squared = 0.097). Based on the test conducted, Hypothesis 1 is rejected. There is no 4

RESEARCH ARTICLE significant difference between the 2 groups of respondents on the understanding of the concept of Forensic Accounting. Table 6: Descriptive statistic on both groups Group Statistics understanding

by the Accounting Research Institute (ARI), Universiti Teknologi MARA Malaysia and the Ministry of Education (MOE) Malaysia for the funding of this study.and for their believe and continuous support.

SE

REFERENCES

.69987

.15272

[1]

.84835

.18512

Profession

N

Mean

SD

A

21

2.3782

N-A

21

2.7115

*A: Academicians, N-A: Non - Academicians

Further analysis is done to confirm the result and the study doing so by conducting ANOVA. The result, though, is the same with previous analysis, with the Sig. value of 0.173.

[2]

Table 7: Analysis of Variance on the variables ANOVAa Model Regression 1

Sum of Squares

df

.483

1

Residual

10.017

40

Total

10.500

41

Mean Square

F

.483 1.929

Sig 95%. .173b

.250

a. Dependent Variable: Profession, b. Predictors: (Constant), understanding, c. 95% confidence level

5.0 CONCLUSIONS Fraud is material and has so many types now that recent day fraudulent activities go undetected for most of the time and or until it is too late. Forensic accounting is the new branch in accounting which has the single aim of detecting fraudulent activities within and outside an organization so far as the third party’s action is in any way reflective on the activities of that organization. A Forensic Accountant is expected to be a specialist in accounting and financial system. But most important thing is that Forensic Accountant must be analytically-minded and inquisitive, with detailed – oriented approach and be able to think resourcefully. With people mixing up between Forensic Accountant and external auditor, it is foreseeable that we have long way to go. Hence, the authoritative bodies should play greater role in increasing the awareness of the public and private employees on the role and the importance of having Forensic Accountant in their organization. The scope of future research in this area is broad. Attempts should be made to assess the effectiveness of forensic accounting on the governance practices of listed companies, non-listed companies, and government and not-for-profit organizations in Malaysia by conducting in- depth interview with the major role payer of our country. This could help to have a comprehensive conclusion about the role the Forensic Accountants can play in enhancing good governance in any form of organization. ACKNOWLEDGMENTS The authors would like to acknowledge the support provided

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