Accounting Scandals: Beyond Corporate Governance

Abstract

Accounting scandals are becoming perpetual in nature. They range from the ancient Mesopotamia, to the South Sea Bubble of 1720, to the famous Enron of 2001, down to Parmalat, Tesco, and Toshiba of today. The series of accounting scandals that have occurred in the last two decades calls for a greater concern by the accounting profession. The accounting scandals that have occurred in this 21st century alone have shown that there is a need to look beyond corporate governance in the fight against financial deception. In this paper, we argue that even in the face of the Sarbanes-Oxley Act (SOA) of 2002 and other regulations around the world that are targeted towards effective corporate governance, accounting scandals have never ceased to occur. Most of the legislations that have been passed in recent times were targeted at corporate governance, forgetting the crucial role that audit plays within the agency relationship. And whenever there is any revelation of fraudulent financial reporting, investors do not ask who are the directors, but the first question they ask is who are the auditors? Hence, there is a need to improve audit quality by approaching it from a forensic accounting perspective in order to reduce the incidence of financial statement frauds in this era of information revolution, thus restoring investors' confidence back in the financial reporting process and corporate governance. In this paper, we propose a forensic accounting paradigm as a viable option for reducing accounting scandals, since this will compliment corporate governance systems.

Financial Statement Fraud: The Need for a Paradigm Shift to Forensic Accounting

“…The series of embarrassing audit failures that have occurred over the past two decades, for example, should have caused the accounting profession to re-examine and re-establish the necessary accounting procedures, auditing techniques and accounting education (Apostolon & Crumbley, 2005) and are probably enough to stimulate a possible paradigm shift in accounting (Gray & Moussalli, 2006;Koh, et al, 2009;Awolowo, et al, 2018;Griggs, 2019).…”

“…The first question the business community is always quick to ask after any announcement of fraudulent financial reporting, is who are the auditors? (Carnes & Gierlasinski, 2001;Wolosky, 2004;Awolowo, et al, 2018).…”

“…While some other mechanisms, such as good compensation plan, internal audit, and corporate governance are internal in nature, and can be overridden by management to suit their very purpose. External audit appears to be external in nature (Awolowo, et al, 2018). External audit serves as a fundamental mechanism in promoting confidence and reinforcing trust between the principal and the agent (ICAEW, 2005).…”

“…However, whenever any accounting scandal is uncovered, the first question investors usually ask is "where were the auditors?" (Porter, 1997;Johnson, 2010;Awolowo, et al, 2018).…”

“…Furthermore, the findings of this study show that when managements are aware that auditors are now better trained and better informed about fraud and how it can be committed, it could serve as a deterrent to fraud. Until present day auditors' skills are upgraded to those of forensic accountants, the way and manner in which fraud are perpetuated will continue to threaten the integrity of financial reporting (Awolowo, 2014 (Awolowo, et al, 2018). The main goal of a forensic accounting system is to protect organisations from potential financial statement fraud, asset embezzlements and any kind of occupational fraud within an organisation (Gligorić, et al, 2017 Therefore, there is a need for a system shift to forensic accounting.…”