Solidification of Corporate Governance through forensic accounting

The forensic accountants' role in banking sector

Corporate governance has recently become a buzzword in the business world all over the world. Although it is not a new concept in the corporate world, the sectors in which it is used are changing in response to changing demands. This notion was first developed in the United States in the 1970s to address the agency problem.

Corporate governance, in the strictest meaning, is the process by which a corporation’s objectives are determined and pursued in the context of the social, regulatory, and market environment. These include monitoring companies’ actions, policies, practices, and decisions, as well as the actions, policies, practices, and decisions of their agents and affected stakeholders.

Corporate governance methods can also be viewed as an endeavour to bring the various stakeholders’ interests closer together. Although corporate governance is vital for all types of businesses, it is particularly relevant and appropriate for publicly traded limited firms that must protect the interests of minority shareholders. Financial crimes that made it into the public eye highlighted the need for a significant overhaul of the corporate governance system as a whole.

Transparency, accountability, and reliability in professional relationships are the three fundamental pillars of corporate governance. As a result, the coexistence of these three reinforcing pillars is regarded as a prerequisite for developing the belief that the organization is acting in the best interests of all stakeholders.

From Eron (2001), WorldCom (2002), Bombay Dyeing and Manufacturing Company Limited (2005), Satyam Computer Service (2009), Sonali Bank-Hallmark (2012), through the Bangladesh Bank Reserve heist (2016), massive frauds have impacted the general population.

If we go into the details of the aforementioned incidents of financial misappropriation, we will see that they are the result of poor corporate governance processes that resulted in flaws in internal control or fake financial reporting. Good corporate governance is therefore vital to regaining widespread investor confidence, with countries passing full-length corporate governance Codes and Acts that must be followed by corporate organizations.

A growing number of studies show that ‘bad’ corporate governance (CG) is a major contributor to poor performance, distorted financial reports, and dissatisfied stakeholders. Corporations and regulatory authorities are currently attempting to identify and rectify any flaws in their reporting systems.

Internal controls have been weakened as a result of poor corporate governance, as well as non-compliance with established internal controls and operating procedures. Ignorance of and non-compliance with banking business norms, laws, and regulations; inactive shareholders; poor risk management techniques resulting in high amounts of non-performing credits, particularly insider-related credits; lending abuses (Ramaswany, 2009). Internal controls have also been weakened as a result of poor corporate governance, including non-compliance with established internal controls and operating procedures. Passive shareholders; weak risk management techniques leading in substantial amounts of non-performing debts, especially insider-related credits; lending abuses.

As a result of these flaws, many businesses have been looking for ways to strengthen corporate governance in order to ensure more transparent business practices and a more ethical business environment. Due to the homogeneous nature of banking goods, this is especially true for banks.

One of the most significant obstacles standing in the way of these objectives is the potential of fraud from within the organization. Instead of going through the old path of managing the matter with account audit, which is time consuming and wasteful, new organizations have a variety of choices for investigating any concerns with a significantly higher success rate.

Unfortunately, even the best-laid schemes for reducing bank fraud are rarely sufficient. A number of compliance measures had been implemented into risk management strategies to help prevent any acts of fraudulent conduct in order to address the instances of fraud. As a result, if any such action has been found or believed to occur, a comprehensive investigation is required.

Fortunately, in recent years, organizations have had access to forensic accountants’ expertise, allowing them to undertake extensive investigations and handle fraud issues in a more ethical manner. A forensic accounting technique can track down the source and look into a company’s records to uncover any fraudulent activity.

Given the importance put on greater corporate governance, employing forensic accounting’ skills in such a proactive manner appears to be the next natural step in risk management measures in order to remain ahead of the game and address these concerns more efficiently than ever. While this is not to argue that other ways of internal investigation should be ignored, it appears that forensic accounting can undoubtedly help supplement these other strategies to produce a more highly developed program than ever before.

Litigation services, which recognize the position of the accountant as an expert and may require a consultant, and investigative services, which employ the skills of a forensic accountant and may also necessitate trial testimony. As a result, forensic accountants are experts in financial accounting, internal control systems, law, investigation, and interpersonal communication.

The intrinsic properties of forensic accounting aid in the establishment of an integrated corporate governance framework, which will eventually aid in the prevention, mitigation, and detection of fraud in organizations. The investigation abilities of a forensic accountant can thus detect the presence of latent or possible anomalies that may later appear in company activities.

Given the importance put on greater corporate governance, employing forensic accountants’ skills in such a proactive manner appears to be the next natural step in risk management measures in order to remain ahead of the game and address these concerns more efficiently than ever.

While this is not to argue that other ways of internal investigation should be ignored, it appears that forensic accounting can undoubtedly help supplement these other strategies to produce a more highly developed program than ever before. The following are some of forensic accounting’s positive contributions to good corporate governance:

  1. INTERNAL CONTROL SYSTEMS: – According to Ramaswamy (2009), the financial community has realized that there is a greater need for skilled professionals who can identify, expose, and prevent weaknesses in poor corporate governance, flawed internal controls, and fraudulent financial statements due to a failure in corporate communication structure.

Forensic accounting abilities are especially important for dealing with the issues mentioned above, and they are becoming more widely used within a corporate reporting system that emphasizes accountability and responsibility to stakeholders, particularly banks. As a result of the forensic accountant’s specialized knowledge in crime, the corporate reporting system developed by management is expected to improve, resulting in a better corporate image and thus strong corporate governance.

The forensic accountant, who is an expert in financial fraud matters with particular abilities in scientific knowledge and legal matters, could assist management in improving corporate governance in the organization in order to ensure adequate responsibility and avoid fraud by management.

Furthermore, because management is aware that the forensic accountant may be called upon at any time by external auditors or the audit committee to investigate and detect financial fraud, management will be more diligent in carrying out its function effectively, knowing that the forensic accountant is a crime detector.

Knowing that a forensic accountant may be called in to detect and prevent fraud, the board of directors will almost always guarantee that their company has a robust internal control system, as well as visible checks and balances, which will have a favourable impact on corporate governance.

Internal control codes and genres are to be developed and monitored by company management, but the use of forensic accounting will help to increase accountability at all levels of the hierarchy. Increasing responsibility will not only serve as a deterrent to possible fraud, but it will also improve communication and synergy across the organization.

Internal control systems, on the other hand, are known to fail when an external party is successful in obtaining an undeserved favour from an organization by engaging in corrupt practices such as bribing, as well as when internal stakeholders engage in corrupt practices in order to obtain unlawful or unethical benefits from their organization. In both cases, the spirit of corporate governance has been violated.

When an accountant investigates the motivations behind such behaviours, he or she may discover the presence of either compensatory deprivation by the employer or an immoral attitude among the employees, or a combination of the two. As a result, forensic accounting aids in the creation of a favourable working environment, which may deter fraudsters from committing such crimes.

The forensic accounting framework’s scepticism can also predict top-level management’s immoral intentions, which are sometimes beyond the capabilities of corporate governance framework alone to predict.

  1. FINANCIAL STATEMENT FRAUD: – Numerous financial frauds from the past and the beginning of the century, as well as the emergence of the global financial and later economic crises, have brought to the fore the relevance and reliability of financial information, and asserts that the financial reporting system and the accounting and auditing profession are frequently accused because of the appearance of frauds and the loss of trust. As a result, he discusses frauds and omissions as causes of erroneous financial statements, as well as the function and necessity of forensic accounting and a forensic accountant in detecting frauds in financial statements.

In the event of serious irregularities, accounting and auditing skills combined with the analytical eye of forensic accounting can raise a red flag ahead of time. The three pillars of corporate governance are aligned with the accounting conceptual framework on which financial statements are prepared and audited.

Transparency, accountability, and reliability of policies, procedures, and goals are thus reflected in a corporation’s financial statements. Auditors’ thorough examination of the double entry system and paperwork, on the other hand, can occasionally uncover those abnormalities if they are given the much-needed liberty to exercise complete independence. Because of the profession’s inherent limits, it may only be possible to detect fraud signs without taking the necessary steps to prevent it.

As a result, forensic accountants can discover financial manipulation through creative accounting and, if necessary, give litigation support. As a specialized discipline of accounting, forensic accounting tries to overcome the constraints of traditional accounting and auditing techniques.

As a result, forensic accounting, in combination with fraud detection, an effective internal control system, and high-quality financial reports, will enable corporate governance mechanisms to fulfil their responsibilities for accomplishing corporate goals. Furthermore, forensic accounting will have a positive impact on corporate governance by enhancing management responsibility, internal control, and financial reporting. It will also aid in decreasing company failure and investor impoverishment, both of which can have an impact on corporate growth and achievement. Overall, forensic accounting possesses all of the traits necessary to contribute to corporate governance’s ultimate purpose.

The writer can be reached on: 0246390969 or Email: [email protected]


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