Project – The impact of artificial intelligence in auditing and forensic accounting for financial reporting in manufacturing firm in Nigeria
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
In recent years, the integration of Artificial Intelligence (AI) into the financial sector has significantly reshaped the practices of auditing and forensic accounting. The introduction of intelligent systems capable of mimicking human cognition has opened new frontiers in the automation of financial tasks, enabling unprecedented levels of precision and efficiency. AI is now being deployed to perform complex auditing tasks such as data reconciliation, pattern recognition, and anomaly detection, which were previously time-consuming and prone to human error. These technologies are not only augmenting human capabilities but also redefining the expectations for real-time and transparent financial oversight in both public and private sectors.
AI applications in auditing extend beyond basic data processing to include machine learning algorithms, robotic process automation (RPA), and natural language processing (NLP). Machine learning models can learn from historical financial data to identify emerging risks and potential fraud indicators. RPA can streamline repetitive tasks such as invoice processing, ledger entries, and report generation, freeing auditors to focus on higher-level analysis. NLP, on the other hand, can be used to extract and interpret unstructured financial data from emails, memos, and contracts, providing auditors with a more comprehensive view of an organization’s financial landscape. As these technologies mature, they offer the potential for continuous auditing systems that monitor transactions in real time, dramatically improving the speed and reliability of financial reporting (Appelbaum, Kogan & Vasarhelyi, 2017).
In the Nigerian context, the manufacturing sector represents a vital component of the economy, accounting for substantial contributions to employment, industrial output, and GDP. Despite its importance, the sector faces considerable challenges related to financial irregularities, misstatements, and internal fraud. These issues often stem from weak internal control systems, limited regulatory oversight, and reliance on manual auditing methods. Traditional audits, typically conducted annually or semi-annually, are often reactive and incapable of detecting evolving fraud schemes in time to prevent financial damage. This has created a growing need for intelligent, proactive systems—such as AI-enabled auditing tools—that can address these deficiencies.
AI tools have proven especially beneficial in large manufacturing firms where financial transactions occur at high volumes and velocity. The ability of AI systems to process and analyze massive datasets in real-time provides a strategic advantage in detecting abnormalities and inconsistencies that would likely be overlooked by human auditors. For instance, algorithms can flag duplicate invoices, unauthorized access to financial systems, or transactions that deviate from established patterns. When combined with internal control systems, these technologies act as early warning mechanisms that help prevent financial losses and reputational damage. Furthermore, AI tools can continuously learn from new data, refining their fraud detection capabilities over time (Issa, Sun, & Vasarhelyi, 2016).
Forensic accounting—an investigative discipline that combines accounting, auditing, and legal skills—has also undergone a significant transformation due to the influence of AI. In the past, forensic investigations required extensive manual data collection and analysis, which could be slow and error-prone. Today, AI-enhanced forensic tools enable professionals to trace financial transactions across multiple platforms, visualize fraudulent patterns, and reconstruct financial events with greater speed and precision. In manufacturing firms, where procurement fraud, inventory theft, and inflated reporting are common, AI can provide crucial insights into hidden financial manipulations, aiding in litigation and regulatory compliance.
This evolution aligns with global expectations for greater financial transparency and accountability, especially in industries vulnerable to operational inefficiencies and fraud. Nigerian manufacturing firms, many of which operate under strict reporting regulations from the Financial Reporting Council of Nigeria (FRCN) and international accounting standards, stand to benefit significantly from AI adoption. AI not only helps these firms meet compliance requirements but also strengthens investor confidence by ensuring that financial statements reflect an accurate and timely picture of organizational performance. As technology continues to evolve, the convergence of AI, auditing, and forensic accounting is expected to play a central role in shaping the future of financial reporting in Nigeria’s manufacturing sector (Davenport & Ronanki, 2018).
1.2 Statement of the Problem
Despite the growing recognition of the benefits of Artificial Intelligence (AI) in auditing and forensic accounting, the adoption rate remains low among manufacturing firms in Nigeria. Many of these firms continue to rely heavily on traditional, manual, or semi-automated systems for financial reporting and internal auditing processes. These outdated systems are often inadequate in handling the complexities of modern financial operations, especially as transactions grow in volume and complexity. As a result, firms remain vulnerable to various financial risks, including misstatements, undetected errors, and delayed reporting.
One of the most pressing challenges is the high risk of fraud and non-compliance with financial regulations due to inefficient auditing practices. Manual audit methods are prone to human errors and may lack the thoroughness required to uncover sophisticated fraud schemes. In addition, financial irregularities may go unnoticed until significant damage has been done. Without the real-time monitoring capabilities and advanced pattern recognition that AI provides, many manufacturing firms struggle to meet the increasingly stringent requirements of financial reporting frameworks such as the International Financial Reporting Standards (IFRS) and local regulatory bodies like the Financial Reporting Council of Nigeria (FRCN).
Another critical limitation is the shortage of skilled personnel capable of deploying and managing AI-driven financial tools. Implementing AI technologies in auditing and forensic accounting requires expertise not only in accounting and finance but also in data science, machine learning, and systems integration. Unfortunately, Nigeria faces a significant talent gap in these areas. Many firms are unable to attract or afford professionals with the necessary technical know-how, further hindering the implementation of advanced financial technologies. This gap is compounded by the limited availability of training and development programs focused on AI applications in the financial sector.
Compounding this problem is the inadequate investment in AI infrastructure. AI tools require substantial upfront capital for software acquisition, data storage systems, and cybersecurity protections. Most manufacturing firms in Nigeria operate within tight financial constraints and often prioritize immediate operational needs over technological investments. In some cases, decision-makers may lack awareness of the strategic value AI brings to financial reporting and audit quality. Without adequate infrastructure and leadership commitment, even the most promising AI initiatives are likely to fail or remain underutilized.
Given these challenges, there is a clear knowledge gap in understanding how AI impacts financial reporting outcomes in Nigerian manufacturing firms. While global studies have demonstrated improvements in audit accuracy, fraud detection, and financial transparency through AI, there is limited empirical evidence from the Nigerian context. This study aims to bridge that gap by exploring the extent of AI adoption and its practical effects on financial reporting reliability, forensic accounting effectiveness, and audit performance. The findings will provide valuable insights for firms, regulators, and policymakers seeking to enhance financial accountability through modern technology.
1.3 Objectives of the Study
The general objective of this study is to examine the impact of Artificial Intelligence in auditing and forensic accounting for financial reporting in manufacturing firms in Nigeria.
The specific objectives are to:
- Assess the extent of AI adoption in auditing and forensic accounting in manufacturing firms in Nigeria.
- Evaluate the impact of AI on the accuracy and reliability of financial reporting.
- Determine how AI influences fraud detection and prevention in financial processes.
- Investigate the challenges associated with implementing AI in forensic and audit practices in Nigeria.
1.4 Research Questions
This study is guided by the following research questions:
- To what extent have AI tools been adopted in auditing and forensic accounting in Nigerian manufacturing firms?
- How does AI impact the accuracy and reliability of financial reporting?
- What role does AI play in detecting and preventing financial fraud?
- What challenges hinder the effective implementation of AI in auditing and forensic accounting?
1.5 Research Hypotheses
H₀₁: There is no significant relationship between AI adoption and the accuracy of financial reporting.
H₀₂: AI has no significant impact on fraud detection in manufacturing firms in Nigeria.
1.6 Significance of the Study
This study is significant because it explores a timely and relevant issue in the evolving field of financial management—specifically, how Artificial Intelligence (AI) is transforming the way audits and forensic accounting are conducted in manufacturing firms. As global standards for financial reporting become more rigorous, Nigerian manufacturing firms must adapt by leveraging technological innovations. Understanding the impact of AI on auditing and forensic accounting helps firms prepare for this shift and adopt strategies that align with global best practices.
For manufacturing companies in Nigeria, this study will offer insights into how AI can improve the accuracy, speed, and reliability of financial reporting. Many firms currently face challenges related to fraud, financial misstatements, and inefficient audit practices. By highlighting the potential of AI technologies—such as machine learning, robotic process automation, and predictive analytics—the research can guide firms in adopting the right tools to strengthen their internal control systems and reduce financial vulnerabilities.
The study is also highly relevant to auditors and forensic accountants, who are at the frontline of ensuring financial accountability and detecting fraud. As the auditing profession becomes increasingly data-driven, practitioners must adapt by acquiring new skills and competencies. The findings from this study can inform training programs and professional development initiatives by identifying the areas where AI has the greatest impact, and where skill gaps may exist in the Nigerian context.
Regulatory agencies and policy makers, such as the Financial Reporting Council of Nigeria (FRCN), the Central Bank of Nigeria (CBN), and the Institute of Chartered Accountants of Nigeria (ICAN), will also benefit from the study. With credible data and evidence on the role of AI in financial reporting, regulators can develop more effective frameworks to support technology adoption, improve audit quality, and strengthen financial oversight in the manufacturing sector. In the long term, this can enhance investor confidence and encourage more foreign direct investment in Nigeria.
In the academic sphere, this study contributes to the existing literature on AI applications in accounting and finance, especially in developing countries where empirical studies are still limited. It provides a localized perspective that helps scholars and students understand how global technological trends are impacting specific sectors within Nigeria. Future researchers can build upon this work to explore AI implementation across other sectors, such as banking, healthcare, or public administration.
Finally, this study is of broader societal relevance, as it touches on issues of economic integrity, transparency, and trust in financial institutions. When financial statements are accurate and timely, stakeholders—including investors, government agencies, and the general public—can make better-informed decisions. Therefore, enhancing the quality of financial reporting through AI is not only beneficial for businesses but also essential for promoting accountability and sustainable economic development in Nigeria.
1.7 Scope of the Study
This study focuses on Dangote manufacturing firms in Nigeria, with emphasis on their internal audit departments and forensic accounting functions. It examines how AI technologies are used in financial reporting processes and evaluates their effectiveness in fraud detection and accuracy of reporting. The study covers data from the past five years to reflect current trends and practices.
1.8 Operational Definition of Terms
Artificial Intelligence (AI): A branch of computer science that enables machines to mimic human intelligence, such as learning, reasoning, and problem-solving.
Auditing: The systematic examination of financial records to ensure accuracy and compliance with regulations.
Forensic Accounting: The use of accounting skills to investigate financial discrepancies and support legal proceedings.
Financial Reporting: The process of disclosing financial information to stakeholders to provide transparency and accountability.
Manufacturing Firm: A business entity involved in the production of goods using labor, machinery, and raw materials.