INTRODUCTION
Fraud is an integral part of every walk of life. Fraud is evident in every
economy be it developed, like The U.S.A., Europe, Japan or even African Beggar
nation economies. The degree of prevalence varies anyway. Fraud undermine the
safety, soundness and stability of organizations. It is not desirable, it is a
retrogressive virus.
Any organization wishing to conduct its business, in an orderly and efficient manner needs some internal controls. The aim is to produce:
i. Reliable financial accounting information both for its own use and for other interested parties.
ii.
Reduce fraud, because fraud cannot be completely
eradicated.
Fraudsters deliberately falsify reports, most especially where they discover a
loophole in the system.
The desire of every management or organization should be to exterminate fraud, prevent it or to reduce it to the barest minimum. Fraud therefore, is defined as; misappropriati0n, theft or embezzlement of corporate assets in the particular economic environment.
In the simplest thinking, fraud could be seen as stealing by tricks. Historically, fraud has always existed with the nature and life of mankind. The Nigeria society, particularly since after the civil war is plagued with the desire to get rich quick. An ugly aspect of this scenario is frequencies, complexities and magnitude of these frauds. As society become more enlightened and complex, methods of perpetrating frauds become more sophisticated.
THE
PLAYERS IN FRAUD GAME
i. Most frauds take place with the connivance of an insider, or staff of the organization.
ii.It could even be a sole business initiative of the staff. For example; an executive with greedy intent produces and manipulates documents to raise funds with no genuine claim. Everything looks right except that they do not exist.
iii. So many organizations have in the recent time gone under and many factors have been attributed, but it is obvious that fraud was one major of such reasons.
THE
ELEMENTS OF FRAUD
The three
elements are called “WOE” Will, Opportunity and Exit; these imply;
-The will to commit the fraud by the individual.
-The opportunity to execute the fraud
-The Exit, which is the escape from sanctions against successful or attempted fraud or deviant behavior.
TYPES OF FRAUD
Bite fraud: occurs when the assets are taken and the individual taking it disappears. This usually involves large assets, hence it is detected quickly. Therefore to avoid being tracked downs and the “biter” absconds to a protected colony e.g. A thief.
Nibble fraud: involves small assets taken in piecemeal, therefore, the possibility of early detection is very low, hence the fraud takes place on many occasions.
CAUSES OF FRAUD
The causes of fraud arc grouped into two major classes i.e. Institutional and Environmental/Social factors.
I. Institutional factors: The institutional causes of fraud identified are:
a. Poor internal control/internal check; inadequate internal control and invective and/or inefficient application of internal control measures create hayfields loopholes for inclined staff, or member of church to commit fraud, so also ineffective audit.
b. Inadequate training and re-training; lack of adequate training and retraining on both the technical and theoretical aspects of the job leads to poor performance that breeds malpractice. Failure by the management and staff to undergo on-the job training and even relevant outside courses also lead to unsatisfactory performance which eventually creates room for malpractice.
c. Inadequate knowledge and Experience of Staff; Malpractice occur with higher frequency among staff with little experience and knowledge. With experienced and knowledgeable staff, there is less likelihood that malpractice would pass such staff undetected unless with his active connivance.
d. Use of sophisticated Accounting Machines: In the hands of dishonest staff sophisticated accounting machines could be employed to deliberately omit entries, substitute improper calculations and posting. Manipulate documents, substitute fictitious documents and other genuine ones.
e. Poor Security Arrangement: Fraudsters. Thieves always have their way in organizations where security arrangement for valuable documents and assets are weak, poor and vulnerable.
f. Negligence: Negligence is a product of several factors including supervision, lack of technical knowledge, apathy, pressure etc.
g. Bad Management: Management practices, when negative to the aspirations and development needs of staff, could result in the generality of staff being frustrated. Frustration in turn breeds malpractice.
h.Poor Remuneration: When remuneration packages cannotconform with the economic realities of the times or salaries paid cannot favorably compare with those received by their counterparts in the same industry, staff will be compelled to become rather opportunistic in making money from other sources which may lead to wide spread corruption and misappropriation of assets.
Other causes are
i Absence detailed operational manual manual.
ii. Poor record keeping and accounting
iii. Faulty personnel policies.
iv. Staff infidelity.
II.
Environmental/Societal factors;
a.
Personality Profile of Fraudsters: Some people
are over ambitious hence prone to committing fraud. They are bent on making it,
by hook or crook.
They dismiss morality as an unnecessary prerequisite of virtuous life.
b.
Social Value: There is general dishonesty in the
society with morality thrown to the dogs, hence the society becomes fraudulent.
Misplacement of religious and social values, the unquestioning attitudes of the
society towards sources of wealth and brazing desired of such to live up to
expectation.
c.
Fear of Negative Publicity: Many institutions
fail to report cases of fraud to the appropriate authorities, as they believe
doing so will give negative publicity/image of the institution. The attitude
encourages individuals with inordinate ambition to continue to defraud.
d.
Indiscipline: There is always a minimum level of
conformity, orderliness and moderate behavior below which the individual and
the society will not be able to function effectively.
e.
Slow and tortuous legal procedures
f.
Lack of effective deterrent or punitive measures.
MOTIVATIONAL
FACTORS TO DEFRAUD
The
following factors motivate an individual to defraud organizations:
· Excessive pressure to meet family obligation
· High cost of living
· The desire to be like others
· Social expectations and obligations
· Job frustration
· Heavy personal indebtedness
· Desperate need for money
· Greed
· Everybody does it syndrome etc.
FORMS
OF FRAUD
The following are the forms of fraud:
· Forgery of authorized signature
· Premature writing off— of assets
· Over invoicing
· Defalcation
· Suppression of liability/Assets
· Unofficial borrowing
· Fictitious transactions etc.
· Withdrawals from dormant account
· Syndicate fraud
EFFECTS OF FRAUD
· Fraud leads to loss of funds and premature wind-up
· Fraud could lead to loss of an organizations trained manpower as a result of shortage of funds to Sustain its employees who seeks out for greener pastures elsewhere.
· Fraud damages the image of an organization prospective investors/members will not be willing to identify with or invest in an organization with battered reputation or rocked by cases of fraud.
· Where past and present fraud are not being checked by the authorities, other members would definitely cash on the vulnerability of the system to continue to defraud the organization.
FRAUD
DETECTION
Frauds detection requires innovative and creative thinking as well as rigor or science
i. To detect fraud or the intention of it, the following
measures should be deployed.
ii. Staff Appraisal: This could be achieved by depth study and analysis of staff profile through the CV and studying the staff character.The CV: Staff with high turnover or job profile and traits of irresponsibility can be revealed.
Typical character, of a fraudulent staff
a) He rarely wants to go on leave
b) He hates transfer
c) He is a jingle, the most popular among staff and others
d)
His temperate range is between the two extreme very
obliging (all the
time and highly aggressive on occasions)
e) Commands confidence
f) Very hard working but counter productive
FRAUD
IDENTIFICATION
The following indicate fraud:
a) Weak internal check and control
b) Missing of vouchers and documents
c) Falsification of documents
d) Unapproved payments, transactions and incorrectly recorded transaction, etc.
SPECIALIZED
EQUIPMENT AND MACHINE FRAUD
In the recent times, there have been incidences of fraud perpetrated in organizations of which billions of naira is being lost. Many of these frauds are not detected and huge sums of funds are siphoned into the perpetrator’s pocket of such frauds not being detected are those committed using specialized equipment and machines. The most common of these is what is called computer fraud. A computer is designed to aid and provide efficiency to the activities of an organization. This it does by proving speed, accuracy and manipulation of large information storage.
Today,
computer is being manipulated to the advantage of “criminals” and to the
disadvantage and detriment of the organization. This is called computer fraud.
Computer is capable of carrying out any task under the sun as long as the
software that will enable it is available.
Computer can be used for the benefit of the organization and also can be used
with equal speed and accuracy against the organization to defraud it. The three important units of the
computer are:
i. Input unit
ii. Processing unit
iii. Output unit
Through each of these units, fraud can be perpetrated, therefore activities in these units must be identified, and monitored so as to detect fraud and to a large extent prevent computer fraud.
DETECTION
OF COMPUTER FRAUD
The following are examples of computer fraud:
a) Fraudulent input of data
b) Unauthorized and fraudulent input of data (Fraudulent Personnel bye-pass the authority by all means so that the fraudulent data is not being verified before the input.
c) Unauthorized and fraudulent amendment of files: Fraudsters will naturally alter the facts in the file to favor him/her. This is done when the facts of data in the tile can incriminate the fraudster and when such fraudulent personnel is not the one to input the data.
d) Unauthorized and fraudulent amendment to programs. Program experts who are fraudulent commit fraud here, they simply make amendment to the program, to the effects that the program will start malfunctioning and somebody else will start benefiting.
e) Output falsification: This is in the area of manipulation of data and code.
f) Falsification or deliberate delays in processing list and balances with the aim of allowing fraudulent activities before early detection
g) Deliberate introduction of computer viruses into the computer, with the aim of destroy.ing the content of computer before detection.
PREVENTION
Computer fraud can be perpetrated in diverse ways so also there are ways through which it can be controlled and prevented.
To combat fraud, an organization should try to ensure the following:
· Staff integrity and qualification: The quality of staff must be improved upon. The mind-set of the average worker should be made anti-fraud and pro-integrity and contentment.
· There is the need for segregation/rotation of duties.
· Good organization/distribution of work
· Physical access/fire prevention
· Security planning and operating instructions.
Further
advise for computer fraud prevention:
i. You must protect file integrity (unauthorized access must be guided against).
ii. Input controls: Authorization, approval, control totals.
iii. Processing/opening controls e.g. password system at the 3 levels of the compulsory.
iv. Output controls: You must ensure proper distribution to authorized persons.
v. Install data encryption security measure. Of course, the level of data encryption software used, determines the overall safely of these systems.
THE IMPORTANCE
OF AUDITING
The
Origin of Auditing
The practice of auditing had its origin in the necessity for the institution of some systems of check upon person who had the responsibility to record the receipt and disbursement of money on behalf of others. The ancient states and empires applied some systems of check, to their public accounts, evidence abound that the ancient Egyptians, the Greeks, and Romans utilized systems of check and counter check as between the various financial officials.
The person whose duty it was to carry out such an examination of accounts became known as the auditor, the word being derived from the Latin word “audire” to hear. Originally the accounting parties were required to appear before the auditor who heard their statement of accounts etc. Auditors protect the interest of the investing public. Audit of the accounts of limited liability companies virtually in all economics is statutorily compulsory.
In Nigeria, we have two major laws governing the operations of limited liability companies and these laws make the audit of limited liability companies compulsory.
These laws arc:
1. The Companies Act, 1968
2. The Companies and Allied Matters Decree 1990.
However, in the case of public sector organizations, the constitution of the Federal Republic of Nigeria provides for their audit.
DEFINITION
OF AN AUDIT
An audit is a process whereby accounts of business entities etc. are subjected to scrutiny in such detail as will enable the auditor form an opinion as to their accuracy, truth and fairness. This opinion is then embodied in an audit report addressed to those interested parties who commissioned the audit or to whom the auditor is responsible under statue. (Emile Woolf). The International audit practice committee simply defines audit as an independent examination of financial statements of an enterprise by an appointed auditor in accordance with terms of his engagement and in compliance with relevant statutory and professional requirements.
THE
AUDITOR
For all intent and purpose the auditor is a professional accountant, licensed by a statutorily recognized accounting body as possessing sufficient skill, knowledge, experience and integrity, to audit financial statements and allied Matters and express an independent opinion as to their truth and fairness. Bearing in mind, that owners and outsiders interested in the affairs of the organization audited shall rely on such opinion expressed by him.
IMPORTANCE
OF AUDITING
The sole purpose of any audit is to obtain and evaluate the assertions made by the management of the organization. The five assertions assumed to be made by any management are:
1. Existence and/or occurrence: This is to establish that assets and liabilities are in existence; revenue and expense transactions occurred. One of the significant sign post of this is the cut—off i.e. recognizing assets and liabilities, is of proper date and accounting for revenue expenses and other transactions in the relevant period.
2. Completeness: This is to establish that all transactions and accounting for them arc covered by the financial statements.
3. Rights and Obligations: This is to establish that assets are property rights; and liabilities are obligations of the client. Due regards must be paid to contingencies.
4. Valuation and/or Allocation: This is to establish whether or not proper values have been placed on assets, liabilities, revenues and expenses.
5. Presentation and Disclosure: This is to establish that appropriate Generally accepted Accounting Practice (GAAP) are consistently applied and disclosed in compliance with appropriate law and regulations.
In obtaining and evaluating these assertions in the above mentioned the auditor obtains Audit evidence, Evidence is the valid, relevant and unbiased procedure used through the auditors direct and personal knowledge, examinations and enquiries to establish each audit assertion, by and large form an opinion about them which are basis of his report.
i. The fact that the accounts of a concern/business have been audited by a professional accountant, stamps them as correct and authentic record of transactions and a fair portrayal of the state of affairs of the business at a particular date. Therefore other interested parties place reliance on the audited account for future investments in thebusiness
ii. It also enables government to assess the correct tax payable by the organization. etc
CONCLUSION
In an organization, it is important that these concepts outlined be
incorporated in the
operations namely:
· Cash handling
· Staff recruitment
· Project implementation
· Project monitoring and other areas as may be deemed necessary.
If these ideas arc applied much areas of waste and abuse of authorities would be reduced to the minimum.
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