SECURITIES FOR BANK LENDING

Introduction

A.  Securities

What factors readily come to the mind of the banker when he is approached for a facility by a customer.

 Opinion is widely but mistakenly held among finance borrowers that security is the most important factor considered by banks in taking decisions to grant credit facilities. From the bankers  point of view, however, there are numerous factors to be considered in any request for a credit facility and paradoxically a security is more often than not given, the last consideration.

A prudent banker does not lend against security. The social desirability of the venture; its viability, it’s profitability, both to the customer and the bank, the reputation of the customer should rank foremost in the mind of the lending banker when considering any proposal by his customer.  
However, since any lending is a risk taken by the banker, the need to have tangible security so as to provide a kind of insurance to the banker, in case matters go bad, cannot be over emphasized. If for whatever reason the customer is unable to comply with his repayment program the banker can have recourse to the security to recover his money.
Moreover given our present borrowing culture with its high rate of default ,one is tempted to also argue that the issue of security is equally as paramount as the ability of the customer to pay. The demand by bankers for tangible. Security is not only prudent and reasonable but it has the backing of the law where it is said: where adequate security is required by such rules and regulations, such security shall be obtained for the advance, loan or credit facility granted by the bank.

B. Types of Securities Generally Acceptable
for Bank Lending

The type of security a bank will accept will depend on a number of factors such as:
(i) the nature of the facility being sought
(ii) the amount of the facility being sought
(iii) the duration of the facility being sought
(iv) the project for which the facility is being sought for
(v) the reputation of the customer etc.
Securities generally acceptable to the bank may consist of any of the following or even a combination of two or more. The list provided hereunder is not exhaustive.
(i) Mortgage over land and building
(ii) Debenture
(iii) Charge over Fixed Deposit/Savings Account
(iv)  Guarantees
(v) Stock and Shares  

(vi)  Insurance Securities
(vii) Hypothecation
(viii) Domiciliation of Payments
(ix) Trust Deeds
(x) Trust Receipts etc.
However, whatever type of security that is chosen by a banker to “secure” his exposure it must possess certain universal attributes or qualities. These attributes should inter-alia, guide the banker in choosing which security to accept.
Firstly, the value of the security should be ascertainable and stable over the years. This is because anything whose value changes frequently should not be accepted because it could fall below the exposure of the bank.

 Secondly, the security should be easily realizable with minimum delay and expense.

Thirdly, the security should cover the lending adequately.

 Fourthly, it should give absolute title to the banker with as little formalities as possible. Lastly it should be transferable easily.

C. Types of Securities “Commonly” Used

The securities to be considered are: Landed properties, Debenture, Fixed Deposit/Savings Accounts and Guarantees.

A)  Landed Properties

For landed property security, usually a mortgage (Equitable or Legal) ; is executed by the customer charging the said property and or improvements on the land (either houses,  economic trees, farm etc.) to the lending banker. In very simple terms, a mortgage could be defined as a security, effected by the creation or transfer of interest in property for the payment of a debt or discharge of some other obligation. Whenever a mortgage is entered into the lender (bank) is referred to as the mortgagee and the borrower (customer) who owns. The property/improvements on the land to be used or has the authority of the owner of the property/improvement on the land to be used is called the Mortgagor.

 We will now consider the various types of mortgages.

(i) Equitable Mortgage

An equitable mortgage passes only the equitable estate or creates an interest in the land or property. An equitable mortgage could be created by mere deposit of title documents with the lender with the intention to use it as security for borrowing. It could also be created if the Mortgagor’s estate or interest is merely equitable.

(ii) Legal Mortgage

A  legal mortgage arises when there is a transfer of a
legal estate or interest in land or property for the purpose of securing, the repayment of a facility.
Most banks prefer Legal to Equitable Mortgage for the
obvious advantages, in case of default such as:
(1) The  right to sell or foreclose the mortgage property, without having to obtain the order of a court of law.
(2) The right to appoint a Receiver Manager without having to get an approval of the Court.
(3) The right to enter and remain in possession without having to obtain an Order of the Court.

(iii) Tripartite Legal Mortgage

This is the same with a legal mortgage but the main distinction is that there is a third party apart from the lender and the borrower. The third party (called Surety) who more often than not owns the property to be charged as the security is joined along with the borrower as mortgagors. This type of mortgage is commonly used by corporate bodied borrowers along with another individual (who more often than not has a vested interest in the corporate body). The advantages to the lender are the same with those of a legal mortgage in case there is any default in repayment of the facility by the borrower.

   Requirements for the Preparation and Perfection
of  Securities,  In Respect of Landed Properties

When a facility has been approved for a customer and he offers landed property as security, the legal department would want the following information and documents sent immediately to enable  preparation of  Legal Mortgage engrossments:
(i) Original or Certified True Copy of the Title Deed.
(ii) Borrower’s full names
(iii) Borrower’s residential address (Registered Office Address if a company)
(iv) Nature of facility (i.e. Term loan, Overdraft, Staff loare.tc. )
(v) Consideration (Amount for which the mortgage should be stamped)
(vi) interest Rate
(vii) Certified True Copy of Certificate of Incorporation n
and Memorandum and Articles of Association (if a
Company)
(viii) Certified True Copy of Certificate of Registration of Business Name Form (if sole proprietorship or
partnership).
(ix) Solicitors Search Report on the Title Deeds (if available).
However, if a tripartite legal mortgage is to be prepared.

In addition to the above requirements in respect of a legal mortgage the Lender should also  carry out the following legal checks
(i) Surety’s full names
(ii) Surety’s residential address (Registered Office if a Company)
(iii) Surety’s Certificate of Incorporation and Memorandum and Article of Association (if a company).
After the preparation of the engrossments, same would be sent back to the lender for their customer’s execution. After execution, the engrossments should be sent back for Legal
 perfection. To facilitate the perfection, the
bank should send the following to the Legal department along with the executed engrossments viz:
(i) The Tax Clearance Certificate of the borrower
(ii) Stamping and registration Fees
(iii) Valuation Report of the mortgaged property (where applicable)
(iv) Tax Clearance Certificate of two Directors (if the borrower is a corporate body).
(v) Tax Clearance Certificate of the Surety in the case of a Tripartite Legal Mortgage.
(vi)  The Clearance Certificate of two of the Surety Company Directors (if the Surety is a limited liability company in respect of a tripartite legal mortgage).
Thereafter, they would stamp and register the mortgage at the appropriate Land Registry. The mortgage is also registered at the Company’s Registry in the case of a corporate borrower.
The requirements for the preparation and perfection of a Debenture are the same as those earlier mentioned in respect of a limited liability company. However, in addition there must be a Board Resolution of the Company authorizing execution of the debenture.
When a customer must have paid up the facility he would want to have his title deeds returned to him. What the branch Manager should do in this respect is to write the Control point and categorically say that the customer was no more indebted to the bank.

The Manager of the bank should also forward the earlier perfected mortgage deeds along with a photocopy of the title deed to the Legal department. The necessary Deed of Release or Surrender (as the case may be) would be prepared   for execution. After execution the Legal department would return the deeds to the branch Manager who would then hand them over to the customer along with the original title deeds. The customer would then go to the Land Registry where the mortgage was initially registered and
register the deed of release or surrender.

B)  Debenture

A debenture may be defined as an instrument usually issued by a corporate body (i.e. a limited liability company) to its creditors as evidence of a debt or as a security for a facility. It contains a promise to pay the amount stated on its face, plus the interest. It usually gives a charge on the Company’s assets to secure the indebtedness.
A debenture can be fixed or specific. This means the
borrower cannot dispose of the assets so charged without obtaining the approval of the lender.
The debenture could be floating, which means the borrower is at liberty to deal with the property during its usual course of business i.e. it could sale the charged property, and purchase new ones without necessary obtaining the authority of the lender.
A debenture could also be pari-pasu. This means there are two or more lenders to the company and they share equally in the security without giving priority to one over the other.

C)  Charge Over Fixed Deposit/Savings Account

A charge is a form of security for the payment of a debt consisting of the right of the creditor to receive payment out of some fund in case of default by the borrower in his repayment.

Today charge over deposit or savings account is considered by most banks as one of the best type of security for lending. The reason is obvious.
Before accepting this type of security it is advisable
that the Manager should ensure:

(a) that the customer has enough funds in the account to
cover the lending.
(b) that the account is in the name of the customer.
(c) that where the fixed deposit is in the name of another person, that there is a valid and dully registered assignment of the fixed deposit to the customer for the purpose of the borrowing.
(d) In the case of a corporate body’s account, that a board resolution is obtained authorizing the charging and same must be stamped and registered at the Company’s Registry.
(e) that there is authority to appropriate the funds in the account to liquidate the debt in case of any default by the customer.

D)  Guarantees

A guarantee can be defined as a promise by one person called the guarantor to answer for the debt of another person called the principal debtor who must be legally bound to pay
the debt.
A guarantee is one of the simplest form of bank securities. Individuals or corporate bodies could stand as guarantors for another person. However, before accepting guarantees as security, the branch Manager should ensure the following:
a) ensure that the guarantor is credit worthy
b) ensure that the guarantee is a continuing one, so that
an increase in the facility beyond the amount guaranteed does not discharge the guarantor.
c)  ensure that the guarantee is stamped.
d) in case of a limited liability company being a guarantor ,ensure that the Memorandum and Articles of Association allow
for that and a board resolution is obtained. The document must be registered at the Company’s Registry.
e) in case of an individual being a guarantor , ask for some other tangible asset if possible.

 CONCLUSION

All said, if security is not the primary consideration of a lending banker when approached by his customer for a facility, it could also be safe to argue, it is also not the least in his consideration. From the checklist of the requirements for perfection of landed property security, one could venture to say that it’s an onerous exercise for both the customer and the banker. Unfortunately, despite the difficulty in perfecting landed property security, its efficacy in terms of realization is very low, disappointedly though. As such, it is suggested that it is time we started thinking seriously in terms of utilizing more of the other types of securities for bank lending.
Finally, Lenders should not hesitate to ask questions when in doubt or are not clear about any securities issue.

 

 

 

 

CAUSES OF FRAUD AND THE IMPORTANCE OF AUDITING

 

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.