definitions of fraud

T
here are many definitions of fraud as there are individuals and experts defining it; each definition been affected just like auditing definition, his choice of words, experience, learning and environment of the individual.
Three definitions cited in Barbara R. Farrell, et al (1999) defined it as the “intentional deception to cause a person to give up property or some lawful right”( Webster’s new word dictionary); while that according to the Association Of Certified Fraud Examiners(!999) report to the nation on occupational fraud and abuse defined it as “ the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of employing an organization’s resources or assets”, the third which is from the Federal Bureau Of Investigation describes fraud as “ the fraudulent conversion and obtaining of money or property by false pretense included are larcenies by bailee and bad cheques, except, forgeries and counterfeiting” (FBI 1984:342)

Other definitions of fraud includes that of the New York county which states that “ fraud is any atte4mpt to achieve financial gain through deceptive promises of goods, service or benefit that do not exist, were ever intended to be delivered or were misrepresented, characterized by deceit, concealment and violation of trust, it may or may not involve the use of force or violence” while SAS NO.82 cited in Mohammed( 2002) defin3ed it as “ intentional misstatement arising from fraudulent financial reporting or from misappropriation of assets”; on is part, Aguolu(2002) defined it “ as the intentional distortion of the financial statement to secure particular advantages such as the misappropriation of assets” he went further to give two forms through which it can occur as;
· Defalcation, which he describes as the misappropriation of a company’ assets.
· Manipulation which is either the falsification of a company’s records or the improper use of the assets of the company.

Deduced from the above definitions is that fraud is a deliberate or intentional deception for the gratification of an individual or group which requires a theft followed by alteration of the records to conceal the acts.

Fraud according to Mark P. Patti son can best be explained by

A supply of motivated offenders
The availability of suitable targets
The absence of capable guardians or a control system to “ mind the store”


CAUSES OF FRAUD

“Most people will say fraudsters are motivated by greed, but generally speaking, greed is no primary motivator (fraud and the nation CPA, 2003).

“The best and most widely accepted model for explaining why “good people” commit fraud is the fraud triangle. This is a model developed by Dr. Donald cressey, a criminologist whose research focused on embezzlers, people he called “trust violators”( fraud and the CPA,2003)

According to cressey, there are three factors that must be present, in order for ordinary people to commit fraud. All three factors must be present at the same time in order for fraud to occur. He gave the factors as:

Pressure
Opportunity
Rationalization, he went further to explain them thus:



Pressure: which he called perceived on-shareable financial need. The fraudster has some financial problem that he is unable to solve through legitimate means, so he begins to consider committing an illegal act as stealing cash or falsifying a financial statement as a way to solve his problem. An example of such pressures that commonly leads to fraud includes:

Need to meet earnings to sustain investor’s confidence.
Need to meet productivity target at work
Desire for status symbols such as big house.


What constitute a non-shareable need according to Cressey is particular to each individual and involves some sort of embarrassment, shame and disgrace. He further asserted that they all threaten the fraudster’s status as a person who is trusted by others. Among the examples given includes that of CEO who develops a new business plan that ultimately failed and brought with it a decline in sales figure. Having just suffered through two previous bad quarters, the CEO is afraid that this latest disaster will cost him his job. Unable to face the shareholders and the board of directors and tell the bad news, the CEO persuades the CFO to help him create fictitious sales to mask the losses. The CEO is convinced that they can increase sales and correct the book next quarter.


Opportunity: this Dr. cressey, defied as the method by which the crime can be committed. The person must see some way she can use (abuse) her position of trust to solve her financial problem with a low perceived risk of getting caught. So the fraudster not only has to steal funds, she has to be able to do it in a way that she will likely not be caught and the crime itself will not be detected. For example, if an employee has access to bank cheques, she may see an opportunity to forge a company cheque payable to herself. But that cheque may well be spotted during the reconciliation of bank statement and she would be caught. In this case, even though there is an opportunity to steal the funds there is no opportunity to steal them in secret; but suppose the employee reconciles the bank statement. Now she can write a cheque payable to herself and then when the bank statement arrives, she can destroy the fraudulent cheques and force the balance on the reconciliation.


Rationalization: because the fraudster does not see himself as a criminal, he must justify the crime to himself in a way that makes it an acceptable or justifiable act. Common rationalization includes:

a. I was only borrowing the money
b. I was under paid/ my employer had cheated me.
c. My employer is dishonest toothers and deserves to be fleeced.


Rationalization is only needed at the initial stage, once the act has been completed, the rationalization is often abandoned.

Dr. Cressey in conclusion however admitted that ht e fraud triangle does not apply to those he called “predatory employees”- the person who takes a job with the intent of stealing from his employer. He went further to give reasons sanctions do not deter fraud. Among the reasons was that while carrying out fraud, offenders do not envisaged been caught as they do it in secret; besides, they do not view their actions as criminal

Toby bishop, president and CEO of the association of certified fraud examiners cited in stanek (2007) in his submission about the causes of fraud stated that “it is a fairly consistent series of major gaps in anti- fraud measures at companies”


Others factors contributing to fraud according to Mark P. Patti son includes


Poor internal control
Management over-ride of internal control
Collusion of employees
Collusion between employees and third parties


Dwelling on the motive for fraudulent financial reporting, Mohammed (2002) listed the need;

To obtain a higher price when a company is sold.
To meet the expectation of shareholders;
To obtain loan;
For personal gain.

preventing and detecting fraud

PREVENTING AND DETECTING FRAUD


THE RESPONSIBILITY OF MANAGEMENT:

“The primary duty of prevention and detection of errors and fraud rest with management, this arises out of status and by contract” (Aguolu, 2002). All literature review by the researcher stated clearly that management is responsible for the preparation and integrity of the financial information presented. There was also a consensus that the responsibility for internal control establishment. Proper reporting and the adoption of sound accounting policies rest solely with management.

Management to effectively prevent and detect fraud should among other options, consider the establishment and promotion of a strong corporate culture of integrity, honesty and ethics anchored on personal example through daily words ands actions; in other words, they should resist the temptation to over-ride established internal control measures.

Management should endeavor to set realistic organizational goals and objectives; this is to reduce the pressures on employees that push them into committing fraud.

Management should work to reduce perceived opportunities to commit fraud by ensuring that there is a written policy that describes prohibited activities and the actions required whenever violations are discovered. Other means of reducing fraud opportunities are strict controls, segregation of duties and separation of functions. For example, simple procedures such as not allowing the person writing the cheques reconcile the bank statement, not letting the receiving department maintain physical inventory, not letting the person initiating the purchase order approve the payment and not letting the person maintaining the personal database also issue payroll cheques.

More options management can adopt to reduce perceive opportunities is appropriate authorization policies for transactions, policies, practices, procedures, reports, and other mechanism developed to monitor activities and safeguard assets, particularly in high-risk areas.

Also, management should work to dispel rationalizations for engaging in fraudulent conduct and establish communication channels that will avail them of information in forms of tips and complaints. According to Joseph wells, a former FBI agent, White Collar Criminologist, Certified Public Account And Founder And Chairman Of The Association Of Certified Fraud Examiners cited in stanek(2007) “studies indicates that tips and complaints uncover more fraud than all other method put together”. In establishing the channels of communication, management should strive to inspire confidence about the confidentiality of sources of tips and complaints and also guarantee their tenure of office and secret reward for such information that leads to the discovery of fraud.

More importantly, point of entry into the firm should be secured; this can be done by engaging consultants during the employment process. Lie detector, drug test and finger printing are all options to be considered during the screening; others are adequate background checks of important on resumes and applications.

Establishment and maintenance of an independent internal audit department should also be considered for organizations without such departments.

the effect of fraud

The effects of fraud is spread out among different stakeholders in an economic system; a common thread that runs among 5hese stakeholders is that they are all negatively affected with exception of one. An attempt will be made in this study to itemize these stakeholders and an explanatory note given on each of them.

The stakeholders that are affected include:

The government/economy
The company
The analyst
The auditing/ accounting profession
The perpetrator.


The government/economy: the effect of fraud on the economy of nations is better appreciated by the staggering amount estimated to be lost in the United States alone; a staggering $600b is said to be an estimate of the loss to fraud per annum; this is more than the entire budget of Nigeria since the inception of democratic rule in 1999. Another area of loss to the economy is in taxation which is a major revenue source to the government. Fraudulent activities are meant to be concealed and therefore, not captured by the tax structure extant in an economy. There is also the problem of sub optimization of economic potential as a result of lack of accountability in resource allocation and utilization. This invariably affects the standard of living of the citizenry.


The company: apart from the direct financial loss that the company incurs when financial incidence occurs, there are other legal costs when offenders are prosecuted, increased accounting and insurance costs and loss of productivity associated with hiring and firing employees.

The analyst: the reputation of an analyst is compromised when the company whose stock he has analyzed as sound suddenly goes bankrupt. “As late as November 2001, less than a month before Enron filed for bankruptcy, 13 of 16 analysts who covered Enron still told investors to buy Enron stock even though the company had reported a staggering $1.1b revision in its net worth the previous month and was undergoing a SEC probe. Not surprising, investors wondered whether they could trust corporations, auditors or stock analyst (MSN Encarta, 2005)


The accounting profession:

Auditing is a “reputation business”. The Enron scandal saw the American congress almost outlawing auditing in the country. The loss of confidence was so deep and extensive that The Public Company Accounting Reform and Investor Protection Act was passed. Among other provisions, it sought to have a third party go over an already audited financial statement.

The destruction of reputation most often lead to loss of repeat business or failure of cross-selling and in the extreme cases, collapse like Arthur Anderson LLP.

The perpetrator: they usually gain indirectly rather than directly and they are the only stakeholders who gain from fraudulent activities. Their gain might be in the form of:

i. Increased stock
ii. Larger salary/ bonus
iii. Delayed firing or termination
iv. Delayed or improved financial consequences (debt covenant/bond rating/IPO/merger).
v. Delayed insolvency.

nigerian:make haste slowly

By ilobi Austin
Before the appointment of Prof. Charles Soludo, as the governor of Central Bank of Nigeria, very few Nigerians even among the powerful knew much about shareholding. His #25 billion minimum capital requirement for the banks saw them running to the public for funds. They, for once employed strategies that the ordinary Nigerian could talk about. It was then common to hear promos like” #100,000 shares bought in 1989, now worth #150, 000,000”quickly, every Nigerian including the pepper seller joined in the rush to become millionaires.
Some smart Nigerians, not wanting to miss the opportunity to make good money, metamorphosed overnight into professional seminar organizers, even when their own understanding was at best elementary, to teach the rest of us about the new money spinner. The same is happening today with the forex trade. A hungry looking fellow wants to sell strategy that will guarantee $1000 in some instance, daily and others weekly, returns.
Today, some light years down the road, some Nigerians are cursing the day they met that guy wearing that banks T-shirt,” hawking” shares in that motor park, that road or market. While for others, it is the seminar guy .why? They have not heard a word either from the guy or the bank about their principal let alone the advertised millions they were supposed to make from their investment; or the one they bought has vanished from the streets of Nigeria. But, should it have been so?

No. if only they had started by appreciating what they were been wheedle to invest in. The starting point of every human undertaking is knowledge. Acquiring the right and adequate information on a venture could save anyone from avoidable regrets and heartache. It is only the right information that will remove the make-believe fences in our lives. The rush on the part of Nigerians to make money has made them victims of sometimes, stupid swindles- Wonder Banks with 100% returns on invested capital within three months, dollar washing or printing machines, free browsing of the net with your phone without any payment to either the telecom company by way of recharge to “how to turn #5000 into #1000, 0000 within the next six months trading in stocks. Pray, who is that stockbroker in Nigeria today that will bother with #50,000 worth of shares let alone #5000.where then did the millions come from, Margin trading or shorting? The informed knows too well that that these packages are available in proportion to your shares value and quantity with your broker .But Nigerians like sheeps being led to the slaughter house, pay exorbitant seminar fees to listen to these packs of lies.

A seminar is promoted whose cost per participant ranges between #10,000 and #40,000 depending on the location and the target audience. A resource person is introduced who mount the podium and harps on shares that has jumped from their penny status to aristocratic level. He then quickly tells his audience the capital appreciation on those shares and bonus and rights that has gone to the holders of such shares and then skirt around price-earning ratio and ultimately, informs his listeners that there are still shares with similar potentials; he goes ahead to give ten to twenty of such shares and the curtain. The participants leave the venue all planning on how much to throw into such shares. So they go home and without knowing it actually starts action on those recommended shares. This is a simple arithmetic; a 5% bargain on any share is bond to create a scrambling which would trigger a bullish activity on it.
Seminars cannot and will never give comprehensive information on any issue of it focus. In fact, until Nigerians regard what it offers as introduction into the subject matter of it discuss or data, they will continue to pay an avoidable high price for negligence.
My family has profited from stocks not because of any seminar, but because, apart from being a Business Administration graduate of the great University of Nigeria with Accountancy as my core, where everything about shares is thought, I have devoted time to research and learn what works and how it works.
As for those who have nicknamed our president Mr. go-slow, I would say, that it would be better if 80% of the time available to salvage the country is spent on planning than implementation of fluctuating sensations as programs. We are all witnesses to the impressionistic and inconsequential programs of the past that took us nowhere near our dream Nigeria.
Ilobi Austin. ntejeoyi@yahoo.com is a fresh graduate and lives in Warri.

recommendations

RECOMMENDATIONS

Having drawn the concussion that fraud exist in public companies fro the study, the researcher recommends the following


WHISTLE BLOWING

A whistle blowing act which would seek to not only protect but reward internal staff with information that would lead to the discovery of fraud should be enacted. It is vitally important that there be a method of reporting so people can furnish information without fear of reprisal.


REVIEW OF EXTANT LAWS

The laws and guidelines governing the auditing practice should be reviewed with the aim of making fraud detection the core of the practice. The new law should compel the auditor, in situations were he qualifies a report or has doubt about items in the financial statement, to report to the Economic And Financial Crime Commission (EFFC). In other words, the act should override any duty that an auditor may have to a client not to communicate information which he has become aware of as an auditor.

REVIEW OF THE COURSE CONTENT

The course auditing, should have it content reviewed to include every aspect of forensic accounting. Forensic accounting is the integration of accounting, auditing and special investigative skills. This would enable the auditor do exactly what the public expects of them; uncover the paper trail left by a fraud. This increase in the course content would enable them examine financial statements and related material for wrong doing and analyze the reality of business situations.


THE CHIEF EXECUTVE DUTY


The chief executives officers should certify the accuracy of financial statement or risk going to prison for “willfully and knowingly” filing inaccurate statements.


ISOLATE AUDITING

The auditing guidelines that seeks to grant independence to the auditor by ensuring that he is not connected to the company been audited should be enforced. The firms providing auditing service should not be allowed by the law to through any guise, provide consulting services to the same company as was the case of Arthur Anderson in Enron.



WONDER IF THERE IS NO REFERENCE? NOT IN THE MODE TO GIVE AWAY EVERY THING TO SOME LAZY FOLKS, YOU HOW IT IS WITH SOME FOLKS. COPY AND PASTE AND SUBMIT AS THERE’S

Provisions that tend to grant the auditor the power and authority to perform with hindrance. An assignment.

The company and allied matters decree of 1990 was signed into law by the Babangida’s Administration. It is a codifying legislation that have re-enacted, repealed, and in some cases, amended all previous legislations relating to formation, structure, operations, mergers and liquidations of companies.

Its objective as it relates to auditing and the auditor includes to:

i. Ensure competence on the part of the auditor;

ii. Ensure the independence of the auditor through it provisions on his appointment, removal and resignation;

iii. Spell out the duties of the auditor and specific matters to be covered in his report and;

iv. Provide him the needed rights to perform his duty;

To ensure the independence of the auditor, the Act specifically provides that his appointment be made through a resolution at an AGM and not just by the directors or other caucus.

His tenure in office is not subject to the dictate of management as the Act provides that he stays until the conclusion of the next AGM; however, the directors may appoint the first auditor(s) for a company under certain circumstances. It also provides for the qualification of the auditor which in the main removes him from the employment list of the company subject to the control of directors. The Act also envisages that he would have no interest whatsoever in the company that he is examining.

The removal of the auditor before the expiration of his term of office cannot be done by the board of directors but by a resolution at an AGM and even he has been legally removed, he shall still be entitled to any money due to him.

In the event that he resigns, the law requires that he states the fact of his resignation and all such circumstances that might have led to his resignation. This is to guard against forced resignation by the board of directors.

The specific provisions which seek to guarantee the independence of the auditor includes:

Appointment of the auditor

S357(1) every company shall at each annual general meeting, appoint an auditor or auditors to audit the financial statements of the company and to hold office from the conclusion of that, until the conclusion of the next, annual general meeting.

(2) At any annual general meeting, a retiring auditor, however appointed, shall be reappointed without any resolution being passed unless,

A. He is not qualified for reappointment; or

B. A resolution has been passed at that meeting appointing some other person instead of him or providing expressly that he shall not be reappointed; or

C. He has given notice in writing of his unwillingness to be reappointed.

Qualification of the auditor

S358 (2) none of the following persons shall be qualified for appointment as auditor of a company:

A. An officer or servant of the company;

B. A person who is a partner of or in the employment of an officer or servant of the company;

C. A person or firm who or which offers to the company, professional advise in a consultancy capacity in respect of secretarial, taxation or financial management.

D. A body corporate

And for this purpose, an auditor of a company shall not be regarded as either an officer or servant of it.

(3) A person shall also not qualify for appointment as an auditor of a company if he is, under subsection (6) of this section, disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or would be so disqualified if the corporate body were a company.

(5) No person shall act as auditor of a company at a time when he knows that he is disqualified for appointment to that office and if an auditor of a company to his knowledge becomes so disqualified during his term office, he shall thereupon, vacate his office and give notice in writing to the company that he has vacated it by reason of that disqualification.

Removal of the auditors

S362 (3) nothing in this section shall be taken as depriving a person removed under it of compensation or damages payable to him in respect of the termination of his appointment as auditor or of any appointment terminating with that, as auditor

Resignation of auditors

S365 (2) an auditor’s notice of resignation shall not be effective unless it contains either:

A. A statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of the members or creditors of the company; or

B. Statements of any such circumstances as are mentioned above.

extract from my project. it is on auditng

PROJECT TOPIC: AUDITING AND FRAUD PREVETION IN PUBLIC COMPANIES

(A CASE STUDY OF NNPC-WARRI)


THE BACKGROUND OF THE SYUDY

The impact of the activities of companies, both private and public on the wealth creation capacity of nations, it human and material resources cannot be over-emphasized. Where the reporting of the activities of the companies by way of financial statements by the three groups of board, audit committee and external auditor is fraught with error and fraud, either by commission or omission, it without doubt, affects negatively the wealth creation capacities of such nations and it human and material resources.

The dialectics about auditing duties notwithstanding, “for all practical purpose, the duties expected of an auditor are: to report on the truth and fairness of the financial statements; to detect material cases of errors and fraud which should be revealed by the application of normal procedures (and) to prevent errors and fraud by the moral deterrent effect of his examinations” (Aguolu, 2002, pg303); Nwabueze, (2000:15) in corroborating Aguolu’s position, states that it is the secondary duty of the auditor to detect errors and fraud and also to prevent their occurrence.


Fraud is an undesirable constraint on growth and development of companies and nations. “The cost of fraud to businesses is difficult to estimate because not all fraud and abuse is discovered, not all uncovered fraud is reported and civil or criminal action is not always pursued”(Farrell, 1991:1). “The adverse impact of financial fraud not only to individuals and the community but even on national economic systems is increasing rapidly worldwide. Left unchecked, fraud could leads to financial ruin of people and community enterprises as well as seriously damage economic systems”(Interpol,2007:1). Appropriately one in twenty companies failures are attributed to fraud”Farrell, 1999:3).
Notable recent cases of apparent audit failure would include the collapse of one of the world largest and presumably best run companies- Enron through what has been described as “creative accounting”(MSN Encarta,2006:3) which allowed its management to engage in over-valuations of its operations, “abuse of authority”(aguolu,2002:114) and “management over-riding of established controls”(ibiden). A fallout of the Enron scandal includes the fact that “more3 than seven hundred (700) companies had to restate their earnings from the previous five years, a tacit admission that they too, engage in creative accounting” (MSN Encarta, 2006:5). In Kenya, according to THE EAST AFRICAN, the finance minister, Amos Kimunya, told a news conference that a forensic investigation commissioned by his ministry had revealed that the losses connected to the suspect transactions amounted to Ksh 35 million($507,250)”. According to the report of the five-man forensic specialist from Pricewater housecooper (PWC) “the control environment at Kenya Reinsurance is weak, particularly around cash calls management, revenue capture and debtor control”. This is what the normal external audit ought to have discovered in the state owned corporation slated for privatization. In Nigeria, a court case, Alhaji Umar Abba Gan Vs sec, alleged a concealment of debt owed by African Petroleum Plc. In October 2006, the board of Cadbury Nigeria Plc revealed “overstatement” in her accounts, which according to the release, has span over four years. The amount involved was between #13 billion and #15b (solanke, 2007).

In the various cases cited, it was obvious that it was the management that breached the trust reposed in them by the shareholders; so, “where were Enron’s audit committee and its external auditing firm, Arthur Anderson LLP? The same question obviously would apply to the other public companies. “These bodies were responsible for assuring investors and the public that the firm’s financial statement were full and accurate” (MSN Encarta, 2005:12)

Auditing, in putting up a defense has always relied on section 360 of the Companies and Allied Matters Acts, which form its provisions, provides” that the primary object of auditing is to ascertain whether proper books and records have been kept and whether the Accounts and returns gives a true and view of the financial transactions”(Nwabueze,2000:18); however, in a decided case, the trial judge Moffitt J., observed that “ if fraud has taken place and is undetected by the auditor, he is blameworthy in the eyes of the law….” See case: Pacific Acceptance corporation V Forsyth (12970) 92 WN (NSW) 29 at 65.(roman,2006:24); irrespective of a judgment delivered a century earlier in which “the courts recognized the approach taken by auditors, In conclusion that the auditor was to be seen as a watch dog and not as a bloodhound” Per lopes LJ in re Kingston Cotton Mill Co(No 2)(1896) 279 at 289 (Roman,2006:23)

This study therefore, seeks to determine the effectiveness of auditing as a tool for preventing fraud.


An excerpt from my project; more will join from the same work.