FRAUD IN FINANCIAL INSTITUTION AND THE AUDITORS LIABILITY (A CASE STUDY OF ACCESS BANK PLC IN ENUGU)

ABSTRACT

There in a misconception as to the role of the auditor in relation to fraud. Management has hence put in place a system of internal control adequate to its circumstances in order to help it ensure the reliability and accuracy of company records.  Despite all these there have been celebrated cases of fraud in financial institutions.  This hence highlights the need for an increased awareness of fraud and its manifestations in books accounts not only by accountants, but by investigations, social science and the general public.  This study also highlights the merging of the behaviourial aspects of organizational fraud with its investigation aspects. It is the considered opinion of the writer that fraud and deception in financial institutions can be reduced by improving on professional and organizational ethics.  It inspiration behind this text was the urge to lucidly discuss issues on fraud peculiar to the Nigeria’s financial system. The first chapter outlines the objectives of the study, and various constraints experienced by researcher.  The second chapter discuss extensively on the incidence and consequences of fraudulent activities.  It also identifies the various efforts exhibited by Nigerian auditors towards the reduction of these fraudulent activities.  The third chapter deals with the researcher and statistical method used in the research work where as the fourth analysis the source data with the statistical technique reviewed in chapter three.  The last chapter presents the findings of the study as well as the recommendations suggested by the researcher.  Finally, the writer is solely responsible for any errors and omission found in this work and apologizes for such deficiencies.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

The problem of fraud in financial institution in Nigeria has remained one of the disturbing features of the banking sector.  The menace is of the great concern to regulatory authorities the government and the general public because financial institutions are the central of modern economy, the place of people wealth and supplier of credit, which lubricates the engine of growth of the entire economy.

According to Phil Britt 2010, banking fraud is as old as the industry itself, and it continuous to  be one of the larges expenses faced by many financial institution, then according to Virginia Garcia, research director for Needham, mass-based Tower group estimates that 30 percent to 50 percent of the industry’s and 55billion in annual operating losses is attributes to fraud.

According to Haris Chairman of Passmark security in Redwood city clif (2011).  The banking industry has spent the past year and a half determining what is the biggest problem phishing, pharming and Bust-out, he says that banks are using a greater array of information and multifactor analysis to lock down system when fraud schemes are detected, user names and passwords, should be supported in internet banking transaction with new and better ways of authenticating genuine customers and indentifying fraud artists trying to take over banks accounts, according to the summer update on identity theft from the federation deposit insurance corporation.

According to the federation trade commission (2010 August Second pg 13) fighting an almost up heard of term only three year ago, is the top internet fraud scheme.  Large national banks such as Citicorp and bank of America are among the most fighting financial institutions.  Banks have been on the alert for fighting scans for nearly two years.  They post information on their web sites warning customer about the dangers of fighting and notifying them that the financial institution itself will not seek customer identification information via-e-mail.

Then the federal Trade Commission (2011 August Second pg 13) also opined about pharming which involves a criminal infecting a PC or Domain name system DNS serve to redirect a user’s web browser automatically to a mirror site that looks like a financial institutions legitimate website, complete with account links, including ones asking for user names, passwords, and other sensitive customer data.

The third one is bust-out which penetrators wait their banks, the use stolen ID information to “bust-out” with an auto loan.  Garcia says that data management is critical for banks taking a holistic approach.  So banks are employing technologies that gather data in real time, cleans it and combine it with information from other systems.  “Those data that approach fraud management as a mandate to protect their reputation and built customer trust will also improve operational efficiencies and see significant pay back to their bottom lien through reduction of losses.

The Federal Bureau of Investigation (FBI) investigates matter relating to fraud, theft, or embezzlement occurring with or against the national and international financial community.  These crimes are characterized by deceit, concealment or violation of trust, which are not dependent upon the application of physical force or violence. Such acts are committed by individuals and organization to obtain personal or business advantage.  The FBI focuses its financial crimes investigations on such criminal activities as corporate fraud, healthcare fraud, mortgage fraud, identify theft, insurance fraud, mass marketing fraud, and money laundering. Financial crimes section (FCs) of the FBI has the mission to investigation financial fraud and to facilitate the forfeiture of assets from those engaging in federal crimes.  The FCs has four units, the economic crimes unit, health care, fraud unit, financial institution fraud unit and the asset forfeiture unit.

The economic crimes units are responsible from significant frauds target against individual businesses and industries to includes: corporate fraud, mass marketing fraud, telemarketing, and pyramid schemes.

The financial institution fraud unit is to identify, target, disrupt and dismantle criminal organizations and individuals engage fraud schemes which target our nation for institutions.  Areas investigated in the financial institution fraud include; financial institution failures, insider fraud, check fraud, counterfeit negotiable instruments, check kiting, loan fraud and mortgage fraud.

In 2010, Association of certified Fraud Examiner (ACFE) estimated that fire percent of annual revenue was lost due to fraud.  Applying this five percent to the estimated 2010.  Gross domestic product would translate to approximately and 652 billion in fraud losses.  Other findings including tips which uncovered fourty four percent of the million dollar fraud which was more than twice the rate of best position to witness violation, questionable ethical standards.  After tips, the next most frequent detection of fraud was by accident 36.3 percent of small business cases were discovered by accident versus 25.5 percent for all case combined.  The percentage of fraud detection by tips was 32.2 percent for small business and 34.2 percent for small business and 34.2 percent for all cases .  small business suffer disproportionate fraud losses. Based on number of employees, the media loss for small organization. (Fewer than 100 employers) was $190,000 and the median loss of largest organization was 150,000%.  Frauds committed by owners or executives caused a median loss of $1million.

Provisions in the Companies and Allied Matter Decree (CAMA) directly relevant to this study are those relating to the role of auditors and the duty of the companies to keep proper statement accounts section 257(1) of CAMA establishes the important duty, for every company to appoint on external, auditor and to empower him to audit the financial statements of that company.  These auditors are then empowered to carryout such investigations as are necessary to facilitate proper discharge of their duties.  Section 334 of CAMD imposes the duty on directors of companies to prepare financial statements, section 33(2) of the same law stipulates that the duty on companies to keep accounting records shall be discharge when the records are “sufficient to show and shall be such as to disclose with reasonable accuracy, at anytime, the financial position of the company”. Section 33(3) penalizes the breach of this statutory duty and imposes a term of 6months imprisonment or N500 fine upon conviction.

From the forgoing, it can be seen that most case of fraud in financial institution whether the huge, medium, or small scale would not have been possible without a complete disregard of professional ethics and non-compliance with legal and financial provision against fraud.

1.2  STATEMENT OF THE PROBLEM

It has been contented that auditors, are actual participants, in the financial crimes at most of financial institutions today.  The boundary between a normal audit enquiring and fraud investigation is very difficult to differentiate and his has let to the public perception of the auditors role.

This issue therefore is to find out firstly what has led to this rapid increase in fraudulent malpractice. Another is to what extent would one say internal auditor include fraud detection responsibility in their normal audit assignments. It will be discovered that the increase in fraud in the case of stringent controls in caused by weak internal control system which is the management or and the negligence of the internal auditors and external auditor.

1.3  OBJECTIVES OF THE STUDY

The objectives of this study is to;

1. Indentifying the factors that lead to the occurrence of fraud in financial institutions.
2. To examine the auditors responsibilities with respect to fraud that have effects on financial statement.
3. To evaluate the auditors method of operation and duties regarding to prevention and detection of fraud.

1.4  STATEMENT OF RESEARCH QUESTIONS

In this study fraud in financial institutions and the auditors liability (A case study of Access Bank Plc, Enugu) the following research questions were highlighted and asked:-

1. Does the perceived aggressiveness by internal and external auditors in detecting financial irregularities limit the frequency occurrence of fraud?
2. Do all the fraud management strategies used by many financial institution help to stop the losses faced by the financial institution?
3. How does development of scan method used by the fraudsters in attacking banks limit the frequency of occurrence of fraud?

1.5  STATEMENT OF HYPOTHESIS

H₀:  A decrease in the perceived aggressive by internal and external auditors in detecting financial irregularities will into limit the frequency of occurrence of fraud.

H_i:   An increase in the perceived aggressive by internal and external auditors in detecting financial irregularities will limit the frequency of occurrence of fraud.

H₀:  A decrease in fraud management strategies will not stop the losses faced by many financial institutions.

H_i:   An increase in fraud management strategies will stop the losses faced by many financial institutions.

H₀:  A decrease in fraudsters developing scan method for attacking banks will not limit the frequency of occurrence of fraud.

H_I:   An increase in fraudsters developing scan method for attacking banks will limit the frequency of occurrence of fraud.

1.6  SIGNIFICANCE OF THE STUDY

The significance of this study is the fraud in financial institution designed to benefit the organization by exploiting an unfair or dishonest advantage that also may deceive an outside party.  Perpetrators of such acts usually accrue an indirect personal benefit, such as management bonus payment or promotions. It also designed to benefit the institution such as:-

1. Improper payment such as illegal political contributions, bribes and kickbacks as well as payoffs to government officials, intermediaries of government officials customers or suppliers.
2. Intentional fraud in tax compliance activities in which one party receives some benefits not obtainable in an arms length transaction.
3. Intentional and improper representation or valuation of transactions, assets, liabilities and income among others.
4. Intentional and improper transfer pricing (examples valuation of goods exchanged between related organizations). By purposely structuring pricing techniques improperly management can improve their result to the detriment of other organization.

1.7  SCOPE AND LIMITATIONS OF THE STUDY

This study is limited to fraud in financial institutions. It’s a well known fact that this issue of fraud permits all other government parastatals and agencies but the researcher purposely excluded them and focused on financial institutions, not because their concept cannot be conveniently applied in all but because it is quite likely that the planning and control system of these sectors differ.  Thus, many of the generalization that are applicable to the financial institutions, may not be applicable to the financial institution, at least without considerable modification to other government parastatals and agencies.

The source of information for this work will be collected by the use of a well-structured questionnaire which will be distributed to senior bank officials, as well as junior staff personnel of the Access Bank.

Furthermore, due to the inherent problems normally encountered by accounting students, studying Business Financial matter, the researcher exhausted considerable effort and time in attempt to convince the respondents that the study is strictly an academic exercise.

One has to take cognizance of the fact that internal and external auditing control system differs from organization to organizations.  This regrettably leads to a lack of standardized financial statement or report.

1.8  DEFINITION OF TERMS

The following terms have been defined as they related to the context of this research work.

1. Fraud: Fraud encompasses a range of irregularities and illegal acts characterized by intentional deception or misrepresentation, which an individual knows to be false.  It is also  the crime or offense of deliberately deceiving another in order to damage them usually to obtain property or service from him unjustly.
2. Fraud Auditing: According to Association of certified fraud examiners (2010) definitions, fraud auditing is an proactive approach to detect financial frauds using accounting records and information analytical relationships, and awareness of fraud perpetration and concealment schemes.
3. Audit: Inyiama Oliver(2010) defined audit as an independent examination of the accounting books records and financial statement of an organization by an appointed auditor to enable him express an independent opinion as to whether the financial statements are in agreement in all materials respects with the application financial reporting frame work and consequently show a true and fair view.
4. Auditing: It is an independent examination of the financial statement of an organization with a view to a confirm that these financial statements show a true and fair view.
5. Auditing Report: The auditors reports is a formal opinion, or disclaimer thereof, issued by either an internal auditor or external auditor as a result of an internal audit or evaluation performed on a legal entity or subdivision thereof (called on auditeo) (such a an individual, a group of persons, a company, a government or even the general public, among other) as an assurance service in order for the user to make decisions based on the results of the audit.
6. Investigation: It is the examination of the accounts and records of an organization on behalf of a client for a special purpose in order to minimize risk and maximize success.
7. Internal Control: According to Inyiama Oliver (2010) defined internal control as the whole system of controls both financial or otherwise which are established by management to safeguard the company’s assets, ensure reliability of underlying record, promote operational efficiency and monitor adherence to polities and directors.
8. Financial Institution: It is simply an institution that issues claims against itself acquire by ultimate lenders, and uses the proceeds to acquire financial claims against other.

REFERENCES

Gercia V., (2011) Research Director for Needtian Mass-Based Tower Group

Haris (2011) Chairman of Passmark Security in Redwood City Clif

Association of Certified Fraud Examiner (2010) Report to the Nation on Occupational Fraud and Abuse

Phil B., (2010) Fighting the New face of fraud

Finyiama O. (2010) Auditing and Investigations Enugu: Providence Publication

Finyiama O. (2010) Auditing Principles and Practice Enugu: Providence Publication

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