Upload
truongdat
View
215
Download
1
Embed Size (px)
Citation preview
© 2015 Research Academy of Social Sciences
http://www.rassweb.com 147
International Journal of Empirical Finance
Vol. 4, No. 3, 2015, 147-164
The Impact of Auditing in Controlling Fraud and Other Financial
Irregularities
Lawal Babatunde Akeem1
Abstract2
Fraud in the Nigerian Banking Industry before the recent merger, acquisition and recapitalization efforts was
at alarming rate. It has caused many banks to collapse, and many investors and depositors funds were trapped
in. Infact it has prevented many banks from achieving their goals and many businesses went into liquidation.
Honestly speaking it has become a cankerworm that has eating deep into the financial sector of the Nigerian
economy. That calls for the need for this study and the purpose of this study therefore is to identify the
causes of fraud, measure its impact and identify the means of controlling it. The study is a survey research
and questionnaire was used for the collection of primary data. Questionnaires were administered to staff of
First Bank of Nigeria PLC. Chi-square was used in analyzing data. The findings show that lack of adequate
training, communication gap, and poor leadership skills were the greatest causes of fraud in Nigerian banking
industry. It was concluded that adequate internal control system should be put in place and that workers
satisfaction and comfort should be taking care of.
Keywords: fraud, banking, merger, acquisition, recapitalization, investors.
1. Introduction
According to Gay, Schelluh and Reid 1997, an auditor has the responsibility for the prevention,
detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in
auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media,
regulators and the public. This debate has been especially highlighted by the collapse of both small and big
corporations across the globe. The auditing profession in Nigeria has caught the media’s attention following
financial scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afri Bank,
and Bank PHB among others. There seems presently to be a misconception that auditors’ duties are largely
the preventing, detecting and reporting of fraud, for example, Idris (2009). The aim of this paper is to
identify financial report users’ perceptions of the extent of fraud and financial irregularities in first bank of
Nigeria plc, and to determine their perceptions of the auditor’s responsibilities in detecting fraud and other
financial irregularities and the performance of related audit procedures in first bank. The project also aims to
ascertain whether the report users’ perceptions of auditors’ responsibilities on fraud and other financial
irregularities are consistent with those of the auditing profession as expressed in auditing standards in
Nigeria.
Bank organizations in Nigeria perform a variety of tasks and responsibilities not only for transformation
agenda but also to enable it to function in an effective manner. These tasks and responsibilities are
distributed among teams, which are assigned to fulfil their duties in a specific organisation. All designated
tasks are equally important in Nigerian Banks, thus, making all employees and staff crucial to the operations
of the bank. One of the crucial functions in these organizations is the process of auditing especially in the
1MBA, BSc, Department of Economics, Accounting & Finance, Jomo Kenyatta University of Agriculture and
Technology, Juja, Nairobi, Kenya. 2 To cite this article: Lawal Babatunde Akeem (2015). The Impact of Auditing in Controlling Fraud and Other
Financial Irregularities. International Journal of Empirical Finance, 4(3), 147-164.
L. B. Akeem
148
cases of fraud and irregularities. It has been reported that an audit is an evaluation of an organization, system,
process, project or product, which involves the independent and fair assessment of the financial statements of
the organization. Knowledgeable, independent, and objective individual or group of individuals, known as
auditors or accountants, makes a report based on the results of the audit. In addition, this function is
performed to determine the reliability and validity of financial information, and to present an evaluation of a
specific company or an internal control of a particular business system, for these systems must comply with
the generally accepted standards laid down by national governing bodies for regulation (Power, Walsh, &
O’Meara, 2001). Because of such importance, this project seeks to consider the effect of fraud and
irregularities on first bank performance in Nigeria and its control.
In accordance to fraud and irregularities on banks performance in Nigeria, auditing and financial
evaluation are crucial since it reflect on how their respective administrators manage the flow of their income,
assets and transactions. For this reasons, banks in Nigeria should hire several experts to do the auditing and
financial evaluations. Aside from hiring accountants and auditors that will work for them internally, they
also need to seek help of other experts to avoid biasness and also in order reveal the genuine stability of the
entity being audited (Jones and Pendlebury, 2000). According to Arter, (2002), these people are called
independent auditors expert or sometimes called external auditors. Basically, external auditors/accountants
are audit experts who perform an audit on the financial statements of a government, company, individual, or
any other legal entity (Cameron, 1982). As stated previously, these people are working independently to
present an unbiased and independent evaluation on such entities. In comparison to internal auditors, external
auditors’ primary responsibility is assessing the risk management practices and strategy, management and
governance processes of an entity. These experts usually does not express any opinion on the entity's
financial statements, they just evaluate and never do such recommendations. Similar to internal auditors,
independent auditors are considered by the public service sector and other organisations to take a look at
financial statement to confirm they are free of errors and obvious misstatements (Arter, 2002).
The objectives of this paper are to:
Examine and report in writing of opinion on the truth and fairness of the financial statements so that
anybody reading and or using the financial statements can belief in them.
Attest to the fairness of the financial statements and compliance with laws, regulations and the
effectiveness of controls.
To gather sufficient evidence so as to be able to form an opinion on the accuracy and correctness of the
financial statement.
To provide credibility to financial information that can be relied upon by outsiders, such as
stockholders, creditors, government regulators, customers and other interested third parties.
To prevent errors and fraud by the deterrent and moral effect of the audit. .
The above objectives will be guided by the following questions:
What are the auditors’ duties towards fraud?
What should auditors’ do if he discovers an irregularity in the form of material error or fraud?
What options do auditors’ have if they detect a fraud by management?
What effect does lack of auditing have in the banking industry?
Basically, fraud and irregularities occurring among banks in Nigeria created significant effect. This
event may result to business failure or worst bankruptcy. Aside from this, fraud & irregularities could also
have significant effect to capital market, capital structure, Efficiency Market Hypothesis and credit ratings. In
accordance to the impact on control environment and internal controls within Banks in Nigeria, the
independent auditor has a number of affirmative responsibilities. According to the Jones and Pendlebury
(2000), firstly, the independent auditor must be precise in strategies to find out and report the bank's genuine
financial position. Secondly, as a representative for the public, the independent auditor must stay independent
of the management of the bank. The independent auditor owes the independence duty to the shareholders of
the bank, the public and the board of directors. Thirdly, the independent auditor must completely reveal all
material features of the financial condition of the bank. The independent auditor duty of disclosure requires
International Journal of Empirical Finance
149
them to reject an improper engagement, report cheating, and place a caution on statements pertaining to the
ability and liquidity of the company to continue as a going concern.
In independent auditor experts’ affirmative duty to discover irregularities and material errors, including
fraud, the independent auditor fulfils a function that the public considers the independent auditor's most
significant role (Monaghan 1989). According to Harvey, (1990), fraud does not become visible on the face
of bank's records, but frequently signs of it will likely in the form of irregularities, and, hence, the auditor can
only divulge fraud by closely examining irregularities. Whereas the Statements of Auditing Standards (SAS)
according to Arter, (2002) asserts the independent auditor's clear liability to identify management fraud, that
same SAS does not oblige the auditor to guarantee the accuracy of the firm's financial statements.
2. Literature Review
Introduction
From 1900, the financial statements became the basic mechanism by which the activities of company
managers were monitored, and, to some extent, this is still true today. Once the directors were required by
law to prepare annual financial statements shareholders then had access to financial information about the
company they owned. However, this access is limited and the shareholders may come to believe that they are
not getting all the information, or the right information to enable them to make investment decisions. Thus,
the role of auditor as agent for the shareholder becomes crucial and the costs of the audit are as nothing with
the comfort and reassurance the audit affords the shareholders. The independent audit is a crucial part of this
process to ensure that the financial statements faithfully represent the activities of the managers during the
financial period.
There is a difference, known as the ‘Perception Gap’ between the public and the auditing profession in
relation to an auditor’s duty regarding fraud and irregularities. The auditors see their duty as: the independent
examination of an expression of opinion on, the financial statement of an organization by an appointed
auditor in pursuance of that appointment and in compliance with any relevant statutory obligation. The
emphasis is on the financial statements. However, the public, including much of the business community,
tend to see an auditor’s duties primarily in terms of the detention, and possibly prevention, of fraud and
irregularities. There is an ISA 240, “the auditor’s duty to consider fraud in an audit of financial Statements”.
Also relevant are ISA 315 “Understanding the entity and its environment and assessing the risks of a material
misstatement”.
During the 1970s, new organization and expenses pressures caused a shift in the accounts payable
function in many companies. These changes combined with overload, overwork, reduced staffing, high
volume and a need to create low charges led to more errors in the transaction processing. During the late
1970s, the account payable recovery audit industry was developed to audit accounts payable transactions and
recover funds paid in error. The work was done on contingency, and audit recovery firms collected on
agreed-upon percentage of the recovery amount. Sometimes, senior managers are reluctant to approve
recovery audits; they think the result may make them look as though they are performing up to standard.
However, most CEOs understand the value of an increased bottom-line profit, especially when it has no cost.
In today’s organizational environment, there are two classes of audit;
Pre-Audit
Pre-audit is available as a result of technology advances which were not available few years ago. Pre-
audit eliminates errors associated with processing accounts payable transactions before the cheque is written.
This eliminates the loss of cash due to errors.
Post-Audit
Post-audit examines accounts payable transaction after the cheque has been processed. The auditor
reviews transaction after software exposes errors through the data mining function. These errors are
examined and validated with related documents. When a claim is presented to the client, the auditors have
L. B. Akeem
150
the responsibility to follow-up and answer any of the questions. The auditor collects his contingency fee after
the claim is settled. Many firms offer post audit services from one or two-person firms to large companies.
The key to a strong audit is software which has the ability to investigate and locate errors; and when the
errors are found, can track the collection process, once the clients approves collection. An audit firm does not
get paid until the collection is made. Post-audit software also can be purchased by clients to be used
internally by the accounts payable staff and eliminate the cost of external audits. Each major post audit
company has developed its own audit software to find and mine errors. Each company believes its software
is best. Many firms allow a second audit (post-audit) to confirm the completeness of the first that is (pre-
audit).
Audits are often viewed as falling into three major categories:
i. Financial audits
ii. Compliance audits
iii. Operational audits.
In addition, the Sarbanes-Oxley Act requires an integrated audit for public companies.
Financial Audits
A financial audit is an audit of the financial statements of an entity. An audit of financial statements
ordinarily covers the balance sheet and the related statements of income, retained earnings and cash flows.
The goal is to determine whether these statements have been prepared in conformity with the generally
accepted accounting principles. Financial statement audits are normally performed by firms of certified
public accountants; however, internal auditors often perform financial audits of departments or business
segments. Users of auditors’ reports include management, investors, bankers, creditors, financial analysts,
and government agencies.
Compliance Audits
The performance of a compliance audit is dependent upon the existence of verifiable data and of
recognized criteria or standards, such as established laws and regulations, or an organization’s policies and
procedures. Compliance auditing involves testing and reporting on whether an organization has complied
with the requirements of various laws, regulations and agreements. These audits measure compliance with
banking laws and regulations and with traditional standards of sound banking practice. Internal auditors
perform audits of compliance with internal controls, other company policies and procedure, and applicable
laws and regulations. Internal audits departments often are involved with documenting and testing internal
control for management’s reports required by the Sarbanes-Oxley Act. Finally, many state and local
governmental entities and nonprofit organizations that receive financial assistance from the federal
government must arrange for compliance audits under the Single Audit Act or OMB Circular A-133. Such
audits are designed to determine whether the financial assistance is spent in accordance with applicable laws
and regulations.
Operational Audit
An operational audit usually includes the intention to appraise the performance of a particular
organization, function or group of activities. An operational audit tends to require more subjective judgment
than do audits of financial statements or compliance audits. Before starting an operational audit, the auditor
must obtain a comprehensive knowledge of the objectives, organizational structure, and operating
characteristics of the unit been audited.
Fraud
Fraud according to Webster’s new world dictionary is the “intentional deception to cause a person to
give up property or some lawful right.” The Association of Fraud Examiners (1999) report to the nation on
occupational fraud and abuse as “the use of one’s occupation for personal enrichment through the deliberate
misuse or misapplication of employing an organizations resources or assets.” Fraud, according to Adeniji
International Journal of Empirical Finance
151
(2004) and ICAN (2006), is an intentional act by one or more individuals among management, employees or
third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as the
intentional misrepresentation, concealment, or omission of the truth for the purpose of deception or
manipulation to the financial detriment of an individual or an organization which also includes
embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the
organization, (Adeduro, 1998 and, Bostley and Drover 1972). Fraud has increased considerably over the
recent years and professionals believe this trend is likely to continue. According to Brink and Witt (1982),
fraud is an ever present threat to the effective utilization of resources and it will always be an important
concern of management. ISA 240 ‘The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial
Statement (Revised)’ refers to fraud as “an intentional act by one or more individuals among management,
those charged with governance, employees or third parties, involving the use of deception to obtain an unjust
or illegal advantage”. Aderibigbe and Dada (2007) define fraud as a deliberate deceit planned and executed
with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether
the perpetrator benefits from his/her actions.
- Irregularity: is an intentional mistake or distortions of financial statement such as misrepresentation or
misappropriation of assets.
- Misappropriation: is any dishonest or fraudulent act which includes such things as:
Unauthorized use, taking, or destruction of banks property for personal gain, or to purposely deprive the
organization of its use,
Forgery or alteration of cheques, drafts, promissory notes, and securities,
Any taking or unauthorized use of bank’s funds, securities, or any other assets,
Forgery or alteration of policy-related items, such as loans, assignments, changes in beneficiaries, etc,
The Cost of Fraud to Banking Organizations
The cost of fraud in banking is difficult to estimate because not all fraud or abuse is discovered as a
result of lack of audit in the banking industry, not all uncovered fraud is reported, and civil or criminal
actions are not always pursued. Data show that the overall cost of fraud is over double the amount of missing
money or assets. As computerized systems become more complex, so is the expected cost of fraud.
Approximately one in twenty banks failures are attributed to fraud (MacErlean 1998).
- The Offenders
It is the trusted and valued employees who generally commit fraud. When frauds are discovered, there is
often shock and disbelief that they could have committed such an act. The perpetrator of fraud could be “the
person next door.” (Russell 1995)The losses for men employees are four times greater than those of women
employees. Losses of employees over 60 years are 28 times greater than those of 25 years old or younger.
Approximately 58 percent of reported fraud is committed by non-managerial employees, 30 percent by
managers, and 12 percent by owner executives (Association of Fraud Examiners 1999). In most cases,
offenders do not view stealing from organizations as harmful; they may think that the crime is victimless;
and they do not view their theft as being devastating or costly to the organizations. Many frauds occur
because the opportunity exists and the perpetrator does not believe he or she will be caught. In many cases,
the offender has “little or no criminal self concept offenders view violation as part of their work “(Hagan
1997). Further, they usually minimize their crime since it results in minor losses for a large volume of
clients; no one client is usually targeted for the crime.
o Factors Involved in Preventing Fraud
The directors and management have the overall responsibility for the prevention of fraud. Prevention
they say is better than cure and although it may be impossible to completely eliminate fraud because of the
effect of collision between the staff and management’s ability to over-ride controls. It is however possible to
reduce the incidence of fraud to the barest minimum. The following factors should be taking into
consideration when trying to prevent the incidence of fraud;
L. B. Akeem
152
1. Fraud Policy- The organization should have a fraud policy which should be well circulated. Posters
explaining the evil effects of fraud should be pasted at strategic points within the company’s premises.
Employees should be well aware of the policy and the punitive measures that would be visited on any person
that violates the policy, management at all levels should also be ready to abide by the policy and lead by
examples.
2. Continuing Education and Training- Management and staff should continuously update their
knowledge about frauds and the latest risks. This can be achieved by attending fraud awareness seminars
offered by accountancy firms, the police and other consultancy outfits.
3. Employee Recruitment and Selection- The recruitment and selection of employee is a key initiative
in fraud prevention. The company should maintain a policy of employing honest, competent and reliable
people. It is also of important that the background and employment history of people to be recruited are
properly reviewed before employment offers are made. There should be rules regarding pre-employment
screening, promotion, performance evaluation and termination. Applicants should be told that offers will
only be made after appropriate responses have been received from referees and necessary follow-ups made.
4. Install Effective Accounting and Control Systems- The installation of an effective accounting system
with appropriate controls is a key to both the detection and prevention of fraud. The accounting system and
the related controls need to be adequate, appropriate and up to date..
Management fraud is possible where the management of an organization is dominated by one person or
a small group of people and there is no external supervisory body or committee. The audit committee, (or
other supervisory committee) if given adequate powers, will be in a position to check the ability of
management to override otherwise effective control so as to perpetrate fraud.
o Auditor’s Duty Regarding Fraud
The auditor’s duty is not to discover fraud. It is widely but erroneously believed that the auditor’s duty
is to discover fraud, error or irregularities. This view might be correct if the auditor is specially engaged to
investigate the incidence of fraud or other irregularities. The auditor is not therefore duty bound to discover
fraud or error while discharging his duties in pursuant to his appointment as auditor under the Companies Act
or other statue.
The following are the reasons why the public in general including the auditor’s client cannot hold the
auditor responsible for failing to discover fraud and other irregularities in the ordinary course of performing
an audit:
i. Audits are usually carried out on test basis: it is not practical to test the transactions one hundred
percent. In most cases, the auditor takes a small number of items or transactions for testing and he uses his
best judgment to determine the areas to be tested. As a result of this, there is a risk that some material
misstatements resulting from fraud in the financial statement might not be tested.
ii. Frauds are usually executed with great ingenuity: fraudsters believe they are smarter than any other
person because they usually take very great care to conceal their acts. Also, fraud always involves acts such
as collision, forgery, deliberate failure to record transactions or intentional misrepresentation. The auditor
ordinarily gets his evidence from the accounting records, documents (such as invoices) and representation by
management.
It should however be recognized, that the auditor has a duty to form an opinion and also report on the
truth and fairness of the financial statements. In forming his opinion, the auditor normally carry out
procedures and tests which are designed to obtain evidence that will provide reasonable assurance that the
financial statements are properly stated and free from fraud and error which may materially affect it. The
auditor should therefore plan his audit so that he can have a reasonable expectation of detecting material
misstatement resulting from fraud or error in the financial statements.
International Journal of Empirical Finance
153
Controls Auditors Have in Preventing Fraudulent Activities
Due in the part to the phenomenal losses in the banking industry, the controversy as existed concerning
the role of the external auditor and the public’s perception of that role SAS no 53, “ the auditors
responsibility to detect and report errors and irregularities”, issued by the Accounting Standards
Board(1988), was originally intended to address this problem. However, the public oversight board of the
AICPA SEC practice section concluded in 1993 that management believed that auditors’ had a greater
responsibility for the detection of fraud than was currently been met. Business owners, legislators, judges,
juries and the general public also share such beliefs. Most people do not realize what the responsibility of the
auditor is according to SAS no1, codification of auditing standards and procedures :” the auditor has the
responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial
statement are free of material misstatement, whether caused by error or fraud. Because of the nature of audit
evidence and the characteristic of fraud, the auditor is able to obtain reasonable, but not absolute, assurance
that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to
obtain reasonable assurance that misstatement whether caused error or fraud, that are not material to the
financial statement are detect”. In an attempt to stifle criticism and appropriately respond to the public’s
demand for improved auditors’ performance, the American institute of certified accountant issued SAS no
82. The new auditing standard details the auditors’ responsibility to detect and report material misstatement
in financial statement due to fraud. This is the first time the AICPA has used the word ‘fraud’ rather than the
more discreet word ‘irregularity’. The two types of misstatement relevant to the auditors’ consideration of
fraud in a financial statement audit are those arising from fraudulent financial reporting and misappropriation
of assets. The SAS is effective for financial statement audit periods ending on or after December 15, 1997.
Similarly, the private securities litigation reform Act of 1995 imposes some of the same requirement on
public company auditors. The requirements are as follows:
1. Audit must include procedures designed to provide reasonable assurance of detecting illegal acts that
would have a direct and material effects on financial statement amounts.
2. Each audit must include procedures to identify related-party transactions that are material.
3. Each audit must include an evaluation of the ability of the issuer of financial statement to continue as
going concern.
Communication about Fraud to Management and the Audit Committee
Whenever the auditor has determined there is evidence that fraud may exists, that matter should be
brought to the attention of an appropriate level of management. This is generally appropriate even if the
matter might be considered inconsequential, such as a minor defalcation by an employee at a low level in the
entity’s organization. Fraud involving senior management and fraud (whether caused by senior management
and employees) that causes a material misstatement of the financial statement should be reported directly to
the audit committee regarding the expected nature and extent of communications about misappropriations
perpetrated by lower level employees.
When the auditor, as a result of the assessment of the risk of material misstatement due to fraud, have
identified risk factors that have continuing control implications (whether or not transactions or adjustment
that could be the result of the fraud have been detected). The auditor should consider whether these risk
factors represent reportable conditions relating to the entity’s internal control that should be communicated to
senior management and the audit committee. (Section325, communication of internal control related matters
noted in an audit). The auditor also may wish to communicate their risk factors identified when actions can
be reasonably taken by the entity to address the risk. The disclosure of possible fraud to parties other than the
client’s senior management and its audit committee ordinarily is not part of the auditor’s responsibility and
ordinarily would be precluded by the auditor’s ethical or legal obligation of confidentiality unless the matter
is reflected in the auditor’s report.
L. B. Akeem
154
The Responsibilities of Management in Controlling Fraud
Given that the CPAs do not agree with the changed expectations of their role, and the limit on the
auditors possible role in controlling fraud, other consideration in the prevention and detection of corporate
fraud should be discussed. Which include managerial control, employee screening, forensic accounting, and
others.
Managerial Controls
Organizations with one hundred or fewer employees have the greatest median losses per capita. The
primary reason for this is because internal controls are not sophisticated and stringent in smaller
organizations. So what, if any, are management responsibilities when it comes to the prevention or detection
of fraud? Annual reports of management states clearly that management is responsible for the preparation
and integrity of the financial information presented, and the company and management maintain a system of
internal controls to provide for administrative and accounting controls.
Screening
Another element to combat fraud is adequate employee screening. Although, this statement might seem
obvious, a good rule to follow to minimize the risk of fraud is to hire honest employees. There are many
organizations specializing in pre-employment screening. These screening tests include lie detector and drug
tests and fingerprinting of employees. Through adequate background checks of information on resumes and
applications, an employer can elicit significantly more information and determine if the original information
is accurate.
Organizational Climate
A third component to deterring fraud is creating an organizational environment that reduces the
perceived need of a pressured employee to commit fraud. These environments include creating open and
consistent communications for hiring, evaluating employees’ performance, and assessing employees for
promotion. These factors, along with counseling programs and employees enrichment efforts, might curtail
the perceived need of an employee to commit fraud.
Forensic Accounting
Within the last ten years, alarming increase in the cost of fraud to organizations has brought attention to
a specialization called forensic accounting. Forensic accounting is the integration of accounting, auditing,
and special investigative skills. The goal of forensic accounting is to uncover the paper trail left by a fraud
and prepare the investigation prior to presenting it to a court of law. Forensic accountants are trained to
examine financial statements and related materials for wrongdoing and analyze the reality of organizational
situations. Many banks and brokerage firms are now adding this department to investigate possible frauds.
Although it is not yet the norm for all organizations to have forensic accounting department, the trend has
increased considerably.
Others
Finally, a few additional components to business fraud prevention include setting up a hotline whereby
fellow employees can report improper conduct, having a high level employee review unopened bank
statement monthly, establishing a written code of ethics, and making sure that management level employees
are role model. Although these additional practices may not seem important, they help establish the tone
within work environment and may help deter fraudulent activities.
o Auditors’ Responsibilities in Fraud Detection The role of auditors has not been well defined from inception (Alleyne and Howard 2005). Porter (1997)
reviews the historical development of the auditors’ duty to detect and report fraud over the centuries. Her
study shows that there is an evaluation of auditing practices and shift in auditing paradigm through a number
of stages.
International Journal of Empirical Finance
155
Porter study reveals that the primary objective of an audit in the pre-1920’s phase was to uncover fraud.
However, by the 1930’s, the primary objective of an audit had changed to verification of accounts. This is
most likely due to the increase in size and volume of organizations’ transactions which in turn made it
unlikely that auditors could examine all transactions. During this period, the auditing profession began to
claim that the responsibilities of fraud detection rested with the management. In addition, management
should also have implemented appropriate internal control systems to prevent fraud in their companies.
ISA 315 requires auditors to evaluate the effectiveness of an entity’s risk management framework in
preventing misstatements, whether through fraud or otherwise, in the course of an audit. Boynton, Johnson,
and Kell, (2005) stress that this requirement was not previously necessary. They further explain that such an
evaluation was only required previously when they chose to place reliance on that framework and to reduce
the extent of the audit investigation. In addition, all staff members engaged on an audit is now required to
communicate their findings with each other, to prevent situations where staff members, working
independently on their own sections of the audit, have failed to appreciate the significance of apparently
minor irregularities that, if combined, take on a more sinister meaning.
Internal Control
The primary responsibility for the prevention and detection of fraud rests with directors and
management. This is because fraud usually results in financial and other loss to the organization and the
directors and management have a responsibility of not only safeguarding the assets of the organization but o
increasing the wealth of their shareholders. Also, management and directors act in a stewardship capacity
with regard to the assets of the organization entrusted to them by the shareholders. Managers and directors
will be required to report to the shareholders on their stewardship.The tools with which directors and
management discharge this responsibility is through the institution and maintenance of an adequate system of
internal control. Internal controls, in most cases, are designed with the objective of preventing or detecting
fraud. As such, management has a duty to see to the continued operation and effectiveness of the controls
through regular reviews and updates. Internal control is a step taken by a business to prevent fraud- both
misappropriation of assets and fraudulent financial reporting. Others while acknowledging the importance of
internal control for fraud prevention, believed that internal control has an equal role in assuring control over
manufacturing and other processes. Committee of Sponsoring Organization (COSO) commissioned a study,
titled Internal Control-Integrated Framework, defines internal control as a process effected by the entity’s
board of directors, management and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
(a) Reliability of financial reporting
(b) Effectiveness and efficiency of operation
(c) Compliance with applicable laws and regulations.
o Effectiveness of Internal Control in Controlling Fraud
The effectiveness of internal control depends directly upon the communication and enforcement of
integrity and ethical values of the personnel who are responsible for creating, administering and monitoring
controls. Top management should develop a clearly articulated statement of ethical values. Also,
management should establish behavioral, ethical, and antifraud programs that discourage employees from
engaging in misappropriate acts and should provide proper recourse when they become aware of such acts.
- Employees should possess the skills and knowledge essential to the performance of their job. If
employees lack knowledge and skills, they may be ineffective in performing their assigned duties. Ideally,
management should be committed to hiring employees with appropriate levels of education and experience
and providing them with adequate supervision and training. It is especially important for individuals involved
in financial reporting to be competent in the selection and evaluation of accounting principles.
- The control environment of an organization is significantly influenced by the effectiveness of its
board of directors or its audit committee. The board of directors and the audit committee are responsible for
L. B. Akeem
156
overseeing the actions of management. Factor that bear on the effectiveness of the board or the audit
committee include the extent of its dependence from management, the experience and stature of its members,
the extent to which it raises and pursues difficult questions with management, and its interaction with the
internal and external auditors.
- Finance and accounting are the two departments most directly involved in the financial affairs of an
organization. The division of responsibilities between these departments illustrates the separation of the
accounting function from operations and also from custody of assets. Ultimately, the effectiveness of internal
control is affected by the characteristics of the organization’s personnel. Thus, management’s policies and
practices for hiring, providing orientation for, training, evaluating, counseling, promoting, and compensating
employees have s significant effect on the effectiveness of the control environment. Effective human
resources policies often can mitigate other weaknesses in the control environment.
- Effective human resource management is not a guarantee against losses from dishonest employees. It
is often the most trusted employees who engineer large embezzlements. Most organizations purchase fidelity
bonds to cover employees handling cash and other negotiable assets. Fidelity bonds are a form of insurance
in which a bonding company agrees to reimburse an employer, within limits, for losses attributable to theft or
embezzlement by bonded employees. This service offers added protection by preventing the employment of
persons with dubious records in position of trust.
3. Research Methodology
Research Design
According to Nworgu (1991), research design is a plan or blueprint which specifies how data relating to
a given problem should be collected and analyzed. Therefore, it provides the procedural outline for the
conduct of any given investigation. The objectives of this study are to attest to the fairness of the financial
statements and compliance with laws, regulations and the effectiveness of controls, prevent errors and fraud
by the deterrent and moral effect of the audit, gather sufficient evidence so as to be able to form an opinion
on the accuracy and correctness of the financial statement and provide credibility to financial information
that can be relied upon by outsiders, such as stockholders, creditors, government regulators, customers and
other interested third parties. Survey research design was adopted for this study where a sample of the
population is selected and used as respondents.
Population of the Study
The population of the study is made up of 100 staff of FIRST BANK OF NIGERIA, PLC which
consists of bankers, managers, and accountants.
Sample and Sampling Technique
The set questionnaires will be personally administered by the researcher; eighty (80) questionnaires will
be administered for the purpose of this study which is expected to give a result that would adequately
represent the population. This study will make use of random sampling technique in analyzing the data. The
population obtained from this sample is the basis on which deduction and conclusion will be made with
reference to this research.
Validation of the Research Instrument
Adedokun (2005) defined validity as the accuracy with which an instrument measures the characteristic
of interest, which it claims to measure. The contents and context of the questionnaire will determine the
validity of this study (Ali & Raza, 2015; Raza & Hanif, 2013).
International Journal of Empirical Finance
157
Administration of Instrument
The questionnaire will be self-administered to the sampled population of First Bank of Nigeria, Plc. The
respondents will be asked not to indicate their names on the questionnaires so as to make the responses
anonymous.
Sources of Data
The aim of data collection procedure is to get worthwhile data which would enable the researcher to get
the roots of the problem under investigation. Due to the time constraint of this research study, the researcher
will make use of only primary data collection method to collect relevant information to assess whether there
is a significant association between organizations with an internal and external audit function, the number
and value of their self-reported level of fraud and also organizations that does not in source part of their
internal audit function.
Method of Data Analysis
Because of the efficacy and authensity of this research, Chi-square test will be employed. The chi square
test is performed by defining the numbers categories and observing the number of case falling into each
category and knowing the expected number of cases fully in each category, the formulae for the Chi-square
is:
X2= (Oi-Ei)2
Ei
Where X2= chi square
Oi = number of observed case in category i
Ei = number of expected cases in category i
K = number of category, summation runs from 1=1 to 1=K
The researcher used 0.05 and 0.95 level of significance in testing the hypothesis.
The calculated chi-square (x2cal) and the tabulated chi-square (x2tab) are compared and a decision made
therefore.
Accept H1 if x2cal< x2 tab
Reject H0 if x2cal> x2 tab
4. Data Presentation, Interpretation and Analysis
Introduction
The primary data used for this study were obtained through the administration of well-designed
questionnaire to respondents. Using random sampling techniques, the questionnaire was handed to 80
respondents in First Bank of Nigeria, Plc. The respondents were bankers, managers, investors and
accountants. 58 questionnaires were returned, yielding a 72.5 percent response rate. Furthermore, more than
90 percent of the respondents claimed that they were aware of what auditors do. The high level of awareness
combined with their accounting qualifications and audit experience should add credibility to the findings of
the research.
Interpretation and Analysis of Data
This section interprets and analyzes the data gathered by the researcher.
L. B. Akeem
158
Table 4.2.1
Users of financial reports N = 58
Question Strongly Disagree Disagree Neutral Agree Strongly
Agree
Is auditing really helping this bank? 2 (3.4%) 0 (0%) 0 (0%) 20 (34.5%) 36 (62.1%)
Table4.2.1 shows that 62.1 percent of the respondent strongly agreed, 34.5 percent agreed that auditing
is really helping the bank while 0 percent of the respondents were neutral and disagreed, 3.4 percent strongly
agreed to the statement. Auditing is helping the bank to grow because it helps to reduce the level of fraud,
errors and omission.
Table 4.2.2
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Does auditing have effect on the bank’s
operation?
3 (5.2%) 1 (1.7%) 0 (0%) 20(34.5%) 34 (58.6%)
Table 4.2.2 shows that 58.6 percent of the respondents strongly agreed, 34.5 percent strongly agreed that
auditing has effect on the bank’s operation. 0 percent is neutral, 1.7 percent disagreed and 5.2 percent
strongly disagreed. This means that auditing has a positive effect on the bank’s operation.
Table 4.2.3
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Has auditing made a great positive impact
on the growth of this bank?
1 (1.7%) 0 (0%) 2 (3.4%) 25(43.1%) 30 (51.7%)
Table 4.2.3 shows that 51.7 percent strongly agreed and 43.1 percent agreed that auditing has made a
great positive impact on the growth of the bank. 3.4 percent are neutral, 0 percent disagreed and 1.7 percent
strongly disagreed. This implies that auditing has made a great positive impact on the growth of the bank.
Table 4.2.4
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Has auditing increases the banks
productivity?
2 (3.4%) 0 (0%) 2 (3.4%) 34
(58.6%)
20 (34.5%)
Table 4.2.4 shows that 34.5 percent of the respondent strongly agreed, 58.6 percent agreed that auditing
has increased the bank’s productivity while 3.4 percent are neutral, 0 percent disagreed and 3.4 percent
strongly disagreed. This means that the use of auditing in the bank has increases its productivity.
International Journal of Empirical Finance
159
Table 4.2.5
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Has auditing reduced the level of fraud? 2 (3.4%) 0 (0%) 2 (3.4%) 17(29.3%) 37 (63.8%)
Table 4.2.5shows that 63.8 percent of the respondents strongly agreed, 29.3 percent agreed that auditing
has reduced the level of fraud. However, 3.4 percent are neutral, 0 percent disagreed and 3.4 percent strongly
disagreed. Result shows that auditing has reduced the level of fraud in the bank.
Table 4.2.6
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Is fraud a major concern for banks in
Nigeria?
1 (1.7%) 3 (5.2%) 6 (10.3%) 19(32.8%) 29 (50%)
The results in Table 4.2.6 show that 50 percent of the respondents strongly agreed and 32.8 percent
agreed. However, 10.3 percent have a neutral opinion while 5.2 percent disagreed and 1.7 percent strongly
disagreed with this statement. Result shows that fraud is a major concern for banks in Nigeria and the
majority of responses agreed with the statements may be due to the high publicity of fraud cases in Nigeria.
Table 4.2.7
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Do you think that the discovery of
fraudulent activity would have a negative
impact on users?
2 (3.4%) 5 (8.6%) 6 (10.3%) 24 (41.4%) 21 (36.2%)
Table 4.2.7 shows that 36.2 percent strongly agreed and 41.4 percent agreed to this statement. 10.3
percent have a neutral opinion, 8.6 percent disagreed while 3.4 percent strongly disagreed. Fraud is an area of
concern in Nigeria; such responses reflect the common market reaction to negative publicity.
Table 4.2.8
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Do you feel that it is the responsibility of
the auditor to uncover fraud and to report
this to the appropriate authorities?
2 (3.4%) 1 (1.7%) 1 (1.7%) 27 (46.6%) 27 (46.6%)
Table 4.2.8 shows that 46.6 percent of the respondents strongly agreed and 46.6 percent agreed, in
comparison 1.7 percent is neutral, 1.7 percent disagreed and 3.4 percent strongly disagreed with this
statement. The results are in agreement with the requirements of the Approved Nigerian Standard on
Auditing. According to ISA 200 ‘Objective and general principles governing an audit of financial
statements’, the objective of an audit of financial statement is to enable the auditor to express an opinion
L. B. Akeem
160
whether the financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework. However, ISA 200 also requires an audit to be designed so that it provides
reasonable assurance of detecting both material errors and fraud in the financial statements. To accomplish
this, the audit must be planned and performed with an attitude of professional skepticism in all aspects of the
engagement.
Table 4.2.9
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Should the auditors assess internal controls
used by the company to prevent or detect
the theft of assets?
1 (1.7%) 3 (5.2%) 1 (1.7%) 20 (34.5%) 33 (56.9%)
Table 4.2.9 shows that 56.9 percent of the respondent strongly agreed to the statement, 34.5 percent
agreed, 1.7 percent is neutral while 5.2 percent disagreed and 1.7 percent strongly disagreed. This means that
the auditor should notify management of material weakness discovered in the internal control system.
Table 4.2.10
Users of financial reports N = 58
Question Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Is there an evaluation of internal
control system?
1 (1.7%) 1 (1.7%) 2 (3.4%) 21 (36.2%) 33 (56.9%)
Table 4.2.10 reveals that 56.9 percent of the respondents strongly agreed to the statement, 36.2 percent
agreed, 3.4 percent are neutral while 1.7 percent disagreed and 1.7 percent strongly disagreed. Evaluation
must be done by auditors in order to make a preliminary evaluation of the effectiveness of its components
controls and to determine the extent of his reliance on these controls.
Test of Hypotheses
Hypothesis One
Organizations that do not use internal audit function cannot detect and report fraud and other financial
irregularities.
Table 4.2.11: Chi-Square Table on Internal Audit Function in First Bank of Nigeria Plc
Respondent’s
View
0i Ei 0i-Ei (0i-Ei)2 (0i-Ei)2
Ei
Strongly agree 33 11.6 21.4 458 39.48
Agree 20 11.6 8.4 70.6 6.09
Neutral 1 11.6 -10.6 112.4 9.69
Disagree 3 11.6 -8.6 74 6.38
Strongly Disagree 1 11.6 -10.6 112.4 9.69
Total 58 58 0 827.4 71.33 Therefore, Z2 (Chi Square) value calculated is 71.33
The degree of freedom (K-1), 5-1 =4
Using the statistical table to find the value of Z24; 0.05, the result is = 9.488
Therefore, X2 calculated = 71.33
X2 tabulated = 9.488
International Journal of Empirical Finance
161
Decision rule: X2 calculated is greater than X2 tabulated, (71.33 > 9.488) at 5% confidence level and 4
degree of freedom the null hypotheses is rejected and the alternative hypothesis which states that “ First
Bank use Internal Audit Function to detect and report Fraud and other Financial Irregularities” is accepted.
o Hypotheses Two
Organizations that do not in source part of their internal audit function is not likely to detect and report
fraud
Table 4.2.12: Chi-Square table on In Sourcing Part of Internal Audit Function
Respondents View 0i Ei 0i-Ei (0i-Ei)2 (0i-Ei)2
Ei
Strongly Agree 28 11.6 16.4 268.96 23.19
Agree 27 11.6 15.4 237.16 20.44
Neutral 1 11.6 -10.6 112.36 9.69
Disagree 0 11.6 -11.6 134.56 11.6
Strongly Disagree 2 11.6 -9.6 92.16 7.94
TOTAL 58 58 0 845.2 72.86 Therefore, Z2 (Chi-Square) value calculated is 72.86
The degree of freedom K - 1, 5 - 1= 4
Using the statistical table to find the value of Z24; 0.05, the result is = 9.488
Therefore, X2 calculated =72.86
X2 tabulated = 9.488
Decision Rule: since X2 calculated is greater than X2 tabulated, (72.86 > 9.488) at 5% confidence level
and 4 degree of freedom, the null hypotheses is rejected and the alternative hypotheses which stated that “
First Bank in source part of their Internal Audit Function to Detect and Report Fraud” is accepted.
5. Discussion of Findings
From the above analysis, it is seen in hypotheses one that respondents strongly agree that First Bank use
Internal Audit Function to detect and report Fraud and other Financial Irregularities and Hypotheses two,
respondent also agree that First Bank in source part of their Internal Audit Function to detect and report
Fraud.
These results are important for many groups such as investors, regulators, and corporate managers and
directors because it provides evidence on the benefits and value of the internal audit function, which
illustrates its importance in the corporate governance framework of an entity. This evidence on the benefits
and value of internal audit relate to the very topical area of fraud detection and reporting.
6. Summary, Conclusion and Recommendation
Summary
In this paper, the researcher examined the impact of the auditing on First Bank of Nigeria, Plc. In the
process, the researcher drew attention to the problems facing the banking organization that need to be
addressed for the organization to make desired contributions to the orderly growth of the economy and the
efforts to be exerted by management, auditors and employees to combat them. From the analysis, it is clear
that the ability to detect fraud is enhanced for organizations that have an internal audit function compared to
those that does not have. This means that internal audit is a vital tool in fraud detection when assets are
misappropriated by employees or outsiders. It also improves the effectiveness of risk management, control
and governance. Also, organizations that in source part of their internal audit function is more likely to detect
L. B. Akeem
162
and report fraud because more time is spent on in sourcing internal audit which will bring a high level of
entity specific knowledge to the internal audit function compared to outsourcing.
Conclusion
Bank can only reduce the occurrence of fraud by ensuring conclusive, satisfactory and comfortable
working conditions of staff and also, the importance of the auditors’ role in the detection of fraud is
continuously growing. Armed with combination of skills, these financial detectives are today important
assets to modern legal teams. In the backdrop of increasing levels of frauds, the demand for auditors is bound
to substantially increase in the future.
Recommendations
In order to reduce the growing trends of fraud and other financial irregularities, the following strategies
are recommended for further follow up:
1. Banks are to increase their requirements pertaining to qualifications and draw up more efficient
screening techniques.
2. They are to ensure that there is segregation of duties, efficient internal controls, jobs satisfactions and
job enrichment.
3. Awareness should also be created so as to ‘nip’ the situation in the ‘bud’ before anything serious
occurs. This requires more than just sound judgment and dynamic action; it calls for commitment that
can only be gained if the management has ensured that all the motivational incentives have been put
in place. A total alertness that takes nothing for granted and awareness that trust could be misplaced,
this being a diligent and painstaking approach.
4. Furthermore, training techniques should be upgraded to test honesty and integrity and not just
technical skills. This should entail extensive training programme regularly done, as well as
personality tests and Intelligent Quotient (IQ) tests so as to understand the personality and character
of the trainee. This would reduce negligence and carelessness in carrying out basic procedures that
could pose as loopholes for fraud.
References
Accounting Standards Board. 1988. “The Auditors Responsibility to Detect and Report Errors and
Irregularities.”
Adeduro, A.A. (1998): “An Investigation into Frauds in Banks”. An unpublished thesis of University of
Lagos
Adeniji, A. (2004): Auditing and Investigation. Lagos, Value Analysis Publishers
Aderibigbe, P. and Dada, S. O. (2007): Micro Auditing Principles. Lagos ICAN Journal, Vol 11 No 1,
Jan/March.
Akintoye, Ishola Rufus (2010) Quick Insight into Research Methodology, Unique press
Ali, M., & Raza, S. A. (2015). Measurement of Service Quality Perception and Customer Satisfaction in
Islamic Banks of Pakistan: Evidence from Modified SERVQUAL Model. MPRA Paper No. 64039,
University Library of Munich, Germany.
Alleyne, P. & Howard, M. (2005): An Exploratory Study of Auditors’ Responsibility for Fraud Detection in
Barbados.Managerial Auditing Journal. 20(3):284-303.
American Institute of Certified Public Accountants SAS 82
Arter, D. (2002) Quality Audits for Improved Performance. ASQ Quality Press; 3 edition Association of
Certified Fraud Examiners. 1999. “Report on the Nation Occupational Fraud and Abuse.”
International Journal of Empirical Finance
163
Bostley R.W.B. and Dover C.B. (1972): Sheldon’s Practice and Law of Banking, 10th edition, London,
Macdonald and Evans.
Brink, V.Z. & Witt, H. (1982), Internal Auditing. New York, John Wiley & Sons:
Boynton, W., Johnson, R. & Kell, W. (2005).Assurance and the Integrity of Financial Reporting.
8thedition. New York: John Wiley & Son, Inc.
Busari, Adekunle Alade (2005) Research Methodology, Zenith press and consult pg 60-74
Cameron, E.D. (1982) Report of the Independent Auditor on an Efficiency Audit of the Auditor General's
Office under the Audit Act 1901, 5 March, AGPS, Canberra.
Dixon, R. & Woodhead, A. (2006).An Investigation of the Expectation Gap in Egypt. Managerial
Auditing Journal. 21(3):293-302.
Epstein, M & Geiger, M. (1994). Investor Views of Audit Assurance: Recent Evidence of the Expectation
Gap. Journal of Accountancy. 177(1):60-66.
Fazdly, M. & Ahmad, Z. (2004). Audit Expectation Gap. Managerial Auditing Journal. 19:897-915.
First Bank of Nigeria Plc, (2013). Historical Background of First bank Plc.
Fullerton, R. and Durtschi, C. (2004), "The Effect of Professional Skepticism on the Fraud Detection Skills
of Internal Auditors"
Gay, G., Schelluch, P. & Reid, I. (1997): Users’ Perceptions of the Auditing Responsibilities for the
Prevention, Detection and Reporting of Fraud, other illegal acts and error.Accounting Review
Australian7(1):51-61.
Hagan, Frank E. 1997. Introduction To Criminology: Theories, Methods and Criminal Behavior,4th
edition.
Harvey, F. (1990) ‘Detecting and Investigating Fraud in the Public Sector’, AIC Public sector Auditing
Conference, September, Sydney.
Humphrey, C., Moizer, P. & Turley, W. (1993): The Audit Expectation Gap in Britain: an Empirical
Investigation. Accounting and Business Research. 23:395-411.
ICAN (2006): Financial Reporting and Audit Practice. Lagos, VI Publishing Ltd
Idris, J. (2009): Nigerian Auditors are Toothless Bulldogs. October 3
http://www.saharareporters.com/articles/external-contrib/3872
Jones R. &Pendlebury M. (2000) Public Sector Accounting, Financial Times/Division of Pearson Education.
ISBN: 0-273-64626-5. pp.288. 5th Edition.
Leung, P. &Chau, G. (2001). The Problematic Relationship between Audit Reporting and Audit
Expectations; Some Evidence from Hong Kong. Advance in International Accounting.14:181-206
Low, A.M. (1980). The Auditor’s Detection Responsibility: is there an ‘Expectation Gap’? Journal of
Accounting. Singapore.October: 65-70.
MacErlean, Neasa. (1993). Fraud Prevention and the Accountant.Accountancy 112: 42-44.
Moizer.and Turley, 1993 (Eds), Current Issues in Auditing, 3rd ed. Paul Chapman Publishing. London,
Ch. 2:31-54.
Monaghan, C.T. (1989) ‘Comprehensive Auditing for Efficiency’ in Selected Addresses on Public
Sector Auditing, No. 5, AAO, Canberra.
Monroe, G. & Wood liff, D. (1994): An empirical investigation of the audit expectation gap: Australian
Evidence. Australian Accounting Review. November, 42-53.
OremadeTunde (1988): Auditing and Investigation. Lagos, West African Book Publishers
L. B. Akeem
164
Pollick.M.Y. (2006).What is Fraud: http://www.wisegeek.com/what-is-fraud.htm Accessed: 15 February
2010.
Porter, B. (1997): Auditors’ Responsibilities with respect to Corporate Fraud: A Controversial issue, in
Sherer, M. and Turley, S. (Eds), 3rd ed., Current Issues in Auditing, Paul Chapman Publishing.
London, Ch. 2:31-54.
Power T. Walsh S. & O’Meara P. (2001) Financial Management: an Irish text, Gill and McMillan, Dublin.
Raza, S. A., & Hanif, N. (2013). Factors affecting internet banking adoption among internal and external
customers: a case of Pakistan. International Journal of Electronic Finance, 7(1), 82-96.
Russell, (1995).Understanding Fraud and Embezzlement.Ohio CPA Journal 54/1:37-39.
Zikmund P. (2008)."4 steps to a successful fraud risk assessment: internal auditing is in an excellent position
to identify fraud schemes and scenarios and evaluate the controls in a place to prevent them”.