CHAPTER ONE

INTRODUCTION

1.1      Background of the study

The web star dictionary defines fraud as “an intentional deception to cause a person to give up property or lawful right, which could also mean deceit, trickery or cheating. According to statement of internal audit standard No2 of the Institute of Internal Auditors, USA, fraud is defined as an array of irregularities or legal acts characterized by international deception.

The world of financial statements fraud needs no introduction. The practice of manipulating the financial statements of companies to bolster their position is act new but got to a height in Enron and world.com saga (Razace.2002). According to the Association of Certified Fraud Examiners (ACFE), financial statement fraud is the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional omission mount in the financial statement of organization to deceive financial statements users. It caused the accounting firm a very big embarrassment and saw the demise of the world leading accounting firm, Author Anderson (AA) (Isaac, 2008.2).

deliberate misinterpretation and incorrect execution of accounting principles, policies and standards. These days, financial statement fraud is in news around the world because of high profile cases of fraud at large organisations such as Enron Corporation, WorldCom of U.S. and Satyam of India. This type of fraud is the most expensive type of management fraud perpetrated by top level management of an organisation. The Satyam collapse, which cost Rs. 78 billion caused by cooking of accounting books, is the biggest bankruptcy in the Indian history. The Security Exchange Commission of U.S. charged two former executives of Basin Water, Inc., a company that built, sold, and leased water treatment systems that cleaned contaminated ground water, with fraudulently inflating its revenues, beginning with the company’s first financial report after it went public. The specific GAAP (Generally Accepted Accounting Principles) violations included improperly recognized revenue transactions where the company did not have a final sale, did not have the customer’s required acceptance of the system, allowed the customer to pay nothing until the customer resold the system, did not provide enough assurance that the customer would pay for the system, or had not yet shipped the system. As result, revenues were overstated in 2006 by 13% and in 2007 by 74%. The SEC also alleged insider trading violations by the CEO. In February 2009, the company restated its financial results and in July 2011 declared bankrupt [1]. A number of warnings of fraud in US listed Chinese companies have grown in recent months. On 11 April, 2011 the SEC suspended trading in RINO International due to questions surrounding the accuracy and completeness of information contained in RINO’s public filings, and the company’s failure to report the resignation of its chairman, directors of the board and an outside lawyer and forensic accountants brought in to investigate allegations of fraud. More recently, the unravelling of Longtop Financial Technologies Ltd highlighted the scale of the problem. The company regularly reported income that was slightly higher than executives’ predictions [2]. Market participants such as investors, creditors have to make a wise decision about investing in a company on the basis of reliability, uniformity and transparency of the published financial information in the form of financial statements. Therefore, it is the responsibility of the society, accounting profession, business community and different regulators to prevent financial statement fraud because its occurrences undermine the confidence in the corporate world and has worst impact on the economy of a country. Collapses of high profile companies have left a dirty smear on the effectiveness of corporate governance, quality of financial reports, and credibility of audit functions. An exponential increase in the use of technology has further aggravated the problem in 21st century and provides opportunities for crimes to be committed across borders. It has become a critical issue in the businesses around the world, which has significantly; dampen the confidence of the investors. Traditional auditing procedures are not able to prevent financial statement fraud because it is not their primary objective. International Auditing and Assurance Standard Board (2007) states that auditors' main responsibility is to express an opinion about whether financial statements are prepared within an acceptable accounting framework and thus provide assurance that financial statement are free from material misstatement, whether caused by fraud or error. Auditing Profession Act 26 (2005) defines audit as the examination of financial statements in accordance with applicable auditing standards with the objective of expressing an opinion as to their fairness and compliance with a financial reporting framework and any applicable statutory requirements. Failure to detect or prevent financial statement fraud can damage the reputation and the credibility of the audit profession. In order to help auditors, data mining techniques can use past cases of fraud to build models to estimate the risk of fraud and help in understanding the reasons behind the fraudulent financial reporting. The current business environment, have pushed the top of many companies and organization with paying attention to how to make the financial statement look better in order to attract investors or paint a good picture of their companies, using aggressive accounting (Anumaka; 2007:1)
Fraud is classified into two categories:

Fraud involving the manipulation of the records and accounts
 Fraud usually by employees involving the theft, un-appropriation or embezzlement of companies funds in the form of cash or its other assets usually by junior staffs Apart from the problem of scarce resource, organization run the typical risk of fraud and errors even more problems solution to fraud is not sought far. In this project work, problems of financial statement fraud will be extensively assessed with its solution in relation to organization.

1.2 STATEMENT OF THE PROBLEM

The current business environment and even more economic recession, have in recent times pushed the top management of many organization into paying  attention to how to make financial statements of their companies look better in order to attract investors by manipulating figures in their financial statement either by increasing or decreasing the figures depending on what they want to achieve at the moment using aggressive or creative accounting otherwise known as financial statement fraud (Anumak, 2007). In recent times, fraud has been discovered to pose a big threat on organizations. It is a big business risk which can incur a very big cost leading to a lot of problems of which one of the problems is loss of confidence of shareholders and the public on the company. The bankruptcies or near failures of such organizations as Penn Square Bank, E.S.M. Government Securities, and Continental Illinois Bank have renewed interest in the problem of financial statement fraud-the deliberate issuance of misleading financial reports. During 1985 and 1986, the House Energy and Commerce Subcommittee on Oversight and Investigations conducted 16 hearings' in an attempt to uncover the reasons behind this recent wave of socalled audit failures. 2 These hearings have prompted heated debate about the proper roles of the reporting entity and the independent auditor in detecting and preventing financial statement fraud. Financial statement fraud directly harms the shareholders and creditors of the issuer of a fraudulent financial report, since they stand to lose all or part of their investments if such fraud results in a bankruptcy or near failure. Fraudulent financial reporting also can have a significant impact on the public's confidence in the integrity of the financial reporting system. Decreased public confidence in the reliability of financial information affects all financial statement issuers, since investors and creditors will demand higher rates of return in the face of greater uncertainty about the accuracy of financial reports. Before evaluating the proposed solutions to this problem, it is helpful to determine how widespread financial statement fraud has become. Unfortunately, no precise method to measure the inci dence of such fraud has been developed. 3 The conventional measurement is the proportion of audits that result in litigation alleging financial statement fraud.4 Although 50,000 audits were performed over a recent five-year period,just over 100 lawsuits were filed alleging audit failure. 5 These figures suggest that about 99.8% of all audits are free of financial statement fraud. While chairman of the Securities and Exchange Commission (SEC), John S. R. Shad concluded that "[t]he evidence concerning alleged audit failures suggests that the system is working well." 6 Shad noted that auditing firms that are members of the SEC Practice Section of the American Institute of Certified Public Accountants (AICPA) must report any allegations of audit failure made in connection with a filing prepared for the SEC. 7 Since this requirement was initiated in 1979, only 176 such cases have been reported, less than one percent of the audits performed during that period.8 The frequency of litigation alleging financial statement fraud, however, provides only an imprecise measurement of the actual occurrence of such fraud. This measurement, by definition, is underinclusive, because it does not include the unmitigated instances of fraudulent financial reporting. It is also over inclusive, since an allegation of financial statement fraud does not mean that such fraud actually occurred. Because the number of alleged frauds has been quite small in relation to the thousands of financial statements issued each year, the actual level of fraud is unlikely to be of crisis proportion, as some insist, This research work tries to solution to financial statement fraud. Another area on which the research work will focus on “is auditor involvement in solving fraud problems. We will also look into corporate governance as a tool in fraud prevention cost of fraud will be discussed too.
Fraud is a very big business risk which if not prevent will have a very big negative impact on organizational performance.

 1.3     OBJECTIVE OF THE STUDY
The major purpose of this research work is the assessment of the problems of financial statement fraud on organizations with solution to it. Areas like reason for fraud, types and implication of costs of fraud will be discussed. 
Since auditors are to express their opinion on the financial statement of an enterprise as to truth and fairness of such statement, the internal auditor’s role in the prevention of fraud will be looked into. The use of corporate governance as a tool on the fraud prevention will be discussed or properly examined plus the current effort of the Nigerian Accounting Standard Board to curb fraud.

1.4      RESEARCH QUESTIONS

Some research questions that have been drafted in financial statement frau in an organizations: Issues and solution are as follows:

1.   Is financial statement fraud a problem in an organization?

2.   Can I prevent fraud?

3.   How can I prevent fraud?

4.   What are the cost of fraud?

5.   Who can significantly reduce fraud in an organization?

6.   Is auditor impropriety a yardstick to fraud?

7.   Who can be held liable for fraud?

8.   Can I detect fraud?

9.   Fraud can be prevented/there is solution to fraud?

1.5      RESEARCH HYPOTHESIS

As a means of solving the problems mentioned in the research questions, the following hypothesis are formulated:

H0: There is no solution to fraud issues

H1: There is solution to fraud issues

H02:       There are problems associated with fraud
H2:      There are no problems associated with fraud.

1.6      SIGNIFICANCE OF THE STUDY

As the major objective of this write-up is the assessment of problems/costs of financial statement fraud on organizations with solution to it, the study will benefit various parties. One of the benefits is to the management of business organizations. It will help them to know the effect/cost of fraud, how to prevent it, even how to recognize fraud. It will also benefit investors, share-holders, financial information users etc. who may resort to audited financial state of organizations to take investment decisions. It will also be readily available for academic consumption.

1.7      LIMITATION OF THE STUDY

The research study was carried out under a tight schedule. It was undertaken within a short time and was carried out intermittently with lectures and private studies. There was also a problem of data collection due to reluctance on people’s side to provide information. Also another limitation is the insincerity of some respondents in the filling of the questionnaire. For instance, some of the questionnaires were revisited through oral interviews. Financial constraint was another limitation as a student.

1.8      DEFINITION OF TERMS

Fraud:            
An intentional deception to cause a person to give up property or some legal right, which could also mean deceit, trickery and cheating.
Financial Statement:  

A yearly book that contains summarized information of the form’s affairs organized systematically.

Audit:                        
A person assigned to carry-out an independent examination of evidence supporting the financial statement of an organization.
Corporate governance: 

A set of process, customs, policies, laws etc affecting the way a corporate is directed, administered or controlled.

Financial statement fraud:   

The deliberate misrepresentation of financial condition of an enterprise accomplished through the intentional misstatement of amount in the financial statement to deceive financial statement users

You either get what you want or your money back. T&C Apply

Talk to us right now: (+234)906-451-7926 (Call/WhatsApp)

---