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TITLE PAGE
AUDIT10RSS AND FRSAUD PREVENTING IN PUBLIC
LIABILITY COMPANIES
A CASE STUDY OF NIGERIA NATIONAL PETROLUEM COPORATION (NNPC)
ILLO EMMANUEL CHUKWUEMEKA
PG/MBA/93/17495
A PROJECT WORK
SUBMITTED TO ACCOUNTANCY DEPARTMENT OF UNIVERSITY OF
NIGERIA ENUGU CAMPUS
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF
MASTERS OF BUSINESS ADMINISTRATION IN ACCOUNTANCY (MBA)
DEPARTMENT OF UNIVERSITY OF NIGERIA ENUGU CAMPUS (UNN)
OCTOBER 1998
Certification
…………………………………….
STUDENTS NAME
……………………………..
PROJECT SUPERVISOR
MR. VINCENT EZEUGWU
……………………………………
DR(MRS) R.G. OKAFOR
HEAD OF DEPARTMENT
DEDICATION
This research project work is dedicated to God Almighty, for the tremendous Grace
he has available for its successful completion. Also to my family for he love and
throughout the programme.
ACKNOWLEDGEMENT
My sincere gratitude to God Almighty for his unfailing love, wisdom
and guidance during this research work.
I am also unequivocally indebted to a noble people for their guidance
and support for providing the initial impetus, and to my project supervisor
MR. VINCENT EZEUGWU, my friends and PRODA Librarians for their
encouragement and support towards research work.
Finally, my gratitude goes to my family for their love and support.
ABSTRACT
It is clear that the public expectations of auditor and their reports run at cross roads
with what is obtainable in practice. There is this erroneous belief by that Auditors
Report is an assurance that the company is fraud free and that it is duty of the auditor
in the Course of his duties to prevent and detect fraud. But statistics have shown that
despite the annual audit to which public Liability companies are subjected, fraudulent
practices still persist and on an alarming increase and this has caused the demise of
many limited limited liability companies such as the Nigeria National supply company
(NNSC) International Telephone and Telecommunication (I.T.T) Bank of credit and
Commerce ETC just to mention but few. Statutorily, the role of the auditor, among
other things, to state whether a true and fair view is given on the company’s state of
affairs at the end of its financial year, state whether proper books of accounts have
been kept and in agreement with records and returns and report any departures from
standard accounting practice. Studies have proved that auditors rely heavily on the
legal protection which has provided them with the greatest shield to alienate
themselves completely from any commitment relating to fraud prevention and
detection.
it is in the light of the above and others that the researcher has deemed it necessary to
inquire into the ways auditors can be made relevant in fraud prevention and detection
in addition to their statutory role using the Nigerian National Petroleum Corporation
(NNPC) as a case study. From there, we may be able to make suggestions that may go
a long way to rectify the anomalies discovered in the study.In carrying out this
research, the main types of data employed were primary and secondary data. Primary
data were obtained through personal interviews, questionnaires, surveys and
observations. Secondary data were collected mainly from review and appraisal of
available literatures and documents. In the case of the primary data a set of
questionnaire was administered to the accounts and audit staffs of the NNPC while
interviews was conducted with external auditors. The data gathering' technique is that
of random sampling, using simple percentages to analyze the data collection. It was
investigated that the role of external auditor, in conjunction with the internal auditor in
fraud prevention lie in the application and use of interim and continuous audits; but
effective internal control remains the best machinery to combat fraud in public
liability companies until the statute defining their role is reviewed to include fraud
prevention and detection.
TABLE OF CONTENT
Title page PAGE
Approval page i
Dedication ii
Acknowledgement iii
Abstract iv
Table of content v
List of tables vii
CHAPTER ONE: INTRODUCTION
1.0 Background of the study 1
1.1 Statement of the problem 2
1.2 Objective of the study 7
1.3 Research Questions 8
1.4 Significance of the study 8
1.5 Scope of the study 10
1.6 Definition of terms 11
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Origin of Auditing 13
2.2 Auditing in Nigeria 15
2.3 Auditing defined 16
2.4 Key Elements of an Audit 20
2.5 Who is an Auditor 20
2.6 Types of Audit 21
2.7 Internal Audit 22
2.8 Objectives and Purpose of Internal Audit 24
2.9 External Audit 24
2.9.0 Auditors Liabilities 28
2.9.1 Auditors Standard of care 29
2.9.2 To whom is the auditor liable 30
2.9.3 Privity 30
2.9.4 Proximity 31
2.9.5 Foreseability test 31
2.9.6 Fraud 32
2.9.7 What is fraud 33
2.9.8 Elements of fraud 37
2.9.9 Forms and types of fraud 38
2.9.10 Sources, characteristics and causes of fraud 39
2.9.11 Causes of fraud 40
2.9.12 Why is fraud committed (motives) 41
2.9. 13 Effect of fraud. 42
2.9.14 Fraud in public liability companies. 44
2.9 . 15Management responsibility to detect and prevent fraud 48
2.9. 16Auditors responsibility for detecting and preventing fraud. 49
2.9.17The role of auditors (statutory) in fraud prevention and control 52
References. 55
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.0 Introduction 60
3.1 Area of study. 60
3.2 Population of the study. 61
3.3 Sampling 61
3.4 Use of questionnaire. 61
3.5 Return of the questionnaire. 62
3.6 Other sources of data. 62
Primary data. 62
Secondary data 63
Interview 63
3.7 Method of data analysis. . 64
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA.
4.0 Introduction 65
4.1 analysis of questionnaire Responses from Audit and Account Staff of
NNPC.
CHAPTER FIVE: RECOMMENDATIONS AND CONCLUSION
5.0 Summary of Findings. 75
5.1 Findings from questionnaires 75
5.2 Further findings from questionnaires 76
5.3 Findings from Interview with External Auditors of the NNPC. 77
5.4 Implications of findings 79
5.5 Recommendations 82
5.6 Limitation of study. 84
5.7 Conclusion 84
Bibliography 88
Appendix I 90
Journals, periodical, Newspaper and Magazines 95
Appendix II 97
LIST OF TABLES
PAGE
Table 2.4 Key Elements of an Audit 20
Table 4.01 Years in service in NNPC 65
Table 4.02 Status of Staff 66
Table 4.03 Is NNPC prone to fraudulent activities 66
Table 4.04 How many times have fraud occurred in NNPC 67
Table 4.05 Who uncovered most of the frauds 68
Table 4.06 Is management capable of controlling and preventing
fraud in NNPC 68
Table 4.07 If management is incapable of controlling and preventing
fraud in NNPC, what are their constraints. 69
Table 4.08 What should management do. to ensure that fraud
is controlled 69
Table 4.09 Do you think an Internal Auditing measure will
completely prevent fraud in NNPC. 70
Table 4.10 Are you part of the External Auditors during the
Audit Exercise?
70
Table 4.11 What is your relationship with the auditor during the
Exercise? 71
Table 4.] 2 Are you satisfied with their approach to the Audit work? 71
Table 4.13 Reasons behind External Auditors failure to
prevent fraud. 72
Table 4.14 The best options for the External Auditor to be more
relevant in fraud prevention. 73
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY.
Management exercises a great deal of discretion in preparing financial statement
which is the working paper the auditor. An audit provides reasonable assurance that
management's representations on his activities are reliable. Therefore, an audit has
value because management's stewardship is examined and reported to the users of
accounting information.
The purpose of audit therefore, is to provide assurance. Assurance to share-
holders, bankers, creditors, government agencies and authorities, investors and the
general public at large these people need confidence that the picture of the company
as given by the Directors via the financial statements is not misleading. The law,
therefore, has requested the Directors to obtain a second opinion from an expert-the
auditor.
It is the duty of the auditor to examine the financial statements and consequently
form an opinion of fairness in conformity with generally accepted accounting
principles.
As a secondary function, it is also his duty to uncover an act of omission or
commission which in his view is fraudulent in nature.
It is a common thing in Nigeria that almost everybody wants to get rich very
quickly without actually working very hard for it. To Nigerians, wealth connotes
power and importance and one of the shortest and easiest cut to wealth today is seen
as fraud in whatever form and content, with little or no regard to its unpleasant
consequences to the individuals and the Economy at large.
It is no exaggeration to state that, three out of every four Nigerian Adult has the
tendency to exploit every fraudulent opportunity available to him/her, such
opportunity does not exist, two out of every four will try to create one for
himself/herself. It is' safe to state here that public liability companies have become a
major target of these fraudsters who take advantage of the vastness and
unprofessionalism of these public companies to perpetrate their nefarious acts. The
list of public companies with publicized cases of fraud in various degrees, which are
in millions of Naira is endless. They include, the Nigerian National Petroleum
Corporation (A case study of this research work) National Electric Power Authority
(Now, Power Holding Company of Nigeria). Nigerian Ports Authority PIc. NIPOST
PIc., NITEL and so on. Worse still, even Government Ministries and Parastatals are
not left out of the mess.
Auditing has over the years gone considerably to a' commendable length to expose
various fraudulent practices both in public and private sectors of the economy.
This has assumed so much importance that it has become inevitably necessary to
critically evaluate the role of external auditors in fraud prevention, particularly in
the public liability companies in these present days of what the 'writer prefers to
call "wealth craze Age" resulting in increasing fraudulent acts d practices.
Honestly speaking, it is not misleading to make it point clear that the bane of
Nigeria's Economic woes and problems has its roots from the numerous fraudulent
practices perpetrated and perpetuated by so many of the greater number of the
citizenry who are well placed in the society. These people accounted for the
unimaginable amount of tax payer's money running into billions of naira squandered
and siphoned away in many foreign lands.
It is very worrisome to observe that this types of sharp practice are found among
our politicians whom we look up to as real models in governance. The case of
Umaru Dikko and others. Who looted public funds and siphoned away into their
private accounts in foreign countries.
The uniformed men have neither assumed the position of the saints.
There have been so many reported cases of looting in higher quarters by some of the
uniformed men. These men acquire luxurious and ostentatious items which ordinarily
they could never have acquired on their salary in the barracks. The most vocal of
such unpleasant cases of fraudulent acts by the uniformed men that bug my mind are
that of President Abacha Looting of Nigeria money into foreign country.
Since the early 80s reports of fraudulent acts particularly in the public tor
have never failed to make headlines both in the Electronic and Print Media is so
appealing that the Government and the public at large have come out to courage and
organize public lecturers, campaigns and workshops to create awareness so as to
reduce the increase in fraud and arrest its damaging influence on the country's image
abroad. Just, in 2005, the transparency international ranked Nigeria as the third (3)
most corrupt nations in the world. This is regrettable.
Section 357 of company and Allied Masters Decree of 1990 (CAMD) requires
that all registered limited liability companies - both public and private must have
their financial records audited annually by external.
auditors so appointed. It is the duty of the auditors in the course of their work to
uncover any fraudulent practices either by omission or commission. , This therefore,
leads to the question, H()w then can the auditor's role be extended to include fraud
prevention? The answer is not fare fetched. This, I hope to uncover as I progress.
1.1 STATEMENT OF PROBLEM.
Nigerian National Petroleum Company is one of the Limited Liability
Companies in Nigeria and' it is owned by the government.
For some time now, Nigeria has been experiencing increasing fraudulent
practices in public limited liability companies. Companies and allied matters decree
of 1990 provides that the accounts of public limited companies shall be subjected to
audit annually. However, such audit has not entirely eliminated the occurrence of
fraudulent practices in some public limited liability companies. Such limited liability
companies that readily came to my mind are: -
i. The Nigerian National Supply Company (NNSC)
ii. International Telephone and Telecommunication (ITT)
iii. Bank of credit and Commerce
iv Co-operative and Commerce Bank (CCB)
v. African Continental Bank (ACB)
The above listed public liability companies are just to mention but a few. The
sharp practices surrounding the operations of these companies have led to their
untimely demise. Thank goodness that African Continental Bank has revived and is
now on its Banking business again. ,
The bureaucratic nature of public liability companies causes a lot of
unnecessary delays which allows enough space and time for fraud to be conceived and
perpetrated. Some of these fraudsters take advantage of this set back to explore all
avenues that will aid them succeed in their shameful acts.
Inefficiency, of company staff result in improper, book keeping and in some
cases they refuses to co-operate fully with ,the auditor. Certain transactions are off
records. Due process" is not followed in the expenditure of funds. Consequently, the
auditor is left at a cross road.
One cannot also ignore the great threat posed to the auditor by the temptation of
money as a form of "settlement" (also and most popularly referred to "Ghana Must
go" in the Eastern part of the country). The slang means that the auditor should keep
mute even in the face of high fraud and financial irregularities. Some government
banks that were distressed. Such as African Continental Bank (ACB) and co-operative
and commerce bank (CCB). These Banks attributed their failures to the negligence
and improper
auditing of auditors. The truth is that the cause of their failure is linked to fraud
perpetuated by both insiders and outsiders to the bank.
The above mentioned problems and others have often put doubts on the ability
and relevance of external auditors to help prevent and detect fraud in Limited
Liability Companies, even with the presence of the external auditors (Management
Employee) could make no difference. And this IS why the subject is given another
serious look by this research work.
1.2 OBJECTIVE OF THE STUDY.
Growing trends of a fraudulent acts and practices have really questioned the role
of audit and what it seeks to achieve. Therefore, one would at this juncture, pause and
ask these questions. How can we effectively check and curb this canker worm in the
society called fraud? Where actually does the auditor fits in. answers to these
questions and others . I will attempt to proffer.
Hence the objective of this study can be summarized as follows: -
i. To identify the causes of fraud in public Limited Liability Companies.
ii. Examine the statutory principles of auditors in relation to fraud.
iii. Seek how the scope of present day audits can be extended to include
prevention and not only discovery of fraud.
iv. To suggest solution for combating fraud in Public Limited Liability
Companies.
1.3 RESEARCH QUESTIONS
The study, in consideration of the problems it seeks to address attempt to
provide answers tot he following specific problems.
i. Is the present day audit approach enough to expose fraudulent practices?
ii. Is it possible to introduce an audit approach that will not only aim at uncovering
fraud but also adopt measures to help prevent them before hand?
iii. Are present day auditor culpable in not uncovering fraudulent practices for the
fact that, it is not their duty to detect fraud (this is a statutory defence?)
iv. Can audit report which is the end product of audit exercise deter finance staff
from committing fraud?
1.4 SIGNIFICANCE OF THE STUDY.
The role of the auditor and is influence on the decisions made by users of
financial statements cannot be stressed often enough~ Shareholders, Bankers,
Creditors, Government Agencies, Investors, etc all rely on the auditor's report to base
their investment decisions. This is so because they require assurance that they are not
being mailed by the financial statements
and this assurance can only most adequately be provided by the External Auditor
who in his capacity is viewed as an expert in this field, impartial and above all
independent. The big question remains, why is fraud on the increase in public
companies despite the continuous audit of financial statements 'of these companies?
This study, therefore, taking the objectives of the study as detailed earlier will
highlight possible lapses and remedies in the audit process and also look at measures
that will not only anchor on the examination of books and records to detect fraud, but
also on the actual avoidance and prevention of fraud before they occur.
The contribution of this study is to the improvement of the role of auditors in
the prevention and total eradication of fraud in public liability companies. Audit will
no longer be a periodic affair but a routine exercise which will keep every employee
(not only finance staff as in the case of normal audit) aware that any deed
within/outside the working environment is being monitored.
It is hoped that at the end of this study, the following resultant benefits. will
accrue to companies, shareholders, other researchers and the Nigerian Economy at
large.
i. Further classification of the role of auditors in fraud prevention and detection as
these had been a prolonged is conception by many that it is the duty of the
auditor to prevent and detect fraud. .
ii. Users of financial statements will after the study know who to hold responsible
for any loss/losses incurred upon their reliance on audited financial statements.
iii. Suggest ways to make auditors more relevant in fraud prevention and detection.
4. Further enrichment of available literature on the subject matter and other related
matters.
1.5 SCOPE OF THE STUDY
Fraud occurs in public liability companies with reckless abandon. This study
therefore is to cover areas as it concerns auditors (both Internal and External) and
fraud prevention. The case study for this research has also been confirmed to the
Nigerian National Petroleum Corporation (NNPC), whose image and status as the
main strength of the Nigerian Economy has made it target point for numerous
fraudsters.
1.6 DEFINITION OF TERMS •
AUDIT.
Official Examination of accounts and books of records to see that they are in
order.
AUDITING
A process of Examination of accounts or books of records of an Enterprise/Entity in
order to express an opinion as to whether the records or the accounts so prepared by
the organization show a true and fair view of the company's state of affairs.
BUREAUCRATIC.
Situation whereby employees sticked too much to rules, carried on according to
official rules and habits negating tactical decisions that would have enhanced
organization overall performance.
BOOK-KEPPING
This is the book whereby an organization records all the transactions of the Company
upon which the auditors check to evaluate her performance.
CREDITORS.
These are set of people who lend money/fund to an organization for the purpose
of running such an organization and are in turn receive rewards.
inform of interest and are to be settled immediately after mortgage assets in terms of
liquidation.
• DIRECTOR.
A Director IS defined by Section 650 as including "any person occupying the
position of Director by whatever named called". He is the highest body of people
governing a company .
• EXPLOIT.
Use available loop holes discovered selfishly tot he detriment of the Entity's or
organizational resources.
Irregularities involving criminal deception to gain an unjust or illegal advantage.
It may be perpetrated with the intention of making money or obtaining goods or it
may be perpetrated when a person deceive others by pretending to have abilities or
skills that he does not really has.
• SHAREHOLDER.
This is a holder ·of share in a company. The word shareholder is not defined
anywhere in the CAMA .
However, in a company having share capital, members generally will be allotted
shares which is a measure of the financial interest such a member has in the company.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.0 INTRODUCTION
This involves high lights of the view of eminent scholars in the area Understudy
coupled with the researcher's elaboration's and explanations. This chapter therefore,
review those existing literatures with a view to underscoring the varying author's
perceptions and understanding of the topic of study. To achieve this unique goal, the
researcher relied mostly on seminar papers, articles in journals and few related books
on the subject matters which were discussed under a good number of underlined
subheadings below.
2.1 ORIGIN OF AUDITING
"Historians believe that record keeping originated about 4000 B.C, when ancient
civilization in the Near East began to establish governments and business.
From the beginning, governments were concerned with accounting for receipts
and disbursements and collecting taxes. An integral part of this concern was
establishing control, including audits, to reduce errors was establishing controls,
including audits, to reduce errors and fraud on the part of incompetent or dishonest
officials. Several "Modern" forms of internal
control are described in the Bible. Specifically, the Bible discusses dual custody of
assets, the need for competent and honest employees, restricted access, and
segregation of duties.
"The origin of auditing is as a result of the separation of ownership from
control. It is instituted to protect the· interest of the owners by ensuring that financial
statements are justifiable. Because of the Separation of ownership from control, it
becomes necessary of those managers entrusted' with the owner's financial and
economic resources to present their financial reports (stewardship reports) to their
employer. The reports presented might contain errors, refuse to disclose fraud and
mismanagement, be inadvertently or deliberately misleading or refuse to disclose
relevant information. For these reasons, the owners may hold some reservation about
the credibility of the manager's (stewardship) reports" .
For the owners to be satisfied and even for the Managers to be justified to
establish and, maintain their integrity, it becomes necessary to invite an independent
party one who is not involved with either party to examine the stewardship reports.
For the purpose of expressing an opinion as to the truth and fairness of the reports.
The independent party's duty is not just mere examination of the accounts from
which the financial statements are prepared rather, it includes collection of all
relevant.
information though necessary to satisfy section 360(3) of Companies and Allied
Matters Decree (CAMD) 1990.
2.2 AUDITING IN NIGERIA
The practice of auditing in Nigeria is contained in the provisions of the
companies and Allied Matters Decree of 1990 (often referred to as CAMD) This
decree replaced the company Act of 1968. However, both statutes are basically the
same in form and content.
The CAMD of 1990 under section 357 states that:
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 general meeting, a retiring auditor, however appointed, shall be re-appointed
without any resolution being passed unless.
a. He is not qualified for re-appointment; or
b. A resolution has been passed at the meeting appointing some other person
instead of him or providing expressly that he shall not be re-appointed, or
c. He has given the company notice 111 writing unwillingness to be re-
appointed.
The law in recognizing the utmost importance and desirability for the auditor to be
truthful and fair and above all independent in the course of his duties spells out clearly
in section 358(2) that:
a. An officer or servant of the company
b. A person who is a partner of or in the employment of an officer 0f servant of the
company
c. A person of 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 a servant of it.
The professional requirement for a person to quality for appointment as an
auditor of a company in Nigeria, are contained in Section 3 59 (1) which states
…….." Unless he is a member of a body of accountants in Nigeria established from
time to time by an Act or Decree .
2.3 AUDITING DEFINED
Many professional bodies on accountancy and auditing and various scholars
have offered definitions and explanations as to what auditing means. Because of time
factors, we shall consider some of them.
"By means of this study of auditing, not only can the true presentation of an
organization's financial position and transaction be assured, but also the overall
methods of business organization and administration, can be appreciated and
assimilated. Though the investigation, the recommendations and implementation of'
the most effective methods of management organization are made possible".
Different types of audits and the purpose of audits have evolved over the years
and this evaluation is still taking place. Accordingly, Auditing should be defined
broadly enough to cover the various types and purpose of audits. The definition of
Auditing that appeared in a statement of basic auditing concept published in 1973 by
the American Accounting Association (AAA) Committee on Basic Auditing concept
embrace both the process and purposes of auditing. According to the statement
(Auditing is a systematic process of objectively. obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
Correspondence between these assertions and established criteria and Communicating
the results to interested users".
According to (Howard 1982) Auditing may be defined as "the Examination of
certain statements covering the transaction over a period 1d the financial position of
an organization on a certain date in order that
the auditor may issue a report on them. It can be seen from this definition, plainly that
the job of an auditor is to examine "certain" statements having to do with the business
of the organization and then give a report concerning the examination. A more
involved definition of auditing issued by the consultative Council of the Accountancy
Bodies (CCAB) is stated as "the independent examination of and expression of an
opinion on, the financial statements of an enterprise by an appointed auditor in
pursuance of that appointment and in compliance with any relevant statutory
obligation. The' independent examination of the financial statement of an organization
with. a view to expressing an opinion as to whether these statements give a true and
fair view and comply with the relevant statues - Aguolu. The auditor's responsibility is
to report financial statements as presented by management. The definition' above
points out an important feature of an audit i.e., the independent examination of the
financial statements of an enterprise. It is important in practice that the auditor is not
influenced by the management concerned or the Directors of the company perse. He
should not be under the control of the person in charge of preparing the evidence and
the financial statement which he is auditing . This will enable him to give in his
opinion a correct report about the financial affairs of the company.
(Kwame 1982) in his definition of auditing further stressed on the independence of the
auditor. In his words, Auditing is the independent examination and investigation of
the evidence from which a financial statement has been prepare with a view to
enabling the independent information and explanation obtained by him, the statement
is properly drawn up and gives a true and fair view of that it purports to show, if not to
reporting what respect he is not satisfied.”
Another beautiful definition of auditing is found in (Amyas 1990) about the
performance, by a component independent person, with a view to reporting an opinion
on the quality of that performance, position or information as measured by established
criteria.
There are six key components in the above general definition
There are:
i. Entity
ii. Performance, position and information
iii. Competent independent
iv. The collection and evaluation of evidence
v. Established criteria
vi. Reporting on opinion
These key components are reiterated in Table 2.4 together with an
indication of their importance to the underlying question 9f "What is an audit"? Also
the question one may then be tempted to ask is, who is an audit”. Also the question
one may be tempted to ask is, who is an auditor?
TABLE 2.4 KEY ELEMENTS OF AN AUDIT
ELEMENT SIGNIFICANCE
The Entity
Performance, Position and Information
Competent independence person
Collection and evaluation of evidence
Established Criteria
Reporting an opinion
The scope of the audit
The subject of the Audit
The auditors qualification to audit
The method of auditing
The objective of audit investigation
The output of the audit
2.5 AN AUDITOR
"In ordinary sense, an auditor is any person who is charged with the Responsibility of
examining the books and accounts of an organization or association in such detail as
would enable him to form an independent opinion as to the trueness and fairness of
the financial statement”.
There are two types of auditors, namely, external auditor and internal
appointment, scope of work, reporting, independence, responsibility and approach to
work among others. An internal auditor is an employee of the , and review. In fact the
scope of his work, appointment, promotion are determinable by the management. The
reports of the internal auditor are made to management and by this, the internal auditors
independence as' a necessity for effective audit is not all that encouraging.
In respect of external auditor, one of the criteria for appointment is the presence of
reasonable degree of independence of auditor.
This “independence” is necessary but it must be pointed out here that it is a thing
of the mind rather than having “No prior relationship”.
2.5 TYPES OF AUDIT
There are four main types of audit and these include private, statutory, internal and
management audits. A private audit is that conducted on the request of the owners other
than those required by law and the conduct of this audit is guided by a term of reference
and scope of work is filtrated by law. Internal audit is that conducted on the affairs of the
organization by employee of the same organization, a tool of management. And lastly,
management audit is a review of the activities of management.
2.7 INTERNAL AUDIT
Many organization of various sizes have been the need for internal audit as a tool for
ensuring effective working of internal control system, owing to this priceless value from
internal audit, the Institute of Chartered Accountants of England and Wales (ICAEW):
defined' it as "a review of operations and records: some time continuous undertaking
within a business by specially assigned staff'.
(Millichng 1990) defined internal audit as why audit (internal) is required:
a. The lending of credibility- that is to detect errors, frauds and disclose hidden
information.
b. Accountability- the Directors are the agents of the shareholders, their performance
need to be evaluated.
c. To resolve conflict of interest.
For the above objectives to be accomplished, the internal audit unit or department
must perform certain function which ,must be in "line with the requirements of the
company or organizational internal control system. Some of the functions are
enumerated below:
1.
i. To ensure that management policies are executed and at the right time
ii. To ensure that management are supplied with quality information necessary to
perform their functions as required of them.
iii. To ensure the safeguarding of the organization's (physical) assets.
iv. To ensure that the internal control system for the organization is will
designed and implemented.
v. To carry out investigations and other tasks as may be assigned by the management
and/or audit committee
vi. To provide training for non-auditing officers in ensuring effective
implementation of internal control system
vii. To review the internal control system to detect error and lapses with the aim to
approve
viii. To assist the external auditor (s) as may be required
"An independent appraisal function within an organization for the view of system of
control and the quality of performance as a service to the organization. It objectively
examines, evaluates and reports on the adequacy of inten1al control as a contribution to
the proper economic, efficient and effective use of resources”
Internal audit is an examination and review of management performance by some
people working as employees of the organization like
the managers but unlike the manager, they are not involved in the managing of (directly)
of the financial and economic resources. The functions or purpose of internal audit are
performed in a department or unit known as internal audit department and by people
known as internal auditors.
It is practically difficult for an internal auditor to possess any reasonable
degree of independence in mind and attitude because of the management influences on
the terms of 'reference and scope of work. In fact, one area of interest to the external
auditor in assessing the degree of reliance to be placed on the works of the internal
auditor is the degree of independence enjoyed by the internal auditor.
2.8 OBJECTIVES AND PURPOSES OF INTERNAL AUDIT
The main objective of an internal audit is to assure management that the internal check
and the accounting system are effective in designing and in operating. L.G. Campbell in
a book titled "International Auditing" identified the three reasons.
2.9 EXTERNAL AUDIT
External audit or statutory audit is that conducted because it is mandatory by law and
the terms of reference and scope of work is as filtrated by law. The duty of an audit9r to
a company are governed by statute and cannot to limited. This statute is called the
company and Allied Matters
l.
Decree (CAMD) 1990. Various sections of the CAMD 1990 confirmed the position of
the external auditors in relation to companies. Some of these elections are as follows:
i. Section 357, This section states that every company shall at each annual general
meeting appoint an auditor to audit the financial statement of the company. The
auditor is required to report 011 the account prepared by the directors.
ii. Section 360 (3) gives the auditor rights of access at all times to all books of
account and vouchers of the company. He should also demand any information and
explanations from the officers (including directors) which he may consider
necessary for the performance of his duties. Where at any time he is denied this
right, he should qualify his report accordingly.
iii. Section 361 of CAMD 1990 makes provision for fixing auditor's remuneration
which is contained in the letter of engagement. In the letter of engagement usually
sent by the auditor to the company in which the auditor states in writing the work
expected from him a section is devoted to fees. The letter usually states that "our
fees are computed on the basis of the time spent on your affairs by the partners and
our staff on the level of skills and responsibility involved. Unless otherwise
agreed, our fees will be charged separately for each of the main classes of work
described, will be billed at appropriate interval during the course of the year and
will be due on presentation.
Once it has been agreed, this letter will remain effective from one audit
appointment to another, until it is replaced, it is therefore apparent that payment of
auditor’s remuneration has legal backing
iv. Section 366, gives the auditor right to make written representation or auditor, he
will be given twenty-eight (28) days notice before the annual general meeting to
make his written representation.
v. Section 366, (1) states that auditors are entitled to attend any general
meeting of the company and to receive all notices and other communication
relating to any general meeting which any member of the company is entitled to
receive and to be held at any general meeting which they attend on any part of the
business which concerns them as auditors.
In carrying out his duties, the auditor should take' into account standards that are
laid down by various professional bodies regulating the
conduct of 'Accountancy and audits such as, the International Accounting Standards
Committee (lASC) and International Auditing Practices , Committee (lAPC).
The CAMD does not say how the auditor should carry out his duties and this is a
case law and pronouncements by the professional bodies and , the Auditing Standards
and Guidelines help to determine the work to be performed and expected of Auditors.
His duties cannot be limited and where he otherwise limits his duties, he may be
,held liable for negligence, default, breach of duty and trust as stipulated by section
368 of CAMD 1990.
The duty of the auditor can be expanded but not restricted. Where the auditor fails
to exercise reasonable ,care, skills and diligence in his work, action may be brought
against him for negligence misfeasance.
However, under section 641 of CAMD 1990, an auditor may be exonerated
from liability if brought to the court for negligence, default, ach of duty or breach of
trust, where the court is of the opinion that the auditor exercised reasonable care,
skills and diligence and honesty and having regard to all the circumstances of the
case he could be excused. The may relief him either wholly or partly from liability on
such terms as thinks fit.
2.10 AUDITORS AND LIABILITIES
The provision of any form of professional service, including audit carries with it a
duty that he service will be performed with a reasonable level of care. If it is not
fulfilled, then; on the grounds of negligent behavic it may be possible to hold the auditor
liable for losses sustained as a result Section 368 of CAMD states that :
“ A company’s auditor shall in the performance of his duties, exercise such care,
diligence and skill as is reasonably necessary in each particular circumstance”.
Where a company suffers loss or damage as a result of the failure its auditor to
discharge the fiduciary duty Imposed on him by sub-section of this section, the auditor
shall be liable for negligence and the direct may institute an action of negligence against
him in the court.
If the directors fail to institute an action against the auditor under section (2) of
this section, any member may do so after the expiration thirty days notice to the
company of his intention to institute such action. " Liabilities arises partly from the
auditor's responsibility ur statute laws, for example,
a. Under the Theft Act, (1968) an auditor will be criminally liable for knowingly
publishing statements which are misleading, false and deceptive.
b. Under prevention of fraud (investment) Act of 1958, he will also be liable for
inducing or attempting to induce another person to invest by making any statement
which he knows to be false or misleading:
c. Also the "officer or an auditor" under various sections of Companies and Allied
Matters Decree (CAMD), 1990 could be held liable for any act committed by
him".
2.11 WHAT STANDARD OF CARE?
It is not possible to be precise about what the auditor's duty of care implies in terms
of specific actions or conduct. As a guiding principle, there is a general responsibility to
perform an audit in manner which would be considered appropriate in the circumstances
involved. As stated by Lopez 1.1 in Re Kingston Cotton Mill Co. (1896).
It is the duty of an auditor to bring to bear on the work he has to "perform that skill,
care and caution which a reasonably competent, careful ,and cautions auditor would use.
What is reasonable skill, care and caution must depend on the particular circumstances of
each case".
The standard of care expected thus rests on motions of 'reasonable conduct and
behaviour which is generally as appropriated by the community.
2.12 TO WHOM IS THE AUDITOR LIABLE?
Perhaps the issue of greatest uncertainty concerning the auditors duty of care is the
extent to which he or she should be liable to third parties. The auditor's contract is with
the company, but it is recognized that a duty of care is owed to the company's members,
who appoint the auditor and to whom the auditor reports even though they are legally
distinct from the company.
In the liability to third parties three tests are usually applied.
2.13 PRIVITY
The traditional approach to the question of liability is based on the doctrine of
privety of contract, that is, that liability could normally and only exist where parties
concerned had a contractual. Relationship.
The auditor has a contractual relationship with ·the client and therefore has a duty
of care as a result, but this was not thought to extend to others who may have relied
otherwise liability would be unlimited. According to a much cited American case,
Ultramares Corporation V s. Touche and Co (1931), on this point, auditors could be
exposed to a liability in indeterminate amount for an indeterminate time to an
indeterminate ' class.
2.
More recently, the concept of privity has not been used to exclude liability to
individuals other than parties to the audit contract as the balance of opinion has shifted to
accept that the auditor may have duty of care to certain third parties.
2.14 (PROXIIVHTY)
In place of privity the concept of proximity might be applied.
Sometime, this is applied to determine the boundaries of liability, that is, that a duty of
care is owed to those who are so closely or directly affected by the audit that the auditor
could reasonably be expected to have them in mind when conducting his or her work and
reporting on it. Two famous cases related to the proximity concept are: Candler V s.
Crane Christmas and Co (1951) and Hedley Byrne and Co Ltd V s Heller and Partners
Ltd (1964).
2.15 FORESEABILITY TEST
This test means that liability should not be held if the auditor could not ,be expected
to have foreseen the third parties use of and reliance on the ,audit. A case related to the
foresee ability test is the one of Scoutt Group V s 'Mcfarlence (1978).
The necessary test for a negligent action were generally perceived as:
i. Pecuniary loss must be suffered
ii Negligence must proved
iii. There must be a causal link
iv The expert knows or 'ought to have known that
v. Reliance was being placed upon the statement
2.16 FRAUD
" Fraud- The image of this five letter has assumed an embarrassing, larger-than-
life-dimension in Nigeria. It now hangs ominously like the sword of Damocles. The
consensus is that fraud now reigns"
"Fraud has been aptly described as the growth industry of the eithtics". In the
words of (Efeni 1991) There is trouble at home front. The trend is disturbing, and it
threatens to rip to shreds the country's latest bid to polish its image in the eyes of the
world .:. The infamous act of these felons is bequeathing an undesirable tag on Nigeria,
a burden that is felt heavily by the honest folk"
Fraud has assumed such crises proportion and has become a source of serious
concern to individuals, companies, financial institutions and the government at large.
Yet, views are still divided. On whether such nefarious acts and their disastrous
consequences should be discussed openly. Some experts have even likened fraud to
STD, those who have it seldom talk about it. But, it is common knowledge that this ugly
trend, if left unchecked could undermine the safety, soundness and stability of any
enterprise or even
damage the image as well as erode public confidence in an entire economic system.
Very many people are involved in fraudulent practices in Nigeria today. Doctors
write favorable medical reports for their patients: Journalist demand “brown envelopes
for complimentary stories some examiners collect bribes and allow students to cheat;
government officials award contracts after collecting “Settlement fee” traditional rulers
properly with government officials with the aim of getting their share of the “national
cake” even when the government is very disreputable. Today fraud and related crimes
have wreaked untold havoc on Nigerian economic and social life.
2.17 WHAT IS FRAUD
The advanced Learners Dictionary defines fraud as “criminal deception, act of
the this kind person or thing that deceives: while the international Auditing Guideline
(IAG), “This refers to irregularities involving the use of deceits to obtain all illegal or
unjust advantage and may involve the followings:
a. Manipulation, falsification, or alteration of records or documents
b. Misappropriation of assets.
c. Suppressing or omitting transactions from record or documents
d. Recording transaction without substance: and:
e. Misapplication of accounting policies if this is intentional and deceitful”
The American Criminal Law defines as “a generic term, and embraces all the
multifarious means which human ingenuity can devise which are resort to by one
individual, to get an advantage over another by false representation”
However, it goes further to state that, “no definite and invariable rule can be laid down
as a general pro-position in definiting fraud, as it includes surprises, trick, cunning and
unfair ways by which another is cheated. The only boundaries, definition it are those
limiting human knavery”
The United States Supreme Court in 1987 provided a definition of fraud in the civil
sense involving six requisites as follows:
First: That the defendant has made a representation in regard to material fact:
Second: That such representation of false;
Third” That such representation was not actually believed by the defendant, on
reasonable grounds, to be true;
Fourth: That it was made intent that it should be acted on: and
Sixth: That in so action on it, the complainant was ignorant of its falsity and
reasonably believed it is to be true.
Adewunim wole, in his book titled, fraud in banks, defined fraud as “a conscious
premeditated action of a person or group of persons with the intention of altering the
truths and or facts for selfish and monetary gain”.
He adds that it involves the use of deceit and trick and sometimes highly intelligent
cunning and know-how.
The action usually takes the from of forgery, falsification of documents and
authorizing signatures and out-right theft”.
“Fraud may be said to include all act of omissions and concealment which involves
a breach of legal or equitable duty, truest”.
Fourth: That is was made intent that is should be acted on;
Fifth: That is was acted on the compliment to his damage: and
Sixth: That in so acting on it, the complainant was ignorant of its falsity and reasonably
believed it to be true.
Adewumi whole, in his book titled, Fraud in banks, defined fraud as “a conscious
premeditated action of a person or group of persons with the intention of altering the
truths and or facts for selfish and monetary gain”
He adds that it involves the use of deceit and trick and sometimes highly intelligent
cunning and know-know. The action usually takes the form
of forgery, falsification of documents and authorizing signatures and out-right theft”.
“Fraud may be said to include all act of omission and concealment which involves
a breach of legal or equitable duty, truest or confidence, justly reposed and are injurious
to another or by which an undue or unconscious advantages is taken on another.
Whichever perspective fraud is looked at, it connotes an international distortion of
financial statements for whatever purpose, the misappropriation of assest, whether or not
accompanied by distortions of financial statements.
The issue of fraud and fraudulent practices in any organization should not be left
lying low. The frequency with which it rears its ugly head in any establishment will
determine the long term survival and growth of the company, and if not handled with care
lead to corporate failures.
(The progress Bank Plc 1992) organized a seminar on “Fraud Prevention and
Detection”. It was zoned to cover the Western, Northern and Eastern part of the country.
The Energy section as well as the Federal Government are also not left out in the
Campaign and enlightenment against fraud. This has assumed a constant feature in news,
dailies, magazines, journals as well as the electronic media.
2.18 ELEMENTS OF FRAUD
“Fraud implies deceit, criminal deception, use of false representations, and
dishonest trick” explains Bolanle Forlarim, a professor of psychology at the University of
Lagos, adding that “deceit is the basic of fraud”. It may occur in the social sphere and
involves false representation to sense goodwill, enhanced status or self-image. It may
involve dishonest trick(s) and result in money or material loss to the victims. It may
involve fraudulent production as in creative and intellectual works. The main motive is to
obtain benefit without putting in the necessary effort or (going through) prescribe
process.
Fraud involves an intent to deceive which goes beyond mere negligence. For the
action of fraudulent misrepresentation to succeed, the following element must be present;
A false representation
A knowledge or belief (or equivalently and insufficient basis of information) that
the representation is false.
An intention to induce the plaintiff to act in reliance the misrepresentation.
Resulting reliance by the plaintiff
Damage to the plaintiff resulting from the reliance
2.19 FORMS AND TYPES OF FRAUD An analysis of frauds shows that this crime takes different forms.
Some of the more rampant ones include insiders- trading in securities, tax evasion, "
advance fee fraud" seems (aka' (419) embezzlement or pilferage, credit card, cheque and
insurance fraud, to mention a few, computer fraud in various forms is also on the
increase. With the growth in popularity of computers, the incidence of computer fraud
ranging . from simple book- keeping scans, via input document to more sophisticated
manipulation of the system by analysts or computer maintenance staff who know the
system pretty well.
Culprits can be found at different echelons of society from the lowly manual
worker to the highest management levels in companies, banks governments etc victims
also span the whole spectrum.
Fraud includes" cheating, deceit, or trickery deliberately practical in order to gain
some advantages dishonestly, deception or artifice of any kind anything contrived or
intended to deceived”.
"Deceiving illegally in order to make money or obtain goods" .
"A person who deceives others by pretending to have abilities or
skills etc, that he does not have, and impostor"
Fraud can be divided into the following categories"
a. “Bite Fraud” b. Nibble fraud
With a bite fraud, the money or assets are taken and the perspetrator disappears.
The Bite fraud are always large running into hundred of millions of naira. This makes it
to be detected quickly.
Whereas, with Nibble frauds, a small amount of money or assets is taken each
time at varying intervals so that the risk of being detected is low. Also categorized
under nibble frauds, is the profit and loss fraud whereby either income is understated or
expenditure overstated.
The balance sheet fraud also exists but it is relatively easier to detect than the
profit and loss fraud.
2.20 SOURCES, CHARACTERISTICS AND CAUSES OFRAUD
Basically, there are two main sources of fraud. It is either internal or external.
Though distinguishable in theory, these sources are very often not, separable in practice.
That is to say, a successful fraud often takes place and succeeds as a result of the
collaboration-international or unintentional of an insider in most cases an employee of
the company.
Especially in corporate environments, the facts show that frauds have, some
common characteristics, they include:-
a) They occur where controls are either non-existent or relatively inadequate or the
management is lax and has failed to exercise needed controls. Such situations are
clear invitation to dishonest conduct.
b) In addition to bringing contagious, corrosive and in all cases, disastrous to the
economy, they are culminations of processes in which many factors are at work, and;
c) They are in some cases, the consequences of the foolishness of the victims who
"entrust" property to confident men who assure them that some venture actually;
(spurious investment or commercial transactions) will produce fantastic profits.
2.21 CAUSES OF FRAUD
There are many institutional, socio-economic and political factors that give rise to
fraud. It is generally accepted in business environments that fraud occurs when:
A person through deception acquires an unmerited advantage he could not have
otherwise achieved through lawful, just or normal process. A person in a position of
trust and responsibility in defiance of prescribed standards breaks the rules to advance
his personal interests at the expense of the public. Interest he has been committed to
protect and promote.
An opportunity presents itself and a fraudster has reason to believe that he could take
advantage of such a lapse in institutional arrangements, and. get away unnoticed. Such
institutional lapses or inadequacies also create opportunities for fraudsters, and are
offer manifested in various ways, some of these include
i. Lack of adequate supervision
ii.. Inadequate control, procedures and systems when controls are inadequate, loopholes
are created for the fraudulent minded operator in the system and he sees it as an
opportunity he must avail himself of.
Human avarice, the insatiable appetite to amass wealth is another major cause of
frauds. Added to these are social and economic conditions of the society. Some of which
are, the rate of unemployment, wide spread poverty, the extended family system and
widening social and economic inequalities, are all contributory factors.
2.22 WHY IS FRAUD COMMITTED (MOTIVES)
There are various people involved in the perpetration of company frauds. These
include:
a) External bodies, that is, non-company staff and non company customers.
b) Company staff
(c) Company customers
(d) Directors and top executives of the company
(e) A combination of any of the above
So what is it that, precipitates, inclines or motivates one to select dishonest and
fraudulent means rather than honest means in the quest to satisfy goals and needs?
According to (Bologna 1987) "the degree of competitive treat to survival may
cause one to choose either dishonest means when competition is keen and predatory,
resort to dishonesty can be quickly rationalized". He goes further to state that "beyond the
realm of competitive and economic survival, social and political survival provides
incentives, too, in the form of egocentric and ideological motives, sometimes people
commit fraud to. aggrandize their egos, to put on airs, or to. assume false status.
Finally, he says that "motives to commit fraud in business are usually rationalized
by the old saying that all is fair in love and war-and in
2.23 EFFECT OF FRAUD
The effect of fraud can be very disastrous and devastating. Fraud poses a great
threat and worry to corporate life and existence in Nigeria. It is by no doubt easily proved
the most intractable of all the various problems confronting the Nigerian business circle
today.
Fraud leads to loss of money and assets-monies that ordinarily belong to someone
other than the company. This loss results in some case in reduced level of resources
available for use in the operations of the company. In very severe cases where frauds
occur with crippling frequency and in large sizes, it might force the company to
liquidate. As it is, when the company folds up, the investors, customers and creditors as
well as the government lose money. When it does not lead to complete wounding up,
Once reported it puts the company in bad light and there will be loss of confidence and
reduced patronage.
Frequent occurrence of fraud ultimately distracts the attention of the management
and leads to increased running cost. Time and money that would have been spent on
improvement and expansion of operations would be expended on preventing fraud.
Consequently, funds are sunk into setting up and maintaining fraud control procedures
and systems. The effects are multi - faceted.
Fraud practice have painted an ugly picture of· the Nigerian businessmen and
women and the nation's economy. Those fraudulent practices have ruined many
businessmen and wrecked several factories in far away leads. Nigerian businessmen now
suffer a distrust of their personal integrity in international trading, while some countries
have set retaliatory
Measures against "Nigeria:, in a bid to protect their citizens from further fraudulent
escapades of Nigeria.
2.24 FRAUD IN PUBLIC LIABILITY COMPANIES
Reported and unreported fraud cases run into billions of naira as perpetrators of
the crime become sophisticated by the day. Going by the Nigerian Deposit Insurance
Corporations report, (1992) over N411.7 million was lost to fraud. The inspector
General of Police, (Ibrahim Coomassie, 1993) put the figure at two billion naira (N2b).
The case of frauds in public companies are enormous. Sometimes in ' the mid-80's
there was a blown cases of missing two point eight billion naira (N2.8b) of the Nigeria
Petroleum Corporation, NNPC. In 1988, a one time Petroleum Minister, was alleged to
have completely enriched a foreign oil firm to the tune of about fifty seven million, one
hundred and seventeen thousand, four hundred and forty-three dollars ($57.117,443)
which when converted at the ruling market rate amounted t6 a staggering four hundred
and fifty-six thousand, and ninety-three billion naira (N456,093b).
The communications industry is one area that, harbours fraudsters.
There have been instances where NITEL officials sold customers lines to undeserving
element at a fee. Touts also make illegal connections and avoid payments. And inspite
of few policies being put in place by NIPOST to
Permanently exterminate mail pilferage, the problem keeps recurring even in more
dangerous manner. A new dimension introduced by some mischievous NIPOST staff has
all the, trapping of robbery, costing NIPOST customers money and property.
Other parastals are riot left out. The Nigerian Ports Plc (Np PLC) and the Nigerian
Airways, have at various times fallen victims of fraudsters, most of whom are insiders.
The Mahmud Waziri Panel that reviewed the operations of the NP PIc is said to have
uncovered a twenty-two million US dollar ($22m) fraud relating to the purchase of a
floating dock for the maintenance and repair of all underwater hull (ship's body) and
other fittings.
The Nigerian Ports PIc (1985) 4~000 tons floating dock sank. In October, 1989, a
contract for a new 6,000 ton dock was awarded, but the probe panel found out that the
purchases of that dock for 30, 000 Us Dollar was highly inflated. The maximum cost
ought to have been 18,000 Us Dollars.
Also uncovered was that about 32 million NP PLC funds were also placed in three
commercial banks in Lagos under private names. The panel also discovered that
employees of the company collude with ship owners and their agents to under-declare
cargo tonnage.
It is perhaps banks that have the most reported cases of fraud involving huge sums
of money. According to Mrs. E.N Oputu-Brume, at the First African Conference of
Audit Directors ... nowhere is the incidence of fraud more serious and pervasive than in
the financial industry
(Ogwuma 1985) before he became the Central Bank Governor, put the value of
attempted frauds in the banking sector at N200 million per annum. In 1991, he estimated
the value of both attempted and successful bank frauds at over one billion naira per
annum.
Cases of fraud in banks have been highlighted by the Nigerian Deposit Insurance
Corporation (NDIC) in its various annual reports. Against its level ofN98.2, million in
1989, the amount involved in frauds and forgeries in commercial banks showed an
increase of 703. I percent in 1990. In 1991, a total sum of N360.2 million was involved,
out of which N25.5 million was regarded as actual expected loss. This showed an
increase of 13.8 percent above the level in 1990.
In 1990, two bank managers in the defunct Bendel State, were arraigned before a
special Military Tribunal on the Recovery of public fund. They were charge with
defrauding the bank under four months to the tune of N3 million. A syndicate of seven
persons succeeded in defrauding the
Central Bank of Nigeria t6 the tune of Nl0 million. A manager of the Apex Bank with
three staff members were 'implicated in the deal. It was a case of. Forged NIO million
cheque of NICON Merchant Bank Limited paid into another bank account in Lagos
which they had earlier opened with the sum of Nl0, 000. 00.
But the banks are not alone. Other Financial Institutions equally succumb to
frauds. In the Insurance Industry, the modus operandi include; False reports of accidents
and subsequent claims which are confirmed by fraudulent inspectors; connivance
between a client, who actually suffers a fire or road accident or theft of his care,' and an
employee or agent of the Insurance Company to manipulate the pertinent data; crooks
and fraudsters who insure a single car or machinery in many insurance companies get
involved in insurance fraud as exemplified in the case of a textile factory in Lagos which
made insurance claims for the fire that burnt down the factory it was later discovered to
be deliberate arson.
The, government ministries, departments and functions, have also been
experiencing its fair share of cases of frauds of various degrees and forms. In April
1992, five senior accountants in Niger State of director’s level were interdicted for their
alleged involvement in an attempt to defraud the Nigeria State Rural Electrification
Board of several thousands of naira.
Only recently in January, 1995, a minister in the Abacha cabinet requested to be
allowed to embark on a "thank you" visit to those countries who voted Rilwan Lukman as
the Secretary General of the organization of Petroleum Exporting countries (OPEC).
Unknown to the Presidency (who, granted approval for the trip in ignorance of the
impending cost) the trip was to cost NNPC a whopping one million US dollar (N135.
million in the autonomous market).
This fraud was however foiled by Professor Sam Aluko, Chairman of the National
Economic Intelligence Committee, who immediately protested to the Presidency and
authority who given to him to instruct the Managing Director of the NNPC to' suspend
any expenditure in that, regard.
The list goes on an on and in larger and more professional nature.
That is why fraud is attracting very serious considerations from all spheres of the society
2.25MANAGEMENT RESPONSIBILITY TO' DETECT AND PREVENT
FRAUD.
It has been widely ,proclaimed and rightly too, ,that it is the duty of management
to detect and prevent fraudulent acts by way of introducing a complete and effective set
of internal control and check measures.
Management should evolve positive policies aimed at safeguarding assets under
them such as:
The installation of an effective accounting system;
The institution and the operation of an appropriate system of internal control.
It should be noted here, that big time frauds have in most cases been . traced to top
management members. Management have only succeeded ~n uncovering frauds when
such management is subjected to change or when there is problem in the share of the
spoils.
2.26 AUDITOR'S RESPONSIBILITY FOR DETECTING AND PREVENTING
FRAUD.
It appears from a number of studies in recent times that the role of an auditor in
relations tot he detection and prevention of fraud is widely misunderstood. The studies
have found that a large proportion of investors and corporate management believes that
the detection of fraud is one main objectives of an audit. Perhaps, at this juncture let me
take a quick run-down of the provisions of the Companies and Allied Matters Decree
(1990) as it affect the functions and duty of auditors; section 360(1) of (CAMD 1990)
states that it shall be the duty of the company's auditors in preparing their
report, to carry out such investigations as may be able them to form an opinion as to the
following matters whether: -
(a) Proper accounting records have been kept by the company and proper returns
adequate for their audit have been received from branches not visited by them;
(b)The company's balance sheet and (if not consolidated) its profit and loss accounts are
in agreement with the accounting records and returns.
In addition to the above, the CAMD also states that;
"It shall be the auditor's duty to consider whether the information given
in the director's report for the year for which the accounts are prepared is
consistent with those accounts; and if they are of the opinion that it is not,
they shall state that fact in their report" .
The question of the auditor's responsibility for the prevention and detection of
fraud is highly contentious. The objectives of the ·earliest audits' were concerned mainly
with the detection" of fraud and errors. In more recent times, it become generally
accepted that such a task placed impossible burdens on auditors, hence, fraud detection
and prevention has been relegated to a subsidiary role. This is true for the fact that the
development
3. 4. of good method of internal control and checks made this problem less seriousFurthermore, the draft auditing guideline on irregularities, Fraud and, errors, went on to emphasis that the responsibility for the prevention and, detection of irregularities and errors rests with management. The above guidelines raise a fundamental problem. That is, the problem of confidence financial statements by is users.
Of good method of internal control and checks made this problem less serious.
Furthermore, the draft auditing guideline on irregularities, fraud and Errors, went
on emphasis that the responsibility for the prevention and detection of irregularities and
errors, rests with management. The above guideline raises a fundamental problem. That
is, the problem of confidence in financial statement by is users.
It has been said earlier that auditing is the creation of rational confidence statements
- rational confidence that the financial statements are true and fair above fraud free. Is it
not the doubt that will be associated with financial statements prepared by management
that give rise to the audit of accounts? If the above situation is true, and having known
that it is true, then auditors should be held responsible for the detection of fraud.
However, some frauds may be difficult to detect, and small frauds may be more
expensive to detect than the cost of allowing them to take place. For some types of
fraud, their may be insufficient evidence available to the external auditor to confirm
whether fraud is taking or has taken place. Under such circumstances, the auditor may
be completely responsible and liable for the detection and prevention of such related
fraud.
5.
2.27 ROLE OF AUDITORS (STATUTORY) .IN FRAUD
PREVENTION AND CONTROL.
The basic fact as regards the duty of auditors under the companies and allied
matters decree is now very clear to us. The court have made some pronouncements on the
role of auditors. The basic position in law is that it is not the auditor's primary
responsibility to detect or prevent fraud and other irregularities. This was categorically
stated in the court in the case of Kingston Cotton Mill Co. (1896).
In this case, Justice Lopes 'considered the degree of case required of auditors. He
stated, "an auditor is a watchdog and not a blood bound. He is not entitled to rely on the
representation of trusted officers of the company".
In view of the fact that the auditing techniques have improved consequent upon an
increase in the standard of care placed upon auditors when the Kingston Cotton Mill
(1896) case was decided, the courts therefore, in subsequent pronouncements went
beyond relying on representations by trusted officers of the company to personal and
physical inspection. This was stated in the case of Re Thomas Gerrand and Sons Limited
(1967). The auditor's duty is to state whether a set of accounts gives a true and fair view
and comply with the relevant legislation.
6.
The statutory auditor has a very crucial role to play in the process of stemming the
spread of fraud, which may have often referred to as an unedifying cancer. In this regard,
the auditor is expected to design his audit procedures to give him reasonable expectation
of detecting any material misstatements.
Doubts have been expressed as to whether the audit activities performed by
statutory auditor would achieve the desired results in terms of detecting and
investigating frauds. In fact, the auditor are known to make this fact clear in their report
by including qualification clauses calculated to protect themselves from claims of
negligence and libel.
However, it is on record that operation of the Bank of England in the BCC B case
followed a report by price water house (an external auditing firm) exposing the massive
and widespread fraud. It is therefore, conceivable that, if the accounting firm had not
exposed this practice of "running a bank within the bank", institutionalized fraud could
have continued indefinitely 'unabated, with dire implications for the entire financial
system.
Another school contends that fraud detection and investigation and its prevention,
like security falls within the ambit of senior management in any enterprise. Proponents
of this 'view reason that "Company directors have a -clear fiduciary duty to protect the
assets entrusted on them". They believe
that the Internal Auditor is better placed than the External Auditor to contend with
growing incidence of fraud since he will be performing side by side by side with other
employees at the work place. This is regarded as a "policy" function. To them, the external
auditor performing accounting function of committed long before the audit date. Such
detection long after losses had been incurred through fraud is salutary, but does not per
se~ improve organizational performance, hence necessitating the strong need to
maintain.
Consequently, the statutory auditor seeks assurance that, fraud or error '
which may be material to the financial statements has not occurred, or if it
has occurred the effect of the fraud is properly reflected in the financial
In summary, Oputa concludes that the auditing function that will contend with
fraud is the policy function which confers on the internal auditor the responsibility to
ensure that persons in charge of financial transactions at the point of actual operations
i.e. shop floor, as experience has shown that most frauds are hatched and perpetrated, at
this point.
1.
2.28 REFERENCES
1. Philip L. Deffliese, Montgomery's Auditing, 11th ed. (USA John Wiley and Sons
Inc. 1990), p.7
2. J.E Oseni, "Hindrances to Internal Audit Efficiency", The Nigerian Accountant,
lan/Mar. 1994, volume xxvii No.1, p.6
3. Lesile R. Howard, Auditng, (London Macdonald and Evans, 1982)P.I
4. Philip L. Defliese, Montgomery's Auditing, 11th Ed., (USA: John Wiley and Sons
Inc.1990, p.4
5. Ibid p.I
6. Ibid p.2
7. Amyas Mascarenhas, Stuart. Turley, Spicer's Practical Auditing, 18th
Ed.,
(London; Butterworth and Co. (Publisher) Ltd; 1990), p.5
8. L.G Campbell, Internal Auditing, p.147
9. Company's and Allied 'Matters Decree (CAMD), 1990.
10. Amyas Mascarenhas, Stuart, Turley, Spicer's Practical Auditing, 18th Ed.,
(London: Butterworth and Co. (publishers) Ltd., 1990), p.35
REFERENCES 1. Deffliese, Philip L. (1990) Montgomery's Auditing, U.S.A John Wiley
and Sons Ine; 11th
ed., p.7 and pA .
2. Oseni, J.E. (1994) The Nigerian Accountant, "Hindrances To Internal
3. Howard Leslie R. (1992) Auditing, London: Macdonald and Evans, P.l
4.Ibid p.1
5.Ibid p. 6. Amyas Mascarenhas, Stuart. Turley, (1990) Spicer's Practit~lAUditing,
London; Butterworth and Co. Publisher Ltd; 18th
Ed.
p.5; p. 35
7. L.G Campbell, Internal Auditing, p.147
8.Company’s and allied Matters Decree (CAMD), 1990.
9. Nwachukwu Obinna (1995), The Sunday Magazine, "Nation Fraudster",
March 5, p.24. 7.
10. Uduak Paul (1992), Business Time", "Checking fraud in the F inanci, system",
October 19, p. 16.
11. Efeni Emmanuel (1991), The Guardia'<\, "Fraud checking crooks in higl places",
October 15, p. 23
12. Archibong E. E. (1991), The Nigerian Accountant, "Fraud Prevention and Control
- whose duty?" April/June.
13. Gologna Jack. G. (1987), Fraud AUditing and Forensic Accounting; New Tools
and Techniques, U.S.A John Wiley & Sons Inc., P. 5 p.7
14. Ibid p.5
15 .Adewuruni Wole (1986), Nigerian Institute of Banker'!., "Fraud in Banks Lagos
Landmark Publication Ltd., p.2
16. Ibid p.2
17. Macdonald Dennis (1952), Law of Fraud and Mistakes, London: Sweat and
Max Ltd. P.3
8.
18 Ibid p.7
1.9 Oputa Ereme E. N. (1992), First Bank Review, "Contending with the growing
culture of fraud. A challenging role for the Auditor" p.l
20. Ibid, p. 2
21. Ibid, p.2
22. Anderson R. J. (1984) The External Audit; Singapore. Copp Clark
Pitman Ltd. P. III.
9.
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 INTRODUCTION.
Research design and methodology is the overall framework of carrying out a
research and covers such things as the methods of data collection, population of the
study, samples and instruments used as well as how they are validated, the strategy for
final analysis of data to provide answers to the research questions. As a result, the
researcher deals with the followil1g issues: Area of study, population of the study,
sampling, description of responses and methods of data analysis.
3.1 AREA OF STUDY.
The researcher conducted the study at the Nigerian National Petroleum
Corporation depot at Emene, Enugu. The choice of this establishment was motivated by
the fact that the product of this corporation, which is oil, is the mainstay of the Nigerian
Economy and the greatest source of revenue to Nigeria. Therefore, the corporation
should be guided jealously.
3.3 POPULATION OF THE STUDY
The population of the study is ,made up of some accounting officers of the
corporation including of course some administrative functionaries of the establishment and the
Internal Auditor
3.3 SAMPLING
In order to avoid consideration drop in' the standard and competence that may be
caused by a large sampling, the researcher used a sample of 80 drawn from the Nigerian
National Corporation Office as follows:
Establishment No selected
Accounting/Treasury Department 50
Internal Auditor 20
Administrative staff 10
Total 80
Stratified sampling was adopted to measure that the officers interest on the above
corporation were evenly represented.
3.4 USEOF QUESTIONNAIRE
By this method, the researcher designed and distributed a list of questions called
questionnaire consisting of 23 (Twenty three) question which bordered on the auditor’s
effort at fraud prevention and/or and minimization administrated some to the staff
responsible for his
assignment (i.e. production of the financial statement and audit of this financial
statements).
The questionnaire was designed to enable the respondent either answer "Yes or
No" give opinion or select one or more from alternative answers provided. The
respondent where opinion as not demanded, was required to tick (~) inside the bracket.
3.5 RETURN OF THE QUESTIONNAIRE.
The response rate to the questionnaire was quite encouraging out of the 80
questionnaires distributed, 70 were answered and returned representing 88% of .the total
number administered, whereas 6 questionnaires were not returned representing 8% of the
80 questionnaires distributed, 4 were returned unanswered representing 5% of the total
number administered.
This refers to the areas from where information and facts were collected for ease of
work. The data used for the research were collected from both primary and secondary
sources.
(a) PRIMARY SOURCES.
The primary sources of data include information from self administered
questionnaires and personal interview the researcher has with the internal
auditor, accountant, Head of Personne1 Management (HPM) and other senior staff of the
Nigerian National Petroleum Corporation and personal observations during the survey.
(b) SECONDARY DATA.
Secondary data used consists mainly of information from text books,
Journals/articles and magazines. Information regarding the NNPC as an established
system also constituted the secondary data. This method of' data selection was based on
the fact that it was suitable for the study of the present issue and was also oriented
towards identifying the various ways of checking fraudulent practices in Limited
Liability Companies.
INTERVIEW.
In addition, since the researcher is not optimistic of retrieving hundred percent (100%) of
his information through questionnaires and library research, it was therefore necessary to
correct deviations in questionnaires.
The research therefore conducted both oral interview and Personal discussions with the
Senior Staff of the Nigeria National petroleum Corporation to get from them their own
view on how audit exercise creates impact (if any) on the management of Nigeria
National Petroleum Funds.
10.
3.7 METHOD OF DATA ANALYSIS.
The tools found in this project were merely descriptive statistic on documentation by
influential ones in the field of Auditing and Investigations, financial management in
Public Liability Companies.
The researcher use comparative deductions in the analysis of data analysis of data
gathered.
Thus, this method used is descriptive statistical tool since it facilitates comparism
of figures and 'make for simplistic standardized figure as a result percentage analysis
solved the problem.
11. CHAPTER FOUR
PRESENTATION AND ANALYSIS OF DATA
4.0 INTRODUCTION. To be useful, raw data collected for study must be analyzed and interpreted in light of the
conditions under which they were done. The analysis and interpretation of data are the
means by which the research problems are answered and the stated hypothesis (if any)
tested. Therefore, this chapter has the main objective of determining in view of
respondents to the questionnaires, the degree of relationship between management,
external and auditors, fraud and its prevention.
ANALYSIS OF QUESTIIONAIRE RESPONSES FROM AUDIT AND ACCOUNTS STAFF OF NNPC. Table 4.01 Question 1 Years in service in NNPC.
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
1 - 5 years 15 41.67%
5~ - 10 years. 10 27.78%'
10~ - 15 years 6 16.67
above 15 years 5 13.88
TOTAL 36 100
TABLE 4.02
QUESTION 2: Status Of Staff
Table 4.03
Question 3: Is NNPC prone to fraudulent activities.
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
Yes 28 77.8%
No 7 19.4%
No Response 1 2.8%
TOTAL 36 100
Table 4.03 shows that 77.8 percent of the respondents clam to have heard or
noticed cases of fraud in NNPC, 19.4 percent of them maintained a no position
While just one person or 2.8 percent of the total is indifferent.
From the table, it is clean, and one can conclusively say that fraud does really exist in
NNPC.
RESPONSE 0/0 OF TOTAL
ALTERNATIVE DISTRIBUTION
Top Management. 1 2.8
Middle Management. 13 36.1
Supervisor. 15 41.7
Others. 7 19.4
TOTAL 36 100
RESPONSE
ALTERNATIVE
RESPONSE
DISTRIBUTION
NO OF TOTAL
1-5 2 5.5%
6 - 10 years 20 55.6%
Above 10 6 16.7%
No Response 8 22.2%
TOTAL 36 100%
12. Table 4.04 indicates that 5.5 percent of the respondent have heard or noticed fraud cases
ranging between 1 and 55.6 have recorded between 6 and 10, while 16.7 percent claim to
have knowledge of over 10 cases of fraud 21 respondent representing 22.25 percent were
not forthcoming in declaring the number of cases that come to their notice.
The above implies that fraud does truly exist in the NNPC at varying degrees. The
model class of reported fraud however, is between 1 and 5.
Table 4.05
Question 5: who uncovered most of the frauds?
Table 4.05 indicates that only 5.5 percent of fraud uncovered in c NNPC was "done by
management. 55.6 percent of exposed fraud was done by the internal (auditor, 22.2
percent had no response.
This implies that the internal auditor' and team uncovers most of the fraud in NNPC and
can therefore be said to be very efficient in fraud detection and prevention.
Table 4.06
Question 6: Is management capable of controlling and preventing fraud in NNPC.
1.
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
Management 2 5.5%
Internal Auditor. 20 55.6%
External Auditor. 6 16.7%
No Response 8 22".2%
TOTAL 36 100
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
Yes 29 80.5%
No 6 16.7% 0f Response 1 2.8%
TOTAL 36 100
Table 4.07 Question 7: If management is incapable of controlling and preventing fraud in
NNPC, what are their constraints?
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
No time 5 22.7%
They are ignorant of it. 8 36.4%
Not their duty. 2 9.1%
Lack of technical know-how. 7 31.8%
TOTAL 36 100%
Table 4.08 Question 8: What should management do to ensure that fraud is controlled?
RESPONSE RESPONSE % OF TOTAL
ALTERNATIV
E
DISTRIBUTION
a. Internal control policies, check
s and 25 69.4%
balance
s.
b. Staff welfar education and 4 11.1%
enlightenment.
c. Use of consultants and. 1 2.8%
d. Management making efforts but 2 5.6%
co-ordination and
e. No efforts. 1 2.8%
f. No answer. 3 8.3%
TOTAL 36 100
1.
Table 4.09
Question 9: Do you think an Internal Auditing measure will completely prevent
fraud in NNPC
RESPONSE IRESPONSE
% OF TOTAL
ALTERNATIVE DISTRIBUTION
Yes
10 27.8%
No 25 69.4%
No Response 1 2.8%
TOTAL 36 100%
Table 4.09 shows that 27.8 percent of the respondents agree that an
Internal Auditing measure will completely prevent fraud in the corporation. However, a whooping 69.4 percent disagree while 2.8 percent had to response. The
above concludes that internal auditing cannot completely prevent fraud in NNPC. Hence there is the need for external auditors to involved in the system. Table 4.10 Question 10: Are you part of the External Auditors during the Audit exercise?
RESPONSE RESPONSE NO OF TOTAL ALTERNATIVE DISTRIBUTION Yes 29 80.6%
No I 7 19.4%
I T01'AL 36 100
The table above indicates that 80.6 percent of the total respondents are involved
with external auditors during the audit while only 19.4 are not.
Table 4.11
Question 11: What IS your relationship with the auditor during the Exercise?
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
Cordially 26 72.2%
Reserved 5 13.9%
Uncooperative 1 2.8%
No response 4 11,1%
TOTAL 36 100
From the table above, one can conclude that External Auditors are afforded all
the support, assistance and co-operation they require in the course of performing their
duties as indicated by 72.2 percent of the total respondents.
Table 4.12
Question 12: Are you satisfied with their approach to the Audit work?
RESPONSE RESPONSE NO OF TOTAL
ALTERNATIVE DISTRIBUTION
Yes 29 80.6% No 4 11.1%
No Response 3 8.3%
TOTAL 36 100
Table 4.12 shown that 80.6 percent of the total respondents are satisfied with the
approach to audit work by External Auditors, while 11 1 percent are not. 8.3 percent
of the respondents were indifferent. External auditors can hence be said to be
performing their functions accordingly.
Table 4.13
Question 13:Reasons behind External Auditors failure to prevent fraud.
RESPONSE ALTERNATIVE RESPONSE
DISTRIBUTION
% OF
TOTAL
1
2
3
4
It is their duty
Time limit is small consideration
the scope of NNPC operation
They are ignorant of the
Corporation’s entire operation
No response
22
9
3
2
61.1%
25.0%
8.3%
5.6%
TOTAL 36 100
Table 4.13 indicates that 61.1 percent of the total respondents suggest
that it is not the duty of external auditors to detect and prevent fraud; 25.0 percent
claim time given for audit is small while 8.3 percent say that the external auditors
are ignor.ant of the corporation's entire operations.
1.
The above result justifies the statutory defense that it is not the duty of External
Auditors to detect and prevent fraud.
Table 4.14
Question 14: The best options for the External Auditor to be more relevant in fraud
prevention.
The table above indicates that 8.3 percent of respondents are of the view that
extending the scope of external audit beyond the examination of books and financial
statements would make external auditors more relevant in fraud prevention. 69.4
percent however, are of the belief that a partnership
RESPONSE ALTERNATIVES
RESPONSE
DISTRIBUTION
% OF
TOTAL
1 The scope of external auditors should go beyond the
examination of books and financial statements. He
should be more involved in the should be more
involved in the operations of the corporation
3
83%
2 The external auditor should work in cooperation with
the internal audit team in order to be more reliably
informed.
25
94%
3 External Audit should no longer be an annual
exercise but an all round the year event.
8
22%
Total 36 100
between internal and external auditors would provide the best remedy while 22.2
maintained that external audit should no longer be annual exercise but n all round the year
event.
With credence to the above reasoning, we can conclusively state that make
auditing more relevant in fraud prevention, the external auditors auld work closely and in
co-operation with the internal auditors in order to e more reliably informed.
1. 2. CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND
CONCLUSION
5.0 SUMMARY OF FINDINGS.
This section would give a summary of facts unveiled in the course of this
research. In this regard the findings shall be discussed in two subheading viz: -
Findings form questionnaires and;
Findings from interviews.
5.1 FINDINGS FROM QUESTIONNAIRES.
1. Fraud does really exist in NNPC.
2. Most fraud uncovered in NNPC is credit to internal auditors.
3. Management can conveniently control and prevent fraud in NNPC.
This is however dependent on how effectively they are able to implement
policies and control lapses:
4. The major effort being made by management to ensure that fraud checked is
through internal control policies, checks and balances.
5. Internal auditing measure will not completely prevent fraud in NNPC.
Consequently, external auditing has a role to play towards that end.
6. External auditors have failed to prevent fraud because it is not their duty.
This is in line with statue.
7. to make external auditors more relevant in fraud prevention and control, They should work in co-operation with the internal auditing team in
order to be more reliable informed.
5.2 FURTHER FINDINGS FROM QUESTIONNAIRES.
In arriving at their approach to work, some respondents complained about the following: 1. Little or no independence of external exercise.
2. Laxity in the conduct of their auditors. 3. Biases and;
4. The selfish urge to retain their “mouth watering” contracts which
invariably makes them nothing more than toothless bulldogs and
subject to management influence and “control”. All these against the ethics
of the profession On why external auditors have failed to prevent fraud,
respondents provided 'the following reasons in addition to the options in
the questionnaire.
1. Lapse in internal control.
2. Improper book-keeping
2. Uncooperative attitude of staff.
3. Time factor
4. Fear of losing their contracts.
5.The statutory defense shield that it is not their duty to detect fraud. Respondents
also suggested ways to make external auditors more relevant in fraud prevention.
These includes.
6. Review of existing statute which unfortunately has provided external auditors
with a reason to absolve themselves of the duty of fraud detection and prevention
and control.
7. Observance of the independence of auditors.
8. Appointment of external auditors should now be a function of shareholders and
no longer a management function.
9. Improvement in the quality of account staff.
5.3 FINDINGS FROM INTERVIEWS WITH EXTERNAL AUDITORS OF
THE NNPC.
The following facts were unveiled in the course of the interviews
1. The external auditors unanimously agreed that fraud does .really exist and occur
in NNPC.
13.
2. Internal audit and control has all it takes to prevent and detect fraud in the
corporation (However, not completely). Furthermore, against external audit, internal
audit stands a better chance to prevent fraud. This according to the external auditors
is because there is statutory limit as regards how far external auditors can go in the
course of performing their functions while internal auditors 'has neither a pre-set nor
defined limit and can go to any length to prevent and uncover fraudulent practices.
3. Purpose of external audit is just to satisfy management and users of financial
statements and reports.
4. Duty demands that external auditors are not to prevent nor detect fraud but to
cross check financial statements and books to ensure that the books give a true
and fair view opinion about the financial transaction as presented by them. Any
financial irregularities discovered are reported to management.
5. The closest the external auditor gets to fraud prevention is to check that all
inten1al control measures related to transactions are observed and also ensure
that they are capable of preventing and checking fraud. where, in his opinion,
they are not, he will pass his comments (qualify his rep0l1) and make
recommendations.
6. On problems faced by the external auditors, the following were presented;
Staff not giving required and adequate cooperation. This is contrary to the
analysis of data obtained from the questionnaire on table 4.11, where 73.4
percent of the respondents claim to maintain a cordial relationship with
external auditors in the course of performing their functions and a merge 13.8
percent and 2.1 percent are reserved and unco-operated respectively.
i. Lapses in internal control which makes their work more cumbersome.
ii. Misconception of the role of the external auditors by some staff. Some staff
believes it is the duty of the external auditor to prevent and detect fraud far
them.
All the external auditors however, do not consider time constraint as a
problem as opposed to views held by some of the respondents to
questionnaires.
5.4 IMPLICATION OF FINDINGS.
Section 5.2 takes a critical look at the consequences and implications of the
major findings listed in the previous section.
Firstly, the fact that fraud does exist in NNPC implies that appropriate
measures must be expeditiously put in place to prevent and curb their occurrence.
Secondly, the fact that management can conveniently control and prevent
fraud through internal control policies, checks and balances, further demonstrated in
the fact that most fraud uncovered was done by internal audit is a major
achievement. This implies that management should ensure that all loops and lapses
inherent in internal controls are adequately checked and controlled so that the gains
of the system can be consolidated and improved upon.
The major effort being made by management to ensure that fraud is checked
through internal control.
This means that management gives little or no attention to other fraud
prevention alternatives such as staff motivation and education as well as use of
consultants and specialists. The consequence is that management put all its eggs in
one basket and invariably, where they are lapses in internal control, they
immediately cashed upon to perpetuate fraudulent acts.
Furthermore, the points that whether internal audit nor external audit can
ultimately prevent fraud has been emphasized. This implies that there has to be a
trade off between both and consequently upon this is the call for
a Joint Venture Relationship between internal and external auditors to make the task
of fraud prevention an easier and more reliable one.
Again, the fact that some staff have a misconception of the role of the
external auditor by believing it is his duty to prevent and detect fraud implies that
some staff are ignorant of their responsibilities is and the consequence of this is to
create room for laspses which can be capitalized upon by dubious individuals to
defraud the corporation.
Also, the purpose of external audit is just to satisfy management and users of
financial statements. This implies that external auditors rarely consider themselves
directly relevant in fraud prevention - (Statutory defense)
Lastly, the closest the external auditor goes to fraud prevention is to check tat
all internal control measures are observed and capable of· preventing and detecting
fraud. This implies that the external auditor is only a consultant in fraud prevention.
Consequently, he could be consulted to pass his comments on internal control and
make recommendations where necessary.
14.
5.5 RECOMMENDATIONS.
In view of the discussions so far made, literature review, coupled with the
findings and their implications it has therefore become necessary to make the
following recommendations.
1. Effective internal audit and control measures remains the best solution to
fraud prevention and should be properly put in place. Also, all lapses and
loopholes checked are eliminated where in existence and where problems and
difficulties arise, consultants should be sought and employed. It is the duty of
the consultants to ensure that the more appropriate and effective fraud
prevention and detection measures of inte111al control are put in motion.
2. The most effective way to get external auditors directly involved and relevant
in fraud prevention, detection and control is through interim and continuous
audits. Through interim audit, the systems and controls re constantly
reviewed ad evaluated by the external auditor to check for weaknesses which
could create room for errors and fraud. Any of such weaknesses discovered
are quickly blocked. Also through continuous· audit, staff are keep on their
toes, and on the alert because the audit functions are performed on a
continuous and unannounced basis.
15.
Continuous audit has proved to be a very useful tool in combating and preventing
fraud in organizations.
3. Less reliance (as a matter of fact, little or no reliance) on the external
auditor to detect and prevent fraud. Management and staff must be made to
be curiously aware that, statutorily" it is neither the function nor duty of the
external auditors to prevent and detect fraud.
4. Appointment of auditors should no longer be management function but that
of shareholders. Also, no external auditor should audit a company for more
than 5 years. Both measures are aimed at avoiding a situation whereby
external auditors are "bought over" by management and left at their mercy,
influence, and control, consequently making them biased and collaborators
of fraud.
5. Review of existing statutes. The present one has provided external auditors
with a reason to absolve and alienate themselves of the duty to fraud
detection and prevention. Eternal auditors should be legislation be made
responsible to some extent for the detection and prevention of fraud
considering the degree of reliance placed by users of audited financial
statement in their various decision variables on the assuring comments of
the external auditor.
5.6 LIMITATIONS OF STUDY.
This study is however constrained by a lot of factors. The project as entitled
can be seen from all ramifications to be intriguing, sensitive, inquisitive as well
as exciting. Fraud is something that most gladly be willing to participate in the
spoils. The environment is so full of fraudulent acts that most companies owing to
bad publicity and attendant problems will at like to make them public.
The major problem encountered in the course of this research was the
ever unwillingness of people to disclose corporate information particularly the
country's most sensitive and virile parastatal. Other set-backs include 'me given to
execute this work which is by no means adequate taking cognizance of the topic
and a "no go area" tag placed on the NNP coupled also with the stress encountered
in going here and there searching for formation thereby resulting to loss of
motivation, zeal and concentration .
Finance was also a major stumbling block, for the research involved yelling to
different locations with repeated calls, running and distribution of questionnaires,
stationeries and other implied costs.
5.7 CONCLUSION.
The main objective of an external audit is now clearly recognized as being the
expression of an opinion by the external auditor on the truth and
16. 17.
fairness and compliance with statutory requirements of a set of accounts presented
to him. This assertion is further supported by RJ. Anderson in his book; External
Audit; where he says, "The contractual duties owed to' a client in most audit
engagements seem clear. They are to enable an opinion to be expressed on the
financial statements and to express that opinion using due care.
Over the years, three has been this unfortunate misconception by
management, staff as well as users of financial statements that it is the external
auditor's responsibility to detect and prevent fraud in addition tot he responsibility
of examination of financial statements to uncover financial irregularities. It is
because of these "implied" additional contractual responsibilities that many auditors
fill engagement letters for.
Statutory audit engagements are desirable. The purpose of such a letter is to
clarify whether auditor's are to be limited to their statutory obligations and, if not, to
define any additional contractual duties they are to undertake
The above assertions, notwithstanding, does not necessarily conclude there,
there is no place for the external auditor in fraud prevention. As earlier mentioned,
interim and continuous audits are two audit functions, perfol1ned by the external
auditor which have both proved to be useful tools in
18.
combating and preventing fraud in organizations. Through these categories of
auditors, the external auditors can be actively involved in fraud prevention and it is
left to management to take advantage of these external audit functions to combat
fraud.
While external audit may lead to the detection and prevention of errors and
fraud, management should however, rely mainly on an adequate and effective
system of internal control for their prevention and detection.
In as much as it is not part of the auditors statutory duty at the present time to
prevent and detect fraud, recent calls and suggestions particularly in the United
States of America has maintained the external auditor's duty should be extended to
include fraud prevention and detection.
Similarly, a good working atmosphere in which people are treated fairly and
frankly are motivated and are given a feeling that the organization genuinely cares
about their solution also contributes in some measure towards minimizing the risk of
fraud.
In the absence of such an atmosphere, individuals may, in ce11ain
circumstances, feel resentful towards the organization and may resort to dishonest
means to, as they see it, redress the balance, unless they feel they can discuss their
problems freely with someone who has the commitment and authority to take
decisions.
In addition, to all these, good, strong accounting controls and security
measures which are subject to periodic re-assessment are vital to the continued
good health of an organization.
Finally, the responsibility for the prevention and detection of fraud and
irregularities rests with management, who may obtain reasonable assurance that this
responsibility will be discharged by instituting an. adequate system of internal
control. Whether or not those who have inherited the mantle of fraudsters will be
deterred from their actions in future by these controls is uncertain. Much will depend
on the willingness of government, the police, the business community, to work
together to create effective defenses and an environment where detection is assured.
BIBLIOGRAPHY
Adewunmi, Wole (1986), Fraud in Banks: Nigerian Institute of Bankers, Lagos Landmark
Publication Ltd.
Amyas, Mascarenhas, Turley, Stuart (1990), Spicer's Practical Auditing; Edinburgh:
Butterwort and Co. Publishers Ltd.
Andrew R.J , (1984) The External Audit, Singapore: Copp Clark Pitman Ltd.
Arens, Leobbecke, James K. (1991), An Integrated Approach to Auditing, New Jersey:
Prentice-Hall Inc.
Advanced Learners Dictionary
ACCA Study Text (1989), Auditing and Investigation, London: BPP Publications Ltd.
Bologna, Jack G. (1987), Fraud Auditing and Forensic Accounting: Nevv
Tools and Techniques, U.S.A., John Wiley and Sons Inc.
Defliese, Philip L. (1990), Montgomery Auditing, USA, 11 th Educ. John Wiley & Sons
Inc.
Howard Leslie .R. (1922), Auditing, London: Macdonald and Evans.
Kwame Gyasi (1982) An Integral Guide to Auditing, Bedfordshire:
Graham Burn.
Mcdonnel Dennis (1952) Law of Fraud and Mistakes, London: Sweet and Max Ltd.
Woolf, Emile (1990) Auditing Today, Iniltshire: Prentice- Hall International
Instruction: Tick (/) in the box as appropriate and supply full answers in the blank space
where necessary.
QUESTION NO. 1
How long have you been working with NNPC?
i. Between 1 – 5 years
ii. Between 51/2 – 10 years
iii. Between 101/2 – 15 years
iv. Above 15 years
QUESTION NO. 2
What is your position?
i. Top management
ii. Middle management
iii. Supervisor
iv. Others
QUESTION NO. 3
Have you heard or noticed any case(s) of fraud in NNPC since you joined the corporation?
i. Yes
ii. No
iii. No response
QUESTION NO 4
i. Between 1 – 5 years
ii. Between 6 – 10 years
iii. Above 10
iv. No response
QUESTION NO. 5
Who uncovered most of the frauds?
i. Management
ii. Internal Auditor
iii. External Auditor
iv. No Response
QUESTION NO. 6
Can Management in your opinion control and prevent fraud in NNPC?
i. Yes
ii. No
iii. No response
QUESTION NO. 7
If they cannot, what factor do you consider to be responsible for this ability?
i. No time
ii. They are ignorant of it
iii. No their duty
iv. Lack of technical know-how
QUESTION NO. 8
What effort is management to ensure that fraud is checked?
i. Internal control policies, checks and balances
ii. Staff welfare, Education and Enlightment
iii. Use of consultants and specialists.
iv. Lacking co-ordination and implementation
v. No efforts
vi. No Answers
QUESTION NO. 9
Do you think an Internal Auditing measure will completely prevent fraud in NNPC?
i. Yes
ii. No
iii. No Response
QUESTION NO. 10
Are you involved with External Auditors during their Audit exercise?
i. Yes
ii. No
QUESTION NO. 11
How do you react to them in the course of performing their duties.
i. Cordially
ii. Reserved
iii. No Response
QUESTION NO. 12
Are you satisfied with their approach to the audit work.
i. Yes
ii. No
iii. No Response
QUESTION NO. 13
External Auditor have failed to prevent fraud because?
i. It is no their duty
ii. Time unit is small considering the scope of NNPC operations
iii. They are ignorant of the corporation’s entire operations.
iv. No Response
QUESTION NO. 14
Which of the following do you think can be done to make external Auditors more relevant
in fraud prevention?.
i. The scope of External auditors should beyond the examination of books and financial
statement he should be more involved in the operations of the corporation
ii. The External Auditor should work in corporation with the Internal Audit
team on order to be more reliably informed.
iii. External Auditor should no longer be an annual exercise but an all round
the year event
JOURNALS, PERIODICALS, NEWSPAPERS AND MAGAZINES
Achibony E. E (1993), The Nigerian Accounts, "Fraud Prevention
& Control- whose duty? April/June.
Awofeso Seyo (1992) African Concord, “Living in Fraud”, jan.27
Ayeni G.(1988) Daily Times, "Prevention Fraud Through
Proper Auditing", June 30.
Company and allied matters decree (CAMD) 1990
Efeni Emmanuel (1991) The Guardian, "Fraud checking· Crooks in High
Places", Oct. 15
Nwachulcwu Obinna (1995), The Sunday Magazine, "Nation of Fraudsters",
March 5.
Oputu - Bremen E. N. (1992), First Bank Review, "Contending with the growing
culture of fraud, A challenging role for the
Auditor". Dec.
Oseni J.E The Nigerian Accountant, "Hindrance to Internal
Audit Efficiency", Jan./Mar., Vol. Xxvii No.1
Uduak Udak Uduaka paul (1991) Business Times, "Checking fraud the
Financial system", Oct. 19. .
NNPC Yesterday (1989) NNPC Journal, "Today and Tomorrow",
NNPC Public Affairs Dept.
NNPC (1987) NNPC JOURNAL, Petroleum Exploration
and Dept. in Nig.
APPENDIX II
QUESTIONNAIRES
Department of Accountancy
Post Graduate School,
University of Nigeria, Enugu
Campus.
August 1998
Respondents,
QUESTIONNAIRE ON: AUDITORS AND FRAUD PREVENTION IN PUBLIC
LIABILITY COMPANIES.
A CASE STUDY OF THE NIGERIAN NATIONAL PETROLEUM
CORPORATION, (NNPC)
Yes, I wish to inform you that I am, a Postgraduate student of the above named Department and
school. I am currently carryout a Project study on the topic stated above in partial fulfillment of
the requirements for the Award of Masters Degree (MBA) in Accountancy of University. The
purpose of this exercise is to examine critically the role played by auditors in fraud prevention in
Public Liability Companies.
Sir/Madam, I urge you to feel free in providing the needed answers to the attached
questionnaires to the best of your knowledge.
Answer to questions provided in this questionnaire will solely be used for this work. As
such, I am assuring you that any information given to the successful completion of this work will
be treated in the, strictest confidence.
Thanks for your co-operation.
Yours faithfully, ILLO EMMANUEL CHUKWUMA
PG/MBA/93/17495