THE RESPONSIBILITIES OF INTERNAL AUDITORS IN CONTROLLING FRAUD AND WASTAGES IN CORPORATE ORGANIZATION (A CASE STUDY OF INNOSON TECHNICAL COMPANY EMENE, ENUGU)

CHAPTER ONE

1.0     INTRODUCTION

1.1     BACKGROUND OF THE STUDY

In our society where the business culture has been overridden in recent times with fraudulent practice penetrate by management and employee, the detection was often led to unjustifiable criticisms of his role. Auditors are known to be competent, honest and independent professionals who express unbiased opinion on the truth and fairness of the financial statement as presented by management to members of the company. The accounting profession has over the year built a reputation, which encourages others to rely upon the opinions auditors express. If these opinions are unclear or even unreliable serious consequences may and indeed have resulted.

The auditors duty is to examine the financial records of the company and to take reasonable care to ascertain that the financial records shows the company’s true position. The auditor is expected to prepare a detailed report to the company members and report shall state the matters set out in schedule six to this act. The auditor is also 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 opinion that it is not, they shall state that fact in their report. If the subsiding company and its auditors fail to provides this information, every other officer who is in default shall be guilty of an offence and liable to fine. That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and public (Gay et al, 2007). This debate has been especially highlighted by the collapse of both small and big corporations across the globe. The auditing profession in Nigeria has caught the media’s attention following financial scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afribank, as bank PHB among others.

There seem presently to be a misconception that auditors duties are largely the preventing detecting and reporting of fraud, for example, (Idris, 2009). Financial report user’s perceptions of the extent of fraud in Nigeria, and to determine their perceptions of the auditor’s responsibilities in detecting fraud and the performance of related audit procedures. The paper also aims to ascertain whether the report user’s perceptions of auditors’ responsibilities on fraud are consistent with those of the auditing profession as expressed in auditing standard in Nigeria.

Fraud, according to Adeniji (2004) and ICAN (2006), is intentional act by one or more individuals among management employees or third parties, which result in a misrepresentation of financial statements. Omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 1998 and Bostley and Drover, 1972). Fraud has increased considerably over the recent years and professionals believe this tend is likely to continue. According to Brink and Witt (1982), fraud is an ever-present threat to important concern of management. ISA 240 “the auditor’s responsibilities to consider fraud in an audit of financial statement (Revised)” refers to fraud as an “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Aderibigbe and Dada (2007), defined fraud as a deliberate deceit planned and executive with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether the perpetuator benefits from his/her actions.

Weirich and Reinstein (2000 Cited in Allyne and Howard, 2005), defined frauds as intentional deception cheating and stealing some common types of fraud include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales, underclared stock, making unauthorized “write-offs”, and claiming excessive or never incurred expenses. Pollick (2006) regards fraud as a “deliberate misrepresentation, which causes one to suffer damages, usually monetary losses”. Albrecht et al (1995 cited in Allyno and Howard 2005) classified fraud into employee embezzlement, management fraud. Fraud also involves complicated financial transactions conducted by white-collar criminals, business professional with specialized knowledge and criminal intent (Pollick, 2006).

The term fraud, waste and abuse are often used interchangeably, even though they are conceptually and legal distinct. They nevertheless often co-exist, frequently arise from the same underlying factors, and in terms of prevention, they are often amenable to the same counter measure. Fraud against government is more easily accomplished in an environment of administrative and fiscal laxity. Indeed, it may well be that a significant proportion or revenue loss flows less from deficit than from careless or inefficient management of public resources. In my event, the appearance of carelessness and inefficiency can be an invitation to perpetrators of fraud.

1.2     STATEMENT OF THE PROBLEM

Internal audit is an integral part of the finance structure of public organizations. A constant complaint in the sector is that internal audit department is too understaffed and under resourced generally to be fully effective. There exist a lot of arrears of work due to inadequate staffing of internal audit departments. There is inadequate knowledge of Electronic Data Processing (EDP) and computer for efficient auditing of computerized systems. Most of the public sector management working papers do not provide cementation because of this problem. Staff of the internal audit department is not well remunerated and it makes them to lack interest in their work. Many adduce the argument that internal auditors, being employees in public sector do not have the liberty to exercise the unbiased and independent attitude so necessary to auditor. In the heal of the controversies for inept public sector performance, Nigeria as a developing economics and Kano State in particular has to garner her resources for effective developmental utilization and the need for the services of internal auditor in the public sectors becomes more imperative hence this research into the effectiveness of using internal audits as instrument of improving public sector management.

1.3     OBJECTIVES OF THE STUDY

The aim of this research work is to examine the responsibilities of the internal auditor in controlling fraud and wastages in corporate organization, with specific reference to Innoson Technical Company, Emene Enugu. The specific objective of this research work includes the following:-

1. To evaluate the role of internal auditor in controlling fraud and wastages in Innoson Technical Company, Enugu.
2. To determine the effect of fraud wastages on the performance of the company (Innoson Technical Company, Enugu).
3. To examine the impact of the internal auditor in the department of Innoson Technical Company, Enugu.
4. To determine the types and causes of fraudulent practices in Innoson Technical Company, Enugu.

1.4     RESEARCH QUESTION

The researcher formulated the following research questions:

1. Does internal auditor play significant role in controlling fraud and wastages in the company?
2. Does fraud and wastages have any effect on the performance of the company?
3. Does the internal auditor have significant impact on the development of the company?
4. Does false accounting and asset misappropriation constitute types and causes of fraudulent practices in your company?

1.5     RESEARCH HYPOTHESIS

For the researcher to carryout extensive study on the responsibility of the internal auditor in controlling fraud and wastages in corporate organization, with specific reference to Innoson Technical Company Enugu, he developed the following research hypothesis;

HO:         Internal auditor does not play any role in controlling fraud and wastages in Innoson Technical Company, Enugu.

HI:          Internal auditor play significant role in controlling fraud and wastages in Innoson Technical Company, Enugu.

Ho:         Fraud and wastages do not have any effect on the performance of the company.

HI:          Fraud and wastages have so many effects on the performance of the company.

HO:         The internal auditors do not have any impact on the development of Innoson Technical Company, Enugu.

HI:          The internal auditors have significant impact on the development of Innoson Technical Company, Enugu.

1.6     SIGNIFICANCE OF THE STUDY

It is hoped that this study will enable the management of Innoson Technical Company, Enugu and other similar companies that requires an effective internal audit such as research institution, business organizations and the general investigating public to be guided adequately in the pursuit of the realization of their own objectives. It will enable them manage the increasing fraud and wastages, cases of sophistication of crime, irregularities and their implications.

Finally, it will be of immense benefits to the practicing accountants in their audit works, there would be accountants, legal practitioners who need them as a good reference guide for their legal duties.

1.7     SCOPE AND LIMITATION OF THE STUDY

The scope of this study focuses on the responsibilities of the internal auditor in controlling fraud and wastages in corporate organization, with specific reference to Innoson Technical Company, Emene Enugu. The reason is to enable the researcher have enough time to carry out an in-depth study of the subject matter with regards to its operations in the institution. It is important to state that in spite of the sensitive nature of the issue, the quality of work was neither delineated nor lacked substance and as such should be reliable in establishing comparative standards of performance.

The major limitation of this study is essentially “time”. The fact that one does his job or she is expected to perform her full-time official duty as a student from Monday to Friday and still carries on with his/her project work is energy whelming.

In addition, the time presently allotted to the study research documentation/project writing is insufficient. On a suggestion that student should be grounded in the areas of research work right from 2nd year of the four years program. This will enable them to operate matters rather than the new famous crash.

Finally, inadequate finance; financing the project is another handicap on the researchers. An extensive research work requires reasonable level of funding which made the researcher not to be able to collect all necessary information pertaining to this research work.

1.9     DEFINITION OF TERMS

An Audit: Nwabueze C.C. (2000), defined an audit as an independent examination by a statutory appointed person called the auditor to investigate an organization, its records and the financial statements prepared from them and thus, from an opinion on the accuracy and correctness of the financial statement.

Auditing: J.C. Eze (2005), defined auditing as an activity carried on by the auditor when he verifies or examines accounting information, determine the accuracy and reliability of accounting statement and reports and then express his opinion.

Internal Audit: Is an independent appraisal function established by the management for the review of the internal control system as a service to the organization (Eze J.C). The institute of chartered accountants of England and Wales (ICAE & W) also defined internal auditing as “A review of operation and records, sometimes continuous, undertaking within a business by specially assigned staff”.

Internal Control System: Auditing standard and guideline (ASA) defined the system as “the whole system of controls, financial and otherwise established by the management in order to:

1. Carry out the business of the enterprise in an orderly and efficient manner.
2. Ensure adherence to management policies.
3. Secure as far as possible the completeness and accuracy of the records.

Management Audit: According to Mayo association limited (1988), management audit is an independent examination of the quality and policies of the management of an organization as well as the level of their execution against the background of relevant environmental factors and condition. It could cover any aspect of organization activities such as: Corporate planning, marketing, financial and accounting, production research and development, or other aspect of its corporate affairs. The objective is to produce a report that will form a basis for the review and amendment of the organization policies and procedures.

Auditing Standard: Auditing Practice Committee(APA) defined auditing standard as those principle which the members of the profession should use as guideline whenever they are discharging and audit responsibility.