CAUSES AND EFFECTS OF FINANCIAL STATEMENT FRAUD IN NIGERIA’S CORPORATE INSTITUTIONS: EVIDENCE FROM FCMB (A CASE STUDY OF FIRST CITY MONUEMENT BANK, NNEWI, ANAMBRA)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Financial statements are prepared by the management of a company for the usage of various stake holders. These financial statements indicate the state of the financial well-being of the company. They are usually the window into a company’s financial affairs available to the average investor, and sometimes the only information available to banks and other institutional investors. Consequently, potential investors and other stakeholders rely on these financial statements to assess the type of dealing they could have with the company. An accurate assessment of a company could only be carried out if the financial statements are accurate. Recent events, particularly the sudden collapse of companies with very healthy financial statements, have showed that most financial statements are not prepared in line with generally accepted accounting principles (GAAP) and accounting standards. In the past and up till now in most jurisdictions, when a company fails or when it is realized that published financial statements are not accurate, it is usually the auditors who are the first to be accused or blamed. The accusation is usually that auditors actively participated in developing or concealing the activities that led to the misstatement or inaccuracy in the financial statements. Recent developments tend to widen the scope of these accusations. For instance, there is the increasing realization that since management has primary responsibility for the preparation and distribution of financial statements, most of these inaccuracies is a result of their deliberate action or inaction. Similarly, it is being realized that auditors as outsiders, find it difficult to detect inaccuracies deliberately introduced and ingeniously concealed in financial statements by management. This has led to the clamour for a greater responsibility and liability to be imposed on management. Financial reporting (FR) is intended to serve a number of user groups with diverse and sometimes conflicting interests, such as shareholders (present and prospective), creditors, lenders, labour leaders, and governments. A number of perspectives are, therefore, associated with FR but all tilt towards magnifying its importance in resolving the principal-agent conflict occasioned by asymmetric information available to the two parties. One perspective considers FR as the way by which managers of organizations give account of their stewardship to their owners and other stakeholders (Van Tendeloo & Vanstraelon, 2014). Others consider FR as: the production and communication of information to shareholders and all other users who have interest in an organization (Olaolye, 2010); the provision of information that is useful in making business and economic decisions, the objective been affected by the economic, legal, political and social environment in which FR takes place (Belkaoui, 2011); and the provision of information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions (IASB, 2010). The IASB (2010) dedicates one of the objectives of FR to the information needs of present and potential investors about the reporting entity’s financial performance and financial position that is useful to them in evaluating the entity’s ability to generate cash, and in assessing the entity’s financial adaptability. In the present age of scams, financial statement fraud represents enormous cost to the economy globally. Collapses of high profile companies have left a dirty smear on the effectiveness of corporate governance, quality of financial reports, and credibility of audit functions. An exponential increase in the use of technology has further aggravated the problem in 21st century and provides opportunities for crimes to be committed across borders. It has become a critical issue in the businesses around the world, which has significantly; dampen the confidence of the investors. The deliberate misstatement of numbers in the accounting books with the help of well - planned scheme by an intelligent squad of knowledgeable perpetrators in order to deceive the capital market participants is termed as financial statement fraud.

1.2 STATEMENT OF THE PROBLEM

The regularity of fraud and misappropriation of funds is creating fear, anxiety, and a loss of confidence in the minds of bank customers. Also, financial statement fraud leads to increase in bank losses which have led to the economic distress of commercial banks in recent times. Management is required to set up an internal control system to check financial statement fraud but this system varies significantly from one bank to the next, depending on such factors as their size, nature of operations, and objectives. Since internal controls operate in an environment which influences its operations, proper care must be exerted into the implementation of these systems in other to achieve the utmost aim of the bank. This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations. An analysis of the problems related to these losses as a result of financial statement fraud indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization. Thus the need for the study to assess the causes and effects of these financial statement frauds in the banking sector in Nigeria and ways of ensuring that the cases of bank distress and poor performance recorded in the past do not occur again.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the causes and effects of financial statement fraud in Nigeria’s corporate institutions. Other general objectives of the study are:

1. To examine the extent of financial statement fraud in Nigeria.

2. To examine the causes and effects of financial statement fraud in corporate institutions.

3. To examine how the causes and effects of financial statement fraud affects the financial performance of an organization.

4. To examine how to detect the financial statement fraud in corporate institutions.

5. To examine the relationship between financial statement fraud and financial performance of a corporate institution.

6. To suggest possible solutions for improving the audit process in the areas of detecting financial statement fraud.

1.4 RESEARCH QUESTIONS

1. What is the level of financial statement fraud in Nigeria?

2. What are the causes and effects of financial statement fraud in corporate institutions?

3. Will the causes and effects of financial statement fraud affect the financial performance of an organization?

4. What are the ways on how to detect the financial statement fraud in corporate institutions?

5. What is the relationship between financial statement fraud and financial performance of a corporate institution?

6. What are the possible solutions for improving the audit process in the areas of detecting financial statement fraud?

1.5 RESEARCH HYPOTHESES

HYPOTHESIS 1

1. The causes and effects of financial statement fraud do not have significant effect on the financial performance of an organization.
2. The causes and effects of financial statement fraud do have significant effect on the financial performance of an organization.

HYPOTHESIS 2

H0: There is no significant relationship between financial statement fraud and financial performance of corporate institutions.

1. There is a significant relationship between financial statement fraud and financial performance of corporate institutions.

1.6 SIGNIFICANCE OF THE STUDY

The significance of this study is that this work will be beneficial to investors, shareholders and other interest members of the public as they will be able to know the extent of controlling and preventing of fraud that existing in their company. The significance of this study to banking industry and society at large cannot be over emphasized at least to probe into causes, effects and solutions to the incessant fraud practices in banks. The study findings will be a referral point in policy formulation on fraudulent activities on corporate institutions in general. It will also be beneficial to investors, donors and other sectors of the economy other than the banking sector. The findings of this study will add wealth of knowledge to the academic community hence stimulate further research with regards to fraud in corporate institutions.

1.7    SCOPE OF THE STUDY 

The study is based on the causes and effects of financial statement fraud in Nigeria’s corporate institutions: Evidence from FCMB, Anambra state.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Financial statement: Financial statements are reports prepared by a company's management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income statements, statement of owner's equity, and statement of cash flows.

Fraud: Wrongful deception with the intent to gain personally or financially or Intentional deception in order to persuade another person to part with something of value. A person who pretends to be something or someone he is not. Fraud takes place when a person deliberately practices deception in order to gain something unlawfully or unfairly.

Corporate Institutions: Establishment, foundation, or organization created to pursue a particular type of endeavour, such as banking by a financial institution. Consistent and organized pattern of behaviour or activities (established by law or custom) that is self-regulating in accordance with generally accepted norms.