FINANCIAL STATEMENT FRAUD IN AN ORGANIZATION: PROBLEMS AND SOLUTIONS

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

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

The world of financial statements fraud needs no introduction. The practice of manipulating the financial statements of companies to bolster their position is act new but got to a height in Enron and world.com saga (Razace.2002).

According to the Association of Certified Fraud Examiners (ACFE), financial statement fraud is the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional omission mount in the financial statement of organization to deceive financial statements users. It caused the accounting firm a very big embarrassment and saw the demise of the world leading accounting firm, Author Anderson (AA) (Isaac, 2008.2).

 The current business environment, have pushed the top of many companies and organization with paying attention to how to make the financial statement look better in order to attract investors or paint a good picture of their companies, using aggressive accounting (Anumaka; 2007:1)

 Fraud is classified into two categories:

 *          Fraud involving the manipulation of the records and accounts

 *          Fraud usually by employees involving the theft, un-appropriation or embezzlement of companies funds in the form of cash or its other assets usually by junior staffs.

Apart from the problem of scarce resource, organization run the typical risk of fraud and errors even more problems solution to fraud is not sought far. In this project work, problems of financial statement fraud will be extensively assessed with its solution in relation to organization.

1.2. STATEMENT OF THE PROBLEM

  The current business environment and even more economic recession, have in recent times pushed the top management of many organization into paying  attention to how to make financial statements of their companies look better in order to attract investors by manipulating figures in their financial statement either by increasing or decreasing the figures depending on what they want to achieve at the moment using aggressive or creative accounting otherwise known as financial statement fraud (Anumak, 2007).

 In recent times, fraud has been discovered to pose a big threat on organizations. It is a big business risk which can incur a very big cost leading to a lot of problems of which one of the problems is loss of confidence of shareholders and the public on the company. This research work tries to solution to financial statement fraud. Another area on which the research work will focus on “is auditor involvement in solving fraud problems. We will also look into corporate governance as a tool in fraud prevention cost of fraud will be discussed too.

 Fraud is a very big business risk which if not prevent will have a very big negative impact on organizational performance.

1.3      OBJECTIVE OF THE STUDY

  The major purpose of this research work is the assessment of the problems of financial statement fraud on organizations with solution to it. Areas like reason for fraud, types and implication of costs of fraud will be discussed.

 Since auditors are to express their opinion on the financial statement of an enterprise as to truth and fairness of such statement, the internal auditor’s role in the prevention of fraud will be looked into. The use of corporate governance as a tool on the fraud prevention will be discussed or properly examined plus the current effort of the Nigerian Accounting Standard Board to curb fraud.

1.4      RESEARCH QUESTIONS

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

Is financial statement fraud a problem in an organization?

Can I prevent fraud?

How can I prevent fraud?

What are the cost of fraud?

Who can significantly reduce fraud in an organization?

Is auditor impropriety a yardstick to fraud?

Who can be held liable for fraud?

Can I detect fraud?

Fraud can be prevented/there is solution to fraud?

1.5      RESEARCH HYPOTHESIS

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

H0:        There is no solution to fraud in an organization 

H1:        There is a solution to fraud in an organization

H0:       There are no problems associated with fraud

H1:      There are  problems associated with fraud

1.6      SIGNIFICANCE OF THE STUDY

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

1.7      LIMITATION OF THE STUDY

  The research study was carried out under a tight schedule. It was undertaken within a short time and was carried out intermittently with lectures and private studies.

 There was also a problem of data collection due to reluctance on people’s side to provide information. Also another limitation is the insincerity of some respondents in the filling of the questionnaire. For instance, some of the questionnaires were revisited through oral interviews. Financial constraint was another limitation as a student.

1.8      DEFINITION OF TERMS

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

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

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

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

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