EFFECT OF FINANCIAL STATEMENT FRAUD ON ORGANISATIONAL

PERFORMANCE: A CASE STUDY OF SELECTED DEPOSIT

MONEY BANKS IN NIGERIA

BY

TIJANI KEHINDE HUSSEIN

UJ/2016/MS/0520

A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING, FACULTY OF

MANAGEMENT SCIENCE, UNIVERSITY OF JOS, JOS-NIGERIA, IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF
BACHELOR OF SCIENCE (B.Sc.) DEGREE IN ACCOUNTING

AUGUST, 2021
 DECLARATION

I TIAJNI KEHINDE HUSSEIN do humbly declare that this research work entitled

“EFFECT OF FINANCIAL STATEMENT FRAUD ON ORGANISATIONAL

PERFORMANCE: A CASE STUDY OF SELECTED DEPOSIT MONEY BANKS IN

NIGERIA” is as a result of findings from my research efforts, carried out in the

Department of Accounting, Faculty of Management Sciences, University of Jos,

Jos-Nigeria. It was carried out under the supervision of Mr. Ishaya Lalu. I further

declare that, to the best of my knowledge, this work contains no material

previously published by another person or group except where due

acknowledgement has been made in the text and stands subject to plagiarism

scrutiny.

__________________________ __________________
Tijani Kehinde Hussein Date

ii
 CERTIFICATION

This is to certify that this research project entitled “EFFECT OF FINANCIAL

STATEMENT FRAUD ON ORGANISATIONAL PERFORMANCE: A CASE STUDY OF

SELECTED MONEY DEPOSIT BANKS IN NIGERIA” was carried out by TIJANI

KEHINDE HUSSEIN in the Department of Accounting, Faculty of Management

Sciences, University of Jos, Jos-Nigeria for the award of Bachelor of Science

Degree in Accounting.

_____________________ ______________________
Mr. Ishaya Lalu Date

iii
 DEDICATION

This project is dedicated to Almighty Allah, The Originator, The Producer, and

The Initiator of my life. Also to my ever loving caring wife Mrs. Oluwatoyin B. A.

and my adorable children Miss Faizah and Master Khan.

iv
 ACKNOWLEDGEMENTS

My pure gratitude goes to Almighty Allah, my creator, who has been the source

of my strength and help me to reach this stage of my academic pursuit. I express

thanks to many people for their contributions and assistance especially Mr.

Ishaya Lalu my supervisor for his immense contributions amidst your tight

schedules and fatherly advice to make the research work a great success.

Sincerely, you are a great supervisor with a difference.

I equally extend my regards to my level coordinator Mr. Samuel I. and all the

entire staff of Accounting Department especially Mr. Kutus Martins, Mr, Pirdam,

Mr. Lukman, Mr. Osareme and other staff for their understanding and

encouragement all through the degree programme.

I also acknowledge the priceless contribution from my dearly wife Mrs.

Oluwatoyin T. and my mother for their support for making this project a

successful one.

I wish to thank my colleagues and boss, Sgt Bamidele Ikoko, Sgt Abdullahi

Ibrahim, Sgt Sani Abdullahi, Cpl Adamu Abdulmalik (Rtd), Cpl Ayodele Olasupo,

Cpl Iyanda Olayinka (Engr), Cpl Etim Odudu-Obasi, LCpl Ogbo Joshua, Daniel,

Oluwafemi and also to my course mate, Moses Kadzia, Adeniyi Favour and many

more for their generosity, prayer and assistance throughout the programme. I say

big thanks for being there always for me.

May God Almighty bless you all (Amen)

v
 ABSTRACT

This study examined the effect of financial statement fraud on organisational

performance. Specifically, in actual fact, dependence on the information
provided in financial statements constitutes one of the greatest global challenges
for businesses. Return on Assets (ROA) was obtained from the financial
statements of Nigeria Banks from year 2000 to 2015 in order to measure their
financial performance, multiple regression analysis model was used to determine
the effect of independent variables on the dependent variable. All the above
findings on the classification of causes of fraud are caused by management,
technological, legal, personal and social. The study found out that the Y-intercept
was 0.426 for all years. It was recommended that Deposit money banks
management should come up with a policy which clearly indicates steps to be
taken on any staff found committing fraud. This will help reduce internal fraud
which is more elaborate in the bank than external.

vi
 TABLE OF CONTENTS

Page

Title Page i

Declaration ii

Certification iii

Dedication iv

Acknowledgements v

Abstract vi

Table of Contents vii

List of Tables x

List of Figures x

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study 1

1.2 Statement of the Problem 2

1.3 Objectives of the Study 4

1.4 Research Question 4

1.5 Statement of the Hypothesis 4

1.6 Significance of the Study 5

1.7 Scope of the Study 5

1.8 Justification of the Study 5

1.9 Definition of Terms 6

vii
CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction 7

2.2 Conceptual Framework 7

2.3 Theoretical Framework 14

2.4 Literature Review 21

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction 46

3.2 Research Design 46

3.3 Population of the Study 46

3.4 Sample of the study 46

3.5 Data Collection and Research Instruments 47

3.6 Data Analysis 47

3.7 Limitations of the Study 48

CHAPTER FOUR

4.1 Introduction 49

4.2 Data Analysis and Interpretation 50

4.4 Discussion of Findings 53

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings 55

5.2 Conclusions 55

5.3 Recommendations 56

5.4 Suggestions for Further Studies 57

viii
Reference 58

Appendix 65

ix
 LIST OF TABLES

Table 4.1: Fraud and Forgery cases and amount of money lost by

Nigerian Banks (2000 - 2015). 49

Table 4.2: Model Summary. 51

Table 4.3: Summary of One-Way ANOVA results of the regression

Analysis between financial performance of Nigerian Banks

and its determinants. 51

Table 4.4: Regression coefficients of the relationship between financial

Performance of Nigerian banks and the four predictive

variables. 52

LIST OF FIGURES

Fig.1: Application of Routine Activity Theory in crime 16

Fig 2: Fraud Triangle Theory 18

Fig 3: Fraud Diamond Theory 20

x
 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

As a countermeasure to high profile accounting scandals and business collapses,

among the most notable being Enron in 2001, the Sarbanes Oxley Act was passed

by the United States of America congress in 2002. The purpose of the Act is to

add strength to a public company’s internal control mechanism and financial

reporting, which in turn will lead to greater transparency in financial statements

(Agami, 2012). In Malaysia, corporate financial scandals such as those

committed by Transmile Group Berhad, Tat Sang Holding and Megan Media

Holdings Berhad, (2007) have diminished the firms’ value and shareholders’

wealth. This has possibly had a negative impact on foreign direct investments.

Concomitant with the financial and nonfinancial damage, the faith and reliance

of the public in the accounting and auditing profession will be destroyed by

financial statement fraud (KPMG, 2012).

PricewaterhouseCoopers (2011) discloses that one of the most challenging issues

for businesses globally is fraud. Notwithstanding the imposed regulation and

legislation or the control mechanisms implemented by the companies, the

intensity of economic crime and the concomitant financial and non-financial

damage remains unchanged. In fact, as reported by PricewaterhouseCoopers

(2007), out of every two companies worldwide, one had been a target of

economic crime within the preceding two years.

1
In response to the aforementioned crisis, the improvement of financial statement

fraud controls and the integrated strategies of prevention, detection and action to

response to financial statement fraud are important for reducing financial

statement fraud. These strategies need to be practised at all levels in corporations

and supported by a board of directors, audit committee oversight, executives,

chief executive officer, chief financial officer, chief operating officer and

accountants through internal audit, compliance and monitoring functions

(KPMG 2007).To date, most discussions have stressed prevention and detection

strategies that can be used to mitigate financial statement fraud. Although

previous academic researchers did not examine the actual practices of financial

statement fraud controls in commercial companies, it is suggested that an

improvement in such control is required. Johl et al. (2013) studied the actual

practice of internal control that is related to financial statement fraud. By using

Malaysian evidence, Johl et al. (2013) found little attention had been given to

examining internal audit’s contribution towards financial reporting quality. In

relation to this, the present research focuses on the practices of financial

statement fraud control in the context of Malaysian commercial companies and

provides qualitative evidence of qualitative aspects of financial statement fraud

control.

1.2 Statement of the Problem

In capital markets, financial statement provided by the companies should be fair,

efficient, transparent and free from any misleading information. Financial

2
statements or financial reports are supposed to be tools upon which users can

rely when making investment decisions. Therefore the dissemination of financial

statement information from companies should be timely, accurate, complete and

free from any material misstatements. This is very important for investors to be

able to determine their investment decisions and trading strategies Ravisankar, et

al. (2016). However in reality, the reliability of financial statement information

seems to be questioned by investors and public due to previous financial

statement fraud cases. In actual fact, dependence on the information provided in

financial statements constitutes one of the greatest global challenges for

businesses (PWC, 2012). Thus, the research found financial statement fraud has

become a serious problem and tends to be extensive and momentous which

requires improvement in financial statement fraud control due to the huge

impact of financial statement fraud losses.

According to ACFE (2012), financial statement fraud cases triggered the greatest

median loss at $1 million despite the small number of cases involved in the

research investigation. The issue is serious as the actual level of economic crime

and the associated financial and non-financial damage has been reported to be

on the rise as the number of financial statement fraud cases has increased since

2003 (PWC, 2012).

ACFE (2012) revealed that globally an average organisation is estimated to lose

5% of its revenue each year due to significant frauds which also include financial

statement fraud. If this rate of loss is applied to 2011 Gross World Product, this

3
causes an anticipated fraud loss of $3.5 trillion (ACFE, 2012). The impact is that

financial statement fraud cases have resulted in financial losses, a loss of

shareholder value and bankruptcies (Center for Audit Quality, 2010). As such, it

leads to the question what is lacking in the internal control system adopted by the

companies?

Strategies in detecting and preventing fraud cases have been presented in the

literature (Vaughan, 2007; Wells, 2007; KPMG, 2009; PWC, 2012; Rejda, 2013).

However, the investigation of the actual practices of financial statement fraud

control to provide improvement appears from the literature to be very limited.

Most of the related literature is from professional bodies such as Institute of

Internal Auditors (IIA), American Institute of Certified Public Accountants

(AICPA), Association of Certified Fraud Examiners (ACFE), KPMG and

PricewaterhouseCoopers (PWC). Hence, in this research, improvements for

financial statement fraud control and the awareness of financial statement fraud

control will be suggested.

1.3 Objectives of the Study

The main objective of this study is to examine the effect of financial statement

fraud on organisational performance.

 To determine the effect of financial statement fraud on organisational

performance;

 To examine the relationship between bank fraud and organisational

effectiveness;

4
 To investigate the relationship between bank fraud and organisational

survival.

1.4 Research Questions

Specifically, the research focuses on the following questions which are related to

financial statement fraud on organisational performance:

 What are the effects of financial statement fraud on organisational

performance in Nigeria Banks?

 What is the relationship between bank fraud and organisational effectiveness?

 What is the relationship between bank fraud and organisational survival?

1.5 Statement of Hypothesis

A research hypothesis is a generalized and verifiable statement about a state of

phenomena which may be true or false. Therefore, these research null

hypotheses will be empirically tested in this research work.

Hypothesis One

Ho: There is no significant relationship between bank fraud and

organisational performance.

Hypothesis Two

Ho: There is no relationship between bank fraud and organisational

performance.

5
1.6 Significance of the Study

The recommendations in this research work will provide effective roles for

company management to improve financial statement fraud control and thus

provide a monitoring tool for deposit money bank.

Considering that the management of a company as well as its auditors has to play

vital roles in protecting the shareholders’ interests, financial statement fraud

control and strategies would create awareness within corporations of financial

statement fraud. These strategies will also help businesses (1) to identify fraud in

a timely manner and minimize the resulting damage, (2) to enhance the

reliability of financial statements and increase shareholder value, and (3) to

conduct their business ethically. The contribution of this research would enhance

the upgrading of the Standard of Procedures and Internal Control System in

organizations that reflect strong management practices towards reducing any

financial statement fraud.

1.7 Scope of the Study

Conceptually the study covers the effect of financial statement fraud on

organisational performance which is concerned in Nigeria. In which Nigeria

Banks was used as a case study. However, the research was limited to Nigeria

Banks in Ibadan due to the schedule of researcher is from year 2000 to 2017.

1.8 Justification for the Research

Research into fraud and financial statement fraud in particular, is difficult as

fraud is usually a hidden activity. Higson (2010) found management reluctant to

6
report suspected fraud because of its imprecise definition, vagueness over

directors’ responsibilities and confusion about the reason for reporting fraud. The

Committee of Sponsoring Organisations of the Treadway Commission report

found that most audit reports issued in the year prior to the fraud coming to light

were unqualified (COSO 2009); therefore, qualified audit reports do not

adequately quantify the impact of financial statement fraud. Fraud Advisory

Panel (2009) figures suggest that UK fraud involving false accounting peaked in

the early 1990s, falling until 1996 when reported cases of false accounting rose

again, though not to the same level. Similar data available for Australia suggest

that financial statement fraud peaks in times of recession (Fraud Advisory Panel

2009).

1.9 Definition of Terms

Fraud: Fraud refers as an international misrepresentation of financial information

by one or more individual among management, employees or third parties. Fraud

also defined as misappropriation, theft or embezzlement of corporate assets in the

particular economic environment.

Bank: It is a place where money and other things are kept.

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.

7
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.

8
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents the literature as well as the conceptual framework and

theoretical framework for the study so as to serve as a link between the past and

the present.

2.2 Conceptual Framework

2.2.1 Corporate Fraud

The concept of fraud has been defined in various societies mostly in line with the

culture or prescribed social life of the people. Hornby (2015) defined fraud as an

action or an instance of checking somebody in order to make or obtain goods

illegally. Olaoye (2014) noted that fraud consists of both the use of deception to

obtain an unjust or illegal financial advantage and intentional misinterpretation,

affecting the financial statement by one or more individuals among management,

employees or other parties. This is similar to the definition of Olowookere (2013)

who defined fraud as any activity that is painted with initial intention to cheat or

deceive.

According to Ogunleye (2014), the incidence of fraud in the Nigerian banking

system has become a matter of serious concern to all.

Fraud can be defined as deliberate deceit or an act of deception aimed at causing

a person or organization to give up property or some lawful right. The

Association of Certified Fraud Examiners (2014) further defines fraud as the use

9
of one’s occupation for personal enrichment through the deliberate misuse,

misapplication or employment of organizational resources or assets. Fraud can be

defined as the fraudulent conversion and acquisition of money or property by

false pretence (FBI, 2009). In legal terms, fraud is seen as the act of depriving a

person dishonestly of something, which such an individual would or might be

entitled to, but for the perpetration of fraud. In its lexical meaning, fraud is an

act of deception which is deliberately practiced in order to gain unlawful

advantage. Therefore, for any action to constitute a fraud there must be dishonest

intention to benefit (on the part of the perpetrator) at the detriment of another

person or organization.

Fraud usually requires theft and manipulation of records, often accompanied by

concealment of the theft. It also involves the conversion of the stolen assets or

resources into personal assets or resources. There is a general consensus amongst

criminologists that fraud is caused by three elements called “Weight of Evidence

(WOE)” Onibudo, (2012). For any fraud to occur there must be a will, an

opportunity and exit (escape route). A fraud will only occur if the perpetrators

have the will to commit the fraud, if the opportunity to commit the fraud is

available and if there is an exit or escape route from relevant sections or

institutions that are against fraud or related deviant behaviour. Fraud is a global

phenomenon. It is not unique to the banking industry or for that matter, peculiar

to only Nigeria.

10
With the crash of major multinational corporations like Enron (in the United

States of America) coupled with high level allegations and actual cases of

corporate fraud, many organizations in their attempt to improve their image

have resorted to developing ethical guidelines and codes of ethics. The whole

essence of these is to ensure that all organizational members irrespective of rank

or status, complies with the minimum standard of ethical responsibility in order

to promote the reputation of such firms in their chosen industry, earn the

goodwill of customers and thus improve their competitive advantage (Unugbro

and Idolor, 2012). In the present Nigerian epoch, many youths and elder citizens

alike want to make it within the shortest possible time, because banks deal with

money, and money related businesses, it is no wonder that they have become the

targets of persistent fraudsters.

As naturally expected, fraud is perpetrated in many forms and guises, and

usually have insiders (staff) and outsiders conniving together to successfully

implement the act. The following types which are not in any way completely

exhaustive are the most common types of bank frauds in Nigeria identified by

Ovuakporie (2004);

2.2.1.1 Theft and Embezzlement

This is a form of fraud which involves the unlawful collection of monetary items

such as cash, traveler’s cheque and foreign currencies. It could also involve the

deceitful collection of bank assets such as motor vehicles, computers, stationeries,

equipment, and different types of electronics owned by the bank.

11
2.2.1.2 Defalcation

This involves the embezzlement of money that is held in trust by bankers on

behalf of their customers. Defalcation of customers deposits either by conversion

or fraudulent alteration of deposit vouchers by either the bank teller or customer

is a common form of bank fraud. Where the bank teller and customer collude to

defalcate, such fraud is usually neatly perpetrated and takes longer time to

uncover. They can only easily be discovered during reconciliation of customers‟

bank account. Other forms of defalcation involves colluding with a customer’s

agent when he/she pays into the customer’s account and when tellers steal some

notes from the money which are billed to be paid to unsuspecting

customers/clients.

2.2.1.3 Forgeries

Forgeries involve the fraudulent copying and use of customer’s signature to draw

huge amounts of money from the customer’s account without prior consent of

the customer. Such forgeries may be targeted at savings accounts, deposit

accounts, current accounts or transfer instruments such as drafts. Experience has

shown that most of such forgeries are perpetrated by internal staff or by outsiders

who act in collusion with employees of the bank who usually are the ones who

release the specimen signatures being forged (Onibudo, 2012).

2.2.1.4 Unofficial Borrowing

In some instances, bank employees borrow from the vaults and teller tills

informally. Such unofficial borrowings are done in exchange of the staff

12
postdated cheque or I.O.U. or even nothing. These borrowings are more

prevalent on weekends and during the end of the month when salaries have not

been paid. Some of the unofficial borrowings from the vault, which could run

into thousands of naira, are used for quick businesses lasting a few hours or days

after which the funds are replaced without any evidence in place that they were

taken in the first place. Such a practice when done frequently and without

official records, soon very easily becomes prone to manipulations, whereby they

resort to other means of balancing the cash in the bank’s vault without ever

having to replace the sums of money collected.

2.2.1.5 Foreign Exchange Malpractices

This involves the falsification of foreign exchange documents and diversion of

foreign exchange that has been officially allocated to the bank, to meet

customer’s needs and demand, to the black market using some ‘ghost customers”

as fronts. Other foreign exchange malpractices include selling to unsuspecting

and naïve customers at exchange rates that are higher than the official rate and

thus claiming the balance once the unsuspecting customer has departed. These

practices usually find fertile grounds to grow in banks which have weak control,

recording and accounting systems and corrupt top management staff

(Ovuakporie, 2004).

2.2.1.6 Impersonation

Impersonation involves assuming the role of another person with the intent of

deceitfully committing fraud. Impersonation by third parties to fraudulently

13
obtain new cheque books which are consequently utilized to commit fraud is

another popular dimension of bank fraud. Cases of impersonation have been

known to be particularly successful when done with conniving bank employees,

who can readily make available, the specimen signatures and passport

photograph of the unsuspecting customers (Ogunleye, 2014).

2.2.1.7 Manipulation of Vouchers

This type of fraud involves the substitution or conversion of entries of one

account to another account being used to commit the fraud. This account would

naturally be a fictitious account into which the funds of unsuspecting clients of

the banks are transferred. The amounts taken are usually in small sums so that it

will not easily be noticed by top management or other unsuspecting staff of the

bank. Manipulation of vouchers can thrive in a banking system saddled with

inadequate checks and balances such as poor job segregation and lack of detailed

daily examination of vouchers and all bank records (Ravisankar, et al 2016).

2.2.1.8 Falsification of Status Report

A common type of fraud is falsification of status report and/or doctoring of status

report. This is usually done with the intent of giving undeserved recommendation

and opinion to unsuspecting clients who deal with the bank customers. Some

clients for example will only award contracts to a bank customer if he/she

providers evidence that he/she can do the work and that they are on a sound

footing financially. Such a fraudulent customer connives with the bank staff to

beef up the account all with the aim of portraying himself not only as being

14
capable but also as a persons who will not abscond once the proceeds of the

contracts has been paid. The inflation of statistical data of a customer’s account

performance to give deceptive impression to unsuspecting third parties (which is

very common in Nigeria), for whatever reasons, is a fraudulent behavior

(Ovuakporie, 2004).

2.2.1.9 Money Laundering

This involves the deceitful act of legitimizing money obtained from criminal

activity by saving them in the bank for the criminals or helping them transfer it

to foreign banks, or investing it in legitimate businesses. In the recent political

dispensation (in Nigeria), money laundering by con men, politicians and

fraudulent bank staff have assumed alarming dimension (Oraka, 2016).

2.2.1.10 Fake Payments

A common type of fraud in the banking sector is fake payments, which involves

the teller introducing a spurious cheque into his/her cage. It is done with or

without the collaboration of other members of staff or bank customers. This type

of fraud is however easy to detect if the bank has a policy of thoroughly

examining all vouchers, checks, withdrawal slips and payments on a daily basis

(Egbunike, 2016).

2.2.1.11 Computer Frauds

This involves the fraudulent manipulation of the bank’s computer either at the

data collection stage, the input processing stage or even the data dissemination

stage. Computer frauds could also occur due to improper input system, virus,

15
program manipulations, transaction manipulations and cyber thefts. In this

epoch of massive utilization of automated teller machines (ATMs) and online real

time e-banking and commerce; computer frauds arising from cyber thefts and

crimes has assumed a very threatening dimension. No bank seems to be immune

from it, and a significant proportion of the billions of naira spent annually in the

banking sector to help reduce fraud usually are channeled towards combating

compute frauds and cyber-crimes/thefts.

According to Asukwo (2009), the immediate and remote causes of frauds in

general include the following:

2.2.1.12 Greed

Greed refers to an inner drive by individuals to acquire financial gains far

beyond their income and immediate or long-term needs. It is usually driven by a

morbid desire to get rich quick in order to live a life of opulence and extravagant

splendor. Greed has in many cases been regarded as the single most important

cause of fraud in the banking sector (Egbunike, 2016).

2.2.1.13 Inadequate Staffing

A poorly staffed bank will usually have a problem of work planning and

assignment of duties.

The bank that is flooded with unqualified and inexperienced staff will of a

necessity have to grapple with the problem of training and supervision of its

officers. This situation can very easily be capitalized upon by the teeming

16
fraudsters that the bank has to contend with in its day to day transactions

(Egbunike, 2016).

2.2.1.14 Poor Internal Control

Inadequate internal control and checks usually creates a loophole for fraudulent

staff, customers and non-customers to perpetrate frauds. Therefore to reduce or

eliminate frauds, there is a need to always have effective audits, security systems

and ever observant surveillance staff at all times during and after bank official

operating hours (Onibudo, 2012).

2.2.1.15 Inadequate Training and Re-Training

Lack of adequate training and retraining of employees both on the technical and

theoretical aspects of banking activities and operations usually leads to poor

performance. Such inefficient performance creates a loophole which can very

easily be exploited by fraudsters (Oraka, 2016).

2.2.1.16 Poor Book Keeping

Inability to maintain proper books of accounts coupled with failure to reconcile

the various accounts of the bank on daily, weekly or monthly basis usually will

attract fraud. This loophole can very easily be exploited by bank employees who

are fraudulent (Onibudo, 2012).

2.2.1.17 Genetic Traits

This has something to do with heredities: a situation whereby characteristics are

passed on from parents to offspring. For instance a kleptomaniac who has a

pathological desire to steal just for the sake of stealing would naturally not do

17
well as a banker. It is therefore imperative for banks to trace such symptoms

quickly among members of their staff in order to reduce the possibility of fraud

among employees. Aside the aforementioned causes of fraud, the following

factors suggested by Aderibigbe (2009) and Onibudo (2012), also contributes

immensely to fraud:

i. Inadequate compensation, salaries and fringe benefits that are accruable to

bank staff;

ii. The ease at which the stolen assets are converted after deceitful appropriation;

iii. Refusal to comply with laid-down procedures without any penalty or

sanction;

iv. Collusion between interacting agents charged with the responsibility of

protecting the assets and other interest of the bank;

v. Poor working conditions;

vi. Poverty and infidelity of employees.

2.3 Theoretical Framework

2.3.1 Routine Activities Theory

Routine activities theory examines the environmental context in which crimes

occur. Routine activities are theory of place, where different social actors

intersect in space and time. The people we interact with, the places we travel to,

and the activities we engage in influence the likelihood and distribution of

criminal behavior. Specifically, routine activities theory focuses on the

intersections of motivated offenders, suitable targets, and the absence of capable

18
guardians. It is important to note that routine activities theory offers suggestions

about the probability of criminal behavior rather making definite claims about

when crime will occur. The presence of a motivated offender, a suitable target,

and a lack of guardianship does not mean that crime is inevitable. Instead, the

theory argues that the likelihood of crime increases or decreases based on the

existence of these three elements. Moreover, Cohen and Felson (2014) suggest

how their theory applies to studying crime trends at varying macro and micro

levels of analysis, ranging from national crime rates to a particular individual or

location.

Cohen and Felson (2014) state that each successful crime event minimally

requires an offender who is motivated to commit the crime and able to act on this

motivation. Simple intent is not sufficient for a crime to occur -- a motivated

offender must be capable of carrying out his desires.

Routine activities theory does not explain why an offender is motivated to commit

a crime, but instead assumes that motivation is constant. In other words, the

theory presumes that some members of society will be motivated toward criminal

behaviour and will seek to act on these motivations when opportunities arise. If a

motivated offender identifies a viable target, the question becomes whether the

offender is able to carry out his intentions and commit the crime.

19
 Presence of
Motivation to commit
opportunities/targets
crime
to commit crime

Absence of capable
guardianship to
prevent crime

Fig.1: Application of Routine Activity Theory in crime

Source: Choo, (2011)

In order for a crime to occur, a motivated offender must also identify and engage

a suitable target. Suitable targets can take a number of forms depending on the

nature of the crime (i.e. the particular intent of the offender) and the situational

context (i.e. the available opportunities). A suitable target might be an object,

such as a piece of valuable property to steal or a home to burglarize. Or, another

person might serve as a lucrative target, such as someone wearing flashy

jewellery who catches the attention of a robber. As noted earlier, one might

consider suitable targets at varying levels of analysis. Cohen and Felson (1979)

suggest how large-scale societal changes influence the quantity of suitable targets

nationally. At the micro-level, the evaluation of what is and is not a suitable

target largely depends on the perceptions and preferences of an individual

offender.

The final component of routine activities theory consists of capable guardianship,

which bears the potential to dissuade or prevent crime even in the presence of a

20
motivated offender with a selected suitable target. Capable guardianship is an

expansive concept that researchers interpret and study in a variety of ways.

Formal types of guardianship, such as police officers and other types of law

enforcement, symbolize a well-recognized form of protection from crime and

victimization. Routine activities theory suggests that the presence of these agents

might prevent a crime from happening. Many potential offenders, despite being

motivated to commit a crime, would be hesitant to engage in criminal behavior

with a police officer nearby.

2.3.2 Fraud Triangle Theory (Donald R. Cressey 1950)

Fraud Triangle Theory (FTT) was developed as an idea to investigate the causes of

fraud. It was first coined by Donald R. Cressey (1950) called the FTT (Cressey

2003 in Manurung and Hadian 2013). Cressy in 1950 was troubled with the

question of why people commit financial crime; this is what gives him courage to

examined 250 criminals in a period of 5months. Cressey conclude that:

“Trust violators, when they conceive of themselves as having a

financial problem which is non-shareable, and have knowledge or
awareness that this problem can be secretly resolved by violation of
the position of financial trust. Also they are able to apply to their

own conduct in that situation verbalizations which enable them to

adjust their conceptions of themselves as trusted persons with their
conceptions of themselves as users of the entrusted funds or

property” (Crassey 2003).

21
 Pressure

Rationalization Opportunity

Fig 2: Fraud Triangle Theory

Source: Cressey (2003)

FTT describes three factors that are present in every situation of fraud as follows:

1. Perceived pressure, incentives / pressures: This is the initial cause of

committing fraud. Pressure can include almost anything that will motivate

individual to commit fraud including lifestyle, economic demands, and others -

others include financial and non-financial term (Manurung and Hadian 2013).

Statement of Auditing Standards (SAS) No. 99 indicates that there are four

common types of conditions on the pressure that can lead to cheating. The

condition is financial stability, external pressure, personal financial need and

financial targets (Manurung and Hadian 2013).

2. Perceived opportunity: This is the ability of a fraudster to discover and exploit

organizational weaknesses to violate trust. Opportunities created by the internal

control weaknesses; poor corporate governance; lack of job rotation and poor

22
supervision among others. According to SAS 99, the chances of financial

statement fraud can occur in three categories of the condition. (i) the nature of

the industry (ii) ineffective monitoring and (iii)organizational structure.

3. Rationalization: This is the attitude, character or set of ethical values that allow

certain part(ies) to commit acts of fraud, or different people in an environment

that makes them quite hit rationalize fraudulent actions.(Skousenet, al. 2009).

Rationalization can also be a process through which a fraudster justifies his evil

course of action. Cressey’s findings reveal that all the three elements (perceived

pressure, opportunity and rationalization) must be present for a fraudster to be

able to violate trust in an organization (Cressey 2003).

2.3.3 Fraud Diamond Theory (David T. Wolfe and. Dana R. Hermanson 2004)

The Fraud Diamond Theory (FDT) is an extension of FTT that was made by David

T. Wolfe and. Dana R. Hermanson in 2008. They believed that the FTT could be

enhanced to improve both fraud prevention and detection by considering an

additional element “capability”. In addition to addressing, perceived pressure,

perceived opportunity, and rationalization, Wolfe and Hermanson (2004)

considered an individual’s capability. This includes personal traits and abilities

that play a major in whether fraud may actually occur even with the presence of

the other three elements (Wolfe and Hermanson 2008 in Tugas 2012) FDT can

be illustrated using Figure 3

23
 Pressure

Rationalization Opportunity

Capability

Fig 3: Fraud Diamond Theory

Source: Wolfe and Hermanson (2008)

The FDT was first published in CPA Magazine in December 2008. The

recognition of the element of capability has involved the six factors expected to

be achieved by the fraudsters as suggested by Wolfe and Hermanson (2008).

i. A fraudster must have function or authority for him to be able to commit

fraud.

ii. The fraud perpetrator must be intellectual to the extent that he/she can be

able to harness and exploit organizational weakness to commit fraudulent

action.

iii. Fraudster must be egoistic and have strong confident and courage as he will

not be caught.

iv. The fraud perpetrator must be a person who can coerce and pursued other

to commit fraud by themselves or together with him.

24
v. Fraudster must be a person who can be able to deceive others or look at

people into their eyes to convincingly and comprehensively tell them lie.

vi. A fraudster must be able to conquer the stress by withholding and hiding the

true face of the matter as well as frequent monitoring the issue in order to

prevent detection.

Wolfe and Hermanson (2008) state, “Opportunity opens the doorway to fraud,

and incentive (i.e. pressure) and rationalization can draw a person toward it.

However, the person must have the capability to recognize the open doorway as

an opportunity and to take advantage of it by walking through, not just once, but

repeatedly”.

2.4 Literature Review

2.4.1 Significance of financial statements

Accounting is an information-processing system that records monetary

transactions and presents the financial results through financial statements. The

financial statement is the summary of transactions and events affecting the

company’s financial position. There are three main elements of financial

statements, namely, (1) the profit and loss account (P&L), (2) the balance sheet,

and (3) notes to the financial statement (Notes). Collectively, the company will

also prepare the cash flow statements of the company (Kwok, 2010). The main

objective of financial statements is to provide information about the company’s

financial position, performance, and changes in financial position. Financial

statements are very important to a wide range of internal and external users in

25
making economic decisions, particularly investment decisions (Gordon et al.,

2009). Chapter 2 of the UK Companies Act 2006 requires every company to keep

adequate accounting records that sufficiently explain the accuracy of company’s

transactions. Any failure to comply with this provision will be liable to an offence

under section 389 of the Act. To provide reasonable assurance concerning the

accuracy of the financial statement to the company’s shareholders, Chapter 4 of

the Act further requires the external auditing of the financial statement. In this

case, the company’s shareholders rely upon the reported financial position to

assess the company’s performance.

In relation to this, the duty of the companies to keep sufficient accounting

records is considered as significant as financial statements demonstrate the

results of the company’s economic transactions. The management of the

company has responsibility for reporting the outcome of the economic events for

the resources through the financial statements.

Financial statement users will make economic decisions by evaluating the

company’s ability to generate cash. The economic resources are important

because they will affect the financial condition of the company, including the

company’s liquidity and solvency.

The issue of financial statement fraud has been focused upon by the public,

investors, regulators and practitioners due to the huge losses from the reported

fraud worldwide. The collapse of a number of large companies, such as Enron

Corporation (Moncarz et al., 2011), WorldCom (Thornburgh, 2011), Global

26
Crossing (Gomez, 2008) and Adelphia (Barloup et al., 2009), affected the

confidence of investors and resulted in a loss of market capitalization.

Consequently, three questions were raised from these accounting scandals in the

US. The first question concerns the reliability of financial information in the US

financial market. The second question concerns the severity of market

misconduct in the US and the third involves the responsibility of auditors in

relation to financial statement fraud detection (Razaee, 2008).

In relation to this, the financial statements prepared by every company should

contain reliable financial information to provide the best tool for investment

decisions. The statements are expected to be free from any material

misstatements. The statement plays an important role in keeping the capital

market efficient. There are a number of studies in relation to financial statement

fraud that address the trends, determinants and consequences of financial

statement fraud. The previous studies also discussed the responsibility for

preventing, detecting and remediating financial statement fraud.

The attention to financial statement fraud is possibly due to the increasing

number of global financial statement fraud cases (PWC, 2010). Research done by

Skousen et al. (2008) explored whether financial statement fraud relates to a

group of people that has adequate pressure and opportunity, as this might allow

them to behave unethically. Observably, financial statement fraud cases relate to

weak internal controls. The previous cases and studies of financial statement

fraud also relate to a number of factors that contribute to financial statement

27
fraud. Besides these reasons, the research differentiates between the two major

types of financial statement fraud.

The first type of financial statement fraud committed by top management

involves misleading the company investors, which results in large losses that will

diminish the company’s reputation and the accounting profession. Generally, the

second type of financial statement fraud might be committed by top or middle

management, which concerns fulfilling the company’s expectations, particularly

in terms of bonuses and compensation.

According to the KPMG Fraud Barometer (2009), the UK nationwide losses

brought to court in 2008 were reported to be £1.1 billion (KPMG, 2009). This

figure indicates the importance of bringing fraud losses under stricter control.

These corporate frauds are presumably the transformation of white-collar crimes

that have increased the volume of victims and losses.

Specifically, Slotter (2009 cited in Telberg, 2009) notes a trend of corporate

scandals and fraud that started with the savings and loans scandals in late 1980s,

followed by the health care insurance fraud in the late 1990s, and the popularity

of financial restatement fraud in the late 2000s.

2.4.2 Financial Statement Fraud Explanation

Financial statement fraud has been identified as a financial crime, which the UK

Financial Services and Market Act 2000 defines as any offence involving (1)

fraud or dishonesty, (2) misconduct in, or misuse of information relating to

financial market, or (3) handling the proceeds of crime. The research has viewed

28
financial statement fraud from the perspective of both legislation and academic

literature.

The UK Fraud Act 2006, based on one element of financial statement fraud, states

that “a person is guilty of fraud if he breaches any sections listed in subsection

(2), which includes (2a) false by representation, (2b) fraud by failing to disclose

information and (2c) fraud by abuse of position”. The UK Theft Act 1968 defines

false accounting as “where a person dishonestly with a view to gain for himself

or another or with intent to cause loss to another, which includes (1) destroys,

(2) defaces, conceals or falsifies any accounts or any record or document made

or required for accounting purposes; or (2) in furnishing information for any

purpose produces or makes use of any account, or any record or document as

foresaid, which to his knowledge is or maybe misleading, false or deceptive in a

material particular”.

In respect to financial statement fraud allegations, section 2 of the UK Fraud Act

2006 is presumably relevant. Fraud in financial statements comprises (1) false

numbers or representation, (2) inaccurate information that may relate to fraud

by failing to disclose the correct information and also (3) involvement of

company’s directors or top management.

Therefore, it could be charged as fraud due to an abuse of position. The above

sections are entirely relevant to financial statement fraud allegations as they

involve the falsification of accounts and records, which, ultimately, misleads the

financial statement users. In the meantime, the UK Financial Services and Market

29
2000, part VIII subsection 7 states that market abuse is recognized when “the

behaviour consists of the dissemination of information by any means which

gives, or is likely to give, a false or misleading impression as to a qualifying

investment by a person who knew or could reasonably be expected to have

known that the information was false or misleading”. In this case, the false

financial reporting can be associated with market manipulation through which

the manipulation of financial figures is achieved to mislead the company’s

investors.

From an academic perspective, Grazioli et al. (2011) define financial statement

fraud as an intentional process of deception by the company management.

Another definition of financial statement fraud made by the National Commission

on Fraudulent Financial Reporting (2007) defines financial statement fraud as

reckless conduct by act or omission that results in materially misleading financial

statements.

However, KPMG (2010) explains that financial statement fraud occurs when

financial records have been falsified or manipulated or altered. Therefore, the

disclosure will definitely be false. Spathis (2009) and Razaee (2008) add another

way that a company may commit financial statement fraud, that is by

misapplication and misinterpretation of accounting standards or by manipulating

the accounting practices.

In the meantime, KPMG International (2011) views ‘fraud’ as a broad legal

concept that generally refers to an intentional act committed to secure an unfair

30
or unlawful gain. Beasley (2010) argues that financial statement fraud is limited

to two types of fraud. Firstly, financial statement fraud occurs when

‘management intentionally issues materially misleading financial statement

information to outside users’, and, secondly, financial statement fraud is due to

‘misappropriation of assets by top management that includes the chairperson,

vice chairperson, chief executive officer, president, chief financial officer and

treasurer’. Another issue of financial statement fraud is explained by George

(2012) who views financial statement fraud as ‘intentional misstatement or

omission of financial data in financial reporting’. Financial statement fraud also

involves intent and deception by the top management of the company with a set

of well-planned schemes.

The schemes of financial statement fraud may involve the six activities of (1)

‘falsification, alteration or manipulation of material financial records, supporting

documents or business transaction, (2) material intentional misstatement,

omissions or misrepresentation of events, transaction, accounts or other

significant information from which financial statements are prepared, (3)

deliberate misapplication, intentional misinterpretation, and wrongful execution

of accounting standards, principles, policies and methods used to measure,

recognize, and report economic events and business transactions, (4) intentional

omissions and disclosures or presentation of inadequate disclosures regarding

accounting standards, principles, practices and related information, (5) the use

of aggressive accounting techniques through illegitimate earnings management

31
and (6) manipulation of accounting practices under the existing rules-based

accounting standards which have become too detailed and easy to circumvent

and contain loopholes that allow companies to hide the economic substance of

their performance’.

2.4.3 Motives for Financial Statement Fraud

Although there are a number of motives for financial statement fraud, the most

common is due to the weak financial conditions of companies. Reinstein et al.

(2011) document that financial statement fraud begins with financial and moral

problems in the company in which the company’s control environment becomes

lacking, which encourages inefficiency within its auditing procedures.

These findings were supported by Carcello and Palmrose (2010), Dechow et al.

(2006) and Lys and Watts (1994) who found that financial distress and poor

financial performance are the most important reasons for the occurrence of

financial statement fraud. Therefore, companies have a propensity to mislead in

terms of their financial information and the probability of financial statement

fraud is raised. Brennan and McGrath (2007) state that one of the motives for

financial statement fraud is aimed to gain external capital by falsifying the

financial figures on financial statement as an attraction. In addition, the AICPA

(2007) found that financial statement fraud is used to delay the reporting of

financial problems by violating the debt covenants. Another incentive of financial

statement fraud is achieved through the companies’ stock option (Watts &

32
Zimmerman, 1990). Oppenheimer (2011) argues that corporate manipulation of

companies’ stock options was prevalent between 1993 and 2005.

The manipulation of a company’s stock options has been widely used as one of

the methods of financial statement fraud. Besides Beasley et al. (2010), Crawford

and Weirich (2010) reported that company committed financial statement fraud

in order to (1) window dress the financial performance and thus evade reporting

a pre-tax loss, (2) improve the value of the share price to attract the company’s

investors, (3) meet the earnings expectation as set by the security analyst, (4)

meet the exchange listing requirement, (5) cover up the asset misappropriation,

and (6) hide the company’s deficiencies. The two reasons from Beasley are highly

supported by Kellogg and Kellogg (2006) who suggested that the two important

reasons of financial statement fraud are to attract the company’s investors and to

increase the value of the share price. Razaee (2008) and Abbott et al. (2000)

found that a company that commits financial statement fraud actually lacks the

effectiveness of corporate governance. Thus, for example, there may be

companies in which the CEO also serves as a chairperson and where both the

audit committee and audit functions are ineffective.

2.4.4 Nature of Financial Statement Fraud

A number of financial statement fraud issues have been discussed in previous

literature. The Federal Bureau of Investigation (FBI) (FBI, 2010) and Telberg

(2009) classify the improper revenue recognition or profit inflation as the most

common form of financial statement fraud.

33
In particular research, improper revenue recognition or profit inflation is also

known as fictitious revenue, which occurred widely in previous financial

statement fraud cases. Fifth (2010) states the fraud companies create fictitious

supplier and customers in order to achieve fictitious revenue.

The fraud companies were also overstating revenue and thus inflating the

company’s profit, which resulted in a share price increment. The previous

financial statement fraud cases have proven that public listed companies have

committed financial statement fraud to increase share price and attract company

investors by inflating the company’s profit (Kellogg & Kellogg, 2006). Other

common types of financial statement fraud are delay in financial disclosure and

including false information in the company’s prospectus (Razaee 2008; Cheng et

al., 2011). Such fraud not only breaches the Listing Requirements but also

misleads the existing and potential company’s investors. In relation to this, the

motives of financial statement fraud are mainly found to (1) increase the share

price to attract the company’s investors and (2) “window dress” the company’s

financial performance to meet the Listing Requirements (Beasley et al., 2010).

According to Chen et al. (2012), general financial statement fraud includes the

(1) failure to disclose information, (2) delay in disclosure, (3) profit inflation, (4)

false statements and information in the prospectus, and (5) false statements in the

financial reports. These types of financial statement fraud will have a serious

impact on the users of financial information as well as the company’s

shareholders. Another type of financial statement fraud is improper revenue

34
recognition. FBI classifies improper revenue recognition as one of the top

schemes of financial statement fraud that begins with financial restatement in a

company’s financial reporting. In this regard, half of the US Securities and

Exchange Commission cases involved improper revenue recognition that has

affected market capitalization.

The COSO research on fraudulent financial reporting for year 1998-2007 of the

US public companies found that the most common financial statement fraud

techniques are revenue recognition, overvaluing assets and figures manipulation

but not theft. Another type of financial statement fraud is earnings management

in which a company manipulates the actual earnings figures in order to provide

a better, if false, public view of its earnings. Therefore, a company will disclose

false information in financial statements in relation to the company’s earnings to

achieve its objectives. Xu and Liu’s (2009) study recognizes another source of

fraud in financial statements. According to the study, the fraud in the financial

system could exist in the computer system, network and the key person who is

responsible for providing access to the financial information in the accounting

system. Financial statement fraud is possibly the integration of financial fraud,

computer fraud and Internet fraud. In relation to these findings, the detection

methods through financial auditing or any statistical model would not be

effective in discovering financial statement fraud.

35
2.4.5 Indicators and Perpetrators of Fraud Firms

The Committee of Sponsoring Organizations of the Treadway Commission

(COSO) research on fraudulent financial reporting for the period 1998-2007 in

US public companies shows that the alleged perpetrators of financial statement

fraud are brought to the attention of the company’s chief executive officer and

chief financial officer. The named fraudsters were found to meet the analyst’s

expectation, conceal the deterioration of financial performance and purposely for

debt and equity offering. Chen et al. (2011) found that previous fraud cases

show that the conditions of the firm that have a poor performance, suffer more

losses, lower growth and lower stock return. The research findings by Tillman

(2009) indicate the perpetrators of financial statement fraud are from the

company’s management. They consist of the chairman, directors, general

manager, auditors, chief accountant and supervisors. This situation was

supported by the survey done by Ernst and Young (2012) and the research

findings by Brennan and McGrath (2012). Both findings show that the

perpetrators of financial statements mainly consist of top management personnel,

namely, the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and the

top executives from the fraudulent company. According to Tillman (2008),

financial statement fraud cases are found to arise from collusion or deceit among

the top management, which definitely requires some effective mitigation

measures and greater oversight by the company management.

2.4.6 Measures to Control Financial Statement Fraud

36
Albrecht (2008, 2010) notes that ‘financial statement fraud causes a decrease in

market value of stock of approximately 500 to 1,000 times the amount of

money’. In one case, a $7 million fraud caused a drop in stock value of about $2

billion. In relation to this, the research found the need for every commercial

company to find ways to mitigate financial statement fraud. Financial statement

fraud control possibly reduces the impact of financial statement fraud; therefore,

it provides cost savings to organizations. In addition, public awareness towards

financial statement fraud control is considered important to reduce financial

statement fraud cases. The study of Insurance Fraud in Nigeria indicates the little

concern of fraud issues by public has created a worsen problem in managing

fraud control in Nigeria (Yusuf & Babalola, 2009).

In relation to financial statement fraud control measurement, the research found

that improvements in governance are possibly effective in reducing financial

statement fraud cases in Malaysia. On the recommendation of Shim (2011), the

profound collaboration between the government, regulators and private sector,

embraces certain measures of governance practices and enforcement. However,

transparency of financial reporting and accountability of company management

towards financial statement fraud control are two important principles that help

to reduce financial statement fraud in all organizations. As previous financial

scandals have established, a lack of transparency and accountability create the

incentive for top management to commit fraud (Gilsinan et al., 2008).

Considering the contextual fundamentals of corporate culture, top managers are

37
seen as a major cause of corporate crime, thus ethical top management possibly

reduces corporate crime, particularly in relation to financial statement fraud

(Clinard, 2003). In this case, control among the top management is found to be

important in reducing the case of financial statement fraud in commercial

companies.

According to the American Institute of Certified Public Accountants (AICPA)

(2008), the most effective way to implement measures to reduce wrongdoing is

to base them on a set of core values. This will provide a platform upon which a

more detailed code of conduct can be constructed, giving more specific guidance

about permitted and prohibited behaviour, based on the applicable laws and the

organization’s values. Hence, management needs to clearly express that all

employees will be held accountable for acting within the organization’s code of

conduct. The document should identify the measures an organization should take

to prevent, deter and detect fraud.

However, Dion (2008) suggests that the corporate codes of ethics are not

sufficient to strengthen the ethical behaviour due to the lack of self-evidence to

identify the right things and perceive rationalization. In order to strengthen the

ethical behaviour among the company individuals, the company is supposed to

close or minimise the opportunity and rationalization of people to commit

financial statement fraud.

The above research believes that strategies and controls in relation to financial

statement fraud are a necessity in today’s business environment because fraud

38
has always been a growth industry. According to Biegelman (2009), “[a]n ounce

of prevention does equal a pound of cure”; therefore, the risk of fraud can be

reduced through a combination of prevention, deterrence, and detection

measures.

According to a recent study by the Association of Certified Fraud Examiners

(2012), companies without fraud control have experienced fraud losses of

approximately 45% median larger than the companies with fraud controls. In

relation to this, it is important for every company to place fraud control,

particularly the strategy of prevention, detection and response towards financial

statement fraud. The strategy could persuade individuals that they should not

commit fraud because of the increased likelihood of prevention, detection and the

new punishment.

The research believes there are two parties involved in controlling financial

statement fraud, namely, the regulators of the country and the company itself.

These two parties have to play their respective roles in order to mitigate fraud. In

addition, the audit committee can be a part of the monitoring mechanism to

oversee the integrity and quality of the financial statement process. Johnson

(2007, cited in Solaiman, 2011) documents that, ‘good legal rules’ are one of the

important parameters in the development of the securities market. Johnson

indicates that securities regulation and accounting best practices are two

important mechanisms for combating financial statement fraud.

39
In relation to the company’s action, research by Chen et al. (2011) suggest that a

large number of outside directors would contribute to control financial statement

fraud in the company. A large proportion of outside directors would be helpful in

monitoring the firm’s activities and deterring company fraud. Specifically,

Beasley (2010) refers to the outside directors as all non-employee directors. He

suggests that the longer the tenure of directors in the company, the better the

control and mitigation of financial statement fraud would be.

Razaee (2008) also suggests a practical monitoring mechanism to control

financial statement fraud. This includes direct oversight functions by the board of

directors, the audit committee, external auditors, and regulatory agencies.

Therefore, the effective role and responsibility of the board of directors in the

company should be to set the “tone at the top” and they should not tolerate any

misstatements in financial statements. In addition, indirect overseeing functions

by a company’s owner/investor, analysts, institutional investors, and investment

bankers should also be a part of the monitoring mechanism.

The effective internal control structure and audit functions are found to be

important issues in financial statement fraud control. The National Commission

on Fraudulent Financial Reporting (NCFR) (2007) documents that the

management is responsible for designing adequate and effective internal controls

in the financial statement process. Meanwhile, the internal and external auditors

must ensure that internal control designs are adequate and effective in

preventing, detecting, and responding to financial statement fraud. Internal

40
auditors are responsible for assisting management to design, maintain, and

monitor the internal control system, while external auditors are given the

responsibility for detecting any material misstatement in the financial statements

(Razaee, 2008).

In relation to this, the effective internal control structure and audit functions are

found to be important mechanisms for controlling financial statement fraud.

NCIR (2007) documents that the management is responsible for designing

adequate and effective internal controls in the financial statement process. The

internal auditors and external auditors have to ensure that the internal controls

designed are adequate and effective in preventing and detecting financial

statement fraud. In relation to this, internal auditors are responsible for assisting

management to design, maintain, and monitor the internal controls system. In the

meantime, external auditors have been considered as having the responsibility to

detect any material misstatements in the financial statements. Auditors are also

expected to be independent in their social role, which will contribute to the

accountability of corporate management, and therefore, increase the value of the

reported financial information issued by the company management. However,

audit practitioners are considered to have failed in their ethical duty if they do

not make use of safeguarding mechanisms, such as whistle-blowing, and

perform their role as expected by the audit profession (Alleyne et al., 2013).

41
2.4.7 Financial Statement Fraud and Case Profiles

The collapse of Enron caused about $70 billion losses in market capitalization

while WorldCom is the biggest bankruptcy caused by financial statement fraud

in US history.

Cotton (2007) found that the estimated total loss of market capitalization resulted

from financial statement fraud committed by Enron, WorldCom, Qwest, Tyco and

Global Crossing is about $460 billion. The profile of fraud cases that are

presented below caused a great shock to the financial market during the 2000s.

The reported fraud cases wiped a billion dollars off the financial markets in

various types of schemes and alternatives. The previous cases of corporate and

accounting fraud, such as Enron, WorldCom, Qwest and Sun Beam led the

accounting bodies, practitioners and regulators to review the effectiveness of the

accounting standards, auditing regulations and corporate governance principles.

In fact, those scandals were strongly influenced by the development of new

regulations to improve the reliability of financial reporting and to regain the

confidence of investors (Ayala & Ibarguen, 2011).

The Enron case involved the most complicated accounting transactions in which

the company had used a complex organizational structure to hide the impact of

complex transactions. Barboza (2012, cited in Cullinnan, 2009) reports that

Enron’s financial statements had been misstated by as much as US$24 billion. The

fraud schemes that had been committed included (1) hiding the company’s debt,

(2) creating the company’s common equity and (3) overstating the company’s

42
earnings. Duncan, who was a partner of Andersen and the auditor of the

company, had overlooked the matter and destroyed the key documents of the

Enron Company (Reinstein, 2011).

As a benefit of the malfeasance, Andersen had received $52 billion for

professional fees. Andersen provided both audit work and non-audit work for

Enron. Andersen also acted as the internal and external auditor for the Enron

Corporation. The auditor of Enron, David Duncan also received a $700,000

salary from the company. Apart from this, the CFO and controllers of Enron were

previously executives of Andersen’s (Albrecht, 2008, 2010). Among the causes of

the Enron fraud were ineffective audit functions and failure of corporate

governance (Razaee, 2012).

As a result, Enron collapsed, filed for bankruptcy and Arthur Andersen was

dissolved due to its misconduct, which misled investors about the company’s debt

and profitability (Reinstein, 2011). Razaee (2012), in his research, states that

Andersen was claimed by SEC to have “knowingly and recklessly” issued false

and misleading audit reports for Waste Management for years between 1992 and

1996. The SEC (2001) cited in Razaee (2012) states that Andersen agreed to a

fine of $7 million as a settlement for allegations of overstating a client’s profit by

almost $1.4 billion. Andersen agreed to the first antifraud injunction in more

than 20 years although it did not admit nor deny the offences. Consequently, this

fraud case became (1) the largest civil penalty among the SEC enforcement

43
against a Big Five firm, (2) the first antifraud injunctions for more than 20 years

and (3) the largest restatement of earnings in US history (Razaee, 2012).

In the late 2000s, the Enron Corporation was the seventh largest corporation in

the United States in terms of sales, as it was one of the leading electricity, natural

gas and communications companies in the world. Enron was also named as

‘America’s most innovative company’ from year 1996 to 2000 by Fortune

magazine (Petra & Loukatos, 2012). As the group suffered economic losses, the

directors of Enron had misreported the financial information in order to

maintain its credit rating (Ayala & Ibarguen, 2011). In addition, Enron focused

on increasing the Earnings per Share (EPS) and manipulating the accounting data

in order to influence the stock price. To secure this purpose, the company hid the

existing debt to finance the EPS growth, and finally, to affect Enron’s stock price,

which struck a high of $90 per share in mid-2000 and fell to below $1 per share

by the end of the year 2001.

Enron breached the US Generally Accepted Accounting Principles (GAAP), in

which the financial statements did not include the related party transactions. This

led to Enron’s bankruptcy on 2nd December 2001 with shareholder losses of $11

billion. Arthur Andersen vanished as an auditing firm after the US Department of

Justice accused them of giving an unqualified report for Enron in March 2002

(Ayala & Ibarguen, 2011). The directors and corporate officers of Enron also

claimed to be unaware of accounting fraud in the company. Sarbanes-Oxley

(SOX) 2002 established corporate responsibility (Section 302) for financial

44
reporting in as much as the management have to sign and affirm certain

responsibilities in relation to financial statements (Petra & Loukatos, 2012).

Financial statement fraud in WorldCom was the biggest corporate failure and

bankruptcy in US history. WorldCom is America’s second biggest long distance

phone company and largest mover of Internet traffic in America. The founder of

the company was Bernard Ebbers who started with a small company but made

more than 60 corporate acquisitions within 15 years (Tran, 2012). As stated in

Dyck and Zingles (2012), WorldCom was another accounting fraud that was

revealed in June 2002 after the enactment of SOX 2002. WorldCom was a

telecommunications company that had an accounting fraud of $3.8 billion.

The case involved top management of WorldCom executives and other

employees.

In Malaysia, to date, Transmile Berhad constitutes the biggest accounting and

corporate fraud. The company had misled the accounting statement by

overstating its revenue at RM530 million. According to a press release on 28

October 2011, the two former independent directors of the company were found

guilty for the misleading statement. Both of them were sentenced for one year’s

imprisonment and a fine of RM300,000.00 (Securities Commission Malaysia,

2011).

45
2.4.8 Impact of Financial Statement Fraud Cases on the case study (Evans

Publisher Plc.)

Financial statement fraud causes huge losses to a company. The impact of

financial statement fraud involves economic and non-economic losses. Other

than losses of millions in profit, financial statement fraud also increases the

insurance cost and the loss of efficiency that results from the firing and hiring of

employees (Farrell & Franco, 2011). Financial statement fraud also impacts upon

the accounting and auditing professions resulting in a public lack of trust and

loss of integrity of the accounting profession.

The consequences of financial statement fraud are very severe. Other than

decreasing shareholder value, it also has a severe effect upon other factors.

Razaee (2012) reports that financial statement fraud might cause a company (1)

to become bankrupt, (2) to suffer a decline in stock value and (3) be delisted

from the stock exchange. It was further reported that the top executives involved

in committing financial statement fraud (1) lose the stock based compensation

value, (2) are forced to resign or are fired, (3) lose the opportunity to serve as

officers or directors at any other public listed company as well as being barred by

the Securities Commission and (4) are fined or jailed.

Finally, in the previous cases, the company’s auditors had (1) to surrender their

audit licence, (2) were placed on a probation period, and (3) received fines. The

example of recent cases was Andersen, which was one of the Big Five accounting

46
firms. Andersen was responsible for the audit failures and destroying the audit

evidence for financial statement fraud at Enron and WorldCom.

2.4.9 Management Responsibilities in relation to Financial Statement Fraud

There are a number of management responsibilities towards enhancing the

transparent financial statement. According to Institute of Internal Auditors (IIA)

(2011), the board of directors of the company has to play its vital role in being

vigilant in terms of the integrity, quality, transparency and reliability of the

financial reporting process of the company. The board of directors also has to

ensure the adequacy and effectiveness of their internal control structure in terms

of preventing, detecting and correcting material misstatements in financial

statements as well as in terms of the objectivity of audit functions. In reality, the

internal auditors of the company have to promote or encourage the management

to develop a detailed fraud prevention programme (Carpenter & Mahoney,

2011). The responsibility of the company management in relation to financial

statement fraud control has been addressed in Section 280 of the Standards for

the Professionals Practice of Internal Auditing (2011).

The standards give guidance to company management to deter any fraud and

responsibility for establishing and maintaining the control systems. In relation to

the assurance of the control, the internal auditors have to ensure that in relation

to employee fraud and management fraud, they operate with due professional

care. This section would assist the internal auditors in meeting their

responsibilities. Other responsibilities of controlling financial statement fraud

47
from the company are gained from the audit committee of the independent

directors of the company. The audit committee should be the independent ‘eyes

and ears’ of the investors, employees, and other stakeholders. Kang (2011)

suggests that the frequency of audit committee meetings would affect the

effectiveness of their roles. Their role is to evaluate management’s identification

of fraud risk, the implementation of anti-fraud measures and provide the tone at

the top that fraud is opposed by the organization. Kang’s (2011) study suggests

that more frequent meetings – at least five times a year – would enhance the

monitoring process of the effectiveness of the company’s internal control.

Zhang et al. (2012) found that the effective role of the audit committee is

contributing to better internal controls within the company. In addition to the

competency of the audit committee, they are also expected to be independent in

overseeing the company’s internal control. The audit committee should hire

independent auditors to assess and report on the financial health of the company.

The report of internal controls designed by the independent auditors should be

presented to the audit committee but not to the management of the company.

Zhang et al. (2012) also found a relationship between the external auditor’s

independence and the strength of the company’s internal control. The study

shows that a good internal control of the company is reflective of the

independence of the external auditor.

The audit committee is also responsible for ensuring that management does not

engage in fraudulent conduct. Although the entire management team shares the

48
responsibility for implementing and monitoring these activities, the entity's chief

executive officer should initiate and support such control measures. According to

Biegelman (2009), all companies, worldwide, must transform security

departments into rigorous fraud prevention programmes.

They should be staffed with qualified fraud examiners. He believes that “failed

corporations and tougher legislation are forcing entities throughout the world to

transform weak, reactive security departments into robust, proactive fraud

prevention programmes with one goal: stop fraud before it happens.”

2.4.10 Prevention of Financial Statement Fraud

According to ACFE (2006), the top five prevention techniques are (1) internal

controls, (2) new-employee background checks, (3) regular fraud substantive

audits, (4) established fraud policies and (5) willingness to punish. In the

meantime, Chang et al. (2009) state that the company management has to

evaluate the effectiveness of the internal controls and certify that the financial

reports were complying the relevant rules and regulations in order to reduce

manipulation of financial statements. In respect of the company’s internal

control, Hillison et al. (2009) suggest that the role of the internal auditors is to

control fraud within the organisation.

In relation to financial statement fraud, it might be effective for the internal

auditor of the company to conduct an analytical review of the financial

statement. The analytical review will allow the internal auditor to analyse any

abnormal result or performance over a number of years. The horizontal, vertical

49
and variance analysis are expected to reveal irregular reporting. Another

substantive audit would be achieved through a review of the contract. The

internal auditors possibly detect illegal profit and conspiracies arising between an

individual company and the company’s vendor. In-depth investigation of the

contract files and bidding contract possibly prevent fraud through the internal

auditing process. Peat Marwick (1998) of KPMG suggests that stringent control

of the internal audit function would prevent fraud in the organization. The

monitoring and the enforcement of job rotation and mandatory vacation of

company individuals would prevent and control fraud. However, George (2012)

highlights a greater role and quality of audit committee will reduce the

probability of financial statement fraud cases. The audit committee is supposed to

have financial competence and longer tenure of audit committee in companies

contributes to financial statement fraud mitigation.

In the meantime, ACFE (2005) suggests that every company should establish and

maintain a fraud policy as a fraud prevention technique. It is advisable that the

established fraud policy is separated from the company’s code of conduct or

ethics policy. In relation to this, individuals in the company will clearly

understand that the organisation will not tolerate any form of fraud.

Fraud prevention is a more viable strategy since it is often difficult to recover

fraud losses once they are detected. Many companies and their auditors deal with

fraud on a case-bycase basis rather than implement a long-term plan. Also,

recent legislation, such as the Sarbanes-Oxley Act of 2002 (SOX), does not do

50
much in terms of fraud prevention; instead, the law focuses on punishment and

accountability (Bierstaker et al., 2011). In the meantime, Petra and Loukatos

(2009) assert that the primary foundation of the Act is important to provide

investors and public with better trust in accounting and financial reporting.

2.4.11 Detection of Financial Statement Fraud

Fraud detection can be accomplished through various means. Association of

Certified Fraud Examiner (ACFE) (2009) reveals that the most common means by

which fraud is detected includes (1) informers from employees and/or external

parties, (2) internal audits, (3) by accident, (4) internal controls and (5) external

audits. Alternatively, there are also many fraud detection techniques or detection

tools to detect financial statement fraud. These include (1) “Computer-Assisted

Techniques”, (2) Digital Analysis, (3) Game Theory and (4) the Strategic

Reasoning Concept (Durtchi, 2010; Coderre, 2009; Nigrini, 2009). These

techniques are implemented to reduce the possibility of fraud in the financial

statement. The detection of financial statement fraud turns out to be even more

difficult when the perpetrators, offering large incentives, enlist supposedly

independent auditors to become a part of the scheme (Weisenborn et al., 2007;

Daniel, 2007). In the meantime, proactive fraud detection involves aggressively

targeting specific types of fraud and searching for their indicators, symptoms, or

red flags (Albrecht, 2012). In some cases, even though indicators of fraud or ‘red

flags’ exist, it has been found that no fraud occurred. For example, in certain

cases, ‘red flags’ were found to be due to the carelessness of employees. In the

51
meantime, other cases of ‘red flags’ were found to be due to actual fraud in the

organization. Therefore, the possibility of fraud must be investigated to confirm

the actual existence of fraud.

A financial ratio is one of a number of accounting tools that is also known as

analytical techniques and used to interpret company performance. Basically,

financial ratios are used to measure and evaluate a company’s profitability,

liquidity, leverage, activities and solvency.

These ratios are widely used by the accounting users, such as tax authorities,

financial institutions, creditors and other stakeholders. However, in the case of

financial statement fraud, financial ratios are arguably not a significant tool for

any indication of company performance in the case of unreliable financial

information.

Fraud detection in the financial statement is arguably difficult for new auditors as

they have little knowledge and experience (Grazioli et al., 2011). Therefore,

sufficient knowledge and high experience of auditors presumably contributes to

the efficient financial statement fraud detection. According to Weisman and

Brodsky (2011), the issue of fraud detection has attracted great concern and

attention by the government, media and public due to large losses in the financial

market. In relation to this, the proactive fraud detection implementation and

controls could assist the company in mitigating financial statement fraud

(Weisman & Brodsky, 2011). The research found a number of financial

statement fraud detection techniques that have been suggested from the

52
empirical research. According to Ravisankar et al. (2016), financial statement

fraud detection is more effectively done by human experts and experience rather

than any detection techniques. However, data mining techniques could assist the

auditors in predicting the possibility of material misstatement in financial

statements. Data mining techniques provide effective handling of a large number

of accounting transactions and financial ratios.

Other detection tools for analysing accounting data have been introduced by

Durtschi et al. (2009). Benford’s Law is used to detect any large volumes of

records of individual transactions but has not demonstrated any application to

financial statement fraud. The tool would assist the company auditor in detecting

any irregularities in accounting data and the observation can be made through

the appearance of a certain number more frequently than other numbers in

accounting data. Benford’s law was initiated by Simon New Comb, (2001).

The law deals with the pattern of numbers and the probability of the occurrence

of a digit, and therefore, offers digital analysis for irregularities of financial

figures in the financial statement.

Benford’s analysis is the most appropriate for examining a set of numbers from a

mathematical combination. The accounts receivable and accounts payable are

two types of account that are most useful to analyzed using Benford’s Law. In

addition to accounts receivable and payable, Benford’s Law has also been found

to be useful for analysing the disbursements, sales and expenses transactions. The

53
digital analysis of Benford’s Law has been found to be integrated into a number

of software packages.

2.4.12 Response to Financial Statement Fraud

According to KPMG (2011), the response control is designed to take corrective

action and remedy the harm caused by fraud or misconduct. It should involve

investigation, enforcement, accountability and corrective action to remedy the

harm caused. In the meantime, the three leading bodies in accounting – the

Institute of Internal Auditors, the American Institute of Certified Public

Accountants and the Association of Certified Fraud Examiners (2008) – state that

an effective reporting process should be in place to seek input on potential fraud.

The coordinated approach of response control includes investigation and

corrective action which is to ensure that potential fraud is being addressed in an

appropriate and timely manner. The research found that corrective action would

complement the response control. The corrective actions have been described by

KPMG (2011) as actions by the company to remedy the harm caused by a

particular fraud case. The corrective actions are important for every company to

examine the root causes of the fraud, and therefore, the particular risk of fraud

could be controlled and mitigated.

Communication to individuals in the company in relation to the reported fraud

cases is important to show the responsive action of the company’s management

and that there is no tolerance for any fraudsters. Therefore, the company would

administer the disciplinary action for any fraud cases. Hence, the corrective

54
actions are essential for achieving effective strategies for financial statement

fraud control. The corrective action is considered imperative because it supports

the prevention and detection strategies.

55
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter looks at the methodology that was used to conduct the study. It

specifies the research design, target population, sample, how data was collected

and methods to analyze data.

3.2 Research Design

The research design is a plan of the methods and techniques to be adopted for

collection and analysis of the data required in obtaining answers to research

questions. The study used a descriptive design. A descriptive research is a process

of collecting data in order to answer questions concerning the current status of

the subjects in the study. The research often involves collecting information

through data review. This type of research best describes the way things are

(Mugenda & Mugenda, 2008). This study described the variables associated with

the problem.

3.3 Population of the Study

According to Cooper & Schindler (2008), a population is the subject such as a

person, organization, customer database or amount of quantitative data on which

measurement is being taken. This definition ensures that population of interest is

homogenous. Population studies are more representative because everyone has

equal chance to be included in the final sample that is drawn. The population of

interest in this study is the Nigerian Banks.

56
3.4 Sample of the study

The sample of this study was chosen through stratified sampling. The study

sampled Nigerian Banks in each sector of the company. The sector is Finance and

Accounts sector.

3.5 Data Collection and Research Instruments

Secondary sources of data was adopted in this research with data collected from

Central Bank of Nigeria, Nigeria Deposit Insurance Corporation (NDIC) annual

reports, Nation Bureau of statistics, internet and certain journals and publications

records of financial statements fraud. Specifically, Return on Assets (ROA) was

obtained from the financial statements of Nigeria Banks from year 2000 to 2015

in order to measure their financial performance. The data collected were

carefully examined and verified to ensure that there was any form of abnormality

and inaccuracy. This will ensure a reliable outcome from the data analysis

3.6 Data Analysis

The usage of Multiple Regression analysis model was used to determine the effect

of independent variables on the dependent variable. Correlation coefficient was

used to investigate how the independent variables inter-relate with the

dependent variable. Analysis of Variance (ANOVA) was performed to determine

the impact of independent variables on the dependent variable in the multiple

regression analysis.

57
3.6.1 Analytical Model

The analytical model for the study was a regression analysis for the independent

variables and dependent variable.

The Multi-regression analysis took the form below:

Y= ao+ b1X1+b2X2+b3X3+b4X4 +e ------------------------------------------- (1)

Whereby;

Y= Financial performance of Nigeria Banks expressed by ROA- ratio of after tax

profits to total assets

XI= % of Fraud due to Behavioral causes

X2= % of Fraud due to Technological causes

X3=% of Fraud due to Management causes

X4=% of Fraud due to Legal Causes

a= The constant of regression

e= The error term.

3.7 Limitations of the Study

Issues of fraud have been broadly discussed in academic research. There is a

limitation that needs to be acknowledged and addressed regarding the research.

There are a number of frauds in different disciplines. However, financial

statement fraud has been chosen as the issue under investigation. From the

various types of financial fraud identified including fraudulent financial

reporting, misappropriation of assets, revenue or assets gained by fraudulent or

58
illegal acts, expenses or liabilities avoided by illegal acts, expenses or liabilities

incurred for illegal acts and other misconduct (KPMG, 2011).

59
 CHAPTER FOUR

RESULTS AND ANALYSIS OF FINDINGS

4.1 Introduction

This chapter describes the analysis of data followed by a discussion of the

research findings. The findings relate to the research questions that guide the

study. Data were analyzed to identify, described and explore the effect of

financial statement fraud on organisational performance. Data were obtained

from CBN and NDIC annual reports.

Table 4.1: Fraud and Forgery cases and amount of money lost by Nigerian Banks

(2000-2015)

YEAR Total No of Total Total Expected Proportion of

Fraud Amount
Loss (N’ Billion) Expected Loss to
Cases Involved (N’
Amount Involved
Billion)
(%)
2000 403 2,857.11 1,080.57 37.82
2001 943 11,243.94 906.30 8.06
2002 796 12,919.55 1,299.69 10.06
2003 850 9,383.67 857.46 9.14
2004 1,175 11,754.00 2,610.00 22.21
2005 1,229 10,606.18 5,602.05 52.82
2006 1,193 4,832.17 2,768.67 57.30
2007 1,553 10,005.81 2,870.85 28.69
2008 2,007 53,522.86 17,543.09 32.78
2009 1,764 41,265.50 7,549.23 18.29

60
2010 1,974 24,490.73 6,423.53 36.73
2011 3,852 33,367.80 6,674.20 69.61
2012 5,960 19,743.99 5,758.44 114.3
2013 2,527 29, 534.47 6,543.60 58.42
2014 1,461 9,829.23 2,650.34 26.4
2015 10,734 113,334.49 53,345.45 533.3
Total 36,721 398,691.5 124,485.47 1,115.93
Source: CBN and NDIC Annual Reports for 2000 – 2015

The table above shows the fraud and forgery cases and amount of money lost by

banks during the study period. The actual losses to banks grew steadily from

2000 – 2004. The amount lost increased from 2.6 Million Naira in 2004 to 5.6

Million Naira in 2005. Thereafter, it grew steadily for the remaining years under

review with 2015 recording the highest loss to Nigerian banks with a staggering

amount of 1.6 billion naira. Though 2015 had the highest amount involved, it

recorded a loss of 53.3 million naira. A total of N124 million was lost by banks to

fraud.

4.2 Data Analysis and Interpretation

The study conducted a linear regression model to establish the relationship

between frauds and financial performance of Nigerian Banks. Coefficient of

determination explains the extent to which changes in the dependent variable

can be explained by the change in the independent variables or the percentage of

variation in the dependent variable (financial performance of Nigerian Banks)

that is explained by all the four independent variables (fraud due to behavioral
61
causes, fraud due to technological causes, fraud due to management causes and

fraud due to legal causes).

Table 4.2: Model Summary

Model R R – Square Adjusted Std. Error of

the Estimate
R-Square
1 0.819 0.671 0.664 0.245

Source: Authors Computation (2018)

The three independent variables that were studied, explain only 66.4% of the

financial performance of Nigerian Banks as represented by the adjusted R2. This

therefore means the four variables contribute to 66.4% of financial performance

of Nigerian Banks, while other factors not studied in this research contributes

33.6% of financial performance of Nigerian Banks.

Table 4.3: Summary of One-Way ANOVA results of the regression analysis

between financial performance of Nigerian Banks and its determinants

Model Sum of df Mean F Sig.

Squares Square

Regression 3.268 4 1.209 4.187 0.00116

1 Residual 11.61 35 0.252
Total 14.878 38
Source: Authors Computation (2018)

From the ANOVA statistics in table 4.9, the processed data, which are the

population parameters, had a significance level of 0.00116 which shows that the

data is ideal for making a conclusion on the population’s parameter. The F

62
calculated at 5% level of significance was 4.187. Since F calculated is greater

than the F critical (value = 2.64), this shows that the overall model was

significant i.e. there is a significant relationship between financial performance

of Nigerian Banks and its determinants.

Table 4.4: Regression coefficients of the relationship between financial

performances of

Nigerian banks and the four predictive variables

Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) 0.426 0.217 3.451 0.035
Fraud due to 0.479 0.104 0.108 2.246 0.024
Behavioural
causes
Fraud due to 0.761 0.128 0.546 5.967 0.031
Technological
causes
Fraud due to 0.617 0.452 0.324 3.972 0.024
Management
causes
Fraud due to 0.501 0.116 0.383 4.124 0.037
Legal Causes
Dependent variable: Financial performance of Nigerian Banks
Source: Authors Computation (2018)

The coefficient of regression in Table 4.4 above was used in coming up with the

model below:

63
FP= 0.426 + 0.479B + 0.761T + 0.617M + 0.501L ---------------------------

(1)

Where, FP = financial performance,

B = fraud due to behavioural causes,

T = fraud due to technological causes,

M = fraud due to management causes

L = fraud due to legal causes.

According to the model, all the variables were significant as their P- value was

less than 0.05 at 95% confidence level. The four variables (fraud due to

behavioural causes, fraud due to technological causes, fraud due to management

causes and fraud due to legal causes) were positively correlated with financial

performance of Nigerian Banks.

From the model, the four variables are constant at zero, financial performance of

Nigerian Banks was 0.426. Findings from the study also shows that, taking all

other independent variables at zero, a unit increase in fraud due to behavioural

causes will lead to a 0.47 increase in financial performance of Nigerian Banks a

unit increase in fraud due to technological causes will lead to a 0.76 increase in

financial performance of Nigerian Banks, a unit increase in fraud due to

management causes will lead to a 0.61, while a unit increase in fraud due to

legal causes will lead to a 0.50 increase in financial performance of Nigerian

Banks. This deduces that fraud due to technological causes have the most

symmetry effect to the financial performance of Nigerian Banks followed by

64
fraud due to management causes, then fraud due to legal causes while fraud due

to behavioural causes had the least effect.

4.3 Discussion of Findings

The study correlates with Kanu & Okorafor (2013) who identifies technological

causes of frauds. The study revealed that technology has improved significantly

in the modern world. Everything is nearly computerized. However, fraud has also

become easy to perpetrate. A fraudster can commit fraud in a fraction of a second

without being noticed. This fraud can also take place in a very far distance.

From the regression model, the study found out that there were factors

influencing the financial performance of Nigerian Banks, which are fraud due to

behavioural causes, fraud due to technological causes, fraud due to management

causes and fraud due to legal causes. The study found out that the constant (Y-

intercept) was 0.426 for all years. The four independent variables that were

studied (fraud due to behavioural causes, fraud due to technological causes,

fraud due to management causes and fraud due to legal causes) explain a

substantial 66.4% of financial performance of Nigerian Banks as represented by

adjusted R2 (0.664). This therefore means that the four independent variables

contributes 66.4% of the financial performance of Nigerian Banks while other

factors and random variations not studied in this research contributes a measly

33.6% of the financial performance of Nigerian Banks.

The study established that the coefficient for fraud due to behavioural causes was

0.479, meaning that fraud due to behavioural causes influenced the financial

65
performance of Nigerian Banks. The study also deduced that fraud due to

technological causes had an influence on financial performance of Nigerian

Banks since it had a coefficient of 0.761. The study further deduced that fraud

due to management causes influenced financial performance of Nigerian Banks

as it had positive coefficient (0.617). Finally, the study revealed that fraud due to

legal causes had an effect of financial performance of Nigerian Banks as it had a

coefficient of 0.501. All the above findings on the classification of causes of fraud

are in line with Kanu & Okorafor, (2013) and Adebisi (2014) who classifies

fraud as those caused by management, Technological, Legal, Personal and Social.

66
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings

In determining the effect of fraud on financial performance of Nigerian Banks,

the study found out that there were factors influencing the financial performance

of Nigerian Banks. The factors are fraud due to behavioral causes, fraud due to

technological causes, fraud due to management causes and fraud due to legal

causes. The study found out that the Y-intercept was 0.426 for all years. The four

independent variables that were studied (fraud due to behavioral causes, fraud

due to technological causes, fraud due to management causes and fraud due to

legal causes) explained a substantial 66.4% of financial performance of Nigerian

Banks as represented by adjusted R2 (0.664). The study therefore concludes that

fraud influences the financial performance of Nigerian Banks.

5.2 Conclusions

In view of the craze for money, and the prevailing harsh economic environment,

big time frauds are on the increase in Nigerian Banks, hence bank are losing

amounts running into billions of naira’s to fraudsters on a daily basis in most

cases, when the frauds are detected early; amounts already drawn are usually

difficult to recover. Even where deposit money banks discover fraud and there is

the possibility of recovering some of the frauds, the cooperation of the police has

not been particularly encouraging. Also in some cases, top levels of management

that do not want negative publicity for the deposit money banks try to hide

67
certain cases. A sound and effective control system will not only prevent fraud

but will at an early stage detect it.

From the regression model, the study found out that there were factors

influencing the financial performance of Nigerian Banks, which are fraud due to

behavioural causes, fraud due to technological causes, fraud due to management

causes and fraud due to legal causes. The study found out that the Y-intercept

was 0.426 for all years.

The four independent variables that were studied (fraud due to behavioral

causes, fraud due to technological causes, fraud due to management causes and

fraud due to legal causes) explain a substantial 66.4% of financial performance

of Nigerian Banks as represented by adjusted R2 (0.664). This therefore means

that the four independent variables contributes 66.4% of the financial

performance of Nigerian Banks while other factors and random variations not

studied in this research contributes a measly 33.6% of the financial performance

of Nigerian Banks.

The study concludes that fraud due to behavioral causes influenced the financial

performance of Nigerian Banks. The study also concludes that fraud due to

technological causes had an influence on financial performance of Nigerian

Banks. The study further concludes that fraud due to management causes

influences financial performance of Nigerian Banks. Finally, the study concludes

that fraud due to legal causes has an effect of financial performance of Nigerian

68
 Banks. This is in line with Kanu & Okorafor, (2013) who classifies fraud as

caused by management, technological, Legal and Behavioural factors.

5.3 Recommendations

i. The study recommends that Nigerian Banks should increase their employee

requirements pertaining to qualifications; draw up more efficient screening

techniques and ascertain that references are not fictitious at the recruitment

stages.

ii. They should also ensure that there is segregation of duties, efficient internal

controls, jobs satisfactions and job enrichment.

iii. Nigerian Banks management should create awareness about bank fraud.

This requires more than just sound judgment and dynamic action; it calls for

commitment that can only be gained if the management has ensured that all

the motivational incentives have been put in place.

iv. Training techniques should be upgraded to test honesty and integrity and

not just technical skills. This should entail extensive training programme

regularly done, as well as personality tests and Intellectual Quotient (IQ)

tests so as to understand the personality and character of the trainee. This

would reduce negligence and carelessness in carrying out basic procedures

that could pose as loopholes for fraud.

v. The study recommends that Deposit money banks management should come

up with a policy which clearly indicates steps to be taken on any staff found

69
 committing fraud. This will help reduce internal fraud which is more

elaborate in the bank than external.

5.4 Suggestions for Further Research

This study has explored the effect of fraud on financial performance of Nigerian

Banks and established that fraud has a strong influence on financial performance

of Nigerian Banks. The overall effect of fraud can therefore not be ignored at any

cost. The study therefore recommends that another study needs to be done with

an aim of investigating the effectiveness of the strategic responses to fraud related

risks in the Nigerian Banking Industry.

70
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 APPENDIX
Table 4.1: Fraud and Forgery cases and amount of money lost by Nigerian Banks

(2000-2015)

YEAR Total No of Total Total Expected Proportion of

Fraud Amount
Loss (N’ Billion) Expected Loss to
Cases Involved (N’
Amount Involved
Billion)
(%)
2000 403 2,857.11 1,080.57 37.82

2001 943 11,243.94 906.30 8.06

2002 796 12,919.55 1,299.69 10.06

2003 850 9,383.67 857.46 9.14

2004 1,175 11,754.00 2,610.00 22.21

2005 1,229 10,606.18 5,602.05 52.82

2006 1,193 4,832.17 2,768.67 57.30

2007 1,553 10,005.81 2,870.85 28.69

2008 2,007 53,522.86 17,543.09 32.78

2009 1,764 41,265.50 7,549.23 18.29

2010 1,974 24,490.73 6,423.53 36.73

2011 3,852 33,367.80 6,674.20 69.61

80
2012 5,960 19,743.99 5,758.44 114.3

2013 2,527 29, 534.47 6,543.60 58.42

2014 1,461 9,829.23 2,650.34 26.4

2015 10,734 113,334.49 53,345.45 533.3

Total 36,721 398,691.5 124,485.47 1,115.93

Source: CBN and NDIC Annual Reports for 2000 – 2015

Table 4.2: Model Summary

Model R R Square Adjusted R Std. Error of

Square the Estimate

1 0.819 0.671 0.664 0.245

Source: Authors Computation (2018)

Table 4.3: Summary of One-Way ANOVA results of the regression analysis

between financial performance of Nigerian Banks and its determinants

Model Sum of df Mean F Sig.

Squares Square

Regression 3.268 4 1.209 4.187 0.00116

1 Residual 11.61 35 0.252

Total 14.878 38

Source: Authors Computation (2018)

81
Table 4.4: Regression coefficients of the relationship between financial

performance of Nigerian banks and the four predictive variables

Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Error Beta
(Constant) 0.426 0.217 3.451 0.035

Fraud due to 0.479 0.104 0.108 2.246 0.024

Behavioural

causes

Fraud due to 0.761 0.128 0.546 5.967 0.031

Technological

causes

Fraud due to 0.617 0.452 0.324 3.972 0.024

Management

causes

Fraud due to 0.501 0.116 0.383 4.124 0.037

Legal Causes

Dependent variable: Financial performance of Nigerian Banks

Source: Authors Computation (2018)

82