The incidence of fraud and fraudulent activities is a cankerworm that has eaten deep into our domain. Ironically, fraud is an ill wind that blows no one any good. Recently, it was widely reported that massive fraud was perpetrated in one of our large financial institutions, which appears to have had a highly devastating impact on the bank’s bottom line to be reported during their financial year-end.
Fraud examined
Fraud can be defined as wrongful or criminal deception intended to result in financial or personal gain (Oxford Advanced Learner’s Dictionary). It can also be viewed as a deliberate deception carried out to obtain unfair or unlawful benefit (Ayozie, 2016). From the above definitions, it can be deduced that fraud involves the use of criminal intent to obtain an unjust or illegal benefit. By virtue of its nature and mode of occurrence, fraud can be grouped under two major headings: fraudulent financial reporting and misappropriation of assets.
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(a) Fraudulent financial reporting:
fraudulent financial reporting refers to the intentional misstatement or omission of amounts or disclosures in financial statements to misinform the diverse users of these financial statements. This type of fraud can be achieved through manipulation, falsification, or alteration of accounting records and supporting documents, intentional misapplication of accounting principles, or misrepresentation or omission of events or transactions in the financial statements.
(b) Misappropriation of assets:
The misappropriation or abstraction of assets for personal gain can occur through embezzlement of cash and cheque receipts, causing an entity to pay for goods not received, using organisational assets for personal purposes, stealing physical assets or intellectual property, altering invoices, false declarations, paying ghost or dummy workers, over-invoicing, teeming and lading, suppressing credit notes, and, above all, double payment of invoices.
Fraud risk factors
Fraud risk factors refer to events, conditions, or circumstances that indicate an incentive or pressure to commit fraud or provide an opportunity for fraud within our environment. Instances that could trigger fraud include a weak or absent internal check system and the lack of an internal control or internal audit unit. Other factors include poor working conditions, arrears of work, or when management is dominated by one person or a small group. Transactions with related parties and high turnover of key account staff are other major risk factors. Additionally, inadequate working capital due to declining profitability serves as a significant warning signal that must be closely monitored.
Impact of fraud
As previously stated, fraud is an ill wind that blows no one any good, and its effects are always disastrous to the individual concerned, the organisation in question, and society at large. These negative implications can be summarised as leading to financial loss, emotional, psychological, and health issues, and erosion of public trust and confidence. Furthermore, fraud can cause reputational damage to the party involved, inhibit personal relationships, and lead to the diversion of revenues or resources to undesired destinations. Repeatedly, fraud has led to corporate failure, as globally reported in cases such as Enron, WorldCom, Tyco, and MCI Telecom. Above all, both fraud and fraudulent activities are harmful to society.
“In today’s world, where wealth accumulation and illegal property acquisition are rampant, there is a need to critically examine how to exterminate this menace.”
To begin, it is important to understand what a forensic audit is. Forensic audit is the application of specialised skills, knowledge, techniques, and expertise in the area of auditing. This expertise is used to collect relevant audit evidence, which is then analysed and reported in a format admissible in a court of law for dispute resolution, particularly between warring parties. The objective of a forensic audit is primarily to resolve disputes. In today’s world, where wealth accumulation and illegal property acquisition are rampant, there is a need to critically examine how to exterminate this menace. The forensic audit exercise appears to be the way out of this entanglement we have been in for ages.
No doubt, at the end of it all, a forensic audit will assist in the following ways: identifying the actual nature of the wrongful act (whether it is fraud, money laundering, or corruption), establishing the exact amount stolen, embezzled, or misappropriated, and determining the parties involved. Fraud and fraudulent incidents are often grounds for collusion between two or more parties. This approach will also help establish the motive or reason behind the wrongful act. Furthermore, a forensic audit will assist the auditor in documenting all infractions based on established control procedures and management’s actions. Suggested recommendations or possible countermeasures aimed at exterminating fraud and fraudulent activities will also accompany the forensic audit report.
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I commend private and public sector entities that have embraced forensic auditing in stemming or eradicating fraud. I strongly believe that those yet to adopt forensic auditing should not hesitate, as its associated benefits far outweigh the challenges of long legal battles within our court system.
In addition to adopting forensic audit principles, the following measures can complement the forensic audit exercise: enacting anti-fraud legislation, promoting ethical values across all levels, and encouraging whistleblowing in and around the workplace. Emphasising good work ethics, promoting a strong judicial reform system, and ensuring proper record-keeping are also crucial. A widespread public enlightenment campaign should be launched to discourage fraud. Promotion of effective internal control systems across all tiers of government, regular public awareness of the dangers of fraud, and an effective risk assessment process are equally important. Encouraging fair rewards for job performance and establishing purposeful leadership will also serve as antidotes to eradicating fraud. Corporations must promote accountability and transparency, and sanctions or punitive measures must be enforced on all defaulters to serve as deterrents.
Conclusion
We must all join hands to win the war against fraud and fraudulent activities in whatever capacity we find ourselves, starting from our homes, professional groups, town unions, religious affiliations, and up to government quarters. This is the only way we can truly harvest the fruit of the much-talked-about good governance.
Written by Kingsley Ndubueze Ayozie KJW, FqCTI, FCA.
