INTERNAL CONTROL MEASURES ON PREVENTION OF FRAUD IN GOVERNMENT ESTABLISHED

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INTERNAL CONTROL MEASURES ON PREVENTION OF FRAUD IN GOVERNMENT ESTABLISHED

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Fraud itself is a polemic syndrome which is capable of crumbling economic growth. This is because, as the saying goes that ―prevention is better than cure‖, management of every organization must do everything humanly possible to prevent fraud from occurring. Lin and Koo (2011) opined that companies have to adjust their technologies and methods of internal control in accordance with computerization in order to exercise effective controls. Yang et al (2011) argued that internal control techniques used in an Information Technology (IT) environment are quite different from those used in a manual environment. Yang et al (2011) submitted that transactions are automatically triggered or executed in an IT environment, and the internal controls are supported with information technology, pointing out that the adaptation of internal control techniques are a critical management issue in order to ensure the efficacy of internal controls and the achievement of operational objectives. Prevention of fraud is more economical than the spill – over effect of allowing fraud to occur. The performance of organizations may depend on the ability of such organizations to deal with fraud. The performance of an organization indicates how effective a firm is able to use its asset to generate returns vis-a-vis the ability to control and avert the occurrence of fraud and safeguard the organization assets through necessary internal control mechanisms. Shanmugan, Haat and Ali (2011) argue that fraud prevention, embezzlement, detection and accurate financials are all reasons to justify for good internal control practices. Over the years, management of different organizations has continually put in place several control mechanism to safeguard the organizations’ resources. Despite these efforts, fraud is still prevalent in most organizations. It is on record that where there is collusion and management override of controls, no internal controls procedures will work.

Fraud is an aged long phenomenon associated with mankind mostly in his public interaction with other people, corporate entities and indeed government owned institutions. Nigeria government institutions are not exception to this aged long tradition of fraud in the public service sector of our economy. Fraud no doubt is one of human phenomenon that creates serious challenges for all kinds of businesses be it public or private (Perri & Brody, 2012). The concept of fraud focuses on any deliberate action or in-action of man either as an individual or as a group to deceived others or take possession of an item deceitfully at the expense of others (Halbouni et al, 2016).

The survival of any organization to a large extend depends on its ability to detect and prevent fraud and its attendance consequences by the adoption of auditing practices mostly in the public sector of any economy. Auditing is the arts of checking the books and accounts of any business to protect the business from fraud and fraudulent activities, highlighted by any discrepancies in accounting methods of the day to day business transaction of an organization for its growth and survival. The constant review and verification of the accuracy of financial records of any organization is the certain way to curb if not eliminates completely fraud and fraudulent activities in any organization be it private or public (Bello & Orah, 2019).

The cardinal responsibility of auditing in addition to examining and preparing financial documentations, writing financial reports, examining financial statement for compliance with laws and regulations, prepare tax owed and returns, looking at the validity of a company financial statement and writing report at the end of the investigation all geared toward the detection and prevention of fraud and fraudulent activities in any organization especially the public organizations, this core principles of auditing and auditors seems to have fail over the years as fraud cases in Nigeria public service sector has assumed an alarming proportion evident by the recent fraud (corruption) allegation against the head of different public organizations by the Economic and Financial Crime Commission (EFCC). Internal auditors who are gate keepers in checkmating fraud and fraudulent activities in any organization especially public service institution in Nigeria have not been able to detect and curb fraud in some institutions based on the increasing rate of fraud in government owned institutions in Nigeria.

Despite the fact that there has been continuous auditing by both internal and external auditors in the private and public organization in our country, incidences of fraud and fraud related activities is being reported in government owned institution in Nigeria. Does it mean that auditing practice mostly in government owned institutions in Nigeria is ineffective in the detection and prevention of fraud and financial crimes? Or has the auditing process been compromised by the auditors and managers of government institutions in Nigeria? This paper seeks to conceptually investigate and provide answers to the research questions.

Over the years successive government and accounting/auditing professionals have committed huge resource to create an enabling environment for the practice of auditing and the training of auditors to enhance their technical know-how in preparing, checking and handling of financial statements in order to curb the increasing rate of fraud in public institutions in Nigeria. But this effort by government and various accounting bodies has not yielded the desired result, as fraud and corruption allegations against managers of government owned institution are on increase in Nigeria. Therefore, the main objective of the study is to conceptually investigate the role of auditing in detecting and preventing fraud and financial crime in the Nigeria public sector.

Internal audits evaluate company internal controls, including its corporate governance and accounting processes. It ensures compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. The managers of public institutions mostly are provided with the necessary tools to attain operational efficiency by identifying problems and correcting the gaps observes before they are discovered by external audits (Abdullahi, 2018).

The Institute of Internal Auditors (IIA) (2014) defines internal auditing as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” It further elaborates that internal auditing “helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control governance processes and eliminate all forms of fraud and fraudulent activities in the organization. Auditing whether financial or otherwise is a veritable tool for the survival and growth of any organization through the routine audit to ensure the organization has the ability to survive in a competitive and turbulent business environment and continue to prosper. This is achieved through monitoring, analyzing and assessing the risk and controls of the organization by reviewing the organization compliance with states and federal policies and laws.

Internal audits was traditionally design to ensure reliable accounting information to safeguard the organization asset especially public organizations, but more recently, internal auditing has evolved to encompass operational auditing, risk assessment, information technology assurance services, and more. This expanding role has increased the relevance of internal auditing as part of the organization’s management control structure thereby requiring different skills and competencies, and many organizations need to face the choice whether to develop these broader competencies internally or to outsource internal auditing to outside service providers (Ahlawat & Lowe, 2004; Widener & Selto, 1999). Over the last decades, this decision has been keenly debated in both academic and professional literature.

The debate over the benefits of organizing the internal audit function in-house versus the alternative of outsourcing this function to third party vendors (usually a public accounting firm) is not without partisan interests. Indeed, the debate can be seen as a jurisdictional dispute between the internal auditing and the public accounting professions over the right to control the provision of internal audit services (Rittenberg & Covaleski, 2001; Covaleski, Dirsmith, & Rittenberg, 2003). Public accounting firms have found the provision of internal audit services to be a lucrative market (Petravick, 1997; Rittenberg & Covaleski, 1999). Some estimate that potentially, an accounting firm’s revenues from internal audit services can be up to ten times that of annual financial statement audits (Aldhizer, Cashell, & Martin, 2003). These firms justify their presence in the market for internal audit services by stressing their sophisticated expertise, flexibility, and cost-effectiveness (Caplan & Kirschenheiter, 2000).

Internal auditors, on the other hand, emphasize the importance of in-depth, organizations pacific knowledge, loyalty, and their role in handling crisis situations and fraud prevention (Barr & Chang, 1993; Chadwick, 2000; Martin & Lavine, 2000). This debate has gained additional momentum as in the wake of recent business scandals many organizations are currently reconsidering their internal audit functions-either voluntary or forced by new laws, regulations, and guidelines (the SarbanesOxley Act, SEC-rules and their local counterparts all around the world). Although these new rules appear to favour in-house internal auditing as an integral part of the organization, outsourcing is still allowed provided-broadly speaking-that the organization retains management of the internal audit function and the contractor is not the external auditor.

STATEMENT OF THE PROBLEM

This issue has scarcely been examined in Nigeria, particularly on the relationship between the elements of internal controls (segregation of duty, and system authorization) and fraud detection and prevention. However, it is important for organizations to understand the implications and impact of the different internal controls on fraud detection and prevention, as this will possibly assist the organizations in cost minimization in terms of internal controls and know which of the internal control tools should be given priority in the course of the design of internal controls into the accounting systems. Several and related research carried out in the area of internal controls and fraud detection and prevention have not put into consideration the individuals relationship of the elements of internal control (segregation of duty and system of authorization) with fraud detection and prevention.

OBJECTIVES OF THE STUDY

The broad objectives of this study are to empirically examine the effects of internal controls on fraud detection and prevention in Nigeria: evidence from Ondo State. The specific objectives are to:

1. examine how segregation of duty affects fraud detection and prevention

2. determine the effects of system authorization on fraud detection and prevention

RESEARCH QUESTIONS