THE ROLE OF AN AUDITOR IN THE PREVENTING OF FRAUD

CHAPTER ONE

INTRODUCTION

• BACKGROUND OF THE STUDY

External auditing is an independent, objective assurance and consultancy activity systematically designed to add value and improve an organization operations, performance, efficiency and effectiveness. It helps the organization to achieve its objectives and goals by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of governance, risk control, planning and management control (IIA Report, 1999).

In the past, auditors complained of fraud and theft as an objectives of auditing and it was the auditors duty to report to shareholders of all the dishonest acts that were observed and had affected the propriety of the contents of the financial statement and by early 1930s, it was recognized that the auditing objective was for the verification of accounts (Carey, 2000).

For the development of a true professional status of internal auditing, the institution of internal auditors became the outgrowth for organizational development. Although the roots are in accountancy, its key purpose lies in the area of management control. It comprises a complete intra company financial and operational review (Robert, 1945). The internal audit function became responsible for careful collection and interpretation of selected business facts to enable management to keep of significance business developments, activities and results from diverse and voluminous transactions (Mautz, 1964).

By 1993, the statement of responsibilities of external auditing noted that external auditing encompasses the examination and evaluation of the effectiveness of organizations system of internal control and the quality of performance in carrying out assigned responsibilities (IIA Report, 2002). It led to reduction in corruption cases in many organizations that was uncovered and had a big impact on the company’s sales and profitability.

Many organizations have now employed the use of internal auditing since it is today’s major factor in establishing the quality of the organization internal control system.

Organizations are also struggling to implement more effective governance structures and processes. In such climate, it is no surprise that the internal audit function is viewed as the most qualified group of professionals to help with such experimentation with improved governance as well as support key governance processes for monitoring the control over and for evaluating the operational effectiveness of these management strategies and initiatives.

However, to take advantage of this tremendous surge in the demand for their services, not only do internal auditors need a considerably enhanced repertoire of skills, attributes and competencies but they also need to commensurately raise their organizational status and profile and align themselves appropriately within their respective organizations (Stone, 2000).

External auditing group was to monitor compliance with the policies and standards and the effectiveness of the external control structure across the organization. Their work was focused on the areas of great risk as determined by the risk assessment approach (CCR, 2008).

Organizations today still face many problems despite the presence of internal auditing teams. Companies are seen to have poor management of resources, mainly funds due to the high levels of fraud. The findings of audit were meant to be used by management to ensure that the organization grows but management seems to be so reluctant to take immediate actions hence hindering organizational competitiveness and effectiveness.

1.2     STATEMENT OF THE RESEARCH PROBLEM

The banking industry is a subsector of the Nigeria financial system, and it play a significant role in the economic development and financial stability of the country. It is in this regard that the CBN is charge with the responsibility of administering the Bank and other financial institutions Act (BOFIA) 1991 as amend, which aims at ensuring high standards of banking practice and sustaining financial stability and integrity. It is the pursuance of this mandate that led to the issuance of the prudential guidelines by the CBN which is intended to sanitize the financial reporting system in the banking industry. The prudential guidelines, coupled with the SAS No. 10 on “Accounting by banks and Non-banks financial institutions (part 1)” issued by the Nigerian Accounting Standard Board (NASB) in 1990, have made banks to desist from their previous “Window dressing” or “Creative accounting” tendencies. These with the provisions of other relevant laws like CAMA, 1990; form the basis upon which directors of banks prepare each of their banks financial statements and upon which auditors express their opinion on the financial statements.

However, the researcher discovered that the problems or challenges associated with bank audit include:

1. The inability of the auditor(s) to carry out proper and thorough risk assessment before engaging on the audit exercise.
2. The inability of the auditor to detect fraud committed by the bank staff using extraordinary or special income source(s) or item(s).

• The inability of the auditor to detect fraud committed by the bank staff through the bank loan portfolio.

1. The inability of the auditor(s) to detect fraud committed by staff and employee through items that make up “other assets” and “other liabilities”.
2. There is an expectation Gap between the auditor and the users of the audited financial statements as to whose responsibility is it to detect and prevent fraud – the auditor or the management of the bank(s).

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to determine the role of external auditors in the prevention and detection of fraud in the Nigerian banking sector. Other specific objectives include:

1. To determine if the external auditors has actually help in reducing or preventing fraud in the Nigerian banking sector.
2. To find out why cases of bank fraud are still being reported in the Nigerian banking sector, despite their financial statement being audited.

• To determine the effects of undetected fraud on the performance of banks in Nigeria.

1. To bridge the expectation gap between the users of financial statements and the auditors, on whose responsibility is it to prevent and detect fraud in a bank.

1.4 RESEARCH QUESTIONS

The research questions for the study include:

1. In what ways has external auditors being able to prevent and detect banking fraud.
2. What are the possible causes of bank’s audit failure?

• How can undetected fraud affect a bank performance?

1. Who does the law confer the responsibility of prevention and detection of fraud, the Auditors or the Directors?

1.5 RESEARCH HYPOTHESES

In other to pursue the objective of the study, the following hypothesis has been formulated and will be tested.

Ho: There is no significant relationship between the role of the external auditor and fraud detection and prevention in the selected Nigerian bank.

Hi: There is significant relationship between the role of the external auditors and fraud detection and prevention in Nigerian bank.

Ho: There is no significant relationship between fraud detection and audit of the financial statement in the selected Nigerian bank.

Hi: There is significant relationship between fraud detection and audit of the financial statement in the selected Nigerian bank.

Ho: There is no relationship between the qualification and experience of the auditors and fraud detection in selected Nigerian banks.

1.6    SIGNIFICANCE OF THE STUDY

The role of bank remains central in financing economic activity, and its effectiveness could exert positive impact on overall economy, as a sound and profitable banking sector is better able to withstand negative shocks and contribute to the stability of the financial system (Athanasoglou, 2005). Therefore, the role of external Auditors in the prevention and detection of fraud in the banking sector have attracted the interest of academic research as well as of bank management.

The findings of this study will help banks and other financial institutions in formulating effective policy that will reduce fraud.

It will enable Nigerian government and other regulatory authorities like Central Bank of Nigeria (CBN) formulate policies and institute reforms that will enhance performance of loan portfolios

Finally, the academicians, and researchers will find this study useful, as it shall increases the body of knowledge on roles of the external auditors, and bank performance in Nigeria.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

The scope of this research work covers the role of external auditors in the prevention and detection of fraud in the banking sectors. First Bank Plc is used as a case study. This is not unconnected with the fact that it is the oldest bank in Nigeria, with a high level of experience in the Nigeria financial market, but also because it is one of the leading bank in Nigeria with its branches scattered almost everywhere, which made it easily accessible for the researcher, therefore saving him cost and time.

The period under review covered 2004 to 2013 being a period that witnessed global economic meltdown occasioned by “window dressing” or “creative accounting technique employed by the management of most big business in the world today”, this has left the auditors with more responsibilities and commitment than never before, and more so in the area of fraud prevention and detection. This is why this period chosen by the research is appropriate.

In the course of carrying out this study, the researcher encountered some challenges which imposed some limitation on the study.

The most prominent limitation encountered was the inaccessibility of adequate publication relating to the role of Auditors in preventing and detecting fraud in the Nigerian banking sector.

Other limitations involve some certain factors which hinder the research work.

1. Time Constraint: All the Nigerian banks was not visited due to time constraint. So, therefore the sample size was restricted to the First Bank in the Federal Capital Territory.
2. Financial Constraint: This hinders the visitation of all the Nigerian Banks Headquarters and their major branches as was intended by the researcher. This constitutes a barrier to the research work.

• Resource Constraint: Data collection is another vital area of constraint because the information relating to the problem cannot be easily found just like other issues in textbooks. Such issues relating to this topic can be trace more on the internet, journals and relevant business newspaper.

• DEFINITIONS OF TERMS

The researcher would attempt to define some technical terms encountered in the process of this study. These terms include:

Efficiency: This is the short-term measure of how well an organization uses its resources.

Effectiveness: This refers to how well an organization reaches its objectives over a period of time.

Management: This refers to the act of getting thing done through other people. It involves the process of planning, organizing, staffing, motivating, directing and controlling etc.

Performance level: This is the state of act living a designed goal.

Credit Crunch:  It is a reduction in the general availability of loans for credit or a sudden tightening of the conditions required to obtain a loan from the banks

Financial Crisis: The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value.

Many financial crises are associated with banking panics, and many recessions coincided with these panics.

Financial System: This is a composition of various institutions, markets, instruments and operators that interact within an economy to provide financial services. It can also be seen in the context of sets of rules and regulations, and heap of financial arrangement within the financial sector.

Regulatory Authorities: These are institutions, which are responsible for the orderly development of the financial system. They ensure compliance with laid down rules and regulations guiding their operations.

1.9 PLAN OF THE STUDY

This research work has been segmented into five major chapters, chapter one of this study deals with the introduction to the research work which comprises: statement of the problem, research question, objectives of the study, significance of the study, research hypothesis and finally definition of terms.

Chapter two review the past work of various authors which are relevant to the research work.

The sources and method of data collection, research design and data analysis techniques will be discussed in chapter three.

Analysis and interpretation of data will also be discussed in chapter four. While the summary, conclusion and recommendation deals with the outcome of these various segments of the study and will be treated in chapter five.

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