Effectiveness*of*the*Mechanisms*of*Fraud*Prevention*and* Detection(in(Nigeria)

Transcription

1 Advances)in)Social)Sciences)Research)Journal) )Vol.3,)No.3) Publication)Date:March.25,2016 DoI: /assrj Efiong,' E.' J.,' Inyang,' I.' O.,' &' Joshua,' U.' (2016).' Effectiveness' of' the' Mechanisms' of' Fraud' Prevention' and' Detection' in' Nigeria.' Advances)in)Social)Sciences)Research)Journal,)3(3))206B217.' Effectiveness*of*the*Mechanisms*of*Fraud*Prevention*and* Detection(in(Nigeria) Eme)J.)Efiong) DepartmentofAccounting, UniversityofCalabar,P.M.B.1115,Calabar,Nigeria Inyang)O.)Inyang) DepartmentofAccounting, UniversityofCalabar,P.M.B.1115,Calabar,Nigeria Udeme)Joshua) DepartmentofAccounting, UniversityofCalabar,P.M.B.1115,Calabar,Nigeria Abstract) Whereas) the) problem) of) fraud) is) a) global) one,) the) rate) and) extent) to) which) it) is) perpetrated) in) Nigeria,) particularly) in) the) public) sector,) is) quite) high) and) alarming.) Literature)reveals)that)different)fraud)prevention)and)detection)mechanisms)are)being) adopted)to)combat)the)menace)of)fraud.)forensic)accounting)techniques)appears)to)be) the) most) effective) and) are) currently) used) in) most) developed) countries) of) the) world.) However,)the)extent)to)which)forensic)accounting)techniques)are)being)applied)in)fraud) prevention) and) detection) in) Nigeria) is) not) known.this) study) was) therefore) aimed) at) investigating) the) mechanisms) of) fraud) prevention) and) detection,) and) their) levels) of) effectiveness) in) Nigeria.The) study) involved) the) collection) of) quantitative) data) from) accounting)practitioners.)the)questionnaire)served)as)the)survey)instrument.the)study) identified)several)fraud)prevention)and)detection)mechanisms)that)are)currently)used) in)nigeria,)such)as)systems)of)internal)controls,)operational)audits)and)corporate)code) of) conduct.) Students ) tytest) indicates) a) significant) difference) between) the) perceived) effectiveness) and) actual) usage) of) fraud) prevention) and) detection) mechanisms) in) Nigeria.)It)was)further)discovered)that)the)most)effective)mechanisms,)like)the)forensic) accounting) techniques,) are) the) least) used) in) fraud) prevention) and) detection.) This) implies) that) the) current) mechanisms) of) fraud) prevention) and) detection) are) not) proactive) in) dealing) with) the) fraud) menace.) The) study) recommended) that) proactive) measures)in)terms)of)mechanisms)be)employed)in)tackling)fraud)manace)in)nigeria.) Keywords:)Fraud,Fraudpreventionmechanisms,frauddetectionmechanisms,Fraudmanace innigeria,forensicaccountingtechniques INTRODUCTION) Theroleofauditorinfraudpreventionanddetectionwasquestionedasaresultoftherisein financialscandalsatthebeginningofthetwentypfirstcentury,associatedwithincreasedfraud incidence and awareness(bhasin, 2013). Hogan et al( 2008) argued that the rise and rate of occurrence of financial fraud have not shown any decline since the SarbanesPOxley Act was passedin2002.torespondtothesemodernorganisedfraudstherehasbeencallsfortheskills ofaccountantswithnonptraditionalmethods. According to Ratlift et al (1996), fraud is defined as activities carried out to obtain money, property or services, to avoid payment or services or to secure personal or business Copyright SocietyforScienceandEducation,UnitedKingdom 206

2 AdvancesinSocialSciencesResearchJournal(ASSRJ) Vol.3,Issue3MarchP2016 advantagesinfavourofthefraudster.theinternationalstandardsforprofessionalpracticeof Internal Auditing, (2002), opined that these activities may not necessarily dependent on violence or the use of physical force. Adefila, Kasum and Olaniyi (2005), have argued that fraud risk increases as a result of inadequate, ineffective, weak, absent or nonpexistence of fraud preventive and detective mechanisms. By implication, government agencies are to use themosteffectivefraudpreventionanddetectionmechanisms(kasum,2009). Fraud in the Nigerian economy has done so much of untold harm to the citizenry. Moreover, Jeremiah,(2006)notedthatinNigeria,fraudinboththepublicandprivatesectorsaremajor factorsofthedwindlingeconomy.accordingtohamiltonandgabriel(2012:112), fraudand relatedillshavecausedinstabilityintheeconomyresultingtoahighmortalityrateofbusiness organisationsandtheconsequentlossesofrevenue innigeria. This study investigates the mechanisms of fraud prevention and detection as it is commonly used in Nigeria. Further, perceived levels of effectiveness of fraud prevention and detection methods used in Nigeria were examined. Moreover, it brings to fore significant difference in theactualuseoffraudpreventionanddetectionmethodsandtheirlevelofeffectiveness. ThesophisticatednatureoffraudinNigeria(Adefilia,Kasum,andOlaniyi2006;Okunborand Obaretin2010;Akindele,2011)callsforaninvestigationintothemethodsoffraudprevention anddetectionthatareincommonusageinthecountry.literaturehasrevealedthatthemost effective fraud prevention and detection mechanisms are the least used in combating the menace of fraud (Bierstaker, Brody and Pacini, 2006). However, it is not clear if significant difference exist between the perceived effectiveness of the fraud prevention and detection mechanismsandtheiractualusageinfraudmanagement.thequestionsthenarewhatarethe common fraud prevention and detection mechanisms and their level of effectiveness in Nigeria? Is there any significant difference in the perceived effectiveness of fraud prevention anddetectionmechanisimsandtheiractualusageinnigeria? Traditional)Mechanisms)of)Fraud)Prevention)and)Detection) Ttraditionalmechanismsoffraudpreventionanddetectioninanorganizationbeforeorafter theincidencehavebeenfashionedincludeinternalcontrolsystems,operationalaudits,codeof conduct and reference checks on employees (Bierstaker, Burnaby and Hass 2004 and Bierstaker,BrodyandPacini2006). Sydney,(1986)describesinternalcontrolaschecks,whetherfinancialorotherwise,whichis established by management of any organisation, to enable work done in an orderly manner and for the safety, security and reliability of records. These can only be obtained as responsibilitiesofaccountantsandauditorwithreferencetofraud.fraudmaybediscoveredas internal auditor performs his task, but this maybe hinderd as management has significant influence over an internal auditor s commitment to detect fraud (Ramaswamy, 2007:33). HamiltonandGabriel(2012:114)arguethat, accountantandauditorshaveoftenbeenexalted to be the leaders in fraud prevention by employing their skills in designing tight control systems. HamiltonandGabriel(2012)observethatinternalcontrolsystemsstrategyisatbestashortP runsolutiontoalargeandpervasiveproblemoffraud.worsestill,effectivelongprunmeasures offraudpreventionarenotonlycomplex,butalsodifficult(robertson,1976).nnamdi(1991) claimsthat,theineffectivenessofinternalcontrolmeasuresareduetoweaknessinstaffpolicy Copyright SocietyforScienceandEducation,UnitedKingdom 207

3 Efiong,'E.'J.,'Inyang,'I.'O.,'&'Joshua,'U.'(2016).'Effectiveness'of'the'Mechanisms'of'Fraud'Prevention'and'Detection'in'Nigeria.'Advances)in)Social) Sciences)Research)Journal,)3(3))206B217.' andcontrol,operationalprocedures and management s attitude. Hence, internal controls are notperceivedasaneffectivemechanismforfraudpreventionanddetection.thisramaswamy, 2007:33)putsinamoreconciseway fraudisnolongerwthatinternalorexternalauditorscan guardagainstwiththeirperiodicaudit. Forensic)Accounting)Mechanisms)of)Fraud)Prevention)and)Detection) Forensic accounting mechanisms such as benford s law, data minimg etc have been used in fraud prevention and dectection as defined by Mehta and Mather(2007), have disscused the operational workings of these techniques.generally, forensic accounting approaches include theproactiveandthereactiveones.theuseofanyoftheseapproachesdependsverymuchon the existing circumstances. The proactive approach is asserted to be a universally tactical approach as it aggressively targets types of fraud, searches for indicators, symptoms, or red flags(levanti,2001).thebendford sdigitalanalysis(nigrini,1999);thebreakpointtechnique (Hassibi, 2000); the strategic fraud detection technique(albrecht and Albrecht, 2004); fraud hypothesistestingtechnique(albrechtetal.2004)andthefivepstepdetectiontechnique(ernst andyoung,2006)aregenerallyproactiveforensicaccountingtechniquesbecausetheycomply withthedetectivephilosophywhichaimsatcatchingfraudbeforeitoccurs.ontheotherhand, thereactiveapproach,favoursthephilosophyofwaitingtoseethefraudtakingplacefirstand then arrest it. This may involve the use of electronic equipment, such as the closed circuit television(cctv)ordigitalandmobilecameras(njanike,dubeandmashayanye2009). Many empirical studies have been carried out on the application of forensic accounting techniquesinfraudinvestigationforinstancenjanke,dubeandmashayanye(2009)intheir studyontheeffectivenessofforensicauditingindetecting,investigating,andpreventingbank frauds,soughttofindoutleveltowhichtheforensicauditorsareabletofulfilthismandateand investigate problems that hinder forensic auditors to make progress in their operations in developing countries. Their study made use of questionnaires, personal interviews, and document review as the instruments for data collection. Using a sample of thirty forensic auditors from thirteen commercial banks, four building societies and four audit firms in Zimbabwe,itwasfoundthattheforensicauditingdepartmentssufferfrommultiplechallenges. Amongst these challenges were lack of material resources, lack of technical knowphow, interferencefrommanagement,andunclearrecognitionoftheprofession. However,OkunborandObaretin(2010)conductedastudyoneffectivenessoftheapplication of forensic accounting services in Nigerian corporate organisations and came up with a differentresult.themainobjectivesoftheirstudyweretoestablishwhethertheapplicationof forensic accounting services by corporate organisations is effective in deterring fraudulent practicesandtofindouttheperceptionoftheusersofforensicaccountingservices,innigeria. Theresearchwasconductedusingthemixedmethodsapproach,involvingthecombinationof structured interviews and questionnaire. Ten companies were selected as the sample for the study from the population of companies quoted on the Nigerian Stock Exchange. Their study revealed that the application of forensic accounting services by corporate organisations in Nigeriaisnoteffectiveincurbingfraudulentactivities. WhiletheirresultisconsistentwiththefindingsofOkoyeandJugu(2009),whoexaminedthe effectivenessoffrauddeterrencepoliciesinthebankingsectorofthenigerianeconomy,itis ratherinconsistentwiththegeneralbeliefontheimportanceforensicaccounting.theydonot also agree with the bulk of the literature from elsewhere that as reviewed in this work. This particularlymakesthefraudsituationinnigeriatobecomplexandcallsforfurtherstudies. URL:) 208

4 AdvancesinSocialSciencesResearchJournal(ASSRJ) Vol.3,Issue3MarchP2016 METHOD)OF)STUDY) ThisstudywasconductedonaccountingpractitionersinthepublicserviceinNigeria. Consideringthegeographicalspreadofthepopulationofthisstudy(accountingpractitioners inpublicservice),themultipstagesamplingtechniquewasadopted.themultipstagesampling isadevelopmentofclustersampling (Saunders,LewisandThornhill,2009:231)whichcanbe usedwithgeographicallydispersedpopulationstosavetimeandcost. Nigeria has 36 states with a Federal Capital Territory (FCT). These states and the FCT are currentlystratifiedintosix(6)geoppoliticalzones(fig.1and2).theseformedthefirstsetof clusters(six)forthisstudy. Fig.)1:) )Map)of)Nigeria)showing)the)six)geoYpolitical)zones) Copyright SocietyforScienceandEducation,UnitedKingdom 209

5 Efiong,'E.'J.,'Inyang,'I.'O.,'&'Joshua,'U.'(2016).'Effectiveness'of'the'Mechanisms'of'Fraud'Prevention'and'Detection'in'Nigeria.'Advances)in)Social) Sciences)Research)Journal,)3(3))206B217.' South West Ekiti Oyo Ondo Ogun Osun Lagos South-South Akwa Ibom Bayelsa Cross River Delta Edo Rivers South-East Abia Anambra Enugu Ebonyi Imo North-West Sokoto Kebbi Katsina Kaduna Kano Zamfara Jigawa North-Central Niger Kwara Plateau Benue Nasarrawa Kogi FCT North-East Yobe Borno Adamawa Taraba Bauchi Gombe Fig.2)States)in)each)of)the)six)geoYpolitical)zones)in)Nigeria.) Each cluster was numbered uniquely from 1 to 6. This forms the firstpstage sampling units fromwhereasampleoftheunitwastakenusingthesimplerandomsamplingtechnique.the samplefractionselectedforthiswas50percent.accordingtoudofia(2011),asamplefraction ofisdeemedsatisfactoryasnoseriousresearchcanprogresswithsamplingfractionofless than10percent.fiftypercentofsixisthree.thegeoppoliticalzonesorstrataselectedthrough thisprocesswere:southpwest,northpcentralandsouthpsouth. URL:) 210

6 AdvancesinSocialSciencesResearchJournal(ASSRJ) Vol.3,Issue3MarchP2016 In a related study, Efiong (2015) (in preparation) adopted federal universities where Accounting courses are offered in the three geographical zones as the next stage in the samplingprocess.theseuniversitiesandthestateswheretheyaresituatedarefoundintable 1.MimistriesandAgenciesofgovernmentinthesestateswerenowusedasthebasicunitof sampling. Table)1)selected)zones,)States)and)federal)university)offering)Accounting)courses) Zones State Federal University offering Accounting Courses South- West Lagos University of lagos Osun Obafemi Awolowo Univeristy South- South Akwa Ibom University of Uyo Cross River Edo Rivers University of Calabar University of Benin University of Port Harcourt North-Central Kwara University of Ilorin Plateau FCT University of Jos University of Abuja The number of government ministries and agencies in the different States and the Federal CapitalTerritory(FCT),AbujaareshowninTable2.Thisinformationwasobtainedfromthe MinistryofInformationofthedifferentStateGovernmentsandtheFCT. Table)2:)Number)of)Ministries)and)Agencies)in)the)Selected)States) State Number Number of Samples of Ministries/Agencies Akwa Ibom Cross River Edo Osun Kwara Lagos Plateau Rivers FCT, Abuja Total Table2showsthenumberofministriesandagenciesofgovernmentinthevariousStatesand thefctis488.thechieffinancialofficerand the Head of the internal Audit in each of the agencies and ministries were considered as key players in the use of forensic accounting techniques in fraud prevention and detection in the organisation, hence, these two officers were selected for sampling. This also serves to provide a check on the responses given from Copyright SocietyforScienceandEducation,UnitedKingdom 211

7 Efiong,'E.'J.,'Inyang,'I.'O.,'&'Joshua,'U.'(2016).'Effectiveness'of'the'Mechanisms'of'Fraud'Prevention'and'Detection'in'Nigeria.'Advances)in)Social) Sciences)Research)Journal,)3(3))206B217.' eachestablishmenttoensureinternalconsistencyinthedata.thetotalnumberofsamplesin eachunitwasthereforemultipliedby2resultingto976fortheentirepractitioners. Thisstudyadoptsthesurveystrategyusingthequestionnaireasresearchinstrument. Thequestionnairehad3sectionswith60variables.SectionAlabelled demographicattributes had6variables.sectionbmeasures useoffrauddetectionandpreventionmechanisms with 27variablesandsectionCmeasures perceivedeffectivenessoffrauddetectionandprevention mechanisms alsowith27variables. SectionsB&Ccontainratingquestionseitherasfrequency( always, often, rarely, never, and indifferent )orlikelihood( veryeffective, effective, ineffective, veryineffective,and neithereffectivenorineffective )respectively. Atotalof976copiesofquestionnairewereadministeredonpractitionersofwhich588usable copies were retrieved. This gives a response rate of per cent. The data were analysed usingbothdescriptiveandinferencialstatistics. RESULTS) Table3showstheperceivedeffectivenessofthefraudpreventionanddetectionmechanismby practitioners.fraudpreventionanddetectionmechanismsarerankedfromthemosteffective to the least effective. Table 3 reveals that the most effective fraud detection and prevention mechanism as perceived by practitioners were, the use of forensic accountants, data mining, virus protection, fraud prevention and detection training, the use of firewalls, fraud auditing and bank reconciliation. Also, the least effective of the mechanisms as perceived by the practitionersincludestaffrotationpolicy,corporatecodeofconductandethicspolicy,useof ethicsofficers,fraudvulnerabilityreviews. Table)3:))Ranking)of)perceived)effectiveness)of)fraud)prevention)and)detection)mechanisms) Fraud prevention and N Mean Rank detection mechanism Forensic accountants Data mining Virus protection Fraud prevention and detection training Password protection Firewalls Fraud auditing Bank reconciliations Digital analysis Benford law Increase role of audit committee Ethics training Inventory observation Financial ratios Code of sanctions against suppliers and contractors Security department Fraud reporting policy Whistle blowing Surveillance equipment URL:) 212

8 AdvancesinSocialSciencesResearchJournal(ASSRJ) Vol.3,Issue3MarchP2016 Internal control Discovery sampling Reference check on employees Operational audits Fraud hotline Fraud vulnerability reviews Ethics officer Corporate code of conduct and ethics policy Staff rotation policy Valid N (list wise) 572 Ontheotherhand,theactualusage of fraud prevention and detection mechanisms by these practitioners(orintheirunits)ispresentedintable4. Table 4 reveals that operational audit with rank number 1 is the most frequently used fraud detection and prevention mechanism. This is closely followed by corporate code of conduct, internal control, bank reconciliations, inventory observation and reference check on employees. The least frequently used are forensic accountants, virus protection, data mining andfirewall. Table)4)))Ranking)of)the)actual)use)of)fraud)prevention)and)detection)mechanisms) Fraud prevention and detection N Mean Rank Mechanism Operational audit Corporate code of conduct Internal control Bank reconciliations Inventory observation Reference check on employees Security department Staff rotation policy Password protection Increased role of audit committee Financial ratios Fraud reporting policy Ethics officer Code of sanctions against suppliers contractors Surveillance equipment Fraud vulnerability reviews Whistle blowing policy Ethics training Digital analysis Benford Law Fraud hotlines Discovery sampling Fraud auditing Fraud prevention and detection training Copyright SocietyforScienceandEducation,UnitedKingdom 213

9 Efiong,'E.'J.,'Inyang,'I.'O.,'&'Joshua,'U.'(2016).'Effectiveness'of'the'Mechanisms'of'Fraud'Prevention'and'Detection'in'Nigeria.'Advances)in)Social) Sciences)Research)Journal,)3(3))206B217.' Firewalls Data mining Virus protection Forensic accountants Valid N (list wise) 580 Onehypothesiswastestedinthisstudy.Itisstatedhereasfollows: Ho:Thereisnosignificantdifferencebetweentheperceivedeffectivenessoffraudprevention anddetectionmechanisms,andtheiractualusageinnigeria. H1: There is a significant difference between the perceived effectiveness of fraud prevention anddetectionmechanisms,andtheiractualusageinnigeria. Intestinghypothesis,t=(26)=3.45,p<0.05)revealsthatsignificantdifferenceexistsinthe perceived effectiveness of fraud detection and prevention mechanism and their perceived usageinfraudpreventioninnigeria(table5). Table)5:)Difference)in)use)and)effectiveness)of)fraud)prevention)and)detection)mechanisms) Paired Differences PERCEIVEDEFFE - ACTUALUSAGE Mean Std. Deviation Std. Error Mean 95% Confidence Interval of the Difference Lower Upper T df Sig. *)p)<)0.05.)) DISCUSSION)OF)FINDINGS) The objective of this study was to investigate the mechanisms of fraud prevention and detectionandtheirperceivedlevelsofeffectivenessinnigeria.tocarryoutthisinvestigation in a direct manner, the question, what are the common fraud prevention and detection mechanisms and their perceived level of effectiveness in Nigeria is there any significant difference? wasposed.datawerecollectedandanalysedusingappropriatetechniques. Fromthedataanalysisin,variousfrauddetectionmechanismsinactualusageinNigeriahave beenidentified.thestudyrevealedthatoperationalauditandsystemsofinternalcontrolsare themostfrequentlyusefrauddetectionandpreventionmechanisms.thisiscloselyfollowed by other fraud mechanisms including corporate code of conduct, bank reconciliations, inventory observation and reference check on employees, in their order of decreasing usage. The least frequently used as identified in the present study are forensic accountants, virus protection, data mining and firewall. These findings are similar to those of Bierstaker, Brody andpacini,(2006).thefraudpreventionanddetectionmechanismthatarecommonlyusedin preventing and detecting financial fraudulent activities as revealed in this study are the traditional accounting and auditing methods. It has been discussed earlier that fraudulent activities have become so sophisticated and it will take a sophisticated mechanism, like the forensicaccounting,totackle.yet,forensicaccountingtechniquesarefarfrombeingfamiliarin Nigeriaandparticularlyinthepublicservice.Moreover,thefindingsofthisstudyandavailable literaturerevealthattheuseofforensicaccountants,virusprotection,firewalls,passwordsand dataminingaremoreeffectivemechanismsthanoperationalaudits,corporatecodeofconduct, internalcontrol,andtherestthatareusedmorefrequently. URL:) 214 (2- tailed) *

10 AdvancesinSocialSciencesResearchJournal(ASSRJ) Vol.3,Issue3MarchP2016 There appears to be clear differences in the effectiveness of frauddetectionandprevention mechanisms and their actual usage in fraud prevention. For example, the use of forensic accountants ranks number one in effectiveness, but it is the least used mechanism in fraud preventionanddetectioninnigeria.thisobservation agrees with the findings of Bierstaker, BrodyandPacini,(2006)thatthemosteffectivefraudpreventionmethodsweretheleastused incombatingthemenaceintheunitedstatesofamerica.thiswasconfirmedbythestudent st test,whichrevealsthatsignificantdifferenceexistsintheeffectivenessoffrauddetectionand preventionmechanismsandtheiractualusageinfraudpreventioninnigeria. Traditional accounting methods like systems of internal controls have been found to be ineffective in fraud detection and prevention. This findings have support in the work of MuslimatandHamid(2012)whodiscoveredthatinternalauditstafflacksthebasicknowledge offrauddetectionandprevention.thecontinuousdependenceontraditionalmethodsagainst conventionalfrauddetectionandpreventiontechniques,liketheforensicaccountingwillnot only continue to increase fraud incidence in the public service and even other sectors of the economy,butalsoaffectgeneraldevelopmentinthecountry. The foregone discussion has therefore provided answers to the research question, what are the common fraud prevention and detection mechanisms and their levels of effectiveness in Nigeria? Is there any significant difference? But why should the most effective fraud prevention and detection mechanism be the least used in combating the menace of fraud in Nigeria?Thenextsectionofthediscussionseekstoanswerthequestion. CONCLUSION) Various mechanisms of fraud prevention and detection in usage were identified. The most common ones included operational audit, corporate code of conduct, internal controls, bank reconciliations, and inventory observations while the least used methods were forensic accountants, virus protection, data mining, fraud prevention and detection training, fraud auditing and digital analysis by Benford s law. It was rather shocking to discover that the perceived most effective mechanisms of forensic accountants, data mining, virus protection, fraudpreventionanddetectiontraining,etcweretheleastcurrentlyusedinnigeria.thelack ofuseofthesebetter,effectivemethodsmaybeconnectedwiththelackofawarenessandnonp availabilityofexperts. Inviewofthefindingsofthisstudyandtoensurethatallhandsareondecktoreducefinancial fraudsinnigeriaandelsewhere,itisrecommendedthatorganisationsshouldadoptthemost effectivemechanismsintheirfraudpreventionanddetectiondrive.thisisbecausethestudy has shown that current fraud prevention and detection mechanisms commonly used are perceived as the least effective in combating fraud menace. Forensic accounting mechanisms andtheuseofforensicaccountantswhichhavebeenperceivedmosteffectivemethodsshould beencouragedatalllevelsofgovernmentlocal,stateandfederal. References) Adefila, J. J., Kasum, A. S. and Olaniyi, T. A. (2005) The global endemic nature of financial malpractices: an analyticalappraisal.africanjournalofmanagement,1(1),pp11p20. Akindele,R.I.(2011)FraudsasanegativecatalystintheNigerianbankingindustry.JournalofEmergingTrendsin EconomicsandManagementSciences(JETEMS),2(5),pp357P363. Albrecht,C.andAlbrecht,U.(2004)Strategicfrauddetection:atechnologyPbasedmodel.NewYork:Longman. Copyright SocietyforScienceandEducation,UnitedKingdom 215

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