By Ogunmolawa Omonike
It is no longer news that most organizations take the management of financial resources serious. This is necessitated by the fact that organizational set objectives can be achieved especially if the system of such management is sensitive to the behaviour of operators of the system. One of such sensitivity is towards preventing fraudulent activities. This implies that finances can be controlled to reasonably stop fraud occurrence.The concept of financial control and fraud prevention can be explained from the following definitions:
Financial: In business or economic dealings, financial implies anything involving, connected or related to money.
Control: In finance, control means the business or art of managing the monetary resources of an organization. It also means the regulations or rules governing a system.From the two definitions presented it can be implied that the management of financial resources begins with the control of: Generating or sourcing of money and spending of money.
From these explanations, financial control can be defined as the administrative (segregation, code of ethics, welfare scheme, training, development, job rotation and so on) and accounting controls (approval, authorization, arithmetic, reconciliation, variance and trend analysis, and so on) put in place by an organization in order to ensure that the amount of money generated or sourced remains intact if it cannot be multiplied, and the money is spent reasonably for the intent purposes of the organization.
It is important to note that financial control can reasonably prevent fraud when it is operated through an organization’s robust internal control system. This position will be better explained after presenting the concept of fraud and its causes.
Fraud is defined as dishonesty in the form of intentional deception or willful misrepresentation of a material fact (Osisioma, 2009). It is lying, the willful telling of untruth and cheating, the gaining of an unfair advantage or unjust advantage over another. It is cheating as direct opposite of truth, justice, fairness, and equity.
A civil proceeding based on the US Supreme court ruling in 1887, Singleton and Singleton (2006) defined fraud as a “representation in regard to a material fact that is false and was not actually believed to be true by the defendant on reasonable grounds and that the complainant was ignorant of its falsity and reasonably believed it to be true was made with intent that it should be acted upon was actually acted upon by the complainant to his damage.”
Wells,(2006) sees fraud as “any crime for gain that uses deception as its principal modus operandi.” Osisioma, (2009) defines fraud based on the celebrated case of Wells vs Zenz as “a generic term which embraces all the multifarious means which human ingenuity can devise and are resorted to by one individual to get any advantage over another.
It includes all surprises, tricks, cunning, dissembling and unfair ways by which another is deceived.”Relationship that is of mutual benefit: Fraud can be defined from the relationship that involves two individuals (the fraudster &the victim) that is of mutual benefit like employer-employee. From this perspective the employee is considered the fraudster. The following definitions are presented:Under the law “conversion is an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the exclusion of the owner’s right”(Osisioma, 2009).
According. to Wells (2006), occupational fraud and abuse means when ‘an employee misuses assets and properties under his care like using the organization’s money for personal benefit, inflation of contracts, bypassing tender procedures, kickbacks, lapping, unnecessary purchases, ghost vendors and employees or false overtime and sick time abuse.
Okoye, (2009) defines “employee fraud as falsification, unveiling false document, lying or violating an employer’s policies” It is important to note here that errors can occur in the course of executing a financial schedule by an employee.
However, the American Institute of Certified Public Accountants (AICPA) posits that “The primary factor that distinguishes fraud from error is whether the underlying action is intentional or unintentional.”According to the professional body “fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.”From the explanations so far it can be deduced that fraud is secretive because it is an illegal and unauthorized action. Duty of trust is not observed by the employee.
For the purpose of this writeup, the workplace will be used to discuss the causes of fraud by using the second perspective (relationship that is of mutual benefit) on the definition of fraud.
Weak Workplace Culture: An understanding of a workplace culture is important before presenting how it can be weak to be a cause of fraud. According to the Business Dictionary(2018),it is a “culture that is built on shared attitudes, beliefs, customs, and written and unwritten rules that have been developed over time and are considered valid.” It is also the organizational culture that includes its expectations, experiences, philosophy, as well as the values that guide member’s behaviour, and is expressed in member’s self-image, inner workings, interactions with the outside world, and future expectations.However, where the culture in a workplace is only based on written rules and regulations without paying much attention to unwritten rules fraudulent acts can take place.
The question is what are written and unwritten rules? The internal control system (ICS) is an embodiment of written rules and regulations of any serious minded organization. The ICS is a process influenced by top, middle and lower levels of management that is put in place to reasonably ensure the productive use of human and financial resources to achieve good operational results, dependable. financial reporting and conformity with managerial policies, rules, and regulations.
The ICS has five components (COSO,2009 &2013):control environment, control activities, risk assessment, monitoring communication, and information.This chapter discusses only two components – control environment and control activities.The control environment is considered the most important and a fundamental framework for the other four components. This is so because it includes clear definition of policies, encompasses the way management assigns authority and responsibility, it entails the integrity, ethical values and competence of the entity’s people; management’s philosophy and operating style.
By and large, the control environment is made up of directive, detective, preventive, segregation, and supervisory controls.The second component of the ICS control activities includes policies and procedures that help ensure management directives are carried out. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, and security of assets.The control activities include arithmetic, accounting and audit controls. From the explanations, it can be said that rules and regulations are put in place to identify, detect and prevent fraud in order to achieve good organizational performance or results.
However, the possibility of fraud occurrence is high if the understanding of an employee’s manners in achieving such results does not go beyond the workplace: This brings to bear the definition of unwritten rules. Unwritten rules are not found or written in an organizations book of policies or procedures, they are concerned with the internal and external influences on social behaviour of an employee which is known by the employer but never discussed or spoken. They are hint at policies that can help identify, curtail, and prevent situations that can make an employee commit fraud. The question is what are the internal and external influences that will make an employee commit fraud? They include but not limited to the following:
Management’s inability to Inculcate a reminder of ethical values or virtues as part of any training on work procedures on newly recruited and existing employees, ensure that at any point in time employees comprehend clearly organizational policies, procedures and how to comply and apply them.
Other are leading by good example, which consequently can promote undue influence and opportunities to commit fraud. Bring in tandem sanctions on fraudulent acts with intrinsic and financial reward on good conduct, which consequently can encourage the rationalization to commit fraud; and establish a good compensation structure, incentive schemes and liveup to the expectations of paying salaries as at when due.
Family upbringing that is characterized by negative virtues, causes that erode good virtues like extravagant life style, Gambling, Extra marital affairs or keeping bad company, doing hard drugs and substances. Pressure like Family problems and issues, Peer group influence, Political obligations as a party member.
Societal Indifference: When the social order of an employee is indifferent to the frequent changes in the financial status of the employee, fraud at the workplace ·can occur. From the above explanations, it can be deducted that a week internal control system, internal and external influences are possible causes of employee fraud.
Written Rulers Robust Internal control system (ICS): An ICS that is designed or built to be sturdy is capable of preventing fraud. In administering financial control, the ICS employs the budget at the point of sourcing or generating money and when spending such money.
The question is how can a budget prevent fraud? In answering this question, the case of the Federal Government of Nigeria (FGN) will be discussed using the two documents that provide the basis for the annual budget planning, namely: the Medium Term Expenditure Framework (MTEF) and Fiscal Policy Strategy Paper (FSP), Charts of Accounts and the role of the Office of the Auditor General for the Federation (OAGF). The Fiscal Policy Strategy Paper (FSP)refers to the means of raising the required money and other non-revenue funds and the manner in which they should be allocated with a view to meeting national macroeconomic and social targets and goals.
The’ Office of Accountant General of the Federation (OAGF) issued a treasury circular in May 2017 introducing the Government Inteġrated Financial Management Information System (GIFMIS) revenue reference number for all revenue collected on behalf of MDAs for federal government through the-electronic banking platform, Remita, into the Treasury Single Account (TSA). The GIFMIS system is proven to be efficient, effective, and has increased the ability of FGN to undertake central control and monitoring of expenditure and receipts in the MDAs.
It has also enabled the ability of FGN to access information on financial and operational performance, government cash position and economic performance and also have controls to prevent and detect potential and actual fraud. The TSA is reported to save the FGN over N2Obillion monthly. The Medium Term Expenditure Framework(MTEF) indicates spending priorities of the government by reflecting efforts towards multi-year perspective in budgeting to allocate public resources among competing needs on a rolling basis over the medium term. All government spending are articulated and clearly shown in the framework.
This document is reported to allow the articulation of government expenditure on the national budget to be based on the price list issued by the Budget Office of the federation. It also allows the incurrence of only the expenditures identified in the budget.Charts of Accounts are used to monitor revenue and expenditure transactions. Different codes are identified for both revenue and expenditure. Codes identification is further broken down into recurrent and capital revenue and receipts. This has a way of preventing fraudulent practices as recurrent revenue or receipts are used to finance only the recurrent expenditures, while, capital revenue or receipts are used to finance only the capital expenditure.
Ogunmolawa writes from National Museum, Akure