REVIEW OF RELATED LITERATURE

2.1 INTRODUCTION

This chapter reviews the literature on the effect of fraud and financial crimes on the economy of Nigeria. It discusses issues arising from the topic of discuss as viewed from different perspectives, with a view of giving a theoretical and empirical foundation to the study.

2.2 OVERVIEW OF FRAUD AND RELATED FINANCIAL CRIMES Black (1979) defines fraud as all multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated. Under common law, three elements are required to prove fraud; a material false statement made with intent to deceive (scanter), a victim’s reliance on the statement and damages. The criminal code section 380 sub-section one stated that everyone who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence with the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service. This means that fraud is criminal deception intended to financially benefit the deceiver. Edelherz-et al (1977) defines fraud as an illegal act or series of illegal acts committed by nonphysical means and by concealment or guide to obtain money or property, to avoid the payment or loss of money or property, or to obtain business or personal advantage. Also Webster’s collegiate dictionary of current English defines fraud as deceit, trickery, specifically; intentionally pervasion of truth in order to induce another to part with something of value or to surrender a legal right. Fraud is a feature of every organized culture in the world. It is a significant and growing threat to organizations. Regardless of its size, location of industry (Golden, Skalak, & Clayton, 2006). Fraud is an activity that takes place in a social setting and has severe social consequences for the economy, corporation, and individuals. Sociologists are of the opinion that some middle-range theories of fraud in Nigeria include family members-Nuclear, relative, patterns of friendship and social networks made up of friends and friends of members of social systems to which a particular individual belongs. The cultural transmission theory formulated by Sutherland (1949) holds that deviant behaviour, like non deviant behaviour, and the norms of conduct and cultural belief are products of society, that are learnt by people as members of a society or social groups in the society. With specific reference to the violations of criminal law, the theory holds that a person becomes criminal if he is exposed more frequently and for a prolonged period of time to expressions of views and attitudes favourable to criminal activities than views and attitudes unfavourable to such activities. Interaction process theory of deviant behaviour or trust violation involves a non-sharable financial problem; knowledge of how to violate; and rationalizations about the violations. Non-sharable financial problems include business failure through an unsuccessful gamble or speculation and important socio obligations such as emergency expenditure which involve the persons social status. Those who violate trust believe that they can resolve these problems secretly by violating their positions of trust, and they are confident that they have the knowledge of the technique to do so. They rationalize their behaviour not as trust violation but they were “only borrowing” and hope to pay back but something then happens which makes it impossible for them to refund what they were only borrowing. Trust violations are usually put in the position they violate precisely and they were regarded as trustworthy with other people’s money or property. The classic application of the interaction process theory of deviant behaviour is that by Gressey (1959). The study which the author believes to be a universal explanation of trust violation by individuals entrusted with funds or property has underlined three essential elements of trust violation i.e pressure, opportunity and rationalization (Merton, 1957). The three elements can be further explained thus: (i) The modes-conformist or deviant – with which the members of the different strata in the society adapt to the anomies or normless situation; (ii) the variation in the rates at which the members of different strata choose different modes of adaptation. Note that other members of the society who are excluded from access to legitimate means to success goals will experience a sense of relative deprivation which they will try to relieve in any of the following ways; Aggressive criminal behavior; Aggressive revolutionary political behavior; Retreat into psychosomatic illnesses-drug addiction, alcoholism, suicide and membership in other worldly religious sects, and Ritualism. A typical example is the so called area boys in urban centers. Ladan (2005) defines financial crime as a conduct or a malpractice or a criminal act, which is detrimental to the interest or development or well being of the financial sector of the economy which are prohibited and are punishable by the laws of the nation. Criminal behaviour as defined by Andoh (2004) is an act that violates criminal law and may therefore be followed by criminal proceedings and attracts appropriate punishment. Those who broke the law do not necessarily have to be caught to be considered as criminals; it is enough that they commit the act forbidden by law. For an act to constitute a crime there must be both mensreus (guilty act) and mensrea (guilty mind). The only exception allowed by law when both ingredients have been established against an individual, is when one is not of sound mind or is not of age of responsibility. According to Andoh (2004) some scientists and psychologists theorized that criminals are born and that most criminals inherit such genes from their forebears. Some say that is most likely for a criminal father to produce criminal children than for a straight parent to do the same. In any case it is generally accepted that people become criminally involved because of greed and peer pressure. We can summarize the making of criminal in the following: Criminal behaviour is learned; The learning process is through association with other people; The main part of the learning takes place within close personal groups; The learning techniques to carry out certain crimes and also specific attitudes and motivates conducive toward committing crimes; Learning experience different associations; this will vary in frequency and importance for each individual; The process of learning criminal behaviour is different from the learning of any other behaviour. Ezeilo (2008) stated that 78% of financial crimes are committed by employees and about 200,000 directors have had more than three (3) company failures. It was also observed that one third of the more frequently and for a prolonged period of time to expressions of views and attitudes favourable to criminal activities than views and attitudes unfavourable to such activities. Interaction process theory of deviant behaviour or trust violation involves a non-sharable financial problem; knowledge of how to violate; and rationalizations about the violations. Non-sharable financial problems include business failure through an unsuccessful gamble or speculation and important socio obligations such as emergency expenditure which involve the persons social status. Those who violate trust believe that they can resolve these problems secretly by violating their positions of trust, and they are confident that they have the knowledge of the technique to do so. They rationalize their behaviour not as trust violation but they were “only borrowing” and hope to pay back but something then happens which makes it impossible for them to refund what they were only borrowing. Trust violations are usually put in the position they violate precisely and they were regarded as trustworthy with other people’s money or property. The classic application of the interaction process theory of deviant behaviour is that by Gressey (1959). The study which the author believes to be a universal explanation of trust violation by individuals entrusted with funds or property has underlined three essential elements of trust violation i.e pressure, opportunity and rationalization (Merton, 1957). The three elements can be further explained thus: (i) The modes-conformist or deviant – with which the members of the different strata in the society adapt to the anomies or normless situation; (ii) the variation in the rates at which the members of different strata choose different modes of adaptation. Note that other members of the society who are excluded from access to legitimate means to success goals will experience a sense of relative deprivation which they will try to relieve in any of the following ways; Aggressive criminal behavior; Aggressive revolutionary political behavior; Retreat into psychosomatic illnesses-drug addiction, alcoholism, suicide and membership in other worldly religious sects, and Ritualism. A typical example is the so called area boys in urban centers. Ladan (2005) defines financial crime as a conduct or a malpractice or a criminal act, which is detrimental to the interest or development or well being of the financial sector of the economy which are prohibited and are punishable by the laws of the nation. Criminal behaviour as defined by Andoh (2004) is an act that violates criminal law and may therefore be followed by criminal proceedings and attracts appropriate punishment. Those who broke the law do not necessarily have to be caught to be considered as criminals; it is enough that they commit the act forbidden by law. For an act to constitute a crime there must be both mensreus (guilty act) and mensrea (guilty mind). The only exception allowed by law when both ingredients have been established against an individual, is when one is not of sound mind or is not of age of responsibility. According to Andoh (2004) some scientists and psychologists theorized that criminals are born and that most criminals inherit such genes from their forebears. Some say that is most likely for a criminal father to produce criminal children than for a straight parent to do the same. In any case it is generally accepted that people become criminally involved because of greed and peer pressure. We can summarize the making of criminal in the following: Criminal behaviour is learned; The learning process is through association with other people; The main part of the learning takes place within close personal groups; The learning techniques to carry out certain crimes and also specific attitudes and motivates conducive toward committing crimes; Learning experience different associations; this will vary in frequency and importance for each individual; The process of learning criminal behaviour is different from the learning of any other behaviour. Ezeilo (2008) stated that 78% of financial crimes are committed by employees and about 200,000 directors have had more than three (3) company failures. It was also observed that one third of the work force will NEVER commit acts of dishonesty no matter what their economic circumstances while two third will commit dishonest acts and vice versa depending upon their economic circumstance. This is popularly known as the one-third principle. Financial crimes victims include: Customers of the company; Investors; Suppliers; Bankers (financial institutions in general); Insurers; Government authorities, e.g. Tax fraud, stock fraud, etc.

2.3 THE IMPACT OF FRAUD AND FINANCIAL CRIMES ON ECONOMIC GROWTH AND DEVELOPMENT

In legal terms, there are five elements to a fraud: (i) “Scienter”, or knowledge of facts, events, or circumstances by one party; (ii) Misrepresentations (including non-disclosure) of that knowledge of the party in dealings with another; (iii) Reliance on those misrepresentations by the second party; (iv) An agreement, contract, or transaction between the parties which a reasonable person would not have entered into if privy to the first party’s knowledge; and (v) Harm or damage to the second party as a result. The casual factors that should be removed to deter fraud are best described as fraud triangle. The fraud triangle explains three factors that are present in every situation of fraud. (i) Motive (or pressure) – the need for committing fraud (need for money etc). (ii) Rationalization – the mindset of the fraudsters that justifies them to commit fraud; and (iii) Opportunity-the situation that enables fraud to occur (often when internal controls are weak or nonexistent). Breaking the fraud triangle is the key to fraud deterrence. Breaking the fraud triangle implies that an organization must remove one of the elements in the fraud triangle in order to reduce the likelihood of fraudulent activities. “Of the three elements, removal of opportunity is most directly affected by the system of internal controls and generally provides the most achievable route to deterrence of fraud”. (htt://en.wikipedia.org/wiki/fraud deterrence). Common personality traits of fraudsters include the following: Wheeler and dealer, Domineering/controlling, Don’t like people reviewing their work, Strong desire for personal gain, Have a “beat the system attitude”, Live beyond their means, Close relationship with customers or vendors, Unable to relax, Often have a “two good to be true” work performance, Don’t take vacation or sick time or only take leave in small amount, Often work excessive overtime, Outwardly, appear to be very trustworthy, Often display some sort of drastic change in personality or behaviour. Corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. In public companies, this type of “creative accounting” can amount to fraud and investigations are typically launched by the government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States. The Enron scandal resulted in the indictment and criminal conviction of the big five auditor Arthur Andersen on June 15, 2002. Although the conviction was overturned on May 31, 2005 by the supreme court of the United States, the firm ceased performing audits and is currently unwinding its business operations. In July, 2002, WorldCom filed for bankruptcy protection in what was considered the largest corporate insolvency ever at the time. These scandals reignited the debate over the relative merits of Untied States GAAP, which takes a “rules-based” approach to accounting, versus International Accounting standards and United Kingdom GAAP, which takes a “principles-based” approach. The financial accounting standard Board announced that it intends to introduce more principlesbased standards. More radical means of accounting reform have been proposed, but so far have very little support. The debate itself, however, overlooks the difficulties of classifying any system of knowledge, including accounting, as rules-based or principles-based. In 2005, after a scandal of insurance and mutual funds the year before, AIG was under investigation for accounting fraud. The company already lost over 45billion US dollars worth of market capitalization because of the scandal. This was the fastest decrease since the WorldCom and Enron scandals. Investigations also discovered over a billion US dollars worth of errors in accounting transactions (http:llen.wikipedia.org/wik:/accounting scandals). Since 2008, the financial institutions of the leading world economies-USA, Germany, Britain, France, China and Japan, Italy and Brazil have experienced great difficulties resulting in a huge cash crunch. Whereas Lehman Brothers was liquidated, American International Group (AIG) was too interconnected with World economics outside the united state to be left to die, but were rescued with American treasury funds. In the wake of this serious financial crisis, many mortgages could not be serviced, credit dried up for many consumer in the leading world economics. There were cases of bankruptcies, jobs were lost, and suicides were recorded. The economies in the developing countries like Nigeria were particularly vulnerable because of the dependence of many of them on western economic and financial systems. In Nigeria for example, the drop in the price of crude oil and its reduced production due to the conflict in the Niger Delta, had a telling effect on the country’s revenues and budget. The demand for goods and services was generally depressed leading to factory closures and lay-offs. The financial crisis in Nigeria is more complex to decipher. It is however, well established now that the Nigeria banking system is both corrupt and inefficient (Jibo, 2008). The highly commendable work of the Central Bank of Nigeria (CBN) governor Sanusi Lamido Sanusi has exposed the stench in the country’s banking industry. Huge unsecured loans were given by the banks; their CEOs allegedly manipulated bank books and helped themselves to customer funds. Above all, bank shares were manipulated to deceive. Things were presented from a public relation (PR) perspective and many were led to purchase bank shares which were almost worthless. While this alleged scam was on, the banks presented a polished image by maintaining an elaborate scheme of deceit. Many Nigerians were ruined by a number of banks who loaned them money to purchase their worthless shares. Bank CEOs in a number of instances criminally used their customers’ accounts to borrow money from banks under their charge (Enwegbara, 2009).

2.4 FINANCIAL FRAUD IN GOVERNMENT AND ORGANIZATION

Financial fraud in an entity can be divided into three categories: Those perpetrated by chief executives; by political office holders and; by public servants and employees of entities Fraud perpetrated by chief executive is management fraud while those perpetrated by political office holders and public servant/employees are regarded as condonable fraud and staff fraud respectively. Condonable or staff fraud can be perpetrated by circumventing internal control arrangement or by breaching internal control regulations. Condonable fraud occurs where the employee diverts the employer’s property which was given to enhance the performance of the employee (Mainoma, 2009). The use of employer’s photocopying machines and computer facilities for persona gains or benefits is an example of condonable fraud. This class of fraud is tagged condonable because any effort to eradicate it is expensive and counterproductive. In this case, the employer will condone the class of fraud and thus allow the fraud and the organization to co-exist. However, condonable frauds are difficult to eradicate but they can be minimized. Staff frauds are perpetrated by employees involved in the theft, misappropriation or embezzlement of the employer’s funds, stock of goods or other assets. The type of fraud is characterized by: Inclusion of ghost names in payroll, Over booking of hours worked and overpaying of allowances, Keeping inadequate records and therefore incurring loss, Misappropriating unclaimed wages, Pilferages of currency notes from the bundles, Misappropriation of revenues collected. The third category, leadership fraud is analogous to management fraud in the private sector and undermines the entire fabric of public accountability. Since it is mitigated from above and may be executive from outside the organization, it operates outside the internal control system (Oshisami, 1994). When it is executed within the organization, example, defalcation and misappropriations, it may be caught within the web of internal control, i.e. when this is not deliberately shifted by the leadership. Whatever the reason, it often creates problems for the internal audit and may be arrested by external audit. Some common example of management/leadership fraud includes: Fictitious transaction; Wrong project evaluation; Wrong project award; Erroneous reporting of level of project executed; Loans to relatives leading to bad debts. Audit to deter frauds differ in objectives, coverage and execution from normal audit (internal and external) and therefore require additional skills, time, thoroughness and sometimes extra audit and accounting capabilities (Oshisami, 1994 and Daniel, 1999). Part of the difficulty appears to be inadequate training and development of audit personnel in the field. For instance, internal audit personnel being trained for the detection of fraud requires to be exposed to new ways of examining books of accounts and documentation, various techniques of asset and cash survey and ascertainment, various abuses of documentation for imprest purchases, applied stores, schemes of preparing and paying ghost workers and the means of their detection.

2.5 LITERATUER REVIEW

Economic and financial crimes serve as a bane to economic development of Nigeria that has huge earning from oil. In the works of Waziri (2009), corruption afflicts virtually all parts of the Nigerian society. It has eaten deep into Nigeria value system and is now threatening to spread to the culture as public adulation for wealth has increased. The society no longer asks questions as to how people came by their questionable wealth. Okolo (2007), financial crime has become really pervasive and the likelihood of corporate fraud occurring has also become more severe. Uche (2009) asserts that high level financial abuse was hindering tax collection, making enforcement of law difficult and discouraging foreign investment. These growing financial crimes are making it difficult for Nigeria to meet her welfare and social responsibility to the citizenry. The pervasion of corruption in Nigeria has attracted criticisms from various quarters and has been widely reported. Nigeria economy was reported to have lost an estimated sum of £205 million (N105.4 billion) in tax revenues between 2005 and 2007 to the United Kingdom, the European Union and Ireland, as a result of corruption in the form of trade mispricing (Chriatain Aid, 2008; Otusanya, 2010). More so, the joint audit conducted by the central bank of Nigeria(CBN) and the Nigeria deposit insurance commission (NDIC) on the five indicted banks in 2009 revealed how corrupt practices have led to loss of huge funds in non-performing loan. It showed that the five banks had a total loan portfolio of N2.8 trillion. Aggregate of nonperforming of these loans represents 40.81 per cent of the total loans (Otusanya, 2012). With an upsurge in financial accounting fraud in the current economic scenario experienced, financial accounting fraud detection has become an emerging topic of great importance for academic, research and industries. In this age of high technology, fraud investigators can no longer be satisfied with just auditing or accounting skills, these investigators should be trained as forensic accountants and this training should include an extensive knowledge of accounting information systems (Bressler, 2006; Manning, 2005; Ramaswamy, 2005). The failure of internal auditing system of the organization in identifying the accounting frauds has led to use of specialized procedures to detect financial accounting fraud, collective known as forensic accounting (Kranacher and Stern 2004). Ojaide (2000) notes that there is an alarming increase in the number of fraud and fraudulent activities in Nigeria, requiring the visibility of forensic accounting services. Therefore, many foreign investors have lost several billions of dollars to fraudsters thereby leading to reduction or even dis-investment from Nigeria and its attendant negative consequences on economic growth and development. Appropriate legislation was enacted to criminalize all corrupt conducts including unjust enrichment. Key institutions like Independence Corrupt Practices Commission (ICPC), Economic and Financial Crime Commission (EFCC) were established to fight corruption. Ribadu (2004) asserted that corruption and economic crime cases are usually very complex and complicated. Some involve documents or subjects that are very technical requiring a wellschooled investigator to unravel. Therefore, forensic accountants are required to compliment the effort of anti – corruption agencies. Ojaide (2000) submits that there is an alarming increase in the number of fraud and fraudulent activities in Nigeria emphasizing the visibility of forensic accounting services. Okoye and Akamobi (2009),Owojori and Asaolu (2009), Izedomin and Mgbame ( 2011), Kasum (2009) have all acknowledge in their separate works, the increasing incidence of fraud and fraudulent activities in Nigeria and these studies have argued that in Nigeria, financial fraud is gradually becoming a normal way of life. As Kasum (2009) notes, the perpetuation of financial irregularities are becoming the specialty of both private and public sector in Nigeria as individual perpetrates fraud and corrupt practice according to the capacity of their office. Consequently, there is a general expectation that forensic accounting should be able to stem the tide of financial malfeasance witnessed in most sectors of the Nigerian economy. However, there has not been adequate emphasis, especially survey evidence on how forensic accounting can help curb financial crimes beyond the several anecdotal views that abound.