The effect of consistent fraudulent practices on banks financial performance

CHAPTER ONE

INTRODUCTION

1.1 Background of Study

Modern organizations are constantly surrounded with fraud from sources both internal and external sources. Research shows that there is not a single financial organization that is immune to fraud, and that the typical organization loses 5-7% of its annual revenues to fraud. (Samociuk,Iyer&Doody 2010, 11). Even though frauds perpetrated by external sources can be quite serious, however, most notable frauds in organizations are usually the handiwork of the organizations’ members. A chronicle of most fraud cases in organization as explained by Moses (2019). Bringing to the knowledge of the people about financial statement fraud and diversion of resources of enterprise has taken a centre stage by many researchers in the recent past (Aburime, 2012). Previously, incidence of financial statement frauds have risen greatly, (Rezaee, 2005). In the years past, fraud has gone up systematically both on frequency of occurrence and magnitude of losses. Frauds in financial dealings affect those that own the business, lenders and people that the business owes including the workers of the firm. As a result, those who do business with those enterprises express loss of confidence in financial information (Khanh, 2010).

Other scholars and writers like Everette (2012), Kanu and Okorafor (2013), Odunayo (2014) all concurred that the purpose of financial statement fraud more often than not speak about earning supervision, cash flow adjustment and sudden significant sales which stem on fictitious revenue, concealed expenses, third party related transactions and improper valuation of assets. Arakumar (2015) observe that financial reporting fraud appears in various ways, he further maintain that regular attempt in advancing financial statement involves: over reporting income, understanding expenses and liabilities, timing differences, incorrect valuation of assets and third party related transactions.

Everette (2012), Odunayo (2014) gave analytical review of tracing the “red flag‟ as the most powerful techniques of tracing any anomalies in the financial statement. Athur(2014) and Arunkumar (2015) explained analytical review method as comparing the current period with the prior period, compare income statement and cash flow. The role of financial statement fraud on the output and growth of banking firms in Nigeria has raised a lot of concerns, despite the fact that most of all these financial statements are audited by registered accountants in Nigeria; managements have always find loopholes inperpetrating financial statement fraud.

Eze and Ogiji cited (Libiano 2006) defined banking firms as the bedrock of increases in productive sector of an economy. Adebayo (2011) refers to this sector as industries involved in creating new commoditiesor adding values to the one already produced. Oghogho et al (2013) recounted that before Companies and Allied Matters Acts of 1900, there were no statutory arrangements for the mandatory Audit of an organization’s monetary proclamation. The same number of organizations, understanding the need for ensuring the enthusiasm of the contributing open, they embedded a statement in their Article of Association, for the readiness of Annual review by a free people. There are different definitions of financial information manipulation. Financial information manipulation in this context is misreporting, in other words intentional fraudulent financial reporting. Fraudulent financial reporting is the violation of accounting standards, the omission of existing amounts or the inclusion of fictitious amounts (Arens & Loebbecke, 2000). Financial information may have few errors in financial statements. If these errors are significant important so they should be corrected otherwise errors may be called fraud. In our study we will focus on fraudulent in the financial statements and manipulated financial information. Manipulated financial information sends false signals to users of the financial information and results to make irrational decision on economy especially for investments. In order to prevent the fraudulent in the financial statement some measures should be taken. Fraud detection is very costly and is impossible to detect all frauds. Sound Financial health of a bank is the guarantee not only to its depositors but is equally significant for the shareholders, employees and whole economy as well. As a sequel to this maximum efforts have been made from time to time, to measure the financial position of each bank and manage it efficiently and effectively. The purpose of CAMELS rating (Capital adequacy, Asset quality, Management quality, Earnings, Liquidity and Sensitivity to system risk) is to determine a bank’s overall condition and to identify its strengths and weaknesses in Financial, Operational and Managerial aspects. Despite the use of CAMEL Model by regulators to assess financial performance of banks, inefficiencies in performance have been experienced. Some countries have shifted to other Models like EAGLES (Earning ability, Asset quality, Growth, Liquidity, Equity and Strategy) (Hales, 2005). Financial performance is a measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firms’ overall financial health over a given period of time and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation (Hales, 2005). Though it appears the banking industry is one of the most profitable within the economy, higher performance could have been attained in terms of them performing a leading role in the re-activation of our economy, creation of wealth to her shareholders and rendition of social obligations to the larger society.

1.2 Problem Statement

Growing cases of fraud and cyber-crime mean that financial institutions need to urgently invest in detection and preventive mechanisms as today’s fraudsters are increasingly sophisticated (BFID, 2012). A number of studies have been carried out in the area of fraud. Notable works include that of financial institutions training centre, Lagos (FITC: 2005).Worried about why people commit fraud Cressey carried out a study in which he interviewed some 200 embezzlers imprisoned and came out with the conclusion that every fraud had 3 things in common namely: pressure (sometimes referred to as motivation, or incentive), rationalisation (that is, reasons to justify), and knowledge and opportunity to commit the crime Cressey (1953) identified that pressure may come to bear on management or any staff to commit fraud because of insatiable greed, habits (such as drugs, women, and gambling), and psychosis.

It is on this basis that this research seeks to examine the effect of consistent fraudulent practices on banks (MFI) financial performance, identify how incorrect asset valuation affects the financial statements and know how deception in financial statement

1.3 Research Question

– What effect does Financial fraud has on the financial performance of MFI in Buea?

– What is the effect of fictitious revenue on Micro Financial Institutions in Buea?

– How does incorrect asset valuation affect the financial performance of banking industry?

– Could improper expense recognition aid Accounting fraud in banking firms in MFI Buea ?

1.4 Research Objectives

The general objective of this study is to evaluate the effect of accounting fraud on financial performance of MFI in Molyko Buea.

– However, the specific objectives are as follows

– Ascertain the effect of fictitious revenue on financial performance of MFI. Determine the extent to which incorrect asset valuation affect the financial performance of the MFIs in Buea.

– Ascertain how improper expense recognition aid Accounting fraud in Micro Finance in Buea.