1.0 INTRODUCTION
The incidence of fraud and fraudulent practices in our society and
business organizations, in particular, has become a source of worry. In this note,
you shall learn the concept of fraud, and distinguish between fraud and errors.
The categories of fraud, fraud detection and prevention in
selected accounts
will also be taught.
2.0 OBJECTIVES
At the end of this note, you should be able to:
· define fraud
· distinguish fraud from errors
· describe the categories of fraud
· explain fraudulent acts in selected accounts.
3.0
MAIN CONTENT
3.1
Meaning of Fraud
The term “fraud” can
be used for several sins and offences including:
(a) fraud, which involves the use of deception
to obtain an unjust or illegal financial
advantage.
(b) intentional misstatements in, or omissions
of amounts or disclosures from an
entry’s accounting records or financial statements.
(c) theft, whether or not accompanied by misstatements
of accounting records or financial
statements.
Fraud can be defined
as ‘misrepresentation by a person of a material fact known by that person to be untrue or made
with reckless indifference as to whether the fact is true, with the intention of
deceiving the other party and with the
result that the other party is injured’.
3.2
Categories of Fraud
Frauds can be
classified under two categories, namely:
(a) management fraud
(b) non-management
fraud
3.2.1
Management Fraud
This type of fraud
occurs when the top management of an organization deceives shareholders, creditors and external
auditors for the purpose of issuing
misleading financial statements. The situations which give room for management frauds to occur are as
follows.
(i) Affairs of the business
are dominated by one man;
(ii) Lack of
sufficient competent staff to run the accounts department;
(iii) Weakness in the
internal control system;
(iv) Related party
transactions, this is, transactions between the firm’s management and its
officers; (v) When the board of
directors do not get effectively involved in the supervision of the affairs of the
organization.
3.2.2
Non-Management Frauds
These types of fraud
are rampant in the day-to-day affairs of the
business, and they include the following:
(a) defalcations
(b) embezzlement
(c) erasures
(d) alterations
(e) errors
· original
errors
· errors
of omission
· errors
of principle
· errors
of commission
Non-management fraud
may occur either in the form of
misappropriation of
cash or goods or manipulation of accounts without direct misappropriation.
Please note the
following explanations on the items identified under non-management frauds.
(a)
Defalcation
This is defined as
the act or instance of embezzling, and is caused by non-segregation of duties. Areas in which
defalcation could occur include:
(i) if the chief
cashier cashes a debtor’s cheque and fails to record the receipt;
(ii) assets and goods
may be intercepted and may not be on record;
(iii) assets may also
be taken out after they have been properly
recorded.
These circumstances
will lead to either temporary or permanent
concealment.
(b)
Embezzlement
This speaks of the
act of appropriating money fraudulently to one’s own use.
(c)
Erasures
This refers to the
act of instant erasing from the books of records.
(d)
Alterations
This means the act or
process of alteration or modification to defraud the employer.
(e)
Errors
Errors are defined as
the act of ignorance or imprudent deviation from a code or usual practice. Errors are
sub-divided into four categories as listed
earlier:
(i)
Original errors – errors emanating from the original or source document. They are made in copying the source
document into the books of original
entry.
(ii) Errors of omission – errors
made when the whole documents or transactions
are completely omitted or overlooked from the
record.
(iii)
Errors of principle – these can occur when the recording clerk fails to abide by the rules of double entry
system or where item of expense is
treated as revenue or where revenue is treated as capital.
(iv)
Errors of commission – these occur when one fails to perform his or her duty. These errors are common in
everyday activities
of the business.
3.3
Fraud Detection and Prevention in Selected Accounts
Here, we shall
highlight the different accounts and the most frequent frauds associated with them.
The list is not
exhaustive.
(a)
Salaries and wages
· Ghost/dummy/fictitious
names
· Overstatement
of gross pay
· Time
card fraud
· Understatement
of deductions
(b)
Sales
· Teeming
and lading
· Understatement
of sales invoices
· Misappropriation
of cash as a result of delays in banking
(c)
Purchases
· Submission
of false invoices
· False
charges from suppliers
· Unauthorized
purchases and payment
(d)
Petty cash
· Overloading
of receipts
· Fake
invoices
· Corroboration
with the cashier
(e) Fixed assets
· Theft
· Misappropriation
· Manipulation
of records
· Private
use of company assets
These fraudulent acts
can be prevented where:
(i) adequate
precautionary measures are adopted by the internal auditor to strengthen the internal control of
the organization;
(ii) there are
adequate checks on the system;
(iii) there are
separation of duties.
4.0
CONCLUSION
In this note, you
have learnt that the prevalence of fraud in organizations is very disturbing. Emphasis should be placed
on having strong internal control system
on ground in order to quickly detect and prevent fraudulent acts. The internal auditors should
be alive to their responsibilities.
5.0
SUMMARY
In this note, you
have learnt the following:
· Definition
of fraud as misrepresentation by a person of a material fact known by that person to be untrue or made
with reckless indifference as to whether
the fact is true, with the intention of deceiving
the other party and with the result that the other party is injured;
· Categorising
fraud (with explanations) into management and non management fraud. Non-management fraud include:
defalcations, embezzlement, erasures,
alterations and errors;
· Describing
the different accounts (selected) and the most frequent fraud associated with them.
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