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FRAUD IN FINANCIAL INSTITUTION AND THE AUDITORS LIABILITY

CHAPTER ONE

 INTRODUCTION 

1.1   BACKGROUND OF THE STUDY

The problem of fraud in financial institution in Nigeria has remained one of the disturbing features of the banking sector.  The menace is of the great concern to regulatory authorities the government and the general public because financial institutions are the central of modern economy, the place of people wealth and supplier of credit, which lubricates the engine of growth of the entire economy.

According to Phil Britt 2010, banking fraud is as old as the industry itself, and it continuous to  be one of the larges expenses faced by many financial institution, then according to Virginia Garcia, research director for Needham, mass-based Tower group estimates that 30 percent to 50 percent of the industry’s and 55billion in annual operating losses is attributes to fraud.

According to Haris Chairman of Passmark security in Redwood city clif (2011).  The banking industry has spent the past year and a half determining what is the biggest problem phishing, pharming and Bust-out, he says that banks are using a greater array of information and multifactor analysis to lock down system when fraud schemes are detected, user names and passwords, should be supported in internet banking transaction with new and better ways of authenticating genuine customers and indentifying fraud artists trying to take over banks accounts, according to the summer update on identity theft from the federation deposit insurance corporation.

According to the federation trade commission (2010 August Second pg 13) fighting an almost up heard of term only three year ago, is the top internet fraud scheme.  Large national banks such as Citicorp and bank of America are among the most fighting financial institutions.  Banks have been on the alert for fighting scans for nearly two years.  They post information on their web sites warning customer about the dangers of fighting and notifying them that the financial institution itself will not seek customer identification information via-e-mail.

Then the federal Trade Commission (2011 August Second pg 13) also opined about pharming which involves a criminal infecting a PC or Domain name system DNS serve to redirect a user’s web browser automatically to a mirror site that looks like a financial institutions legitimate website, complete with account links, including ones asking for user names, passwords, and other sensitive customer data.

The third one is bust-out which penetrators wait their banks, the use stolen ID information to “bust-out” with an auto loan.  Garcia says that data management is critical for banks taking a holistic approach.  So banks are employing technologies that gather data in real time, cleans it and combine it with information from other systems.  “Those data that approach fraud management as a mandate to protect their reputation and built customer trust will also improve operational efficiencies and see significant pay back to their bottom lien through reduction of losses.

The Federal Bureau of Investigation (FBI) investigates matter relating to fraud, theft, or embezzlement occurring with or against the national and international financial community.  These crimes are characterized by deceit, concealment or violation of trust, which are not dependent upon the application of physical force or violence. Such acts are committed by individuals and organization to obtain personal or business advantage.  The FBI focuses its financial crimes investigations on such criminal activities as corporate fraud, healthcare fraud, mortgage fraud, identify theft, insurance fraud, mass marketing fraud, and money laundering. Financial crimes section (FCs) of the FBI has the mission to investigation financial fraud and to facilitate the forfeiture of assets from those engaging in federal crimes.  The FCs has four units, the economic crimes unit, health care, fraud unit, financial institution fraud unit and the asset forfeiture unit.

The economic crimes units are responsible from significant frauds target against individual businesses and industries to includes: corporate fraud, mass marketing fraud, telemarketing, and pyramid schemes.

The financial institution fraud unit is to identify, target, disrupt and dismantle criminal organizations and individuals engage fraud schemes which target our nation for institutions.  Areas investigated in the financial institution fraud include; financial institution failures, insider fraud, check fraud, counterfeit negotiable instruments, check kiting, loan fraud and mortgage fraud.

In 2010, Association of certified Fraud Examiner (ACFE) estimated that fire percent of annual revenue was lost due to fraud.  Applying this five percent to the estimated 2010.  Gross domestic product would translate to approximately and 652 billion in fraud losses.  Other findings including tips which uncovered fourty four percent of the million dollar fraud which was more than twice the rate of best position to witness violation, questionable ethical standards.  After tips, the next most frequent detection of fraud was by accident 36.3 percent of small business cases were discovered by accident versus 25.5 percent for all case combined.  The percentage of fraud detection by tips was 32.2 percent for small business and 34.2 percent for small business and 34.2 percent for all cases .  small business suffer disproportionate fraud losses. Based on number of employees, the media loss for small organization. (Fewer than 100 employers) was $190,000 and the median loss of largest organization was 150,000%.  Frauds committed by owners or executives caused a median loss of $1million.

Provisions in the Companies and Allied Matter Decree (CAMA) directly relevant to this study are those relating to the role of auditors and the duty of the companies to keep proper statement accounts section 257(1) of CAMA establishes the important duty, for every company to appoint on external, auditor and to empower him to audit the financial statements of that company.  These auditors are then empowered to carryout such investigations as are necessary to facilitate proper discharge of their duties.  Section 334 of CAMD imposes the duty on directors of companies to prepare financial statements, section 33 (2) of the same law stipulates that the duty on companies to keep accounting records shall be discharge when the records are “sufficient to show and shall be such as to disclose with reasonable accuracy, at anytime, the financial position of the company”. Section 33(3) penalizes the breach of this statutory duty and imposes a term of 6months imprisonment or N500 fine upon conviction.

From the forgoing, it can be seen that most case of fraud in financial institution whether the huge, medium, or small scale would not have been possible without a complete disregard of professional ethics and non-compliance with legal and financial provision against fraud.

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