CHAPTER ONE
1.1
Background To The Study
The Institute of Internal Auditors
(IIA) (2001) defines fraud as "an array of irregularities and illegal acts
characterized by intentional deception". Turner (in Elliot &
Willingham, 1980:97) and Robertson (2002:5) define fraud more broadly as
"all means that human ingenuity can devise, and which are resorted to by
an individual to get an advantage over another by false suggestions or
suppression of the truth". This type of fraud includes surprises, tricks,
cunning, dissembling and any other unfair way by which another person is cheated.
The definition of financial statement fraud is essentially the same as that of
fraud, apart from a few additional aspects. The International Standard of
Auditing (lSA) 240 (IAASB, 2007:272) defines corporate fraud as "an
intentional act by one or more individuals among management, those charged with
governance, employees or third parties, involving the use of deception to obtain
an unjust or illegal advantage". Financial statement fraud is thus fraud
committed by the management of an organization with the goal to artificially
improve the financial performance and results of the company as stated in the
financial statements. This is done most often by means of overstating assets
and revenue or understating liabilities and expenses. Financial statement fraud
must be clearly distinguished from non-fraudulent earnings management and
accounting errors. Non-fraudulent earnings management takes place when a legitimate
generally accepted accounting practice (GAAP) method is applied, but only
because it has a favorable impact on the financial statements (Rezaee, 2002).
An example is a company's management decision to use certain inventory
valuation or depreciation methods. Such practices must, however, also be looked
upon critically, as it can lead to greater accounting risk in the financial
statements of a company. Accounting risk refers to the increased risk of a
company's management perpetrating financial statement fraud at some stage in
the future to improve the appearance of financial performance and position. The
research therefore seek to investigate Effects
of firm characteristics on financial statement fraud –A case study of Total plc.
1.2 Statement of the Problem
Financial statement fraud has larger
implications than many managers realize. For many, it is only a means to
improve results, but apart from harming the company in which it is being perpetrated,
it can also affect economic markets.
Rezaee (2002:7) gives the following
summary of the potential harmful effects of financial statement fraud: it
undermines the quality and integrity of the financial reporting process; it jeopardizes
the integrity and objectivity of the accounting profession; it diminishes the
confidence of capital markets and market participants in the reliability of financial
information; it makes the capital market less efficient; it adversely affects a
nation's growth and prosperity; it may result in litigation losses; it destroys
the careers of individuals involved in the fraud; it causes bankruptcy or economic losses by the
company engaged in the fraud; it
encourages a higher level of regulatory intervention; and it causes
destructions to the normal operations and performance of the alleged companies.
At least for the above reasons, it is necessary to attempt the prevention of
fraud incidences. A profile that is developed to analyse a company's character
and situation can help interested parties in a proactive way to protect their
interests.
The problem confronting the
research is to determine the effect of firm
characteristics on financial statement fraud –A case study of Total plc.
1.2
Objectives of the Study
1. To
examine the social factors that cause financial statement fraud.
2. To
investigate the effects of firm characteristics on financial statement fraud.
1.3
Research Questions
1.
What are the social factors that cause financial statement fraud?
2.
What are the effects of firm characteristics on financial
statement fraud?
1.4
Significance of the Study
The study elucidates on the
Effects of firm characteristics on financial statement fraud –A
case study of Total plc.
Financial statement fraud has larger
implications than many managers realize. For many, it is only a means to
improve results, but apart from harming the company in which it is being
perpetrated, it can also affect economic markets.
1.5
Research Hypothesis
Ho: The Effects of firm characteristics on financial statement fraud in
Total plc. is low.
Hi: The Effects of firm
characteristics on financial statement fraud in Total plc. is high.
1.6
Scope of the Study
The study focuses on the
appraisal of the Effects of firm
characteristics on financial statement fraud –A case study of Total plc in Uyo
Metropolis.
1.7
Limitations of the Study
The study was confronted by some constraints including logistics
and geographical factor.
1.8 Definition of Terms
FRAUD
The Institute of Internal Auditors
(IIA) (2001) defines fraud as "an array of irregularities and illegal acts
characterized by intentional deception". Turner (in Elliot &
Willingham, 1980:97) and Robertson (2002:5) define fraud more broadly as
"all means that human ingenuity can devise, and which are resorted to by
an individual to get an advantage over another by false suggestions or
suppression of the truth". This type of fraud includes surprises, tricks,
cunning, dissembling and any other unfair way by which another person is
cheated.
FINANCIAL STATEMENT FRAUD
The International Standard of Auditing
(lSA) 240 (IAASB, 2007:272) defines corporate fraud as "an intentional act
by one or more individuals among management, those charged with governance,
employees or third parties, involving the use of deception to obtain an unjust
or illegal advantage". Financial statement fraud is thus fraud committed
by the management of an organization with the goal to artificially improve the
financial performance and results of the company as stated in the financial
statements.
References
Elliot, R.K. & Willingham, J.J.
1980. Management fraud: detection and
deterrence. New York: Petro celli Books.
Ernst & Young South Africa. 2003.
Fraud risk and prevention.
Rezaee, Z. 2002. Financial statement fraud: prevention and
detection. New York: John Wiley.
Robertson, J.C. 2002. Fraud examination for managers and auditors.
4th Edition. Austin, Texas: