CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Fraud is a global problem affecting the society as a whole. Fraud in general poses a great threat to organizations of all sizes in all parts of the world. No person or organization is immune to fraud. Fraud has been in existence for a long period of time. It is a complex problem since fraudulent activities are carried out without a trail. Fraud affects organizations through loss of funds which can lead to low amount of funds available to carryout business transactions, it can also lead to lose of customer confidence and time wasted through investigations. According to the Association of Certified Fraud Examiners (ACFE) annual fraud report, typical organizations lose 5% of its revenue to fraud each year. It is therefore important that organizations should try to minimize the chances of fraud occurring. This can be done through developing anti-fraud policies, proper internal control among others. Fraudulent activities have robbed the business community and accounting profession of much of its credibility.

Fraud is a practice that is not to be trusted, deceitful, dishonest or immoral. Fraud is the intentional, deliberate act to obtain unjust advantage Kula, Yilmaz, Kaynar, &Kaymaz (2011). For fraud to be present there needs to be a wrongdoer, a victim and a nonexistence of control or safeguards. Brody (2010) states that within occupational fraud, there are three categories: asset misappropriation, corruption and fraudulent statements. A huge size of employees in any organization is honest and straightforward. Though, businesses are currently establishing to realize and recognize the level of the danger created by the small percentage of employees who act fraudulently and deceive their company.

If the act of fraud is not arrested, it might delete the resources and performance of public institutions in Cameroon because foreign investors might not find it wise to transact business via these institutions and this will affect the institutions performance drastically.(Soares &Melo Sobrinho, 2008).  There is no question that financial fraud is a pressing concern. With billions of dollars in losses impacting on estimated tens of millions of victims, fraud is a major problem (Anderson, 2013). But the wide range of fraud prevalence estimates makes it difficult for organizations to assess the true scope and impact of the problem. Fraudulent activities in companies and institutions are experienced all over the world. A report done by the Federal Bureau of Investigation in the US stated that the most common fraudulent activities in organizations relate to computer fraud (Rennison and Rand, 2007 cited in Addington, 2008). The most recent Federal Trade Commission (FTC) survey of fraud in organizations estimated that 37.8 million incidents of fraud took place in 2011 (Anderson, 2013). Yet the FTC Consumer Sentinel Network, the database of consumer complaints, received just over 1 million organization fraud-related complaints in 2011 (FTC, 2013). According to a 2007 report of 30 countries in organization fraud, over one in ten companies have on average been a victim of fraudulent activities in the past year. Greece and Bulgaria each had unusually high rates of over 20%, and Japan had the unusually low rate of 2%. With a victimization rate of 12.5%, the United States had higher fraud prevalence than the international average.

Several causes of fraud have been identified by various researchers. According to Kanu and Okorafor (2013), causes of fraud depend on the environment. They classified the causes as Technological, Legal, Personal, Social and Management. Technological causes are those which have been made possible by the advancement in Technology. For example, frauds committed when processing Electronic Funds Transfers (EFT). Legal causes of fraud are those which enhance fraud as a result of inefficient legal system. For example, instances where a fraudster has several fraud cases pending before the court of law and still goes ahead to perpetrate other frauds. Management causes of fraud are those actions or omissions by management of organization which lead to fraud. For example, frauds committed due to weak internal control systems. Personal causes of fraud are those perpetrated by individuals who have undeveloped character due to poor upbringing. Social causes of fraud are those enhanced from poor societal values in which the society adores a rich person without checking the source of wealth.

Over the last two decades, there have increase in management fraud. Recent internal reports suggest that employee fraud is persuasive, plaguing both large and small organization alike. According to 1996 report in the Nation on occupation fraud and abuse, which cost US organizations more than $3.9 billion annually (Hillison, 1999). Furthermore, the Association of Certified Fraud Examiners (ACFE) in their survey for 2008 estimated that US companies lose 7% of their annual income to fraud, resulting in approximately $995 billion in losses (ACFE, 2008). Almost daily one can read about organizations that have been exploited in both the private and public sectors relating in embarrassing, fraudulent scheme and the loss of asset (Alleyne. et al, 2010). Not only has the incidence of fraud increased, but the dollar amounts of fraud and the number of companies being victimized have also increased (Humphrey, 1993; Hemraj, 2004). Because of this situation, a number of individuals and groups, shareholders, corporate audit committee and the securities exchange commission (SEC) are feeling the pressure of the responsibility to detect and prevent fraud. Even though auditors have been willing to accept the increased responsibility to uncover fraud, their basic training for this task needed to be developed (Alleyne, 2010, ACFE. 2008).

Moreover, in Kenya, there is increasing cases of fraudulent activities in most organizations within the country (Nichols, Bruguier and Marcos, 2006). The case of fraud in majority of these organizations is related to lack of personal finance discipline of individual employees working in these organizations. Garman, Leech and Grable, (1996) argue that personal finance behavior of employees if not positive and leads to employee stress related challenges. They purport that when employees have poor personal financial discipline, they fall pray of fraud attempts. Organizations have been faced with a lot of fraudulent activities ranging from their own staff moving funds internally to their own accounts and in some cases, staff moving funds to offshore accounts.

Also, financial fraud is a rampant phenomenon in developing economies. It is a culture where people make plans to cover up accounting records for personal gain. According to Association of Certified Fraud Examiners, 2019, the sustainability of companies become questionable when they do not have sufficient capital. This is no different from the situation in Cameroon where the majority of institutions suffers financial losses caused by poor financial treatment. Institutions like the University of Buea play crucial roles in economic development and poverty alleviation in the majority of developing economies. Yet, despite these contributions, insufficient scholarly attention has been directed towards the effects of frauds on the sustainability of such institutions. On the contrary, significant research efforts have been focused on the effects of frauds in public sector companies and government parastatals, a gap this study intends to fill.

Organizational performance is the measure of how well the organization has done the job (Stoner, Freeman &Gilberth, 1995). Increasingly, questions are being raised over the cost of funds for this enterprises and their ability to earn margin sufficient to cover their operational cost and still realise profit (Arsyad, 2005). It has been pointed out repeatedly that MFIs need to be economically viable and sustainable in the long run (Srinivasan etal. ,2006). In fact, studies have found linkages between the financial sustainability of micro finance institutions and achievement of their social objectives. Low income customers are more likely to borrow from institution they see as financially viable (Zeller et al. 2003). Fraud has remained one of micro finance biggest threat to its performance in the past years.

Fraud is a universal financial word. Its occurrence or perpetration is not limited to Cameroon. The incidence of fraud in the Cameroon public sectors has assumed an alarming proportion of late (Uzoka, 2001). With the deregulation of the banking system in the early 1980s, the pace at which institutions were established increased in an unprecedented manner. Fraud is a global phenomenon that has been in existence for long and increasing every day. Fraud is a deliberate act that causes a business or economy to suffer damages, often in the form of monetary losses. Fraud according to Adeniji,(2004) and ICAN, (2006) is an intentional act by one or more individuals among management , employees or third parties which results in a misrepresentation of the financial statement. In addition, general poverty amongst the citizenry coupled with high degree of unemployment in the larger society make survival a herculean task. Corruption and other forms of vices became easily identifiable with Cameroonians irrespective of their gender, social status and professional callings. Under this dispensation, frauds have grown in scope, nature, methodology and dimensions as the institutions advances. The rate, frequency and volume of financial losses have been a major source of concern to the regulatory agencies. Government and public statements have been issued because of these cankerworms, which has eaten the fabrics of the society. Unfortunately, the bane of society is agreed and the philosophy to get rich quick is now the order of the day. According to Nwaze, (2006), it will almost amount to an understatement to say that fraud has come to stay. It has been around since the beginning of time and would certainly continue to be an issue until the end of time. Fraud occurs in almost all facets of human endeavor. Employee dishonesty is as old as the work place itself. Fraud has assumed dimensions, albeit with increased sophistication. Hence forgeries, deceit and other unwholesome practices have continued to be a way of life and the practitioners have flourished overtime at the expense of the larger society.

Furthermore, the latest trend has advanced and some of these staff colludes with customers to defraud companies. Many businesses are increasingly losing funds through staff instigated fraud (KPMG, 2003). This happens through collusion by staff and customers and only 60% of such fraud is reported since they try to prevent negative publicity by attempting to deal with such disciplinary cases internally. Although studies have been generally conducted about fraud, in organizations, a direct linkage of study which has attempted to relate influencing factors in the context of the public sector in Cameroon has not been done. These organizations continue to suffer as a result of the fraudulent activities surrounding the (Cheptumo, 2010).  Interaction with some stakeholders of the institutions in Cameroon indicates the prevalence of occupational fraud in general and financial fraud in particular in some of these institutions. Some complained of poor accountability and transparency in the management of the resources placed at their disposal. Placing fraud in the public sector in Cameroon will help us understand the current effects of fraud on the performance in these institutions and provide a direction for how accuracy of reporting and measurement can be improved in the future. This study therefore, wishes to shed more light on the effects fraud on the performance of public institutions in Buea case of the University of Buea.

The main question guiding the study is: What is the effect of fraud on the performance of Public institutions in Buea?

The specific questions include:

1. What is the effect of Misappropriation of Assets on the performance of Public institutions in Buea?
2. What is the effect of Improper Revenue Recognition on the performance of Public institutions in Buea?

• What is the effect of Overstatement of Assets on the performance of Public institutions in Buea?

1. What measures can be taken by these institutions to mitigate fraud?

1.3 Objectives of the Study

The main objective of the study is to evaluate the extent to which fraud affects the performance of Public institutions in Buea. However, it is set to achieve the following specific objectives which are to;

1.  Determine the extent to which Misappropriation of Assets affects the performance of Public institutions in Buea.
2. Examine the extent to which Improper Revenue Recognition affects the performance of Public institutions in Buea.
3. Determine the extent to which Overstatement of Assets affects the performance of Public institutions in Buea
4. To investigate the measures used by public institutions to mitigate fraud

1.4 Hypotheses of the Study

The following null hypotheses are formulated for this study:

• Misappropriation of Assets does not significantly affect the performance of public institutions.
• Improper Revenue Recognition does not significantly affect the performance of public institutions.
• Overstatement of Assets does not significantly affect the performance of public institutions

1.5 Significance of the Study

The study would be of significance to organizations in the sense that they can use the information provided so as to understand areas that need to be monitored in reducing fraud. Management heads can use the information provided in this study to understand the major causes of fraud from employees/ fraudsters. This is a step towards initiating ways of preventing fraud from occurring.

Also, as whistle blowers, employees would benefit from this study because it offers information on how the workers can encourage a protected whistle blower system that ensures their protection after raising the red flags of fraud. An employee’s understanding of the company’s system of internal controls is extremely important for deterring fraudulent activities. The study would act as an education source material for employees on how to recognize fraud and the detrimental effects that it can have on an organization. Employee whistle blowing is the only way to detect occupational fraud. Anti-fraud training programs for employees, managers and executives organizations reduce losses and shorter-term frauds than organizations lacking such programs in place.

Furthermore, the study would also be beneficial to future researchers who would like to extent their investigations on this topic of fraud and its effects on the performance in public organizations. This study would act as a baseline research that can give them a guide on areas that require further study concerning the topic. The ideas provided in this study can give them an understanding of what it all entails in fraud and detection.