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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 4, NO 7

THE IMPLICATION OF OCCUPATIONAL FRAUD AND FINANCIAL
ABUSE ON THE PERFORMANCE OF COMPANIES IN NIGERIA
Sunday O. Effiok1, Cornelius M. Ojong2, Obal U. E. Usang3
1.Department of Accounting, Faculty of Management Sciences, University of Calabar, P.M.B. 1115,
Calabar, Cross River State - Nigeria , Tel: +2347067052400
2.Department of Banking and Finance, Faculty of Management Sciences, University of Calabar, P.M.B.
1115, Calabar, Cross River State - Nigeria
3.Department of Accounting, Faculty of Management Sciences, University of Calabar, P.M.B. 1115,
Calabar, Cross River State - Nigeria

Abstract
This study examined the implication of occupational fraud and financial abuse on the
performance of Nigeria companies. The question of fraudulent behavior falls squarely within the
area that psychologist refer to variously as psychopathic behavior, antisocial behavior,
sociopathic behavior, dys-social behavior, etc. The crux of the problem lies in the three Ms of
financial reporting fraud (i.e. financial manipulation, financial misrepresentation and intentional
misapplication). The study made used of an ex-post research design and data were collected from
both primary and secondary sources and analyzed using the Ordinary Least Square (OLS)
method. The study revealed that occupational fraud and financial abuse does significantly affect
the performance of Nigerian companies. Conclusively, it is clear that in the post-Sarbanes-Oxley
world, transparency is demanded from donors, regulators, and constituents. The public expects,
and has a right to expect, companies to have sound internal controls that ensure resources are
appropriately maintained, managed and distributed. To convince the public that they are getting a
true and accurate financial picture, reporting is changing and becoming more specific.
Understanding what fraud is, and how it occurs, is the first step to detection and prevention
within a company. The study recommended that companies that adopt stricter controls and
monitoring and have a better understanding of their financial situation are less likely to
experience fraud than their counterparts who do not take these steps.
Keywords: FINANCIAL MANIPULATION, FINANCIAL MISREPRESENTATION,
INTENTIONAL MISAPPLICATION, FINANCIAL ABUSE
1.0 Introduction
The headline-grabbing accounting failures of the early 21st Century-Enron, Worldcom,
Adephia, Tyco and many others to come-would be reason enough to study the serious issue of
fraud. (Wells 2007). But these methods are not new; there are merely variations of tried and true
scams. (Thomas 2002).
White-collar crime has been called a type of crime by the advantaged. According to
Herbert Stern, (1973), Sutherland, (1949). Crime is the most lucrative business in the world.... I
speak now not only of the crimes in the streets, the burglaries and the robberies which represent
tens of billions of dollars each years; I speak of the crime which we call White-collar-the
crimes committed by advantage; the crimes committed with pen and pencil, not with gun or
jimmy; under the bright lights of the Chief Executive Offices, not by stealth in the dark.
According to Transparency International (TI) fraud is an international phenomenon
touching all countries in the world. Transparency International (TI) is a global network including
more than 90 locally established national chapters and chapters-in-formation, whose goal is to
fight corruption in the national arena. TI produces a transparency International corruption
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perception index (CPI), which ranks more than 150 countries by the perceived levels of
corruption, as determined by expert assessment and opinion surveys, for example, the 2006
Index ranks the United States 20th, tied with Chile and Belgium. TI defines corruption as the
abuse of entrusted power for private gain. It hurts everyone whose life, livelihood, or happiness
depends on the integrity of people in a position of authority. Certainly financial statement fraud
falls under this definition of corruption.
From the foregone extract, it becomes conclusive that the problem of fraud in business,
industry and government ha assumed immense proportions with the increasing breath and
complexity of the operations of various sectors. Even (Mathews and Perera, 1996) in their
contribution to the concept of creative accounting opined that creative accounting has positive
effect if it enhances the development of accounting practices and negative when it is meant to
mislead and defraud investors, bankers and other users of financial statements.
To corroborate the opinion of Mathews and Perera, (Banks 2004) categorized the
behavior of financial statement preparers thus:
i.

When preparers become aware of a proposal to alter accounting regulation in a way that they feel
will be disadvantageous to them, they may engage in lobbying to attempt to prevent the
change. They attempt to bring about an alternative depiction of economic reality which is
more favorable to them. In this paper, this type of behavior is described as macromanipulation. (Blount, 2003).

ii. Creative accounting at an individual entity level involves preparers in altering accounting
disclosures so as to create the view of reality that they wish to have communicated to
users of the financial statements. This type of behavior is described in this paper as
micro-manipulation. (Rezaee, 2002). In both cases, it is obvious that the preparers are
interested in building the financial statements to suit their purposes. (Silver, Howard
and Sheetz, 2004).
Nigeria is not isolated from the growing wave of financial fraud. A report of creative
accounting scandal in Africa Petroleum PLC slated for privatization in 2001 showed that the
financial statements of the company did not fairly present the companys financial position. A
number of transactions, including substantial loans, were omitted from the financial statements.
These facts were discovered when due diligence audit was done preparatory to privatizing the
company (Oyejide and Soyibo, 2001). In November 2006, an accounting scandal in Cadbury
Nigeria Plc also raised more questions than answers about creative accounting. An independent
investigation of the companys financial statements confirmed a significant and deliberate
overstatement of the companys financial position over a number of years. This compelled the
company to reduce its reserve by making a one-time exceptional charge in 2006 of between N13
billion and N15 billion (Itsueli, 2006).
1.1 Statement of problem
The question of fraudulent behavior falls squarely within the area that psychologist refer
to variously as psychopathic behavior, antisocial behavior, sociopathic behavior, dys-social
behavior, etc. The crux of the problem lies in what Hilzenrath, (2002) describe as the three Ms
of financial reporting fraud. These are:

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i.

Manipulation, falsification, or alternation of accounting records or supporting documents from

which financial statements are prepared;
ii. Misrepresentation in or intentional omission from the financial statements of events, transactions,
or other significant information; and
iii. Intentional misapplication of accounting principles relating to amounts, classification, manner of
presentation, or disclosure.

Most fraudulent schemes touching financial reporting should fit into one of these three
categories.
1.2 Objectives of the research
The broad objective of the research is to examine the implication of occupational fraud
and financial abuse on the performance of a company. The specific objectives therefore include:
i. To examine the extent to which financial manipulation impacts on the performance of a company.
ii. To assess the extent to which financial misrepresentation affect organizational performance.
iii. To examine how intentional misapplication of accounting principles can impact on financial
performance of a company.

1.3 Research questions

i. To what extent can financial manipulation impact on the performance of a company?
ii. How can financial misrepresentation affect organizational performance?
iii. To what extent can intentional misapplication of accounting principles impact on the financial
performance of an organization?

1.4 Research hypotheses

i.

There is no significant relationship between financial manipulation and the performance of a

company.
ii. Financial misrepresentation does not affect organization performance.
iii. Intentional misapplication of accounting principles does not affect financial performance of a
company.

2.0 Literature Review and Theoretical Framework

2.1 Theoretical framework
2.1.1 Sociological theory of fraud (Clarke, 1990)
Fraud is a crime and it is important to remember that the concept of what constitutes a
crime is constantly being adapted to meet the particular needs of any society. There may be some
constant concepts in all societies such as respect for property, life and sexual rights and in all the
auditing sector, respect for free and fair view reports, the client etc. Most people are capable of
committing a crime in sudden anger, drunkenness or as a result of stress and they may be little
than we can, to prevent isolated acts by individuals, ODonnell (1974). However, if it can be
ascertained that certain groups or certain individuals are more likely than others to commit
crime, then they may be the likelihood to reduce the amount of crimes by removing the factors
which predisposed these individuals or groups towards criminal acts and motivation. He thus

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suggests that there are predisposing factors of crimes and there are the participating factors
which trigger off tendencies for fraud and criminal motives in groups or individuals concerned.
Crime and criminal motives are a part of a normal social order in that it can be an
expression of the same motivations that give rise to accepted behavior, Oluwadare (1993). He
stated that the embezzler, the fraudster and the law abiding storekeeper are concerned with
making money. One makes money into his private pocket (egoism) and the other making the
money for the organization (altruism). Thus Durkham, one of the founders of sociology argued
that crime is an integral part of all healthy societies.
2.1.2 Psychology/Physiological theory
Oluwadare, (1993) posited that these are explanation by some scholars that crime is a
personal rather than a social problem. That this approach varies from those who believe that
some people are innately wicked to those who hold the view that there is genetic cause for
criminality connected with the endocrine glands.
Lombrose (1876), believe that criminality was inborn because after he examined the skull
of notorious bandit and found characteristics which he believed to be result of a throw back to
an earlier evolutionary type. He concluded that there was a criminal type which resulted in
insensible to pain, extremely acute sight, love of orgies, irresistible caring for evil for its own
sake etc. Rosenthal (1972) in his support for this theory suggested a possible link with crime
while quoting studies of twins shared crime traits at a rate more than double of that of non
identical twins.
2.1.3 Ethical judgment
Velayutham (2003) explains that professions need a code of ethics to reassure the public
and clients of their members responsibilities and thereby maintain members integrity and
reputations. The Code identifies the objectives of the accountancy profession as working to the
highest standards of professionalism, attaining the highest levels of performance and meeting its
responsibility to the public. To achieve these objectives, members have to observe a number of
fundamental principles: integrity, objectivity, professional competence and due care,
confidentiality, professional behaviour and compliance with technical standards. Velayutham
(2003) separates the principles in the Code into two categories: those principles that establish the
character and moral responsibility of the members of the profession and those principles that
establish the characteristics of professional behaviour and the requirement to comply with
technical standards. Velayutham (2003) challenges the ability of the Code to establish the moral
responsibility of the profession. Velayutham (2003) contends that the Code focuses primarily on
the quality of the service provided by accountants and auditors and not on ethics. He suggests
that the principles of professional behaviour and compliance with technical standards are not
ethical principles, because their compliance depends on law-like statements and quality standards
that do not allow for autonomous decision-making. In Velayuthams (2003) opinion, only the
principles that focus on character and moral responsibility are ethical principles. In addition, the
requirement that auditors evaluate whether financial statements fairly present the underlying
transactions and events in terms of statements of GAAP has shifted the focus of the Code from
ethics to quality (Velayutham 2003). Schlachter (1990) suggests that ethical judgement is a
function of the Code and of the written and unwritten organisational policies that govern
members contacts with colleagues, clients and third parties. Francis (1990), on the other hand,
states that accountants own moral agency is involved in the production and creation of
accounting reports. Elias (2002) investigates how members of the accounting profession view
aggressive earnings behaviour and he concludes that highly idealistic members judge Rabin
(2005), earnings management more harshly than less idealistic members do. In this context,

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idealism is defined as an individuals attitudes towards the consequences of an action, and how
these consequences affect the welfare of others. In summary, auditors ethical judgments are
formed by the provisions of the Code, organizational policies governing ethics and individuals
own moral agency. Ethical judgment is fundamental to auditors in forming an opinion as to
whether financial statements fairly present the financial position, results of operations and cash
flows of an entity and is distinct from compliance with statements of GAAP.
Other theories that seriously backup the concept of creative accounting include the
agency theory by Meckling and Jensen (1976) market efficiency theory by Taffler (1995), ethical
theory by Revseine (1991), Roland (1984) and stakeholder theory by Freeman (1983). Some of
these theories appear extant but are very relevant to the study.
2.2 Means and schemes of financial reporting fraud
Three ms of financial reporting fraud:
These are:
i.

Manipulation, falsification, or alternation of accounting records or supporting documents from

which financial statements are prepared;
ii. Misrepresentation in our intentional omission from the financial statements of events,
transactions, or other significant information; and
iii. Intentional misapplication of accounting principles relating to amounts, classification, manner of
presentation, or disclosure. Hilzenrath, (2002).

Most fraudulent schemes touching financial reporting should fit into one of these three
categories.
2.2.1 Abusive schemes involving fraudulent financial reporting
Fraudulent financial statements compose a small percentage of fraud schemes but pack a
major economic wallop for investors and employees. Typically, fraudulent statement schemes
are presented with the knowledge of-if not the support of-top corporate executives. Because the
Enron Corporation committed so many types of fraudulent financial reporting (as well as its
other misdeeds), its financial and earnings management offer classic examples of abuse toward
investors and employees that earmark fraud in SEC filings.
In the late 1990s, Professor Bonner, Palmrose, and Young analyze SEC enforcement
releases to determine common types of fraud involving accounting and auditing schemes. The
types of rule-bending and breaking the professors gleaned from the release reveal creatively
devious ways to mask bad news and fool investors and authorities about the real state of
company finances. Major fraud types are described here.
2.3 Fictitious or overstated revenues and assets
Fraudsters use any of multiple methods to create fictitious revenues or assets in order to
inflate income on financial statements. A slightly different approach is simply to overstate
income-either by using mark-to-market accounting to make records of (future) income
flexible.

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One type of overstated-income scheme is the bill-and-hold transaction. The customer

agrees to purchase goods and the seller invoices the customer but retains physical possession of
the products until a later delivery date. Not all such transactions involve fraud, but the practice
must be closely examined in light of accounting rules because it is open to abuse. Fraudsters may
use this approach to count both sales and inventory on hand as revenue producers. Maremont,
(2003).
2.4 Fictitious Reductions of Expenses and Liabilities
Perpetrators improve the bottom line on financial statements using unscrupulous
approaches-fictitious reductions of expenses and liabilities-to mask a corporations true losses or
debt. Common approaches to such reductions include the burial of deals likely to generate losses
in derivative instruments whose creation does not require an initial cash outflow so their creation
does not appear on the books.
Despite rules for futures contracts in FASB statement N0. 80, which requires recognition
of market value changes in futures contracts when the effects for the hedged items are
recognized, unscrupulous officers have used these instruments to report deferred losses as assets.
Green, (2003).
2.5 Premature Revenue Recognition
Premature revenue recognition is a means of recording income as actual order to inflate
earnings totals when sales have been completed, the products delivered, or invoices paid. In
general, revenue from products sales should not be recognized on financial statements until it has
been realized or realizable and earned. Based on the provisions of SAB 101, income should not
be recognized under these circumstances because delivery has not actually occurred.
Customers on the other side of early delivery schemes often return the unfinished product
or demand more completion before payment is rendered.
Many abusers record and recognize revenue whose receipt is contingent on the
completion of a contract. Too many side agreements may indicate premature revenue
recognition, bill-and-hold schemes, and channel stuffing.
Premature revenue recognition is a key ingredient when fraudsters cook the books. It is
the number one reason that corporations must restate financial statements. Magrath, (2002).
2.6 Misclassified Revenues and Assets (Perry, 2002)
Securities investments have been widely misclassified by fraudulent corporate chiefs.
GAAP requires investments of debt securities (such as bonds) to be classified as trading, held to
maturity, or available for sale. Investments may be classified as held to maturity only if the
holder intends to and is able to hold those securities to maturity. Held to maturity securities are
reported as amortized cost, with no adjustment made for unrealized holdings gains or losses
unless the value has declined below cost. If the value will not increase, the security is written
down to fair value and a loss recorded in earnings.

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Under GAAP, investments must be classified as trading if they are bought and held
principally for sale in the near term. Securities classified neither as trading or as held-to-maturity
are classified as available-for-sale securities.
Trading and available for sale securities are reported at fair market value and must be
periodically adjusted for unrealized gains and losses to bring them to fair market value.
Unrealized gains or losses from trading securities are included in income for the period.
Unrealized gains or losses from changes held as available for sale are reported as a component of
other comprehensive income. Common or preferred stock can be classified only as trading or
available for sale.
The transfer of a security between categories of investments is required to be accounted
for at fair value. Securities transferred from the trading category will already have had any
unrealized holding gain or loss reflected in earnings. For securities transferred into the trading
category, the unrealized holding gain or loss at the date of the transfer must be recognized in
earnings immediately. For a debt security transferred into the available-for-sale category from
the held-to-maturity category, the unrealized holding gain or loss at the date of the transfer must
be reported in other comprehensive income. Securities transferred from available for sale to held
to maturity report unrealized holding gain or loss at the date of the transfer as separate
component of other comprehensive income and amortized to interest income over the remaining
life of the security.
Fraudsters manipulate financial statements by intentionally misclassifying securities or
transferring securities to a different class that would trigger the recognition of gain or conversely
postpone the recognition of a loss. A corporation might misclassify a debt security as held to
maturity so as to avoid recognizing a decline of value in the current quarter. Conversely,
transferring a security from held to maturity to either trading or available for sale may allow the
recognition of gains that had not been previously recognized.
According to Richardson, (2003) inventory is another area ripe for earnings management
and misclassification. GAAP requires that inventory be reported at lower of replacement cost or
market value (i.e., current replacement cost.). Inflating inventory value achieves the same impact
on earnings as manipulating the physical count. Fraudulent managers can accomplish this simply
by creating false journal entries to increase the balance in the inventory account. Another
common way to inflate inventory value is to delay the write down of absolete or slow down
moving inventory, since a written down would require a charge against earnings.
2.7 Overvalued Assets or Undervalued Expenses and Liabilities
Overvalued assets comprise property for which fraudsters set prices that are unstoppable
using standard business valuation approaches. These assets might be bought to essentially pay
off parties to which the fraudsters are beholden, sold to artificially boost income, or simply held
and recorded on statements at far more than their actual worth.
Gain-on-sale accounting is a technique enabling fraudulent executives to use SPEs to
purchase or sell overvalued ventures at unsupported values, which are recorded by the
corporation as massive losses/revenues.

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Accounts receivable offers myriad opportunities for valuation schemes. GAAP requires
accounts receivable to be reported at net realizable value the gross value of the receivable
minus an estimated allowance for uncollectible accounts. Companies circumvent GAAP rules by
underestimating the uncollectible portion of a receivable. Underestimating the value of the
provision (the amount deemed uncollectible) artificially inflates the receivables value and
records it at an amount greater than realizable value. A related fraud is failing or delaying to
write off receivables that have become uncollectible.
2.8 Omitted Liabilities
Omitted liabilities are the mirror image of fictitious revenues and assets: fraudsters hide
debt or employ other off-balance sheet financing to avoid having to include the negative picture
on corporate financial statements. SPEs may be used to bury poorly performing assets because
their transactions are not part of the corporate financial statements (Smith, 2004).
2.8.1 Omitted or Improper Disclosures
Disclosure, one of the categories of management assertions in financial statements,
requires that certain information, such as assets held as collateral and preferred stock dividends
in arrears, be included in the notes of financial statements. Fraudsters use omitted or improper
disclosures to avoid listing questionable or bad news on the balance sheet. For example,
contingent liabilities may be underestimated and their likelihood of loss may be understated to
minimize their financial statement effect.
Improper disclosures can take the form of misrepresentations, intentional inaccuracies or
deliberate omissions in: descriptions of the corporate or its products, in media reports and
interviews, as well as in financial statement sections of annual reports, 10-Ks, 10-Qs, and other
reports; as well as in footnotes to the financial statements (Berton, 2004).
Equity Fraud
Equity fraud, also known as investment or securities fraud, basically involves the
promotion and sale of nonexistent or illegal securities investments as well as intentional
misrepresentation or concealment of investment and financial related information. Equity fraud
causes third parties to suffer financial loss. Equity fraud is usually perpetrated to deceive or
mislead and is illegal. The many forms of investment fraud range from boiler rooms, shady stock
promotions, real estate transactions, and corporate financial fraud, all of which dupe investors in
public companies (Dunn, 2003).
Related-party Transactions
According to Accounting Buzz.com, a related party transaction is an interaction between
two parties, one of whom can exercise control or significant influence over the operating policies
of the other. A special relationship may (and often does) exist between the parties, e.g., a
corporation and a major shareholder or parent and subsidiary. Mohrweis, (2003).

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Alter Ego
Alter ego, or second self, is an equitable remedy which permits a person to win a dispute
against a corporation that a plaintiff does not have standing to use under regular law. Under this
alter ego doctrine, the owners of the corporation are held responsible for corporate acts by
piercing the corporate veil and disregarding the corporate entity. Wagner and Goldsmith,
(2001).
2.9 Minimizing Income or Inflating Expenses to Reduce Tax Liabilities
Although tax evasion is a strong term, less ethical corporations often stretch available
deductions or overstate expenses to reduce their tax liabilities.
All corporations seek to minimizeand even avoid-tax liabilities. The difference
between avoidance and evasion is key. Tax evasion is illegal: it is the willful attempt to
circumvent the tax laws through misrepresentation or deceit. By minimizing income in these
ways, fraudsters hide the true nature or misrepresent the facts to take advantage of a tax
exemption or exclusion that does not actually apply.
2.10 Earlier researches on occupational fraud and financial abuse
I.

Edwin H. Sutherland (1883-1950)

Much of the current literature is based on the early works of Sutherland (1883 1950), a
criminologist at Indiana University. Sutherland was particularly interested in fraud committed by
the elite upper-world business executive, either against shareholders or the public. As Gilbert
Geis noted, Sutherland said, General Motors does not have an inferiority complex, United
States Steel does not suffer from an unresolved Oedipus problem, and the DuPonts do not desire
to run to the womb. The assumption that an offender may have such pathological distortion of
the intellect or the emotions seems to me absurb, and if it is absurb regarding the crimes of
businessmen, it is equally absurb regarding the crimes of persons in the economic lower classes.
For the non-initiated, Sutherland is to the world of white-collar criminality what Freud is
to psychology. Indeed, it was Sutherland who coined the term white-collar crime in 1939. He
intended the definition to mean criminal acts of corporations and individuals acting in their
corporate capacity. Since that time, however, the term has come to mean almost any financial or
economic crime, from the mailroom to the boardroom.
Many criminologists, myself included, believe that Sutherlands most important
contribution to criminal literature was elsewhere. Later in his career, he developed the theory of
differential association, which is now the most widely accepted theory of criminal behavior.
Until Sutherlands landmark work in the 1930s, most criminologists and sociologists held the
view that crime was genetically based, that criminals beget criminal offspring.
While this argument may seem nave today, it was based largely on the observation of
non-white-collar offenders-the murderers, rapists, sadists, and hooligans who plagued society.
Numerous subsequent studies have indeed established a genetic base for street crime, which
must be tempered by environmental considerations. (For a thorough explanation of the genetic

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base for criminality, see Crime and Punishment by Wilson and Herrnstein.) Sutherland was able
to explain crimes environmental considerations through the theory of differential association.
The theorys basic tenet is that crime is learned, much like we learn math, English or Guitar
playing.
Sutherland believed this learning of criminal behavior occurred with other persons in a
process of communication. Therefore, he reasoned, criminality cannot occur without the
assistance of other people. Sutherland further theorized that the learning of criminal activity
usually occurred within intimate personal groups. These explanations, in his view how a
dysfunctional parent is more likely to produce dysfunctional offspring. Sutherland believed that
the learning process involved two specific areas: the techniques to commit the crime; and the
attitudes, drives, rationalizations and motives of the criminal mind. You can see how
Sutherlands differential association theory fits with occupational offenders. Organizations that
have dishonest employees will eventually have an influence on some of those who are dishonest.
II.

Donald R. Cressey (1919-1987)

While much of Sutherlands research concentrated on upper world criminality, Cressey

took his own studies in a different direction. Working on his Ph.D. in criminology, he decided
his dissertation would concrete on embezzlers. To serve as a basis for his research, Cressey
interviewed about 200 incarcerated inmates at prisons in the Midwest.
Cresseys Hypothesis: Embezzlers, whom he called trust violators, Intrigued Cressey. He was
especially interested in circumstances that led them to be overcome by temptation. For that
reason, he excluded from his research those employees who took their jobs for the purpose of
stealing a relatively minor number of offenders at that time. Upon completion of his
interviews, he developed what still remains as the classic model for the occupational offender.
His research was published in other peoples Money: A Study in the social Social Psychology of
Embezzlement.
Cresseys final hypothesis was:
Trusted persons become trusted violators when they connive of themselves as having a
financial problem which is non-shareable, are aware this problem can be secretly
resolved by violation of the position of financial trust, and are able to apply to their own
conduct in that situation verbalizations which enable them to adjust their conceptions of
themselves as users of the entrusted funds or property.
Over the years, the hypothesis has become better known as the fraud triangle. (See
Exhibit 1-3.) One leg of the triangle represents perceived opportunity, and the final leg stands for
rationalization.
Non-shareable financial problems: The role of the non-shareable problem is important.
Cressey sais, When the trust violators were asked to explain why they refrained from violation
of their positions of trust they might have held at previous times, or why they had violated the
subject position at an earlier time, those who has an opinion expressed the equivalent of one or
more of the following quotations:

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a. There was no need for it like there was this time.

b. The idea never entered my head.
c. I thought it was dishonest then, but this time it did not seem dishonest at first.

OPPORTUNITY

FRAUD
TRIANGLE

PRESSURE

RATIONALIZATION

Exhibit 1-3 The Fraud Triangle

In all cases of trust violation encountered, the violator considered that a financial
problem which confronted him could not be shared with persons who, from a more objective
point of view, probably could have aided in the solution of the problem.
What is considered non-shareable is, of course, wholly in the eyes of the potential
occupational offender, Cressey noted. Thus a man could lose considerable money at the race
track daily but the loss, even if construed a problem for the individual, might not constitute a
non-shareable problem for him. Another man might define the problem as one that must be kept
secret and private; this is, as one which is non-shareable.
In addition to being non-shareable, the problem that drives the fraudsters is described as
financial because these are the types of problems that generally can be solved by the theft of
cash or other assets. A person with large gambling debts, for instance, would need cash to pay
those debts. Cressey noted, however tat there are some nonfinancial problems that could be
solved by misappropriating funds through a violation of trust. For example, a person who
embezzles in order to get revenge on her employer for perceived unfair treatment uses
financial means to solve what is essentially a nonfinancial problem.
Through his research, Cressey also found that the non-shareable problems encountered by
the people he interviewed arose from situation that could be divided into six basic categories:
1.
2.
3.
4.
5.
6.

Violation of ascribed obligations

Problems resulting from personal failure
Business reversals
Physical isolation
Status gaining
Employer employee relations chore

All of these situations dealt in some way with status-seeking or status-maintaining

activities by the subjects. In other words, the non-shareable problems threatened the status of the

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subjects, or threatened to prevent them from achieving a higher status than the one they occupied
at the time of their violation.
Conjuncture of Events: One of the most fundamental observations of the Cressey study was
that it took all three elements - perceived non-shareable financial problem, perceived
opportunity, and the ability to rationalize for the trust violation to occur. If any of the three
elements were missing, trust violation did not occur. [A] trust violation takes place when the
position of trust is viewed by the trusted person according to culturally provided knowledge
about the rationalizations for using the entrusted funds for solving a non-shareable problem, and
that the absence of any of these events will preclude violation. The three events make up the
conditions under which trust violation occurs and the term cause may be applied to their
conjuncture since trust violation is dependent on that conjuncture. Whenever the conjuncture of
events occurs, trust violation results, and if the conjuncture does not take place there is no trust
violation.
Cresseys classic fraud triangle helps explain the nature of many but not all occupational
offenders. For example, although academinas have tested his mode, it still has not fully found its
way into practice in terms of developing fraud prevention programs. Our sense tells us that one
model even Creseys will not fit all situations. Plus, the study is nearly half a century old.
There has been considerable social change in the interim. And now, many antifraud professionals
believe there is a new breed of occupational offender one who simply lacks a conscience
sufficient to overcome temptation. Even cressey saw the trend later in his life.
After doing this landmark study in embezzlement, Cressey went on to a distinguished
academic career, eventually authoring 13 books and nearly 300 articles on criminology. He rose
to the position of Professor Emeritus in Criminology at the University of California, Santa
Barbara.
It was my honor to know Cressey personally. Indeed, he and I collaborated extensively
before he died in 1987, and his influence on my own antifraud theories has been significant. Our
families are acquainted; we stayed in each others homes; we traveled together; he was my
friend. In many, we made the odd couple. He, the academic and me, the businessman. He, the
theoretical and me, the practical.
I met him as the result of an assignment, in about 1983. A Fortune 500 company hired me
on an investigation and consulting matter. They had a rather messey case of a high-level vice
president who was put in charge of a large construction project for a new company plant. The
$75 million budget for which he was responsible proved to be too much of a temptation.
Construction companies wined and dined the vice president, eventually providing him with
tempting and illegal bait: drugs and women. He bit.
From there, the vice president succumbed to full kickbacks. By the time the dust settled,
he had secretly pocketed $3.5million. After completing the internal investigation for the
company, assembling the documentation and interviews, I worked with prosecutors at the
companys request to put the perpetrator in prison. Then the company came to me with a very
simple question: Why did he do it? As a former FBI Agent with hundreds of fraud cases under
my belt, I must admit I had not thought much about the motives of occupational offenders. To
me they committed these crimes because they were crooks. But the company certainly
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progressive on the antifraud front at the time wanted me to invest the resources to find out why
and how employees go bad, so they could possibly do something to prevent it. This quest took
me to the vast libraries of the University of Texas at Austin, which led me to Cresseys early
research. After reading his book, I realized that Cressey had described the embezzler I had
encountered to a T.I wanted to meet him.
Finding Cressey was easy enough. I made two phone calls and found that he was still
alive, well, and teaching in Santa Barbara. He was in the telephone book and I called him.
Immediately, he agreed to meet me the next time I came to California. That began what became
a very close relationship between us that lasted until his untimely death in 1987. It was he who
recognized the real value of combining the theorist with the practitioner. Cressey used to
proclaim that he as much from me and as I from him. But then, in addition to his brilliance, he
was one of the gracious people I have ever met. Although we were together professionally for
only four years, we covered a lot of ground. Cressey was convinced there was a need for an
organization devoted exclusively to fraud detection and deterrence. The association of Certified
Fraud Examiners, started about a year after his death, is in existence in large measure because of
Cresseys vision. Moreover, although Cressey didnt know it at a time, he created the concept of
what eventually became the certified fraud examiner. Cressey theorized that it was time for a
new type of corporate cop one trained in detecting and deterring the crime of fraud. Cressey
pointed out that the traditional policeman was ill-equipped to deal with sophisticated financial
crimes, as were traditional accountants. A hybrid profession was needed someone trained not
only in accounting, but also in investigation methods, someone as comfortable interviewing a
suspect as reading a balance sheet. Thus was the certified fraud examiner program born.
III.

Dr. W. Steve Albrecht

Another pioneer researcher in occupational fraud and abuse and another person
instrumental in creation of the certified fraud examiner program was Dr. Steve Albrecht of
Brigham Young University. Unlike Cresseys, Albrecht was educated as an accountant. Albrecht
agreed with Cresseys vision traditional accountants, he said, were poorly equipped to deal
with complex financial crimes.
Albrechts research contributions in fraud have been enormous. He and two of his
colleagues, Keith Howe and Marshall Romney, conducted an analysis of 212 frauds in the early
1980s under a grant from the Institute of Internal Auditors Research Foundation, leading to their
book entitled Deterring Fraud: The Internal Auditors Perspective. The studys methodology
involved obtaining demographics and background information on the frauds through the use of
extensive questionnaires. The participants in the survey were internal auditors of companies that
had experienced frauds.
Albrecht and his colleagues believed that, taken as a group, occupational fraud
perpetrators are hard to profile and that fraud is difficult to predict. His research included an
examination of comprehensive data sources to assemble a complete list of pressure, opportunity,
and integrity variables, resulting in a list of 50 possible red flags or indicators of occupational
fraud and abuse. These variables fell into two principle categories: perpetrator characteristics and
organizational environment. The purpose of the study was to determine which of the red flags
were most important to the commission (and therefore to the detection and prevention) of fraud.
The red flags ranged from unusually high personal debts, to belief that ones job is jeopardy;
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from no separation of asset custodial procedures, to not adequately checking the potential
employees background.
The researchers gave participants both sets of 25 motivating factors and asked to rank
these factors on a seven-point scale indicating the degree to which each factor existed in their
specific frauds.
IV.

Richard C. Hollinger

The Hollinger Clark Study: In (1983), Richard C. Hollinger of Purdue University and
John P. Clark of the University of Minnesota published federally funded research involving
surveys of nearly 10,000 American workers. In their book, Theft by Employees, the two
researchers reached a different conclusion than Cressey. They found that employees steal
primarily as a result of workplace conditions. They also concluded that the true costs of
employee theft are vastly understated. In sum, when we take into consideration the incalculable
social costs the grand total paid for theft in the workplace is no doubt grossly underestimated
by the available financial estimates.
Hypotheses of Employee Theft: In reviewing the literature on employee theft, Hollinger and
Clark noted that experts had developed five separate but interrelated sets of hypotheses to
explain employee theft. The first was that external economic pressures, such as the nonshareable financial problem that Cressey described, motivated theft. The second hypothesis was
that contemporary employees, specifically young ones, are not as hard-working and honest as
those in past generations. The third theory, advocated primarily by those with years of
experience in the security and investigative industry, was that every employee can be tempted to
steal from his employer. The theory basically assumes that people are greedy and dishonest by
nature. The fourth theory was the job dissatisfaction is the primary cause of employee theft, and
the fifth was that theft occurs because of the broadly shared formal and informal structure of
organizations. That is, over time, the group norms good or bad become the standard of
conduct. The sum of the research led Hollinger and Clark to conclude that the forth hypothesis
was correct, that employee deviance is primarily caused by job dissatisfaction.
Case Results: A common complaint among those who investigate fraud is the organizations and
law enforcement does not do enough to punish fraud and other white-collar offenses. This
contributes to high fraud levels or so the argument goes - because potential offenders are not
deterred by the weak or often nonexistent sanctions that are imposed on other fraudsters. Leaving
aside the debate as to what factors are effective in deterring fraud, ACFE researchers sought to
measure how organizations responded to the employees who had defrauded them.
3.0 Research Method
An analytical ex-post facto approach is used. Secondary information has been obtained
from specialized studies and scientific sources, while primary information was generated through
a questionnaire.
On the basis of previous studies, the questionnaire was designed in two
parts: Section A contained items seeking information on the demographic characteristics of
respondents such as sex, age, and level of education of respondents. Section B contained items
seeking further information to measure the major variables of the study. In section B, a Likert
quintuple measurement scale was used to show the opinions of the study sample members on the
questionnaire items. In order to find the arithmetic means of the opinions of sample members,
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weights were designated in agreement with the significance of each paragraph of the
questionnaire, where the weight (5) was designated to the case of strongly agree, (4) to the
case of agree, (3) to the neutral case (average), (2) to disagree, and (1) to strongly
disagree. The items here were positively and negatively worded.
3.1 Validity and Reliability of the Research Instrument
To ensure face validity of the instrument used, the items on the questionnaire were drawn
up and given to experts in research, Faculty of Management Sciences for checking. It was
absolutely necessary to determine whether the items measured what they were supposed to
measure. In most cases except for a few, the statements were straight forward and important.
However, those that tended to be ambiguous were deleted. A few mechanical errors were
identified and corrections were made by the supervisor before it was administered.
To establish the reliability of the instrument the researcher carry out a trial testing using
some respondents randomly selected from the left over companies which were not part of the
sampled of the study. The instrument (questionnaire) was administered to these respondents to
fill and the questionnaire retrieve and analyze.
3.2 Model specification
The specified model for this study ready thus:
FIN. PERF = 0 + 1FMAN + 2FMIS + 3IM +
Where:
FIN.PERF
= Financial Performance
FMAN
= Financial Manipulation
FMIS
= Financial Misrepresentation
IM
= Intentional Misapplication
0
= intercept
1 and 23
= Slope coefficients

= Stochastic error term

0, 1, 2, 3 0
4.0 Data Analysis
Table 1: Regression results of occupational fraud and financial performance
DEPENDENT VARIABLE: Financial Performance (FIN.PERF)
VARIABLE
ESTIMATED
STANDARD
T-Statistic
P- Value
COEFFICENTS
ERROR
Constant
41.563
11.186
3.716
.001
FMAN
-.188
.148
-7.275
.000
FMIS
-.190
.193
-5.983
.000
IM
-.120
.080
-4.500
.001
R
=
0.935
R-Square
=
0.916
Adjusted R-Square
=
0.891
SEE
=
3.99581
F Statistic (df1= 5 & df2=25)
= 12.883 (p .000)
Durbin Watson Statistic
=
2.027
t-statistics (table value) at 5% two tail
=
2.04

Source: Researchers Estimation 2012

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Table 1 shows the regression results of occupational fraud and financial performance.
The independent variable occupational fraud is mirrored by Financial Manipulation (FMAN),
Financial Misrepresentation (FMIS) and Intentional Misapplication (IM) while the dependent
variable financial abuse is also mirrored by Financial Performance (FIN.PERF).
The regression results showed that the estimated coefficient of the regression
parameters have negative signs and thus conform to our economic a-priori expectation. The
implication of this sign is that the dependent variable Financial Performance (FIN.PERF) is
negatively influenced by Financial Manipulation (FMAN), Financial Misrepresentation (FMIS)
and Intentional Misapplication (IM). This means that an increase in the independent variables
will bring about a poor financial performance.
The coefficient of determination R-square of 0.916 implied that 91.6% of the sample
variation in the dependent variable is explained or caused by the explanatory variables while
8.4% is unexplained. This remaining 8.4% could be caused by other factors or variables not built
into the model. The high value of R-square is an indication of a good relationship between the
dependent and independent variables.
The value of the adjusted R2 is 0.891. This shows that the regression line captures more
than 89.1% of the total variation in financial performance caused by variation in the explanatory
variables specified in the equation with less than 10.9% accounting for the error term.
Testing the statistical significant of the overall model, the F-statistic was used. The model is
said to be statistically significant at 5% level because the F-statistics computed of 12.883 is
greater than the F-statistic table value of 2.60 at df1=5 and df2=25.
The test of autocorrelation using D/W test shows that the D/W value of 2.027 falls
within the inconclusive region of D/W partition curve. Hence, we can clearly say that there exists
no degree of autocorrelation.
4.1 Discussion of findings
Our analysis and empirical results has shed some insight on the implication of
occupational fraud and financial abuse on the performance of Nigeria companies. The result of
this study has provided relatively strong support for the existence of a negative impact of
occupational fraud and financial abuse on the performance of Nigeria companies. At a general
level, this result is largely consistent with results obtained by Clark (1983) that employees steal
primarily as a result of workplace conditions.
The findings of hypotheses of this study
indicate that there is no significant relationship between financial manipulation and the
performance of a company.
This finding findings from the research hypotheses revealed that in order with the
findings of Sutherland, (1949) who found out that financial misappropriation, financial misrepresentation and when spend appropriately greatly motivate employees to perform beyond
their expectation thereby increasing their performanc of the firm. In corroboration with the
findings of this study is the finding of Wells 2007, oyejide & Soyibo, 2001; 1973 and Thomas
2002.
5.0 Conclusion and Recommendation
It is clear that in the post-Sarbanes-Oxley world, transparency is demanded from donors,
regulators, and constituents. The public expects, and has a right to expect, companies to have
sound internal controls that ensure resources are appropriately maintained, managed and
distributed. To convince the public that they are getting a true and accurate financial picture,

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reporting is changing and becoming more specific. Understanding what fraud is, and how it
occurs, is the first step to detection and prevention within a company.
As it has been shown, though, much of the research that has been conducted suggests it is
consistently easier for fraud to occur in some companies because of the atmosphere of trust, the
weak internal controls, the reliance on volunteers and the overall lack of business and financial
expertise. This just demonstrates how important it is for all companies to be vigilant, to be more
prepared, to educate their leaders and to begin to behave in a more professional manner
including the implementation of internal controls and planning for stricter accountability and
effective governance to deter fraudulent behavior.
It is believe that the facts are clear. Companies that adopt stricter controls and monitoring
and have a better understanding of their financial situation are less likely to experience fraud
than their counterparts who do not take these steps.

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