THE ROLE OF AUDITORS IN FRAUD PREVENTION AND CONTROL IN PUBLIC SECTOR

THE ROLE OF AUDITORS IN FRAUD PREVENTION AND CONTROL IN PUBLIC SECTOR(A CASE STUDY OF KADUNA STATE WATER BOARD KADUNA)

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ABSTRACT

This research topic is the role of auditors in fraud prevention and control in public sector. Kaduna state water board is chosen as a case study.  The research topics has been chosen in order to investigate the causes, and possible ways of preventing and controlling of fraud in Kaduna state water board.  Among the objectives of this study is to identify the problems and solution in an effort to minimize the occurrence of fraud and financial mismanagement in Kaduna state water board. Both primary and secondary sources of data are were used in gathering the data, hypothesis were formulated and Hi which saysThat the presence of effective and efficient auditors will greatly help in preventing fraud in Kaduna State Water board (KSWB) was accepted and recommendations were made.

TABLE OF CONTENTS

Title Page   –       –       –       –       –       –       –       –       –       –       i

Declaration Page –       –       –       –       –       –       –       –       –       ii

Approval Page     –       –       –       –       –       –       –       –       –       iii

Dedication  –       –       –       –       –       –       –       –       –       –       iv

Acknowledgement        –       –       –       –       –       –       –       –       v

Abstract     –       –       –       –       –       –       –       –       –       –       vii

Table of content  –       –       –       –       –       –       –       –       –       viii

CHAPTER ONE

1. Introduction        –       –       –                –       –       –       –       1        
   1. Historical Background of Kaduna State Water Board –        –       6
   1. Statement of Problem   –       –       –       –       –       –       –       15
   1. Research  Question      –       –       –       –       –       –       –       15 
   1. Statement of hypothesis —    –       –       –       –       –       –       16
   1. Purpose of the study    –       –       –       –       –       –       –       16
   1. Significant of the study –       –       –       –       –       –       –       17
   1. Limitation of the study –        –       –       –       –       –       –       18
   1. Scope of the study –     –       –       –       –       –       –       –       18
   1. Definition of terms –     —      –       –       –       –       –       –       18

CHAPTER TWO

• Literature Review         –       –       –       –       –       –       –       20
  • Nature and purpose of Account –    –       –       –       –       –       20
  • Communication of account information flow Chart     –       –       23
  • Internal Control   –       –       –       –       –       –       –       –       24
  • Independence of he Internal audit Department –       –       –       29
  • Independent of the external auditor –      –       –       –       –       31
  • Fundamental differences –     –       –       –       –       –       –       34
  • The role of accountant and auditors in the society     –       –       37
  • Impact of public Accountant and Auditing –      –       –       –       41
  • Fraud and its cost public sectors –  –       –       –       –       –       44
  • Detection Techniques   –       –       –       –       –       –       –       46

CHAPTER THREE: Research Methodology

• Introduction        –       –       –       –       –       –       –       –       50
  • Population of the study         –       –       –       –       –       –       51
  • Sampling method                 –       –       –       –       –       –       51
  • Instrument of Data Collection        –       –       –       –       –       31
  • Procedure for collection, and analysis and treatment –        –       52
  • Validity —   –       –       –       –       –       –       –       –       –       54

CHAPTER FOUR – Data Presentation and Analysis

• Introduction        –       –       –       –       –       –       –       –       56
  • Presentation of Data –  –       –       –       –       –       –       –       56
  • Findings –   –       –       –       –       –       –       –       –       –       75

CHAPTER FIVE – Summary, Conclusion &Recommendations

• Summary-  –       –       –       –       –       –       –       –       –       80
  • Conclusion –       –       –       –       –       –       –       –       –       81
  • Recommendations –     –       –       –       –       –       –       –       82

Bibliography        –       –       –       –       –       –       –       –       84

CHAPTER ONE

1. INTRODUCTION

Auditor plays a greater roles in the state and the entire nation as awhole, for the development of public sectors in the states, itconstitute nearly 80% in terms of financial management for fraudprevention and control in the public sector.

Auditing in its modern form, has attended a primitive existence sincethe 16th century when the division first started to grow betweenthose who provide capital and those who managed the business.The introduction of the joint stock companies, has greatly widenedthe possibility of raising capital for industry as a result of the limitedliability of share holders it became possible to offer shares to thepublic and thus the availability of capital to industry and commerce.

Under the company form of organization, the government put moreemphasis on financial management in the public sector to ensureproper record keeping that the accounting book has always showthe true and fair view of the financial statement and operation arebeing carried out successfully as such problem of financialmisconduct and misappropriation through fraudulent by all meansshould be identified and taken care of. This has necessitated for theinsight of this project in which the auditor detect how fraud isdetected and looking for prevention method and controlling it in thepublic sector. The primary responsibility for detection, control and prevention of fraud rest with the management, this responsibility arises at contractual duty of care directors and mangers of an organization becomes directors and managers, act in stewardship capacity with regard to the property entrusted to them by the government and stock holders and others owners. How they exercise this duty of care is a matter for them in most cases their duty may be discharged by institutions and maintaining a strong system of internal control.

Therefore, internal control can be seen as the whole system ofcontrol; financial and other wise, established by the managementin order to carry on the business in an organization in an orderly andefficient manner to ensure adherence to management policiescontrol and safeguards the assets and secure as far as possible the competence and accuracy of the records, in an organization forinternal control to be effective the following should be specified.

In all cases. The delegation of authority and responsibility should be clearly specified. An employee should always know the practice powers delegated to him or she the extend of his authority and to whom they should report, for example.

1. Responsibilityfor approving the purchase of items of plantmay be retained by the Board of Directors and within thecompetence of the works managers for the budgeted amountagreed by the board.
2. Responsibility for the correct operation of internal control maybe delegated by the board to specified management personnel and the internal audit department.
3. The involvement of several people reduces the risk of international manipulation or accidental error and increase the checking element of work.
4. Function for which a given transaction should be separated include initiation (e.g. the work for foreman decides the organization need more lubrication oil) authorization(the works manager approve the purchases) execution (buying department order for the oil) custody on arrival of the oil is taken by the store department with appropriate documentation.

This indicate how important internal control is and its effect on asset andliabilities, revenue and expenditure as well as every aspect of theoperation of the organization in the public sector as most businessdecision are based on accounting data which explains how importantinternal controls system provide double assurance of the responsibility ofthe accounting data which form bases for business decision such adecision should be communicated to all section of the organization andmust follow up to enhance compliance for effective performanceupon theother hand fraud can be seen as a way which involves the use ofdeception, to obtain an unjust or illegal financial advantage byinternationalmis-statements in or omission of amount from an entriesaccountingrecord of financial statements.

The primary responsibility for fraud detection and irregularities rest withthe management. This responsibility arises from a contractual dutyof careby directors and managers and also because directors and othermanagers act in a worship capacity with regards to the propertyentrustedto them by the organization or other owner. How to exercise this duty is a matter for them, but in must cases their duty may be discharged by instituting and maintaining a strong system of internal control. The possible indications of fraud and irregularities includes:

1. Missing vouchers or documents: An employee destroyed an invoicecopy and pocket the cash paid in connection with the invoice.
2. Evidence of disputes, lack of partial payments by debtors mayindicate disputed invoices.
3. Evidence of falsified document that is an invoice,dates werealtered to place the documents in a different year bolster profit.
4. Unexpecteditemsofreconciliationorsuspenseaccountsdifferences on bought andsales ledger control accountsmay indicate trivial non material errors but may indicate real fraud.
5. Evidence that internal control is not operating as it is intended toexplanation that short cuts have been made to achieve greaterefficiency may infact have been made to facilitate fraudulentconversion

On discovery of fraud the following sequence of actions may beappropriate to prevent such occurrence.

1. If it appears that fraud error have occurred, and may be materialthen consider the effect on the financial statements and ensure thatthey are prepared with such adjustments and amendments as maybe required.
2. If further investigations are required and account cannot be delayed,then the auditor report may have to be qualified for uncertainty.
3. In events were frauds have occurred ensure top management areaware of such events.

1.1    HISTORICAL BACKGROUND OF KADUNA STATE WATER BOARD (KSWB)

Water is one of the most fundamental necessities for life and humansurvival this does not only imply to its availability but also thechances for everyone to have assess to it. Water supply systemsinclude the world’s water resources, all of its water requirement itincludes works for collection purification storage, and distribution ofwater to homes.

The water treatment systems were first brought by the colonial masters since before the end of the colonial period there were towns which had water supply which among others include Kaduna and Zaria which were established in the year 1929 and 1939respectively which were primarily established to meet the demand at that time by the colonial masters and some restricted area (G.R.A).

The supply of water in Kaduna State was the sole responsibility of the state ministry of works and housing prior to 1971.Thedepartment of water supply was remove from the ministry and become an autonomous body for the purpose of efficiency and effectiveness, as well as to serve as an avenue for providing portable water supply to all part of the state.

Kaduna state water board was established as North Central waterBoard came into being in May 1971 by edict NO.2 of 1971 signed bythe then military Governor (late Brigadier Abba Kyari Retd). TheBoard then became a body corporate with perpetual succession anda common seal and shall have power to sue and be sued in its Corporate name.

POWERS AND FUNCTIONS OF THE BOARD

The Board has the power vested or to be vested as follows:­

1. Tocontrol and manage all water works plants.
2. To establish, control, manager, extend and develop such waterworks (old and new).
3. To ensure that water is supplied to the public consumers at reasonable charges, in portable quality and also adequate quality.
4. To organize the conduct of comprehensive research from time totime for utilization in the formulation of policy relating to the supplyand usage of water in the state. To enable the board to perform allor some of the above function both Federal and state governmentgive it capital grants but that of the federal government was later  stopped to defray re-current costs however, the edict empowered the board to charge, with the approval of the governor, theconsumers determine reasonable rate that shall as sufficiently aspossible pay for the salaries, fees and allowances of the members,the salaries remuneration, fees, allowance pensions, gratuities andother retirement benefits of the officers, servants, other services at aconsultants to the board all expenses of working staff andmanagement of the board and its water works and other propertiesincluding proper provision for depreciation for renewal of assets. Such as minor works of capital nature, such payments as compensation, taxes, rates and other levies payable le under any law and interest on any loan raised by the board etc. The board is anautonomies body with the board governing council consisting of achairman and the general manager of the board is included for theday to day running of the affairs of the board, it has a managementcommittee headed by the general manager and the following andthe following members who assisted him/her in one way or the orderother.

Assistant General Manager (secretary)

Assistant General Manager (operation)

Assistant General Manager (finance)

Assistant General Manager (project)

Assistant General Manager (commercial)

project manager (Rural water supply)

Chief internal auditor.

The Board appreciate and terminates its own staff being guided by thecivil service rules (CSR), financial regulation (FR) its own edict, staffregulations and domestic/house report of the external auditors. The Boardoffers services in terms of water supply to the entire state including drillingof boreholes in the rural areas through the rural water supply department.

         ACCOUNTING AND COMMERCIAL DEPARTMENT

The issue of revenue administration cannot be discussed in Kaduna Statewater Board without making full reference to those two departments the(Accounting and commercial) because they are the revenue generatingunits officials (meter readers, bill distributions, billing clerks, accountants,commercial staff) are realized when money is paid to the cashiers. Theaccounting department is headed by assistant general manager (finance).

The department has three sections (finance, revenue and final accounts)each headed by chief accountant while (store is headed by a chief storeofficer). At the district level, the section is headed by district accountants,it is the responsibility of this department to keep proper accounts inrespect of the functions of the board, preparing the financial yearstatement of accounts in a form that may be approved by the board. Italso prepares an estimated revenue and expenditure. The revenueestimate will serve as a guideline for the collection of revenue, it will be ayardstick for measuring the efforts of revenue officials.It is also theaccounts department that collect and keeps proper account of revenuegenerated and control the expenditure of the board.

Like the accounts department, the commercial department is headed bythe assistant general manager (commercial) it involves twoseparatesections (commercial and detection) headed by a chief. All the districtlevels.

The department is headed by assistant chief commercial or detectionofficer. The direct contact between the board and consumers is madepossible through this department it is this department that sales andsupply water to the consumers.

All connections are made by thisdepartment, it fixes meters where necessary, takes the reading of themeters makes assessment of the amount to be paid, prepare anddistribute bills and follow up to encourage consumers to settle their bills, itis the work of this department to disconnect defaulters or illegalconnections. They reconnect for those who settle their outstanding if theyare formalized.

SOURCE OF REVENUE TO THE BOARD

Kaduna State Water Board like any other organization need, fund toenable it operate effectively, the main source of revenue comes from thesales of water to all categories of consumers. The board is one of themany parastatals, established out of government ministries anddepartment with the aim to booster the efficiency and effectiveness inproviding public services to the generality of the people. These publicservice corporations are not established principally to make profit but toserve people and to be able to break even i.e. (situation where there is noprofit and no losses B. E. P).

For the board to maintain itself, it charges reasonable subsidized rates forthe water supply for both treated and raw water (which is consumed by bigindustries). The treated water metered connection is charged at the rateof 1000 litres per Naira as per the following

1. The first category is the metered connection which is that ofdomestic consumption, which consist of houses they are chargedN100 per 1000 litres.
2. The second category is that of public institutions including that ofFederal, state and local government whatever amount theyconsumed are charge at the rate of N 140 per 1000 litres.
3. The third is the most important source of revenue to the board itis more reliable because settlement of tariffs is most often up todates the third category include industrial and commercialconsumption below 5 million, while 5 to 10 million litres arecharged N300 per 1000 litres and additional consumption above10 million litres are charge at the rate of N500per 1000 litresper month.
4. The last is the tanker supply which is charged N500 per 1000litres apart from the metred domestic. There is also the flat rate chargedthat have multiple caps heads are charged N200monthly.

Raw water is another source of revenue the charge here is onthe untreated water supply to industries like refinery and textiles.The charge is at the rate of500 per 1000 lites.

The above mentioned charges have been approved by the stategovernment and came into effect from the 1st January 2000. Theincreased in the water rate has become necessary for obviousreasons. There has been increased in the operational cost, theprices of chemicals have gone up N. E. P. A. tariffs, spare partsfor maintenance of treatment plants and distribution system haveall gone up.

Apart from water rates as source of revenue to the board, thereare others source which include private water connection (PWC)charge, this are money charged on consumers who want freshwater connection and the charges depend on the size of the pipeto be used.

WATER CONNECTION CHARGES

SIZE OF PIPE	WITHOUT FITTINGS	WITH FITTING
3/4	N358	N 455
1	N 450	N 460
1/4	N 455	N 465

Source: Kaduna State Board (commercial Department) other sources are the profiton bank interest on money deposit, AWS school fees paid by those sisterBoard of other states for training of their staff and other miscellaneous likefee for reconnection and alteration.

1.2    STATEMENT OF PROBLEMS

It is a know face fact that auditors are not created to only to face or identified fraud, but to set standards and make sure the standards are followed by the accounts,. They control the activities of accountant so as to deviate from the set standard. But it have been noted that some accountant want a head and engaged themselves in some fraudulent act. The question one should ask is what role auditors play in preventing the possible fraud by either accountant or any other person that involved in the management of the organization funds?

1.3    RESEARCH QUESTION

1. What are the reaction to mass incidence of frauds and financial mismanagement.
2. Why do these problem continue to surface unabated despite the presence of auditors.
3. Could it be due to particular operation system n case or it is professional incapability on the part of the auditor.
4. Has the society at large got its part of blame
5. How can these problems be overcome all this will try to provide an answer at the end of conclusion.

1. STATEMENT OF HYPOTHESIS

The research intend to test the following hypothesis.

H0:   That the presence of auditor in Kaduna State Water board          (KSWB) does not prevent fraud.

Hi:    That the presence of effective and efficient auditors will greatly       help in preventing fraud in Kaduna State Water board (KSWB).

1. OBJECTIVES OF THE STUDY

In the contemporary business sector it is of paramount importancefor managers, and executive both in private and public sectors tounderstand the language concepts and principles of financialmanagement as well as the role played by the accountant and aand auditors in discharging their responsibility (ties).

This is so because of the financial implications and responsibilitiesattached to their various offices.Therefore the study could be itemized as follows:

1. To thoroughly investigate the causes of fraud and frauddetection prevention and control in Kaduna State water.
2. To identify various problems and prospects in the efforts tominimize he occurrence of fraud and financial mis­-management in the public Sector.
3. To suggest possible ways of curbing the adverse effects on the organization.

1. SIGNIFICANCE OF THE STUDY

Within the entire public sector there is the need to take up the studynature which has the sole aim of diagnosing the causes oframpant cases of fraud in the public sector and the impact of suchfraud to the management of Kaduna State Water Board and otherpublic sector alike. The management of Kaduna State Water Boardand other public sector will find the outcome of this research usefulespecially as it will serve as a pointer to the factor which leads to fraud in public sectors. There is no doubt that this research workwill serve as a future reference

1. LIMITATION OF THE STUDY

There is no doubt that time was one of the major constraint which is insufficient but significant to undertaken the entire works. Hence issue of transportation and inadequate funds also constituted a major obstacles and unwillingness of some of the staff to responds positively to the interview/question.

1.8    SCOPE OF THE STUDY

The research work is only limited to Kaduna State Water Board. The researcher cannot be able to carryout or cover all other public sectors such it was limited to Kaduna State Water Board alone.  

1.9    DEFINITION OF TERMS

Fraud: is deliberate act of falsification of record in order to conceal either theft or some other form of misconduct.

Error: The word “error” is used to refer to unintended mistake infinancial statement andaccounting whether of a mathematical or misinterpretation of relevant fact.

Audit:The word “Audit” refer to official checking and investigationof the books of accounts to see if it shows a true and fair view.

Auditor:The word refer to a person who auditsthe books of account.

Irregularities: Refers to intentional distribution of financial statement and accounting records. Continuously on the accounting whole year or attend to at frequent regular intervals during the financial year.

Internal Audit: This refers to as independent appraisal activity within an organization for the review of operation as a service to manpower it is a management control which function by measuring and evaluating the effectiveness of other controls.

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