Welcome to Festus Ogwu & Co.

On
Fraud detection and Control Techniques
in
Government Agencies

Presented by
Emeka Ogwu
E- Mail: fesass@yahoo.com
V-Mail: 08033105711,
08088745335
Agenda: Day 1
1.0. Introduction
1.1. Fraud.
- Brief overview
1. 2 A Civil Wrong
– Tea-Break
1.3 Criminal Offence
1.4 A non Common law System
1.5 Remedies of Fraud – Legal Perspective
Launch
• Brain Storming Section
• Participants Opinion
 DAY 1
• FRAUD - A LEGAL FRAME WORK

In law fraud is defined as a deliberate deception to secure unfair or

unlawful gain, or to deprive a victim of a legal right. Fraud itself can
be a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to
avoid the fraud and/or recover monetary compensation), a criminal
wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by
governmental authorities) or it may cause no loss of money, property
or legal right but still be an element of another civil or criminal wrong.
The purpose of fraud may be monetary gain or other
 FRAUD- A LEGAL FRAME
WORK (Con’t)
• benefits, such as obtaining a driver's license or qualifying for a

mortgage by way of false statements.

• A hoax is a distinct concept that involves deliberate deception

without the intent to gain or of materially damaging or depriving a

victim.
• AS A CIVIL WRONG

• In common law jurisdictions, as a civil wrong,

fraud is referred to as a tort. While the precise
definitions and requirements of proof vary among
jurisdictions, the requisite elements of fraud as a
tort generally are the intentional
misrepresentation or concealment of an
important fact upon which the victim is meant to
rely, and in fact does rely, to the harm of the
victim.
Proving fraud in a court of law is often said to be
difficult. That difficulty is found, for instance, in that
each and every one of the elements of fraud must
be proven, that the elements include proving the
states of mind of the perpetrator and the victim,
and that some jurisdictions require the victim to
prove fraud with so-called clear and convincing
evidence.
• AS A CRIMINAL OFFENCE

• In common law jurisdictions, as a criminal

offence, fraud takes many different forms, some
general (e.g., theft by false pretence) and some
specific to particular categories of victims or
misconduct (e.g. forgery, falsification, alterations
etc). The elements of fraud as a crime similarly
vary. The requisite elements of perhaps most
general form of criminal fraud, theft by false
• pretence, are the intentional deception of a victim
by false representation or pretence with the intent
of persuading the victim to part with property and
with the victim parting with property in reliance on
the representation or pretence and with the
perpetrator intending to keep the property from
the victim.
 IN NON-COMMON LAW SYSTEMS
• In civil law systems and other legal systems,
the concept of fraud seems to exist, but its
elements and applications may or may not
vary substantially from the common law
system concepts discussed in this article.
 REMEDIES OF FRAUD
LEGAL ASPECT
 Rescission (i.e., reversal) of a fraudulently obtained
agreement or transaction,
 The recovery of a monetary award to compensate
for the harm caused,
 Punitive damages to punish or deter the
misconduct, and possibly others.
 In cases of a fraudulently induced contract, fraud
may serve as a defence in a civil action for breach
of contract or specific performance of contract.
 Fraud may serve as a basis for a court to invoke its
equitable jurisdiction.
BRAIN STORMING
Question Time
Agenda: Day 2
• 2.0. Types of Fraud
• 2.1. Assets Misappropriation
• 2.1.1. Double Cheque Fraud
• 2.1.2. Cheque Kitting
• Tea Break
• 2.2. Payroll Fraud.
• 2.3. Cheque Fraud- others.
• 2.4. Overtime Fraud
• Lunch
• 2.5. Fraudulent Financial Reporting
• Brian Storming Section
• Participants Opinion
 TYPES OF FRAUD
• Fraud can be as minor as a theft of office supplies
or as serious as defrauding investors and
creditors through elaborate accounting schemes.
Fraud may be classified into three broad
categories:
 Assets Misappropriation.

• This usually involves misappropriation of cash,

either through outright theft, skimming of cash
• receipts, or fraudulent cash disbursements.
However, asset misappropriation also can
involve non-cash assets, such as computers,
vehicles or inventory.
• Embezzlement is the illegal use of agencies
funds by the person who controls the funds, and
can go undetected when proper segregation of
duties is not in place.
Acts of embezzlement may include:

• Double cheque fraud, which occurs when the

employee writes two cheques each time a bill is
paid; one cheque is sent to the vendor and one
cheque is sent to the employee.
• Cheque kiting, which is when an individual
draws a check for more than the amount
available in the account. The employee deposits
the check and withdraws from a second account.
The employee deposits the amount back into the
original account before the bank registers the
transaction or check clears the first account.
• PAYROLL FRAUD
• Payroll fraud can occur in a few different ways.
An example of payroll fraud includes processing
payroll for a fictitious employee. Fictitious
employee fraud occurs when an employee
fabricates time and attendance entries to another
employee who does not exist, and therefore,
does not provide services to the agency. The
fraud takes place when this fictitious employee’s
payroll is redirected to the bank account of the
employee who is committing the fraud.
• CHEQUE FRAUD - OTHERS
Cheque fraud is among the oldest and most
common forms of financial crime. Even with the
advent of electronic payment products, cheques
still account for billions of payments each year,
making them a prime target for criminals.
• There are three main types of cheque fraud:
• Counterfeit - cheques not written or authorized
by legitimate account holder
• Forged - Stolen cheque not signed by account
holder.
• Altered - an item that has been properly issued
by the account holder but has been intercepted
and the payee and/or the amount of the item
have been altered
 • HOW YOU CAN PROTECT YOUR AGENCY
FROM CHEQUE FRAUD.
• Reduce the use of cheques in favour of electronic
payments such as wire payments, direct deposit
and pre-authorized payments
• Choose envelopes that make cheques hard to
detect while in transit. This helps to minimize the
risk of cheques being intercepted
• Keep cheque stock in a secure location
• Destroy unused cheques from closed accounts
immediately
• Checks and Balances - split responsibilities so
that no one person is responsible for cheque
issuance and reconciliation
• Prompt account reconciliation - Reconcile your statements as
soon as they are received. To speed things up, many clients see
a significant advantage in products like:
• Use of internet banking platform
– Positive Pay, which matches cheques presented against
your own cheque issue files and identifies all exceptions
for a Pay/No Pay decision
– Corporate Clearing, which helps large volume cheque
issuers manage the daily processing and reporting of
paid items
• When re-ordering cheques, use a continuous set of serial
numbers
• Order only one set of cheques per account

• When laser-printing cheques, issue multiple passwords to

those responsible for cheque printing and use cheque paper
with toner anchorage to permanently bond toner ink into the
paper
• Use high quality cheques employing a reasonable mix of
security features.
• Report any old outstanding cheques and suspected fraud
on your account immediately.
• Overtime Reporting Fraud, which takes
place when employees overstates their hours
worked, which goes unnoticed by their
supervisors. Another example of overtime
reporting fraud could be when an employee
and supervisor conspire to overstate and
falsely approve the employee’s hours in return
for a kickback of the compensation.
•  

• FRAUDULENT FINANCIAL REPORTING.

Governments are exposed to the risk of each of

these types of fraud. However, according to the
ACFE study, two specific types of fraud account
for more than 50 percent of the instances of fraud
within the government environment:
• Billing schemes and corruption. Billing schemes occur

when a government pays invoices an employee fraudulently

submits to obtain payments he or she is not entitled to

receive. Versions of billing schemes include the creation of

a shell company or ghost vendor, purchasing a product with

government funds and returning it for a personal refund, or

charging personal purchases to the government. Common

warning signs for these schemes include:

• Increasing “Soft” Expenses.

• In most cases, soft expenses such as

transport and travelling, motor running,
accommodation expenses etc are increasing
at a rate that is very unusual in the
organisation or department. This raises a red
flag to account reviewing officers in the
department, putting them on enquiry or
suspecting fraud.
 Vendors with PO Box addresses,
• Where vendor’s addresses are stated with p.o
box only, this is often done to conceal the
possibility of tracing such vendors to their
appropriate addresses. In most cases, such
vendors do not exist.
• Vendors listed as initials.

• Many vendors listed as initials such as DBA LTD , HLM Enterprises

etc, are very good red flag flyers. These abbreviations are usually not

the real names of the companies but are used to conform to names

of accounts opened by the fraud perpetrator for ease of clearing

payment cheques.

• Excessive voided or missing checks.

• Where cheques are voided in multiples or various cases of missing

cheques being reported by accounts officer, management need be

Be put on enquiry for imminent fraud.

• INTERNAL THEFT.

• Another area of fraud within government

agencies is internal theft. An employee may steal
company assets for personal use or resale.
Employees may steal small amounts of inventory
at a time, which accumulate to a large amount
over time. Internal theft can also be the result of
over-ordering products, such as office supplies, in
small increments. The responsible employee.
• uses the unneeded items for personal use or
returns the items, keeping the cash.
•  
• SKIMMING

• Skimming is the act of an employee intercepting a payment

from a company before the transaction is ever recorded;

therefore, it cannot be matched with records and detected. An

employee that could commit skimming would be one with direct

contact to a customer or one that handles cash transactions.

• FRAUDULENT STSTUTORY FINANCIAL
REPORTING.
• Fraudulent statutory financial reporting is the act of deliberately

issuing misleading financial statements in order to protect the

financial reputation of the entity and falsely satisfy the needs of

financial statement users. Agencies may modify their financial

statements by altering revenue recognition through sham

transactions, prematurely recognizing revenue, tampering with

percentage of completion account, inflating their sales numbers, or

billing for uncompleted services.

• CORRUPTION.
• Corruption occurs when government employees or officials accept
bribes, illegal or inappropriate gratuities, kickbacks or excessive gifts
or when government employees or officials experience conflicts of
interest. In the state and local environment, corruption schemes are
made possible by the fact that most governments award service
contracts through a competitive bidding process. The official
supervising the process could be tempted to accept a bribe or
kickback from a bidder in exchange for awarding that vendor a
contract. Ultimately, corruption schemes cause governments to
overpay for services (since the lowest bidder would likely have been
selected had corruption not taken place), thus benefiting the
perpetrator at the expense of taxpayers.
WHEN FRAUD OCCURS

• During the past year, stock prices have plummeted, the housing
market has collapsed, and the economy has faltered. The ripple
effects from these events have caused significant financial
difficulties for many people. Accordingly, the temptation for
employees to commit fraud schemes as a quick way of getting cash
has increased significantly.
• This financial pressure to commit fraud is one of the three
components of the “fraud triangle,” along with rationalization and
the perceived opportunity to commit fraud. These three components
are present in every fraud.
• While pressure and rationalization are largely out
of a government’s hands, governments do have
the ability to reduce perceived and actual
opportunity.
 • FRAUD TRIANGLE
•  
 PROTECT YOUR BUSINESS
AGAINST FRAUD

• According to the Association of Certified Fraud Examiners, “fraud

includes any intentional or deliberate act to deprive another of
property or money by guile, deception, or other unfair means.”
Fraud can be committed by a wide array of individuals within an
organization and in a multitude of ways.
• Typically fraud seems like an uncomplicated scheme, but it can
easily go unnoticed in the business setting. If you start to see any
signs of fraud, have a fraud investigation done to make sure your
department or the agency as a whole is not affected.

 
• BRIAN STORMING
QUIZ SECTION
• It is evidently clear that there was no dispute about the forgery –
the signature wasn't even close. And the bank admitted that it did
not verify the signature before cashing the cheque, and then
allowed it to clear. Nonetheless, the client's responsibility was also
clear – he should have ensured the blank cheques were secure.
• In our interview with the client, he confirmed that he did not
remember receiving the blank cheques. He then suggested several
places where they might have been stored in his home, but he
couldn't be sure. We also considered that on the specific cheque
used in the transaction, the forger had to add the name and
address manually, which was correctly done.
• REQUIREMENT

– Suggest possible redress available to the customer.

– As the manager of the bank, present your defence

on the forgery.
– Is there any mid way redress to this matter?
Question Time
Agenda: Day 3
• 3.0. Detection Techniques
• 3.1. Data Analysis
• Tea Break
• 3.2. Supervised Methods
• 3.3. Unsupervised Methods
• Lunch
• Brain Storming Section
• Participants Opinion
DETECTION TECHNIQUES
 DETECTION TECHNIQUES
• DATA ANALYSIS AS A FRAUD DETECTION
TECHNIQUE
• Techniques used for fraud detection fall into two primary
classes: statistical techniques and artificial intelligence.
Examples of statistical data analysis techniques are:
• Data pre-processing techniques for detection, validation, error
correction, and filling up of missing or incorrect data.
• Calculation of various statistical parameters such as averages,
quartiles, performance metrics, probability distributions, and so
on. For example, the averages may include average length of
calls, average number of calls per month and average delays in
• bill payment.

• Models and probability distributions of various

business activities either in terms of various
parameters or probability distributions.
• Computing user profiles.

• Time-series analysis of time-dependent data.

• Clustering and classification to find patterns and

associations among groups of data.
• Matching algorithms to detect anomalies in the
behaviour of transactions or users as compared to
previously known models and profiles. Techniques
are also needed to eliminate false alarms,
estimate risks, and predict future of current
transactions or users.
• Some forensic accountants specialize in forensic
analytics which is the procurement and analysis of
electronic data to reconstruct, detect, or otherwise
• identify fictitious vendors, and these techniques might also be used
by a the head office to detect fraudulent or erroneous sales reports
by the branches in a multi - branch environment.
• Fraud management is a knowledge-intensive activity. The main AI
(Artificial Intelligence) techniques used for fraud management include:

• Data mining to classify, cluster, and segment the data and

automatically find associations and rules in the data that may signify
interesting patterns, including those related to fraud.
• Expert systems to encode expertise for detecting fraud in the form of
rules.
• Pattern recognition to detect approximate classes, clusters, or
patterns of suspicious behaviour either automatically may
• support a claim of financial fraud. The main steps
in forensic analytics are as earlier stated, (a) data
collection, (b) data preparation, (c) data analysis,
and (d) reporting. For example, forensic analytics
may be used to review an employee's purchasing
activities to assess whether any of the purchases
were diverted or divertible for personal use.
Forensic analytics might be used to review the
invoicing activity for a vendor to
• (unsupervised) or to match given inputs.

• Machine learning techniques to automatically identify

characteristics of fraud.
• Neural networks that can learn suspicious patterns from
samples and used later to detect them.
• Other techniques such as link analysis, Bayesian networks,
decision theory, land sequence matching are also used for fraud
detection.
• The younger companies in the fraud prevention space tend to
rely on systems that have been based around machine learning,
rather than later incorporating machine learning into an existing
system
• Machine learning and data mining

• Early data analysis techniques were oriented toward extracting

quantitative and statistical data characteristics. These
techniques facilitate useful data interpretations and can help to
get better insights into the processes behind the data. Although
the traditional data analysis techniques can indirectly lead us to
knowledge, it is still created by human analysts.
• To go beyond a data analysis, system has to be equipped with a
substantial amount of background knowledge, and be able to
perform reasoning tasks involving that knowledge and the data
provided. In effort to meet this goal, researchers have turned to
ideas from the machine learning field. This is a natural source of
• ideas, since the machine learning task can be described as turning
background knowledge and examples (input) into knowledge
(output).
• If data mining results in discovering meaningful patterns, data turns
into information. Information or patterns that are novel, valid and
potentially useful are not merely information, but knowledge. One
speaks of discovering knowledge, before hidden in the huge
amount of data, but now revealed.
• Supervised and unsupervised learning

• The machine learning and artificial intelligence solutions may be

classified into two categories: 'supervised' and 'unsupervised'
learning. These methods seek for accounts, customers, suppliers,
• etc. that behave 'unusually' in order to output suspicion scores,

rules or visual anomalies, depending on the method.

• Whether supervised or unsupervised methods are used, note that

the output gives us only an indication of fraud likelihood. No stand

alone statistical analysis can assure that a particular object is a

fraudulent one. It can only indicate that this object is more likely to

be fraudulent than other objects.

SUPERVISED METHODS
• In supervised learning, a random sub-sample of all
records is taken and manually classified as either
'fraudulent' or 'non-fraudulent'. Relatively rare
events such as fraud may need to be over
sampled to get a big enough sample size. These
manually classified records are then used to train
a supervised machine learning algorithm. After
building a model using this training data, the
• algorithm should be able to classify new records as
either fraudulent or non-fraudulent.
• Hybrid knowledge/statistical-based systems, where
expert knowledge is integrated with statistical
power, use a series of data mining techniques for
the purpose of detecting cellular phone fraud.
Specifically, a rule-learning program to uncover
indicators of fraudulent behaviour from a large
database of customer transactions is implemented.
• Cahill et al. (2000) design a fraud signature, based on data of
fraudulent calls, to detect telecommunications fraud. For scoring a
call for fraud its probability under the account signature is
compared to its probability under a fraud signature. The fraud
signature is updated sequentially, enabling event-driven fraud
detection.
• Link analysis comprehends a different approach. It relates known
fraudsters to other individuals, using record linkage and social
network methods.
• [Show me your friend and I will tell you who you are.]

• This type of detection is only able to detect frauds similar to those

• which have occurred previously and been classified by a human.
To detect a novel type of fraud may require the use of an
unsupervised machine learning algorithm.
• UNSUPERVISED METHODS

• In contrast, unsupervised methods don't make use of labelled

records.
• Some important studies with unsupervised learning with respect to
fraud detection should be mentioned. For example, Bolton and
Hand use Peer Group Analysis and Break Point Analysis applied
on spending behaviour in credit card accounts. Peer Group
Analysis detects individual objects that begin to behave in a way
different from objects to which they had previously been similar.
• Another tool Bolton and Hand developed for
behavioural fraud detection is Break Point
Analysis. Unlike Peer Group Analysis, Break
Point Analysis operates on the account level. A
break point is an observation where anomalous
behaviour for a particular account is detected.
Both the tools are applied on spending behaviour
in credit card accounts.
• Also Murad and Pinkas focus on behavioural
• changes for the purpose of fraud detection and present three-

level-profiling. Three-level-profiling method operates at the

account level and points to any significant deviation from an

account's normal behaviour as a potential fraud. In order to do

this, 'normal' profiles are created based on data without fraudulent

records (semi supervised). In the same field, also Burge and

Shawe-Taylor use behaviour profiling for the purpose of fraud

detection. However, using a recurrent neural network for

prototyping calling behaviour, unsupervised learning is applied.

• BRAIN STORMING
QUIZ SECTION
Question Time
Agenda: Day 4

• 4.0. Accountability
• 4.1. Overview
• 4.2. The Scope
• Tea Break
• 4.3. Finger Prints of Fraud
• 4.4. Nature of Accountability
• Lunch
• 4.5. Fraud and Accountability
• Brain Storming Section
• Participants Opinion
 ACCOUNTABILITY AS FRAUD
DETECTION AND
CONTROL TECHNIQUE:
• OVERVIEW

• One of the major attributes that have eluded the Nigerian policy

for a long time is

• Accountability. The fact that accountability seems to be the major
road to good governance makes it Inevitable. It is apparent
therefore, that without a reversion to this cardinal attribute, the
attainment of good governance may continue to remain a wild
goose chase. If the tenet of accountability is well observed, it
could be a necessary hindrance to fraudulent practices as
• opportunities resulting from exploitable loopholes would be

reduced if not totally wiped out.

• It is on this note that we examine the relevance of the practice of

accountability in fraud prevention and control. To this end, we

need to specifically examine the three major components of

accountability, which are responsibility, responsiveness and

transparency.
 Each of these components has four attributes

(making twelve attributes in all) that constitute the

essential components of fraud analysis. We will

view it from both the primary and secondary data

to enhance the quality of the findings. Statistical

methods, such as standard deviation (to derive

the standard scores), frequency distribution (to

rank or rate the scores) and Analysis of Variances.

(ANOVA)

(to test findings) were employed in the evaluation

of the data.

It is clear that of the three components,

transparency is perceived the most effective

antidote of fraudulent practices. While openness

to public scrutiny (also an attribute of transparency) remains the

best method to prevent fraud. On this note it is recommended,

among other things, that Public Servants should be cultured to

imbibe the spirit of openness to public scrutiny, timely release of

reliable information, prudence in the application of resources, etc,

all of which serve as necessary inputs needed for fraud prevention

and control to sanitise the system.

 THE SCOPE
The idea of accountability is as old as organised government. In a
limited sense, it is usually associated with financial dealings in
which those concerned are deemed to be under a duty bound to
give a formal statement of monetary involvement. In other words, It
is a system in which individuals and organizations are delighted to
be’ accountable for their conducts and responsibilities.
Accountability is a basic tenet of African public service ethics as it
is unequivocal to say that it is a prime and enduring ethical value
required of all public servants. Since public accountability is central
to good governance, it has been generally taken to be the
parameter for adjudging the public expectation of fairness,
responsiveness and exemplary leadership. According to Etzioni
(1975), the principle is as old as the existence of human being
in social forms, as it has evolved in stages and closely followed
political watershed. From the days of King Hamurabi of Babylon
right down to mediaeval England and to the present day, the
concept is bedeviled with the problem of what constitutes
accountability.

  According to Asobie (1991), accountability is the obligation

owed by anyone occupying a position of trust or responsibility to
provide appropriate response to all stakeholders, for action
carried out and/or performance achieved in the discharge of his
duties.
 Accountability is an obligation because it goes
as a corollary to the responsibility and authority
to perform assigned duties. It’ is therefore a
necessity, whether or not formally requested.
 
 FINGER PRINTS OF FRAUD
• The most common traits and habits of fraudsters are lying,
dishonesty, high profile lifestyle, desire for material things, drug
and alcohol abuse.
• We can clearly deduce from the above that, even though
fraudsters could not be identified by demographic data, a close
watch of individual behaviour and way of life may provide possible
insight of a fraudster. An honest person today may be a criminal
the next day, having overstepped the line, due to social pressures
which cannot be quantified.
In his own view Rose Ackerman (1997) stated that though fraud

occurs throughout the whole world, it is of special concern in

developing countries. Where fraud is systemic, those who pay and

receive bribes can expropriate such nation’s wealth leaving little

for its poorest citizens. He went further to say that a country’s

level of corruption depends not on its economic potentiality but

rather, on its political structure.

 NATURE OF ACCOUNTABILITY.
Olson (1993) gave four criteria regarded as basic to public
service accountability.

These include: fiscal accountability; managerial accountability;

programme accountability and Individual accountability.

Fiscal accountability: is concerned with adherence to

applicable laws and regulations, consistency with appropriate
accounting principles and traditions, accuracy and fairness of

reports and complete legitimacy of expenditure.

 
•  
Managerial Accountability: deals with the generating of essential
information for decision-making and the need for economy, efficiency
and effectiveness of operations.

Programme accountability: is broadly concerned with overall

evaluation of programme impact and the extent to which it’s intended
goals and aspirations are attained.

Individual accountability: is related to the ‘personal qualities and

conducts demonstrated by accountable officers. It involves such
attributes as commitment, honesty, trust, probity arid integrity. It is
necessary to add that, it is the individual accountability that
enhances the required overall transparency.
• Accountability often begins with the need to pursue probity and
integrity on the part of public administrators to guard against abuse
and misuse. Accountability in general implies “stewardship”. Public
accountability has five known patterns: political, legal, ‘financial,
ombudsman (public complaints commission) and public opinion.
Our concern however, is financial accountability.

Financial stewardship function, in the main, involves ensuring legal

compliance with applicable laws and regulations. This, can be

discussed under two operational definitions.

• (a) Efficiency Accountability - this implies that accounting
officers have a duty to use the resources placed at their disposal in
the most efficient manner.
• (b) Effective Accountability - this relates to the role which the
accounting function should play in assisting management to achieve
programme or activity objective. In most cases effectiveness is
measured where output can be quantified in monetary terms
otherwise, cost-benefit analysis is applied. According to Asobie
(1991), accountability is in effect an external control on accounting
officers. To be effective it must satisfy four necessary conditions:

 
• 1. There must be timely, honest, accurate, complete, adequate and
relevant information on the actions of those entrusted with public
fund. 
• II. There must be external auditor’s independence of the
organization/ ministry/departments being entrusted.

iii. There must be arrangement which will enable recourse on the

basis of such information to correct deficiencies, reward
honourable performances, penalize fraudulent dealings. We must
call to question all forms of abuses and redress illegal acts
promptly as they arise.

iv. A system must exist which makes all the three elements above
interact.
 FRAUD AND ACCOUNTABILITY
The effective performance of the functions of financial management
is today faced with serious challenges of an increasing tide of fraud
in our society. To ensure accountability, fraud must be viewed as
real threat to good governance, effective management and as
enemy of progress in the society as a whole.

Fraud in practical terms, refers to situations where accountability is

impaired. Fraud is a subset of the much broader concept of
corruption.

A legal definition may be to consider fraud as any form of

irregularity involving the use of’ criminal deception to obtain
some illegal advantages. Fraud occurs when a person in a position of
trust and responsibility, in defiance of prescribed norms, breaks
the rules to advance his personal interests at the expense of the
public interest which he has been entrusted to guard and promote.

It also occurs when a person, through deceit, trick or highly

intelligent cunning manners, gains an advantage he could not
otherwise have gained through lawful, just or normal processes.

The common element in most definitions of fraud is the use of

deception.

Effective financial management must analyse the conditions

leading to fraud so as to take appropriate policy and procedural
measures to control or prevent its occurrence. Such measures
may include:
• Regulations.
• Relationships. 

• Attitudes and

• Awareness.

These are needed to minimize opportunities and help individuals

resist temptations to engage in such criminal acts. Thus, Fraud is a
matter of the individual, choosing to cash in when the opportunity
arises. It occurs when intent and opportunity meet. 

The cheapest and best approach to the prevention of fraud is

precaution and there are three-pronged attacks on employees’
fraudulent tendencies, namely:

- Elimination of pressure to commit fraud

- Elimination of opportunities to commit fraud and 

- Increasing personal integrity.

 QUIZ SECTION
• 1.4. Director General Sold Investment Products Not
Approved by the board
• NAFDAC internal control team received multiple complaints
over a short period about a branch in the North East of
Nigeria and Mr. Emeka, a DG and the branch manager.
The complainants had no connection to one another other
than having Mr. Emeka as their adviser.
• Mr. Emeka had worked at the branch for many years, and
his clients regarded him as knowledgeable and trustworthy
given his dual advisory and branch manager roles. He had
recommended a test control payment procedure to the
• complainants that he promised would provide guaranteed 10%
savings on their processing cost. The clients wrote cheques, for
varying amounts, and gave them to Mr. Emeka. In return they
received a “schedule" detailing their savings.
• At first, the complainants enjoyed regular savings as expected.
Then, within a year, the savings suddenly stopped. After many
failed attempts to contact Mr. Emeka  the complainants eventually
complained to the NAFDAC head office and demanded their money
be returned as all payments could not be traced to NAFDAC
account, and as such they were being prosecuted for acquiring
control certificates without paying for them.
• Unknown to the complainants, the savings scheme Mr. Emeka sold
to them was not approved by NAFDAC. The Agency explained that
Mr. Emeka had made these transactions “off-book", meaning he
had sold a saving scheme outside the activities of the agency and in
this case without NAFDAC’S knowledge. The agency sympathized
with the complainants but did not offer compensation, as the losses
resulted from transactions not actually by it.
• Unsatisfied, the complainants brought their complaint to You.

• REQUIRED:
– List the procedures you will take to investigate this matter.
– Review the matter before you and document your findings
– Take a decision with respect to this matter, based on your
findings.
Question Time
Agenda: Day 5

• 5.0. Strong Internal Control

• Tea Break
• 5.1. Internal Audit
• 5.2. Promoting Tips
• Lunch
• Group Photograph
• Certificate Presentation
• Participants General Assessment
• Vote of Thanks
 STRONG INTERNAL CONTROLS
• According to the ACFE study, 20 percent of fraud schemes that
were uncovered were initially detected though internal controls.
Management needs to design controls to provide assurance that
fraud objectives are being met. This process starts with operations
that are routine in most governments, such as preparing monthly
bank and account reconciliations. It is imperative that these
controls are performed in a timely manner in order to function
properly.
• Effective controls surrounding check processing also are essential
for every government. In general, there should be a segregation of
duties for the approval, processing and signing of checks,
• as well as the reconciliation of bank statements.
All checks over a dollar threshold should be
manually signed by two employees from outside of
the finance department. These steps alone greatly
decrease the chance of billing schemes going
undetected. The government also should invest in
check stocks that cannot be scanned or easily
manipulated.
• Governments also can take advantage of their
• bank’s positive pay system, a common devise used to
eliminate check fraud. Under such a system, the
government’s finance department submits its check
register daily to the bank through a secure online
process. The bank then only clears checks that match
the check number, payee and amounts submitted by
the government.
• When a government receives a significant number of
check payments through the mail, it may be wise to
establish a lockbox with the bank
• to mitigate fraud. Under a lockbox system,
receipts are mailed directly to the government’s
bank, where they are tracked and deposited.
This process essentially eliminates the risk that
check receipts will be misappropriated.
Governments also should obtain fidelity bonds
for all employees who handle cash.
 • INTERNAL AUDIT

Many large governments have a formal internal audit department.

While small governments generally find this cost-prohibitive, these

governments can still achieve the same objective by creating an

internal audit committee, as many small not-for-profit organizations

do. Such a committee should be headed by a member of the

government’s ruling body or an independent financial expert

appointed by the ruling body. The following are procedures that the

internal audit
committee should perform, as recommended by Edward J.

McMillan, CFE:

• Review the prior month’s bank reconciliation detail.

• Ensure that the organization’s internal control policies are

effective and, more importantly, being followed.

• Meet with representatives of the bank to review signature cards

to ensure that all that signs are authorised and that there are

no unauthorised accounts.
Meet with the insurance agent to ascertain that coverage is
adequate for all policies, with particular attention to fidelity
bonds.

Test the payroll by comparing payroll records to personnel

files.

Contact each employee directly to ensure that there are no

“ghosts on the payroll.”

Interview all employees who are responsible for receiving and

disbursing cheques to ensure that policies and controls are
adequate and being followed.

Test disbursements to ensure that invoices have been

approved for payment properly.
 Check the accounts payable files and physically contact new vendors to

ensure that they exist.

The internal audit committee should report its findings to the governing

body and external auditors. Developing an internal audit committee may

be a government’s best and, in many cases, only way to determine that

internal controls are functioning properly. In addition, the ACFE study

noted that 18 percent of uncovered fraud schemes were detected as a

result of internal audit procedures.

 
 PROMOTING TIPS
The ACFE study noted that 50 percent of uncovered fraud schemes
in the government sector were initially detected through employee
tips. Governments should encourage such tips by developing a
formal whistleblower policy. This policy should describe the method
in which employees can report fraud without fear of retaliation. In
order to make the process more confidential, the government should
consider using a third party “whistleblower hotline.” Under such a
system, a vendor receives phone calls directly from whistleblowers,
logs the information gained from these calls, and reports the issues
to the appropriate government official. Whistleblowers may report
their tips anonymously if they so choose.
For most such hotlines, the costs of implementation and ongoing usage
are not significant.
• CONCLUSION

• Fraud is prevalent in the government environment, and the current

economic crisis has given employees all the more reason to
consider attempting a fraud scheme. While the risk that fraud will
occur can never be completely eliminated, governments do have an
obligation to constituents to minimize this risk to the extent that is
possible. Developing strong internal controls, ensuring an active
internal audit function, and encouraging employee tips are the most
effective ways of accomplishing this objective.
 Venue Options

Location –
Mandate Garden Hotel,
Question Time