Abstract

The globalization of the economy, technological advancement, complexity of business, and allegation of fraudulent financial reporting have recently sharpened the ever-increasing attention on internal controls and auditing.

Simultaneously, the capital market have seen many new financial instruments and players been introduced, making transactions and operations more complex and increase in fraudulent activities, and payroll expense is one of the main expense in every business, this makes it easier for there to be fraudulent activities. This type of fraud is not noticed reason it increases very rapidly.

The study mainly focused on the Role of External Auditors in Detecting and Preventing Payroll Fraud in NGOs. To accomplish the objective, both primary and secondary data were used in the research. Primary data was administered to 50 employees through the means of questionnaires meanwhile secondary data was gotten from the examination of relevant documents of the[NGOs website] to enable the collection of relevant data.

Data gotten from questionnaires were compiled, sorted, edited, classified, coded and analyzed with the help of descriptive statistics frequencies, percentages, and product moment correlation coefficient. Based on our result from the correlation analysis r=0.041, it showed that there is a strong positive correlation between audits and the detection and prevention of payroll fraud in NGOs in Buea.

The researcher recommend that, municipality authorities, head of banking institution, and those directly involved with issues in need of control in NGOs such as accountants, cashiers among others should take care of the internal control measures and make sure they implement it so that it does not continue and be of harm to the various NGOs, companies should adhere to disciplinary actions against workers who go against internal control measures and most especially fraud propagators, the government should get into dialogue and more talks with NGOs.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The evolution of auditing had been a complicated history that has always been changing through historical events. Auditing always change to meet the needs of the business environment of the century. Auditing had existed since the beginning of human civilization and it focused mainly on detecting fraud and was done through extensive detailed examination from ancient times until the late 19th Century Lee, (1988). Fraud was of a great concern during the early history of auditing because; internal controls were not used effectively until the 20th Century.

The late 19th Century was a turning point in auditing when laws like the English Company Act of 1862 were enacted. Auditing activities existed in countries like ancient China, Rome and Greece. According to McNamee, (1995), the earliest records ever audited were Babylonian Clay tablets some 5000 years ago. The historical development of auditing was based on the “Stewardship” concept of Company Management Whereby Stewards was appointed to safeguard and account for the assets over which they had management control.

The function of the auditor was to ensure the Proprietors that the stewardship of their company was effectively and honestly carried-out. Auditing has undergone remarkable evolutions in the 21st century with the existence of new types of auditing like internal auditing, external auditing, management auditing, statutory auditing and compliance auditing.

In the 21st century the auditing profession witnessed corporal scandals. After a series of revolution involving irregular accounting procedures bordering on fraud penetrated throughout the 1990s involving Enron and its Accounting firm Arthur Andersen, Enron stood on the verge of undergoing the largest bankruptcy in history in mid-November 2001 (the largest chapter 11 bankruptcy until that of the Investment bank Lehman Brothers on September 15, 2008). It was mainly the scandal on Enron that indicated the lack of independence and objectivity at the executive levels Agacer, Vehmanen &Valcarcel, (1997).

Enron did not only fail due to improper Accounting Practices but, it also failed due to corporate cultures that pushed executive into unethical behavioursRobbins, (2003) thus undermining fundamental principles such as objectivity and independence. The Enron scandal led to increased demand for independence and objectivity of auditors within the auditing profession. This scandal led to a loss of clients in the largest auditing firm (Enron). To be able to keep their clients, auditors paid keen attention to ethical dilemmas that came their way Agacer et al, (1997).

‘‘It is always right to detect a fraud and perceive a folly. But it is often very wrong to expose either. A man of business should always have his eyes open, but must often seem to have them shut’’ (Stanhope). People are very weak when the power of money is involved. They believe that money is the answer to everyone’s problem. That is why they are easily attracted to commit fraud. This bad practice is still prevalent in the business world today. Business analyst said that itwas already part of the economic parlance with the state of our global and local economy today, businesses and individuals suffer a decline in their financial resources.

The issue of payroll in organizations was of utmost importance to the life of the organization as it ensured optimal use of the organization’s resources. According to Cadmus and Child, (1953), because payroll wasso important as part of operating cost, and because it was usually controllable within rather wide limits, it was customary and correct that payroll should have continual executive attention.

The present day observation of payroll differs from that of the earlier days owing to the changes in businesses and the world at large. Taking a step down memory lane, the following changes have been visible. It should be noted that primarily, payroll can trace it roots back to bookkeeping in most industrialized nations.

In the first instance, bookkeeping was a way for merchants to keep trace of their sales and outgoings, but over the time as trade and businesses developed on a large scale, it developed in to something much more complex. These days, companies needed to keep trace of their employees pay as well as their own buying and selling, and with tax and legislation ever changing, the need for accurate and efficient payroll solution became paramount.

Today payroll may sound very contemporary or new in our life but payroll actually dates back to 7000 BC. Whilst not the payroll we know today, archaeologists had found evidence of payroll records caved in to stones, dating back to this period. There were also records from Athens in the 5th century showing that the Greeks also liked to keep their houses in order.

The Greek system was the first known system which beard resemblance to HR and payroll systems used today. The Athenians developed a system for managing pay in which public servants, treasurers and clerks kept records by chiselling payment details and financial records in to stones. Payroll as known today largely came about during the industrial revolution of the 19th century. With the onset of mass production and employment countries, the need to keep accurate record of workers and their pay arose. Without financial documentation it would had been impossible to keep up with outgoings.

During the 19th it was still based on manual recordings of the above information. In 1950s, when the first Computerized LEO (Lyon Electronic Office) was developed. IT based payroll began to take shape in order to handle clerical task. Whilst it was first used for valuation, it was soon used to manage other clerical tasks including payroll services.

Today, companies’ no longer need to manage their own payroll as they are companies specialized in payroll management who can you. Today in work places, any business which employed staff needed a fluent and effective payroll system. Payroll had moved on since the industrial period. Is your business equipped to deal with the demand of life in the information revolution? Save your company, institution or organization time and money by investing a professional payroll outsourcing solution

The role of the external auditor in management was very important in the auditing profession Stewart & Subraniam, (2009). The auditor’s role in management was extremely essential due to the business entity concept which stated that there should be separation of ownership from management (Stewardship concept in Company Management).

As proprietors became further and further removed from the day-to-day management of their businesses, there was the need for an independent person to safeguard and account for assets which they had management control. Independence was therefore fundamental to the reliability of auditors’ reports so that their work could not be biased. Auditing could be generally classified into internal and external auditing. External auditing was done whereby an independent person examines the overall financial statement of an entity.

The study focused on external auditing whereby an audit was carried ¬¬out by an independent auditing firm or individual in detecting and preventing payroll in an organization. External audit involved an audit by an independent body out of the organization to review the financial statements of an organization as a whole or payroll system in particular in an organization as well as the results of the operations.

External auditor functions were delegated by management, board of directors (BOD)or shareholders to independent body or bodies who had this as their sole responsibility. External audit has as its objectives to bringing a systematic and disciplined approach to evaluate and improve the effectiveness of payroll, risk management, control and government processes.

External auditing also provided a reasonable assurance to management and board of directors that the controls they had in payroll department were adequate to mitigate any potential payroll fraud and risk that the organization had encountered and ensured that information and opinions were communicated with clarity and accuracy.

Therefore, external auditors helped in strengthening payroll system and corporate governance. Major companies had also collapsed in Cameroon due to improper auditing. These were mostly banks and micro-financial Institutions like CONFINEST, AMITY BANK, First Investment for Financial Assistance (FIFA), and Union Bank of Cameroon and a host of others. To ensure independence and objectivity of an external auditor, an unbiased and reliable audit reports were to be issued. Independence had to be in both facts and in appearance.

After the fall of Enron and other big 4s, the United States congress passed the Sarbanes- Oxley Act (Sarbox) of 2002 to enhance standards for all U.S Public company boards, management and public accounting firms. It was named after the US Senator Paul Sarbanes and US representative Michael G.Oxley Rosemary Peavier, (2003). It was designed to protect shareholders from fraud that could ultimately destroy their investment.

The Sarbanes –Oxley Act created certain financial reporting procedures for both public companies and their auditors. Senior executives and auditors were given specific responsibility to ensure that the financial reporting from public companies had to be truthful in the future. The penalties for non-compliance with Sarbanes-Oxley Act included both civil and criminal charges.

Moreover, other pitfalls of the act were that; it was unnecessary and too expensive to implement, it had failed in its objective to ensure honest financial record keeping and disclosure. Nonetheless, the Act had helped in the preparation of precise financial statements for public companies and that shareholders had greater confidence in their investment.

1.2 Statement of Problem

All organizations can be at risk of fraud. Large fraud will lead to the collapse of the entire organization, causing major losses to the investors, an important legal cost affecting directly to key individuals and loss of confidence in capital market. Publicized fraudulent by key executives have negatively impacted the reputations, brands and images of many organizations in the world wide.

Payroll fraud was one of the largest accounting frauds occurred in every organization. Clearly, whilst payroll fraud was uncommon, there were plenty examples where it happened, and it cost losses to businesses and employers a significant amount of money. A study in 2010 found that businesses in Britain lost 73 billion euro a year due to payroll fraud (Stephen Harrison), the National Fraud Authority Chief Executive. However, this figure covered what was detected so, the actual figure was likely to be significantly higher. According to the Association of Certified Fraud Examiners, it was the number one source of accounting fraud and employee’s theft. Statistics showed that payroll fraud happened in 27% of all businesses. It occurred nearly twice as often (14.2%) in small organizations with less than 100 employees than in large ones (7.6 %), Mathew Garrett, (2015)

The researcher undertaking the study was to find various ways in which payroll fraud could occur, how it could be detected and possible ways of preventing and stopping it from happening. Payroll fraud was persistent in jobs where the workers were not running their own independent businesses: construction, day labour, agriculture, poultry, trucking, home base work and public sector.

Most Non-Governmental Organizations (NGOs) suffered losses and expenses from payroll fraud. The research focused more in NGOs to see how payroll fraud occurred and the possible ways it was detected and prevented by external auditors. Preventing fraud included policy, procedure, training and communication whilst finding focused on the activity and the techniques in order to quickly recognize it or was happening.

External auditing was concerned with auditing of financial statements of an organization and financial reporting by reviewing activities to safeguard a company’s assets and to prevent fraud and errors in the organization. Therefore, the significance of auditing in every organization had not to be under-emphasized.

The Auditor’s independence increased the quality of audits done and consequently, investors relied heavily on the quality of financial information in order to make investment decisions. Independence and objectivity of both external audits and external auditors were an integral part of the profession for improved quality in terms of reliability and credibility of the work (Institute of Internal Auditors, 2001).

Yet independence and objectivity were not easy to achieve because they entailed mental aptitude and unbiased conduct which was difficult to achieve since external auditors were required to review and report upon decisions made by top management of the same company. Consequently, management could manipulate estimates and judgments required for the preparation of financial statements.

Furthermore, external auditors offered additional services to their clients such as giving constructive advices to management Zwaanet et al, (2009). This placed the auditor in a unique and conflicting position and impaired objectivity because of the acceptance of undue hospitality and due to the fact that management and the external audit department were viewed as contradictory rather than complementary functions.

In the 21st century, NGOs in Cameroon had greatly evolved because of technological advancements and diversification of services ranging from humanitarian, educational, health care, public policy, social, human right, environmental and other services to effect changes according to their objectives. These modifications had enabled NGOs to increase in size leading to complexity of business practices, accounting practices and process controls. Thus there was the need for external audits for efficiency and effectiveness.

1. What is an audit?
2. Who is an external auditor?
3. How can external auditors detect and prevent payroll fraud?
4. What is payroll fraud?
5. Does fraud exist in payroll departments?
6. Who are the persons involved in payroll fraud?
7. Does fraud have any adverse effect on the progress of any organization and country’s economy?
8. What are the causes of fraud in the payroll system?
9. What are the types of fraud committed in the payroll department?
10. Does poor motivation of employees in an organization cause fraud?
11. What are the areas and persons involved in payroll fraud?
12. How can payroll fraud be prevented in NGOs?

1.3 Objectives

1. To identify areas, persons and problems involved in payroll fraud.
2. To examine the role of external auditors in detecting and preventing fraud.
3. To make recommendations.

1.4 Hypotheses

H0: There is no significance role played by external auditors in detecting and preventing payroll fraud in NGOs.

H1: There is a significant role played by external auditors in detecting and preventing payroll fraud in NGOs.