Abstract
Financial reporting fraud affects corporate organizations as stakeholders express lack of self-confidence in financial reports. The chapter assessed the effect of financial reporting fraud, improper expense recognition and fictitious revenue on the performance of firms in the Nigerian Exchange Group return on assets (ROA). Secondary data were collected from the firm annual accounts. Correlation and regression analysis were employed. The results revealed that improper expense recognition has a negative significant relationship with ROA. Also, fictitious revenue reflected a positive but insignificant relationship with ROA. The chapter concluded that financial reporting fraud somewhat affects the performance of firms as supported by a positive relationship reflected by fictitious revenue and negative relationships shown by improper expense recognition. The chapter recommended that financial reporting fraud needs to be investigated to reveal the fraud that affects the performance of firms to aid better and easier forensic accounting investigation.
TopIntroduction
The capital market is central to the fiscal strength, progression and development of any economy including Nigeria. The capital market trading institution in Nigeria is the Nigerian Stock Exchange (NSE). The Nigerian Stock Exchange (NGX), formally Nigerian Exchange Group, is a foremost integrated market in Africa that services the continent’s biggest economy. The financial report provided by the firms in the capital market should be reasonable, efficient and clear and must be free from any misleading information (Robert, 2020). Kanu and Okorafor (2013) stated that financial reports are thought to be tools in which users can rely when making investment decisions. However, many firms have suffered a lot in Nigeria nowadays from fraud and untrue deeds in the capital market.
The habitual nature of fraud in firms has posed severe threat to the financial performance of firms and the survival of market in general (Agbaje & Oloruntoba (2018). Fraud methods can be done in many ways which include the reporting of fictitious income, cooking different period accounting information, omission of debts and expenses that is incorrect expense recognition, incorrect reporting, and incorrect examination of the value of properties or inappropriate valuation of asset (Everette, 2012 & Arthur, 2014). The faith of financial reporting on fraud circumstances is brought to questioning by stakeholders (Robert, 2020). Notably, Robert (2020) and Sudaryono (2021) reported that the fictitious revenue, the incorrect asset valuation and the improper recognition of expense constitute major fraud methods in corporate organizations.
Arthur (2014) and Agbaje and Oloruntoba (2018) have opined that the dependence of stakeholders on the information provided in financial report continues to constitute one of the greatest global challenges for businesses as it has always been difficult to stop fraud methods when it takes place. Thus, there is the need to know the direct and indirect link of fraud methods on the performance of businesses in the Nigerian Exchange Group. Generally, the chapter assessed the effect of fraud methods on the performance of firms in the Nigerian Exchange Group. The specific objectives of the chapter were:
- 1.
To examine the effect of improper expense recognition on the performance of firms in the Nigerian Exchange Group.
- 2.
To assess the effect of fictitious revenue on the performance of firms in the Nigerian Exchange Group.
TopBackground
Fraud methods is the action or accomplishment intended to deceive others. Fraud is a deliberate deceiving act intended to offer the committer with an illicit gain or to refute a right to a prey. Commonly, the frequent fraud that occur in financial reporting have been observed as the fictitious revenue, the incorrect valuation of asset and the improper recognition of expense (Robert, 2020 & Sudaryono, 2021). Bulk of studies on fraud methods such as Ozondu, Okoye, and Adeniyi (2019), Ibrahim, Mohammed, and Fatima, (2014), AbdulRaheem, Isiaka, and Muhammed, (2012) and Agbaje, and Oloruntoba, (2018) have always been on a particular sector of the economy. The stakeholders want their firms to be accountable, fair and transparent in their everyday activities so as to achieve for operational success (Reurink, 2018). The chapter was specifically inspired by the reason that investors have no self- confidence in the capital market, and also because of the insolvency of large firms which has been evidenced as the result of fraud methods. The chapter therefore sought to examine the effect of fraud methods on the performance of firms in Nigerian Exchange Group using the most capitalized firms, from different sectors, who are the major market players. The chapter investigated the relationship between fraud methods (represented by improper revenue recognition and fictitious revenue variables) and firms’ Return on Assets (ROA) taken as a substitution to measure firm performance. The chapter thus addressed the issue relating to the pertinent question of to what extent does fraud methods affect the performance of firms in the Nigerian Exchange Group.
Key Terms in this Chapter
Return on Asset: An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient a firm's management is at using its assets to generate earnings.
Detection: The act of discovering a fraud.
Improper Expense Recognition: When revenue is incorrectly moved from one period to another.
Capital Market: Is a market where buyers and sellers involve in trade of financial securities like bonds and stocks.
Financial Fraud: When someone harms your financial health through ambiguous, deceptive, or other unlawful practices. This includes identity theft or investment fraud.
Stock Exchange Group (NGX): The authorized market for trading publicly quoted shares.
Investigation: Detailed search for facts of an important situation.
Fictitious Revenue: It is the sale of goods and services that never occur.
Legitimacy Theory: The theory that a social contract occurs between business and society.