Fraud and Financial Malpractice as A Leading Factor in Business Failure

Fraud and Financial Malpractice as A Leading Factor in Business Failure


Failure of a corporation can be viewed from many perspectives, according to Frcar (1990) Economic failure of a corporation refers to a situation where a firm’s net rate of return on investment, adjusted for risk is significantly lower than the prevailing rate of interest while legal failure refers to a period or situation when the assets of the company are not sufficiency to meet the legally enforcement claims of its creditors. Technical insolvency on its own describes a situation in which a firm finds itself such that it is unable to meet its current obligations even though its total while bank raptly in an equity sense refers to a state where a firm’s total liabilities has outstrip its total assets”

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Whereas Technical insolvency can be said to be an asset liquidating management problem, Bankruptcy is the same as failure or non –performance.

In medical circles, when such an event happens to human life, the doctors invariably confirms the person as “dead”. For firms or corporate organisations, when this situation arises, corporate objectives become unattainable, the business can no long break-even and the venture is said to have failed.

A Accessory symptoms for complete failure of an organisation is distress. Several attempts have been made in the past to define the word “distress” In ordinary parlance the word “distress” connotes “unhealthy situation” or a state of inabilities or weakness which prevents the # achievements of set goals and aspiration.

According to ologun (1994) and Benston et al (1986) distress is described as a “situation of complete or near complete loss of shareholders funds”. Alashi (1993) independent operation or continuance without the assistance of relevant authorities such as a deposit insurance institution” Thus the traditional quantifiable measure of failure (loss figures presented in standard financial statements) are not very helpful in assessing the degree or severity of distress of such a financial institution.

For the purpose of this research a ‘distress organisation’ is a described as one with severe financial, operational and managerial weakness which have rendered it difficult to meet its obligations to its customer, owners and the rest of the economy as and when due. Thus distress of a financial intermediary is often technically used to describe two distinct but closely related states or conditions in which the sum of assets of an organisation, financial or otherwise is less than which prevent it from honoring its obligation to creditors.   Liquidity on the other hand, describes the problematic cash fulcra position of a firm.

For the financial service industry, financial distress is described by the Federal Research Bank, san Francisco (1985) as a sharp reduction (11) the value of financial institutions assets resulting in apparent of real insolvency of many financial institutions accompanied by short run and possible the collapse of some institutions.


In discussing the factors that are responsible to the collapse and eventual failure of a business entity it is necessary to understand that a business entity operates in an environment within the society or Area in which it operates. In other words every organisation exists in a society. It is part of society and as such operates within the confines of that society, in the course of its daily operations, shareholders, the government, technology, its competitors, labour unions and the communities at large. It is all this that constitute the environment of an organisation.

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Environment is defined as “those factors or forces that are largely or totally outside of management” control which are key factors in influencing the success of a decision to develop and sell a new product – Hicks and Gullet (1980). Nickell et al (1996), defines environment as a combination of physical, cultural and social reconditions that surround and affect the nature and quality of living of an individual or group and also affect the nature, quality and type of decisions in a business enterprises.

An organisation and its environment are interdependent, as the organisation depends on its environment for the resources and opportunities necessary for it existence.

Additionally, the environment determines the limits of the organisation activities the provides all the threats or constraints to the business enterprises and opportunities exist in the environment and threats that can destroy the business – Burt (1999). It is for this reason that the management of any and careful in analysing its environment, as the environment is an indispensable factor in organisation.

The environment of business is normally classified into two viz:

  1. Internal environment
  2. External environment.

The external environment consists of all factors outside the organisation

that affect either directly or indirectly the functioning of the organisation. This environment are the task environment.

The general environments consist of factors that are not particular to the organisation, as it also affects other organisations and therefore from the general context within while the organisations operates. It includes .

I        Economic environment

Ii       Socio – cultural environment

Iii      Technological environment

Iv      Political/legal environment

V       Ecological environment

The prevailing economic conditions under which an organisation operate constitutes its economic environment.

The economic environment indicates have resources are being distributed and used within the community, country or nation. The state of the economy at any time affects the operation of the firm. The major happenings in the national economy which the manager must pay attention to include.

The stage of the business cycle the economy can be said to be in deressopm, recession, recovery pr prosperity

The inflationary trend in prices of goods and service

Monitory policies, interest rates deregulations etc

Fiscal policies – tax rates for business enterprise and individuals have significant impact an the achievement of non-achievement of organisational objectives.

Each of these segments of the economy can assist or hinder the achievement of an enterprise’s objectives and success of failure of the organisation.

On social cultural environment, the customs unclose ethics and diversity or characteristics of the workforce determines the taste and preferences for the company’s products or services. These variables are not static as they are continually changing and so the organisation should anticipate the changes and adapt their products and operation accordingly to match the changing tastes of the society. It is the values of the society that determines the premium which that society places on certain products and services.

Technology is the sum total of the methods employed by man in producing goods and services organisations definitely employ technology in their operations. The type of technology used determines the quality, quantity and cost of goods and services provided. Due to the impact of technology in production, the researcher considers it necessary that managers should embraced technological changes in the design of management policies. These changes new challenges in terms of new competitors and new demand from their customers.

The newly introduced INTERNET and the rising number of private companies entering the communication network has posed new challenges to the Nigerian Telecommunication limited (NITEL). An organisation that does not embrace new technological changes may find itself driven out of the market by competitors through better and cheaper products and greater customer satisfaction. It may also find itself with filled warehouses of unneeded goods due to technological indueced changes in tastes.

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Political and legal environments also constitutes a limiting factor that affects the operation of business. Government all over the world make rules that regulates the operation of organisations. These regulations can be through tariffs, environmental laws, anti-trust restrictions taxes and subsidies etc. These rules may be either to promote business or to protect the citizens from unethical activities of business

Though managers may be against government regulation of business in a free market economy. Its desirability is never in doubt.

The rules are the mechanism through which the government can direct the activities of business to a desired direction in order to facilitate economic growth. It can therefore be described as a necessary evil. Managers should therefore continually monitor the direction of government programmes and regulations as it affects their organisation.


The task environment are factors that are peculiar to an organisation. An organisation task environment are easier to identify than the general environment. It consists of the organisations customers, suppliers, competitors and regulatory organics.

The organisations customers are those who patronise its goods and services. They are therefore essential for the survival of the organisation. Managers must find out the need of the customers and try to satisfy them or else the organisation may go out of business. As the saying goes, “if you have no customer, you have no business”.

Organisations use many sources to get information about the needs of their customers, such as market survey, market research, customer forum and direct reports from filed or sales officials are constantly in use. Once this information is gotten, the organisation tries as much as it can to meet their demands. In some cases it might mean changing product entirely or making some modifications to suit customers needs. It goes without saying that their needs determine the success or failure of the business.

The suppliers constitute another important task environments of an organic section. They supplied financial resources raw materials, machinery, human resources many other for input resources. The ability of an organisation to meet with its production schedule depends to a large extent on its suppliers. If any of the suppliers fails the organisation, it could spell doom for the organisation, unless the resources are such that can be sourced elsewhere at minimum notice and cost.

Good managers are expected to have dependable suppliers for their organisations, also where possible, they should have more than one supplier for a particular resources so that they can always have a choice while they cannot be held to ransom by that supplier.

Apart form monopolies, every business has competitors. These are organisation. Similar services with the organisation. Since the organisations are targeting the same customers, what one of them does affects the other.

Managers are constantly monitoring their competitors to see what they are doing and counter its effects on his own organisation. IN some cases, two organisations may have two brands that are competing seriously. Any improvement in the quality of one the brands would definitely affect the other adversely. If the brand owner of the one of the products starts a trade promotion, the other brand owner has no choice than to start its own or risk losing its customers.

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In Nigeria, this type of situation is rampant among the bottling companies. For instance, when in 1996, the coca cola plc introduce promotional activities in drink-winning devices in the mineral cork so as to increase its turnover was also initiated by seven-up bottling company. The point being made here is that every organisation keeps a close watch on its competitors because every action they take has an impact on them either positively or negatively.


Generally, the external environment of the business firms in Nigeria is on complex host of largely uncontrollable factors which influence the firms strategic decisions and ultimately shape the success or failure of the corporation.

Historically, this environment was stable whereby the business firm faced little competition, exchange rates were stable and low, inflationary rates were low cost of capital and sources of funds to the business were acquired easily the external factors which faced the business firms in the pre-sap period were both easy to identify and relatively predictable. In recent years, the Nigerian economic and political environment and global competition has been characterized by instability and modest growth resulting in widespread distress and failures of business organizations.


The internal environment factors has contributed in no small measure in the current distress and failure of otherwise viable business organisations prominent among the internal or institutional factors are poor management/incompetence of Nigeria management team as well as fraud and other financial malpractices

Poor management/incompetence of management

Management incompetence essentially embraces the general lack or deliberate suppression of managerial skill or know-how in the various fields of the organisation structures.

The quality of management has been established as a significant factor in shaping the health of a corporate enterprise. Infact, it has been established that the difference between sound and healthy business organisation on one hand and unsound and distress organisation on the other hand, lies in the quality of management.

The management environment of the Nigerian business organisations both public and private companies such as the Nigerian Telecommunications Limited (NITEL) is sometimes characterised by instability in tenure office, sheer incompetence or even interpersonal disagreement and hostilities within the board members which often heads to polarization of the rank and life of staff.

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This article was extracted from a Project Research Work Topic



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