Investigation into Fraudulent Financial Management Practices in Local Government System

Investigation into Fraudulent Financial Management Practices in Local Government System

Chapter Two

Review of Related Literature

This chapter deals with the review of relevant and related literature to this study. To further lay a solid foundation to the study, the literature was reviewed under the following headings; Conceptual frameworks, theoretical framework, review of empirical studies and summary of literature review.

  1. Conceptual Framework
  • Concept of local governments
  • Concept of financial management
  • Concept of Fraud in local government
  • Causes of fraudulent financial management in local government system
  • Impact of the fraudulent financial management in local government system
  1. Theoretical Framework
  2. Empirical Studies
  3. Summary Of Reviewed Literature

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 Conceptual Framework

Concept of Local Government

Local government is an accepted concept or phenomenon. Some form of local government exists in every country of the world. This is the oldest and the most common form of organizing and ruling human society (Ezeani, 2006). One of the definitions put forward by a prominent writer saw it as a political authority set up by a nation or state as subordinate authority for the purpose of dispersing or decentralizing political power (Agi, 2002). In his own view, Akpan (2008), defined local government as a separate tier of government that enjoys some reasonable measures of autonomy, with elected representatives as officials especially in a democracy. AbdulRasheed et al. (2012), put it “it works at the grass-roots level close to the people, impacting on their everyday lives.” in short, no other level of government whether state or national, enjoys a close proximity to the people as this. Hence, local government is an organ of the state put in place to paddle the development activities of a particular place or district, with a view of making the impact felt at the grass root level Ohiwa, (2001). Local government as stated by Ajayi (2000), is government established by law to administer the functions of government and to see to the welfare and interest of the people at the local level.

Okpata, (2004) sees local government as an extension of government activities to the local people in the local areas, aimed at improving their living conditions and to also integrate their lives.

Reasons for the Creation of Local Government in Nigeria

The reasons for the creation of local government are obviously inherent in the definition of local government. Drawing from the many definitions of local government, local government is basically created to mobilize the human and material resources at the grass-root level for effective rural development (Okoli, 2005).

However, according to Okpata (2004), the need for local government in Nigeria may be stated as follows;

  • There are problems, which the central and state governments cannot fully comprehend; local government best handles such problems. Examples of such matters are local markets, sanitation, refuse disposal, local roads, educational needs and maternity homes.
  • Local people do yearn to have hand in the government of their country. The establishment of local government provides them the political participation.
  • Local people contribute more in terms of finance and material if they know they would be in a position to direct how the finance and materials will be used.
  • Local governments are in better positions than the central or state governments in tapping local sources of revenue e.g. property rates, markets stall, rates, etc.
  • The establishment of local government leads to more even development of the country.
  • To bring government closer to the people.

Functions and Responsibilities of a Local Government Council

The local government as the third tier of government has posed a parental problem to successive government in Nigeria. Consequently, various reforms aimed at creating a framework within which local human and material resources could be harnessed to national development have been initiated in the country, of them has provided answer to the problem.

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The question now is what responsibilities do we want local government council to perform? Each local government council in the state is governed by law and is expected to discharge the duties assigned to it by the provision in the instrument establishing the local government council and other enactment. These functions include;

  1. Security Service: It is the primary duty of government to provide security to the people and their property. Citizens at the state can only pay their legitimacy to the government when their life, property and business are protected against internal subversion and external aggression.

Local government is responsible for maintaining security   within their area of authority. According to section 49 (27) of the Anambra local government Edict of 1976:

“It shall be the duty of every council established under this law to maintain order and good government within the area of authority”.

This implies that local government is empowered to prohibit any act of conduct, which can cause riot, or breach of public peace. Protective service may check the destruction of illegal structure and control any offensive trade or industries.

  1. Economic Development: local government is the best provider of economic service to the people. This is because they are the government that is closer to nature or the people. In the words of Okpata (2004:226):

        The purpose of the local government is to bring the government nearer to the people, local government service as a channel through which the federal and state government execute their programmes and policies to the masses”.

Hence, the ideas of local government are realized only when infrastructural facilities are provided to the masses. Local government should construct and maintain local roads; culverts, bridges, to provide transport service, good market motor-parks and arrange their collection of fees. It is also their duty to control threat from erosion.

  • Social Service:Local government provides some social services to the people. Education is one of the basic social services provided by the local government. It provides nursery, primary and adult education. It also awards scholarship, employment, public libraries and reading rooms for public use.
  1. Medical and Health Services: The local government provides and maintains health facilities such as health centers, maternity homes, dispensaries, as well as refuse dumping for waste disposal. They also provide health education and maintain public conveniences like cemeteries, toilets, abattoirs etc.
  2. Establishment of Agricultural and Commercial Ventures:

Local government provides agricultural holdings, to serve as a reference centers to the peasant farmers who are used to traditional method of farming. They equally make provision for palm seedlings, citrus cultivation, poetry farm, animal husbandry and sellers of agricultural products. It is also their duty to prevent and control any outbreak of disease among animals. All these are geared towards improving our local agricultural system.

Sources of Local Government Revenue

The performance of local government council is subject to availability of adequate fund, which it uses to finance its increasing responsibilities. In the recent time, local government administration has national policies as a result of its strategy to influence and impact on the life of the citizens in the grass roots. Local government activities are fundamental as they affect the basic daily life of the rural and urban dwellers. It is this crucial role of the local government that led it to emerge in 1976 as the third tier of government.

Therefore, since local government in Nigeria has a lot of functions to carry out and it is only when money is available and sufficient that those objectives can be carried out. However, there are two main sources of revenue in the local government. They include internal and external sources;

Internal Sources of Revenue in the Local Government

Local government internal revenue sources are those from which local government authorities generate independent of any tier for use by themselves. Below are the type and source of such local government independent revenues.

  1. Fees
  2. Licensing of radio and television, bicycle and trucks, wheel barrows and carts, canoes and pets, etc.
  3. Registration of births, death and marriages.
  4. Users, charges-rents for restaurants and other eating place, etc
  5. Rates for Property, supply of services, etc.
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The financial inadequacy at the local government level can be attributed to the following factor; first is the systematic decline in the internal sources of revenue which does not keep pace with their functional expansion. Second, is the systematic increase in their externally generated revenue which dampens the urge to exploit their internal sources?

According to Onwe (2004), the Dasuki report on local government administration in Nigeria credence to this position when it is declared that: “Whereas in 1978/79, the majority of the local government generated between 20 and 70 percent of their total revenue, by 1983, the corresponding figures had dropped to between 4 percent and 30 percent”.

A number of internal and external variables explain this decline in revenue at the local government level. First, many states abolished the community or flat rate tax which was hitherto the principal component of the internally generated revenue or simply discouraged its collection either to score political points or to muffle anti-tax agitation.

  1. 4. Poll Tax/Community Tax/Rate Tax: Poll tax or community tax or flat rate tax is a kind of levy imposed across the board by a government authority on every eligible citizen, this form of direct taxation is paid at a flat rate irrespective of whether or not the tax payer enjoys some kind of services provided by the government.
  2. 5. Property Rate/Tenement Rates: Property or tenement rates have been seen by many as probably the key to the solution of the perennial insolvency of local government in Nigeria, the estimation of the potential contribution which this form of tax can make to local government finance is partly based on the sizeable proportion of local revenue derived from it. Obviously, property of tenement rates are a tax with high yield potential, which potentially is yet to be exploited in Nigeria, except in Lagos state and in a few municipal councils. It is elastic because when the town or city enlarges, their tax base also broadens. It can be increased more easily than the flat rate.

External Sources of Revenue in the Local government

The Nigerian constitution stipulates that the revenue of the federation shall be shared between the three tiers of government i.e. the federal, state and local governments. Consequently, local governments receive a percentage of the federal generated revenue. This percentage changes with time.

  1. Statutory Allocation/Financial Transfers/Grants: According to Onwe (2006), grants appear to serve four principal functions namely:
  2. To augment the resources of the local government
  3. To meet the exceptional needs of the limited means of particular areas
  • To assist central control over particular services;
  1. To influence aggregate local government expenditure as part of the process of controlling the national economy.

Government grants to local government are usually in either recurrent or capital expenditure. In Nigeria, grants in respect of recurrent expenditure have been for more common than capital grants.

  1. Loans/Borrowing: Local government in Nigeria has the rights to borrow money and secure such borrowing upon the property and revenue of local government and with the approval of the commissioner or appropriate authority (0Ugoo 2007). The borrowing power of local government areas is statutorily to a certain ratio of their tangible assets. So, even if the prohibition were proved unwise, the requirement may not be altered without a statutory amendment.
  2. Overdraft: Local government has the right with the approval of the commissioner of local government to obtain advance from banks by overdraft provided that no such overdraft shall at any time in any circumstance exceed the income of the local government in the proceeding financial year; for this purpose, income means revenue accruing to the local government excluding capital grants or other grants and loans by the local government (Onwe 2004).

However, external resources of revenue to the local government can either come in form of grants, loans/borrowing and/or overdraft.

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Expenditure Pattern of Nigerian Local Government System

According to Okoli (2005), local government expenditure has been streamlined, and the pattern fall under three sections which are:

  • Recurrent expenditure
  • Capital expenditure
  • Special expenditure

The most important of the three classes of expenditure is the recurrent expenditure.

Recurrent Expenditure: Refers to the cost which local government council incurs repeatedly or annually. It caters for the transient or changeable items of the budget. This expenditure is being classified under the main sector or service, which consumes most of the council’s fund. It takes care of such area like general administration, payment of councilors and workers’ salaries and allowances, education, construction and maintenance of buildings, personal emolument of staff, medical and health services etc.

Capital Expenditure: These are the capital development projects of the council. It takes care of items, which have more permanent features. Items under capital expenditure are normally grouped in four headings namely:

  • Administrative
  • Social sector
  • Economic sector
  • Other services

By administrative project, we mean infrastructural facilities needed for effective performance of the administrative functions such as office blocks, staff quarters, etc. Social sectors take care of such services that help the rural people more than the council. It deals with such services like education, health, water supply, sports, transport, postal service, recreation centers and public conveniences.

All the same, economic sector deals with amenities, which are provided to generate revenue to the council and equally provide economic opportunities to the masses. Such economic ventures includes: development of motor parks, rural markets, building of slaughter house, agriculture etc. however, there are other services which are developmental in nature but cannot fit into any of the classes treated above. Such projects include establishment of councils mechanical project (i.e. self-help project) etc.

Special Expenditure: Here, items, which are neither recurrent nor capital in nature, are taken care of in most occasions, special expenditure may take on the semblance of capital project which occurs once in a while to achieve specific objectives. It deals with such items like purchase of refrigerators, office furniture and equipment etc.

Problems Involving in Revenue collection

In Okpata (2004), identified that there are many problems involved in the collection of revenue in the local government. Below are some of the problems;

Tax Avoidance: This is one of the major problems hindering revenue collection in the local government council. Tax avoidance crop up when one arranges his business in such a way that the income from it will avoid taxation partially or entirely. People also use the names of their wives or children who are minor to register business so as to avoid payment of tax. This is equally applies to children under sixteen years of age with no existing research.

Investigation into Fraudulent Financial Management Practices in Local Government System



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