Effect of Internal Control System on Prevention and Control of Financial Fraud in Nigeria Commercial Banks

Effect of Internal Control System on Prevention and Control of Financial Fraud in Nigeria Commercial Banks from chapter one to five with references

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ABSTRACT

In recent years internal control system has been adapted by different commercial banks in Nigeria as a tool for preventing and detecting fraud in the banking industry. However, despite the use of various internal control measures adapted, financial fraud has rather increased in magnitude and the amount involve are staggering enough as to have serious impact on the profitability of the banks in question.

This is due to the fact that perpetrators acquire greater sophistication in the method used to perpetrate fraud which ultimately leads to loss of customer’s confidence in the Nigerian Banks. This research work was carried out using questionnaire which was administered to staffs of First Bank of Nigeria Plc.

The data collated and collected was analyzed using descriptive statistics while Chi-Square (X²) was used to test the research hypothesis. It was concluded that effective internal control system will ensure good performance of commercial banks in Nigeria and also that the present state of internal control system in Nigerian commercial banks is not effective enough for prevention and control of financial fraud.

Recommendations on how to ensure effective internal control system were made, which includes increasing staff strength, recruitment of professionals, Provision of Additional and More Sophisticated Equipments, Research and Development Departments etc.

TABLE OF CONTENT

Title Page

Certification

Dedication

Acknowledgement

Abstract

Table of Content

CHAPTER ONE:

Introduction

Background to the Study

Statement of the Problems

Objectives of the Study

Research Question

Research Hypothesis

Significance of the Study

Scope and Limitation of the Study

1.7.1 Scope of the Study

1.7.2 Limitation of the Study

Definition of Terms

Organization of the Study

References

CHAPTER TWO:
Literature Review

2.1 Introduction

Historical Background of First Bank of Nigeria Plc

2.2  Academic Reviews

2.2.1   Concept and Definition of Internal Control

2.3  Internal Control System in Commercial Banks

2.3.1   Financial Fraud Prevention by the Internal Control System

Types of Internal Control

2.4 Nature and Types of Fraud in Commercial Banks

2.5  Measures for Controlling Fraud in Commercial Banks

2.6  Computer and Internal Control

2.7   Organization and Management of First Bank of Nigeria Plc

2.8  Functions of First Bank of Nigeria Plc

2.9  Objectives of Internal Control of First of Nigeria Plc

References

CHAPTER THREE: Research Methodology

3.0 Introduction

3.1 Research Focus

3.2 Research Design

3.3 Area of Study

3.4 Population of the Study

3.5 Sources of Data

3.6 Sample and Sampling   Size Technique

3.7 Research Instrument

3.8 Validity of Research Instrument

3.9 Reliability of Research Instrument

3.10   Analytical Technique

CHAPTER FOUR: Data Analysis, Interpretation and Discussion of Findings

4.1   Analysis of Tables

4.1.1   Distribution of Responses According to Demographic Information

4.2  Presentation of Responses According to Questions

4.3  Test of Hypothesis

CHAPTER FIVE: Summary, Conclusions and Recommendation

5.1  Summary

5.2  Conclusions

5.3 Recommendations

Bibliography

Appendix

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND TO THE STUDY

The menace of financial fraud has certainly emerged as one of the hindrances to bank performance in Nigeria. Although fraud is a worldwide phenomenon, it is the single most important financial problem in Nigeria. The nation has suffered severe losses financially. Banks in Nigeria may not be talking about fraud they persistently suffer, especially because of the sensitivity and response to such exposure (Abdulraheem, Isiaka&Muhammed, 2012).

Prior to 1952, there was no form of banking Act to regulate the establishment and operations control of banks in Nigeria , during that time many banks were registered some of which never operated and ever since the period, fraud has remained a permanent feature in our banking industry. This resulted in a loss of faith and trust in the commercial banks by Nigerians and consequently, under-development of the banking habit in the country.

However, with the introduction of the first Banking Ordinance in 1952 and the Central Bank of Nigeria (CBN) Act in 1959 and other subsequent Acts and ordinances with their amendments over the years used to regulate and control the activities and operations of commercial banks have rather increased financial fraud in magnitude and the method used to perpetrate them acquires greater sophistication day after day.

Now with the introduction of modern procedures and advancement in information technology such as those in communication system, automatic electronic gadgets and computers into banking system coupled with various precautionary measures taken by band agents, fraud have rather taken nuclear dimensions and the size of sums involved increased at a geometric rate.

The phenomenon – Financial fraud May be defined as an intentional act of deception involving financial transactions for the purpose of personal gains.

In the words of Awosanya (1986), Fraud is any deliberate action in whatever form (written, spoken, physical) designed to deprive a legitimate owner of his/her assets, properties or rights.

From the definitions given above, it can be noted that fraud must contain some rudiments such as:

1. There must be deceit or deception directed to the detriment of another
2. False representation has been made knowingly without belief in its truth or recklessly careless whether it is true or false.

Thus every act of unfair dealings whether against the bank by its customers or by third parties against the customers by the bank (including its officers), or indeed against the bank by its officers, etc, really supposed to be included. Fraud takes place in various forms, degree, technique and sophistication. The action usually takes the form of forgery-falsification of documents and authorizing signatures and out-rights theft.

Given the above scenario, it is the desire of the government, regulatory authorities, bank’s stakeholders, management and other operators in the economy to see that fraud is checked or controlled if not totally curbed from the banking system.

But one are that is envisaged to be of importance to all the parties involved in all-out war against fraud and other forms of bank malpractices is the area of determining the effectiveness of the fraud control measures that have been or being implemented by the banks, as the fraud issue has appeared intractable.

Given that there are fraud control measures aimed at fraud prevention and control, the application of the right number of measures and their correct proportion will no doubt portray the success rate of checking fraudulent practice, hence, ensuring the survival of the commercial banks, which is evidenced by the level of profitability.

Given the foregoing, it can be seen that a well designed, meticulously installed and resolutely operated management control system (or internal control system) will inevitably check, if not eliminate the occurrence of financial fraud from our commercial banking system. The individual components of an internal control system are known as “controls” or internal controls”.

Consequently, the continued existence of commercial banks rests delicately on the management of public confidence. This calls for the establishment of an effective system of internal control, which among other things, will help to ensure that the organization’s accounting activities are in accordance with the laid down procedures, standards and statutory requirements.

To establish a sound and effective system of internal control, various organizations adopts various devices and methods based on their nature of business and the scope of their operations. Effective internal control system which is always resolving requires a continuous check and re-checking of day to day activities of the business in order to ensure the correctness and fairness of the accounting records and to detect and expose any deviation when it has occurred.

There is also a great need to eliminate or minimize the defects or loopholes and make the internal control system in our banks more effective and operational to guard against the occurrence and re-occurrence of financial fraud in our commercial banks.

In conclusion, financial fraud as a common phenomenon in our commercial banking system has perpetrated an agonizing influence resulting in bad faith, loss of confidence and trust in our commercial banks by depositors. It should be noted that banks as custodian of public or people’s funds should be built on trust and not on fraud.

1.2 STATEMENT OF THE PROBLEMS

In our newspapers there are reports of fraud in Nigerian commercial banks. For instance, different business newspapers has noted with utter dismay how robbers are making nonsense of the various type of security measures in banks by employing scientific means of the strong rooms. Not only that there are increased numbers of report cases of fraud but also the amounts involved are staggering.

The methods used in perpetrating fraud in recent times are acquiring nuclear sophistication day after day, while the bank management are busy devising new method of checking fraud, the fraudulent staffs are busy devising new method of defrauding the banks. It is obvious here that the result of those incidences are damaging.

Fraud leads to unwanted loss of public funds and put the management of the affected banks on its toes. Every incidence of bank fraud reduced public confidence in banking and consequently slows down the development of banking habit in Nigeria.

Also recently, it has just been discovered that even banks management are also involved in fraudulent practice with heavy amount been involved. On August 14^th, 2009, the CBN (central Bank of Nigeria) governor sacked the managing director of 5 banks following allegation of corruption, bad corporate governance practice and mismanagement of public funds.

The CBN governor, Mr.  has said in an interview, “We looked at the institutions and saw in their books huge non-performing loans and when we entered the institutions, we discovered that 75% of the non-performing loans were given to the companies directly related to the (CEOs) Chief Executives Officers of those institutions.

They fraudulently grant loans and advances to their personal companies without due consultation with the board of the companies for approval exposing the financial asset of the banks to excess risk beyond the stipulated” (Sanusi, 2009).

In the light of the foregoing, the following research problems were established;

1. The Incidence of financial fraud is eroding the confidence of Nigerians in the commercial banks
2. The amount always involved in fraudulent occurrences are staggering
3. Another problem is the frequency of fraud occurrence
4. There is no doubt; fraudulent practices always have serious impact on the profitability of the banks in question.

In view of this, there arises the need for positive measures to be taken to avert this situation otherwise it could lead to the crippling of the economy and the operation of the banking industry in particular.

However, despite the steps and the measures taken by the bank to prevent the occurrence of frauds, the situation still remains largely unchanged. It is therefore necessary to appraise and or establish an adequate and effective internal control so as to guard against the ever incidence of fraud, hence this.

1.3 OBJECTIVE OF THE STUDY

This research work focuses essentially on the commercial banks with a view to provide suitable recommendations and suggestions that will help in the prevention and control of financial fraud in Nigerian commercial banks with the help of effective internal control system. Using First Bank Nigeria PLC as a case study. To be able to achieve this, the following specific objectives were pursued by the study, which is to;

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