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EFFECT OF INTERNAL CONTROL SYSTEM ON PREVENTION AND CONTROL OF FINANCIAL FRAUD IN NIGERIA COMMERCIAL BANKS (CASE STUDY OF FIRST BANK PLC)

Dept: BANKING AND FINANCE File: Word(doc) Chapters: 1-5 Views: 1

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 pres

CHAPTER ONE

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 14th, 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. Lamido Sanusi 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

• Another problem is the frequency of fraud occurrence

1. 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;

1. Examine the internal control system with respect to the selected commercial bank in Nigeria, and evaluate the impact of the system as a tool for the prevention and control of financial fraud.
2. Identify possible defects or loopholes (if any) in the system.

iii.      Examine the relevance and appropriateness of the presently adopted control measures in preventing financial fraud.

1. Offer useful recommendations based on the findings on how best to control the incidence of financial fraud in our commercial banks.

1.4    RESEARCH QUESTION

This study is on the impact of internal control system on prevention and control of financial fraud in Nigerian commercial banks. The research was based on the following questions:

1. To what extent are the internal control systems effective in First Bank Nig. plc?
2. What are the methods presently used by the bank to prevent financial frauds?

iii.      What extent does financial fraud occurs in the bank?

1. To what extent does internal control enhance a true reflection of the organization’s activities as presented in the financial statement?

1.5    RESEARCH HYPOTHESES

This research was undertaken on the basis of the following hypothesis:

Ho: Effective internal control system will not ensure good performance of commercial banks in Nigeria.

Hi: Effective internal control system will ensure good performance of commercial banks in Nigeria.

Ho: The present state of internal control system in the banking industry is not effective.

Hi: The present state of internal control system in the banking industry is effective.

1.6    SIGNIFICANCE OF THE STUDY

It is a general consensus that the financial system of any economy is the bedrock in which the economy revolves. With this preview, banks strategically occupy an indispensable position in the economy.

In carrying out this study, the researcher highlighted the importance       and benefits of effectively applying appropriate and correct fraud prevention and control measures. This will serve as a benchmark, especially in the distressed banks whose unfortunate positions are particularly attributable to financial fraud and other malpractices.

This study is also relevant to the commercial banks in Nigeria in that it shows how a well-designed, carefully installed and a resolutely implemented internal control system will aid in checking the incidence of financial fraud. It is strongly believed that it will be of importance not only to the commercial banks management, but also the banking industry as a whole in their various task of putting in place sound backing system for the country.

The usefulness of this study entitled “the impact internal control system on prevention and control of financial fraud in Nigerian commercial banks” cannot be over emphasized because of the positive results accruable from an adequate internally controlled organization. Equally the result of this study would be of immense benefit to numerous groups of persons such as Auditors, External Examiners, Managers, the Accounting and banking professions, Regulatory bodies of banks and other operators in the banking system.

Finally, the study at its end will be of importance to the general public whose confidence and trust have been vehemently shaken as a result of the alarming magnitude of fraudulent activities, failure and distress syndrome our banking system. It will make them to be aware of unrelenting efforts that has been made the regulatory authorities to bring to an end or minimize the incidence of financial fraud.

1.7    SCOPE AND LIMITATION OF THE STUDY

1.7.1 SCOPE OF THE STUDY

This study has been designed to evaluate the impact of internal control system as it aids the prevention and control of financial frauds in Nigerian commercial banks with particular reference to First Bank Nig. plc. Based on the empirical findings; appropriate recommendations were made about the reasonable conclusions that were made on how best to improve the performance of the Nigerian commercial banks.

1.7.2 LIMITATION OF THE STUDY

The major limitation experienced in the course of carrying out this research is in the area of information. A very detailed research work was not possible as a result of some difficulties experienced during the course of carrying out this research in obtaining enough data and findings. One of such major limitation is the refusal of the banks to give adequate information. It is known that banks in Nigeria do not let out information to people easily, especially researchers; this is because other people can make reference to this research work and therefore use the information against the bank. This simply shows that Nigerian banks sees “letting or giving out information about their operation as a threat to their competitive advantage”.

Another limitation experienced during this research work is financial constraint. It limits one’s ability to visit several branches of the bank selected for this research work.

1.8    DEFINITION OF TERMS

Control: This is the force that guides activities towards some predetermined goals. It is concerned with the guidance of the internal operations of the business to produce the most satisfactory projects at the lowest cost.

Bank: These are institutions that keep deposits and render payment mechanism, and sometimes offer advisory services to their customers. Banks are basically financial establishment for safe keeping of money.

Detect: This simply means to discover or notice the presence or occurrence of an event especially something that is not easy to discover.

Financial fraud: This can be defined as an intentional act of deception involving financial transactions for the purpose of personal gain.

Malpractices: In banks, they are omissions of any functionary system of banks which is contrary to the promotion of safe and sound banking practice, or which is in flagrant disregard to the laws, rules and regulations or guidelines made for the promotion of safe and sound banking practices, and which result in financial loss to the bank. Fraud and fraudulent conduct, it should be understood; are also malpractices.

Prevent: This simply means to stop something from happening.