The Impact of Internal Control System

 

CHAPTER ONE 1.0

INTRODUCTION

1.1

Background to the Study

Banks occupy a critical position in a complex financial system that supplies the money and credit needs of the economy. economy. The unique characteristic of a commercial bank is that it also creates money, and it is this particular feature of the commercial banks which distinguishes them from non-banking non-banking financial institution Babatunde, Babatunde, (2006). However, all take part in the  process of financial intermediation whereby such intermediaries also provide considerable  benefits to borrowers in so far as there may ma y be difficulties in locating potential savers who are willing to lend appropriate amount of funds at relevant interest rate. Banks’ ability to promote growth and development depends on the extent to which financial transactions are conducted with trust and least risk. The foundation on which banks is built is on confidence and trust, and where banks indulge in unsafe and unsound confidence, such banks may collapse. So, for banks to achieve objectives and as well as generating generating overall confidence, the Introduction and Establishment of Internal Control must come in to promote efficient operation. Internal control control system therefore serves as a sine-quanon for fraud prevention. Internal control is a creation of management, thus, the management retains sole responsibility for the establishment and maintenance of adequate and functional internal control Adeyemi W. (2000). Banks play very important roles in the economic development development of any country. As an important component of the financial system, banks channel scarce resources from surplus economic units to deficit units. Thus, to an appreciable appreciable and reasonable extent, they exert a lot of influence on the pattern and trend of economic development through their lending and deposit mobilization activities. The efficient mobilization of savings and its allocation of  productive investment by financial institution, thereby promote economic growth and

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development as well as achieving their objectivities, profitability profitability and solvency.

All the

aforementioned benefits that banks can exert on the economy as a whole can be achieved through an effective internal control system and fraud prevention in the banking industry Benjamin A. (2009). In the words of Millechamp A. (2000), “Internal Control system is an independent i ndependent appraisal function within an organization for the review of system of control and the quality of  performance as a service in the organization. The Institute of Chartered Accountant of England and Wales ICAE& W, (2011) defines it as a review of operations and records, sometime continuous undertaken with a business by a specially assigned staff. Internal control, therefore is a whole system of controls, financial or otherwise, established by the management in order to carry out the business of an enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as  possible the completeness and accuracy of record. Fraud, on the other hand is defined by Anyawu (2008) as an act of deception deliberately  practiced to gain unlawful or unfair advantage to the detriment detrime nt of another. The international standard on Auditing (ISA) defines fraud as an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage.

Fraud may may include: manipulation,

falsification or alteration of documents and records; recording transaction without substances, intentional misapplication of accounting policies etc. just to mention a few Horngreen, (2007). Therefore, the menace called fraud has been a deadly disease that has infected many financial corporate body particularly the banks which led to the recent reformation in the  banking industry in Nigeria, thus, involving the process of business combination in the industry such as merger and acquisition whereby the infected banks are being merged to and/or acquired

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 by the healthy and sound s ound ones. This reformation has obviously pointed out. The enormous damage that fraud has done to the banks, thus, the dilution in the financial strength of Nigeria  banks CBN Report, (2011). (2011). In other to combat this syndrome of fraudulent practices, several measures have been identified as the way out to minimize this act. Internal control system is one of the many measures that are to be discuss in chapter 2 of this research. Internal Control System has been the most single trusted and effective measures that can combat this act of malpractices to the  barest minimum.

Infact, the Central Bank of Nigeria (CBN) reported that the backward

development in Nigeria was attributable to the weakness in the Internal Control System of the  banks. Therefore, an attempt to bring to barest minimum, if not completely eradicated, the spate of fraud by the measure of internal control system gave rise to this research study Olatunji, (2009). 1.2.

Statement of the Problem

Following the recent failure of some banks that led to the reformation in the banking industry, the confidence of the bank customer, that is savers of fund, and of the lenders of money from  bank has been lost. Attributed to the failure is also the weakness in the Internal Internal Control System and the prevalence of fraudulent practices among staffs sta ffs and management of the bank. An effective internal control system and good system of fraud prevention will ensure efficient mobilization of savings and its allocation all ocation to productive investment, thereby promoting growth and development, as well as achieving their objectives, profitability, solvency and ultimately restores the lost confidence confidence of customers and lenders overtime. However, the system of internal control is mainly the function of management to establish such, and the ultimate aim of this is to minimize and prevent the occurrence of fraud in the bank, thus It should be noted however that fraudulent practices in the banks is usually cause through lapses or inadequacies which manifested in various ways.

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1.3

Research Questions

For the purpose of this study, the following are some of the problem-solving questions that May come up during the course of carrying out this study. The following are the research questions which will aid the understanding and efficient study of the problem. (a)

Does the Internal Control System have impact on the overall management of banks?

(b)

Can the Internal Control Systems of bank ensure fraud prevention and detection?

(c)

Can an inadequate internal control system cause perpetration of fraud?

(d)

Can strong internal control system fish-out actors that contributed to incidence of fraud

in banks? 1.4

Objectives Objectives of the Study

The general objective of the study is to assess the impact of Internal Control System as a means to minimize and prevent the occurrence of fraudulent practices practic es in any form. These objectives of the study are as follows: i. 

To determine the impact of Internal Control System on the overall management of  Nigeria banks

ii. 

To examine the impact of the Internal Control system on fraud prevention and detect detection. ion.

iii. 

To highlight the major causes of fraud and actors that contributed to the incidence of fraud in banks.

1.5

Significance of the Study

Establishment of an adequate Internal Control and its effective review and assessment by the management will go a long way in preventing fraudulent acts and practices among the fraudsters within the banks and other other third parties. The usefulness and the expected ben benefit efit of the study to the banking industry entail the following:

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It will help in knowing and studying how the principles of Internal Control Components or elements are used to prevent fraud. The study will also unveil the lapses and inadequacies in the bank open to fraudsters within and outside the banks. The study will help to review fraudster’s mode of op eration and thereby recommend ways to avert their operations through the use of internal control c ontrol system. It will also result in reduction in an attempt to defraud by the management and staff as a result of lay-down expected punishment. It will also enhance customers’ confidence and trust in the banking industry as a result of strong internal control being put in place. This study will ultimately help in promoting economic growth and development as a result of efficient mobilization of savings thereby enhancing profitability and solvency in the bank, all of which are achievable through implementation of strong system of internal control. 1.6.

Scope of the Study.

The scope of the study will be limited to how Internal Control System will be used as an effective means to prevent fraud, thus, an essential system have to be in place before fraud can be minimize and prevented, Guaranty Trust Banks Bauchi Branch. Although, information from bank on internal control and fraud are difficult to obtain since they are regarded as sensitive issues which cannot be provided without caution because it is mainly to protect the image of the bank and not to erode d depositors’ epositors’ confidence. On these circumstances, attention is focus on Guaranty Trust Bank Plc, Bauchi Branch, in order to obtain easy accessibility of information. Also, it is believe that this type of study will expose the inadequacy and lapses in the bank with the presence of Internal Control system and this will be a possible suggestion for greater improvement, not only in Guaranty Trust Bank, but on all banks as a whole, other financial institutions and the economy at large.

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1.7.

Limitations of Study

The study was confronted with many problems, among these are: 1.

Inability of the researchers to get to the respondents due to bureaucracy.

2.

 Not all the questionnaires’ distributed for administering was returned.  returned. 

3.

Insufficient time on the part of the researchers to do proper evaluation.

4.

Responses were not given to some questions in the questionnaire regarded as internal issues.

The following limitations had made proper evaluation of Internal Control System as a means of fraud prevention difficulty in Guaranty Trust Bank Plc. 1.8.

Definition of Terms

1.

Internal Check:   Is the aggregate aggregate of the checks checks and balances imposed on day day to day

transaction in an organization whereby the work of one person is verified independently or in complimentary to the work of another. 2.

Internal Audit:  Is an independent appraisal function established by the management

of an organization for the review of Internal Control System as a service to the organization. 3.

system of control, financial or otherwise, otherwise, established Internal Control:   This is a whole system

 by the management in order to carry out the business of an enterprise in an orderly orderly and efficient manner, ensure adherence to; management policies, safeguard the assets and secure as far as  possible the completeness and accuracy of records. 4.

Fraudsters: These are the people who commit frauds.

5.

money or goods Fraud:  This is a crime involving cheating somebody in order to get money illegally.

6.

Error:  This is an unintentional; Mis-statement in the financial statement. It is an act

done without the intention of committing the act.

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7.

Intentional distortion of th thee bases of preparing the financial Irregularities:  This is an Intentional

statement. It is act an error since it is a deliberate act and also not not a fraud since personal benefit may not be be the objectives. The end product product of irregularities is fraud.

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CHAPTER TWO 2.0

LITERATURE REVIEW

2.1

Introduction

This chapter discusses the conceptual and theoretical framework relating to this research work. The current and relevant literature will be sought s ought for and thoroughly reviewed. 2.1

Area of Study

This study will focus on Guaranty Trust Bank Plc., Nigeria, as a case study. Its head office is  based in

Victoria Island, Lagos State. It is one of the biggest companies in entire Western

Africa. Guaranty Trust Bank plc., was incorporated as a limited liability company licensed in July 1990 to provide commercial and other banking services to the Nigerian public. The Bank commenced operation in February 1991, and has since then grown. In September 1996, Guaranty Trust Bank plc. became a publicly quoted company and won the Nigeria Stock Exchange President’s Merit award that same year and subsequently in the year 2000, 2003, 2005, 2006, 2007, 2008 and 2009. In February 2002, the bank was granted a universal banking license and later appointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003. This study will focus on the impact of internal control system of Guaranty Trust Bank plc., and how it prevents the occurrence of fraudulent act and practices. NDIC, (2011). Guaranty Trust Bank plc. is a foremost Nigerian financial institution insti tution with vast business outlays spanning Anglophone West Africa and the United Kingdom. Guaranty Trust Bank plc., is a financial services provider which presently has an Asset Base of over 2 Trillion Naira; Shareholders funds/equity of over 200 Billion Naira and Employs over 5000 people in Nigeria, Cote divoire, Gambia, Ghana, Liberia, Sierra Leone and the United Kingdom. This study will also look at how internet control enhances the profitability and solvency of Guaranty Trust Bank plc.

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2.2 Theory of Internal Control:

The institute of chartered Accountants of England and Wales ICAE&W, (2011). define internal control as the whole system of controls, financial or otherwise established by management in other to carry out the business of an enterprise in orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of records.  Mayo, (2006) defined it as the measure taken by an organization for the purpose of protecting its resources against waste, fraud, inefficiency; ensuring accuracy and reliability in accounting and operating data; securing compliance with organization policies and evaluating the level of performance in the division of the organization. Millechamp (2000) also defined internal control system of an independent appraisal function within an organization for the review of the system of control and the quantity of  performance as a service in the organization. Also following the need to restore public confidence and trust in the financial statement of companies, both financial and non-financial institutions, Sarbanes-Oxley emphasizes the importance of effective internal control, and thus, internal control was defined in the Sarbanes - Oxley Act of 2002 as the procedures and processes used by a company to safe guard the assets,  process information accurately and ensure compliance with laws and regulation. Sarbanes-Oxley requires companies to maintain strong and effective internal control over the recording of transactions and the preparing of the financial statement. Such controls are important because it deters fraud and prevent misleading financial statements. From these definitions, it can be deduced that internal control comprises the plan of an organization and all of the coordinate methods and measures adopted within it, to safeguard its

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assets, check the accuracy accurac y and reliability of its accounting data, promote operational efficiency efficienc y and encourage adherence to prescribe managerial policies. Internal control objectives are channels towards ensuring adherence to managerial policies and achieving organizational goals in generals. It also embraces internal checks, internal audit and the whole system of control, check and balance established by the management Onwuamaeze, (2008). 2.2.1

Internal Audit

This is an independent appraisal function established establis hed by the management of an organization for the review of the internal control system as a service to the organization. The external audit carried out by the external audit department. These departments investigate and appraise the system of external control along with the efficiency of various units of the banks if they are performing their assigned function as a basic for protective and constructive services to management. 2.2.2

Internal Check

This is the aggregate of the checks and balance imposed on day to day transactions in an organization whereby the work of person is verified independently or is complementary to the work of another, the objectives been the prevention or early detection of error and fraud Fakunle, (2006). Internal check therefore of necessity starts from delegation of authorities and proper division of work in such a manner that one person p erson alone does not see a transaction through from the beginning to the end, that is to make the payment of an invoice. Internal ccheck heck would involve the following;

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(a)  Somebody confirming that goods and services have been received and that the price of the invoice is correct (b)  Somebody else preparing the payment voucher (c)  One other person signing the cheque. (d)  The cashier of somebody else writing out the cheque. (e)  Another person with appropriate authority approving the voucher for payment 2.3 Scope of Internal Control

It is the responsibility of every company to design an internal control system which is suitably adapted to their situation. In the case of a group, the parent company ensures that intercontrol systems exist within its subsidiaries. These systems should be adapted in line with their own individual characteristics and to the relationship that exists between the parent company and the subsidiaries Aren and Loebbecke, (2011). (2011). In a situation where a parent has a substantial holding interest, over which it has significant influence, that parent should take care to assess the possibility of acquainting itself with and examining the measures taken by its affiliate, affi liate, in terms of internal control 2.4

Objectives Objectives of Internal Control System

Internal control of a bank is the bank system defined and implemented under its responsibility. responsibilit y. The system more particularly is designed to ensure that certain objectives which are fundamental to the operation of the bank are achieved. These objectives are to: (a) Ensure the effectiveness and efficiency of operations (including protection of asset)

(b) Ensure reliability of financial reporting

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(c) Ensure compliance with applicable laws and regulations and (d) Ensure that the instructions and directional guidelines fixed by the executive management or the management board are applied.

The committee of sponsoring organization (coso) of the treadway commission (1999) categorizes the above stated objectives of internal control system as a means to provide reasonable assurance that; i. 

Assets are safeguard and used for business purposes.

ii. 

Business information is accurate; and

iii. 

Employees comply with laws and regulations.

Internal control is therefore neither limited to a set of procedures nor simply to accounting nor financial processes. Nor does it embrace all of the initiatives taken by the executive bodies bodies or by management, such as defining

company strategy, fixing objectives,

management decisions, and dealing with the risk or monitoring performance according to Ojo (2008). 2.4.1 Ensuring the Effectiveness and Efficiency of Operations  ’

This objective is to ensure the correct functioning of the bank s internal processes,  particularly those implicating the security of its assets. All operational, industrial, commercial and financial processes are concerned. In order for processes to function correctly, standards or operating principle have to be established and  performance and profitability indicators set up. By assets, it must be understood not only the tangible assets, but also the intangible assets

such as know-how, image or reputation. These assets can disappear in the wake wake of of

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thefts, frauds, lack of productivity, errors, or result from a bad management decision or an internal control weakness. Special attention should be paid to the related processes in these cases. Similarly, for the processes involved in the elaboration and processing of accounting and financial information. These processes include act only those which deal directly with the  preparation of financial reports, but also the operational processes which generate the accounting data Ayodele, (2003). 2.4.2

Ensuring the reliability of financial reporting

The reliability of financial information can only be obtained through the implementation of internal control procedures which are capable of faithfully recording all the operations  performed by the organization. The quality of this internal control system can be targeted tar geted by means of: i. 

Segregation of duties, enabling a clear distinction to be made between recording duties, operational duties and retention duties.

ii. 

Function descriptions which should enable the origins of the information  prepared to be identified, together with its recipients.

iii. 

An accounting internal control system enabling to check c heck that the operations have  been performed in accordance with general and specific instructions, and that they have been accounted for so as to produce financial information which complies with generally accepted accounting principles.

2.4.3

Ensuring compliance with applicable laws and regulations.

This refers to the laws and regulations to which the bank is subject. The laws and regulations in force determine the behavioural standards sta ndards that the company incorporates into

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its compliance objectives. Examples of such standards and laws include; banks and other financial institution act (BOFIA), environmental regulations, contract terms and safety regulation, central bank of Nigeria prudential guidelines. Given the large number of areas that exist (company law, commercial law, security, environment, social arts), the banks organization needs to be structured in such a way so that it; i.  ii. 

Is aware of the various rules that t hat apply to it an be informed in due time of any changes that are made for them (legal monitoring)

iii. 

Can transpose these rules into its internal procedures

iv. 

Can inform and train staff on those rules which affect them

2.4.4

Ensuring the application of the instruction instruction of the instruction and directional

guidelines fixed by executive management management board.

These instructions and directional guidelines must be communicated to the staff concerned, based on the objectives allocated to each of them, so as to provide guidelines on how their activities should be conducted. These instructions and directional guidelines must be defined in line with the bank ’s overall objectives and the inherent risks Idowu, (2009). 2.5 Framework for Internal Control Systems in Banking Organizations in Nigeria

As part of its on-going efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound risk management practices, the central  bank of Nigeria (CBN) committee on banking supervision issues the framework for the evaluation of internal control systems. The framework is a set of interrelated elements, thus a component of an integrated system of internal control systems. Other national and international regulatory body and authority also laid down the same elements or components of the integrated system of internal inter nal control as the structure upon which

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the internal control objectives can be achieved. As a result of the global acceptability of and worldwide laid down elements of internal control; these elements are therefore furthers broken down individually into a set of principles. These elements are (5) in numbers. 2.5.1

Internal Control Elements

These elements are also refers to as the component of internal control. The internal control systems therefore consist of five closely related components and interrelated elements. They are: 1.  Management oversight and the control culture 2.  Bank recognition and assessment 3.  Control activities and segregation of duties 4.  Information and communication 5.  Monitoring activities and correcting deficiencies The problems observed in recent large losses at banks can be aligned with tthese hese five elements. The effective functioning of these elements is essential to achieving a bank’s performance, information, and compliance objectives 2.5.2

Principles Principl es for the assessment of internal control system under each of the

elements. A.

Management Management Oversight and the Control Culture

1. 

Board of directors

Principle 1: The board of directors should have responsibility for approving and periodically reviewing the overall business strategies and significant policies of the bank; understanding the major risks run by the bank, setting acceptable levels for these risks and ensuring that senior

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management takes the steps necessary to identify, measure, monitor and control these risks; approving the organizational structure; and ensuring that senior management is monitoring the effectiveness of the internal control system. The board of directors is ultimately responsible for ensuring that an adequate and effective system of internal controls is established and maintained. The board of directors provides governance, guidance and oversight to senior management. It is responsible for approving and reviewing the overall business strategies and significant policies of the organization as well as the organizational structure. The board of directors has the ultimate responsibility for ensuring that an adequate and effective system of internal controls is established and and maintained. Board members should should be objective, capable, and inquisitive, with a knowledge or expertise of the activities of and risks run by the bank. In those countries where it is an option, the board should consist of some members who are independent from the daily management of the bank. A strong, active boar board, d, particularly when coupled with effective upward communication channels and capable financial, legal, and internal audit functions, provides an important mechanism to ensure the correction correcti on of problems that may diminish the effectiveness of the internal control system. The board of directors should include in its activities i. 

Periodic discussions with management concerning the effectiveness of the internal control system,

ii. 

A timely review of evaluations of internal controls made by management, internal auditors, and external auditors,

iii. 

Periodic efforts to ensure that management has promptly followed up on recommendations and concerns expressed by auditors and supervisory authorities on internal control Internal control systems weaknesses, and

iv. 

A periodic review of the appropriateness of the bank’s strategy and risk limits.  

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One option used by banks in many countries is the establishment of an Independent audit committee to assist the board in carrying out its responsibilities. The establishment of an audit committee allows for detailed examination examinati on of information and reports without the need to take up the time of all directors. The audit committee is typically responsible for overseeing the financial reporting process and the internal control system. As part of this responsibility, the audit committee typically oversees the activities a ctivities of, and serves as a direct dire ct contact for, the bank’s internal audit department and engages and serves as the primary contact for the external auditors. In those countries where it is an option, the committee committe e should be composed mainly or entirely of outside directors (i.e., members of the board that are not employed by the bank or any of its affiliates) who have knowledge of financial reporting and internal controls. It should  be noted that in no case should the creation of an audit committee amount amount to a transfer of duties away from the full board, which alone is legally empowered to take decisions. 2. Senior Management

Principle 2: Senior management should have responsibility for implementing strategies and policies approved by the board; developing processes that identify measure, monitor and control risks incurred by the bank; maintaining an organizational structure that clearly assigns responsibility, authority and reporting relationships; ensuring that delegated responsibilities are effectively carried out; setting appropriate internal control policies; and monitoring the adequacy and effectiveness of the internal control system. s ystem. Senior management is responsible for carrying out the directives of the board of directors, including the implementation of strategies and policies and the establishment of an effective system of internal control. Members of senior management typically delegate responsibility for establishing more specific internal control policies and procedures to those responsible for a particular business unit. Delegation is an essential part of management; however, it is important for senior management to oversee the managers to whom they have

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delegated these responsibilities to ensure that they develop and enforce appropriate policies and  procedures Compliance with an established internal control system is heavily dependent on a welldocumented and communicated organizational structure that clearly shows lines of reporting responsibility and authority and provides for effective communication throughout the organization. The allocation of duties and responsibilities should ensure that there are no gaps in reporting lines and that an effective level of management control is extended to all levels of the bank and its various activities. It is important that senior management takes steps to ensure that activities are conducted  by qualified staff with the necessary experience and technical capabilities. Staff in control functions must be properly remunerated. Staff training and skills should be regularly updated. Senior management should institute compensation and promotion policies that reward appropriate behaviours and minimize incentives for staff to ignore or override internal control mechanisms Horngreen, (2007). 3. Control culture Principle 3: The board of directors and senior management are responsible for promoting high ethical and integrity standards, and for establishing a culture within the organisation that emphasizes and demonstrates to all levels of personnel the importance of internal controls. All  personnel at a banking organization need need to understand their role in the internal internal controls process and be fully engaged in the process. An essential element of an effective system of internal control is a strong control culture. It is the responsibility of the board of directors and senior management to emphasise the importance of internal control through their actions and words. This includes the ethical values that management displays in their business dealings, both inside and outside the

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organisation. The words, attitudes and actions of the th e board of directors and senior management manag ement affect the integrity, ethics and other aspects of the bank’s control culture.   In varying degrees, internal control is the responsibility of everyone in a bank. Almost all employees produce information used in the internal control system or take other actions needed to effect control. An essential element of a strong internal control system is the recognition by all employees of the need to carry out their responsibilities effectively and to communicate to the appropriate level of management any problems in operations, instances of non-compliance with the code of conduct, or other policy violations or illegal actions that are noticed. This can best be achieved when operational procedures are contained in clearly written documentation that is made available to all relevant personnel. It is essential that all personnel within the bank understand the importance of internal control and are actively engaged in the  process. In reinforcing ethical values, banking banking organizations should avoid policies and practices that may inadvertently provide incentives or temptations for inappropriate activities. acti vities. Examples of such policies and practices include undue emphasis on performance targets or other operational results, particularly short-term ones that ignore longer-term risks; Compensation schemes that overly depend on short-term performance; ineffective segregation of duties or other controls that could allow the misuse of resources or concealment of poor performance; and insignificant or overly onerous penalties for improper behaviours Oset, (2006). While having a strong internal control culture does not guarantee that an organization will reach its goals, the lack of such a culture provides greater opportunities for errors to go undetected or for improprieties to occur. B. Risk Recognition and Assessment Principle 4: An effective internal control system requires that the material risks that that could adversely affect the achievement of the bank’s goals are being recognized and  and   continually assessed. This assessment should cover all risks facing the bank and the consolidated banking

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organization (that is, credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational r eputational risk).Internal controls ma may y need to be revised to appropriately address any new or previously uncontrolled risks. Banks are in the business of risk-taking. Consequently it is imperative that, as part of an internal control system, these risks are being recognized and continually assessed. From an internal control perspective, a risk assessment should identify and evaluate the internal and external factors that could adversely affect the achievement of the banking organization’s  performance, information and compliance objectives. objectives. This process should cover all risks faced  by the bank and operate at all levels within the bank. It differs from the risk management process which typically focuses more on the review of business strategies developed to maximize the risk/reward trade-off within the different areas of the bank.

Effective risk assessment identifies and considers internal factors (such as the complexity of the organization’s structure, the nature of the bank’s activities, the quality of  personnel, organizational changes and employee turnover) as w well ell as external factors (such (s uch as fluctuating economic conditions, changes in the industry in dustry and technological advances) that could adversely affect the achievement of the bank’s goals. This risk assessment as sessment should be conducted at the level of individual businesses and across the wide spectrum of activities and subsidiaries of the consolidated banking organization. This can be accomplished through various methods. Effective risk assessment addresses both measurable and non-measurable aspects of risks and weighs costs of controls against the benefits they provide Asukwo, (2007). The risk assessment process also includes evaluating the risks to determine which are controllable by the bank and which are not. For those risks that are controllable, the bank must assess whether to accept those risks or the extent to which it wishes to mitigate the risks tthrough hrough

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control procedures. For those risks that cannot be controlled, the bank must decide whether to accept these risks or to withdraw from or reduce the level of business activity concerned. In order for risk assessment, and therefore the system of internal control, to remain effective, senior management needs to continually evaluate the risks affecting the achievement of its goals and react to changing circumstances and conditions. Internal controls may need to  be revised to appropriately address any an y new or previously uncontrolled risks. For example, as financial innovation occurs, a bank needs to evaluate new financial instruments and market transactions and consider the risks associated with these activities. activities . Often these risks can be best understood when considering how various scenarios (economic and otherwise) affect the cash flows and earnings of financial instruments and transactions. Thoughtful consideration of the full range of possible problems, from customer misunderstanding to operational failure, will  point to important control considerations C.

Control Activities and Segregation of Duties

Principle 5: internal Control activities should be an integral part of the daily activities of a bank. An effective internal control system requires that an appropriate control structure is setup, with control activities defined at every business level. These should include: top level reviews; appropriate activity controls for different departments or divisions; physical controls; checking for compliance with exposure limits and follow-up on noncompliance; a system of approvals and authorizations; and, a system of verification and reconciliation. Control activities are designed and implemented to address the risks that the bank identified through the risk assessment process described above. Control activities involve two steps: (1) the establishment of control policies and procedures; and (2) verification that the control policies and procedures are being complied with. wit h. Control activities involve all levels of  personnel Examples of control activities include: personnel in the bank, including senior management as well as front line personnel.

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Examples of control activities include: i. 

Top level reviews - Boards of directors and senior management often request  presentations and performance reports that enable them to review the bank’s  progress toward its goals. For example, senior management may review reports showing actual financial results to date versus the budget. Questions that senior management generates as a result of this review and the ensuing responses of lower level of management represent a control activity which may detect  problems such as control weaknesses, errors in financial reporting or fraudulent activities.

ii. 

Activity controls - Department or division level management receives and reviews standard performance and exception reports on a daily, weekly or monthly basis. Functional reviews occur more frequently than top-level reviews and usually are more detailed. For instance, a manager of commercial lending may review weekly reports on delinquencies, payments received, and interest income earned on the portfolio, while the senior credit officer may review similar reports on a monthly basis and in a more summarized form that includes all lending areas. As with the top-level review, the questions that are generated as a result of reviewing the reports and the responses to those questions represent the control activity.

iii. 

Physical controls - Physical controls generally focus on restricting access to tangible assets, including cash and securities. Control activities include physical limitations, dual custody, and periodic inventories.

iv. 

Compliance with exposure limits - The establishment of prudent limits on risk exposures is an important aspect of risk management. For example, compliance with limits for borrowers and other counterparties reduces the bank’s

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concentration of credit risk and helps to diversify its risk profile. Consequently, an important aspect of internal controls is a process for reviewing compliance with such limits and follow-up on instances of non-compliance. v. 

Approvals and authorizations - Requiring approval and authorization for transactions over certain limits ensure that an appropriate level of management is aware of the transaction or situation, and helps to establish accountability.

vi. 

Verifications and reconciliations - Verifications of transaction details and activities and the output of risk management models used by the bank are important control activities. Periodic reconciliations, such as those comparing cash flows to account records and statements, may identify activities and records that need correction. Consequently, the results of these verifications should be reported to the appropriate levels of management whenever problems or  potential problems are detected.

Control activities are most effective when they are viewed by management and all other  personnel as an integral part of, rather than an addition to, the daily activities of the bank. When controls are viewed as an addition to the day-to-day activities, they are often seen as less important and may not be performed in situations where individuals feel pressured to complete activities in a limited amount of time. In addition, controls that are an integral part of the daily activities enable quick responses to changing conditions and avoid unnecessary costs. As part of fostering the appropriate control culture within the bank, senior management should ensure that adequate control activities are an integral part of the daily functions of all relevant  personnel. It is not sufficient for senior management to simply establish appropriate policies and  procedures for the various activities and divisions of the bank. bank. They must regularly regularly ensure that all areas of the bank are in compliance with such policies and procedures and also determine

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that existing policies and procedures remain adequate. This is usually a major role of the internal audit function Shiozawa, (2011) Principle 6: An effective internal control system requires that there is appropriate segregation of duties and those personnel are not assigned conflicting responsibilities. Areas of potential conflicts of interest should be identified, minimized, and subject to careful, independent monitoring In reviewing major banking losses caused by poor internal controls, supervisors typically find that one of the major causes of such losses is the lack of adequate segregation of duties. Assigning conflicting duties to one individual (for example, responsibility for both the front and back offices of a trading function) gives that person access to assets of value and the ability to manipulate financial data for personal gain or to conceal losses. Consequently, certain duties within a bank should be split, to the extent possible, among various individuals in order to reduce the risk of manipulation of financial financial data or misappropriation of assets. Segregation of duties is not limited limit ed to situations involving simultaneous front and back office o ffice control by one individual. It can also result in serious problems when there are not appropriate controls in those instances where an individual has responsibility for: i.  ii. 

Approval of the disbursement of funds and the actual disbursement; Customer and proprietary accounts;

iii. 

Transactions in both the "banking" and "trading" books;

iv. 

Informally providing information to customers about their positions while marketing to the same customers;

v. 

Assessing the adequacy of loan documentation and monitoring the borrower after loan origination; and,

vi. 

Any other areas where significant conflicts of interest emerge and are not mitigated by other factors.

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Areas of potential conflict should be identified, minimized, and subject to careful monitoring by an independent third party. There should also be periodic reviews of the responsibilities and functions of key individuals to ensure that they are not in a position to conceal inappropriate actions ICAN study pack (2006). D. Information and Communication Principle 7: An effective internal control system requires that there are adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision making. Information should be reliable, timely, accessible, and provided in a consistent format Adequate information and effective communication are essential to the proper functioning of a system of internal control. From the bank’s perspective, in order for information to be useful, it must be relevant, reliable, timely, accessible, and provided in a consistent format. Information includes internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision making. Internal information is part of a record-keeping process that should include established procedures for record retention. Principle 8: An effective internal control system requires that there are reliable information systems in place that cover all significant activities of the bank. These systems, including those that hold and use data in an electronic form, must be secure, monitored independently and supported by adequate contingency arrangements A critical component of a bank's activities is the establishment and maintenance of management information systems that cover the full range of its activities. This information is usually provided through both electronic and non-electronic means. Banks must be particularly aware of the organizational and internal control requirements related to processing information in an electronic form and the necessity to have an adequate audit trail. Management decision-

25

 

making could be adversely affected by unreliable or misleading information provided by systems that are poorly designed and controlled. Electronic information systems and the use of information technology have risks that must be effectively controlled by banks in order to avoid disruptions to business and potential losses. Since transaction processing and business applications have expanded beyond the use of mainframe computer environments to distributed systems for mission-critical business functions, the magnitude of risks also has expanded. Controls over information systems and technology should include both general and application controls. General controls c ontrols are controls over computer systems (for example, mainframe, client/server, client/ser ver, and end-user workstations) and ensure their continued, proper operation. General controls include in-house back-up and recovery procedures, software development and acquisition policies, maintenance (change control) procedures, and physical/logical access security controls. Application controls are computerized steps within software applications and other manual procedures that control the  processing of transactions and business activities. Application controls include, for example, edit checks and specific logical access controls unique to a business system. Without adequate controls over information systems and technology, including systems that are under development, banks could experience loss of data and programs due to inadequate physical and electronic security arrangements, equipment or systems failures, and inadequate in-house  backup and recovery procedures. procedures. In addition to the risks and controls above, inherent risks exist that are associated with the loss or extended disruption of services caused by factors beyond the bank’s c ontrol. In extreme cases, since the delivery of corporate and customer services represent key transactional, strategic and reputational issues, such problems could cause serious difficulties for banks and even jeopardize their ability to conduct key business activities. This potential requires the bank to establish business resumption and contingency plans using an alternate off-site facility,

26

 

including the recovery of critical systems supported by an external service provider. The  potential for loss or extended disruption of critical business operations requires an institutionwide effort on contingency planning, involving business management, and not focused on centralized computer operations. Business resumption plans must be periodically tested to ensure the plan’s functionality in the event of an unexpected disaster. Ajisebutu, disaster.  Ajisebutu, (2007). Principle 9: An effective internal control system s ystem requires effective channels of communication to ensure that all staff fully understand and adhere to policies and procedures affecting their duties and responsibilities and that other relevant information is reaching the appropriate  personnel. Without effective communication, information is useless. Senior management of banks need to establish effective paths of communication in order to ensure that the necessary information is reaching the appropriate people. This information relates relat es both to the operational  policies and procedures of the bank as well as information regarding the actual operational  performance of the organization. The organizational structure of the bank should facilitate an adequate flow of information - upward, downward and across the organization. A structure that facilitates this flow ensures that information flows upward so that the board of directors and senior management are aware of the business risks and the operating performance of the bank. Information flowing down through an organization ensures that the bank’s objectives, strategies, and expectations, as well as its established policies and procedures, are communicated to lower level management and operations personnel. This communication is essential to achieve a unified effort by all bank employees to meet the bank’s objectives. Finally, communication across the organization is necessary to ensure that information that one division or department knows can be shared with other affected divisions or departments. E. Monitoring Activities and Correcting Deficiencies

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Principle 10: The overall effectiveness of the bank’s internal controls should s hould be monitored on an ongoing basis. Monitoring of key risks should be part of the daily activities of the bank as well as periodic evaluations by the business lines and internal audit. Since banking is a dynamic, rapidly rapidl y evolving industry, banks must continually monitor and evaluate their internal control systems in the light of changing internal and external conditions, and must enhance these systems as necessary to maintain their effectiveness. In complex, multinational organizations, senior management must ensure that the monitoring function is properly defined and structured within the organization. Monitoring the effectiveness of internal controls can be done by personnel from several different areas, including the business function itself, financial control and internal audit. For that reason, it is important that senior management makes clear which personnel are responsible for which monitoring functions. Monitoring should be part of the daily activities of the bank  but also include separate periodic evaluations of the overall internal control process. The frequency of monitoring different activities of a bank should be determined by considering the risks involved and the frequency and nature of changes occurring in the operating environment. envir onment. On-going monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the system of internal control. Such monitoring is most effective when the system of internal control is integrated into the operating environment and produces regular reports for review. Examples of ongoing monitoring include the review and approval of journal entries, and management review and approval of exception reports. In contrast, separate evaluations typically detect problems only after the fact; however, separate evaluations allow an organization to take a fresh, comprehensive look at the effectiveness of the internal control system and specifically at the effectiveness of the monitoring activities. These evaluations can be done by personnel form several different diffe rent areas, including the business function itself, financial control and internal audit. Separate evaluations

28

 

of the internal control system often take the form of self-assessments when persons responsible for a particular function determine the effectiveness of controls for their activities. The documentation and the results of the evaluations are then reviewed by senior management. All levels of review should be adequately documented and reported on a timely basis to the appropriate level of management. Principle 11: There should be an effective and comprehensive internal audit of the internal control system carried out by operationally independent, appropriately trained and competent staff. The internal audit function, as part of the monitoring of the system of internal controls, should report directly to the board of directors or its audit committee, and to senior management. The internal audit function is an important part of the on-going monitoring of the system of internal controls because it provides an independent assessment of the adequacy of, and compliance with, the established policies and procedures. It is critical that the internal audit function is independent from the day-to-day functioning of the bank and that it has access to all activities conducted by the banking organization, including at its branches and subsidiaries. Tilto, (2006). By reporting directly to the board of directors or its audit committee, and to senior management, the internal auditors provide unbiased information about line activities. Due to the important nature of this function, internal audit must be staffed with competent, well trained individuals who have a clear understanding of their role and responsibilities. The frequency and extent of internal audit review and testing of the internal controls within a bank should be consistent with the nature, complexity, and risk of the organization’s activities. It is important that the internal audit function reports directly to the highest levels of the banking organization, typically the board of directors or its audit committee, and to senior management. This allows for the proper functioning of corporate governance by giving the board information that is not

29

 

 biased in any way by the levels of management that the reports cover. The board should also als o reinforce the independence of the internal auditors by having such matters as their compensation or budgeted resources determined by the board or the highest levels of management rather than by managers who are affected by the work of the internal auditors. Principle 12: Internal control deficiencies, whether identified by business line, internal audit, or other control personnel, should be reported in a timely manner to the appropriate management level and addressed promptly. Material internal control deficiencies should be reported to senior management and the board of directors. Internal control deficiencies, or ineffectively controlled risks, should be reported to the appropriate person(s) as soon as they are identified, with serious matters reported to senior management and the board of directors. Once reported, report ed, it is important that management corrects the deficiencies on a timely basis. The internal auditors should conduct follow-up reviews or other appropriate forms of monitoring, and immediately inform senior management or the board of any uncorrected deficiencies. In order to ensure that all deficiencies are addressed a ddressed in a timely manner, senior management should be responsible for establishing a system to track internal control weaknesses and actions taken to rectify rectif y them. The board of directors and senior management should periodically receive reports summarizing all control issues that have been identified. Issues that appear to be immaterial when individual control processes are looked at in isolation, may well point to trends that could, when linked, become a significant control deficiency if not addressed in a timely manner. 2.6

Types of Internal Control

All the above elements of internal control system s ystem can be grouped into the following types. 1. Physical Control

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It is the control design to ensure physical protection of assets from unauthorized access. For example, cars are parked at secured garage; cash locked up in a safe or vault; stock locked up in a secured ware house etc. 2. Authorization and Approval All company’s processes and transactions transactions must be duly authorized and approved by responsible company’s officials operating within with in the limit of their authority 3. Personnel These are controls developed to ensure that company maintains at all-time appropriate mix of qualified and experienced staff. This controls take the form of structured recruitment  procedure, training and on the job training. 4. Arithmetic and Accuracy These are control design to ensure accuracy of recording of all transaction processed. It covers casting and cross casting to ensure integrity integrit y of financial report. 5. Management control. This is the most important element of control in that all other control revolves around it. It takes the form of the use of budget and management account to control operations. It may also involve the use of functional internal audit department. 6. Organization control. Every organization should have a clearing laid out organizational structure which define s and allocate responsibility as well as identify lines of reporting. It is essential that every person in the organization should know the précised power delegated unto him and to whom he should report in order to achieve unit of command. 7. Supervision Control.

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These are controls exercised by higher level officers on their subordinate .They may not  be part of the routine control system but they are design to ensure that the organization business are being conducted as intended. 8. Segregation of Duties.  No one person should be allowed to undertake all aspect of a transaction. Segregation of duty is a breaking down of transaction process to accommodate many individuals to take part. This will reduce error or deliberate fraud 9. Acknowledgement and Budgeting This requires that all actions taken ta ken must be acknowledged in writing by the performance. Also, it involves the use of budget to control operation.

2.6.1

Theory of Fraud

Fraud and Forgery have been identified as major causes of bank distress and eventual failure in the Nigerian banking sector (Ajayi ( Ajayi 2010). According to NDIC Publication, about one thousand nine hundred and fourteen (1914) bank staff of various banks were involved in bank fraud between 1996 and 1998. The report also established establis hed that fraud contributed immensely to the failure of most banks in the 1990s,the amount involved representing as many as 32.1% of

shareholders fund in 1998 (Udegbunam, 2010) The concept of fraud: What is fraud? Fraud has been widely defined in literature by scholars and experts. Hornby (2008) defines Fraud as an action or an instance of checking somebody in order to make money or obtain goods illegally. The same dictionary defines the  perpetrators of frauds as fraudsters.

32

 

According to the ICAN (2006) Fraud consists of both the use of deception to obtain an unjust or illegal financial advantage and intentional misrepresentations, affecting the financial statements by the one or more individuals among management, employees, or third parties. Anyawu (2005) defined fraud as an act of deception deliberately practiced to gain unlawful or unfair advantage to the detriment of another. Megis (2003) also refer to fraud as the misrepresentation by a person of a material fact knows. Fraud is also refers to as intentional mis-representation of financial record by one or more individuals or by management or employee or third Parties. It is also a type of irregularities involving the use of criminal deception to obtain an unjust or illegal advantage. Archibong (1992) describes Fraud as a predetermined and well planned tricky process or device usually undertaken by a person or group of persons, with the sole aim of checking another person or organization, to gain ill-gotten advantages, be it monetary or otherwise, which would not have accrued in the absence of such deceitful procedure. From the above, the term fraud may be said to be as an intentional misrepresentation of financial information by one or more individuals among management, employees or third  parties. Fraud may involve;

(a)

 

Manipulation , falsification or alteration of documents and records

(b) 

Recording transaction without substances

(c) 

Mis-appropriate of assets or theft

(d) 

Intentional mis-application of accounting policies

(e) 

Suppressing of transactions or omitting such transaction from records

(f) 

Wilful misrepresentation of transactions of the entity’s state of affairs  affairs   It involves taking a property unlawfully from its owner, without his/her knowledge,

 permission or consent, or to misstate a situation knowingly knowingly or by negligence.

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2.6.2

Causes of Fraud

a)  Brune (2012) said that causes of fraud are through lapses or inadequacies, which manifest in various ways. Lacks of adequate supervision, which fraudulent minded operator in the system sees as an opportunity and utilize it.  b)  Development of new technologies has facilitated the tempo fraudulent activities (More  pronounced in computer computer and information technology). c)  Human avarice, the insatiable appetite to a mass wealth and the social economic condition of the society. However, there are many causes of bank fraud that can be summarized into two namely. 2.6.3 Institutional Factor;

These are factors that exist because of the action or inaction of the banks management. They are therefore factors that are within the control of the management .The following are responsible for fraud perpetuation in any organization particularly resulting from the failure to separate duties, and where an individual handle exclusively all stages of transactions: (a)  Where employee are allowed to accumulate their vocation, which make it difficult to uncover illegal abstraction (b)  Absence of employee rotation: failure to shift personnel encourages fraud by covering the work of each employee. (c)  Remuneration: fair remuneration aids controlling speculation. Where an employee, is remuneration accounting to the value of its contribution to the bank and accounting to the going wage, rather comparatively he dues not to try to correct it i t through (d)  Training : inadequate or lack of proper training of bank personals allows a staff in  bank to unconsciously unconsciously create lapses in the operation assigned to him/her causing another another fraudulent minder staff utilize the opportunity to perpetuate the fraudulent act.

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2.6.4 Environmental/Social Factors

These are factor that are not within the control or the bank management. The high ranking among these factors is the general lust for wealth, also the fact that the society does not challenge the source of people’s of people’s wealth, but rather recognition is given given into such. The bank is a part of the society, coupled with the regard and positi position on bankers are placed in the society. This therefore encourage people even bankers to be bold confident when involved in such malpractices. 2.6.5

Classification of Frauds.

As it has been said earlier, fraud is a criminal act of involving the use of deceit to gain an undue or illegal advantage. This comes in different shapes and magnitude. According to Biggs (2006), he classified fraud into (2) namely; a)  Defalcation This involves either misappropriation of money or goods, which can coax the omission of cash received.  b)  Manipulation This involves Fraudulent manipulation of account involving defalcation. This is less frequent and it involves large amount. It’s also a form of frauds that is indigenous and skill   fully

concealed and carried out by person holding position of the higher trust. Megis also classified fraud into; i.  ii. 

Management fraud Employee fraud

a) Management Fraud This type of fraud comes from the top where the executives of a company deliberately deceive stock holders, creditors, and independent auditor

35

 

According to Fakunle (2006), management fraud often involves the manipulation of the records and the account, typically by the enterprise’s senior officers with a view to benefiting in some indirect way. An example is, obtaining finance under false presences, or concealing a material, worsening off the company’s true position, i.e., window window dressing. Robertson (2010) defines management fraud as a deliberate fraud, committed by management that injures investors and creditors, through materially misleading financial statements. Management fraud is sometimes called fraudulent financial reporting. Management fraud is usually perpetrated by the management staff of an organization, which management frauds are investors and creditors and the instrument of perpetration is a financial statement. The essence of management fraud most times is to attract more shareholders to come and invest in the organization. It is also perpetrated, so that organization will be in better position of obtaining loans from banks, because, a good statement will show a healthy look, hence it will  be a good collateral security. b) Employee Fraud

This is the dishonest action of the employee towards the management despite the fact the management put in efforts to prevent such action. Employee fraud is also known as nonmanagement fraud: These are frauds that are perpetrated by the employees of an organization. Robertson (1996) defines it as the use of fraudulent means to take money or other property from an employer. It usually involves falsification of some kind, like false documents, lying, exceeding authority, or violating an employer’s policies, phases, which are: embezzlement of company’s funds, usually in form of cash or other other assets. It consists of three i.  ii. 

The fraudulent act The conversion of the money or property to the fraudsters us

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iii. 

The cover up

Employee frauds are more likely to be encountered where internal controls are weak: other types of employees frauds according to Awe (2005) are as follows:

i. 

Fictitious payment of suppliers:

ii. 

Alteration of invoices

iii. 

Double payment of invoices

iv. 

Suppression of credit note received

v.  vi.  vii. 

Missing returned cheque (so that it appears that bills are paid) Missing invoices Wages fraud (payroll fraud)

viii. 

Payment for hours not worked for

ix. 

Payment of an incorrect wage rate

x.  xi. 

Fictitious employees (ghost workers) on wage sheet Deliberate errors in wage sheet

xii. 

Misappropriated cash taking

xiii. 

Actual theft of cash balance

 

xiv.

Misappropriated cash from credit sales

It is important to note that all these form of employee fraud are perpetrated, so that the  perpetrators will have an undue benefit from all the irregularities made, as embedded in the definition of fraud.

2.6.6 Types of Fraud

The various types of fraud based on these categories as enumerated by Anyanwu (2013) and Goldface and Inckwube (2007) are as follows:

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i. 

Cash fraud: There is several method of cash fraud that is engaged in by the bank staffs. A cash fraud from the cashier may be outright cash theft by unsuspecting cashier to suppress other colleague. Management cash fraud may take the form of removing cash from strong room and replacing the strong room money with counterfeit currency.

ii. 

Cheque fraud:

This is in form of forging of cheque that is, making an alteration on cheque by changing the figures or the signature. Cheque fraud may involve the following: (a)  Removal of cheque books from stock (e.g. safe) or cheque leafs from cheque book. (b)  Illegal and unauthorized adjustment of cheque amongst which include alteration of signature and date. (c)  Clearing cheque fraud, bank drafts, bank cheque and bankers payment. These are means of payment commonly used in the banking system. Once they are suppressed, intercept, stolen and signatures perfectly forged and names cleverly altered, the fraud will be good and successful. iii. 

Foreign Exchange Malpractices These involve the unlawful trafficking in foreign exchange and non-adherence to official guidance on foreign exchange transaction.

iv. 

Telex fraud: These occur among authentic massages which are to be tested and sent by bankers telex official. Spurious telex messages are introduced because of such fake messages in which money is usually paid to a fictions account through a correspondence bank and later cashed by the overseas collaborations. Then the correspondence bank without notice will credit the fictions account after decoding the telex message.

v. 

Loan fraud:

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This type of fraud is peculiar to specialized banks though occur in all banks. The area of frauds and forgeries are the procedure for granting, recording and monitoring of loan and advances to customers. Loan fraud may take the form of outright grants to unintended and unqualified borrowers who are aided and abetted by senior bank staff that th at may be relatives, friends and business partners. By this, it is an outright intention to defraud.

2.6.7 Type of bank’s common fraudulent practices:

Ovuakporia (2013) gave account of thirty-three types of bank frauds in the banking sector. These includes theft, embezzlement, defalcations, forgeries, substitution, suppression,  payment against unclear effects, unauthorized unauthorized lending, lending to ‘ghost’ borrowers, kite flying and cross firing, unofficial borrowing, foreign exchange malpractice, impersonation, overinvolving, manipulation of vouchers, fictitious accounts, over and under valuation of properties, false declaration of cash shortages, falsification of status reports, duplication of cheque books, mail transfer, interception of clearing cheques, computer frauds, fake payments, teeming and lading, robbers and others.

The above numerous types of fraudulent practices in banks, serve as threats to the success of many banks. If adequate preventive and detective measures are not put into action, it could lead to the complete failure of financial institutions especially banks in Nigeria.

2.6.8 Causes of Bank Frauds:

There are many identified causes of fraud in banks. They vary from Institutional to economical, social, psychological, legal and even infrastructural causes. The Immediate causative agents of frauds in general as a s provided by Ogbunka (2012) are as follows: i. 

Availability of opportunities to perpetrate frauds and forgeries

39

 

ii. 

Human greed, avarice, instability

iii. 

Poverty and the widening gap between the rich and the poor

iv. 

Prevailing misplaced social values, moral and spiritual decadence

v. 

Increasing incidence of unemployment

vi. 

Increasing financial burden on individuals

vii. 

Misapplied intelligence-say for adventure

viii. 

Job insecurity

x.  Social misconceptions that banks’ banks’ money is nobody’s money property and therefore can  be defrauded xi. 

Societal expectations

xii. 

Inadequate training of personnel

xiii. 

unhealthy comparison and competition

xiv. 

Peer group pressure

xv.  xvi.  xvii.  xviii. 

 

xix.

xx.  xxi.  xxii. 

Revenge  Non-adherence to ethical standards Leadership by bad example Over ambition/frustrations of staff Increasing and changing sophistication in technological equipment Poor/weak recruitment policies Inadequate training of manpower Societal indiscipline, especially with money

xxiii. 

Risk on the fraudsters may be low or none

xxiv. 

Possibility of identifying or stopping a fraud may be very little

xxv.  xxvi. 

Lack of effective machinery that guarantee severe punishment for fraudsters and forgers Poor/weak management control, monitoring and supervision

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xxvii. 

Weak internal control system of the bank

2.7 Roles and Responsibility of External Auditor

The Basle Committee on Banking Supervision, in their article, emphasized the impact of external auditor in assessing a bank internal control system through their roles and responsibilities. Although, external auditors, according to them, t hem, are not, by definition part of a  banking Organization Or ganization and therefore, are not part of its internal control system, they have an important impact on the quality of internal controls through their audit activities, including discussions with management and recommendations for improvement to internal controls. The external auditors provide important feedback on the effectiveness of the internal control system. While the primary purpose of the external audit function is to give an opinion on the annual account of a bank, the external auditor must choose whether to rely on the effectiveness of the  bank’s internal control system. For this reason, the external auditor's have to obtain an understanding of the internal control system in order to assess the extent to which they can rely on the system in determining the nature, timing timi ng and scope of their own audit procedures Kechi, (2014). The exact role of external auditors and the processes they use vary from country to country. Professional auditing standards in many countries require that audits be planned and  performed to obtain reasonable assurance that financial statements are free of material misstatement. Auditors also examine, on a test basis, underlying transactions and records supporting financial statement balances and disclosures. An auditor assesses the accounting  principles and policies used and significant estimates made by management and evaluates the overall financial statement presentation. In some countries, external auditors are required by the supervisory authorities to provide a specific assessment of the scope, adequacy and effectiveness of a bank’s internal control system, including the internal audit system.  

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One consistency among countries, however, is the expectation that t hat external auditors will gain an understanding of a bank’s internal control process to the extent that it relates to the accuracy of the bank’s financial statements. The extent of attention given to the internal control system varies by auditor and by bank; however, it is generally expected that material weaknesses identified by the auditors would be reported to management in confidential management letters and, in many countries, to the supervisory authority. Furthermore, in many countries external auditors may be subject to special supervisory requirements that specify the way that they evaluate and report on internal controls. 2.8 Emperical Review

In the work of Olaniyi (2008), and aligning it with the conclusion made in the works of Fakunle (2006), Robertson (2016) and also in the work of Hamby (2011); bank fraud, according to him are now becoming a global phenomenon. The aftermath of fraud, according to him, causes an embarrassment to the nation and on bank owners, customers and their family members, as most bank failures are associated with large scale frauds.   In his conclusion, he was of the emphases that internal control department/unit of any organization is very important in detection and prevention of fraud and cannot be undermined especially by banks. Since the lack of an effective internal control system, according to the he findings is the major cause of bank frauds. It is then concluded that the management of every  bank should create and establish a standard internal control system, strong enough to stand against the wiles of fraud in order to promote continuity of operations and to ensure the liquidity, solvency and going concern concept of the bank. In the work Ajayi (2010) in collaboration with the works of other researchers such as (Olasanmi, 2010; Gold, 2009) ;(Eseoghene, 2010); (Udegbunam, 2009) and (Nwaze, 2008); he opined that expected loss due to fraud in the Nigeria banking industry are affected mainly by

42

 

number of fraud cases and total amount involved, while the numbers of staff involved also contribute to the loss it was found to be statistically insignificant. Base on his findings, he concluded that there should be sound corporate governance and the need to improve on the existing ones, thus; i. 

That management should not hesitate to come to the aid of employees, any time there is a genuine financial request particularly in emergency situations. Such assistance, according to him, does not only eliminate the tendency to defraud the organization, but helps to cultivate a group of dedicated and highly positive workforce.

ii. 

Also, in recruiting key personnel who are to handle certain sensitive operations, it is essential that banks make efforts at conducting a proper background check on the status and nature of the employee in his or her neighbourhood as this would help them establish the probability of the employee engaging in fraudulent activities.

iii. 

He also concluded that sound corporate governance characterized by effective operational practices comparable to international standards should be adopted by top management of bank as an essential ingredient for the prevention of fraud in the banking sector.

iv. 

Top management must also strive to maintain a high degree of ethical standards in the  performance of its duties in view of the fiduciary nature of their functions. All these according to him, is imperative as they are required to safeguard the assets of their  banks.

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CHAPTER THREE 3.0 RESEARCH METHODOLOGY 3.1

Introduction

The research methodology is concerned with the methods of collecting data for this research work for the purpose of this work all the necessary techniques of data collection were through primary and secondary sources, by the use of interview and direct observation of the study elements concerned in the study 3.2

Research Design 

A research design could be defined as a torchlight that illuminates the mind of the researcher in his investigation efforts with the unknown. A research design could also be used to show the method of data processing and presentation. According to osuola, (2013; 4), a research design is the basic plan which will guide the data collection and analysis phase of the research project. There are several types of research design which involves; historical, experimental, survey method, case study etc. Jegede, (2014).However, the case study method was used for this study because it is very useful in explanatory research study. 3.3. Sample Size Sampling Technique 

Due to the largeness of population, samples were drawn from Guaranty Trust T rust Bank’s staff. Questionnaires were distributed to subjects based on random sampling to staff in various department of the bank. Random sampling methods were used for questionnaire administration. Also, analysis was done based on questionnaires administered. This method is made possible due to the limited number staff available for research study the researcher is using random sampling so as to obtain valuable information from staff.

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3.4. Population

The population for a research study is defined by Jegede (2010 (2010)) as ‘the totality of all the observations that an investigator is concerned with.   The population of this research consist of all Staff of Guaranty Trust Bank Bauchi Bauchi Branch, for effective coverage and timely report.  3.5.

Definition of Data

Oxford advanced learner’s Dictionary of current English defined data as “facts, things certainly known and from which conclusion may be drawn”. Data can be any information acquired by researcher in respect of a given study from a wide range of sources which may include any one or a combination of the following: interview, questionnaire, measurement, review of literature and observation. The use of appropriate data in any research work is fundamental and it depends on the expertise, skills and commitment. For example a researcher in need of people’s opinions about a given situation may decide to use a questionnaire for obtaining vital information. 3.6. Sources of Data Collection

Personal interview with chief inspector of the bank, observations of relevant reports and questionnaire administration were the various methods used to collect the needed data for this study. The sources of data used in this research study stud y are: primary sources of data and secondary sources of data. Primary sources of data were obtained from questionnaire administered and personal interview with the chief inspector of the bank conducted by the researchers. Secondary sources of data were obtained from relevant journal, Bank Annual Report and Accounts, Articles and review of research report.

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3.7 Method of Data Analysis

The method of data analysis used for this study was descriptive statistical method were tables and simple percentages will be used to analyze the information in the questionnaire questionnaire supplied by the respondents so as to allow accuracy and easy decoding of information, and on this basis, the discussion of findings shall be made. According to Samford (2010), (2010 ), “Data presentation “Data  presentation method met hod is the process of presenting and the re-arrangement of data in such a way that it will be meaningful and easy to understanding”. In presenting data for this study, the under -mentioned -mentioned tools were employed.  3.8.1 Tabulation

This is the transfer of data from the data instrument to the tabular form in which they were systematically examined. The purpose of tabulation was to condense data for comparison in order to provide easy analysis and interpretation. 3.8.2 Percentage

This is a statistical method used in simplifying further the data arranged in a table. Percentage thus simply involves expressing fractions of a group of data as a component of hundred. 3.8.3 Literary Presentation

This is a presentation in which the research situation, sit uation, events, ideas and processes are explained 3.9. Description of Research Instrument  

The core instrument used to gather information was the questionnaire. The questionnaire was properly designed and addressed to the bank for study. The questionnaire had two parts. Part one talked about the bio-data of the respondents and part two provides questions to be answered. The questionnaire was structured to close ended questions.

46

 

3.10. Reliability and Validity of Research Instrument 

Validity can be defined as the extent to which the survey instrument acts as an accurate  predictor. Validity involves th thee degree to which the questionnaire questionnaire as regards the study measures accurately what is supposed to be measured. According to show and Wright (1991), there are four general procedures for estimating the validity of the questionnaire.

47

 

CHAPTER FOUR 4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA 4.1 Introduction

In this chapter, an attempt was made to present, analyzed anal yzed and interpret the data collected mainly through primary sources. In analyzing the data collected, fifty (50) questionnaires were administered to respondents in Guaranty Trust Bank, forty two (42) were returned, and as such, forty-two (42) were available for analysis. This chapter is divided into three (3) sections. Section 4.1 presents the sociodemographic distribution of the respondents, section 4.2 present data analysis and discussions according to research objectives. Simple percentages and tables were used in the analysis of data; while section 4.3 present the discussion of findings. 4.2 Socio-Demographic Distribution of Respondents Respondents

This section presents the socio-demographic data about the respondent. At table is employed to  present the data and interpretation follows immediately.

48

 

Table 1: Tabular Presentation of Socio-Demographic Distribution of Respondence CATEGORY OPTION FREQUENCY PERCENTAGE (%) 59.524 25 1.  Sex Male 40.476 17 Female 100 42 Total 28.571 12 2.  Age 20 –  27 20 –   27 yrs. 47.619 20 28 28 –   –  35  35 yrs.

3.  Education

4.  Work Experience

36 36 –   –  40yrs  40yrs 41 41 –   –  55yrs  55yrs 56yrs above Total OND HND B.Sc./B.Ed. M.Sc/.M.Ed/MA Ph.D. Total 1 –  5  5 yrs. 6 –  10  10 yrs. 11 11 –   –  15  15 yrs. 16 16 –   –  20  20 yrs. 21yrs. and above Total

6 4 0 42 5 12 18 5 2 42 20 18 3 1 0 42

14.286 9.524 0 100 11.905 28.571 42.857 11.905 4.762 100 47.619 42.857 7.143 2.381 0 100

Source: Field Survey, Feb., 2016

From table 1, the sex distribution of respondents shows s hows that 59.524% of the respondents constitute males and 40.476% of the respondents are female. For the age distribution of respondents as shown above, 28.571% of the respondents falls within the age bracket of 2027yrs, 47.619% falls within 28-35yrs, 9.524% falls within 41-55yrs and 0% falls within the age of 56yrs and above. Table 4.1 also reveals the statistical fact about the educational background of the respondents. 11.905% of the respondents holds OND certificate, 28.571% holds HND certificate, 42.857% are B.Sc. /B.Ed. holder, 11.905% holds M.Sc. /M.Ed. certificate and finally 4.762% are Ph.D. holder. Table 4.1 finally reveals information about the work experience of the respondents. 47.619% of the respondents hold work experienced between 1 to 5yrs; 42.857% had work experience of 6 to 10yrs; 7.143% of the respondents had work experience between 11 to 15yrs; 15 yrs; 2.381% only had work experience between 16 to 20yrs and finally 0% had work experience of 21yrs and above.

49

 

4.2.1 Analysis according to Research Objectives

This section attempts to analyze and interprets data collected from the respondents  based on the objectives stated in chapter 1 of the study.

4.2.2 The Impact of Internal Control System on the overall Management of Nigeria Banks

This sub-section presents data collected on the impact i mpact of internal control system on the overall management of Nigeria banks. This constitutes one of the objectives of the study. An attempt is made to know whether the respondent sees the significant usefulness of internal control system on the banks’ operation, its profitability, solvency, going concern and any relationship that may arise among these variables.

Table 2 Tabular Presentation of the Impact of Internal Control on the overall Management Manageme nt of Nigeria Banks Items Questions Yes No Total 1.  Does internal control system capable 37 5 42 of ensuring and promoting the effectiveness and efficiency of operations in the banks? (11.905%) (100%) (88.095%) 10 42 2.  Does the implementation of effective 32 and strong internal control system capable of enhancing customers’ confidence and trust in the Banks (76.190%) (23.810%) (100%) 12 42 3.  Does the implementation of internal 30 control system in the banks ensure the reliability of financial reporting by the users of banks financial statements? (71.429%) (28.571%) (100%) 4 42 4.  Does effective monitoring and 38 auditing of the functional operation of internal control system promote growth, profitability and continuous existence of the Banks? (90.476%) (9.524%) (100%) 10 42 5.  Does the overriding of control by 32 Bank’s Management capable of making Banks to liquidate and eventually collapse? (76.190%) (23.810%) (100%) Source: Field Survey, Feb., 2016

50

 

From the table 2, it is seen that 88.095% of the respondents agreed that internal control system is capable of ensuring and promoting the effectiveness and efficiency of Bank’s operation. However, 11.905% of the respondents did not agree. This means that the bank staff at large holds a belief that internal control system is capable of promoting the effectiveness of various operations in the banks were control procedures are set in all the operations. The 11.905% respondents who objected to this belief may ma y have a view that internal control system only is not sufficient enough to ensure effective operations of bank, but to be use in collaboration with other system of control or management or directing the affairs of the bank, such as corporate governance. The table further shows that 76.190% of the respondents agree that customers’ confidence and trust in the bank can be enhanced through the implementation of effective and strong internal control system, while 23.810% of the respondents disagree to this assertion. From the table also, it is seen that 71.429% of the respondents agrees that internal control system will ensure reliability of financial reporting by the users of financial fi nancial statements, while 28.571% disagree to this assertion. It is further shown in the table that 90.470% of the respondents are of the opinion that effective monitoring and auditing of the functional operation of the system of internal control will promote the growth, profitability of the bank, and finally ensures its continuous existence, while a minor percentage of 9.524% disputed against this assertion. Finally, the table confirms that 76.190% of the respondents agreed that overriding of controls by Bank’s Management has the capability to make the bank to liquidate and eventually eventuall y collapse, while only 23.810% did not agree. In summary, the table confirms that respondents believe that effective monitoring and auditing of the functional operation of the system of internal control is capable of ensuring growth, profitability and going-concern of the bank and can also promote the effectiveness and

51

 

efficiency of operation in the banks. b anks. However, the overriding of such system s ystem of controls by top management can make banks to liquidate and eventually collapse. 4.2.3 The Impact of Internal Control System on Fraud Prevention and Detection

This sub-section present data collected about the impact of internal control in preventing and detecting fraud and forgery. The data is presented in the table below and an analysis follows immediately. Table 3: Tabular Presentation of the Impact of Internal Control System on Fraud Prevention and Dictation Items Questions Yes No Total 6 42 1.  Does the implementation of strong 36 internal control system able to detect and prevent fraudulent act and  practice? (85.714%) (14.286%) (100%) 7 42 2.  Does an effective supervision and 35 implementation of strong internal control system capable of revealing fraudster’s mode of operations? (83.333%) (16.667%) (100%) 8 42 3.  Does awareness of internal control 34 system by management and staff reduces an attempt to perpetrate fraud? (80.952%) (19.048%) (100%) 30 42 4.  Does an effective internal control 12 system sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters within and outside the bank? (28.571%) (71.429%) (100%)

5. 

Does top management adherence and 29 submission to the control procedures set in place in all departments of the  bank able able to prevent the occurrence of management fraud? (69.048%)

13

42

(30.952%)

(100%)

Source: field survey, Feb., 2016 

From the table 3, it is seen that 85.714% of the respondents agreed that the implementation of strong internal control system in the bank is capable of detecting and preventing fraudulent acts and practices. However, 14.286% of the respondent did not agree. This implies that internal

52

 

control system implemented in the banking operations is capable of preventing fraud and forgery and also in detecting same. The table further shows that 83.333% of the respondents are in support of the fact that effective supervision and implementation of strong internal control system is capable of revealing fraudster’s mode of operation while 16.667% of the respondents oppose the notion. By implication, larger percentage of the respondents agree that bank should set up effective supervision machinery on internal control system, thus, helps in exposing fraudsters’ mode of operation. Furthermore, it was reveal in the table that 80.952% of the respondents agreed that the awareness of control system within the bank by both management and staff will reduce an attempt to perpetrate fraud, while a small percentage percenta ge of 19.048% disagree. Also, the table shows that 71.429% were against the assertion that an effective internal control system is sufficient enough to reveal that lapses and inadequacies in the bank, while only 28.571% support this assertion. This therefore implies that internal control system is not sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters’, rather it should be use with other system of control such as adherence to the code of corporate governance, improved system of audit and monitoring etc. Finally, the table depicts that management fraud can be prevented if and only if, top management adhere and submit themselves to the controls set in place within the bank. This was supported by 69.048% of the respondents from the last question in the table above, but only 30.952% of the respondent disagrees. In summary therefore, the implementation of strong internal control system is capable to preventing and detecting fraudulent acts and practices, but not sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters’ within and outside the bank. However,

53

 

other measures should be used alongside internal control system if the lapses open to fraudsters wants to be discovered and controlled, such as establishment of audit department that regularly audit the fundamental operation of the control procedures in existence, maintaining and supervision of the control system through the establishment of internal control unit/department.

54

 

4.2.3 The Major Causes of Fraud and Actors that Contributed to the Incidence of Fraud in Banks

This sub-section presents data collected about the major causes of fraud, and its actors in the banks. The data is presented in the table below and an analysis follows immediately. Table 4: The Major Causes of Fraud in Banks Items Questions 1.  Inadequate training of bank  personnel serves as a lapses open to fraudsters to operate.

2. 

3.  4. 

5. 

6. 

7.  8. 

Fraud and Actors that Contributed to the Incidence of SA 4

A 8

N 0

DA 12

SD 18

Total 42

9.524%

19.048%

0%

28.571%

42.857%

100%

8

2

12

20

42

19.048% 12

4.726% 0

28.571% 0

47.619% 0

100% 42

28.571% 7

0% 5

0% 12

0% 14

100% 42

16.667% 14

11.905% 0

28.571% 0

33.333% 0

100% 42

33.333%

0%

0%

0%

100%

21

12

5

4

0

42

50% 22

28.571% 12

11.905% 4

9.524% 4

0% 0

100% 42

52.381% 20

28.571% 14

9.524% 0

9.524% 8

0% 0

100% 42

47.619% Source: Field Survey, Feb., 2016

33.333%

0%

19.048%

0%

100%

Lack of effective machinery 0 that guarantee severe  punishment for fraud  perpetrator and forgers encourages perpetration of fraud 0% Job Insecurity can lead 30  people into committing fraud 71.429% Increased financial burden on 4 individual and bank  personnel could lead them to commit fraudulent act 9.524% Weak/poor management 28 control, monitoring and supervision of internal control system can cause  perpetration of fraud 66.667%  Non-adherence to ethical standard set by the bank management and regulatory  body could lead to fraud  perpetration Weak internal control system could also lead to  perpetration of fraud Bad leadership of the bank’s top management and executives could encourage others to perpetrate fraud

55

 

The table 4 above reveals that 9.524% of the respondents strongly agreed that inadequate training of bank personnel serves as a lapse open to fraudsters to operate, 19.048% of the respondents also support the opinion. However, 0% of the respondents are said to be neutral as regards this assertion while 28.571% did not believe that inadequate training of bank personnel could lead to a lapse open to fraudsters to operate and a larger percentage of the respondents strongly disagreed this assertion. This therefore implies that inadequate training trai ning of bank personnel do not serve as a lapses open to fraudsters to operate. The table further shows that 19.048% of th thee respondents agreed that lack of effective machinery that guaranteed severe punishment punis hment for fraud perpetrators could encourage perpetration of fraud, only 4.726% of the t he respondents are neutral; and 28.571% did not believe this opinion which is supported by a greater percentage of the respondents of 47.619% who strongly disagree that the lack of effective machinery that guarantee severe  punishment for fraud perpetrators could encourage perpetration of fraud. More so, the table depicts at a glance that 71.429% of the respondents strongly agreed that job insecurity could lead people, particularly bank staff to involve in fraudulent acts, this was supported by a lesser degree de gree of 28.571% of the respondents, making a total of 100% of the t he respondents who believe that job insecurity leads people into committing fraud. By implication, it means that the entire staff s taff of the bank are of the opinion that job-insecurity is the major actor that leads people into committing fraudulent act. The table 4 further reveals that higher percentage of the respondents strongly disagree that increased in financial burden on bank personnel could lead them to commit fraud. This was supported by 28.571% who merely disagree that increased in financial burden on individual and bank personnel could lead them to commit fraudulent act; but only 16.667% of the respondents believed this assertion, as 9.524% strongly agreed on this assertion, asse rtion, while 11.905%

56

 

of the total respondent neutral as regard this assertion. By implication, it means increased in financial burden will not cause individual and bank personnel to commit fraud. In an attempt to confirm the consistency of the respondents, the table shows that 66.667% of the respondents strongly held and 33.333% agreed that weak or poor management controls, monitoring and supervision in internal control system can cause perpetration perpetr ation of fraud. This was in line with 90.476% and 83.333% opinion of the respondents in table 4.2.1 item number 4 and 4.2.2 item number 2 respectively were 90.470% of the respondents believed that effective monitoring and auditing of the functional operation of internal control system s ystem promote growth, profitability and continuous existence of the banks and 83.333% believed that effective supervision and implementation of strong internal control system is capable of revealing fraudsters’ mode fraudsters’  mode of operations. Table 4 also depicts that half of the respondents i.e. 50% of the respondents strongly agree that non-adherence to ethical standard st andard set by bank management and regulatory body could lead to fraud perpetration. This was supported by 28.571% of the respondents who held the same view. However, 11.905% of the respondents are neutral, while only 9.524% of the respondents objected to this assertion. To further ascertain the responses of the t he respondents on the opinion that strong internal control system is able to detect and prevent fraud fr aud as shows in table 4.2.2, item number 1 where 85.714% of the respondents agreed to this assertion; table ta ble 4.2.3 therefore, clearly reveals again a gain that weak internal control system could lead to perpetration of fraud. This opinion was strongly agreed by 52.381% of the respondents and was supported by 28.571% of tthe he respondent while 9.524% of the respondents are neutral and 9.524% also disagree to this assertion. This therefore implies that weak system of internal control could lead to perpetration of fraud. Finally the table reveals that 47.619% of the respondents strongly held the opinion that  bad leadership bank’s top management and executives could encourage others to perpetrate

57

 

fraud. This was seconded by 33.333% of the respondents, making a total of 80.952% who agreed that bad leadership of the bank’s top management and executive could encourage others to perpetrate fraud; while only 19.048% of the respondents did not agree that such bad leadership could encourage others to perpetrate fraud. This conclusion is almost similar to the opinion of the respondents in table ta ble 2; item number 5 where 69.048% of the respondents agreed that top management adherence and submission to control procedures (which serves as a good leadership) set in place in all departments of the bank is capable of preventing the occurrence of management fraud. Therefore in summary, it is obviously and meticulously revealed by table 4 that job insecurity, as regard this research work, is the prime causes of fraud perpetration, thus an actor that contributed to the incidences of fraud in the bank. In addition to this cause is the weak or  poor management control, monitoring monitoring and and supervision supervision of control system; and also the weakness of internal control system established. 4.3 Discussion of Findings

The study determines whether internal control system is capable of detecting and  preventing fraudulent fraudulent acts and practices in Nigeria banks. Having thoroughly thoroughly analyzed the data gathered from questionnaires administered for the purpose of the study the findings below originated: 1.  The establishment and implementation of strong internal control system is able to detect and prevent fraudulent acts and practices. 2.  Internal control system also enhances the reliability of financial reporting by the users of financial financial statement and also increases customers’ confidents and trust in the bank.

58

 

3.  Effective monitoring and audit of the functional operation of the system of internal control will prevent fraud occurrence which ultimately promote growth, profitability and going concern of the banks. 4.  Also, effective supervision of the implemented control system will aid the implemented control to detect fraud, and exposes the mode of operation by fraudsters. 5.  Overriding of control by management could serves as a bad leadership example, and could also cause the bank to liquidate and eventually collapse. 6.  The establishment and implementation of internal control system is not sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters within and outside the bank. It should be used with other non-internal control system, thus external exte rnal control system such as adherence to the code of cooperate governance, ethical standards set by bank management and regulatory bodies etc. 7.  Of the major finding is the fact that job insecurity will cause people, particularly bank staff to engage in fraudulent acts and practices. Therefore, job security should be guarantee to staff in order to reduce to the barest minimum if not completely the  practices of fraud and forgery among bank staff. Most of the findings listed above are in line within the findings from related past researches on internal control and fraud prevention in commercial banks. The researches conducted by Olaniyi O.A (2006), Robertson (1996) and Hamby (1998) confirms that effective e ffective monitoring and supervision of the functional operation of internal control system will prevent the occurrence of fraud and also detect same. They are of the opinion that there should be the establishment of internal control unit or department to carry out this role of function. Eseoghene (2010), Nwaze (2008), Olasanmi (2010) and Ajayi (2010) also concluded in their researches on the need for sound corporate governance as a means to reduce the incidence of fraud in the  banking industry. industry. In the research conducted by Ajayi specifically opined that internal control is

59

 

not sufficient enough to reduce the incidence of fraud nor reveals the fraudsters mode of operation, but rather concluded, based on his finding, that there should be sound corporate governance and the need to improve on the existing ones. The Basle committee on banking supervision, in their article, emphasized the impact i mpact of external auditor in assessing a bank internal control system through their roles and responsibilities. Although, external auditors, according to them, are not, by definition part of a  banking organization, organizati on, and therefore, are not part of its internal control system, they have an important impact on the quality of internal controls through their audit activities, including discussion with management and recommendations for improvement of internal controls. The external auditors provide important feedback on the effectiveness of the internal controls. In summary therefore, effective audit of the functional operation of the system of iinternal nternal control to prevent and detect fraud should be carried out by external auditors when aauditing uditing their clients.

60

 

CHAPTER FIVE 5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 Introduction

Detailed examination of internal control system s ystem and fraud prevention in commercial banks was looked into in this study because of the rate of fraud and forgery that has negatively affected the profitability and growth of financial institutions. This work specifically examined impact of internal control system on fraud prevention in commercial banks. In gathering information, both primary and secondary sources of data were used and properly analized.

5.1.1 Summary of Major Findings:

Mobilization of savings and lending being an important activities in commercial banks  business and which Santomero (1997), said lending, accounts for a sizeable portion of the risk assets of banks. Thus, both has associated problem of fraud and forgery in ensuring effective mobilization of such savings and collections of the amount lent out. From the findings, it is obviously depicted that the major causes of, and actor act or that contributed to the incidence of fraud and forgery in commercial banks is job insecurity. Furthermore, the findings vividly revealed that overriding of control system in the bank  by top management has also significantly contributed to the collapses of some large banks, coupled with poor or weak management control, monitoring and supervision of internal control system and procedures which also causes fraud to be perpetrated. perpet rated. However, general principles for the assessment of internal control system as subdivided under each of the elements of internal control system were examined. During the course of this study, the primary data reveals that strong and effective system of internal control

61

 

reduces the risks of fraud and forgery being perpetrated and also ensures the continuous existence (going concern) of the bank. 5.2 Conclusion

It has been established in this study that internal control system is paramount in ensuring effective operation of banks, and it has impact on prevention and detection of fraud and enhances the overall profitability of banks. As such, it is an important factor that ensures the going concern of corporate body especially financial institution. Most commercial banks, though has internal control system in place, but are being threatened due to weak and ineffective monitoring of the controls in place, and the overriding of such control by management. This assertion asserti on has been proved by the increasing rate of fraud and forgery perpetration and the growing rate of collapses of banks in the recent time. However, it was revealed from the findings that the major causes of fraud and forgery in commercial banks is the insecurity of job of the bank staffs , and that internal control in its self is not sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters  but to be use with other system of controls, viz-a-viz, external system of control; such as adherence to ethical standards ,rules and laws set by bank regulatory bodies such contained in the CBN prudential guidelines, Bank and other financial institution act(BOFIA), Security and Exchange Commission and finally adherence to the ethical standard and laws set by statutory  body such as adherence to the

code of corporate governance(Nigeria code of best

 practices),appointment of external auditor, etc. Also, from the study, it can be rightly concluded that there is significant relationship  between internal control system and profitability of banks. This rising profile of fraudulent  practices which are threatening the survival of commercial banks is as a result of banks not

62

 

establishing a very strong internal control and monitoring system, coupled with overriding of such controls in place by the management of the banks. This observation is however not true with Guarantee Trust Bank plc. Whose control

 procedures and monitoring activities have shown conformity with good internal control system and staff job being highly secured. 5.3. Recommendations Recommendations

Having studied the situation in Guaranty Trust Bank plc., it is imperative at this point to make some recommendation as to ways of prevent further occurrence of fraud and forgery and to improve monitoring activities and procedures on internal control system in commercial banks. In order to achieve these, the following suggestions are: i.  ii. 

Bank staff should be guaranteed job security. Proper evaluation of the system of internal control and the various control  procedures relating to control objectives should be constantly monitored, supervised and improved where any lapses is noticed or found. This can be achieved by establishing an internal control unit/department.

iii. 

External control system as discussed in the conclusion paragraph above should  be strictly, constantly and continuously adhere to or followed in order to make internal control system effective and sufficient enough to reveal lapses and inadequacies open to fraudsters and forgers within and outside the bank.

iv. 

The functional operation of the internal control system should be constantly reviewed, monitored and audited strictly by external auditor. Internal auditor also carries out this function, particularly when conducting pre-audit test/review.

63

 

v. 

Of paramount important is that the management of commercial banks who establishes controls in the banks should also adhere strictly to such controls, (internal and external). They should be submissive to such controls, and by this will they prove good leadership. Overriding of control by management shows a  bad leadership which can instigate subordinates to follow suit and thereby engaged in the dubious acts of fraud and forgery. Management overriding the control has a future, long term negative effect on the bank as it jeopardize the going concern of such banks.

vi. 

Finally, in spite of the comprehensiveness of this study, it should be noted that findings are based on Guaranty Trust Bank plc.; other banks can still be used. And also the need for more use of secondary data in analysing the system of internal control of banks in subsequent research works.

vii. 

Therefore, there is need for the bank management to ensure that the internal control system is very strong as much as possible to cover those lapses and inadequacies which manifested in various ways known to them.

64

 

REFERENCES

Adewunmi.W. (2012) (2012) “Fraud in banks, Nigerian institute of  bankers”,  bankers”, Landmark pubAjayi M.A. (2010) Determinants of Fraud in Nigeria Banking Industry Anyanwu I.C (2013) (2013) “Money Economics, theory policy and institutions”, insti tutions”, hybrid hybrid   Benjami A. (2009). Principles and practice of guiding investigation and professional practice. FBN Annual Report (2006). Bigg W.W (2014) Practical auditing hybrid publisher limited Business and financial  practices:: Internal Control”, August 2014.  practices 2014. Canadian Deposit Insurance Corporation, Corporation, “Standards of Sound Business and financial  practices: Internal Control”, August 2010. 2010. Canadian Institute of Chartered Accountants, “Guidance on Control”, November 2010 2010.. Central Bank of Nigeria 2009. Banking Sector Reforms and Bank Consolidation in  Nigeria, Bullion, 29(2). economic and financial review, 1(33), 62- 83. Eseoghene. J.I. (2010), Bank fraud in Nigeria: underlying causes, caus es, Effect and Possible European Monetary Institute, “Internal Control Systems of Credit Fakunle, B. (2006). Audit companion. 2nd Edition Lagos Gold face Irokolibe I.J Eradication of banking banki ng malpractices in Nigeria, CBN Institutions”, July 199 Publications, Lagos. Horngreen, C.T. (2007). Cost accounting: A managerial emphasis. Englewood Cliffs, N.J Prentice-hall Inc, 5th Edition Idowu, A. (2009). An assessment of fraud and its management in Nigeria commercial banks. European Journal of social sciences, 10(4) 628-640. Lagos.Publisher ltd, Nigeriaremedies, African Journal of Accounting, Economics, Finance and Banking Research, 6(6), 62-79  Nigeria Deposit Insurance Corporation (NDIC, 2011). 2011). Annual report

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 Nwankwo, G.O. (2011 (2011)) “Bank Management Principles and Practices”, Malt house press house  press Ltd., Ojo, J. A (2008). Effect of bank frauds on banking operations in Nigeria international journal of investment and finance. 1 (1), p 103 Olatunji, O.C. (2009). Impact of internal control system in banking sector in Nigeria pp.181189 Onwuamaeze, D (2008). Migrane of banks, NDIC report of 2007. The Committee of Sponsoring organizations of the Tread way Commission (COSO), “Internal Control –  Integrated  Integrated Framework”, July 2011. 2011. Tilton P.D. (2006). Potential red flags detection techniques,

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APPENDIX

QUESTIONNAIRE Internal Control and Fraud Prevention (A Case Study of Guaranty Trust Bank Bauchi Branch)

Dear Respondent, I am a postgraduate student of Abubakar Tafawa Balewa University (ATBU) Bauchi, conducting a research on the above mentioned topic, as part of the requirement for the Award of Post Graduate Diploma in Accounting is in view of the above that, I humbly wish that you answer the questions raised on the Attached questionnaire. The questionnaire is made up of sections A and and B section A you are required to state your your personal data data and in section B you you are also require to Tick appropriately. I will appreciate it if you give me the benefit of having your true view, as the success or otherwise of this study depend squarely on your responses. All information supplied will be used for the purpose of this research only and will be treated confidentially. Thank you for sparing and participate in this research.

Yours faithfully,

 Nya Eunice Ebong

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SECTION A: BIO DATA

Kindly thick [

] in the appropriate bracket.

1.  Age: i. iii. 

25 years and below 31 - 35 years

[ [

] ]

ii. iv

26 - 30 years [ 36 - 40 years [

] ]

iv. 

40 year and above

[

]

[

]

ii.

Female

[

]

2.  Gender: i. 

Male

3.  Highest teaching qualification: i. 

Grade II

[

]

iv.

PGDE

[

]

ii. 

 N.C.E

[

]

v.

M.Ed

[

]

iii. 

B.Ed.

[

]

vi.

Ph.D Ed

[

]

4.  Work Experience: i.  1-5 years

[

]

iii.

11-15 years

[

]

[

]

iv.

16-20 years

[

]

ii. 

6-10 years

v.

21 years and above

[

]

SECTION B 

Kindly thick [

] in the column that best best expresses your opinion.

Key: SA=Strongly Agree, A=Agree, A=Agree, U=Un-decided, U=Un-decided, D=Disagree, D=Disagree, SD=Strongly SD=Strongly Disagree Items

Questions THE IMPACT OF INTERNAL CONTROL ON THE OVERALL MANAGEMENT OF NIGERIA BANKS

5. 

Does internal control system capable of ensuring and promoting the effectiveness and efficiency of operations in the banks? Does the implementation of effective and strong internal control system capable of enhancing customers’ confidence and trust in the Banks Does the implementation of internal control system in the banks ensure the reliability of financial reporting by the users of banks financial statements? Does effective monitoring and auditing of the functional operation of internal control system promote growth, profitability and continuous existence of the Banks? Does the overriding of control by Bank’s Management Management capable of making Banks to liquidate and eventually collapse?

6.  7.  8.  9. 

Yes

No

Total

68

 

Items

Questions

Yes No

Total

THE IMPACT OF INTERNAL CONTROL SYSTEM ON FRAUD PREVENTION AND DETECTION 10.  Does the implementation of strong internal control system able to

detect and prevent fraudulent act and practice? 11.  Does an effective supervision and implementation of strong internal control system capable of revealing fraudster’s mode of operations? 12.  Does awareness of internal control system by management and staff reduces an attempt to perpetrate fraud? 13.  Does an effective internal control system sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters within and outside the bank? 14.  Does top management adherence and submission to the control  procedures set in place in all departments of the t he bank able to prevent the occurrence of management fraud?

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Questions

THE MAJOR CAUSES OF FRAUD AND ACTORS THAT CONTRIBUTED TO THE INCIDENCE OF FRAUD IN BANKS 15.  Inadequate training of bank personnel serves as a lapses open to fraudsters to operate.

16.  Lack of effective machinery that guarantee severe  punishment for fraud perpetrator and forgers encourages encourages  perpetration of fraud 17.  Job Insecurity can lead people into committing fraud 18.  Increased financial burden on individual and bank  personnel could lead them to commit fraudulent act 19.  Weak/poor management control, monitoring and supervision of internal control system can cause  perpetration of fraud 20.   Non-adherence to ethical standard set by the bank management and regulatory body could lead to fraud  perpetration 21.  Weak internal control system could also lead to  perpetration of fraud 22.  Bad leadership of the bank’s top management and executives could encourage others to perpetrate fraud

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A

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DA

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