THE IMPACT OF INTERNAL CONTROL SYSTEM ON PREVENTION OF FRAUD IN COMMERCIAL BANKS A CASE STUDY OF WEMA BANK PLC.

A STUDY INTO THE IMPACT OF INTERNAL CONTROL SYSTEM ON DETECTION AND PREVENTION OF FRAUD; A CASE STUDY OF MAINSTREET BANK, ABA BRANCH
June 18, 2020
INTERNAL CONTROL AND FRAUD PREVENTION
June 18, 2020

Price: 2000 Naira (BSC, MSC)

ABSTRACT

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ABSTRACTThis research work takes a critical analysis on the studyof the needfor good accounting system in selected commercial small scale business as it effectively applied to ButterfieldBakery and as a case study.The system was analyzed after sampling the opinion of staff of the company in order to get findings on the concept of good accounting system management.The research work has conclusively established that optimal utilization of organization resources be it private or public, big, small or medium. It must be ensure adequate and up to date training of its human resourcesas they are the need to carry out and manipulate other Input in order to make the organization effective.This means that for an organization to be developed and be efficient, scientific and rational approach to good accounting system management is the key an underlying factor to achieve this project however, related literature review were revised and recommended for improvement were revised and recommended for improvement were also made for the consideration of company good accounting system

CHAPTER ONE

INTRODUCTION

2efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations. (COSO, ICIF, 1994).Fraud, on the other hand, can be defined as an act of deliberate deception with the aim of securing a personal benefit by taking advantages of other. Also, it could simply be put as the misappropriation, theft or embezzlement of corporate assets in a particular economic environment in the simplest thinking” it is also known as “stealing by tricks” (Achibong, 2013). It is the trusted and valued employee who generally commits business fraud. When frauds are discovered,there is often shock and disbelief that they could have committed such an act. The perpetrator of business fraud could be “the person next door.” This person is likely to be a married male with a family, religious affiliation, and above average education (Russell and Norvig, 2013).In most cases, offenders do not view stealing from companies as harmful; they may think that the crime was victimless; and they do not view their theft as being devastating or costly to the business. Many frauds occur because the opportunity exists and the perpetrator does not believe he/she will be caught. In many cases the offender has “little or no criminal self-concept and offenders view violations as part of their work” Further; they usually minimize their crime since it results in minor losses for a large volume of clients; no one client is usually targeted for the crime.It has been an ongoing issue for thousands of years and continues to be a problem today. There are several definitions for fraud as a legal (or criminal) concept. According to the Encyclopedia Britannica, (2012), it is “the deliberate misrepresentation of fact for the purpose of depriving someone of a valuable possession. Although fraud is sometimes a crime in itself, more often it is an element of crimes such as obtaining money by false pretense or by impersonation” To
3understand the components of fraud, a systematic approach is in order. As a system, fraud involves victims and perpetrators, and as a structure, it involves a fraud scheme. It can be evaluatedas an open system, and the challenge is to evaluate the weaknesses of this system in order to impact it (detect, prevent, or deter).It can be seen as the intention, deception, misrepresentation, omission or concealment of the truth for the purpose of obtaining unlawfully the assets of the bank, which is the major reason for setting up on internal control system, has become a great pain in the neck of many Nigerian bank managers. It has also become an unfortunate staple in Nigeria’s international reputation. It is really eating deep into the Nigerian banking system and that any bank with a weak internal control system is dangerously exposed to bank fraud (Adeduro, 2014).The cost of fraud to a business is difficult to estimate because not all fraud and abuse is discovered, not all uncovered fraud is reported, and civil or criminal action is not always pursued. Therefore, the main thrust of this study is to examine whether the internal control system in banking sector in Nigeria is effective in fraud detection or not, and also to appraise effectiveness of employee training within the context of internal control system as fraud detector.The menace of financial fraud as certainly emerged as one of the hindrances to bank performance in Nigeria. Although fraud isa worldwide phenomenon, it is the single most important financial problem in Nigeria. The nation has suffered severe losses financially. Banks in Nigeria may not be talking about fraud they persistently suffer, especially because of the sensitivity and response to such exposure (Muhammed 2012)1.2Background to the StudyA system of internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal controls can
4help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting (Markowski & Mannan, 2012). Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank’s reputation. The Basel Committee, along with banking supervisors throughout the world, has focused increasingly on the importance of sound internal controls. This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations. An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization. A system of accounting and records keeping will not succeed in completely and accurately processing all transaction unless controls known as internal controls are built into the system (Opromolla & Maccarini, 2015). Internal controls are processes designed to provide reasonable assurance that management achieves effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations (Grant, Miller, & Alali, 2014).A system of internal controls potentially prevents errors and fraud through monitoring and enhancing organizational and financial reporting processes as well as ensuring compliance with pertinent laws and regulations (Rae and Subramanian, 2013). Reasonable assurance is provided when cost effective actions are taken to restrict deviations, such as improper or illegal acts to a tolerable level. The internal audit reviews the effectiveness of the internal control system to ascertain whether the system is functioning as intended (Fadzil, Haron & Jantan, 2011).
5The system of internal controls should emphasize on, proper identification measurement and monitoring of risks, control activities for each level of operation, creation of reliable information systems that promptly reports anomalies and detailed reporting of all operations and monitoring of all the activities (Opromolla & Maccarini, 2015). Internal controls are affected by a company’s board of directors, management and other personnel and are designed to ensure effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations (Spira & Page, 2013). The management should assess and report the effectiveness of an institution’s internal controls to its stakeholders (Rezaee, 2015). Internal controls should have the following as its components, control environment, risk assessment, control activities, information and communication and monitoring activities (Basel Committee, 2011).These interrelated components of internal control must be present and functioning properly in order to have an adequate and functioning internal control system (Rezaee, 2015).1.3Statement of the ProblemThe regularity of fraud and misappropriation of funds is creating fear, anxiety, and a loss of confidence in the minds of bank customers. Also, poor internal control system leads to increase in bank losses (ACFE, 2010). Management is required to set up an internal control system but this system varies significantly fromone organization to the next, depending on such factors as their size, nature of operations, and objectives. Since internal controls operate in an environment which influences its operations, proper care must be exerted into the implementation of these systems in other to achieve the utmost aim of the bank. This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations (Hochberg, Sapienza & Jorgensen, 2014). An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal
6control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization (Levi, 2013). Nigeria has the highest incidences of fraud in the world, based on a global ranking of 78 Countries surveyed (PwC, 2011). Commercial banks in Nigeriaare more susceptible to fraud than commercial banks in her neighboringcountries. Duffield & Grabosky, 2011; Zahra, Priem & Rasheed, 2012; Mustafa & Youssef (2010) concentrated on the causes and motivations to defrauding by staff. Other scholars, Alleyne and Howard, 2011; Bakre, 2012& Lange (2013), studied therole of external auditors in fraud, detection and prevention and they produced conflicting findings. This shows that different opinions exist as to the effect of internal controls on fraud detection and prevention. It is for this research gaps that this study sought to answer the following research question; what is the effect of internal controls on fraud detection and prevention among commercial banks in Nigeria?1.4Objectives of the StudyThe general objective of the study is to ascertain whether Internal Control System has a significant impact on the prevention and detection of fraud in a commercial bank. The specific objectives of the study are hereby stated as follows:i.To find out the employees’ understanding and awareness of Internal Control System in the bank’s operations.ii.To find out the existence of effective internal control systems in the bank under study.iii.To find out the impact of internal control system, on the overall management of a commercial bank.
7iv.To evaluate the impact of the Internal Control System on the prevention and detection of fraud in the bank under study.1.5Research Questionsi.Does the Bank employees understand and aware of Internal Control System in the bank’s operation?ii.Are there existencesof effective of Internal Control System in the bank’s operations?iii.Are the existing Internal Control System has impact on the bank’s overall management?iv.Can banks with effective internal control system prevent the menace of fraud in their operations?1.6Statement of the HypothesesThe research is intended to investigate the impact of internal control system in the circumstances of embezzlement and fraud detection in the bank. Therefore, the data to be collected in this exercise will be used to test the following hypotheses. Hypothesis One:H0:Are the existing Internal Control System has no impact on the bank’s overall management?H1:Are the existing Internal Control System has impact on the bank’s overall management Hypothesis Two:
8H0:Banks with effective internal control system does not prevent the menace of fraud in their operations.H1:Banks with effective internal control system prevent the menace of fraud in their operations.1.7The Significance of the StudyThe findings of the study would help the management of the bank to maintain an enhanced controlled environment by helping management and employees to establish and maintain an environment throughout the bank that sets a positive and supportive altitude towards internal control, reliable management, operating personnel for effecting internal control and internal check for evaluating whether appropriate controls have been implemented and whether the internal controls are functioning as intended. Other significance of the study includes:Help the bank in reducing fraudulent activities that occur in the organization serve as good reference materials for other researchers on the subject matter.1.8Justification of the Study To highlight the weakness of the Internal Control System and in banks.To provide remedies to these weaknesses highlighted.To know the various measures put in place in prevention of fraud and misappropriation bycommercial banks.To stir up the bank employees awareness to effective mechanism for internal control System.1.9Scope of the StudyThe content of this study should not be seen as being totally exhaustive of all possible situations available in the Nigerian banking sector on the theme of this study. This is due to the vast size of the banking sector and the boundless nature of the study under review. Therefore, the scope of this study is limited to the study carried out on Wema Bank Plc, Sango Ibadan branch.1.10Definition of TermsInternal Control System: This is the whole system of controls financial and otherwise established by the management in other to carry on the business of the enterprises 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 the records.Fraud:Fraud is defined as any intentional or deliberate act to deprive another of property or money by guile, deception or other unfair means.Effectiveness–within this context of the study, it means measure of productivity in utilizing an entity’s resources for the attainment of the organization’s objectives.Efficiency-It means measure of cost benefit in performing recurring functions within an entity.Fraud Detection –This is the act of using or applying a combination of statistical, methodologies and pattern identification algorithms to figure out where the fraud is taking place in an organization.Fraud Prevention-This can be defined as the various ways or means in which fraud can be eradicated.Commercial Bank-Commercial bank is a financial institution that provides various services, such as accepting deposits, making business loans and offering basic investment products.

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