THE IMPACT OF INTERNAL CONTROL MEASURES ON THE DETECTION AND PREVENTION OF FRAUD IN BANKS (A CASE STUDY OF MAIN STREET BANK, ABA BRANCH)
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THE IMPACT
OF INTERNAL CONTROL MEASURES ON THE DETECTION AND PREVENTION OF FRAUD IN BANKS
(A CASE STUDY OF MAIN STREET BANK, ABA BRANCH)
ABSTRACT
Management,
not the auditor is responsible for setting up and monitoring of the internal
control system. Internal control system cannot fully be regarded as effective
not even when the design and implementation is properly done; this is because
the effectiveness of an internal control system depends on the competency and
dependability of the people using it. Bank failures and widespread losses over
the past two decades, have clearly pointed out the picture of how fraud has
penetrated the financial strength of banks; it has however, elevated the
importance of effective internal control system within the formal financial
sector worldwide. Organizations set up internal control system most at times
because they are required by law to do so; but then, how many has actually made
it a point of duty to train and educate employees on how to use these internal
control system since its effectiveness depends on the competency and
dependability of the people using it. This research paper defines internal
control, as a means to an end; it is aimed at verifying the conception that an
efficient and effectively implemented internal control system is the best
strategy for preventing and detecting fraud especially in the banking sector;
thus the objective of this research is to examine the effect of the internal
control system, when it comes to prevention and detection of fraud. Data
captured in this study, was analyzed through descriptive method. Quantitative
technique was also used to analyze the response of the respondents as well as a
computer program known as SPSS. The descriptive analysis involves the use of
percentage, tabulations, and graphical presentation. The sources of data for
the research were both primary and secondary sources. Census technique was used
for the study instead of a sampling technique. Questionnaires and interviews
were used as the data collection methods for the study. Based on the analysis,
internal control system was seen to be significant in detection and prevention
of fraud in banks in Nigeria, hence the need for an effective and adequate
internal control system.
CHAPTER 1
GENERAL
INTRODUCTION
How
extensive should a company’s internal control system be? In today’s
environment, this is a difficult question to answer. The reason being that some
current business, legal, and social trends suggest that companies need to
increase their emphasis on internal control, while other trends indicate just
the opposite. Bank failures and widespread losses over the past two decades
have elevated the importance of effective internal control within the formal
financial sector worldwide. In the United States for example, bank failures
rose over 200 percent in the 1980s partly due to fraud and mismanagement.
Internationally, the collapse of Barings Bank and Yamaichi Securities further
focused the financial sector’s attention on internal control. The Basle
Committee analyzed the problems related to these losses and concluded that they
probably could have been avoided had the banks maintained effective internal
control systems (banking, a regulatory and auditing guide). In addition, a
review of traditional banks affirmed that the implementation of effective
internal control systems played an important role in reducing bank failures.
Internal
control, the strength of every organisation, has become of paramount importance
today in Nigeria banks. The reasons being that the control systems in any
organization are a pillar for an efficient accounting system as well as
achievement of organizational goals.
1.2
BACKGROUND OF THE STUDY
As part of
its ongoing efforts to address bank supervisory issues and enhance supervision
through guidance that encourages sound risk management practices, the Basel
Committee on Banking Supervision issued a framework for the evaluation of
internal control systems. A system of effective 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 help 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. 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. The purposes of such internal controls are to ensure that transactions
are executed in accordance with proper general or specific authorisation and
again to ensure that all transactions are properly recorded with the correct
amount and in the appropriate account and in the proper accounting periods so
as to permit preparation of financial statement in accordance with relevant
legislation and accounting standards and for informed management decision
making.Internal control will ensure that errors and irregularities are avoided
or made apparent. Internal control as a system comprise of the control
environment and procedures .It includes all the policies and procedures adopted
by the directors and management of an entity to assist in achieving their
objectives of ensuring as far as practicable the orderly and efficient conduct
of its business so as to safeguard assets, to prevent and detect fraud and
error to ensure accuracy and completeness of accounting records and the timely
preparation of reliable financial information (SAS 300.1)The company code 1963,
Act 197 section 123 states that “management will need to establish an effective
accounting system comprising a number of controls”. In an attempt to do this
there must be a well-defined organisational structure showing how
responsibility and authority are delegated clearly defined communication
channels or lines of reporting(i.e. upward , downward and horizontal lines of
reporting) for attainment of corporate objectives. These controls are such that
different people are assigned to do different task. No one person should fully
record and process transactions from commencement to the end.
This means
that a company can only achieve its corporate mission through the establishment
of internal control system which makes sure that those policies and procedures
which are laid down by management are efficient. Hence, it reduces the cost of
operation without reducing effectiveness.
1.3
STATEMENT OF THE PROBLEM
The
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. Management is required to set
up an internal control system but this system varies significantly from one
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. 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.
1.4
OBJECTIVES
To find out
the impact of internal control system, on the overall management of
Mainstreet bank Nigeria Aba branch.
To find out
the employees knowledge base on the concept of fraud in the banking sector.
To find out
effective internal control systems influence on prevention and detection of
fraud.
To find out
the problem of fraud and how to curb it.
1.5 RESEARCH
QUESTIONS
Does
Mainstreet bank have an internal control
system? If yes, how effective is it?
What kind of relationship exists between
detection and prevention of fraud and internal control system?
Is lack of
good internal control system a major cause of fraud in banks? And what other
major causes exist?
Can banks
with effective internal control system prevent the menace of fraud?
1.6 RESEARCH
HYPOTHESIS
The 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
hypothesis.
H1:
Effective internal control system can help to prevent and detection of fraud in
Mainstreet bank.
H0: That
effective internal control system may not help to prevent and detect fraud in
Mainstreet bank.
Research is
poised to confirm true or otherwise, to achieve this purpose the research has
formulated the above hypothesis. That the general financial management and
control system as regard revenue and expenditure is effective, efficient and
technical. Also the general financial management and control system as related
to the public opinion is inadequate, ineffective, and this lacks improvement in
its operation achievements which will hinder general development.
1.7 THE
SIGNIFICANCE OF THE STUDY
The 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 audit 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 organisation.
Requirement
for the award of a Master’s degree.
Reference
for other research topics
1.7 SCOPE OF
THE STUDY
The content
of this research should not be seen as being totally exhaustive of all possibly
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 research is limited to the
study carried out on Mainstreet Bank
branch in Aba, Nigeria.
1.8
LIMITATIONS
The
limitations of this research work are as follows;
The internal
control involves human actions which introduces the possibility of errors in
processing or judgement.
Internal
controls can also be overridden by the plan among employees and evasion of
controls or oppression by top management and superior external influences.
Limited funds prevented the choice of more
than one study area.
1.9 OPERATIONAL DEFINITION
Internal
control: a control is “any action taken by management to enhance the likelihood
that established objectives and goals will be achieved” [institute of internal
auditors, 1993].in other words, controls are designed to ensure that
organizations conform to standards or plans. Examples of controls include the
use of sales or expense budgets, computer passwords, or even padlocks on
warehouses.
Effectiveness
– within this context of the study it means measure of productivity in
utilizing an entity’s resources.
Efficiency- it means measure of cost control in
performing recurring function within an entity
Fraud –
intentional deception made for personal gain or to damage another individual.
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