EFFECTIVE INTERNAL CONTROL OF FRAUDS IN BANKS A CASE STUDY OF COMMERCIAL AND MERCHANT BANKS IN NIGERIA

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  • Name: EFFECTIVE INTERNAL CONTROL OF FRAUDS IN BANKS A CASE STUDY OF COMMERCIAL AND MERCHANT BANKS IN NIGERIA
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ABSTRACT

Ever since banking evolved, banks have come to be seen as one of
the few places where one’s treasures can be kept without fear of theft. As a
result bankers all over the world were and still are seen as repositories of
trust and fidelity.
However, in the recent past, the integrity of bankers and the banking
industry in Nigeria have come into question. An epidemic called fraud has
hit the banking industry. This fraud has led to the loss of confidence by the
public in banking institutions.
The incidence of fraud is universal and permeates the society as a
whole. However, for this study, we have narrowed down our scope to the
commercial and merchant banks in order to take a meaningful study.
Though not specifically stated, yet the researcher conducted the
study for the period between 1985 to 1994, within which period cases of
fraud were much in the news.
The research was based on a number of postulations which include
1. The clerical category of bank employee are more likely to engage in
fraudulent activities than management cadre.

2. Banks that have less fraud occurences are more likely to be profitable
than those with high incidence of fraud.
3. Commercial banks are more likely to have cases of frauds and
forgeries than the merchant banks.
4. Banks with effective internal control are more able to combat frauds
than their counter parts with less effective internal control system.
However, the research work was inadvertently limited by a number of
factors, such as the secrecy of banks and the sceptical attitudes of
respondents in answering questions in the questionnaire. Yaro Yamen’s
formular was used in determining the sample size for then study. Hence of
a total of 66 commercial and 54 merchant banks operating in Nigeria as at
1994, about 110 of the two combined were chosen as the sample. Of this
10 of the possible respondents could not return their own questionnaires,
hence the Researcher had to use 100 for the study. Furthermore, Bowleys,
proportion allocation formular was used to determine the exact number of
banks in each category that would be contained in the sample.
It is also worthy to note that the researcher deliberately administered
the questionnaires to the accountants of the banks in the sample as he felt
that this will ensure validity of the measuring instrument.
A number of findings were made in the course of the study. A few of
them include:
1. Commercial banks had more incidence of fraud than other categories
of banks.
2. All the banks have internal control system.
3. Majority of the internal control system in the banks are only fairly
effective.
Finally, some far-reaching recommendations were made by the
Researcher. A few of them can be stated to include:
1. Ensure effective internal control system. As was determined in the
study, the problem was not with the installation of internal control
system as all the banks in the sample had it. However, the problem is
with its effectiveness. Management of these banks should strive to
ensure the effectiveness of the system. There should be periodic
reviews in this direction.
2. Banks should review their employment and motivation practices. The
commercial bank should endavour to borrows a leaf from the
merchant banks by employing qualitative staff to man positions in the
banks. This is because highly qualified staff are usually paid higher
salaries and such may deter the staff from engaging in fraud.
3. Banks should acquire for use, the standardized computer cheque
book that can encode characters on documents, read encoded
characters, sort documents by various codes, and list documents that
are sorted or unsorted. This computer will help in reducing the
incidence of frauds in banks.
4. In addition to the standardized computer cheque books, the banks
should strive to get computerized. Computerization reduces the
amount of delay of customer-time, as well as ensuring that records
are stored both in the magnetic disc, fleadiskettes, as well as the
printouts. Similarly, this would help in reducing the incidence of fraud.

TABLE OF CONTENTS

Title page i
Certification ii
Dedication iii
Acknowledgment iv
Abstract v
Table of content vi
List of table ix
CHAPTER ONE
1.1. Introduction 1
1.2. Statement of problems 4
1.3. Objective of the study 6
1.4. Hypothesis 6
1.5. Significance of study 7
1.6. Limitations and scope of study 8
CHAPTER TWO
2.0. Literature review 10
2.1. Restatement of the study 10
2.2. Meaning of fraud in the banking Industry 25
2.3. Sources and causes of bank frauds 26
2.3.1. Sources of bank frauds 26
2.3.2. Causes of bank frauds 29
2.4. Types of bank frauds 32
2.5. Effects of frauds 38
2.6. Definition of internal control 42
2.7. Types of internal control 43

CHAPTER THREE
3.0. Research design and methodology 51
3.1. Target population 51
3.2. Sources of data 51
3.3. Determination of sample size 52
3.4. Validity and reliability of measuring instruments 53
3.5. Method of statistical analysis 54

CHAPTER FOUR
4.0. Presentation and analysis 56
4.1. Presentation and analysis of data 56
4.2. Test of hypothesis 73
CHAPTER FIVE
5.0. Findings, recommendations, and conclusion
5.1. Findings
5.2. Recommendation
5.3. Conclusion
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Appendix 5
Bibliography
Vita

CHAPTER ONE

INTRODUCTION
Banks, especially commercial banks, are the major mobilizers of
saving in any economic system by offering savings facilities to the public.
Some of the functions of the banks include the acceptance of deposits from
the public and channeling such deposits to the deficit sectors of the
economy who are in need of inventible funds. These two related and
dependent functions bring the banks face to face with the public who come
to obtain their services. This implies that banks attend to a large number of
customers who they may not, most of the time, personally know, or whose
identity the banks may not immediately know. This shows that banks will be
unable to have an immediate identity of these customers all of whom either
have honest or fraudulent intentions.
The word fraud is described as a social menace perpetuated by a
person or a group of persons with the intention of altering the truth and, or
fact, for selfish personal gain.
Fraud occurs when a person in a position of trust and responsibility, in
defiance of prescribed norms, break the rules to advance his personal
interests at the expense of the public interest he has been entrusted
to guard and promote. It also occurs when a person through deceit, trick or
highly intelligent, cunning, gains an advantage he could not otherwise have
gained through lawful, just, or normal processes.
Worried by this rising tide of bank frauds, the International Corporate
Development Agency (ICDA) recently organized a two-day seminar on
strategies for minimizing bank frauds.
According to Dr. Falorunsho Abudu, a deputy general manager with
First Bank PLC, a resource person at the seminar, major consequences of
bank frauds include loss of capital by banks and their shareholders as well
as loss of public confidence, litigations, regulatory sanctions and negative
publicity.
According to the Nigerian Deposit Insurance Corporation (NDIC) the
amount involved in frauds in the nations banking system rose from N804,
196 million in 1990 to N3.309 billion in 1994. NDIC records also show that
commercial banks are most hit in this fraud virus as the growth rate of
frauds in commercial banks rose by over 700 percent between 1991 and
1994. The higher tendency of frauds in commercial banks may be
attributed to the fact that commercial banks operate from chains of
branches compared with merchant banks with as small number of outlets.
Frauds in banks could be committed through many ways. These
include forgeries on accounts whether savings deposit or current, forgeries
of transfer instruments such as drafts and mail over invoicing for services
rendered to banks and the opening and operation of false accounts as well
as creation of false credit balances.
Dr. Abudu also observed that frauds in banks can be committed
through suspension of cheques, diversion of bank frauds, foreign exchange
malpractices and embezzlement or outright theft of cash. Other methods
are by advances to non-existing customers, misuse of various suspense
accounts and the suppression of cash lodgments.
Unfortunately, too, the bank’s internal control systems are only fairly
effective. In cases where they try to obey the internal control procedures,
they waste so much of the customers time that one could not help
wondering whether the bank staff are not sabotaging the internal control
procedures.
Studies have also shown that there is a very high customer-bank
ratio. Hence, working side by side with this Nigerian banks lack adequate,
well trained and committed staff to render effective and efficient services to
these customers. This has therefore informed the intention of the writer to
examine the effectiveness of an internal control system as an aid to check
fraud in banks.

1.2. STATEMENT OF PROBLEM
Frauds have led to the loss of large amount of money in the economy
as a whole and in banking industry in particular. Some critics have even
pointed accusing fingers on fraud as contributing significantly to the
financial distress of some banks and the poor performance of the others.
Central Bank of Nigeria Annual Report for 1994, pointed out a total number
of distressed banks were 42 as the end of 1994 and this was as a result of
fraudulent practices in these banks. Besides, in view of the role played by
banks in the economy, fraud goes a long way depriving the economy of the
necessary funds required for sounds economic activities.
It forces the management of each bank to spend their hard-earned
money in a bid to check the occurrence. Moreover, it puts question marks
on the integrity of the employees and management of the concerned banks
and gives rise to absolute loss of confidence in the banks.
Thus, this study wishes to address the following problems:
1. Could effective Internal control system aid in minimizing the incidence
of bank frauds?
2. Do banks with effective internal control systems have less incidences
of fraud than those with less effective internal control systems?
3. Do employees in merchant Banks adhere more to laid-down rules
than their counterparts in the commercial banks.
4. Do banks without effective internal control system have other
effective ways of combating frauds?
It is expected that solution to these problems will be suggested in this
research study.

1.3. OBJECTIVE OF THE STUDY
This study is aimed at achieving certain objectives which will mean an
other milestone in the efforts to stop, or rather, control or minimize bank
frauds. The objectives of the study include:-
1. Finding out types, causes, nature and techniques of bank frauds, and
why people engage in frauds.
2. Examine the banks’ detection and control, and preventive measures
against frauds, the incidence of frauds, and whether banks have
adopted special methods of controlling frauds.
3. To determine why bank frauds have continued to exist inspite of all
the control measures adopted.
4. To suggest the introduction of effective internal control system to help
in minimizing the incidence of frauds.

1.4. HYPOTHESIS
The postulations for this study include the following:-
1. The clerical category of bank employees are more likely to engage in
fraudulent activities than the management cadre.
2. Banks that have less fraud occurrences are more likely to be
profitable than those with high incidence of fraud.
3. Commercial banks are more likely to have cases of frauds and
forgeries than the merchant Banks.
4. Banks with effective internal control system are better able to combat
frauds than their counterparts with less effective internal control
system.
1.5. SIGNIFICANCE OF STUDY
This work will be of immense importance and assistance to
management and owners of banks in Nigeria, as well as other developing
countries, as it will contribute significantly towards the detection of frauds.
Besides, it will be of immense value in frauds prevention. The banks can
benefit from this work by using the suggestions and recommendations
made in the study in piloting the affairs of the banks, if this is done,
certainly, banks will be operating more profitably as frauds will be reduced
to the barest minimum, if not totally eliminated.
Furthermore, the study will have the effect of enhancing the interest
of depositors, as well as the banking culture in bank customers. This is
because knowledge of fraud and fraudulent practices in banks dampens
the spirit of the customers and make them feel unsafe at keeping their
deposits in the banks. However, if the suggestions and recommendations
embodies in this study are implemented, the writer hopes that it will go a
long way to forestall fraud occurrences and hence rekindle once more their
interest in banking.
Finally, the government would also find the work beneficial. This
arises out of the fact that the government is currently in the forefront of
ensuring fair practices in the financial system. This may be borne out of the
fact that it realizes the central role that banks play in the development of
the economy.
1.6. LIMITATIONS AND SCOPE OF STUDY
A major factor that grossly limited this study is the rate of response by
the prospective. A number of reasons may have given rise to this.
First, the skeptical attitude of most respondents made the response
rate to be low. Some respondents envisaged that the completion of
questionnaires on the topic will give rise to suspicion by their employers on
their possibility of getting involved in frauds.
Again, the traditional philosophy of secrecy of banks in their
operations played its own role. A lot of data would not be made available
for use because of the preservation of the secrets of banks in order to
protect the bank’s image. They argued that the public might lost confidence
in them, should they learn that fraudulent practices also occur in such
banks.
Finally, no bank likes its competitors to know much it losses annually
to fraud because it is an instrument with which internal control efficiency of
banks is measured.

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