INTERNAL CONTROL SYSTEM AND BANK FRAUD PREVENTION IN NIGERIA BANKING INDUSTRY (A CASE STUDY OF SELECTED BANKS IN AUCHI)

Abstract

This study mainly focuses on internal control system and bank fraud prevention in Nigeria banking industry. Internal control plays a significant role in the Nigeria banking industry. Internal control are policies, procedures, practices on organizational structure implemented to provide reasonable assurance that organization’s business objective will achieve and undesired risk event will be prevented or detected and corrected based on either compliance or management initiated concerns. The researcher uses survey design hence, the use of questionnaires, personal interview and observation in data collection. Hypotheses were formulated and analyzed with the use of chi-square test at 5% level of significance. The findings revealed that bank with internal control system can prevent the menace of fraud and a good internal control system has a significant affection on fraud detection and control. The study concludes that Lack of good internal control measure is a major cause of fraud in various banks and recommends among others that banks in Nigeria should pursue and effective internal control measures to prevent fraud.

TABLE OF CONTENTS

Title Page                                                                         i

Certification                                                             ii

Dedication                                                                       iii

Acknowledgements                                                  iv

Abstract                                                                   v

Table of contents                                                     vi

Chapter One: Introduction                           

1. Background to the Study                                                 1
2. Statement of Problems                                             2
3. Research Questions                                                 3
4. Objectives of the Study                                            3
5. Statement of Hypothesis(es)                                     4
6. Significance of the Study                                                 4
7. Scope of the Study                                                   5
8. Limitation of the Study                                            5
9. Definition of Terms                                                  6

Chapter Two: Review of Related Literature 

1. Introduction                                                             7
2. Definition of Fraud                                                  7

2.3   Theory of Fraud                                                       8

2.4   Types of Bank Fraud and Ways of Defrauding Bank 10

2.5   Causes of Fraud in Bank                                                 12

2.6   Effect of Fraud in Bank                                            13

2.7   Prevention of Fraud in Banks                                  16

2.8   Measures for Controlling Fraud in Bank                  18

2.9   What is Internal Control?                                                 23

2.10 Components of Internal Control                              25

2.11 Management Responsible for Internal Control         26

2.12 Application Measures of Internal Control                27

2.13 Objectives of Internal Control                                  28

2.14 Limitations on the Effectiveness of Internal Control        28

2.15 Period of Concealment of Fraud in Banks                        29

2.16 Brief History of Unity Bank Plc                                        30

2.17 The Bank Strategy Focus                                                 31

Chapter Three: Research Method and Design

1. Introduction                                                             33
2. Research Design                                                      33
3. Description of Population of the Study                    33
4. Sample Size                                                             34
5. Sampling Techniques                                              34
6. Sources of Data Collection                                       34
7. Method of Data Presentation                                   35
8. Method of Data Analysis                                          36

Chapter Four: Data Presentation, Analysis and Interpretation                                                 

4.1   Introduction                                                             37

4.2   Data Presentation                                                    37

4.3   Data Analysis                                                           38

4.4   Hypothesis Testing                                                  57

Chapter Five: Summary of Findings, Conclusion and Recommendations                                                        

5.1   Introduction                                                             62

5.2   Summary of Findings                                              62

5.3   Conclusion                                                              63

5.4   Recommendations                                                   64

References                                                              66

Appendix I                                                               67

Appendix II                                                              68

CHAPTER ONE

INTRODUCTION

1. Background to the Study

Internal control, the strength of every organization, has become of paramount importance today in Nigeria banks; the reason being that the control system in any organization is a pillar for an efficient accounting system. The need for internal control systems in the organization, especially banks cannot be undermined, due to the fact that the banking sector, which has a crucial role in the economic development of a nation, is now being characterized by macro economic instability, slow growth in real economic activities, corruption and the risk of fraud.

Fraud, which is the major reason for setting up internal control system, has becomes a great pain in the neck of many Nigerians. It also has become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigeria banking system and that any bank with a weak internal control system is dangerously exposed to bank fraud.

In a nut-shell, the damage which this menace called “fraud” has done to banks in is innumerable and needs urgent attention. Therefore the attempt to put an end to this economic degradation, gave rise to the topic of this research study internal control system and bank fraud prevention in Nigeria banking industry with Union Bank Plc as a case study. However, this study is aimed at verifying the concept that an effective and efficient internal control system is the best control measure for preventing and detecting fraud, especially in the banking sector. 

1. Statement of Problem

Considering the effects by fraud and fraudulent act as pointed in the introduction, the problem of this study is to effectively comb and curb the incidence of fraud. Yet they have not been able to stop bank fraud completely. For this reason, this research was carried out to help the banks in looking for ways of preventing bank fraud to achieve the objective, and this research work will be guided with questions. 

1. Research Questions

In other to achieve the objective of this study the following questions need to be answered;

1. Is lack of good internal control a major cause of fraud in bank?
2. Do banks with internal control system prevent menace of frauds in Nigeria?
3. Why do bank personnel commit fraud?
4. How effectively is fraud control measure in Nigeria banks?
   1. Objective of the Study

The objective of this research is basically aimed at the following:

1. To determine if lack of good internal control a major cause of fraud in bank.
2. To ascertain whether banks with internal control system prevent menace of frauds in Nigeria.
3. To determine if bank personnel commit fraud.
4. To ascertain how effectively fraud control measure is in Nigerian banks.

1. Statement of Hypotheses

Hypothesis One

HO:   The lack of a good internal control is not a major cause of fraud in banks.

HI:    The lack of a good internal control is a major cause of frauds in Nigeria.

Hypothesis Two

HO:   Banks with internal control system cannot prevent the menace of fraud in Nigeria.

HI:    Banks with internal control system can prevent the menace of fraud in Nigeria.

1. Significance of the Study

From all experience, fraud is unique in terms of the system of planning and execution.

Knowledge of the various ways which fraud have been perpetuated in the past and foresight or anticipation system considering the past can facilitate an adequate internal control design that can be efficient and effective in guiding management in the prevention and re-occurrence of fraud. If it is agreed that majority of fraud are born by the bank, then banks should pursue effective internal control measures to prevent fraud.

The research work therefore is designed to help to get acquainted with various frauds and their method of execution with the view of gaining sufficient knowledge to enrich individuals and collective experience in management and prevention of fraud. 

1. Scope of the Study

This study examines the nature and prevention of bank fraud in Nigeria banking system and is based on knowing how good internal control relate with the prevention of bank frauds in the Nigeria banking. The study is based strictly in Nigeria banking system and more emphasis is based in Auchi, the research work uses a time frame of 5 years (2009 – 2013) using a sample size of 75 for effective result. 

1. Limitations of the Study

As a matter of fact, fraud in bank is a very sensitive issue, bankers hardly agree to discuss incidence of fraud in their bank, this is due to the fact that might scare their customer, and their competitors could capitalized on that. However, personal observation and experience as a long time practicing bankers has also been put to play in the research work especially in the area of scanning for information, except that these observations and experience were not originally documented. 

1. Definitions of Terms

The following are the definition of certain terms used in writing the project which the research feels that there may not be so conversant with.

1. Fraud: This is an act or cause of deception deliberately practiced to gain unlawful and unfair advantage such deception is directly to the detriment of another person or group of persons.
2. Fraudulent: Means deceitful, a person who commit frauds.
3. Internal Audit: Means an independent appraisal unit within an organization for the review of operation and service to management in a managerial control by measuring and evaluating the effectiveness of others.