INTERNAL CONTROL SYSTEM AS A MEANS OF PREVENTING FRAUD IN FINANCIAL INSTITUTION

ABSTRACT

The focus of this work is to examine the importance of controlling fraud internally in financial institution through some tactic measures, a case study of First Bank of Nigeria Plc, Benin. Fraud in financial institutions in particular and in organizations in general has been a major challenges and threat to the growth and development of organization/ institutions and the country in general.

It is an undisputable fact that many financial institutions has failed in the past and some are staggering today because of their inability to manage and control fraud internally in their institutions.

Therefore this very work aimed at providing necessary hints for financial institution on how to carry out effective measures in curbing internal fraud in order to achieve organizational objectives among other things. Also, the study provide data (secondary data) for further studies in the related course of study.

Necessary literatures were deliberately received in which relevant existing studies were critically examined for appreciations and criticism and of course theoretical framework of the subject matter was received, in which various aspect of curbing fraud internally were extensively and intensively looked at.

Subsequently the data gathered through the questionnaire administered were presented, analyzed and duly interpreted.

CHAPTER ONE

1.1 Background/History Of The Study

Financial institutions are organizations which deals primarily in money, they constitute the financial framework of an economy, they also help to pool savings and excess liquidity.

In 1969 the Nigerian Banking Decree specified four types of financial institutions which carry out banking business, they are the commercial banks, discount houses, acceptance and finance houses.

The origin of First Bank in Nigeria as commercial bank in 1892 a company known as Elder Dempster was registered in London and was given the sole authority to distribute coins in Nigeria later in that same year, the bank had its headquarters office in South Africa known as Africa Banking Corporation (ABC). This became the first British bank oversea and indeed in the whole West Africa, ten (10) months later of it’s operations, the Lagos branch was faced with both internal and external operations constrains.

In 1894, Elder Dempster and Company bought over the Africa Banking Corporation to form a new bank in London known as Bank of British West Africa (B.B.W.A) with authorized share capital £100.00. It opened a branch office in Lagos, the bank’s name was changed to Bank of West African Limited (BWA) in 1959.

In 1966 Bank of West African Limited (BWA) merged with Standard Bank Limited (SBL) London to form a single bank known as Standard Bank West Africa Limited (SEWA). In 1969 Standard Bank West Africa Limited was incorporated with Nigerian Standard Bank Limited, which gave raise to the present name bank as First Bank of Nigeria Plc in 1979 (Dr. Unugbro 2007, p. 85, Money and Banking).

Prior to 1952, there was no form of Banking Act or Ordinance to regulate the establishment and operations of commercial banks or a central bank to supervise the control of banking in Nigeria. During that time many banks was registered some of which never operated and ever since that period, fraud has remained a permanent feature in our banking industry.

However, with the introduction of the first Banking Ordinance in 1952 and the Central Bank of Nigeria Act in 1959 and other subsequent Acts and Ordinances with their amendments over the years used to regulate and control the activities and operations of financial institutions in the country, fraud in financial institutions have rather increased in magnitude and the methods used to perpetrate them acquire greater sophistication day after day.

Anikpitan 2006, a bank of repute maintained;

“that, discoveries during investment show that banks now take extra precaution for clearing a cheque because of rampant incident of fraud and forgery”.

Ashimi 1976, maintained;

“that fraud has become sophisticated as to make a forged signature on a cheque leaf look god enough for the rightful owners to think that it was his signature”.

Ughamadu .N. on his article on celebrating bank fraud “in that business times 29 July, 1991 observed that;

The logic for establishing a viable and enabling environment for any country will be meaningless if it’s banking sector is very porous of fraud”.

Ojo A. T. 2002 emphasized that;

“As an open secret financial institution do not have very large resources of their own in relation to the total resources at their disposal. They depend in the remains on other people’s funds which have been entrusted to them because of the confidence the people have on them as models of responsibility and safety”.

To establish a sound internal control system various organization adopt various devices and methods based on their nature of business and the scope of their operations. Internal control system requires a continuous check and rechecking of day to day activities of the business in order to ensure the correctness and fairness of the accounting records, and to detect and expose any deviation when it has accord.

There is therefore a great need to minimize the defects or loopholes and make money effective and operational to guard against the occurrence and re-occurrence of fraud in our financial institutions.

1.2 Statement Of The Problem

In our daily newspapers there are reports of fraud in financial institutions, for instance the recent frauds that was unveil by the central bank governor Lamido Sanusi involving some banks chiefs.

Also Business Concord (Jan. 27, 2000) noted with utter dismay that “Robbers are making nonsense of the various types of security measures in banks by employing scientific means of gaining access to their strong rooms.

Business Times (23rd Jan. 1990); “the rising incidence of bank fraud has created a lot of distrust between banks and their customers”, not only that there are increase numbers of reported cases of fraud but also the sums involved are staggering.

Fraud leads to unwanted loss of public funds and put the management of the affected bank on its loss. Bank fraud incidence, reduces public confidence in banking and consequently slows down development of banking habit in Nigeria.

However, despite the steps and measures taken by banks to prevent the occurrence of fraud, the situation still remains largely unchanged. It is therefore necessary to appraise and establish an adequate and effective internal control system in the financial institution for their orderly and efficient operations so as to guard against ever-increasing incidence of fraud.

1.3 Purpose Of The Study

The main purpose of this work is to examine the internal control system in the operations of First Bank of Nigeria Plc. Also to identify possible loopholes (if any) in the system, to also ascertain the degree of compliance of the banks staff with these measure and to offer useful recommendations based on the findings.

1.4 Need/Significance Of The Study

Even though this study is not a very comprehensive and exhaustive one as a result of some limitations are aspects of the work is very relevant in one way or the other to the Nigeria banking industry as a whole primarily this study is designed for all those that may be interested in carrying out further study on internal control system as it is related to fraud prevention in financial institutions in Nigeria.

Moreover, banks in Nigeria will derive great assistance from this internal control system and subsequently preventing and minimizing fraud. This they can achieve by adopting and implementing the various suggestions and recommendations made in this study in their control system.

1.5 Research Questions

Does the present internal control system of financial institution appropriate in present world of technology and sophistication of the First Bank of Nigeria Plc?
How effective is the internal control system in First Bank of Nigeria Plc?
What techniques, if any can internal control system in banks used to prevent fraud in First Bank of Nigeria Plc?
Have your Bank (First Bank) experienced fraud in the past one, two or three years?
Do you think that the introduction of computerized internal control system in all the branches of First Bank will eradicate banking malpractices fraud?
Does the internal control measures adopted by First Bank to prevent and control fraud effective in the prevention and detection of fraud?
Does the present control system measures in your Bank prevents fraud?
Are all bank instruments like drafts, cheques books, certificates of deposit etc under the control of at least two bank officials?
Do you think the photograph of every customer withdrawing up to a certain amount is taken in First Bank of Nigeria Plc?
Do you think that fraudulent acts are possible because of lapses in your internal control system?
Do you think the use and adoption of computers will help in a great way in fighting or preventing the rate of fraud in First Bank of Nigeria Plc?

1.6 Definition Of Terms

Most words used in this work are technical and may not easily be understand by all, thus an attempt is here by made to define some these terms.

1. Internal Control System (ICS):

It is the whole system of control both financial and otherwise established by management in order to carry on the business of the enterprise in an orderly and efficient manner.

2. Public Limited Company (PLC):

They are public companies registered in the Nigeria Stock Exchange, they opened to every member of the public and through purchasing of a share one can become a member/owner of such.

3. Bank:

It is an establishment that deals especially with money; they give out loans, extension of credit, give advices to customers, etc.

4. Fraud:

It’s a criminal act, it’s an act of deception. It involves tricks cheating, swindling of an individual money or property.

…

CHAPTER TWO

2.0 Literature Review

2.1 Introduction

The review of relevant literature is the main topic of this chapter. A literature review covers theoretical and methodological contributions to a certain issue in addition to the state of knowledge at the time of writing. It provides information about the state of the art in relation to the subject you are writing about. It examines the body of work on the chosen subject. The literature evaluation in this study comprises the …

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TABLE OF CONTENTS
PRELIMINARY PAGES

Title page
Approval page
Dedication
Acknowledgement
Table of Contents
Abstract
CHAPTER ONE
INTRODUCTION
1.1 Background …
⋮
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
2.2 Conceptual Review
2.3 Theoretical Framework
⋮
2.4 Empirical Studies
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Population of Study
3.4 Sampling and Sampling Technique
3.5 Validation of Research Instrument
3.6 Method of Data Collection
3.7 Method of Data Analysis
3.8 Questionnaire Administration
3.9 Ethical Consideration
3.10 Statistical Analysis
CHAPTER FOUR
DATA ANALYSIS, RESULT AND DISCUSSION
4.1 Introduction
4.2 Presentation and Analysis of Data
4.3 Re-statement of Research Questions
4.4 Test of Hypotheses
4.5 Discussion of Findings
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Introduction
5.2 Summary of Findings
5.3 Conclusion
5.4 Recommendation
5.5 Suggestion for Further Study
REFERENCES
APPENDIX A - “QUESTIONNAIRE”

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