CHAPTER ONE

1.0 INTRODUCTION

1.1 Background to the Study

Banks occupy a critical position in a complex financial system that supplies the money

and credit needs of the economy. The unique characteristic of a commercial bank is that it also

creates money, and it is this particular feature of the commercial banks which distinguishes

them from non-banking financial institution Babatunde, (2006). However, all take part in the

process of financial intermediation whereby such intermediaries also provide considerable

benefits to borrowers in so far as there may be difficulties in locating potential savers who are

willing to lend appropriate amount of funds at relevant interest rate.

Banks ability to promote growth and development depends on the extent to which financial

transactions are conducted with trust and least risk. The foundation on which banks is built is

on confidence and trust, and where banks indulge in unsafe and unsound confidence, such banks

may collapse. So, for banks to achieve objectives and as well as generating overall confidence,

the Introduction and Establishment of Internal Control must come in to promote efficient

operation. Internal control system therefore serves as a sine-quanon for fraud prevention.

Internal control is a creation of management, thus, the management retains sole responsibility

for the establishment and maintenance of adequate and functional internal control Adeyemi W.

(2000).

Banks play very important roles in the economic development of any country. As an

important component of the financial system, banks channel scarce resources from surplus

economic units to deficit units. Thus, to an appreciable and reasonable extent, they exert a lot

of influence on the pattern and trend of economic development through their lending and

deposit mobilization activities. The efficient mobilization of savings and its allocation of

productive investment by financial institution, thereby promote economic growth and

1
development as well as achieving their objectivities, profitability and solvency. All the

aforementioned benefits that banks can exert on the economy as a whole can be achieved

through an effective internal control system and fraud prevention in the banking industry

Benjamin A. (2009).

In the words of Millechamp A. (2000), Internal Control system is an independent

appraisal function within an organization for the review of system of control and the quality of

performance as a service in the organization.

The Institute of Chartered Accountant of England and Wales ICAE& W, (2011) defines it

as a review of operations and records, sometime continuous undertaken with a business by a

specially assigned staff.

Internal control, therefore is a whole system of controls, financial or otherwise, established by

the management in order to carry out the business of an enterprise 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 record.

Fraud, on the other hand is defined by Anyawu (2008) as an act of deception deliberately

practiced to gain unlawful or unfair advantage to the detriment of another. The international

standard on Auditing (ISA) defines fraud as an intentional act by one or more individuals among

management, those charged with governance, employees or third parties involving the use of

deception to obtain an unjust or illegal advantage. Fraud may include: manipulation,

falsification or alteration of documents and records; recording transaction without substances,

intentional misapplication of accounting policies etc. just to mention a few Horngreen, (2007).

Therefore, the menace called fraud has been a deadly disease that has infected many

financial corporate body particularly the banks which led to the recent reformation in the

banking industry in Nigeria, thus, involving the process of business combination in the industry

such as merger and acquisition whereby the infected banks are being merged to and/or acquired

2
by the healthy and sound ones. This reformation has obviously pointed out. The enormous

damage that fraud has done to the banks, thus, the dilution in the financial strength of Nigeria

banks CBN Report, (2011).

In other to combat this syndrome of fraudulent practices, several measures have been

identified as the way out to minimize this act. Internal control system is one of the many

measures that are to be discuss in chapter 2 of this research. Internal Control System has been

the most single trusted and effective measures that can combat this act of malpractices to the

barest minimum. Infact, the Central Bank of Nigeria (CBN) reported that the backward

development in Nigeria was attributable to the weakness in the Internal Control System of the

banks. Therefore, an attempt to bring to barest minimum, if not completely eradicated, the

spate of fraud by the measure of internal control system gave rise to this research study Olatunji,

(2009).

1.2. Statement of the Problem

Following the recent failure of some banks that led to the reformation in the banking industry,

the confidence of the bank customer, that is savers of fund, and of the lenders of money from

bank has been lost. Attributed to the failure is also the weakness in the Internal Control System

and the prevalence of fraudulent practices among staffs and management of the bank.

An effective internal control system and good system of fraud prevention will ensure

efficient mobilization of savings and its allocation to productive investment, thereby promoting

growth and development, as well as achieving their objectives, profitability, solvency and

ultimately restores the lost confidence of customers and lenders overtime. However, the system

of internal control is mainly the function of management to establish such, and the ultimate aim

of this is to minimize and prevent the occurrence of fraud in the bank, thus

It should be noted however that fraudulent practices in the banks is usually cause

through lapses or inadequacies which manifested in various ways.

3
1.3 Research Questions

For the purpose of this study, the following are some of the problem-solving questions

that

May come up during the course of carrying out this study. The following are the research

questions which will aid the understanding and efficient study of the problem.

(a) Does the Internal Control System have impact on the overall management of banks?

(b) Can the Internal Control Systems of bank ensure fraud prevention and detection?

(c) Can an inadequate internal control system cause perpetration of fraud?

(d) Can strong internal control system fish-out actors that contributed to incidence of fraud

in banks?

1.4 Objectives of the Study

The general objective of the study is to assess the impact of Internal Control System as a means

to minimize and prevent the occurrence of fraudulent practices in any form.

These objectives of the study are as follows:

i. To determine the impact of Internal Control System on the overall management of

Nigeria banks

ii. To examine the impact of the Internal Control system on fraud prevention and detection.

iii. To highlight the major causes of fraud and actors that contributed to the incidence of

fraud in banks.

1.5 Significance of the Study

Establishment of an adequate Internal Control and its effective review and assessment by the

management will go a long way in preventing fraudulent acts and practices among the fraudsters

within the banks and other third parties. The usefulness and the expected benefit of the study

to the banking industry entail the following:

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It will help in knowing and studying how the principles of Internal Control Components or

elements are used to prevent fraud.

The study will also unveil the lapses and inadequacies in the bank open to fraudsters within and

outside the banks.

The study will help to review fraudsters mode of operation and thereby recommend ways to

avert their operations through the use of internal control system.

It will also result in reduction in an attempt to defraud by the management and staff as a result

of lay-down expected punishment.

It will also enhance customers confidence and trust in the banking industry as a result of strong

internal control being put in place.

This study will ultimately help in promoting economic growth and development as a result of

efficient mobilization of savings thereby enhancing profitability and solvency in the bank, all

of which are achievable through implementation of strong system of internal control.

1.6. Scope of the Study.

The scope of the study will be limited to how Internal Control System will be used as

an effective means to prevent fraud, thus, an essential system have to be in place before fraud

can be minimize and prevented, Guaranty Trust Banks Bauchi Branch. Although, information

from bank on internal control and fraud are difficult to obtain since they are regarded as

sensitive issues which cannot be provided without caution because it is mainly to protect the

image of the bank and not to erode depositors confidence. On these circumstances, attention

is focus on Guaranty Trust Bank Plc, Bauchi Branch, in order to obtain easy accessibility of

information. Also, it is believe that this type of study will expose the inadequacy and lapses in

the bank with the presence of Internal Control system and this will be a possible suggestion for

greater improvement, not only in Guaranty Trust Bank, but on all banks as a whole, other

financial institutions and the economy at large.

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1.7. Limitations of Study

The study was confronted with many problems, among these are:

1. Inability of the researchers to get to the respondents due to bureaucracy.

2. Not all the questionnaires distributed for administering was returned.

3. Insufficient time on the part of the researchers to do proper evaluation.

4. Responses were not given to some questions in the questionnaire regarded as internal

issues.

The following limitations had made proper evaluation of Internal Control System as a means

of fraud prevention difficulty in Guaranty Trust Bank Plc.

1.8. Definition of Terms

1. Internal Check: Is the aggregate of the checks and balances imposed on day to day

transaction in an organization whereby the work of one person is verified independently or in

complimentary to the work of another.

2. Internal Audit: Is an independent appraisal function established by the management

of an organization for the review of Internal Control System as a service to the organization.

3. Internal Control: This is a whole system of control, financial or otherwise, established

by the management in order to carry out the business of an enterprise 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 records.

4. Fraudsters: These are the people who commit frauds.

5. Fraud: This is a crime involving cheating somebody in order to get money or goods

illegally.

6. Error: This is an unintentional; Mis-statement in the financial statement. It is an act

done without the intention of committing the act.

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7. Irregularities: This is an Intentional distortion of the bases of preparing the financial

statement. It is act an error since it is a deliberate act and also not a fraud since personal benefit

may not be the objectives. The end product of irregularities is fraud.

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 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter discusses the conceptual and theoretical framework relating to this research

work. The current and relevant literature will be sought for and thoroughly reviewed.

2.1 Area of Study

This study will focus on Guaranty Trust Bank Plc., Nigeria, as a case study. Its head office is

based in Victoria Island, Lagos State. It is one of the biggest companies in entire Western

Africa. Guaranty Trust Bank plc., was incorporated as a limited liability company licensed in

July 1990 to provide commercial and other banking services to the Nigerian public. The Bank

commenced operation in February 1991, and has since then grown. In September 1996,

Guaranty Trust Bank plc. became a publicly quoted company and won the Nigeria Stock

Exchange Presidents Merit award that same year and subsequently in the year 2000, 2003,

2005, 2006, 2007, 2008 and 2009. In February 2002, the bank was granted a universal banking

license and later appointed a settlement bank by the Central Bank of Nigeria (CBN) in 2003.

This study will focus on the impact of internal control system of Guaranty Trust Bank plc.,

and how it prevents the occurrence of fraudulent act and practices. NDIC, (2011). Guaranty

Trust Bank plc. is a foremost Nigerian financial institution with vast business outlays spanning

Anglophone West Africa and the United Kingdom. Guaranty Trust Bank plc., is a financial

services provider which presently has an Asset Base of over 2 Trillion Naira; Shareholders

funds/equity of over 200 Billion Naira and Employs over 5000 people in Nigeria, Cote divoire,

Gambia, Ghana, Liberia, Sierra Leone and the United Kingdom. This study will also look at

how internet control enhances the profitability and solvency of Guaranty Trust Bank plc.

8
2.2 Theory of Internal Control:

The institute of chartered Accountants of England and Wales ICAE&W, (2011). define internal

control as the whole system of controls, financial or otherwise established by management in

other to carry out the business of an enterprise in orderly and efficient manner, ensure adherence

to management policies, safeguard the assets and secure as far as possible the completeness and

accuracy of records.

Mayo, (2006) defined it as the measure taken by an organization for the purpose

of protecting its resources against waste, fraud, inefficiency; ensuring accuracy and reliability

in accounting and operating data; securing compliance with organization policies and

evaluating the level of performance in the division of the organization.

Millechamp (2000) also defined internal control system of an independent appraisal

function within an organization for the review of the system of control and the quantity of

performance as a service in the organization.

Also following the need to restore public confidence and trust in the financial statement of

companies, both financial and non-financial institutions, Sarbanes-Oxley emphasizes the

importance of effective internal control, and thus, internal control was defined in the Sarbanes

- Oxley Act of 2002 as the procedures and processes used by a company to safe guard the assets,

process information accurately and ensure compliance with laws and regulation.

Sarbanes-Oxley requires companies to maintain strong and effective internal control

over the recording of transactions and the preparing of the financial statement. Such controls

are important because it deters fraud and prevent misleading financial statements.

From these definitions, it can be deduced that internal control comprises the plan of an

organization and all of the coordinate methods and measures adopted within it, to safeguard its

9
assets, check the accuracy and reliability of its accounting data, promote operational efficiency

and encourage adherence to prescribe managerial policies.

Internal control objectives are channels towards ensuring adherence to managerial policies and

achieving organizational goals in generals. It also embraces internal checks, internal audit and

the whole system of control, check and balance established by the management Onwuamaeze,

(2008).

2.2.1 Internal Audit

This is an independent appraisal function established by the management of an organization for

the review of the internal control system as a service to the organization. The external audit

carried out by the external audit department.

These departments investigate and appraise the system of external control along with the

efficiency of various units of the banks if they are performing their assigned function as a basic

for protective and constructive services to management.

2.2.2 Internal Check

This is the aggregate of the checks and balance imposed on day to day transactions in

an organization whereby the work of person is verified independently or is complementary to

the work of another, the objectives been the prevention or early detection of error and fraud

Fakunle, (2006).

Internal check therefore of necessity starts from delegation of authorities and proper

division of work in such a manner that one person alone does not see a transaction through from

the beginning to the end, that is to make the payment of an invoice. Internal check would involve

the following;

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 (a) Somebody confirming that goods and services have been received and that the price

of the invoice is correct

(b) Somebody else preparing the payment voucher

(c) One other person signing the cheque.

(d) The cashier of somebody else writing out the cheque.

(e) Another person with appropriate authority approving the voucher for payment

2.3 Scope of Internal Control

It is the responsibility of every company to design an internal control system which is

suitably adapted to their situation. In the case of a group, the parent company ensures that inter-

control systems exist within its subsidiaries. These systems should be adapted in line with their

own individual characteristics and to the relationship that exists between the parent company

and the subsidiaries Aren and Loebbecke, (2011).

In a situation where a parent has a substantial holding interest, over which it has

significant influence, that parent should take care to assess the possibility of acquainting itself

with and examining the measures taken by its affiliate, in terms of internal control

2.4 Objectives of Internal Control System

Internal control of a bank is the bank system defined and implemented under its responsibility.

The system more particularly is designed to ensure that certain objectives which are

fundamental to the operation of the bank are achieved.

These objectives are to:

(a) Ensure the effectiveness and efficiency of operations (including protection of asset)

(b) Ensure reliability of financial reporting

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 (c) Ensure compliance with applicable laws and regulations and

(d) Ensure that the instructions and directional guidelines fixed by the executive

management or the management board are applied.

The committee of sponsoring organization (coso) of the treadway commission (1999)

categorizes the above stated objectives of internal control system as a means to provide

reasonable assurance that;

i. Assets are safeguard and used for business purposes.

ii. Business information is accurate; and

iii. Employees comply with laws and regulations.

Internal control is therefore neither limited to a set of procedures nor simply to

accounting nor financial processes. Nor does it embrace all of the initiatives taken by the

executive bodies or by management, such as defining company strategy, fixing objectives,

management decisions, and dealing with the risk or monitoring performance according to Ojo

(2008).

2.4.1 Ensuring the Effectiveness and Efficiency of Operations

This objective is to ensure the correct functioning of the bank s internal processes,

particularly those implicating the security of its assets.

All operational, industrial, commercial and financial processes are concerned. In order

for processes to function correctly, standards or operating principle have to be established and

performance and profitability indicators set up.

By assets, it must be understood not only the tangible assets, but also the intangible

assets such as know-how, image or reputation. These assets can disappear in the wake of

12
thefts, frauds, lack of productivity, errors, or result from a bad management decision or an

internal control weakness. Special attention should be paid to the related processes in these

cases.

Similarly, for the processes involved in the elaboration and processing of accounting

and financial information. These processes include act only those which deal directly with the

preparation of financial reports, but also the operational processes which generate the

accounting data Ayodele, (2003).

2.4.2 Ensuring the reliability of financial reporting

The reliability of financial information can only be obtained through the implementation

of internal control procedures which are capable of faithfully recording all the operations

performed by the organization.

The quality of this internal control system can be targeted by means of:

i. Segregation of duties, enabling a clear distinction to be made between recording

duties, operational duties and retention duties.

ii. Function descriptions which should enable the origins of the information

prepared to be identified, together with its recipients.

iii. An accounting internal control system enabling to check that the operations have

been performed in accordance with general and specific instructions, and that

they have been accounted for so as to produce financial information which

complies with generally accepted accounting principles.

2.4.3 Ensuring compliance with applicable laws and regulations.

This refers to the laws and regulations to which the bank is subject. The laws

and regulations in force determine the behavioural standards that the company incorporates into

13
its compliance objectives. Examples of such standards and laws include; banks and other

financial institution act (BOFIA), environmental regulations, contract terms and safety

regulation, central bank of Nigeria prudential guidelines.

Given the large number of areas that exist (company law, commercial law, security,

environment, social arts), the banks organization needs to be structured in such a way so that it;

i. Is aware of the various rules that apply to it

ii. an be informed in due time of any changes that are made for them (legal monitoring)

iii. Can transpose these rules into its internal procedures

iv. Can inform and train staff on those rules which affect them

2.4.4 Ensuring the application of the instruction of the instruction and directional

guidelines fixed by executive management board.

These instructions and directional guidelines must be communicated to the staff

concerned, based on the objectives allocated to each of them, so as to provide guidelines on

how their activities should be conducted. These instructions and directional guidelines must be

defined in line with the banks overall objectives and the inherent risks Idowu, (2009).

2.5 Framework for Internal Control Systems in Banking Organizations in Nigeria

As part of its on-going efforts to address bank supervisory issues and enhance

supervision through guidance that encourages sound risk management practices, the central

bank of Nigeria (CBN) committee on banking supervision issues the framework for the

evaluation of internal control systems. The framework is a set of interrelated elements, thus a

component of an integrated system of internal control systems.

Other national and international regulatory body and authority also laid down the same

elements or components of the integrated system of internal control as the structure upon which

14
the internal control objectives can be achieved. As a result of the global acceptability of and

worldwide laid down elements of internal control; these elements are therefore furthers broken

down individually into a set of principles. These elements are (5) in numbers.

2.5.1 Internal Control Elements

These elements are also refers to as the component of internal control. The

internal control systems therefore consist of five closely related components and interrelated

elements. They are:

1. Management oversight and the control culture

2. Bank recognition and assessment

3. Control activities and segregation of duties

4. Information and communication

5. Monitoring activities and correcting deficiencies

The problems observed in recent large losses at banks can be aligned with these five elements.

The effective functioning of these elements is essential to achieving a banks performance,

information, and compliance objectives

2.5.2 Principles for the assessment of internal control system under each of the

elements.

A. Management Oversight and the Control Culture

1. Board of directors

Principle 1: The board of directors should have responsibility for approving and periodically

reviewing the overall business strategies and significant policies of the bank; understanding the

major risks run by the bank, setting acceptable levels for these risks and ensuring that senior

15
management takes the steps necessary to identify, measure, monitor and control these risks;

approving the organizational structure; and ensuring that senior management is monitoring the

effectiveness of the internal control system. The board of directors is ultimately responsible for

ensuring that an adequate and effective system of internal controls is established and

maintained.

The board of directors provides governance, guidance and oversight to senior

management. It is responsible for approving and reviewing the overall business strategies and

significant policies of the organization as well as the organizational structure. The board of

directors has the ultimate responsibility for ensuring that an adequate and effective system of

internal controls is established and maintained. Board members should be objective, capable,

and inquisitive, with a knowledge or expertise of the activities of and risks run by the bank. In

those countries where it is an option, the board should consist of some members who are

independent from the daily management of the bank. A strong, active board, particularly when

coupled with effective upward communication channels and capable financial, legal, and

internal audit functions, provides an important mechanism to ensure the correction of problems

that may diminish the effectiveness of the internal control system. The board of directors should

include in its activities

i. Periodic discussions with management concerning the effectiveness of the internal

control system,

ii. A timely review of evaluations of internal controls made by management, internal

auditors, and external auditors,

iii. Periodic efforts to ensure that management has promptly followed up on

recommendations and concerns expressed by auditors and supervisory authorities on

internal control Internal control systems weaknesses, and

iv. A periodic review of the appropriateness of the banks strategy and risk limits.

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One option used by banks in many countries is the establishment of an Independent audit

committee to assist the board in carrying out its responsibilities. The establishment of an audit

committee allows for detailed examination of information and reports without the need to take

up the time of all directors. The audit committee is typically responsible for overseeing the

financial reporting process and the internal control system. As part of this responsibility, the

audit committee typically oversees the activities of, and serves as a direct contact for, the banks

internal audit department and engages and serves as the primary contact for the external

auditors. In those countries where it is an option, the committee should be composed mainly or

entirely of outside directors (i.e., members of the board that are not employed by the bank or

any of its affiliates) who have knowledge of financial reporting and internal controls. It should

be noted that in no case should the creation of an audit committee amount to a transfer of duties

away from the full board, which alone is legally empowered to take decisions.

2. Senior Management

Principle 2: Senior management should have responsibility for implementing strategies

and policies approved by the board; developing processes that identify measure, monitor

and control risks incurred by the bank; maintaining an organizational structure that clearly

assigns responsibility, authority and reporting relationships; ensuring that delegated

responsibilities are effectively carried out; setting appropriate internal control policies; and

monitoring the adequacy and effectiveness of the internal control system.

Senior management is responsible for carrying out the directives of the board of

directors, including the implementation of strategies and policies and the establishment of an

effective system of internal control. Members of senior management typically delegate

responsibility for establishing more specific internal control policies and procedures to those

responsible for a particular business unit. Delegation is an essential part of management;

however, it is important for senior management to oversee the managers to whom they have

17
delegated these responsibilities to ensure that they develop and enforce appropriate policies and

procedures

Compliance with an established internal control system is heavily dependent on a well-

documented and communicated organizational structure that clearly shows lines of reporting

responsibility and authority and provides for effective communication throughout the

organization. The allocation of duties and responsibilities should ensure that there are no gaps

in reporting lines and that an effective level of management control is extended to all levels of

the bank and its various activities.

It is important that senior management takes steps to ensure that activities are conducted

by qualified staff with the necessary experience and technical capabilities. Staff in control

functions must be properly remunerated. Staff training and skills should be regularly updated.

Senior management should institute compensation and promotion policies that reward

appropriate behaviours and minimize incentives for staff to ignore or override internal control

mechanisms Horngreen, (2007).

3. Control culture

Principle 3: The board of directors and senior management are responsible for promoting high

ethical and integrity standards, and for establishing a culture within the organisation that

emphasizes and demonstrates to all levels of personnel the importance of internal controls. All

personnel at a banking organization need to understand their role in the internal controls process

and be fully engaged in the process.

An essential element of an effective system of internal control is a strong control

culture. It is the responsibility of the board of directors and senior management to emphasise

the importance of internal control through their actions and words. This includes the ethical

values that management displays in their business dealings, both inside and outside the

18
organisation. The words, attitudes and actions of the board of directors and senior management

affect the integrity, ethics and other aspects of the banks control culture.

In varying degrees, internal control is the responsibility of everyone in a bank. Almost

all employees produce information used in the internal control system or take other actions

needed to effect control. An essential element of a strong internal control system is the

recognition by all employees of the need to carry out their responsibilities effectively and to

communicate to the appropriate level of management any problems in operations, instances of

non-compliance with the code of conduct, or other policy violations or illegal actions that are

noticed. This can best be achieved when operational procedures are contained in clearly written

documentation that is made available to all relevant personnel. It is essential that all personnel

within the bank understand the importance of internal control and are actively engaged in the

process. In reinforcing ethical values, banking organizations should avoid policies and practices

that may inadvertently provide incentives or temptations for inappropriate activities. Examples

of such policies and practices include undue emphasis on performance targets or other

operational results, particularly short-term ones that ignore longer-term risks; Compensation

schemes that overly depend on short-term performance; ineffective segregation of duties or

other controls that could allow the misuse of resources or concealment of poor performance;

and insignificant or overly onerous penalties for improper behaviours Oset, (2006).

While having a strong internal control culture does not guarantee that an organization will

reach its goals, the lack of such a culture provides greater opportunities for errors to go

undetected or for improprieties to occur.

B. Risk Recognition and Assessment

Principle 4: An effective internal control system requires that the material risks that could

adversely affect the achievement of the banks goals are being recognized and continually

assessed. This assessment should cover all risks facing the bank and the consolidated banking

19
organization (that is, credit risk, country and transfer risk, market risk, interest rate risk,

liquidity risk, operational risk, legal risk and reputational risk).Internal controls may need to be

revised to appropriately address any new or previously uncontrolled risks.

Banks are in the business of risk-taking. Consequently it is imperative that, as part of

an internal control system, these risks are being recognized and continually assessed. From an

internal control perspective, a risk assessment should identify and evaluate the internal and

external factors that could adversely affect the achievement of the banking organizations

performance, information and compliance objectives. This process should cover all risks faced

by the bank and operate at all levels within the bank. It differs from the risk management process

which typically focuses more on the review of business strategies developed to maximize the

risk/reward trade-off within the different areas of the bank.

Effective risk assessment identifies and considers internal factors (such as the

complexity of the organizations structure, the nature of the banks activities, the quality of

personnel, organizational changes and employee turnover) as well as external factors (such as

fluctuating economic conditions, changes in the industry and technological advances) that could

adversely affect the achievement of the banks goals. This risk assessment should be conducted

at the level of individual businesses and across the wide spectrum of activities and subsidiaries

of the consolidated banking organization. This can be accomplished through various methods.

Effective risk assessment addresses both measurable and non-measurable aspects of risks and

weighs costs of controls against the benefits they provide Asukwo, (2007).

The risk assessment process also includes evaluating the risks to determine which are

controllable by the bank and which are not. For those risks that are controllable, the bank must

assess whether to accept those risks or the extent to which it wishes to mitigate the risks through

20
control procedures. For those risks that cannot be controlled, the bank must decide whether to

accept these risks or to withdraw from or reduce the level of business activity concerned.

In order for risk assessment, and therefore the system of internal control, to remain

effective, senior management needs to continually evaluate the risks affecting the achievement

of its goals and react to changing circumstances and conditions. Internal controls may need to

be revised to appropriately address any new or previously uncontrolled risks. For example, as

financial innovation occurs, a bank needs to evaluate new financial instruments and market

transactions and consider the risks associated with these activities. Often these risks can be best

understood when considering how various scenarios (economic and otherwise) affect the cash

flows and earnings of financial instruments and transactions. Thoughtful consideration of the

full range of possible problems, from customer misunderstanding to operational failure, will

point to important control considerations

C. Control Activities and Segregation of Duties

Principle 5: internal Control activities should be an integral part of the daily activities of a bank.

An effective internal control system requires that an appropriate control structure is setup, with

control activities defined at every business level. These should include: top level reviews;

appropriate activity controls for different departments or divisions; physical controls; checking

for compliance with exposure limits and follow-up on noncompliance; a system of approvals

and authorizations; and, a system of verification and reconciliation.

Control activities are designed and implemented to address the risks that the bank

identified through the risk assessment process described above. Control activities involve two

steps: (1) the establishment of control policies and procedures; and (2) verification that the

control policies and procedures are being complied with. Control activities involve all levels of

personnel Examples of control activities include: personnel in the bank, including senior

management as well as front line personnel.

21
Examples of control activities include:

i. Top level reviews - Boards of directors and senior management often request

presentations and performance reports that enable them to review the banks

progress toward its goals. For example, senior management may review reports

showing actual financial results to date versus the budget. Questions that senior

management generates as a result of this review and the ensuing responses of

lower level of management represent a control activity which may detect

problems such as control weaknesses, errors in financial reporting or fraudulent

activities.

ii. Activity controls - Department or division level management receives and

reviews standard performance and exception reports on a daily, weekly or

monthly basis. Functional reviews occur more frequently than top-level reviews

and usually are more detailed. For instance, a manager of commercial lending

may review weekly reports on delinquencies, payments received, and interest

income earned on the portfolio, while the senior credit officer may review

similar reports on a monthly basis and in a more summarized form that includes

all lending areas. As with the top-level review, the questions that are generated

as a result of reviewing the reports and the responses to those questions represent

the control activity.

iii. Physical controls - Physical controls generally focus on restricting access to

tangible assets, including cash and securities. Control activities include physical

limitations, dual custody, and periodic inventories.

iv. Compliance with exposure limits - The establishment of prudent limits on risk

exposures is an important aspect of risk management. For example, compliance

with limits for borrowers and other counterparties reduces the banks

22
 concentration of credit risk and helps to diversify its risk profile. Consequently,

an important aspect of internal controls is a process for reviewing compliance

with such limits and follow-up on instances of non-compliance.

v. Approvals and authorizations - Requiring approval and authorization for

transactions over certain limits ensure that an appropriate level of management

is aware of the transaction or situation, and helps to establish accountability.

vi. Verifications and reconciliations - Verifications of transaction details and

activities and the output of risk management models used by the bank are

important control activities. Periodic reconciliations, such as those comparing

cash flows to account records and statements, may identify activities and records

that need correction. Consequently, the results of these verifications should be

reported to the appropriate levels of management whenever problems or

potential problems are detected.

Control activities are most effective when they are viewed by management and all other

personnel as an integral part of, rather than an addition to, the daily activities of the bank. When

controls are viewed as an addition to the day-to-day activities, they are often seen as less

important and may not be performed in situations where individuals feel pressured to complete

activities in a limited amount of time. In addition, controls that are an integral part of the daily

activities enable quick responses to changing conditions and avoid unnecessary costs. As part

of fostering the appropriate control culture within the bank, senior management should ensure

that adequate control activities are an integral part of the daily functions of all relevant

personnel.

It is not sufficient for senior management to simply establish appropriate policies and

procedures for the various activities and divisions of the bank. They must regularly ensure that

all areas of the bank are in compliance with such policies and procedures and also determine

23
that existing policies and procedures remain adequate. This is usually a major role of the internal

audit function Shiozawa, (2011)

Principle 6: An effective internal control system requires that there is appropriate segregation

of duties and those personnel are not assigned conflicting responsibilities. Areas of potential

conflicts of interest should be identified, minimized, and subject to careful, independent

monitoring

In reviewing major banking losses caused by poor internal controls, supervisors

typically find that one of the major causes of such losses is the lack of adequate segregation of

duties. Assigning conflicting duties to one individual (for example, responsibility for both the

front and back offices of a trading function) gives that person access to assets of value and the

ability to manipulate financial data for personal gain or to conceal losses. Consequently, certain

duties within a bank should be split, to the extent possible, among various individuals in order

to reduce the risk of manipulation of financial data or misappropriation of assets. Segregation

of duties is not limited to situations involving simultaneous front and back office control by one

individual. It can also result in serious problems when there are not appropriate controls in those

instances where an individual has responsibility for:

i. Approval of the disbursement of funds and the actual disbursement;

ii. Customer and proprietary accounts;

iii. Transactions in both the "banking" and "trading" books;

iv. Informally providing information to customers about their positions while marketing to

the same customers;

v. Assessing the adequacy of loan documentation and monitoring the borrower after loan

origination; and,

vi. Any other areas where significant conflicts of interest emerge and are not mitigated by

other factors.

24
 Areas of potential conflict should be identified, minimized, and subject to careful

monitoring by an independent third party. There should also be periodic reviews of the

responsibilities and functions of key individuals to ensure that they are not in a position to

conceal inappropriate actions ICAN study pack (2006).

D. Information and Communication

Principle 7: An effective internal control system requires that there are adequate and

comprehensive internal financial, operational and compliance data, as well as external market

information about events and conditions that are relevant to decision making. Information

should be reliable, timely, accessible, and provided in a consistent format

Adequate information and effective communication are essential to the proper functioning

of a system of internal control. From the banks perspective, in order for information to be

useful, it must be relevant, reliable, timely, accessible, and provided in a consistent format.

Information includes internal financial, operational and compliance data, as well as external

market information about events and conditions that are relevant to decision making. Internal

information is part of a record-keeping process that should include established procedures for

record retention.

Principle 8: An effective internal control system requires that there are reliable information

systems in place that cover all significant activities of the bank. These systems, including those

that hold and use data in an electronic form, must be secure, monitored independently and

supported by adequate contingency arrangements

A critical component of a bank's activities is the establishment and maintenance of

management information systems that cover the full range of its activities. This information is

usually provided through both electronic and non-electronic means. Banks must be particularly

aware of the organizational and internal control requirements related to processing information

in an electronic form and the necessity to have an adequate audit trail. Management decision-

25
making could be adversely affected by unreliable or misleading information provided by

systems that are poorly designed and controlled.

Electronic information systems and the use of information technology have risks that

must be effectively controlled by banks in order to avoid disruptions to business and potential

losses. Since transaction processing and business applications have expanded beyond the use

of mainframe computer environments to distributed systems for mission-critical business

functions, the magnitude of risks also has expanded. Controls over information systems and

technology should include both general and application controls. General controls are controls

over computer systems (for example, mainframe, client/server, and end-user workstations) and

ensure their continued, proper operation. General controls include in-house back-up and

recovery procedures, software development and acquisition policies, maintenance (change

control) procedures, and physical/logical access security controls. Application controls are

computerized steps within software applications and other manual procedures that control the

processing of transactions and business activities. Application controls include, for example,

edit checks and specific logical access controls unique to a business system. Without adequate

controls over information systems and technology, including systems that are under

development, banks could experience loss of data and programs due to inadequate physical and

electronic security arrangements, equipment or systems failures, and inadequate in-house

backup and recovery procedures.

In addition to the risks and controls above, inherent risks exist that are associated with

the loss or extended disruption of services caused by factors beyond the banks control. In

extreme cases, since the delivery of corporate and customer services represent key transactional,

strategic and reputational issues, such problems could cause serious difficulties for banks and

even jeopardize their ability to conduct key business activities. This potential requires the bank

to establish business resumption and contingency plans using an alternate off-site facility,

26
including the recovery of critical systems supported by an external service provider. The

potential for loss or extended disruption of critical business operations requires an institution-

wide effort on contingency planning, involving business management, and not focused on

centralized computer operations. Business resumption plans must be periodically tested to

ensure the plans functionality in the event of an unexpected disaster. Ajisebutu, (2007).

Principle 9: An effective internal control system requires effective channels of communication

to ensure that all staff fully understand and adhere to policies and procedures affecting their

duties and responsibilities and that other relevant information is reaching the appropriate

personnel.

Without effective communication, information is useless. Senior management of banks

need to establish effective paths of communication in order to ensure that the necessary

information is reaching the appropriate people. This information relates both to the operational

policies and procedures of the bank as well as information regarding the actual operational

performance of the organization.

The organizational structure of the bank should facilitate an adequate flow of

information - upward, downward and across the organization. A structure that facilitates this

flow ensures that information flows upward so that the board of directors and senior

management are aware of the business risks and the operating performance of the bank.

Information flowing down through an organization ensures that the banks objectives,

strategies, and expectations, as well as its established policies and procedures, are

communicated to lower level management and operations personnel. This communication is

essential to achieve a unified effort by all bank employees to meet the banks objectives.

Finally, communication across the organization is necessary to ensure that information that one

division or department knows can be shared with other affected divisions or departments.

E. Monitoring Activities and Correcting Deficiencies

27
Principle 10: The overall effectiveness of the banks internal controls should be monitored on

an ongoing basis. Monitoring of key risks should be part of the daily activities of the bank as

well as periodic evaluations by the business lines and internal audit.

Since banking is a dynamic, rapidly evolving industry, banks must continually monitor

and evaluate their internal control systems in the light of changing internal and external

conditions, and must enhance these systems as necessary to maintain their effectiveness. In

complex, multinational organizations, senior management must ensure that the monitoring

function is properly defined and structured within the organization.

Monitoring the effectiveness of internal controls can be done by personnel from several

different areas, including the business function itself, financial control and internal audit. For

that reason, it is important that senior management makes clear which personnel are responsible

for which monitoring functions. Monitoring should be part of the daily activities of the bank

but also include separate periodic evaluations of the overall internal control process. The

frequency of monitoring different activities of a bank should be determined by considering the

risks involved and the frequency and nature of changes occurring in the operating environment.

On-going monitoring activities can offer the advantage of quickly detecting and

correcting deficiencies in the system of internal control. Such monitoring is most effective when

the system of internal control is integrated into the operating environment and produces regular

reports for review. Examples of ongoing monitoring include the review and approval of journal

entries, and management review and approval of exception reports.

In contrast, separate evaluations typically detect problems only after the fact; however,

separate evaluations allow an organization to take a fresh, comprehensive look at the

effectiveness of the internal control system and specifically at the effectiveness of the

monitoring activities. These evaluations can be done by personnel form several different areas,

including the business function itself, financial control and internal audit. Separate evaluations

28
of the internal control system often take the form of self-assessments when persons responsible

for a particular function determine the effectiveness of controls for their activities. The

documentation and the results of the evaluations are then reviewed by senior management. All

levels of review should be adequately documented and reported on a timely basis to the

appropriate level of management.

Principle 11: There should be an effective and comprehensive internal audit of the internal

control system carried out by operationally independent, appropriately trained and competent

staff. The internal audit function, as part of the monitoring of the system of internal controls,

should report directly to the board of directors or its audit committee, and to senior

management.

The internal audit function is an important part of the on-going monitoring of the system

of internal controls because it provides an independent assessment of the adequacy of, and

compliance with, the established policies and procedures. It is critical that the internal audit

function is independent from the day-to-day functioning of the bank and that it has access to all

activities conducted by the banking organization, including at its branches and subsidiaries.

Tilto, (2006).

By reporting directly to the board of directors or its audit committee, and to senior

management, the internal auditors provide unbiased information about line activities. Due to

the important nature of this function, internal audit must be staffed with competent, well trained

individuals who have a clear understanding of their role and responsibilities. The frequency and

extent of internal audit review and testing of the internal controls within a bank should be

consistent with the nature, complexity, and risk of the organizations activities. It is important

that the internal audit function reports directly to the highest levels of the banking organization,

typically the board of directors or its audit committee, and to senior management. This allows

for the proper functioning of corporate governance by giving the board information that is not

29
biased in any way by the levels of management that the reports cover. The board should also

reinforce the independence of the internal auditors by having such matters as their

compensation or budgeted resources determined by the board or the highest levels of

management rather than by managers who are affected by the work of the internal auditors.

Principle 12: Internal control deficiencies, whether identified by business line, internal audit,

or other control personnel, should be reported in a timely manner to the appropriate

management level and addressed promptly. Material internal control deficiencies should be

reported to senior management and the board of directors.

Internal control deficiencies, or ineffectively controlled risks, should be reported to the

appropriate person(s) as soon as they are identified, with serious matters reported to senior

management and the board of directors. Once reported, it is important that management corrects

the deficiencies on a timely basis. The internal auditors should conduct follow-up reviews or

other appropriate forms of monitoring, and immediately inform senior management or the board

of any uncorrected deficiencies. In order to ensure that all deficiencies are addressed in a timely

manner, senior management should be responsible for establishing a system to track internal

control weaknesses and actions taken to rectify them.

The board of directors and senior management should periodically receive reports

summarizing all control issues that have been identified. Issues that appear to be immaterial

when individual control processes are looked at in isolation, may well point to trends that could,

when linked, become a significant control deficiency if not addressed in a timely manner.

2.6 Types of Internal Control

All the above elements of internal control system can be grouped into the following types.

1. Physical Control

30
 It is the control design to ensure physical protection of assets from unauthorized access.

For example, cars are parked at secured garage; cash locked up in a safe or vault; stock locked

up in a secured ware house etc.

2. Authorization and Approval

All companys processes and transactions must be duly authorized and approved by

responsible companys officials operating within the limit of their authority

3. Personnel

These are controls developed to ensure that company maintains at all-time appropriate

mix of qualified and experienced staff. This controls take the form of structured recruitment

procedure, training and on the job training.

4. Arithmetic and Accuracy

These are control design to ensure accuracy of recording of all transaction processed. It covers

casting and cross casting to ensure integrity of financial report.

5. Management control.

This is the most important element of control in that all other control revolves around it. It takes

the form of the use of budget and management account to control operations. It may also involve

the use of functional internal audit department.

6. Organization control.

Every organization should have a clearing laid out organizational structure which define s and

allocate responsibility as well as identify lines of reporting. It is essential that every person in

the organization should know the prcised power delegated unto him and to whom he should

report in order to achieve unit of command.

7. Supervision Control.

31
 These are controls exercised by higher level officers on their subordinate .They may not

be part of the routine control system but they are design to ensure that the organization business

are being conducted as intended.

8. Segregation of Duties.

No one person should be allowed to undertake all aspect of a transaction. Segregation of duty

is a breaking down of transaction process to accommodate many individuals to take part. This

will reduce error or deliberate fraud

9. Acknowledgement and Budgeting

This requires that all actions taken must be acknowledged in writing by the performance. Also,

it involves the use of budget to control operation.

2.6.1 Theory of Fraud

Fraud and Forgery have been identified as major causes of bank distress and eventual

failure in the Nigerian banking sector (Ajayi 2010). According to NDIC Publication, about one

thousand nine hundred and fourteen (1914) bank staff of various banks were involved in bank

fraud between 1996 and 1998. The report also established that fraud contributed immensely to

the failure of most banks in the 1990s,the amount involved representing as many as 32.1% of

shareholders fund in 1998 (Udegbunam, 2010)

The concept of fraud: What is fraud? Fraud has been widely defined in literature by

scholars and experts. Hornby (2008) defines Fraud as an action or an instance of checking

somebody in order to make money or obtain goods illegally. The same dictionary defines the

perpetrators of frauds as fraudsters.

32
 According to the ICAN (2006) Fraud consists of both the use of deception to obtain an

unjust or illegal financial advantage and intentional misrepresentations, affecting the financial

statements by the one or more individuals among management, employees, or third parties.

Anyawu (2005) defined fraud as an act of deception deliberately practiced to gain

unlawful or unfair advantage to the detriment of another. Megis (2003) also refer to fraud as

the misrepresentation by a person of a material fact knows. Fraud is also refers to as intentional

mis-representation of financial record by one or more individuals or by management or

employee or third Parties. It is also a type of irregularities involving the use of criminal

deception to obtain an unjust or illegal advantage.

Archibong (1992) describes Fraud as a predetermined and well planned tricky process

or device usually undertaken by a person or group of persons, with the sole aim of checking

another person or organization, to gain ill-gotten advantages, be it monetary or otherwise, which

would not have accrued in the absence of such deceitful procedure.

From the above, the term fraud may be said to be as an intentional misrepresentation of

financial information by one or more individuals among management, employees or third

parties. Fraud may involve;

(a) Manipulation , falsification or alteration of documents and records

(b) Recording transaction without substances

(c) Mis-appropriate of assets or theft

(d) Intentional mis-application of accounting policies

(e) Suppressing of transactions or omitting such transaction from records

(f) Wilful misrepresentation of transactions of the entitys state of affairs

It involves taking a property unlawfully from its owner, without his/her knowledge,

permission or consent, or to misstate a situation knowingly or by negligence.

33
2.6.2 Causes of Fraud

a) Brune (2012) said that causes of fraud are through lapses or inadequacies, which

manifest in various ways. Lacks of adequate supervision, which fraudulent minded

operator in the system sees as an opportunity and utilize it.

b) Development of new technologies has facilitated the tempo fraudulent activities (More

pronounced in computer and information technology).

c) Human avarice, the insatiable appetite to a mass wealth and the social economic

condition of the society. However, there are many causes of bank fraud that can be

summarized into two namely.

2.6.3 Institutional Factor;

These are factors that exist because of the action or inaction of the banks management.

They are therefore factors that are within the control of the management .The following are

responsible for fraud perpetuation in any organization particularly resulting from the failure to

separate duties, and where an individual handle exclusively all stages of transactions:

(a) Where employee are allowed to accumulate their vocation, which make it difficult to

uncover illegal abstraction

(b) Absence of employee rotation: failure to shift personnel encourages fraud by covering

the work of each employee.

(c) Remuneration: fair remuneration aids controlling speculation. Where an employee, is

remuneration accounting to the value of its contribution to the bank and accounting to

the going wage, rather comparatively he dues not to try to correct it through

(d) Training : inadequate or lack of proper training of bank personals allows a staff in

bank to unconsciously create lapses in the operation assigned to him/her causing another

fraudulent minder staff utilize the opportunity to perpetuate the fraudulent act.

34
2.6.4 Environmental/Social Factors

These are factor that are not within the control or the bank management. The

high ranking among these factors is the general lust for wealth, also the fact that the

society does not challenge the source of peoples wealth, but rather recognition is given

into such. The bank is a part of the society, coupled with the regard and position bankers

are placed in the society. This therefore encourage people even bankers to be bold

confident when involved in such malpractices.

2.6.5 Classification of Frauds.

As it has been said earlier, fraud is a criminal act of involving the use of deceit

to gain an undue or illegal advantage. This comes in different shapes and magnitude.

According to Biggs (2006), he classified fraud into (2) namely;

a) Defalcation

This involves either misappropriation of money or goods, which can coax the omission of cash

received.

b) Manipulation

This involves Fraudulent manipulation of account involving defalcation. This is less frequent

and it involves large amount. Its also a form of frauds that is indigenous and skill fully

concealed and carried out by person holding position of the higher trust. Megis also classified

fraud into;

i. Management fraud

ii. Employee fraud

a) Management Fraud

This type of fraud comes from the top where the executives of a company deliberately

deceive stock holders, creditors, and independent auditor

35
 According to Fakunle (2006), management fraud often involves the manipulation of the

records and the account, typically by the enterprises senior officers with a view to benefiting

in some indirect way. An example is, obtaining finance under false presences, or concealing a

material, worsening off the companys true position, i.e., window dressing.

Robertson (2010) defines management fraud as a deliberate fraud, committed by

management that injures investors and creditors, through materially misleading financial

statements. Management fraud is sometimes called fraudulent financial reporting.

Management fraud is usually perpetrated by the management staff of an organization, which

management frauds are investors and creditors and the instrument of perpetration is a financial

statement.

The essence of management fraud most times is to attract more shareholders to come and invest

in the organization. It is also perpetrated, so that organization will be in better position of

obtaining loans from banks, because, a good statement will show a healthy look, hence it will

be a good collateral security.

b) Employee Fraud

This is the dishonest action of the employee towards the management despite the fact

the management put in efforts to prevent such action. Employee fraud is also known as non-

management fraud: These are frauds that are perpetrated by the employees of an organization.

Robertson (1996) defines it as the use of fraudulent means to take money or other property from

an employer. It usually involves falsification of some kind, like false documents, lying,

exceeding authority, or violating an employers policies, phases, which are: embezzlement of

companys funds, usually in form of cash or other assets. It consists of three

i. The fraudulent act

ii. The conversion of the money or property to the fraudsters us

36
 iii. The cover up

Employee frauds are more likely to be encountered where internal controls are weak: other

types of employees frauds according to Awe (2005) are as follows:

i. Fictitious payment of suppliers:

ii. Alteration of invoices

iii. Double payment of invoices

iv. Suppression of credit note received

v. Missing returned cheque (so that it appears that bills are paid)

vi. Missing invoices

vii. Wages fraud (payroll fraud)

viii. Payment for hours not worked for

ix. Payment of an incorrect wage rate

x. Fictitious employees (ghost workers) on wage sheet

xi. Deliberate errors in wage sheet

xii. Misappropriated cash taking

xiii. Actual theft of cash balance

xiv. Misappropriated cash from credit sales

It is important to note that all these form of employee fraud are perpetrated, so that the

perpetrators will have an undue benefit from all the irregularities made, as embedded in

the definition of fraud.

2.6.6 Types of Fraud

The various types of fraud based on these categories as enumerated by Anyanwu (2013) and

Goldface and Inckwube (2007) are as follows:

37
 i. Cash fraud:

There is several method of cash fraud that is engaged in by the bank staffs. A cash

fraud from the cashier may be outright cash theft by unsuspecting cashier to suppress

other colleague. Management cash fraud may take the form of removing cash from strong

room and replacing the strong room money with counterfeit currency.

ii. Cheque fraud:

This is in form of forging of cheque that is, making an alteration on cheque by changing the

figures or the signature. Cheque fraud may involve the following:

(a) Removal of cheque books from stock (e.g. safe) or cheque leafs from cheque book.

(b) Illegal and unauthorized adjustment of cheque amongst which include alteration of

signature and date.

(c) Clearing cheque fraud, bank drafts, bank cheque and bankers payment. These are means

of payment commonly used in the banking system. Once they are suppressed, intercept,

stolen and signatures perfectly forged and names cleverly altered, the fraud will be good

and successful.

iii. Foreign Exchange Malpractices

These involve the unlawful trafficking in foreign exchange and non-adherence to

official guidance on foreign exchange transaction.

iv. Telex fraud:

These occur among authentic massages which are to be tested and sent by bankers

telex official. Spurious telex messages are introduced because of such fake messages in

which money is usually paid to a fictions account through a correspondence bank and

later cashed by the overseas collaborations. Then the correspondence bank without notice

will credit the fictions account after decoding the telex message.

v. Loan fraud:

38
 This type of fraud is peculiar to specialized banks though occur in all banks. The

area of frauds and forgeries are the procedure for granting, recording and monitoring of

loan and advances to customers. Loan fraud may take the form of outright grants to

unintended and unqualified borrowers who are aided and abetted by senior bank staff that

may be relatives, friends and business partners. By this, it is an outright intention to

defraud.

2.6.7 Type of banks common fraudulent practices:

Ovuakporia (2013) gave account of thirty-three types of bank frauds in the banking

sector. These includes theft, embezzlement, defalcations, forgeries, substitution, suppression,

payment against unclear effects, unauthorized lending, lending to ghost borrowers, kite flying

and cross firing, unofficial borrowing, foreign exchange malpractice, impersonation, over-

involving, manipulation of vouchers, fictitious accounts, over and under valuation of properties,

false declaration of cash shortages, falsification of status reports, duplication of cheque books,

mail transfer, interception of clearing cheques, computer frauds, fake payments, teeming and

lading, robbers and others.

The above numerous types of fraudulent practices in banks, serve as threats to the

success of many banks. If adequate preventive and detective measures are not put into action,

it could lead to the complete failure of financial institutions especially banks in Nigeria.

2.6.8 Causes of Bank Frauds:

There are many identified causes of fraud in banks. They vary from Institutional to

economical, social, psychological, legal and even infrastructural causes. The Immediate

causative agents of frauds in general as provided by Ogbunka (2012) are as follows:

i. Availability of opportunities to perpetrate frauds and forgeries

39
 ii. Human greed, avarice, instability

iii. Poverty and the widening gap between the rich and the poor

iv. Prevailing misplaced social values, moral and spiritual decadence

v. Increasing incidence of unemployment

vi. Increasing financial burden on individuals

vii. Misapplied intelligence-say for adventure

viii. Job insecurity

x. Social misconceptions that banks money is nobodys money property and therefore can

be defrauded

xi. Societal expectations

xii. Inadequate training of personnel

xiii. unhealthy comparison and competition

xiv. Peer group pressure

xv. Revenge

xvi. Non-adherence to ethical standards

xvii. Leadership by bad example

xviii. Over ambition/frustrations of staff

xix. Increasing and changing sophistication in technological equipment

xx. Poor/weak recruitment policies

xxi. Inadequate training of manpower

xxii. Societal indiscipline, especially with money

xxiii. Risk on the fraudsters may be low or none

xxiv. Possibility of identifying or stopping a fraud may be very little

xxv. Lack of effective machinery that guarantee severe punishment for fraudsters and forgers

xxvi. Poor/weak management control, monitoring and supervision

40
xxvii. Weak internal control system of the bank

2.7 Roles and Responsibility of External Auditor

The Basle Committee on Banking Supervision, in their article, emphasized the impact

of external auditor in assessing a bank internal control system through their roles and

responsibilities. Although, external auditors, according to them, are not, by definition part of a

banking Organization and therefore, are not part of its internal control system, they have an

important impact on the quality of internal controls through their audit activities, including

discussions with management and recommendations for improvement to internal controls. The

external auditors provide important feedback on the effectiveness of the internal control system.

While the primary purpose of the external audit function is to give an opinion on the annual

account of a bank, the external auditor must choose whether to rely on the effectiveness of the

banks internal control system. For this reason, the external auditor's have to obtain an

understanding of the internal control system in order to assess the extent to which they can rely

on the system in determining the nature, timing and scope of their own audit procedures Kechi,

(2014).

The exact role of external auditors and the processes they use vary from country to

country. Professional auditing standards in many countries require that audits be planned and

performed to obtain reasonable assurance that financial statements are free of material

misstatement. Auditors also examine, on a test basis, underlying transactions and records

supporting financial statement balances and disclosures. An auditor assesses the accounting

principles and policies used and significant estimates made by management and evaluates the

overall financial statement presentation. In some countries, external auditors are required by

the supervisory authorities to provide a specific assessment of the scope, adequacy and

effectiveness of a banks internal control system, including the internal audit system.

41
 One consistency among countries, however, is the expectation that external auditors will

gain an understanding of a banks internal control process to the extent that it relates to the

accuracy of the banks financial statements. The extent of attention given to the internal control

system varies by auditor and by bank; however, it is generally expected that material

weaknesses identified by the auditors would be reported to management in confidential

management letters and, in many countries, to the supervisory authority. Furthermore, in many

countries external auditors may be subject to special supervisory requirements that specify the

way that they evaluate and report on internal controls.

2.8 Emperical Review

In the work of Olaniyi (2008), and aligning it with the conclusion made in the works of

Fakunle (2006), Robertson (2016) and also in the work of Hamby (2011); bank fraud, according

to him are now becoming a global phenomenon. The aftermath of fraud, according to him,

causes an embarrassment to the nation and on bank owners, customers and their family

members, as most bank failures are associated with large scale frauds.

In his conclusion, he was of the emphases that internal control department/unit of any

organization is very important in detection and prevention of fraud and cannot be undermined

especially by banks. Since the lack of an effective internal control system, according to the he

findings is the major cause of bank frauds. It is then concluded that the management of every

bank should create and establish a standard internal control system, strong enough to stand

against the wiles of fraud in order to promote continuity of operations and to ensure the

liquidity, solvency and going concern concept of the bank.

In the work Ajayi (2010) in collaboration with the works of other researchers such as

(Olasanmi, 2010; Gold, 2009) ;(Eseoghene, 2010); (Udegbunam, 2009) and (Nwaze, 2008); he

opined that expected loss due to fraud in the Nigeria banking industry are affected mainly by

42
number of fraud cases and total amount involved, while the numbers of staff involved also

contribute to the loss it was found to be statistically insignificant. Base on his findings, he

concluded that there should be sound corporate governance and the need to improve on the

existing ones, thus;

i. That management should not hesitate to come to the aid of employees, any time there is

a genuine financial request particularly in emergency situations. Such assistance,

according to him, does not only eliminate the tendency to defraud the organization, but

helps to cultivate a group of dedicated and highly positive workforce.

ii. Also, in recruiting key personnel who are to handle certain sensitive operations, it is

essential that banks make efforts at conducting a proper background check on the status

and nature of the employee in his or her neighbourhood as this would help them

establish the probability of the employee engaging in fraudulent activities.

iii. He also concluded that sound corporate governance characterized by effective

operational practices comparable to international standards should be adopted by top

management of bank as an essential ingredient for the prevention of fraud in the banking

sector.

iv. Top management must also strive to maintain a high degree of ethical standards in the

performance of its duties in view of the fiduciary nature of their functions. All these

according to him, is imperative as they are required to safeguard the assets of their

banks.

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 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

The research methodology is concerned with the methods of collecting data for this

research work for the purpose of this work all the necessary techniques of data collection were

through primary and secondary sources, by the use of interview and direct observation of the

study elements concerned in the study

3.2 Research Design

A research design could be defined as a torchlight that illuminates the mind of the

researcher in his investigation efforts with the unknown. A research design could also be used

to show the method of data processing and presentation. According to osuola, (2013; 4), a

research design is the basic plan which will guide the data collection and analysis phase of the

research project.

There are several types of research design which involves; historical, experimental,

survey method, case study etc. Jegede, (2014).However, the case study method was used for

this study because it is very useful in explanatory research study.

3.3. Sample Size Sampling Technique

Due to the largeness of population, samples were drawn from Guaranty Trust Banks

staff. Questionnaires were distributed to subjects based on random sampling to staff in various

department of the bank. Random sampling methods were used for questionnaire administration.

Also, analysis was done based on questionnaires administered. This method is made possible

due to the limited number staff available for research study the researcher is using random

sampling so as to obtain valuable information from staff.

44
3.4. Population

The population for a research study is defined by Jegede (2010) as the totality of all the

observations that an investigator is concerned with. The population of this research consist of

all Staff of Guaranty Trust Bank Bauchi Branch, for effective coverage and timely report.

3.5. Definition of Data

Oxford advanced learners Dictionary of current English defined data as facts, things

certainly known and from which conclusion may be drawn. Data can be any information

acquired by researcher in respect of a given study from a wide range of sources which may

include any one or a combination of the following: interview, questionnaire, measurement,

review of literature and observation. The use of appropriate data in any research work is

fundamental and it depends on the expertise, skills and commitment. For example a researcher

in need of peoples opinions about a given situation may decide to use a questionnaire for

obtaining vital information.

3.6. Sources of Data Collection

Personal interview with chief inspector of the bank, observations of relevant reports and

questionnaire administration were the various methods used to collect the needed data for this

study. The sources of data used in this research study are: primary sources of data and secondary

sources of data.

Primary sources of data were obtained from questionnaire administered and personal

interview with the chief inspector of the bank conducted by the researchers. Secondary sources

of data were obtained from relevant journal, Bank Annual Report and Accounts, Articles and

review of research report.

45
3.7 Method of Data Analysis

The method of data analysis used for this study was descriptive statistical method were

tables and simple percentages will be used to analyze the information in the questionnaire

supplied by the respondents so as to allow accuracy and easy decoding of information, and on

this basis, the discussion of findings shall be made.

According to Samford (2010), Data presentation method is the process of presenting

and the re-arrangement of data in such a way that it will be meaningful and easy to

understanding. In presenting data for this study, the under-mentioned tools were employed.

3.8.1 Tabulation

This is the transfer of data from the data instrument to the tabular form in which they

were systematically examined. The purpose of tabulation was to condense data for comparison

in order to provide easy analysis and interpretation.

3.8.2 Percentage

This is a statistical method used in simplifying further the data arranged in a table.

Percentage thus simply involves expressing fractions of a group of data as a component of

hundred.

3.8.3 Literary Presentation

This is a presentation in which the research situation, events, ideas and processes are explained

3.9. Description of Research Instrument

The core instrument used to gather information was the questionnaire. The

questionnaire was properly designed and addressed to the bank for study. The questionnaire

had two parts. Part one talked about the bio-data of the respondents and part two provides

questions to be answered. The questionnaire was structured to close ended questions.

46
3.10. Reliability and Validity of Research Instrument

Validity can be defined as the extent to which the survey instrument acts as an accurate

predictor. Validity involves the degree to which the questionnaire as regards the study measures

accurately what is supposed to be measured. According to show and Wright (1991), there are

four general procedures for estimating the validity of the questionnaire.

47
 CHAPTER FOUR

4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.1 Introduction

In this chapter, an attempt was made to present, analyzed and interpret the data collected

mainly through primary sources.

In analyzing the data collected, fifty (50) questionnaires were administered to

respondents in Guaranty Trust Bank, forty two (42) were returned, and as such, forty-two (42)

were available for analysis.

This chapter is divided into three (3) sections. Section 4.1 presents the socio-

demographic distribution of the respondents, section 4.2 present data analysis and discussions

according to research objectives. Simple percentages and tables were used in the analysis of

data; while section 4.3 present the discussion of findings.

4.2 Socio-Demographic Distribution of Respondents

This section presents the socio-demographic data about the respondent. At table is employed to

present the data and interpretation follows immediately.

48
Table 1: Tabular Presentation of Socio-Demographic Distribution of Respondence
CATEGORY OPTION FREQUENCY PERCENTAGE (%)
1. Sex Male 25 59.524
Female 17 40.476
Total 42 100
2. Age 20 27 yrs. 12 28.571
28 35 yrs. 20 47.619
36 40yrs 6 14.286
41 55yrs 4 9.524
56yrs above 0 0
Total 42 100
3. Education OND 5 11.905
HND 12 28.571
B.Sc./B.Ed. 18 42.857
M.Sc/.M.Ed/MA 5 11.905
Ph.D. 2 4.762
Total 42 100
4. Work 1 5 yrs. 20 47.619
Experience 6 10 yrs. 18 42.857
11 15 yrs. 3 7.143
16 20 yrs. 1 2.381
21yrs. and above 0 0
Total 42 100
Source: Field Survey, Feb., 2016

From table 1, the sex distribution of respondents shows that 59.524% of the respondents

constitute males and 40.476% of the respondents are female. For the age distribution of

respondents as shown above, 28.571% of the respondents falls within the age bracket of 20-

27yrs, 47.619% falls within 28-35yrs, 9.524% falls within 41-55yrs and 0% falls within the age

of 56yrs and above. Table 4.1 also reveals the statistical fact about the educational background

of the respondents. 11.905% of the respondents holds OND certificate, 28.571% holds HND

certificate, 42.857% are B.Sc. /B.Ed. holder, 11.905% holds M.Sc. /M.Ed. certificate and

finally 4.762% are Ph.D. holder.

Table 4.1 finally reveals information about the work experience of the respondents.

47.619% of the respondents hold work experienced between 1 to 5yrs; 42.857% had work

experience of 6 to 10yrs; 7.143% of the respondents had work experience between 11 to 15yrs;

2.381% only had work experience between 16 to 20yrs and finally 0% had work experience of

21yrs and above.

49
4.2.1 Analysis according to Research Objectives

This section attempts to analyze and interprets data collected from the respondents

based on the objectives stated in chapter 1 of the study.

4.2.2 The Impact of Internal Control System on the overall Management of Nigeria Banks

This sub-section presents data collected on the impact of internal control system on the

overall management of Nigeria banks. This constitutes one of the objectives of the study. An

attempt is made to know whether the respondent sees the significant usefulness of internal

control system on the banks operation, its profitability, solvency, going concern and any

relationship that may arise among these variables.

Table 2 Tabular Presentation of the Impact of Internal Control on the overall

Management of Nigeria Banks
Items Questions Yes No Total
1. Does internal control system capable 37 5 42
of ensuring and promoting the
effectiveness and efficiency of
operations in the banks?
(11.905%) (100%)
(88.095%)
2. Does the implementation of effective 32 10 42
and strong internal control system
capable of enhancing customers
confidence and trust in the Banks (76.190%) (23.810%) (100%)
3. Does the implementation of internal 30 12 42
control system in the banks ensure the
reliability of financial reporting by the
users of banks financial statements?
(71.429%) (28.571%) (100%)
4. Does effective monitoring and 38 4 42
auditing of the functional operation of
internal control system promote
growth, profitability and continuous
existence of the Banks? (90.476%) (9.524%) (100%)
5. Does the overriding of control by 32 10 42
Banks Management capable of
making Banks to liquidate and
eventually collapse? (76.190%) (23.810%) (100%)
Source: Field Survey, Feb., 2016

50
From the table 2, it is seen that 88.095% of the respondents agreed that internal control system

is capable of ensuring and promoting the effectiveness and efficiency of Banks operation.

However, 11.905% of the respondents did not agree. This means that the bank staff at large

holds a belief that internal control system is capable of promoting the effectiveness of various

operations in the banks were control procedures are set in all the operations. The 11.905%

respondents who objected to this belief may have a view that internal control system only is not

sufficient enough to ensure effective operations of bank, but to be use in collaboration with

other system of control or management or directing the affairs of the bank, such as corporate

governance. The table further shows that 76.190% of the respondents agree that customers

confidence and trust in the bank can be enhanced through the implementation of effective and

strong internal control system, while 23.810% of the respondents disagree to this assertion.

From the table also, it is seen that 71.429% of the respondents agrees that internal

control system will ensure reliability of financial reporting by the users of financial statements,

while 28.571% disagree to this assertion. It is further shown in the table that 90.470% of the

respondents are of the opinion that effective monitoring and auditing of the functional operation

of the system of internal control will promote the growth, profitability of the bank, and finally

ensures its continuous existence, while a minor percentage of 9.524% disputed against this

assertion.

Finally, the table confirms that 76.190% of the respondents agreed that overriding of

controls by Banks Management has the capability to make the bank to liquidate and eventually

collapse, while only 23.810% did not agree.

In summary, the table confirms that respondents believe that effective monitoring and

auditing of the functional operation of the system of internal control is capable of ensuring

growth, profitability and going-concern of the bank and can also promote the effectiveness and

51
efficiency of operation in the banks. However, the overriding of such system of controls by top

management can make banks to liquidate and eventually collapse.

4.2.3 The Impact of Internal Control System on Fraud Prevention and Detection

This sub-section present data collected about the impact of internal control in preventing

and detecting fraud and forgery. The data is presented in the table below and an analysis follows

immediately.

Table 3: Tabular Presentation of the Impact of Internal Control System on Fraud

Prevention and Dictation
Items Questions Yes No Total
1. Does the implementation of strong 36 6 42
internal control system able to detect
and prevent fraudulent act and
practice? (85.714%) (14.286%) (100%)
2. Does an effective supervision and 35 7 42
implementation of strong internal
control system capable of revealing
fraudsters mode of operations? (83.333%) (16.667%) (100%)
3. Does awareness of internal control 34 8 42
system by management and staff
reduces an attempt to perpetrate
fraud? (80.952%) (19.048%) (100%)
4. Does an effective internal control 12 30 42
system sufficient enough to reveal the
lapses and inadequacies in the bank
open to fraudsters within and outside
the bank? (28.571%) (71.429%) (100%)
5. Does top management adherence and 29 13 42
submission to the control procedures
set in place in all departments of the
bank able to prevent the occurrence of
management fraud? (69.048%) (30.952%) (100%)
Source: field survey, Feb., 2016

From the table 3, it is seen that 85.714% of the respondents agreed that the implementation of

strong internal control system in the bank is capable of detecting and preventing fraudulent acts

and practices. However, 14.286% of the respondent did not agree. This implies that internal

52
control system implemented in the banking operations is capable of preventing fraud and

forgery and also in detecting same.

The table further shows that 83.333% of the respondents are in support of the fact that

effective supervision and implementation of strong internal control system is capable of

revealing fraudsters mode of operation while 16.667% of the respondents oppose the notion.

By implication, larger percentage of the respondents agree that bank should set up effective

supervision machinery on internal control system, thus, helps in exposing fraudsters mode of

operation.

Furthermore, it was reveal in the table that 80.952% of the respondents agreed that the

awareness of control system within the bank by both management and staff will reduce an

attempt to perpetrate fraud, while a small percentage of 19.048% disagree. Also, the table shows

that 71.429% were against the assertion that an effective internal control system is sufficient

enough to reveal that lapses and inadequacies in the bank, while only 28.571% support this

assertion. This therefore implies that internal control system is not sufficient enough to reveal

the lapses and inadequacies in the bank open to fraudsters, rather it should be use with other

system of control such as adherence to the code of corporate governance, improved system of

audit and monitoring etc.

Finally, the table depicts that management fraud can be prevented if and only if, top

management adhere and submit themselves to the controls set in place within the bank. This

was supported by 69.048% of the respondents from the last question in the table above, but only

30.952% of the respondent disagrees.

In summary therefore, the implementation of strong internal control system is capable

to preventing and detecting fraudulent acts and practices, but not sufficient enough to reveal the

lapses and inadequacies in the bank open to fraudsters within and outside the bank. However,

53
other measures should be used alongside internal control system if the lapses open to fraudsters

wants to be discovered and controlled, such as establishment of audit department that regularly

audit the fundamental operation of the control procedures in existence, maintaining and

supervision of the control system through the establishment of internal control unit/department.

54
 4.2.3 The Major Causes of Fraud and Actors that Contributed to the Incidence of Fraud

in Banks

This sub-section presents data collected about the major causes of fraud, and its actors

in the banks. The data is presented in the table below and an analysis follows immediately.

Table 4: The Major Causes of Fraud and Actors that Contributed to the Incidence of
Fraud in Banks
Items Questions SA A N DA SD Total
1. Inadequate training of bank 4 8 0 12 18 42
personnel serves as a lapses
open to fraudsters to operate. 9.524% 19.048% 0% 28.571% 42.857% 100%
2. Lack of effective machinery 0 8 2 12 20 42
that guarantee severe
punishment for fraud
perpetrator and forgers
encourages perpetration of
fraud 0% 19.048% 4.726% 28.571% 47.619% 100%
3. Job Insecurity can lead 30 12 0 0 0 42
people into committing fraud
71.429% 28.571% 0% 0% 0% 100%
4. Increased financial burden on 4 7 5 12 14 42
individual and bank
personnel could lead them to
commit fraudulent act 9.524% 16.667% 11.905% 28.571% 33.333% 100%
5. Weak/poor management 28 14 0 0 0 42
control, monitoring and
supervision of internal
control system can cause
perpetration of fraud 66.667% 33.333% 0% 0% 0% 100%
6. Non-adherence to ethical 21 12 5 4 0 42
standard set by the bank
management and regulatory
body could lead to fraud
perpetration 50% 28.571% 11.905% 9.524% 0% 100%
7. Weak internal control system 22 12 4 4 0 42
could also lead to
perpetration of fraud 52.381% 28.571% 9.524% 9.524% 0% 100%
8. Bad leadership of the banks 20 14 0 8 0 42
top management and
executives could encourage
others to perpetrate fraud
47.619% 33.333% 0% 19.048% 0% 100%
Source: Field Survey, Feb., 2016

55
The table 4 above reveals that 9.524% of the respondents strongly agreed that inadequate

training of bank personnel serves as a lapse open to fraudsters to operate, 19.048% of the

respondents also support the opinion. However, 0% of the respondents are said to be neutral as

regards this assertion while 28.571% did not believe that inadequate training of bank personnel

could lead to a lapse open to fraudsters to operate and a larger percentage of the respondents

strongly disagreed this assertion.

This therefore implies that inadequate training of bank personnel do not serve as a lapses

open to fraudsters to operate. The table further shows that 19.048% of the respondents agreed

that lack of effective machinery that guaranteed severe punishment for fraud perpetrators could

encourage perpetration of fraud, only 4.726% of the respondents are neutral; and 28.571% did

not believe this opinion which is supported by a greater percentage of the respondents of

47.619% who strongly disagree that the lack of effective machinery that guarantee severe

punishment for fraud perpetrators could encourage perpetration of fraud.

More so, the table depicts at a glance that 71.429% of the respondents strongly agreed

that job insecurity could lead people, particularly bank staff to involve in fraudulent acts, this

was supported by a lesser degree of 28.571% of the respondents, making a total of 100% of the

respondents who believe that job insecurity leads people into committing fraud. By implication,

it means that the entire staff of the bank are of the opinion that job-insecurity is the major actor

that leads people into committing fraudulent act.

The table 4 further reveals that higher percentage of the respondents strongly disagree

that increased in financial burden on bank personnel could lead them to commit fraud. This was

supported by 28.571% who merely disagree that increased in financial burden on individual

and bank personnel could lead them to commit fraudulent act; but only 16.667% of the

respondents believed this assertion, as 9.524% strongly agreed on this assertion, while 11.905%

56
of the total respondent neutral as regard this assertion. By implication, it means increased in

financial burden will not cause individual and bank personnel to commit fraud.

In an attempt to confirm the consistency of the respondents, the table shows that

66.667% of the respondents strongly held and 33.333% agreed that weak or poor management

controls, monitoring and supervision in internal control system can cause perpetration of fraud.

This was in line with 90.476% and 83.333% opinion of the respondents in table 4.2.1 item

number 4 and 4.2.2 item number 2 respectively were 90.470% of the respondents believed that

effective monitoring and auditing of the functional operation of internal control system promote

growth, profitability and continuous existence of the banks and 83.333% believed that effective

supervision and implementation of strong internal control system is capable of revealing

fraudsters mode of operations. Table 4 also depicts that half of the respondents i.e. 50% of the

respondents strongly agree that non-adherence to ethical standard set by bank management and

regulatory body could lead to fraud perpetration. This was supported by 28.571% of the

respondents who held the same view. However, 11.905% of the respondents are neutral, while

only 9.524% of the respondents objected to this assertion.

To further ascertain the responses of the respondents on the opinion that strong internal

control system is able to detect and prevent fraud as shows in table 4.2.2, item number 1 where

85.714% of the respondents agreed to this assertion; table 4.2.3 therefore, clearly reveals again

that weak internal control system could lead to perpetration of fraud. This opinion was strongly

agreed by 52.381% of the respondents and was supported by 28.571% of the respondent while

9.524% of the respondents are neutral and 9.524% also disagree to this assertion. This therefore

implies that weak system of internal control could lead to perpetration of fraud.

Finally the table reveals that 47.619% of the respondents strongly held the opinion that

bad leadership banks top management and executives could encourage others to perpetrate

57
fraud. This was seconded by 33.333% of the respondents, making a total of 80.952% who

agreed that bad leadership of the banks top management and executive could encourage others

to perpetrate fraud; while only 19.048% of the respondents did not agree that such bad

leadership could encourage others to perpetrate fraud. This conclusion is almost similar to the

opinion of the respondents in table 2; item number 5 where 69.048% of the respondents agreed

that top management adherence and submission to control procedures (which serves as a good

leadership) set in place in all departments of the bank is capable of preventing the occurrence

of management fraud.

Therefore in summary, it is obviously and meticulously revealed by table 4 that job

insecurity, as regard this research work, is the prime causes of fraud perpetration, thus an actor

that contributed to the incidences of fraud in the bank. In addition to this cause is the weak or

poor management control, monitoring and supervision of control system; and also the weakness

of internal control system established.

4.3 Discussion of Findings

The study determines whether internal control system is capable of detecting and

preventing fraudulent acts and practices in Nigeria banks. Having thoroughly analyzed the data

gathered from questionnaires administered for the purpose of the study the findings below

originated:

1. The establishment and implementation of strong internal control system is able to detect

and prevent fraudulent acts and practices.

2. Internal control system also enhances the reliability of financial reporting by the users

of financial statement and also increases customers confidents and trust in the bank.

58
 3. Effective monitoring and audit of the functional operation of the system of internal

control will prevent fraud occurrence which ultimately promote growth, profitability

and going concern of the banks.

4. Also, effective supervision of the implemented control system will aid the implemented

control to detect fraud, and exposes the mode of operation by fraudsters.

5. Overriding of control by management could serves as a bad leadership example, and

could also cause the bank to liquidate and eventually collapse.

6. The establishment and implementation of internal control system is not sufficient

enough to reveal the lapses and inadequacies in the bank open to fraudsters within and

outside the bank. It should be used with other non-internal control system, thus external

control system such as adherence to the code of cooperate governance, ethical standards

set by bank management and regulatory bodies etc.

7. Of the major finding is the fact that job insecurity will cause people, particularly bank

staff to engage in fraudulent acts and practices. Therefore, job security should be

guarantee to staff in order to reduce to the barest minimum if not completely the

practices of fraud and forgery among bank staff.

Most of the findings listed above are in line within the findings from related past

researches on internal control and fraud prevention in commercial banks. The researches

conducted by Olaniyi O.A (2006), Robertson (1996) and Hamby (1998) confirms that effective

monitoring and supervision of the functional operation of internal control system will prevent

the occurrence of fraud and also detect same. They are of the opinion that there should be the

establishment of internal control unit or department to carry out this role of function. Eseoghene

(2010), Nwaze (2008), Olasanmi (2010) and Ajayi (2010) also concluded in their researches on

the need for sound corporate governance as a means to reduce the incidence of fraud in the

banking industry. In the research conducted by Ajayi specifically opined that internal control is

59
not sufficient enough to reduce the incidence of fraud nor reveals the fraudsters mode of

operation, but rather concluded, based on his finding, that there should be sound corporate

governance and the need to improve on the existing ones.

The Basle committee on banking supervision, in their article, emphasized the impact of

external auditor in assessing a bank internal control system through their roles and

responsibilities. Although, external auditors, according to them, are not, by definition part of a

banking organization, and therefore, are not part of its internal control system, they have an

important impact on the quality of internal controls through their audit activities, including

discussion with management and recommendations for improvement of internal controls. The

external auditors provide important feedback on the effectiveness of the internal controls. In

summary therefore, effective audit of the functional operation of the system of internal control

to prevent and detect fraud should be carried out by external auditors when auditing their clients.

60
 CHAPTER FIVE

5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

Detailed examination of internal control system and fraud prevention in commercial banks was

looked into in this study because of the rate of fraud and forgery that has negatively affected

the profitability and growth of financial institutions.

This work specifically examined impact of internal control system on fraud prevention in

commercial banks. In gathering information, both primary and secondary sources of data were

used and properly analized.

5.1.1 Summary of Major Findings:

Mobilization of savings and lending being an important activities in commercial banks

business and which Santomero (1997), said lending, accounts for a sizeable portion of the risk

assets of banks. Thus, both has associated problem of fraud and forgery in ensuring effective

mobilization of such savings and collections of the amount lent out. From the findings, it is

obviously depicted that the major causes of, and actor that contributed to the incidence of fraud

and forgery in commercial banks is job insecurity.

Furthermore, the findings vividly revealed that overriding of control system in the bank

by top management has also significantly contributed to the collapses of some large banks,

coupled with poor or weak management control, monitoring and supervision of internal control

system and procedures which also causes fraud to be perpetrated.

However, general principles for the assessment of internal control system as sub-

divided under each of the elements of internal control system were examined. During the course

of this study, the primary data reveals that strong and effective system of internal control

61
reduces the risks of fraud and forgery being perpetrated and also ensures the continuous

existence (going concern) of the bank.

5.2 Conclusion

It has been established in this study that internal control system is paramount in

ensuring effective operation of banks, and it has impact on prevention and detection of fraud

and enhances the overall profitability of banks. As such, it is an important factor that ensures

the going concern of corporate body especially financial institution.

Most commercial banks, though has internal control system in place, but are being

threatened due to weak and ineffective monitoring of the controls in place, and the overriding

of such control by management. This assertion has been proved by the increasing rate of fraud

and forgery perpetration and the growing rate of collapses of banks in the recent time.

However, it was revealed from the findings that the major causes of fraud and forgery

in commercial banks is the insecurity of job of the bank staffs , and that internal control in its

self is not sufficient enough to reveal the lapses and inadequacies in the bank open to fraudsters

but to be use with other system of controls, viz-a-viz, external system of control; such as

adherence to ethical standards ,rules and laws set by bank regulatory bodies such contained in

the CBN prudential guidelines, Bank and other financial institution act(BOFIA), Security and

Exchange Commission and finally adherence to the ethical standard and laws set by statutory

body such as adherence to the code of corporate governance(Nigeria code of best

practices),appointment of external auditor, etc.

Also, from the study, it can be rightly concluded that there is significant relationship

between internal control system and profitability of banks. This rising profile of fraudulent

practices which are threatening the survival of commercial banks is as a result of banks not

62
establishing a very strong internal control and monitoring system, coupled with overriding of

such controls in place by the management of the banks.

This observation is however not true with Guarantee Trust Bank plc. Whose control

procedures and monitoring activities have shown conformity with good internal control system

and staff job being highly secured.

5.3. Recommendations

Having studied the situation in Guaranty Trust Bank plc., it is imperative at this point to make

some recommendation as to ways of prevent further occurrence of fraud and forgery and to

improve monitoring activities and procedures on internal control system in commercial banks.

In order to achieve these, the following suggestions are:

i. Bank staff should be guaranteed job security.

ii. Proper evaluation of the system of internal control and the various control

procedures relating to control objectives should be constantly monitored,

supervised and improved where any lapses is noticed or found. This can be

achieved by establishing an internal control unit/department.

iii. External control system as discussed in the conclusion paragraph above should

be strictly, constantly and continuously adhere to or followed in order to make

internal control system effective and sufficient enough to reveal lapses and

inadequacies open to fraudsters and forgers within and outside the bank.

iv. The functional operation of the internal control system should be constantly

reviewed, monitored and audited strictly by external auditor. Internal auditor

also carries out this function, particularly when conducting pre-audit

test/review.

63
 v. Of paramount important is that the management of commercial banks who

establishes controls in the banks should also adhere strictly to such controls,

(internal and external). They should be submissive to such controls, and by this

will they prove good leadership. Overriding of control by management shows a

bad leadership which can instigate subordinates to follow suit and thereby

engaged in the dubious acts of fraud and forgery. Management overriding the

control has a future, long term negative effect on the bank as it jeopardize the

going concern of such banks.

vi. Finally, in spite of the comprehensiveness of this study, it should be noted that

findings are based on Guaranty Trust Bank plc.; other banks can still be used.

And also the need for more use of secondary data in analysing the system of

internal control of banks in subsequent research works.

vii. Therefore, there is need for the bank management to ensure that the internal

control system is very strong as much as possible to cover those lapses and

inadequacies which manifested in various ways known to them.

64
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The Committee of Sponsoring organizations of the Tread way Commission (COSO),

Internal Control Integrated Framework, July 2011.

Tilton P.D. (2006). Potential red flags detection techniques,

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 APPENDIX

QUESTIONNAIRE
Internal Control and Fraud Prevention
(A Case Study of Guaranty Trust Bank Bauchi Branch)
Dear Respondent,

I am a postgraduate student of Abubakar Tafawa Balewa University (ATBU) Bauchi,

conducting a research on the above mentioned topic, as part of the requirement for the Award

of Post Graduate Diploma in Accounting is in view of the above that, I humbly wish that you

answer the questions raised on the Attached questionnaire. The questionnaire is made up of

sections A and B section A you are required to state your personal data and in section B you

are also require to Tick appropriately. I will appreciate it if you give me the benefit of having

your true view, as the success or otherwise of this study depend squarely on your responses.

All information supplied will be used for the purpose of this research only and will be treated

confidentially.

Thank you for sparing and participate in this research.

Yours faithfully,

Nya Eunice Ebong

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SECTION A: BIO DATA

Kindly thick [ ] in the appropriate bracket.

1. Age:
i. 25 years and below [ ] ii. 26 - 30 years [ ]
iii. 31 - 35 years [ ] iv 36 - 40 years [ ]
iv. 40 year and above [ ]
2. Gender:
i. Male [ ] ii. Female [ ]
3. Highest teaching qualification:
i. Grade II [ ] iv. PGDE [ ]
ii. N.C.E [ ] v. M.Ed [ ]
iii. B.Ed. [ ] vi. Ph.D Ed [ ]
4. Work Experience:
i. 1-5 years [ ] iii. 11-15 years [ ]
ii. 6-10 years [ ] iv. 16-20 years [ ]
v. 21 years and above [ ]
SECTION B
Kindly thick [ ] in the column that best expresses your opinion.
Key: SA=Strongly Agree, A=Agree, U=Un-decided, D=Disagree, SD=Strongly Disagree
Items Questions Yes No Total
THE IMPACT OF INTERNAL CONTROL ON THE OVERALL
MANAGEMENT OF NIGERIA BANKS

5. Does internal control system capable of ensuring and promoting the effectiveness
and efficiency of operations in the banks?
6. Does the implementation of effective and strong internal control system capable
of enhancing customers confidence and trust in the Banks
7. Does the implementation of internal control system in the banks ensure the
reliability of financial reporting by the users of banks financial statements?
8. Does effective monitoring and auditing of the functional operation of internal
control system promote growth, profitability and continuous existence of the
Banks?
9. Does the overriding of control by Banks Management capable of making Banks
to liquidate and eventually collapse?

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 Items Questions Yes No Total
THE IMPACT OF INTERNAL CONTROL SYSTEM ON
FRAUD PREVENTION AND DETECTION
10. Does the implementation of strong internal control system able to
detect and prevent fraudulent act and practice?
11. Does an effective supervision and implementation of strong internal
control system capable of revealing fraudsters mode of operations?
12. Does awareness of internal control system by management and staff
reduces an attempt to perpetrate fraud?
13. Does an effective internal control system sufficient enough to reveal
the lapses and inadequacies in the bank open to fraudsters within and
outside the bank?
14. Does top management adherence and submission to the control
procedures set in place in all departments of the bank able to prevent
the occurrence of management fraud?

Items Questions SA A N DA SD Total

THE MAJOR CAUSES OF FRAUD AND ACTORS
THAT CONTRIBUTED TO THE INCIDENCE OF
FRAUD IN BANKS
15. Inadequate training of bank personnel serves as a lapses
open to fraudsters to operate.
16. Lack of effective machinery that guarantee severe
punishment for fraud perpetrator and forgers encourages
perpetration of fraud
17. Job Insecurity can lead people into committing fraud
18. Increased financial burden on individual and bank
personnel could lead them to commit fraudulent act
19. Weak/poor management control, monitoring and
supervision of internal control system can cause
perpetration of fraud
20. Non-adherence to ethical standard set by the bank
management and regulatory body could lead to fraud
perpetration
21. Weak internal control system could also lead to
perpetration of fraud
22. Bad leadership of the banks top management and
executives could encourage others to perpetrate fraud

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