INTERNAL CONTROL SYSTEM AS A MEANS OF PREVENTING FRAUD IN FINANCIAL INSTITUTION
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INTERNAL CONTROL SYSTEM AS A MEANS OF PREVENTING FRAUD IN FINANCIAL INSTITUTION
IN Financial Institutions, INTERNAL CONTROL SYSTEMS CAN BE USED TO PREVENT Fraud.
The purpose of this paper is to investigate the significance of internal fraud control in financial institutions using some methodological measures, using First Bank of Nigeria Plc in Benin as a case study.
Fraud in financial institutions, in particular, and in organisations in general, has posed significant obstacles and threats to the growth and development of organizations/institutions and the country as a whole.
Many financial institutions have failed in the past, and some are still struggling now, due to their failure to manage and control fraud internally within their organisations.
As a result, the purpose of this work was to provide vital clues for financial institutions on how to carry out effective measures in reducing internal fraud in order to achieve organisational goals, among other things. Furthermore, the study provides data (secondary data) for future research in the associated field of study.
Necessary literatures were purposefully received, in which relevant existing studies were critically examined for appreciations and criticism, as well as the theoretical framework of the subject matter, in which various aspects of internal fraud were extensively and intensively examined.
Following that, the information acquired by the questionnaire was presented, analysed, and appropriately interpreted.
CHAPTER ONE
1.1 BACKGROUND OF STUDY
Financial institutions are organisations that deal largely with money; they form an economy’s financial framework and help to pool savings and surplus liquidity.
The Nigerian Banking Decree of 1969 defined four types of financial firms that conduct banking business: commercial banks, discount houses, acceptance houses, and finance houses.
The First Bank of Nigeria began as a commercial bank in 1892, when a company called Elder Dempster was registered in London and given the sole authority to distribute coins in Nigeria later that year.
The bank had its headquarters in South Africa, where it was known as Africa Banking Corporation (ABC). After ten (10) months of operations, the Lagos branch was faced with both internal and external operating constraints, making it the first British bank in West Africa.
Elder Dempster and Company purchased the Africa Banking Corporation in 1894, establishing the Bank of British West Africa (B.B.W.A) in London with an authorised share capital of £100.00. It established a branch in Lagos and changed its name to Bank of West African Limited (BWA) in 1959.
Bank of West African Limited (BWA) combined with Standard Bank Limited (SBL) London in 1966 to become Standard Bank West Africa Limited (SEWA). Standard Bank West Africa Limited merged with Nigerian Standard Bank Limited in 1969, giving birth to the current name bank, First Bank of Nigeria Plc, in 1979 (Dr. Unugbro 2007, p. 85, Money and Banking).
Prior to 1952, there was no Banking Act or Ordinance to govern the founding and operation of commercial banks, nor was there a central bank to oversee banking management in Nigeria.
During that time, several banks were registered, some of which never operated, and fraud has remained a constant presence in our financial business ever since.
However, since the introduction of the first Banking Ordinance in 1952 and the Central Bank of Nigeria Act in 1959, as well as other subsequent Acts and Ordinances with their amendments over the years used to regulate and control the activities and operations of financial institutions in the country, fraud in financial institutions has grown in magnitude, and the methods used to perpetrate it have become more sophisticated.
Anikpitan 2006, a reputable bank maintained;
“that, as a result of the rampant incidence of fraud and forgery, banks now take extra precautions when clearing a cheque.”
Ashimi 1976, still in use;
“That fraud has advanced to the point where a forged signature on a cheque leaf looks good enough for the rightful owners to believe it was his signature.”
Ughamadu.N. remarked in his essay on celebrating bank theft “in that business times 29 July 1991;
The logic for creating a viable and enabling environment for any country is useless if its banking sector is rife with fraud.”
According to Ojo A. T. 2002;
“As an open secret financial institution, they do not have many resources of their own in comparison to the total resources available to them.”
They continue to rely on other people’s funds, which have been entrusted to them as a result of the public’s faith in them as models of responsibility and safety.”
Depending on the nature of their business and the breadth of their operations, various organisations use various technology and methods to develop a sound internal control system.
Internal control systems necessitate a continual check and recheck of the business’s day-to-day operations in order to verify the accuracy and fairness of the accounting records, as well as to discover and disclose any deviation when it occurs.
To defend against the occurrence and re-recurrence of fraud in our financial institutions, there is a huge need to minimise faults or loopholes and make money effective and operational.
1.2 STATEMENT OF THE PROBLEM
In our daily publications, there are reports of financial institution fraud, such as the recent scams exposed by central bank governor Lamido Sanusi involving several bank executives.
In addition, Business Concord (Jan. 27, 2000) expressed dismay that “robbers are making nonsense of the various types of security measures in banks by employing scientific means of gaining access to their strong rooms.”
According to the Business Times (January 23, 1990), “the rising incidence of bank fraud has created a lot of distrust between banks and their customers,” not only are there more recorded cases of fraud, but the quantities involved are startling.
Fraud results in the unintended loss of public funds and places the afflicted bank’s management at risk. Bank fraud decreases public trust in banking and, as a result, delays the growth of banking habits in Nigeria.
Nonetheless, despite the initiatives and safeguards taken by banks to avoid fraud, the situation remains substantially unchanged. To guard against the ever-increasing frequency of fraud,
financial institutions must assess and implement a suitable and effective internal control system for their orderly and efficient operations.
1.3 OBJECTIVES OF THE STUDY
The primary goal of this work is to investigate the internal control system used by First Bank of Nigeria Plc. Identifying potential system flaws (if any), ascertaining the degree of compliance of bank staff with these measures, and making meaningful recommendations based on the findings.
1.4 NECESSITY AND SIGNIFICANCE OF THE STUDY
Even though this study is not comprehensive and exhaustive due to some limitations, aspects of the work are very relevant in one way or another to the Nigeria banking industry as a whole. Specifically, this study is designed for all those who may be interested in conducting further research on internal control systems as they relate to fraud prevention in Nigerian financial institutions.
Furthermore, banks in Nigeria will benefit greatly from this internal control system in preventing and minimising fraud. This can be accomplished by incorporating and applying the different suggestions and recommendations presented in this study into their control system.
1.5 RESEARCH QUESTION
1. Is the current internal control system of the First Bank of Nigeria Plc acceptable in the current world of technology and sophistication?
2. How effective is First Bank of Nigeria Plc’s internal control system?
3. What procedures, if any, can the First Bank of Nigeria Plc’s internal control system utilise to prevent fraud?
4. Has your bank (First Bank) been the victim of fraud in the last one, two, or three years?
5. Do you believe that implementing a computerised internal control system in all First Bank offices will eliminate banking malpractices and fraud?
6. Are First Bank’s internal control procedures for preventing and controlling fraud effective in preventing and detecting fraud?
7. Is your bank’s current control system effective in preventing fraud?
8. Are all bank instruments, such as draughts, cheque books, certificates of deposit, and so on, under the authority of at least two bank officials?
9. Do you believe that every customer withdrawing up to a particular amount in First Bank of Nigeria Plc is photographed?
10. Do you believe that fraudulent acts are conceivable as a result of flaws in your internal control system?
11. Do you believe that the usage and deployment of computers will significantly aid in combating or preventing the rate of fraud at First Bank of Nigeria Plc?
1.6 DEFINITION OF TERMS
The majority of the vocabulary used in this book are technical and may not be easily understood by all; hence, an attempt is made here to describe some of these terms.
1. Internal Control System (ICS): This is the entire system of control, both financial and otherwise, established by management in order to conduct the enterprise’s activity in an orderly and efficient manner.
2. Public Limited Company (PLC): These are public firms that are listed on the Nigeria Stock Exchange. They are open to the general public and can be joined/owned by acquiring a share.
3. Bank: A bank is a financial institution that provides loans, extends credit, provides advice to consumers, and so on.
4. Fraud: This is a criminal crime, an act of deception. It entails deception, cheating, and swindling of an individual’s money or property.
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