CHAPTER ONE INTRODUCTION
Background to the Study
Regardless of the vast amount of resources, time and energy, used by universal banks in developing corporate governance policies, implementing internal control systems, risk management strategies and the training of employees in order to adhere to best practices, some dishonest, intelligent people, commonly referred to as fraudsters, still manage to find ways to override systems to gain access to organizational resources and assets (Rahman & Salim, 2010). This results in operational risk in the form of fraud. Operational risk is therefore the initial type of risk that any institution of any sort takes on. Managing and mitigating the operational risk of an organization is a very significant challenge for managers in top positions. The study examines the effectiveness of fraud risk management practices by both foreign and local universal banks in Ghana.
Fraud in recent times, has evolved from being committed casually to being highly organized and sophisticated (Rahmana & Anwar, 2014). This particular problem is more prevalent in the banking sector where there are more sophisticated compromises as compared to other sectors. It is therefore important for banks to develop comprehensive systems and practices to effectively manage fraud risk (Fadipe-Joseph & Titiloye, 2012). Fraud can be grouped into two main categories. The first category is fraudulent financial reporting, known as management fraud, and the second category is the misappropriation of assets, also a known as employee fraud (Adams, 2015). Both categories of fraud are
particularly harmful to actual and potential users (Hakami, 2011), and may cause materially misleading financial statements. This study will however, emphasise the activities of fraud leading to the issuance of false financial statements.
Additionally, fraud imposes numerous costs to both its financial and non-financial victims (Rahman & Salim, 2010). For the banking financial institutions, they might suffer loss in terms of monetary transactions, reputational risks, and human capital, including the acquaintance to the risks of bankruptcy (Idowu, 2009).
Developing effective preventive measures against fraud, identifying the methods through which fraud is or can be committed, establishing effective control measures and putting in place fraud resolution guidelines not only helps the universal banks to prevent the loss of revenue and assets, but also improve the quality of their business procedures and their overall standing in the financial services environment (Rahman & Anwar, 2014).
Statement of the Problem
The extant collected works has revealed the fact that, there is not a single financial organization that is immune to fraud, and that a typical financial institution loses 5-7% of its annual revenues due to fraudulent activities. (Fadipe-Joseph & Titiloye, 2012). According to Dumbrava and Gavriletea (2008), although banking institutions are normally known as one of the most strictly regulated sectors, the commercial banks continue to be definite targets for the activities of fraudsters. The reasons are absolutely obvious; banks are the first choice and the best place to come to, due to their role in capital raising and
capital intermediation. The ramifications of the actions of fraudsters are not minute, instead, may cause failure in the banking sector. Even more detrimental, it may represent one of the major causes of bankruptcy in the world, being typified by the Iceland crisis in 2008.
Fraud cases in the banking industry in Ghana increased from 1,002 cases in 2016 to 1,418 cases in 2017, the Bank of Ghana (BoG) has disclosed. This represents a 41.66% increase and is a major cause for concern. The total worth which was reported for fraud or even attempted fraud amounted to roughly GH¢190.4 million.
Till now, there has been no specific study to explore the perception of those working in banks regarding fraud-related misconducts in the banking sector most notably, in Ghana. Most of the previous studies discussed on bank frauds have been conducted in the Republic of Uganda (Bank of Uganda, 2005), India (Fadipe-Joseph & Titiloye, 2012), Qatar (Rahman & Salim, 2010), Nigeria (Idowu, 2009) and Saudi Arabia (Hakami, 2011) but very little is known from Ghana’s perspective. The current study therefore intends to fill the above knowledge gap in the extant literature, by specifically examining into detail, the effectiveness of fraud risk management in the banking sector of Ghana. The researcher has further observed that, the silence among the universal banks in Ghana on fraudulent activities, makes it extremely difficult for banks to share very important information that will help control the menace in the sector. It is therefore imperative for the universal banks in Ghana, to develop systems and practices to effectively manage fraud risk. The extent to
which the universal banks in Ghana, have developed such systems and practices to effectively manage fraud risk is the subject of investigation in this study.
