CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Internal control, the strength of every organization, has become very crucial in Nigerian banks. The reason for its high importance is that control system in any organization is fundamental to an efficient accounting system. The need for the internal control systems in any organizations, especially in financial institutions such as the Deposit Money Banks, cannot be underestimated, based on the fact that the banking sector, which has important role to play in the economic development process of a nation, is now being invaded by macroeconomic instability, corruption, fraud etc. Fraud, which is among the reasons for implementing internal control, has become pervasive in the Nigerian banking industry. It has tarnished the global reputation of the country, in which Nigeria was identified as a “fantastically corrupt nation” by the advanced world economies. Fraud has totally penetrated the Nigerian banking industry and that any bank with a weak internal control system, is highly susceptible to bank fraud. The Central Bank of Nigeria reported that cases of attempted fraud in banks, between 2007 and 2015, have exceeded what was recorded between 2001 and 2006. The CBN report showed that a total of 771 cases of attempted fraud, involving 5.4 billion naira were reported as at June, 2014. In 2015, 1,193 cases of fraud were reported involving 11.9 billion naira. This menace can be attributed to weak internal control systems of banks. This clearly chows the picture of the pervasiveness of fraud in Nigerian Deposit Money Banks. Fraud management is now becoming an issue that top bank chiefs and regulators in the Nigerian banking industry face, due to the alarming rate of bank fraud. The implementation of internal control systems alone cannot totally address the issue of fraudulent activities that occurs in banks. Fraudulent acts are common in every organization, but more common in Deposit Money Banks because of the instruments of their trade. Banks are highly susceptible to financial fraud as a result of money and quasi-money instruments used in the process of their operations. The acts of financial fraud have defied solutions despite the implementation of internal control systems put in place in Nigerian Deposit Money Banks (Chibuzor, 2013). Internal control system sometimes negates the efficient operations, banks put in place to curtail cases of fraud, but it has not been totally successful in mitigating the amount of funds that goes into fraud. Thus, internal control systems have become both preventive and protective of banks’ financial resources, sometimes perceived as inimical to the primary operations of these banks Most banks are litigation-shy as judicial officers find it uninteresting to that the internal control process put in place by the banks was planned and done by their employees (Adetiloye, etal, 2014).In addition, where the banks are litigious, courts often sympathize with customers whose infractions resulted into larger losses of funds irrespective of whether collusion with an employee had existed. These cases are not funny outside the banking halls when financial fraud occurred and parties have to prove their innocence. One of the reasons for the use and review of internal control systems in Deposit Money Banks is to minimize cases of fraudulent activities, to promptly detect any intended fraudulent acts before they are actually carried out. Fraud management and internal control are therefore pertinent predictors that determine organizational effectiveness, which implies the rate at which organizations’ achieve their desired goals.
