THE IMPACT OF INTERNAL CONTROL MEASURESON THE DETECTION AND PREVENTION OF FRAUD IN BANKS (A CASE STUDY OF MAIN STREET BANK, ABA BRANCH)
ABSTRACT
Management, not the auditor is responsible for setting up and monitoring of the internal control system. Internal control system cannot fully be regarded as effective not even when the design and implementation is properly done; this is because the effectiveness of an internal control system depends on the competency and dependability of the people using it. Bank failures and widespread losses over the past two decades, have clearly pointed out the picture of how fraud has penetrated the financial strength of banks; it has however, elevated the importance of effective internal control system within the formal financial sector worldwide. Organizations set up internal control system most at times because they are required by law to do so; but then, how many has actually made it a point of duty to train and educate employees on how to use these internal control system since its effectiveness depends on the competency and dependability of the people using it. This research paper defines internal control, as a means to an end; it is aimed at verifying the conception that an efficient and effectively implemented internal control system is the best strategy for preventing and detecting fraud especially in the banking sector; thus the objective of this research is to examine the effect of the internal control system, when it comes to prevention and detection of fraud. Data captured in this study, was analyzed through descriptive method. Quantitative technique was also used to analyze the response of the respondents as well as a computer program known as SPSS. The descriptive analysis involves the use of percentage, tabulations, and graphical presentation. The sources of data for the research were both primary and secondary sources. Census technique was used for the study instead of a sampling technique. Questionnaires and interviews were used as the data collection methods for the study. Based on the analysis, internal control system was seen to be significant in detection and prevention of fraud in banks in Nigeria, hence the need for an effective and adequate internal control system.
CHAPTER 1
GENERAL INTRODUCTION
How extensive should a company’s internal control system be? In today’s environment, this is a difficult question to answer. The reason being that some current business, legal, and social trends suggest that companies need to increase their emphasis on internal control, while other trends indicate just the opposite. Bank failures and widespread losses over the past two decades have elevated the importance of effective internal control within the formal financial sector worldwide. In the United States for example, bank failures rose over 200 percent in the 1980s partly due to fraud and mismanagement. Internationally, the collapse of Barings Bank and Yamaichi Securities further focused the financial sector’s attention on internal control. The Basle Committee analyzed the problems related to these losses and concluded that they probably could have been avoided had the banks maintained effective internal control systems (banking, a regulatory and auditing guide). In addition, a review of traditional banks affirmed that the implementation of effective internal control systems played an important role in reducing bank failures.
Internal control, the strength of every organisation, has become of paramount importance today in Nigeria banks. The reasons being that the control systems in any organization are a pillar for an efficient accounting system as well as achievement of organizational goals.
1.2 BACKGROUND OF THE STUDY
As part of its on-going efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound risk management practices, the Basel Committee on Banking Supervision issued a framework for the evaluation of internal control systems. A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank’s reputation.
