A study into the impact of internal control system on detection and prevention of fraud; a case study of mainstreet bank, aba branch

Thesis Overview

<p> </p><p><b>GENERAL INTRODUCTION</b></p><ol><li><b>INTRODUCTON</b></li></ol><p>How extensive should a company’s<br>internal control system be? In today’s environment, this is a difficult<br>question to answer. The reason being that some current business, legal, and<br>social trends suggest that companies need to increase their emphasis on<br>internal control, while other trends indicate just the opposite. Bank failures<br>and widespread losses over the past two decades have elevated the importance of<br>effective internal control within the formal financial sector worldwide. In the<br>United States for example, bank failures rose over 200 percent in the 1980s<br>partly due to fraud and mismanagement. Internationally, the collapse of Barings<br>Bank and Yamaichi Securities further focused the financial sector’s attention<br>on internal control. The Basle Committee analyzed the problems related to these<br>losses and concluded that they probably could have been avoided had the banks<br>maintained effective internal control systems (banking, a regulatory and<br>auditing guide). In addition, a review of traditional banks affirmed that the<br>implementation of effective internal control systems played an important role<br>in reducing bank failures.</p><p>Internal control, the strength of<br>every organisation, has become of paramount importance today in Nigeria banks.<br>The reasons being that the control systems in any organization are a pillar for<br>an efficient accounting system as well as achievement of organizational goals.</p><p><b>1.2 BACKGROUND OF THE STUDY</b></p><p>As part of its on-going efforts to<br>address bank supervisory issues and enhance supervision through guidance that<br>encourages sound risk management practices, the Basel Committee on Banking<br>Supervision issued a framework for the evaluation of internal control systems.<br>A system of effective internal controls is a critical component of bank<br>management and a foundation for the safe and sound operation of banking<br>organizations. A system of strong internal controls can help to ensure that the<br>goals and objectives of a banking organization will be met, that the bank will<br>achieve long-term profitability targets, and maintain reliable financial and<br>managerial reporting. Such a system can also help to ensure that the bank will<br>comply with laws and regulations as well as policies, plans, internal rules and<br>procedures, and decrease the risk of unexpected losses or damage to the bank’s<br>reputation.</p><p>The Basel Committee, along with<br>banking supervisors throughout the world, has focused increasingly on the<br>importance of sound internal controls. This heightened interest in internal<br>controls is, in part, a result of significant losses incurred by several<br>banking organizations. An analysis of the problems related to these losses<br>indicates that they could probably have been avoided had the banks maintained<br>effective internal control systems. Such systems would have prevented or<br>enabled earlier detection of the problems that led to the losses, thereby<br>limiting damage to the banking organization.</p><p>A system of accounting and records<br>keeping will not succeed in completely and accurately processing all<br>transaction unless controls known as internal controls are built into the<br>system. The purposes of such internal controls are to ensure that transactions<br>are executed in accordance with proper general or specific authorisation and<br>again to ensure that all transactions are properly recorded with the correct<br>amount and in the appropriate account and in the proper accounting periods so<br>as to permit preparation of financial statement in accordance with relevant<br>legislation and accounting standards and for informed management decision<br>making.</p><p>Internal control will ensure that<br>errors and irregularities are avoided or made apparent. Internal control as a<br>system comprise of the control environment and procedures .It includes all the<br>policies and procedures adopted by the directors and management of an entity to<br>assist in achieving their objectives of ensuring as far as practicable the<br>orderly and efficient conduct of its business so as to safeguard assets, to prevent<br>and detect fraud and error to ensure accuracy and completeness of accounting<br>records and the timely preparation of reliable financial information (SAS<br>300.1)</p><p>The company code 1963, Act 197<br>section 123 states that “management will need to establish an effective<br>accounting system comprising a number of controls”. In an attempt to do this<br>there must be a well-defined organisational structure showing how<br>responsibility and authority are delegated clearly defined communication<br>channels or lines of reporting(i.e. upward , downward and horizontal lines of<br>reporting) for attainment of corporate objectives. These controls are such that<br>different people are assigned to do different task. No one person should fully<br>record and process transactions from commencement to the end.</p><p>This means that a company can only<br>achieve its corporate mission through the establishment of internal control<br>system which makes sure that those policies and procedures which are laid down<br>by management are efficient. Hence, it reduces the cost of operation without<br>reducing effectiveness.</p><p><b>1.3 STATEMENT OF THE PROBLEM</b></p><p>The regularity of fraud and<br>misappropriation of funds is creating fear, anxiety, and a loss of confidence<br>in the minds of bank customers. Also, poor internal control system leads to<br>increase in bank losses. Management is required to set up an internal control<br>system but this system varies significantly from one organization to the next,<br>depending on such factors as their size, nature of operations, and objectives.<br>Since internal controls operate in an environment which influences its<br>operations, proper care must be exerted into the implementation of these<br>systems in other to achieve the utmost aim of the bank. This heightened<br>interest in internal controls is, in part, a result of significant losses<br>incurred by several banking organizations. An analysis of the problems related<br>to these losses indicates that they could probably have been avoided had the<br>banks maintained effective internal control systems. Such systems would have prevented<br>or enabled earlier detection of the problems that led to the losses, thereby<br>limiting damage to the banking organization.</p><p><b>1.4 OBJECTIVES</b></p><ol><li>To find out the impact of internal control system, on<br>the overall management of Mainstreet bank Nigeria Aba branch.</li><li>To find out the employees knowledge base on the concept<br>of fraud in the banking sector.</li><li>To find out effective internal control systems<br>influence on prevention and detection of fraud.</li><li>To find out the problem of fraud and how to curb it.</li></ol><p><b>1.5 RESEARCH QUESTIONS</b></p><ol><li>Does Mainstreet bank have an internal control<br>system? If yes, how effective is it?</li><li>&nbsp;What kind of relationship exists between<br>detection and prevention of fraud and internal control system?</li><li>Is lack of good internal control system a major cause of<br>fraud in banks? And what other major causes exist?</li><li>Can banks with effective internal control system<br>prevent the menace of fraud?</li></ol><p><b>1.6 RESEARCH HYPOTHESIS</b></p><p>The research is intended to<br>investigate the impact of internal control system in the circumstances of<br>embezzlement and fraud detection in the bank.</p><p>Therefore the data to be collected<br>in this exercise will be used to test the following hypothesis.</p><p><b>H1</b>:<br>Effective internal control system can help to prevent and detection of fraud in<br>Mainstreet bank.</p><p><b>H0</b>:<br>That effective internal control system may not help to prevent and detect fraud<br>in Mainstreet bank.</p><p>Research is poised to confirm true<br>or otherwise, to achieve this purpose the research has formulated the above<br>hypothesis. That the general financial management and control system as regard<br>revenue and expenditure is effective, efficient and technical. Also the general<br>financial management and control system as related to the public opinion is<br>inadequate, ineffective, and this lacks improvement in its operation<br>achievements which will hinder general development.</p><p><b>1.7 THE SIGNFICANCE OF THE STUDY</b></p><p>The findings of the study would help<br>the management of the bank to maintain an enhanced controlled environment by<br>helping management and employees to establish and maintain an environment<br>throughout the bank that sets a positive and supportive altitude towards<br>internal control, reliable management, operating personnel for effecting<br>internal control and internal audit for evaluating whether appropriate controls<br>have been implemented and whether the internal controls are functioning as<br>intended. Other significance of the study includes:</p><ul><li>Help the bank in reducing fraudulent activities that<br>occur in the organisation. </li><li>Requirement for the award of a Master’s degree.</li><li>Reference for other research topics</li></ul><p><b>1.7 SCOPE OF THE STUDY</b></p><p>The content of this research should<br>not be seen as being totally exhaustive of all possibly situations available in<br>the Nigerian banking sector on the theme of this study. This is due to the vast<br>size of the banking sector and the boundless nature of the study under review.<br>Therefore, the scope of this research is limited to the study carried out on<br>Mainstreet Bank branch in Aba, Nigeria.</p><p><b>1.8 LIMITATIONS</b></p><p>The limitations of this research<br>work are as follows;</p><ol><li>The internal control involves human actions which<br>introduces the possibility of errors in processing or judgement.</li><li>Internal controls can also be overridden by the plan<br>among employees and evasion of controls or oppression by top management<br>and superior external influences.</li><li>&nbsp;Limited funds prevented the choice of more than<br>one study area.</li></ol><p><b>1.9 &nbsp; OPERATIONAL<br>DEFINITION</b></p><p><b>Internal control: </b>a control is “any action taken by management to enhance the<br>likelihood that established objectives and goals will be achieved” [institute<br>of internal auditors, 1993].in other words, controls are designed to ensure<br>that organizations conform to standards or plans. Examples of controls include<br>the use of sales or expense budgets, computer passwords, or even padlocks on<br>warehouses.</p> <br><p></p>