THE IMPACT OF INTERNAL AUDIT IN FRAUD DETECTION, PREVENTION AND CONTROL IN BANKING INDUSTRY (A CASE STUDY OF UNITY BANK PLC)

THE IMPACT OF INTERNAL AUDIT IN FRAUD DETECTION, PREVENTION AND CONTROL IN BANKING INDUSTRY (A CASE STUDY OF UNITY BANK PLC)

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TABLE OF CONTECTS

TITLE PAGE

APPROVAL PAGE:……………………………………………………………………………i

DEDICATION …………………………………………………………………………………ii

ACKNOWLEDGEMENT……………………………………………………………………iii - iv

ABSTRACT ……………………………………………………………………………………v

TABLE OF CONTENTS…………………………………………………………………..vi - vii

CHAPTER ONE

1.1        BACKGROUND OF THE STUDY……………………………………………..1 – 3

1.2        STATEMENT OF THE PROBLEM……………………………………………..3 - 4

1.3        OBJECTIVE OF THE STUDY……………………………………………………4

1.4        SIGNIFICANCE OF THE STUDY………………………………………………4 – 5

1.5        SCOPE OF THE STUDY…………………………………………………………..5

1.6        OUTLINE OF THE STUDY……………………………………………………….6

1.7        DEFINICTION OF TERMS……………………………………………………….6 – 7

CHAPTER TWO

 LITERATURE REVIEW

2.0    INTRODUCTION …………………………………………………………………….8

2.1    ROLES OF INTERNAL AUDIT ……………………………………………….9 – 14

2.2.   THE GENERAL NATURE OF INTERNAL CONTROL…………………14 - 16

2.3    TYPE OF INTERNAL CONTROL……………………………………………16 – 18

2.4    THE NIGERIA BANKING ENVIRONMENT ……………………………..18 – 20

2.5    THE STRUCTURE OF THE NIGERIAN BANKING SYSTEM……....21 – 22

2.6        CONCEPT OF FRAUD…………………………………………………………….22

vi

2.6.1 NATURE AND TYPE OF FRAUD IN BANK……………………………22 – 26

2.6.2 EFFECTS OF FRAUD ON BANKS ……………………………………….26 – 27

2.6.3 CAUSES OF FRAUD…………………………………………………………..27 – 28

2.7    FRAUD CONTROL IN BANKS ……………………………………………..28 – 30

2.8    FRAUD PREVENTION………………………………………………………...30 – 32

2.9    DEFECTION OF FRAUD………………………………………………………32 – 35

2.10  SUMMARY OF THE CHAPTER………………………………………………35

 

CHAPTER THREE

RESEARCH METHODOLOGY

3.1    METHOD OF DADA COLLECTION ……………………………………….36

3.2.   PRIMARY DATA…………………………………………………………………36 – 38

3.3.   SECONDARY DATA…………………………………………………………….38

3.4.   RELIABILITY OF DADA………………………………………………………38 – 39

 

CHAPTER FOUR

4.1    DATE PRESENTATION, ANALYSIS AND INTERPRETATION ….40 – 45

4.4    MAJOR FINDINGS …………………………………………………………….46

 

CHAPTER FIVE

5.0    …………………………………………………………………………………………47

5.1.   SUMMARY…………………………………………………………………………48 – 49

5.2.   CONCLUSION…………………………………………………………………….50 - 51

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CHAPTER ONE

 

1.1            Background of the Study

Internal audit may be seen as a cost and a function, which does not add value to an organization’s product or service. This may be true but, according to Stephen Powell, an effective internal audit service can, in particular, help reduce overhead, identify ways to improve and efficiency and minimize exposure to possible losses from inadequately safeguarded company assets. All of which can have a significant effect on the bottom line.

Similarly, rising cases of fraudulent practice in Nigerian bank have no doubt, become a major threat to the development of Nigerian financial services sector and the economy at large.

Fraud can range from minor employees theft and unproductive behavior to misappropriation of assets and fraud financial reporting. Material financial statement fraud can have significant adverse effect on a bank’s value, reputation and ability to achieve its strategic objectives. A number of highly published cases have heightened the awareness and effects of fraudulent financial reporting. (Examples are cases of distressed bank in the nineties and of course savannah Bank of Nigeria Plc whose operating licence was revoked by CBN). Furthermore, misappropriation of assets, though not often material to the financial statement, can nonetheless result in substantial losses to bank if a dishonest employee has incentive and opportunity to commit fraud.

This and a lot more pose threat to the confidence reposed on banks both by the Nigerian banking public and international business communities.

Based on this scenario, the financial service Authority (FSA) being the Britain’s apex regulatory body in the financial service industry, asked British banks to beware of dealing with the Nigerian banks. The body placed Nigeria high in the list of countries where banks become ready instrument for money laundering – Financial standard Financial standard editorial – Sept. 23,2002 page 8).

To further confirm the spate of fraud in the Nigerian banking sector, the 1996 Annual Report and Statement of Account of NDIC revealed that a total amount of N7.30 billion worth of reported fraudulent attempts occurred in the Nigerian banking industry between 1991 and 1996. Out of this amount, a whopping sum of N1.9 billion representing 26% was successful.

Furthermore, the NDIC in annual report and statement of account for 2001 disclosed that frauds and forgeries were on the increase in the Nigerian banking system. The NDIC put the number of banks affected by the fraud attempts in 2001 at 75 as against 63 in 2000, depicting an increase of 19%. In the same vein, NDIC report stressed that cases of fraud involving insured banks rose by 134% from 403 fraud attempts in 2002 to 943 in 2001. Most of these frauds were successful.

These significant increases in the number of fraud cases the number of banks involved signify that internal audit has not been effectively equipped to rise to the occasion of fraud prevention, detection and control. The risk of fraud can there be reduced through a combination of prevention of prevention, deterrence and detection measures.

It is against this backdrop that this research study is undertaken to review the role of internal audit in fraud detection, prevention and control with a view to proffer suggestions possibly to mitigate the ugly trend.

Historical Background Of Unity Bank Plc

Unity Bank Plc is a Public Liability Company (PLC) incorporated in April 1987. It commenced banking operations in October 1988 with main business in retail commercial banking.

The bank was stared as Niger state wholly – owned bank, but now its shareholding structure has been spread across the Nigerian investing public with over 95% currently held by private and corporate bodies.

Unity  bank is very dynamic and stands firmly to compete effectively with other banks. The bank has branches in strategic locations where the interest of its customers is well served. It has twenty (20) branches and three (3) cash centers nationwide.

However I access a look of the Unity Bank Plc establish facts and figure difficult task especially I am not an insider.  Nevertheless with the help of responding to my questionnaire couple with gestures of some few officials of the bank I was able to access a significance information on the bank.

1.2     Statement of the Problems

Fraud and forgeries are of great concern not only to banking industry but also to non-financial institutions.

Nonetheless, from the underlying facts of the NDIC annual reports highlighted thereof, if could be deduced that banking industry is not the most affected but also the most fertile grounds for attempts.

The effects of fraud on banks cannot be over-emphasized and it is a major problem to the industry. Many banks as well as the values of their assets, resulting in loss of competent manpower as well as reputation, example of which was savannah Bank Plc whose operating license was revoked by Central Bank of Nigeria in April 2002. Similarly in the same month some banks were sanctioned by CBN over their involvements in foreign exchange malpractices. Besides over 21 banks had gone distressed as a result of fraudulent practices in the nineties.

This explains why the researcher is using a commercial bank – Unity Bank Plc as a case study.

1.3     Objective of the Study

This research works is intended to redirect the role of inter audit towards internal control for fraud detection, prevention and control.

It is also remind Management of banks the need to review the role of internal audit for greater responsibilities.

Finally, objective of the study is to educate the internal auditors of the roles they are expected to play in order to rise to the challenges of combating fraudulent practices.

1.4     Significance of the Study

Fraudulent succeed mainly due to vulnerability of internal audit to exercise adequate measures in internal control

The risk of fraud can be reduced through combination of prevention, deterrence and detection measures. However fraud can be difficult to detect because to detect because it often involves concealment through falsification of documents or collusion among management, employees or third parties. But with the aid of a well-equipped internal audit fraud opportunities can be reduced.

Against this background therefore, this research study highlights what it takes to have effective internal audit in banking industry and the roles it should play in definite terms. Therefore, this research work will be of immense benefit to banks, regulatory authorities, government and students who carry out research in the related field.

Furthermore, it will be of particular importance to Unity bank plc and other financial institutions in setting up solid and reliable internal audit along its responsibilities.  It is also useful to non-banking sectors in overhauling the strength of internal audit.

1.5     Scope of the Study

The research work is restricted to Unity Bank Plc, Head Office, Abuja.  The bank was used randomly in view of the fact that the intensity of fraud as it applies and tackled in Unity Bank Plc is capable of representing global perspective of fraud in the industry.  However, in as much as Unity Bank Plc cooperated with me to a large extent fear of secrecy prevented the respondents from opening up on some of my enquires.

Similarly, financial and time constraints hindered the ability of the research from carrying out the research further than this.

1.6     Outline of the Study

This study consist of five chapters, Chapter one deal with the background aspect of the study where purpose of the study has been stated.  Chapter two deals with review of literature.  This is reviewing the past work of the other people on a related topic.  Chapter three deals with research methodology on how this research work was undertaken.  Chapter four presents an analysis of the data from the field.  Chapter five shows the discussion of the findings, conclusion, summary and recommendations.

 

1.7     Definition of Terms

i.        Fraud – Adewumi (1986) defined Fraud as a “conscious 0predetermined action of a person or a group of persons with the intention of altering the truth or facts for selfish monetary gains that involves the use of deceit, tricks and sometimes highly intelligent, cunning and knowledge.

ii.       Forgery – can be defined as “the crime of counterfeit of handwriting, documents, cheques, drafts, currency notes and various other negotiable instruments.

iii.      Internal Audit – is defined as “an independent appraisal function established by Management of an organization for the review of the internal control system as a service to the organization”.  It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper, economic, efficient and effective use of resources.

iv.      Internal Control – is defined as “the whole systems of control established by Management to ensure adherence to policies, safeguard of assets and secure as far as possible the completeness and accuracy of records.

v.       Bank – A banker or bank is a person carrying on the business of receiving moneys and collecting drafts for customers subject to the obligations of honouring cheques drawn upon them from time to time by the customers to extent of the amounts available on their current accounts.




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