EFFECTIVE INTERNAL CONTROL OF FRAUDS IN BANKS A CASE STUDY OF COMMERCIAL AND MERCHANT BANKS IN NIGERIA

EFFECTIVE INTERNAL CONTROL OF FRAUDS IN BANKS A CASE STUDY OF COMMERCIAL AND MERCHANT BANKS IN NIGERIA

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ABSTRACT

Ever since banking evolved, banks have come to be seen as one of the few places where one’s treasures can be kept without fear of theft. As a result bankers all over the world were and still are seen as repositories of trust and fidelity.

However, in the recent past, the integrity of bankers and the banking industry in Nigeria have come into question. An epidemic called fraud has hit the banking industry. This fraud has led to the loss of confidence by the public in banking institutions.

The incidence of fraud is universal and permeates the society as a whole. However, for this study, we have narrowed down our scope to the commercial and merchant banks in order to take a meaningful study.

Though not specifically stated, yet the researcher conducted the study for the period between 1985 to 1994, within which period cases of fraud were much in the news.

The research was based on a number of postulations which include

1.           The clerical category of bank employee are more likely to engage in fraudulent activities than management cadre.


2.           Banks that have less fraud occurences are more likely to be profitable than those with high incidence of fraud.

3.           Commercial banks are more likely to have cases of frauds and forgeries than the merchant banks.

4.           Banks with effective internal control are more able to combat frauds than their counter parts with less effective internal control system. However, the research work was inadvertently limited by a number of

factors, such as the secrecy of banks and the sceptical attitudes of respondents in answering questions in the questionnaire. Yaro Yamen’s formular was used in determining the sample size for then study. Hence of a total of 66 commercial and 54 merchant banks operating in Nigeria as at 1994, about 110 of the two combined were chosen as the sample. Of this 10 of the possible respondents could not return their own questionnaires, hence the Researcher had to use 100 for the study. Furthermore, Bowleys, proportion allocation formular was used to determine the exact number of banks in each category that would be contained in the sample.


It is also worthy to note that the researcher deliberately administered the questionnaires to the accountants of the banks in the sample as he felt that this will ensure validity of the measuring instrument.

A number of findings were made in the course of the study. A few of them include:

1.           Commercial banks had more incidence of fraud than other categories of banks.

2.           All the banks have internal control system.

3.           Majority of the internal control system in the banks are only fairly effective.

Finally, some far-reaching recommendations were made by the

1.           Ensure effective internal control system. As was determined in the study, the problem was not with the installation of internal control system as all the banks in the sample had it. However, the problem is with its effectiveness. Management of these banks should strive to ensure the effectiveness of the system. There should be periodic reviews in this direction.


2.           Banks should review their employment and motivation practices. The commercial bank should endavour to borrows a leaf from the merchant banks by employing qualitative staff to man positions in the banks. This is because highly qualified staff are usually paid higher salaries and such may deter the staff from engaging in fraud.

3.           Banks should acquire for use, the standardized computer cheque book that can encode characters on documents, read encoded characters, sort documents by various codes, and list documents that are sorted or unsorted. This computer will help in reducing the incidence of frauds in banks.

4.           In addition to the standardized computer cheque books, the banks should strive to get computerized. Computerization reduces the amount of delay of customer-time, as well as ensuring that records are stored both in the magnetic disc, fleadiskettes, as well as the printouts. Similarly, this would help in reducing the incidence of fraud.

CHAPTER ONE

1.1.                                                                     INTRODUCTION

Banks, especially commercial banks, are the major mobilizers of saving in any economic system by offering savings facilities to the public. Some of the functions of the banks include the acceptance of deposits from the public and channeling such deposits to the deficit sectors of the economy who are in need of inventible funds. These two related and dependent functions bring the banks face to face with the public who come to obtain their services. This implies that banks attend to a large number of customers who they may not, most of the time, personally know, or whose identity the banks may not immediately know. This shows that banks will be


unable to have an immediate identity of these customers all of whom either have honest or fraudulent intentions.

The word fraud is described as a social menace perpetuated by a person or a group of persons with the intention of altering the truth and, or fact, for selfish personal gain.

Fraud occurs when a person in a position of trust and responsibility, in defiance of prescribed norms, break the rules to advance his personal

interests at the expense of the public interest he has been entrusted to guard and promote. It also occurs when a person through deceit, trick or highly intelligent, cunning, gains an advantage he could not otherwise have gained through lawful, just, or normal processes.

Worried by this rising tide of bank frauds, the International Corporate Development Agency (ICDA) recently organized a two-day seminar on strategies for minimizing bank frauds.

According to Dr. Falorunsho Abudu, a deputy general manager with First Bank PLC, a resource person at the seminar, major consequences of bank frauds include loss of capital by banks and their shareholders as well


as loss of public confidence, litigations, regulatory sanctions and negative publicity.

According to the Nigerian Deposit Insurance Corporation (NDIC) the amount involved in frauds in the nations banking system rose from N804, 196 million in 1990 to N3.309 billion in 1994. NDIC records also show that commercial banks are most hit in this fraud virus as the growth rate of frauds in commercial banks rose by over 700 percent between 1991 and 1994. The higher tendency of frauds in commercial banks may be attributed to the fact that commercial banks operate from chains of branches compared with merchant banks with as small number of outlets.

Frauds in banks could be committed through many ways. These include forgeries on accounts whether savings deposit or current, forgeries of transfer instruments such as drafts and mail over invoicing for services rendered to banks and the opening and operation of false accounts as well as creation of false credit balances.

Dr. Abudu also observed that frauds in banks can be committed through suspension of cheques, diversion of bank frauds, foreign exchange malpractices and embezzlement or outright theft of cash. Other methods


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