INTERNAL CONTROL SYSTEM AND FRAUD PREVENTION & DETECTION IN PUBLIC SECTOR: A CASE STUDY OF BANKS

CHAPTER ONE
1.0.          INTRODUCTION:
Banks occupy a critical position in a complex financial system that supplies the money and credit needs of the economy.  The unique characteristic of a commercial bank is that it also creates money, and it is this particular feature of the commercial banks which distinguishes them from non-banking financial institution.  However, all take part in the process of financial intermediation whereby such intermediaries also provide considerable benefits to borrowers in so far as there may be difficulties in locating potential savers who are willing to lend appropriate amount of funds at relevant interest rate.
Banks’ ability to promote growth and development depends on the extent to which financial transactions are conducted with trust and least risk.  The foundation on which banks is built is on confidence and trust, and where banks indulge in unsafe and unsound confidence, such banks may collapse.  So, for banks to achieve objectives and as well as generating overall confidence, the INTRODUCTION AND ESTABLISHMENT OF INTERNAL CONTROL must come in to promote efficient operation.  Internal control system therefore serves as a sine-quanon for FRAUD PREVENTION.  Internal control is a creation of management, thus, the management retains sole responsibility for the establishment and maintenance of adequate and functional internal control.

1.1.         BACKGROUND TO THE STUDY
Banks play very important roles in the economic development of any country.  As an important component of the financial system, banks channel scarce resources from surplus economic units to deficit units.  Thus, to an appreciable and reasonable extent, they exert a lot of influence on the pattern and trend of economic development through their lending and deposit mobilization activities.  The efficient mobilization of savings and its allocation of productive investment by financial institution, thereby promote economic growth and development as well as achieving their objectivities, profitability and solvency.  All the aforementioned benefits that banks can exert on the economy as a whole can be achieved through an effective internal control system and fraud prevention in the banking industry.
In the words of A.H. Millechamp (2000), “Internal Control system is an independent appraisal function within an organization for the review of system of control and the quality of performance as a service in the organization.
The Institute of Chartered Accountant of England and Wales (ICAE& W) defines it as a review of operations and records, sometime continuous undertaken with a business by a specially assigned staff.
Internal control, therefore is a whole system of controls, financial or otherwise, established by the management in order to carry out the business of an enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of record.
Fraud, on the other hand is defined by Anyawu (1993) as an act of deception deliberately practiced to gain unlawful or unfair advantage to the detriment of another.  The international standard on Auditing (ISA) defines fraud as an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage.  Fraud may include: manipulation, falsification or alteration of documents and records; recording transaction without substances, intentional misapplication of accounting policies etc. just to mention a few.
Therefore, the menacecalled fraud has been a deadly disease that has infected many financial corporate body particularly the banks which led to the recent reformation in the banking industry in Nigeria, thus, involving the process of business combination in the industry such as merger and acquisition whereby the infected banks are being merged to and/or acquired by the healthy and sound ones.  This reformation has obviously pointed out.  The enormous damage that fraud has done to the banks, thus, the dilution in the financial strength of Nigeria banks.
To combat this syndrome of fraudulent practices, several measures have been identified as the way out to minimize this act.  Internal control system is one of the many measures that are to be discuss in chapter 2 of this research work.  Internal Control System has been the most single trusted and effective measures that can combat this act of malpractices to the barest minimum.  Infact, the Central Bank of Nigeria (CBN) reported that the backward development in Nigeria was attributable to the weakness in the Internal Control System of the banks.  Therefore, an attempt to bring to barest minimum, if not completely eradicated, the spate of fraud by the measure of internal control system gave rise to this research study.

1.2.         STATEMENT OF THE PROBLEM
Following the recent failure of some banks that led to the reformation in the banking industry, the confidence of the bank customer, that is savers of fund, and of the lenders of money from bank has been lost.  Attributed to the failure is also the weakness in the Internal Control System and the prevalence of fraudulent practices among staffs and management of the bank.
          An effective internal control system and good system of fraud prevention will ensure efficient mobilization of savings and its allocation to productive investment, thereby promoting growth and development, as well as achieving their objectives, profitability, solvency and ultimately restores the lost confidence of customers and lenders overtime.  However, the system of internal control is mainly the function of management to establish such, and the ultimate aim of this is to minimize and prevent the occurrence of fraud in the bank, thus
          It should be noted however that fraudulent practices in the banks is usually cause through lapses or inadequacies which manifested in various ways.  Therefore, there is need for the bank management to ensure that the internal control system is very strong as much as possible to cover those lapses and inadequacies which manifested in various ways known to them. 

1.3. RESEARCH QUESTIONS:
For the purpose of this study, the following are some of the problem-solving questions that may come up during the course of carrying out this study.  The following are the research questions which will aid the understanding and efficient study of the problem.
(a)   Does the Internal Control System have impact on the overall management of banks?
(b) Can the Internal Control Systems of bank ensure fraud prevention and detection?
(c)  Can an inadequate internal control system cause perpetration of fraud?
(d) Can strong internal control system fish-out actors that contributed to incidence of fraud in banks?

1.4.OBJECTIVES OF THE STUDY
The general objective of the study is to assess the impact of Internal Control System as a means to minimize and prevent the occurrence of fraudulent practices in any form.
          These objectives of the study are as follows:
(a)   To determine the impact of Internal Control System on the overall management of Nigeria banks
(b) To examine the impact of the Internal Control system on fraud prevention and detection.
(c)  To highlight the major causes of fraud and actors that contributed to the incidence of fraud in banks.

1.5.         SIGNIFICANCE OF THE STUDY
Establishment of an adequate Internal Control and its effective review and assessment by the management will go a long way in preventing fraudulent acts and practices among the fraudsters within the banks and other third parties.  The usefulness and the expected benefit of the study to the banking industry entail the following:
(i)                 It will help in knowing and studying how the principles of Internal Control Components or elements are used to prevent fraud.
(ii)             The study will also unveil the lapses and inadequacies in the bank open to fraudsters within and outside the banks.
(iii)           The study will help to review fraudster’s mode of operation and thereby recommend ways to avert their operations through the use of internal control system.
(iv)           It will also result in reduction in an attempt to defraud by the management and staff as a result of lay-down expected punishment.
(v)             It will also enhance customers’ confidence and trust in the banking industry as a result of strong internal control being put in place.
(vi)           This study will ultimately help in promoting economic growth and development as a result of efficient mobilization of savings thereby enhancing profitability and solvency in the bank, all of which are achievable through implementation of strong system of internal control.

1.6.    SCOPE OF THE STUDY.
          The scope of the study will be limited to how Internal Control System will be used as an effective means to prevent fraud, thus, an essential system have to be in place before fraud can be minimize and prevented.  Although, information from bank on internal control and fraud are difficult to obtain since they are regarded as sensitive issues which cannot be provided without caution because it is mainly to protect the image of the bank and not to erode depositors’ confidence.  On these circumstances, attention is focus on Guaranty Trust Bank Plc., Lagere Branch, Ile-Ife, in order to obtain easy accessibility of information.  Also, it is believe that this type of study will expose the inadequacy and lapses in the bank with the presence of Internal Control system and this will be a possible suggestion for greater improvement, not only in Guaranty Trust Bank, but on all banks as a whole, other financial institutions and the economy at large.

1.7.    LIMITATIONS OF STUDY
The study was confronted with many problems, among these are:
1.     Inability of the researchers to get to the respondents due to bureaucracy.
2.     Not all the questionnaires’ distributed for administering was returned.
3.     Insufficient time on the part of the researchers to do proper evaluation.
4.     Responses were not given to some questions in the questionnaire regarded as internal issues.
The following limitations had made proper evaluation of Internal Control System as a means of fraud prevention difficulty in Guaranty Trust Bank Plc.

1.8.    DEFINITION OF RELATED TERMS
1.       INTERNAL CHECK:    Is the aggregate of the checks and balances imposed on day to day transaction in an organization whereby the work of one person is verified independently or in complimentary to the work of another.
2.       INTERNAL AUDIT:   Is an independent appraisal function established by the management of an organization for the review of Internal Control System as a service to the organization.
3.       INTERNAL CONTROL:  This is a whole system of control, financial or otherwise, established by the management in order to carry out the business of an enterprise in an orderly and efficient manner, ensure adherence to;management policies, safeguard the assets and secure as far as possible the completeness and accuracy of records.
4.       FRAUDSTERS:   These are the people who commit frauds.
5.       FRAUD:   This is a crime involving cheating somebody in order to get money or goods illegally.
6.       ERROR:    This is an unintentional; mis-statement in the financial statement.  It is an act done without the intention of committing the act.

7.       IRREGULARITIES:   This is an Intentional distortion of the bases of preparing the financial statement.  It is act an error since it is a deliberate act and also not a fraud since personal benefit may not be the objectives.  The end product of irregularities is fraud.

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Item Type: Project Material  |  Attribute: 112 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
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