ABSTRACT
Fraud has been one
of the major threats to the existence of an organization in the modern day
business and if it is not adequately prevented it might lead to the collapse of
the business within a very short period of time. This research work look into
the way fraud can be detected and prevented in the corporate organization
through the use of internal control as a mechanism for it prevention.
The objectives of
the study were to determine whether the internal control system adopted is
maintained and complied with in most organization within our economy in which
the focus is on the banking sector; to acquire more knowledge on internal
control system and evaluate the effort to which it helps in a sector if adopted
and strictly complied with; to also ensure that there are adequate records on
transactions are properly done. Two null hypotheses were stated to guide the
study as follows:
§ Effective
internal control does not in any way reduce the incidence of fraud
§ It is
not the sole responsibility of the management to ensure the establishment of
sound internal control system.
The research
method and the instrument used were survey and questionnaire respectively. Also
the responses to the questionnaire were analyzed and the results used to test
the hypotheses. Chi square test of the hypotheses revealed that:
§ Effective
internal controls reduce the incidence of fraud
§ It is
the sole responsibility of the management to ensure the establishment of sound
internal control system.
It was concluded
on the basis of the findings that,
§ Before
payment are made they are duly authorized by the management;
§ Segregation
of duties enhance performance of operations of an organisation
§ Irregular
recording of cash and cheques lead to the omission of important transactions.
Therefore it is important
to note that, internal control system can be used for fraud prevention and
detection in an organization.
TABLE OF CONTENTS
Page No
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract
v
Table of
contents
vi
CHAPTER ONE: INTRODUCTION
1.0 INTRODUCTION 1-6
1.1 STATEMENT OF
PROBLEM 6-8
1.2
OBJECTIVE OF THE STUDY 8
1.3
SIGNIFICANCE OF STUDY 8-9
1.4 RESEARCH
METHODOLOGY 9-11
1.5
SCOPE AND LIMITATION OF STUDY 12
1.6 HISTORICAL BACKGROUND OF SKYE BANK PLC 12-14
1.7
DEFINITION OF TERMS 14-17
CHAPTER TWO:
2.0 LITERATURE
REVIEW
19
2.1
FRAUD DEFINITIONS 19-21
2.2 CATEGORIES OF FRAUD 21-24
2.3 FRAUD
DETECTION AND PREVENTION:
TRANSACTIONAL ANALYSIS FOR EFFECTIVE
FRAUD DETECTION 25-29
2.4
HOW FRAUDSTERS EXPLOIT COMPLEX SYSTEMS 29-32
2.5
REPORTING FRAUD AND COMMUNICATING
WITH MANAGEMENT 32-39
2.6
CONTROLS IN ORGANISATIONS 39-52
2.7
CO N C L U S I O N 52-55
CHAPTER THREE
3.0
RESEARCH METHODOLOGY 58
3.1 RESEARCH
DESIGN 58-59
3.2
POPULATION /SAMPLE 59-60
3.3
DATA ANALYSIS 60
3.4 LIMITATION OF STUDY 60
CHAPTER FOUR: PRESENTATION
AND ANALYSIS
4.1 INTRODUCTION 62
4.2ANALYSIS
OF THE RESPONDENTS’ CHARACTERISTICS 62-66
4.3
ANALYSIS OF RESEARCH QUESTIONS 66-73
4.4 HYPOTHESES
TESTING 74-85
CHAPTER FIVE: DISCUSSION, SUMMARY, CONCLUSION AND
RECOMMENDATION
5.1 DISCUSSION 87-88
5.2 SUMMARY 88-89
5.3 CONCLUSION 89
5.4 RECOMMENDATION 89-91
BIBLIOGRAPHY
92-93
APPENDIX 93-96
CHAPTER ONE
1.0 INTRODUCTION
Internal control
is an important tool in the prevention of fraud and detection. It should be emphasised that if fraud is not
taken care of, it can cause serious problem which may invariably lead to
liquidation of the company. The
prevention of fraud through internal controls would contribute positively to
the development of the organisation and ensure continuity of the firm as well
as portraying the good corporate image of the firm in the outside world.
Fraud comes in all
sizes ranging from dollar cases of corporate fraud to thousand dollar cases of
employee embezzlement to employees overcharging their expense reports.
Therefore, an effective fraud prevention strategy must be multi-dimensional,
considering senior management, employees and even outside parties such as the
customers and vendors. An effective fraud prevention strategy must also be
adapted to the ever-changing schemes as internal controls and technology change
the operative environments of most companies.
The inventors of
the concept and practice of control will definitely be restless in their grave.
The system, which they introduced to ensure that finance are properly managed
and utilized as stipulated, has been abused and manipulated by those who are
supposed to be the custodians.
Consequently, all
over the world, financial controls are in discharge; creative accounting is the new ‘god’ and auditors whether internal or external are agonizing over
the present and future of auditing practices.
First it was
Enron, a firm ranked 7th on the fortune 500 chart in 2000 which
suddenly crumbled like a pack of cards as a result of indigenous account
doctoring to the tune of $1.21 billion (Asein, 2002). Then came the shocking
disclosure of the “fund book of record” grade
world accounting fraud which was originally put at $3.7billion but eventually hit $7biilion following the
discovery of $3.7billion earning errors. This happened at the time global
crossing was reeling under $12.4billion debt and over 60 shareholders lawsuit.
Consequently, we
are not immune from the corporate ‘419’ that is shaking corporate America, the
bastion of capitalism and due process to its foundation. Long before now, Nigeria
suffered from a devastated and rampant bank distress epidemic at the end of
which 31 banks with deposit of 1,744,080 deposits, about N90billion in
deposit were closed. There is also the case of African petroleum PLC where
about N29billion was concealed in the records and where the Federal Government
has been forced to set up probe of erstwhile management. But the financial
record of the same Federal Government is in mess as funds were released without
budgeting.
Over the years,
particularly during the era of military, when the economy was been handled by
those trained in the warfare, the zeal and the productive sector of the
national Economy was killed and buried. During this era, while the consumption
attitudes of the populace was being developed, the ethical and cultural
background, the social fabrics, religious belief assaulted from all fronts.
While these were going on, the education of the ‘child’ which hitherto is known
to be the all round development of the child mentally, physically, socially,
morally, religiously, culturally, where dignity of labour as a foundation was
abandoned for man literacy programme. The resultant effects of these were:
§ The
collapse of the national economy.
§ Breakdown
of social, cultural and ethnic background of the people.
§ Mass
unemployment of energetic, vibrant and intelligent youths.
§ The
total eradication of the middle class which resulted to the do or die syndrome
of lower class to ‘reach the top’.
However, the
reduction or prevention of flow of illegal act can be achieved through internal
checks in every organisation or work field and it could be divided into three
units; work environment, control system and fraud specific procedures. Through
these, fraud commitment will be reduced to a lower level and then have a
positive effect in organisations and the nation as a whole.
According to the
Deputy Manager and chief inspector of Intercontinental Bank PLC, Remi Adewunmi,
he observed that reasons for upsurge in bank fraud have the same factors as in
why people steal, which are ; temptation, opportunity and kleptomania syndrome.
According to him,
in the Nigerian context, people perpetrate fraud in order to: Satisfy the
materialistic pen
chant of the society,
put an end to the scourge of poverty in the face of worsening economic
conditions as well as an unbridled greed to acquire wealth for no legitimate
course.
Concerning
reported cases of fraud and forgeries in Nigeria banks for years 2003 to 2006,
Adewumi stated that the Nigerian banking sector witnessed a high rate of fraud
and forgery both in number and amounts of attempted and successful fraud during
the years prior to consolidation.
According to him,
from figures made available by the CBN, the banking sector witnessed a total of
1,036 frauds in 2003. This figure rose in 2004 by 11.8 per cent 1,175 and by
4.59 per cent in 2006 to a figure of 1,229.
It however
declined by 2.9 per cent in 2006 to a figure of 1,193 to which Adewumi said
that this current figure is still considered very high for the 25 surviving
banks.
"The threat
posed to depositors' funds and shareholders' funds by the fraudsters cannot be
over emphasised," he said.
Talking about
fraud prevention and the role of control, the deputy general manager explained
that the first line of defence against fraud is a strong and tested internal
controls.
According to him,
while a lack of internal control does not guarantee that fraud will take place,
it does open the door a bit wider for whoever cares to come in.
"If people
intent on committing fraud think they may be blocked or exposed by strong
internal controls, they will be deterred," he said.
Consequently, he
said, it is incumbent on the internal auditor to guarantee strong internal
control through institutionalization of the following basic internal control
measures; segregating duties, dual controls, joint custody, rotating duties and
specific internal checks and balances.
Other fraud
prevention control, he stated, include, strong physical control over inventory,
marketable securities and blank chequebooks, adequate documentation for cash
movement, presence of robust and reliable software as well as independent spot
check to monitor and sanction deviation.
Still, other fraud
prevention controls include: Regular process review (at least once a year) to
assess adequacy or otherwise of the control mechanism in-built in the system,
acquire robust audit tool that will facilitate fraud detection as well as
appropriate deterrent perception and presence of fraud policy or ethical policy
that will spell out issues regarding employee awareness on fraud,
investigation, whistle blowing, sanction code and others.
Strong internal controls, proactive
auditing of records and analysis of key financial trends are effective tools in
the battle against fraud. Clear policies and zero tolerance toward fraud, along
with employee support programs, help create the proper control environment.
1.1
STATEMENT OF PROBLEM
Fraud can be
catastrophic to any organisation if it is not adequately identified and
monitored. The result otherwise can be devastating to the organisation’s
financial position, reputation, citizen’s confidence level and success in
achieving its goals and objectives.
The existence of
fraud within an organisation has the potential to be viewed as a failure to
fulfil its governance obligation. The major reason for the rising incidences of
fraud has been attributed to the increased hardship caused by the hostile
economic condition. Another reason for the proliferation of fraud is the
confidence built up by the fraudsters who take advantage of the decays in the
nation’s legal system. As a result, fraud has become a cankerworm increasing in
number, magnitude and sophistication daily.
In modern day
business, segregation of duties and physical control system of internal control
serves as prominent, reliable and effective control put in place to avoid fraud
and manipulation. This however has brought some problems which
could be detrimental to the business. For instance, deterioration of working
capital could be detrimental to business organisation and may cause serious
problem which may result in the winding up of the business organisation.
The first line of defence against
fraud is a strong system of internal controls. While a lack of internal control
does not guarantee fraud will take place, it does open the door a bit wider.
People’s intention of committing fraud can be blocked via the awareness of the
existence of strong internal control system put in place by the management.
Internal control becomes a problem to
an organisation when there is:
§ Lack
of segregation of duties, such as an individual making bank deposits, posting
them to the accounts receivable system and performing monthly bank
reconciliation;
§ Poor
physical controls over inventory, marketable securities or blank check stock;
§ Inadequate
documentation and support for cash disbursements;
§ Inadequate
or obsolete accounting software; and
§ Failing
to perform independent verification, such as spot checks of physical inventory
1.2
OBJECTIVE OF THE STUDY
The objectives of
this study include:
§ To
ensure that internal control system adopted is maintained and complied with in
most organisation within our economy in which the focus is on the banking
sector.
§ To
acquire more knowledge on internal control system and evaluate the effort to
which it helps in a sector if adopted and strictly complied with.
§ To
also ensure that adequate records on transactions are properly done.
1.3 SIGNIFICANCE OF STUDY
In consideration
of financial services section (such as banking, insurance, building societies,
customer credit, purchase business, leasing, factory, business ventures etc).
Banking represents probably the most important unit of financial sector.
This is not just
in terms of turnover, profit and employment of labour, but also in its
paramount impact on the other sector of the economy. Any problem in banking sector would
invariably have strong effect on the economy. That is why this research work
tries to study the internal control in relative to fraud prevention and
detection in the banking sector with respect to SKYE BANK PLC and its effectiveness and reliability.
This work will
also serve as a basis of broaden the researcher knowledge on internal control
and its uses. To customers and investors, they would be confident that controls
in place can be relied upon for safeguarding their deposits. Management will
also be able to reduce losses and improve on the internal control system.
Finally, the academic would use this research work as a basis for further
study.
1.4.0 RESEARCH METHODOLOGY
1.4.1
RESEACH QUESTIONS
§ Is
Internal control System Requirement Necessary?
§ Is
ineffective internal control breed Fraud in an organisation?
§ Are
records kept of all cheques received?
§ Is
bank reconciliation prepared regularly?
§ Is
there segregation of duties?
§ Are
invoices authorized before payments are made?
§ Are
accounting policies adopted by the company consistent?
§ Are
registers of fixed assets maintained showing details for all material assets?
§ Are
claims refund made on special forms?
§ Are
regular physical inspections made to ensure existence and condition of asset?
§ Has
there been any restriction as to information or scope of work carried out?
§ Could
corporate re-organisation strategy be responsible for fraud in an organisation?
1.4.2 STATEMENT OF HYPOTHESIS
The hypotheses to
be tested in this study are stated as follows:
Hypothesis
1
Ho:
Effective internal control does not in any way reduce the incidence of fraud
Hi:
Effective internal controls reduce the incidence of fraud
Hypothesis
2
Ho:
It is not the sole responsibility of the management to ensure the establishment
of sound internal control system.
Hi:
It is the sole responsibility of the management to ensure the establishment of
sound internal control system.
1.4.3 POPULATION /SAMPLE
A research
population is the totality of all pertinent observation in a given research
problem situation. In other words, a population is made up of all conceivable
element subjects or observations relating to a particular phenomenon of
interest to the researcher (Asika, 1991).
This research
study is focused on SKYE BANK PLC. The
sampling method adopted is based on probability i.e. every population has equal
chance of been selected. Out of population size of 50, 40 were taken out as
sample sizes on which questionnaire will be distributed so as to generate
responses from the chosen sample size. The population will be divided into
strata i.e. top management and the lower level management.
1.5
SCOPE AND LIMITATION OF STUDY
Since
it will be too tedious to look at the system of internal controls of all the
banks in the country, this research work will be limited to the internal
control system and incidence of fraud in SKYE
BANK PLC with special references to internal control questionnaire as a
means of evaluating the system. The data will be gathered from their various
departments but results and conclusion are envisaged to be relevant to banks
and allied institution with internal control system at any point in time.
1.6 HISTORICAL BACKGROUND OF SKYE BANK PLC
Skye Bank was made
up of five banks in which Prudent Bank has the upper hand in it formation.
These banks are as follows:
(a)
Prudent Bank
(b)
Bond Bank
(c)
Reliance Bank
(d)
Eko International Bank
(e)
Co-operative Bank
Skye
Bank started it operation under the new identity in January 2006 subsequent to
the completion of the various legal and regulatory processes required to form a
valid merger. As at January
1, 2006, Skye Bank’s shareholder’s fund stood at over N34billion
and this puts the bank amongst the first top five banks in Nigeria. With
this capitalization, the bank is better positioned to conduct in business and
deliver value to all stakeholders.
The
bank also deposit base in excess of N17bn and a balance sheet size of
over N114bn while the branch network is currently spread over 160 locations
across the major cities and local government areas of the country.
A
few more branches are in various stages opening at various locations across the
country. Skye Bank is owned by a large number of institutions and individual
investors and the shares are quoted on the Nigeria Stock Exchange. This diverse
ownership base allows professional and seamless operation and the executive management is free from any
undue interference in managing the bank.
The
vision of Skye Bank is to continuously challenge itself to provide limitation
possibilities to its customers and it mission is to provide innovative and
convenient banking services by a dedicated team to the benefit of its
stakeholders. Its core values are: integrity, accessibility, mutual respect and
continuous learning.
INVESTMENT
BANKING
The investment
Banking Group Provide Specialist services to skye Bank’s customers in the areas
of capital raising (Equity and Debt), project and specialized finance. It also
applies technical, financial and managerial skills to provide advising services
for the proper evaluation of business/ project concepts. The services may come
in form of feasibility studies, locating appropriate technology and venture
partners. The bank is registered with the Securities and Exchange Commission
(SEC) as issuing House and Financial Adviser.
The Head Quarter
is located at 3, Akin Adesola
Street, Victoria Island, Lagos,
Nigeria. Its
chairman is Musili Smith with managing Director in the person of Akinsola
Akinfemiwa.
1.7
DEFINITION OF TERMS
AUDIT: - An audit is a
process carried out by a suitable qualified auditor whereby account of business
enterprise, is subject to forming opinion as to its accuracy, truth and
fairness.
FRAUD: - It involves
the use of dishonest or deceitful conduct in order to obtain some unjust
advantage over someone else. The United Kingdom financial services
act 1986, defined fraud as “a regulation involving the use of criminal deception
to obtain an unjust or illegal advantage. The term ‘fraud’ refers to 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. International Auditing Standards (ISAs)
INTERNAL CONTROL SYSTEM: - The
Auditing Practices Committee (APC) defines internal control system as the whole
system of controls, financial and other methods, established by the management
in order to carry on the enterprises in an orderly and efficient operations to
secure its assets, ensure compliance with management policies and secure as far
as possible the competence and accuracy of the records.
INTERNAL AUDIT: -
This is an independent appraisal activity within an organisation for the review
of operations as a service to management.
COMPLIANCE TESTS: -
These are tests which seek to provide audit evidence that internal control are
been applied as prescribed.
SUBSTANTIVE TESTS: -
These are test of transactions and balances and other procedures such as
analytical review which seeks to provide audit evidence as to the consistence,
accuracy, validity, and reliability of the information contained in the
accounting records or financial statement.
WHISTLE-BLOWING:-These
are internal processes put in place to support staff to draw attention to
anything they think is of concern. They provide guidance for employees and
managers in dealing with business conduct and helping them learn how to
identify and to avoid dishonest and unethical business practices as well as
providing guidance on how to respond t o conduct which may appear to be of
concern.
INDEPTH TESTS: -
These are generally cradle to grave tests which involve tracing transactions
through the system from the point of origination to the point of conclusion.
WALK THROUGH TESTS: -
This is a test carried out for the confirmation of what has been documented if
it already exists, the way it ought to have existed.
VERIFICATION: -
This is the establishment of existence, ownership and valuation of assets at
balance sheet date and correction liabilities as shown at that date and
ensuring that presentation of assets and liabilities in the accounts is
correct.
AUDIT EVIDENCE:-
This is the information obtained by the auditor in arriving at the conclusion
on which he base his opinion on the financial statements.
ADMINISTRATIVE CONTROL: - This
is the plan of an organisation i.e all methods and procedures that facilitates
management planning and control and control of operations.
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