ANALYSIS OF EFFECTIVE INTERNAL CONTROL AS A BASIS FOR PREVENTION AND DETECTION OF FRAUD IN BANK.

ABSTRACT

 This paper examines the issues of internal control viz., fraud prevention in the banking industry, adopting both primary and secondary data. Primary data was used to test internal control while secondary data were employed to test fraud prevention. The main primary variables were separation of duties, monitoring, and staff qualifications while the main secondary variables are bank profit, regulation, technology and M2. In both cases regression techniques were adopted. The results show that internal control on its own is effective against fraud, but not all staff are committed to it, while the secondary data is quite supportive of the primary data but more exemplifying in that M2, staff qualifications and technology were significant throughout the various dependent variables. It is also clear from the regressions that technological based fraud is significant. The paper recommends the continuation of the cashless policy of the Central Bank to reduce available cash and improvement in educated staff engagement to reduce fraud in the banking system.

1. INTRODUCTION

Fraud control is becoming an issue that the regulators and top banking executives who are in saddle when fraudulent activities takes place or more succinctly when someone commit an act of fraud in the financial institutions under their management. It is quite clear that the installation of internal controls cannot be sufficient to eliminate dishonest activities, constantly rejigging of the controls already put in place to ensure that they are effective in reducing fraudulent activities in financial institutions from becoming successful should become important. Fraudulent activities are rampant in every organization but more rampant in financial institutions and perhaps more common in Deposit Money Banks (DMBs) because of the instruments of their trade. Banks are most prone to financial fraud as a result of money and near money instruments used in the process of their operations. The acts of financial fraud has persisted in DMBs in spite of strong internal controls put in place to forestall and control any planned intention to steal the bank’s money. Strong controls that at times are antithetical to the efficient operations of the bank having been put in place in certain cases but have not succeeded in reducing drastically the amount of funds lost. Thus all internal control measures have become preventive and protective of the banks financial resources sometimes to the detriment of the bank’s primary operations. Most banks are litigation-shy as judicial officers often do not find it interesting that that the process (internal controls) put in place by the bank was compromised by the employee. In addition, where the bank is litigious, courts often sympathize with customers whose infractions led to large losses of funds irrespective of whether collusion with an employee had existed The scenarios are not funny outside the banking halls when financial fraud happened and parties have to prove their innocence. Whatever the case is, the bank losses money and reputation, the staff members’ lose jobs. One of the reasons for the use and continuous revision of internal control systems in the bank is to ensure that losses occasioned by fraudulent activities are minimal if they occur, and attempts are discovered very early before losses can occur. The triumvirate of fraud prevention, fraud control and detection are coalesced into the effective internal control system that the bank employs.