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University of Nigeria Research Publications
ONUZURUIKE, Nwaeze Martins
Aut
hor
PG/MBA/98/45051
Title
“Towards Curbing Commercial Bank
Fraud: An Analysis of Internal Control System Weaknesses”
Facu
lty
Business Administration
Dep
artm
ent
Banking and Finance
Dat
e
November, 1999
Sign
atur
e
UNIVERSITY OF NIGERIA
BLESSED PEOE~CY BmEm No 12 Cdlege Rd, Oaui Naw Layout,
COVER PAGE
"TOWARDS CURBING COMMERCIAL BANK FRAUD:
AN ANALYSIS OF INTERNAL CONTROL SYSTEM
WEAKNESSES"
b
ONUZURUIKE, NWAEZE MARTINS
DEPARTMENT OF BANKING & FINANCE
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA, ENUGU CAMPUS
NOVEMBER, 1999
ONUZURUIKE, NWAEZE MARTINS PG/MBA/98/4505 1
A PROJECT REPORT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD
OF MASTER OF BUSINESS ADMINISTRATION IN BANKING & FINANCE.
DEPARTMENT OF BANKING & FINANCE FACULTY OF BUSINESS ADMINISTRATION UNIVERSITY OF NIGERIA, ENUGU CAMPUS
NOVEMBER, 1999.
GEWl'lVICRTlOfl
Onuzuruike, Nwaeze Martins, A Postgraduate Student In The - - Department Of Banking & Finance. With Registration Number
Pg/Mba/98/45051, Has Satisfactorily Completed The Requirements For
Course And Research Work For The Degree Of Master Of Business
Administration In Banking & Finance.
THIS PROEJCT REPORT IS AN EMBODIMENT OF ORIGINAL WORK, AND HAS NOT BEEN SUBMI'T'I'ED IN PART OF IN FULL FOR ANY OTHER DIPLOMA OR DEGREI: 0 F THIS UNIVERSITY.
b
DR. J.,E. EZEANYAGU (SUPER VISOR)
MR. 0 .ANEKE (HEAD, DEPAK TMENT OF BANKING & FNANCE)
Date:.
Dedicated
- To the memory of my father, Papa Ogbonnaya Onuzuruike, who set the
standard I strive to reach;
- To my mother Uloaku Onuzurike, who continued from where my late
father stopped;
- To all the struggling students the world over, having tested its ups and 8
downs;
- Above all, to the Lord ALMIGHTY for giving me the life and strength to
cross all the repugnant tests. May all the Honour, Praises, Glory and
Adoration be ascribed to His. Holy Name, Amen!
"I saw with the infinite pleasure, the great object of my mission,
the great nile glittering like the morning sun. I ran to the edge
and having drunk of it, all my efforts with success" ---------- Mungo Park on discovery of River Niger.
In my own case the above could not have been possible if not for the vision,
passion and inspiration from the above, God Almighty. I thank Him for b
everything.
Nevertheless, I extend my deep appreciation to the following people who
contributed in one way or the other to make the long dream a reality.
My foremost regard goes to my project supervisor, DR.J.E. Ezeanyagu, for his
constructive criticisms, fatherly guidance and advice. For those who know
DR EZEANYAGU, no words are necessary, for those who do not know him, no
words will suffice.
I equally appreciate the help rendered by my good fi-iends, Jideofor G. Modebe,
Jonathan I. Ezeh, Mike 0. Ewoh and Emeka Irolewe . May the good Lord
continue to bless them. I also appreciate the understanding of my sister, Mrs Nma
Obiji throughout the period.
Worthy of mentioning too are my lecturers in the faculty in the name of Mrs
Modebe, J., Prof. Okafor. F.O.,Prof. Uche Modurn, Dr. A.M.O. Anyafo, Dr. B.E.
Chikeleze, Dr. Uche, Ugochukwu Chibuike, Dr. Alex N. Ifezue, Mr Onodugo,
Vincent, Mr Kodjo,S.N, Mr Aneke, Onwura E.,Chief John A. Ezeh, Mr. Okoro-
Okoro, E. U., and DR.U.J.Ewurum.
I also owe a lot to Miss Calister Umenwa Edioke for her own contribution.
Finally, I want to admire and appreciate the co-operation of my course-hates
throughout the period. It has really been a wonderful experience.
I thank you all.
ONUZURUIKE. NWAEZE MARTINS PG/MBA/98/45051 BANKING & FINANCE
NOVEMBER, 1999.
The very issue that baffles everyone in the society today is that with the kind of
internal control system installed in the Nigerian commercial banks, hardly can a
day pass by in this country without one hearing one kind of bank fraud or the
other. One then begin to wonder the workability of the so called "INTERNAL
CONTROL SYSTEM in our commercial banks.
The essence of this paper, therefore, is to identifl the weaknesses of the inkrnal
control system and make suggestions towards arresting them in terms
of curbing commercial bank fraud.
In discussing this issue, the researcher divided the work into five chapters.
Chapter one dealt with the introduction which discussed such items as background
of the study, statement of the problems, objectives of the study, statement of
hypothesis, significance of the study, scope and limitations of the study,
assumptions of the study and definition of some key terms.
Chapter two handled the review of related literature. Issues like Nature and types
of commercial bank fraud, causes of commercial bank fraud, statutory law relating
to fraud and financial malpractices in banks, measures for controlling fraud in
commercial banks, concept and definition of internal control system, types of
internal control system, internal control system in banks and other issues were
discussed here.
Chapter three treated research design and methodology which involved the design
of questionnaires, method of data collection, research instrument used and the
population.
Chapter four presented and analysed data using
and z test for hypothesis testing.
percentages, degrees
Chapter five treated the research findings, conclusions and recommendations
based on the data presented and analysed. B
Finally, suggestions for further research
'GABLE OF COn'GETGS Title page
Certification
Dedication
Acknowledgements
Abstract
Table of Contents
CHAPTER ONE: INTRODUCTION
Background of the Study
Statement of the problems
Objectives of the study
Statement of Hypothesis
Significance of the study
Scope and Limitations of the study
Assumptions of the study
Definitions of terms used
CHAPTER TWO: REWEW OF RELATED LITERATURE
2.0. Preamble
2.1. Nature and types of Fraud in Commercial banks
2.2. Causes of Commercial Bank Fraud
2.3. Statutory Law Relating to Fraud and Financial
Malpractices in Banks
2.4. Effects of Fraud
i . . 11
. . . 111
iv
vi
viii
1
6 B
8
9
10
11
14
14
16
17
19
21
29
2.5. Measures for Controlling Fraud in Commercial Banks 3 1
2.6. Survival of Commercial Banks in Nigeria 3 6
2.7. Concept and Definition of Internal Control 40
2.8. Types of Internal Control 4 5
2.9. Internal Control System in commercial Banks 4 8
2.10. Computer and Internal control System 50
2.1 1 . Expected Qualities of a Bank Staff for Effective
Internal Control System 5 1
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3 .O. Sources of Data 5 5
3.1. Interview Questions 5 7
3.2. Samples used
3.3. Methods of Investigation
3.4. Determination of Sample Size and Response Rate 6 1
3.5. The Characteristics of the Banks in the Sample 63
CHAPTER FOUR; DATA PRESENTATION AND ANAL YSIS
4.0. The Questionnaire Response 64
4.1. Whether male or female 66
4.2. Whether the Bank has experienced Fraud in the past five years 67
4.3. Lapses in the Internal control systems Responses for
Incidence of Fraud 68
4.4. Adoption of the Internal control system 69
4.5. The various Internal Control measures Adopted by your Bank 72
4.6. Bank Branch Adopt the use of Computer as an internal
Control Device 7 8
4.7. Computerised Internal control system will Eradicate Banking
MalpracticesEraud 80
4.8. Major Causes of 'Fraud in Banks 8 1
4.9. Test of Hypothesis 9 1
4.9.0. Effective Internal Control system will not ensure Good
Performance of Nigerian Commercial Banks 9 1
4.9.1. Appropriate Installation of Internal Control system will
not Help to Curb 'Fraud in the Nigerian Commercial Banks 94
4.9.2. The Qualifications of the Nigerian Commercial Banks Staff
will not Determine the workability of a Good installed
Internal Control System. 9 7
4.10. Analysis of Secondary Data 100
CHAPTER FIVE: RESEARCH FINDINGS, CONCLUSIONS AND 6
RECOMMENDA TIONS
5.0. 'Findings 103
5.1. Conclusions 105
5.2. Recommendations 107
Selected Bibliography 11 1
Appendix A 115
Appendix B 120
Appendix C 123
Appendix D 124
Appendix E 125
Appendix 'F 126
Appendix G 127
CHAPTER ONE
"That we must re-commence our journey to greatness is
clear enough what is not quite clear is the state of the vehicle
with which to embark on that journey". ... General Sani
Abacha in his 1994 budget speech.
INTROUDCTION
1.0 BACKGROUND OF THE STUDY
The issue of frauds in the Banking Industry in Nigeria and indeed,
all over the world is receiving more attention now than ever before because
of its effects in eroding customer's confidence and partly because of the
frequency and the amount involved which have serious impact on the
profitability of banks in question. Indeed, fraud which has been a feature of
Nigeria society today is endemic to the business system in general. But
banks and commercial banks in particular being part of the financial system
which is the fulcrum on which any economy revolves need to be given
adequate attention terms of 'Towards Curbing Fraud'.
The trend of commercial bank fraud started on a small scale
immediately after the Nigeria Civil war and has since increased in
geometric progression. This was as a result of the oil boom experienced in
the 1970s which led to the massive expansion of economic activities and
consequent increase in the number of banks coupled with the indigenisation
2
policy of the Federal Government at the time. This scenario was accentuated by
the coming of the structural Adjustment Programme (SAP) in 1986 and the
consequent deregulation of the Nigeria economy. As was canvassed, the SAP was
expected to provide conducive environment that will release the creative energies
of Nigerians to enable us attain a new lease of life as a result of increased socio-
economic well-being. But not many expected that most of these newly released
creative energies would be diverted principally to evil and unmitigated
immorality, such as we have never experienced in this country before with the
result that it could now be safely said that to had divested the economy of its
traditional controls and inherent ethical norms was indeed to have unwillingly
deregulated corruption and other economic vices. Nowhere in the national order
were these socio-economic symptoms more pronounced and all-pervading t h h in
the banking sector, a sector that was initially considered as the palladium of the
"new lease of life" expectedly to be ushered in by the new economic regime
postulated in the doctrine of the structural Adjustment Programme and its
mechanisms of the market place. In its wake, there arose a completely misguided
perception of initiative, wealth, productivity, corporate economic performance,
- standards and value system. Consequently, situation as it obtains today in the
banking system is as a result of compounding effect of the proceeding attitudes;
government policies, actions and inactions.
This hydra-headed phenomenon -fraud, is of infinite variety and the
definitions are as well many. According to the Oxford English Dictionary, Fraud
is criminal deception; the using of false representation to obtain an unjust
advantage or to injure the rights and interests of another. From legal perspective,
3 Black's Law Dictionary defines Fraud as" intentional perversion of truth for the
purpose of inducing another in reliance upon it to part with some valuable thing
belonging to him or to surrender a legal right. A false representation of a matter of
fact, whether by words or by conduct, by false or misleading allegation, or by
concealment of that which should have been disclosed, which deceives and is
intended to deceive another so that he shall act upon i t to his legal injury. It is
also averred that "the fertility of mans invention in devising new schemes of fiaud
is so great that the courts have always declined to define it, reassuring to
themselves the liberty to deal with it under whatever form it presents itself.
Hence, 'Fraud in the contemplation of a civil court of Justice may be said to
include all acts, omissions and concealment which involve a breach of legal or
equitable duty, trust or confidence, justly reposed, and are injurious to another or
by which an undue or unconscientious advantage is taken of another".
Furthermore, "All surprise, trick, cunning, dissembling and other unfair means that
is used to cheat any one is considered as fraud". This means that "Fraud in all
cases implies a willful act on the part of any one whereby another is sought to be
deprived by illegal or inequitable means of what he is entitled to:
In the words of R.B. Awosanya, fiaud is any deliberate action in whatever
form (written, spoken, physical) designed to deprive a legitimate owner of hisher
assets, properties or rights'.
Finally, according to Wole Adewumi, "fraud is a consensus premeditated
action of a person or group of persons with the intention of altering the monetary
gain".
In spite of the numerous definitions of fraud, the researcher is inclined to
believe that the foregoing definitions are appropriate, adequate, and reinforcing for
the purpose of this study as they contain the rudiments of fraud, namely that:
- there must be deceit or deception directed to the detriment of another;
- a false representation has been made knowingly without belief in its truth or
recklessly careless whether it be true or false;
- to obtain damages for deceit, it must be proved that the defendant intended
that the plaintiff should act on the fraudulent misrepresentation that he did
act on it, and suffered damage in consequence. Thus, every act of unfair
dealing whether against the bank by its customers or by third parties,
against the customer by the bank (including its officers), or indeed against
the bank by its officers, etc really supposed to be included. Fraudbtake
place in various forms, degree, technique and sophistication. The action
usually takes the form of forgery - falsification of documents and
authorizing signatures and out-right theft.
It has to be noted that a fraudulent act without damage or damage
without a fraudulent act is not actionable . But fraud is actionable if it leads to
any form of damage, which entails one gaining at the expense of another.
Given the above scenario, it is the desire of the Government, regulatory
authorities, bank's stakeholders and management, and other operators in the
economy to see that fraud is checked if not totally curbed from the banking
system.
But one area that is envisaged to be of important to all the parties
involved in this all-out war against fraud and other forms of bank malpractices,
is the area of determining the effectiveness of the fraud control measures that
have been or being implemented by the banks; as the fraud issue has appeared
intractable. Given that there are fraud control measures aimed at fraud
prevention and others that are aimed at fraud detection, the application of the
right number of measures and their correct proportion will no doubt portray the
success rate of checking fraudulent practice, hence, ensuring the survival of the
commercial banks, which is evidenced by the level of profitability.
Given the.foregoing, it can be seen that, a well designed, meticulously
installed and resolutely operated management control system (or internal
control system) will inevitably check, if not eliminate the occurrence of fraud
from our commercial banking system. Internal control system is the whole
system of controls, financial and otherwise, established by the managenknt in
order to carry on the business of the 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 the records. The
individual components of an internal control system are known as 'controls' or
'internal controls'
Consequently, the continued existence of commercial banks rest
delicately on the maintenance of public confidence. This calls for the
establishment of an effective system of internal control, which among other
things, will help to ensure that the organizations accounting activities are in
accordance with the laid down procedures, standards and statutory
requirements.
6 To establish a sound and effective system of internal control,
various organization adopt various devices and methods based on their
nature of business and the scope of their operations. Effective internal
control system which is always evolving requires a continuous check
and re-checking of day to day activities of the business in order to
ensure the correctness and fairness of the accounting records; and to
detect and expose any deviation when it has occurred. People loose
confidence in m t commercial banks not only because of their
fraudulent use of hnds but also because of other fiaudulent practices
and or syndication of some dishonest staff facilitated by defects in the
banks internal control system. There is, therefore, a great need to
eliminate or minimize the defects or loopholes and make the ihternal
control system in our banks more effective and operational to guard
against the occurrence and re-occurrence of fraud in an commercial
banks.
In conclusion, therefore, fraud as a common phenomenon in our
commercial banking system has perpetrated an agonizing influence
resulting in bad faith, loss of confidence and trust in our commercial
banks by depositors . It should be noted that banks as custodians of
public/people's funds should be built on trust and not on fraud.
1.1. STATEMENT OF THE PROBLEMS
The deregulation of the Nigerian economy as occasioned by the
structural Adjustment Programme (SAP) in 1986 led to the licensing of
7
more banks and other financial institution. The ensuing competition gave
rise to the declaration of paper profits and other sharp practices by their
establishments which made the central Bank of Nigeria to issue the
Prudential Guidelines in 1990 and 199 1. It is now a common knowledge
that it was the strict application of the guidelines that brought to the lime
light the wide spread fraudulent activities going on in the financial system
and the distresslfailure syndrome now prevalent in the sector. However,
extent are many statutory laws dealing with frauds and financial
malpractices in banks, beginning with the criminallpenal code Act;
companies and Allied Matters Decree 1, 1990; Banks and other Financial
Institution Decree 25,1991; Central Bank of Nigeria Decree 24, 1991;
Nigeria Deposit Insurance Corporation Decree 22, 1988' Special ~rfbunal
(miscellaneous Offence) Act, 1990; Bank employees, ETC (Declaration of
Assets) Act CAP 27 Laws of the Federation 1990; Foreign Currency
Domiciliary Accounts Act CAP 15 1 1990 Laws of the Federation; Natural
Drug Law Enforcement Agency Act CAP 253 and Failed Banks (Recovery
of Debts) and Financial Malpractices in Banks Decree 18,1994.
It is within the limits of these statutory laws and other policy
measures that banks have operated, and frauds sought to be checked, or
curbed from the banking system. But the big question that arises is, "how
effective and to what extent have these myriad of legislation, of other
prevention and detection measures gone in checking the incidence of the
frauds in commercial banks?" In this regard, various views have been
expressed by different interest group and individuals. These include lack of
8 will on the part of the Government to effectively implement the various
laws and policy measures, poor supervision by the regulatory Authorities
occasioned by ill-equipped and inadequate manpower resulting in
prolonged process of litigation; none complacent attitude on the
part of the police and other law enforcement agencies to undertake quick,
in-depth and adequate investigation due to lack of motivation, equipment
and to some degree, expertise. The above stated statutory laws and policy
measures cannot be said to have absolutely eliminated frauds in the
commercial banks. This study intends to highlight the important role that
the right number and the correct combination of good fraud prevention and
detection measures vide a well designed, meticulously installed and
resolutely operated internal control system can play in cost effectively
controlling the incidence of fiaud in commercial banks to ensure their
continuous survival. In other words, the study intends to determine the
efficiency and effectiveness of internal control system as a tool for
controlling the incidence of fraud in commercial Banks.
1.2 OBJECTIVES OF THE STUDY
The immediate objectives of this study sets out to achieve include
the following:
(i) To review existing literature in fraud in banks, and internal
control system;
9 To examine the internal control system with respect to the selected
commercial banks in Nigeria, and evaluate the appropriateness and
the effectiveness of the system as a tool for fraud control;
To ascertain the degree of compliance of the banks staff with the
internal control measures;
To identifj possible defects or loopholes (if any) in the system;
To examine the relevance and appropriateness of the presently
adopted control measures in preventing fraud; LI
lo offer useful recommendation based on the findings on how best
to curb the incidence of fraud in our commercial banks;
To identifj the means through which the recommendations can
effectively be implemented. b
1.3 STATEMENT OF HYPOTHESIS
The research work is designed to test the following null hypothesis (Ho):
(9.
(ii)
(iii)
Ho: Effective Internal Control System Will Not Ensure Good
Performance of Nigeria Commercial Banks.
Ho: Appropriate Installation of Internal Control System will not
Help to Curb Fraud in the Nigerian commercial Banks.
Ho: The qualifications of the Nigerian Commercial Banks staff
will Not Determine The Workability of A Good Installed Internal
Control System.
10
1.4. SIGNIFICANCE OF THE STUDY
It is a general consensus that the financial system of any economy is
the fhlcrum around which the economy revolves. Within this preview,
banks strategically occupy an indispensable position in the economy. This
is as a result of their primary fhnction of servicing as channel or
intermediary between the surplus economic unit and deficit economic unit,
hence, the efficient functioning of the economy.
In carrying out this study, the researcher intends to highlight the
importance and benefit of cost effectively applying appropriate and correct
fraud and prevention and detection measures. This will serve as a
benchmark particularly to the distressed banks whose unfortunate position
are particularly attributable to fraud and other malpractices. The rekult of
the knowledge of the cost - benefit analysis will definitely be of importance
to the policy makers in that it will help them in assessing the effectiveness
and efficiency of the existing statutory laws and policies, and highlight the
areas that need further efforts.
The study also aim at treating how a well designed, carefully
installed and a resolutely implemented internal control system will aid in
checking the incidence of fraud. ~ h k j it is strongly believed will be
importance not only to the regulatory and supervisory authorities and the
commercial banks management but the banking industry as a whole in their
various task of putting in place sound banking system for the country.
The study will at its end to be of importance to the general public
whose confidence and trust have been vehemently shaken as a result of the
1 1
alarming magnitude of fraudulent activities, failure and distress syndrome
in our banking system. It will make them to be aware of unrelenting
concerted efforts that has been made and being made by the Government
and the regulatory authorities to bring to an end this cankerworm called
fraud.
Furthermore, the study is designed for all those who may be
interested in carrying out further study on internal control system as it
relates to fraud prevention in commercial in Nigeria.
Finally, it enable the operators themselves to know how they have
failed in their tasks and operations which they have set for themselves in
meeting the financial needs of Nigerians. b
1.5. SCOPE AND LIMITATION OF THE STUDY
(A) Scope of The Study: This topic has been chosen to highlight the
function of internal control systems as cost effective fraud control
measure in the survival of banks. However, the study covers the
commercial banking segment of the banking industry in Nigeria with
special reference to First Bank of Nigeria PLC, Union Bank of
Nigeria PLC, when Bank PLC, Afribank Nigeria PLC, united Bank
for Africa PLC, Orient Bank of Nigeria PLC, Eko International Bank
PLC, Ecobank Nigeria PLC, Guaranty Trust Bank PLC and FSB
International Bank PLC.
As at the end of December, 1998, there were 64 commercial
banks in Nigeria with 2229 branches nationwide that are insured with
12 the Nigerian Deposit Insurance Corporation . The period covered under
the study is between 1992 and 1998. The sample was selected from those
commercial banks considered healthy by the researcher, the yardstick used
being profitability. In order to attain the objective of the research, relevant
information was collected on the types of internal control measures, the
appropriateness and effectiveness of the internal control measures, and the
use of automation technology as an internal control measure.
Based in the empirical finding, appropriate recommendation will be
made about The reasonable conclusion that can be validly made on how
best to improve the performance of the Nigerian commercial banking
system.
b
(b) Limitation of The Study:- In as much as the study was that of a research
work, it met with a lot of difficulties as efforts that were geared toward
obtaining relevant statistical data on fraudulent activities in the chosen
banks proved abortive. None of these banks derived of ever being victim of
frauds, but they declined to let out such information as they considered
them very vital. Some of the reasons they adduced for their refusal include:
( 0
(ii)
(iii)
Such data on fraud are official secret of the bank and should not be
made public.
And attempt to disclose this official data will result in the loss of
public confidence in the banking system.
As a matter of strategy, no bank likes its competitor to know how
much it loses annually to fraudulent activities because it is a
13
parameter with which the internal control system efficiency is
measured; they would not also lay bare their intemal control system
for fear of fraudsters cashing in on them;
(iv) Unwillingness of some bank officials to honour request for
interviews.
Given the above structure limitation, the researcher is forced to concentrate
on partially theoretical analysis of fraud and on how it could be cost effectively
controlled using intemal control system to ensure the survival of the Nigerian
commercial banking system.
Moreover, one would also realize that this is a dynamic world and the
world of finance is a fast changing one and nowhere is this more apparent today
than in Nigeria, a country in a hurry to transmute itself into a viable,world
economic power. Hence, attention is drawn to many official reports, newspapers,
magazines, periodicals and books on the Nigeria's financial system which
constantly update the literature.
Secondly, the other difficulties encountered in the course of carrying out
this research work include:
(i) The problem of high cost of transportation, and;
(ii) The high cost of research materials, all as a result of high inflationary trend
in the country today.
In spite of the above listed difficulties, some data were collected and
they are to be analyzed later.
14
1.6. ASSUMPTIONS OF THE STUDY
It is assumed when making some analysis and findings concerning
this study that all the information made available by the people interviewed
and respondents are correct to the best of their knowledge and that the
responses are fiee and fair representation of their origin on the very issue
raised.
1.7. DEFINITION OF TERMS USED
Accountinn System:- Accounting system is the method and
records established to identifl, assemble, analyze, classifl, record
and report entity's transaction and maintaining accountability for
assets and liabilities. b
Control:- Control is the forces that guides activities towards some
predetermined goal. It is concerned with the guidance of the internal
operations of the business to produce the most satisfactory projects
at the lowest cost.
Errors And Irregularities:- Errors are unintentional actions,
example, errors of judgment, etc., while irregularities are intentional
errors; and irregularities that result in an immediate loss of asset is
referred to as defalcation . Malpractices:- In banks, they are omissions of any hnctionary of
banks which is contrary to the promotion of safe and sound banking
practice, or which is in flagrant disregard to the laws, rules and
regulation or guidelines made for the promotion of safe and sound
1 &-
banking practices, and which result in financial loss to the bank.
fraud and fraudulent conduct, it should be understood are also
malpracticies.
Operatio,nal Research:- This has to do with the attach of modem
science on complex problems arising in the direction and
management of large system of men, machine, materials and money
in industry, business, government and defence. The distinctive
approach is to develop a scientific model of the system of
incorporating measurement of factors such as change and risk, with
which to predict and compare the outcome of the alternative
decisions, strategies or controls. The purpose is to help management
determine its policy and action scientifically. B
a. Standard Cost:- Standard costs are predetermined costs, target
cost or carefully preplanned costs which management endeavours
to achieve with a view to attaining maximum efficiency in the
production process. They are cost plans relating to single cost
units-pre-computed costs which purport to be estimate costs as
they should be,
b. Total Qualitv Management:- Total quality management is a
process of individual and organizational development, the
purpose of which is to increase the level of satisfaction of those
concerned with the organization: Customers, suppliers,
stockholders and employees.
CHAPTER TWO
"Unless you try to do something beyond what you have
already mastered, you will never grow" . . .. Ronald E. Osborn
REVIEW OF RELATED LITERATURE
2.0. PREAMBLE
A study of this nature will be incomplete without going through
other articles and issues written on the topic by academicians, authorities
and professionals in the field. b
In this chapter, an attempt is made to review the nature, types and
causes of commercial bank fraud and its effects; the legal framework and
internal control measures for controlling it so as to ensure the continues
survival of the commercial banks in Nigeria.
For purposes of presentation, the chapter is subdivided into eleven
sections. In section 2.1, the Nature and Types of Fraud in Commercial
banks are reviewed. Section 2.2 focuses on causes of Commercial Bank
Fraud. Section 2.3 deals with the statutory Laws Relating to Fraud and
Financial Malpractices in Banks Section 2.4 high lights the Effects of
Fraud-while Section 2.5.6 reviews the various measures for controlling
Fraud in Commercial Banks while section 2.6 treats the survival of
commercial Banks. The concept of Internal Control is treated in section
17 2.7, section 2.8 covers Types of Internal Control, Section 2.9 treated
Internal control system in Commercial Banks, 2.10 handles computer and
Internal control and finally, section 2.1 1 will handle the expected qualities
of a bank staff for effective internal control system.
2.1 NATURE AND TYPES OF FRAUD IN COMMCERIAL BANKS.
The classification of fraud in Banks is primarily a difficult task given
that fraud is of infinite variety, that nature, character and method of
perpetration are diverse. In general, it may be classified in two ways. The
first is on the basis of perpetrators as postulated by Sydney in NDIC
quarterly magazine while the second is on the basis of method used as
stated in Adekanye, "Elements of Banking". @
Using the perpetrators as the basis for classification, bank frauds are
mainly grouped into:
(i) Internal fraud i.e committed by non-staff
(ii) External fraud i.e committed by non-staff
(iii) Mixed fraud i.e committed by outsiders in collaboration with
bank staff.
Furthermore, classification of fraud on the basis of the method of
perpetration although not exhaustive include:-
- Cashiering fraud,
- Falsification of Accountants and Accounting Records currentlcheque
account, savings Deposit, account & suspense AIC.
- Forged cheque with forged signatures,
- Printing of bank documents illegally,
- Clearing fraud,
- Computer Fraud
- Improper Input
- System Penetration
- Programmed manipulation
- Telex fraud (interception and switching of telex messages for transfer of
funds),
- Fax fraud,
- Foreign exchange fraud (letters of credit and others)
- Cross -firing of cheques and kite flying,
- Suppression of entries (cheques and vouchers),
- Opening and operating of fraudulent loan account,
- Over-invoicing for services to the bank,
- Corporate fraud,
- MICR fraud
- Robberies
- Miscellaneous fraud.
In fact, Ovuakporie enumerated thirty-three (33) types of bank fraud
which he asserted is not exhaustive. This view is buttressed by Adewunmi when
he stated the control of . .an identified specific (ie fraud) seems to give birth to
another that is invariably more sophisticated and complex. Thus, each case he
19
asserted, can be said to be a vibrant of another and undoubtedly an
instructive study in human negative use of ingenuity and endowment.
The Nigerian Deposit Insurance Corporation in its various annual
Report and statement of Accounts had reported the most frequently
perpetrated types of fraud based on the returns rendered by insured banks.
Appendix B enumerates the commonest types of fraud perpetrated. A
cursory observation will reveal the increasing level of sophistication for the
period under review ie 1992 - 1998.
Moreso, in the words, of Omotoso, a recent research carried out in
financial institution confirmed the fact that 95% of fraud and forgery cases
are perpetrated with the collusion from inside i.e they are of the mixed type. b
Appendix C cannot agree more as it shows increasing number of bank staff
involvement in fraudulent, while it is agreed that the rate of fraud is
phenomenal in terms of types, number, and the amount involved, and that
the tasks for its control may be daunting, one is inclined to believe that a
comprehensive list of all types of methods of committing fraud and their
causes will help to anticipate and prevent it.
2.2 CAUSES OF COMMERCIAL BANK FRAUD
Fraud in the banking industry are not new. They are as old as the
industry itself. However, in recent times, the rate and frequency at which
they occur have been a cause of great concern to not only the Government,
Regulatory Authorities, stakeholders but bank management and other
operators in the economy . As frauds are usually contrived from either
20 within the banking system or from outside the system or both, the causes
of fraud are usually grouped into two major classes. These are
Institutional/lapses/Inadequacies and Environmental/Societal factors.
Authorities like Adewunmi and Omotoso used this classification. Other
authorities like Musa, Oluyide, Edozien while not specifically using this
classification, but causes of fraud enumerated, by them can be fitted into
the two afore-mentioned classification.
The Institutional factors are those traceable to the internal
environmental of the banks, that is , they are to a great extent factors within
the control of management of the bank while environmental societal factors
are those which result from the influence of the environmental/society on
t he banking industry. b
The summary of the Institutional causes of fraud as identified by the
different authors are:-
- PoorIBad management,
- Poor hadequate Internal control,
- Banking experience of staff (a double - edged sword),
- Numbers of staff,
- Volume of work,
- Nature of services,
- Staff negligence,
- Recruitment system,
- Poor security arrangement for documents,
- Use of sophisticated accounting machines,
- Frustration (i.e Individual perception based on expectation),
- Inadequate infrastructure,
- Delay in procuring documents,
- Over - centralization of authority,
- Inadequate1 Lack of staff training,
- Lapse in the management control system of corporate customers,
- Negligence of customers.
- The identified environmental/societal factors include:
- Societal values,
- Inability of law enforcement agents to detect fraud and prosecute fraudsters
with dispatch,
- Lack of effective deterrentlpunishment (a moot point) b
- Personality profile of Dramatized Personae,
- Fear of Negative Publicity.
2.3. STATUTORY LAW RELATING TO FRAUD AND FINANCIAL
MALPRACTICES IN BANKS.
In this section, attempt is made to closely examine and highlight the
various statutory laws instituted by the government to stem the tide, fraud
and financial malpractices- in the country's corporate life generally and in
this instance, the banking industry. The various laws are discussed
hereunder:-
22
(i) The criminal code act, 1990 laws of the federation: The criminal
code, or the penal code as the case may be, predates all the other laws on
frauds. However, the criminal code did not define fraud but makes
elaborate provisions against fiauds committed against companies. Such
provisions are also applicable to banks since banks in the first place are
companies before they are licenced to carry on banking business
Section 435 makes it an offence punishable by seven years
imprisonment .for any company (bank) director or officer, fraudulently,
appropriates, any company's (banks) property or ill intent, to defraud, omits
to make full and true entry into the books and accounts of the books of the
bank, or destroys, alters, mutilates or falsifies any book of account or
makes any false entry therein. b
Section 436 also imposed severe punishment of seven years
imprisonment on any clerk or servant of the bank who commits
offences analogous to section 43 5.
Finally, section 472 of the Criminal code Act equally prescribes seven (7)
years imprisonment as punishment for any one with intent to defraud, to
obliterate or alter in any way the crossings on a cheque, or to alter cheques
which crossings has been obliterated.
(ii) The companies and Allied Matters decree (CAMD) 1990:- Section 282
of CAMD though did not create criminal liability on bank directors per-se,
it however, impose strict standard of behaviour and duty of care on bank
directors with a view to preventing fraudulent disposition, by requiring,
them to carry on their duties honestly, in good faith and in the best interest
23 of the company. It, however, imposed civil liability in negligence and
breach of their duty.
The provisions of Section 503,504,505, and 508 imposed criminal
liabilities on directors, officers and agents of banks being wound-up. For
example, under section 503, any officer or contributory of companies/banks
being wound-up who falsifies any book of the bank is liable to
imprisonment for two (2) years or a fine of N2,5OOl.OO.
similarly, section 504 makes an officer of a bank which is ordered to
be wound-up, liable to imprisonment for 2 years without option of fine,
where such officer fraudulently induce a person to give credit to the bank,
fraudulently made or caused to be made any gift or transfer of a cheque, or
connived to the levying of execution on the property of a companyhank,
or has concerted or removed any property of the bank, with intent to
defraud the creditors. For failure to keep proper books of accounts during
the period of 2 years immediately preceding winding-up, section 505
imposed criminal liability punishable by five of N2,5OO, on every officer of
a bank who is found to have been responsible for the default.
(iii) Central bank of Nigeria decree no. 24 1991:- The Central Bank of
Nigeria under section 28 of CBN Decree No.24 may require bank directors
or officers or any other persons having access to information to supply such
information to it, or issue guidelines to any person or institution providing
financial services. Failure to, supply the information required or
knowingly supply information which is false in any respect, is an offence
punishable with imprisonment for a maximum of three (3) years or a fine
24 not less than N50,000.00 or more than N100,000.00 for every false
information or to both such fine and imprisonment.
The Banks and other financial institutions decree no. 25, 1991 (Bofid) :
Under the general provision in BORb,the Central Bank of Nigeria as the
apex regulatory activity is empowered to licence and regulate the activities
of banks and other financial institutions operating in Nigeria. The Decree
consequently made elaborate provisions for offences and punishments
against acts of directors and officers of banks which are considered
inimical to the proper operations of a bank. Some of the critical provisions
creating sanctions against malpractices in banks are hereunder discussed:
Insider abuse - section 18: The section not only prohibits the incidence of
insider abuse, but also imposed sanctions against frauds and malprattices
associated with the grant of loans and credit facilities by banks. By this,
provision, managers or officers of the banks are required to be above board
and not to have any interest or derive any benefit in any credit facility
granted, but where any interest exists, such officer shall disclose the nature
of his interest.
Furthermore, bank officers are not allowed under any guise to grant
facilities contrary to their internal rules and regulations and where such
regulation require them to obtain adequate security, such security shall be
first had and obtained. Any contravention of this provision attracts
imprisonment for 3 years or N100,000, and any gain or benefit that may
accrue to the officer from the transgression, shall be forfeited to the Federal
Government.
2 5
Restriction on certain banking activities - section 20:- The section
restricts certain activities of the banks except prior approval of the CBN is
obtained. Such activities include the total amount of any loan or financial
guarantee that may be granted to any person. For merchant banks, it is 50%
of the share holders finds unimpaired by losses while it is 20% for
commercial banks.
In addition, under section 20, the bank is prohibited from permitting
to be outstanding unsecured credit in excess of N50,000 to its directors and
that related companies. The section did not provide criminal punishment
for its contravention, it however, made bank directors liable jointly and
severally to indemnifj the bank against any loss as a result of any breach of
provisions. Notwithstanding the absence of criminal sanctions bnder
section 20, any director or manager who is found to have been instrumental
to the breach under section 20 is criminally liable to be punished under
section 46 of the Decree for 5 years imprisonment or N5,000 fine or to both
fine and imprisonment.
Keeping proper books of accounts - section 24:- In order to facilitate the
early detection of fraud or any financial malpractice, section 24 made it
mandatory for all banks to keep proper books of account in a designated
place in respect of all transactions relating to the operation of the bank
It is the responsibility of the bank directors and management under
section 24(5) to ensure that the bank complies strictly with the provision of
the section and to ensure that all statements, whether oral or written,
submitted in relation to the bank an accurate and devoid of any
26 falsification. Any director, manager or officer of the banks, who
negligently or otherwise fails to ensure compliance with the provision of
the section in liable to imprisonment for 5 years or a N10,OOO fine or both,
and where such book officer willfully causes the bank to make the default,
such officers is liable to 10 years imprisonment or N50,000 fine or both
fine and imprisonment
(v). Nigeria deposit insurance corporation (NDIC) decree no. 22 1988:
Section 17(2) of the Decree enjoins all the banks to co-operate with the
NDIC appointed examiners by producing as and when required all books,
records or information necessary for the performance of the examiners
duty. It is an offence for any bank to willfdly refuse to produce any Book,
record or information, or to willfully or negligently or with intent to
commit fraud, produce false information. It is instructive to know that this
offence is a corporate offence, as distinct from offences against the
functionaries of the bank. However, under section 19 of the Decree, any
director or officer of the bank who breaches the provision of section 7(1),
or any other provision of the Decree, or has not taken adequate precaution
to verifj the authenticity or accuracy of any information submitted under
the Decree, shall be guilty of an offence and liable to imprisonment for 2
years or N50,000 fine or to both fine and imprisonment.
(vi) Special tribunal ((miscellaneous offence) Act cap. 410 1990
(vii)
This law creates offences relating to forgery and uttering of negotiable
instruments, and imposes severe punishment against any breach. For
instance, sec. 3(2) (a) and (c) of the Act provides inter -alia that:
Any person who fraudulently or knowingly alters, forges, procures,
alters, accepts or presents to any person any cheque, promissory note or
other negotiable instrument knowing it to be false, forged, stolen or
unlawhlly procured or, makes or utters any forged document, cheque,
promissory note or other negotiable instrument knowing it to be false or
with intent that it is acted upon as genuine or with intent that any person
may in the belief that it is genuine, be induced to do or refrain from doing
any act or thing. B
In recognition of the gravity of the offence and the attendant
consequences it has on the financial system, the section prescribes a 21
years term of imprisonment without the option of a fine for any one found
guilty of contravening that provision.
Banks employees, etc (Declaration of Assets) Act cap 27 laws of the
Federation 1990: It is an offence under this Act, for any director or any
employee of a bank to own assets in excess of his legitimate, known and
provable income and assets. The punishment for contravening this
provision is 10 years imprisonment and f o r k i b r e of the excess assets or its
equivalent in money to the Federal Government.
28 Section 7(4) further provides that in determining the assets of an
employee, any gift, bequest, donation or fraudulent, fictitious or artificial
transaction made by the employee during the relevant period shall be
treated as forming part of his assets.
Similarly, Section 8 of the Act creates various offences relating to
assets declaration. This include failure to make full disclosure, making
false declaration, failing, neglecting or refusing to make a declaration or
furnishing information as required by the provisions of the Act. The
punishment for any of these offences is 10 years imprisonment. Section
8(2) further provides that any asset found not to have been disclosed shall,
in addition to the penalty, be forfeited to the Federal Government.
(viii) Foreign currency domiciliary accounts act cap 151 1990 laws df the
Federation:- Section 6 of the Act created various offences against bank
directors and other officers of a bank. This include conversion of the
proceeds of any foreign account maintained in such bank for use otherwise,
than through the banking system. The penalty for this offence is
imprisonment for a term not exceeding 5 years.
(ix) National drug law enforcement apency act cap 253, 1990 laws of the
Federation: The Act among other things made provisions against
laundering of funds obtained through unlawful activity. Section 13 of the
Act provides for imprisonment for a term not exceeding 25 years for any
director who knowing that the property involved in a financial transaction
represents the proceeds of some form of unlawful activity, conducts such
financial transaction which in fact, involves the proceeds of a specified
29
unlawful activity with the intent to promote the activity or to conceal the
nature of the proceeds or to avoid a lawful transaction under Nigeria law.
(x) Failed Bank (Recoverv Of Debts) And Financial Malpractices In
Banks. DECREE NO. 18 1994: This Decree was made to apply
exclusively to financial institutions. The main aim of the Decree is
basically to assist in the recovery of debts owed failed banks, and to wage a
decisive war on the monumental incidences of financial malpractices in
banks. Even.through the Decree did not define what is malpractice in
banks, the scope of what constitute financial malpractices under section 19
is very wide and sufficiently elastic to include all act or omission on the
part of the operators of the business of banks, that does not promote safe b
and sound banking practice. Section 20 enumerates various penalties for
the offences. In addition to making elaborate provisions for the easy and
quick recovery of debts owed to failed financial institutions, the Decree
imposed severe penalties on persons found guilty of financial malpractices
in banks, whether or not such banks have failed.
2.4 EFFECTS OF FRAUD
It is an open secret that incidence of fraud has some devastating
effects on organizations, banks, included. Incessant occurrence of frauds,
lead to loss of assets, portrayal of daunted images, the winding up of
organizations and crippling of individuals negatively affected.. These
devastating effects of frauds are more in banking than in any other industry.
This is because there is no area of the banking system that is immune to
30 fraud. Besides, fraud is the biggest single cause of bank failure in
developed countries.
According to Harry West, "No one is entirely immune t o fraud; it
crops up in small and large companies; it involves small and large amounts:
it is perpetrated by management, both senior employees, and to be a victim
of fraud is often a devastating experience? The fraudster has the potential to
strike at the very roots of an individual's or company's solvency, and it is
no exaggeration to say that fraud could undermine the whole basis of
international arrangements, if allowed to go unchecked. If fraud is to be
contained, the first objective must be to develop a much greater awareness
of the damage which fraud can and does cause to business of all kinds.
With specific regards to banks, the effect of fraud are fqr reading,
enormous and the consequences include; huge financial losses to both the
banks and their customers, the depletion of bank capital base and the
shareholder's fund, distress, sources of extreme embarrassment to the
bank's management and loss of confidence in our banks. According to
Paul Uduk, the effects)implications of banks fraud include the following:
- It can result to adverse publicity to the banks in question.
- It usually lead to erosion of public confidence in the banking industry
- Fraud can result to jerking up of cost of banking transactions
- Fraud leads to financial losses to the banks in question.
- Fraud can put affected banks on the run.
- It can lead to over-regulation of the banking industry.
- Fraud can lead to the collapse of the banks in question.
- Fraud could undermine the banking industry in particular and the entire
economy in general.
Hence, given the role that banks play in the economy, the incidence
of fraud in banks will surely create crippling effects in the economy. These
pictured effects has been perhaps the main motivation for the studies on
fraud in banks with the singular aim of minimizing or ultimate curbing its
perpetration, through the evolvement of appropriate controlling measures.
2.5. MEASURES FOR CONTROLLING FRAUD IN COMMERCIAL
BANKS
The devastating effects of fraud on banks have compelled the
focusing of attention on fraud management, so as to reduce the incidence
and to enhance the early detection of already executed frauds. In line with
the adage that "prevention is better than cure", banks need to, and should
always, fimction their respective fraud management strategies, so as to
make the preventive measures receive priority attention
Secondly, to drive home this point, various authors have identified
various measures and methodology for controlling fraud in commercial
banks. Ovuakpine categorized five groups of methodologies, namely, fraud
prevention between two branches of the same bank, fraud prevention within
a branch of a bank, fraud prevention between two different banks, fraud
prevention between a bank and the Central Bank, and fraud prevention by
bank customer.
32 The Nigerian Deposit Insurance Corporation has recommended
some measures aimed at controlling frauds in banks. Some of these
measure are aimed at prevention of fraud and malpractices, while others are
aimed at detection of frauds and other malpractices.
Those measures aimed at fraud prevention include:-
- Establishment of dual control system;
- preparation and application of operational manual;
- Instituting a system of graduated limit of authority;
- Establishing a system of graduated lending limit;
- Defining of, and strict adherence to a system of proper reporting
relationship;
- Instituting a system of micro - filming for documents of value, esptcially
cheques, and checking facilities;
- Installation of close circuit television especially to monitor activities in
areas where each is handled on a massive scale;
- Establishment of inspectorate unit with commensurate powers of authority
to enhance some degree of independence and autonomy within the
corporate organizational structures
- Installation of time-locks devices especially to cash vaults and treasury
areas of the bank;
- Appropriate general personnel policies geared towards rewarding
performance and punishing poor or negligent performance;
- Establishing of system for effective referencing of documents of value upon
presentation in the banks;
33 - Segregation of duties in order to have clear -cut in well defined lines of
responsibility and accountability;
- Proper verification of signatures on all bank documents of funds
transactions;
- Control of dormant accounts to make sure these are not used as channels for
fraudulent finds transaction;
- Retention of passport-sized photographs of all account holders;
- Taking proper confirmation on payees of cheques, et cetera, before finds
are released to them;
- Close watch on the life-style of staff so as to be able to make special
enquiries when there is a dramatic change exhibition affluence or poverty;
- Adherence to a system of coding, decoding and testing of cable and klex
messages;
- Observance of laid down procedures for opening and closing of accounts;
- The use of regiscope camera to photograph person drawing large sums of
money;
- Establishment of code of conduct for all levels of staff.
- The recommended fraud detection measures include:-
- Establish a system of checking cashiers both on regular basis and on un-
programmed basis Bank inspectors could carry out surprise checks on the
books and tills of cashiers in addition to the regular office checks carried
out by their supervisor;
- Establish a system of call-overs, reconciliation and balancing of account at
branch, inter-branch and head office levels;
34
Ensure that statements of account are periodically submitted to
customers. In any case, customers should be accorded the privilege to call
for their statements of account for verification at any time without
necessarily waiting for the periodic arrangement for reduction of statement:
Bank inspectors should establish a system of stock-taking of security i t em
and cash in Vaults. Senior managers in charge of treasury operations
should in addition carry out both planned and surprise checks of security
items and cash in the vaults using the system of dual control to achieve this;
It is vitally important to operate proper books of accounts to record
transaction vouchers against which the stock taking of cash in the vaults
and cashier's tills are reconciled.
Finally, other recommended measures of controlling fraud in banks includd; - - The statutory requirement for banks to employ external auditors, approved
by the central bank of Nigeria and Nigeria Deposit Insurance Corporation
to check their books and affairs. The Central Bank of Nigeria and Nigeria
Deposit Insurance Corporation as the regulatory agents of government
should m o R regularly carry out the examination of the books and affairs
of banks;
- Board mrmbers must not abdicate their responsibilities to bank
management although it is not suggested that they should unduly interfere
with the day - to-day operations of management.
- The Board of Directors owes it a duty to ensure that their policies are
complied with by management.
3~~
Consequently, given the various efforts about the banks have made and are
still making to contend, the incidence of fraud, some authorities like Adewunmi,
Omotosor and Alkalen are of the view that banks in Nigeria have in operation the
basic management control systems capable of assisting in fraud prevention and
detection but that the unexamined principal cause of fraud is the moral weakness
of man's mind owing to his acquisitive instinct. Alkalen buttressed this point
when he stated that while there were other causes of bank failure, the current
distress phenomenain the Nigeria banking industry could be primarily linked to
unprofessional attitudes of bank directors, managers and other employees as
evident in the reported cases of frauds and forgeries, insider related abuses and
other financial malpractices.
However, Sanusi is of the view that the ineffectiveness of these, m8asures
is because of weaknesses in the existing management control system, namely, staff
policy and control, operational procedures and the attitude of management.
It is an acknowledged fact that banks, regulating authorities and
government are making enormous efforts to considerably reduce fraudulent
malpractices in the banking industry. The fact that fraud is still perpetrated at high
levels call to question whether all these controlling measures are effective and the
cost implications to banks. Recent statistics have shown that there is an increasing
number of higher level bank officers involved in perpetration of fraud, for
example, managers, supervisors (see Appendix C).
While some of the authors cited above have offered some suggestions as to
the causes of the ineffectiveness of the control measures, generally, none of the
past studies had assessed empirically "analysis of Internal control System
36 Weaknesses" and their cost to the banks. The questions that also arises as
to whether any proportionate combination of the fraud prevention and fraud
detection measures would have any salutary effect on the cost effectiveness
of the measures and the incidence of frauds generally. These and other
unanswered questions represent a gap in the literature on fraud in
commercial banks and the internal control measures. In order to try to
bridge this gap, a survey have been conducted on the internal control
system and the incidence of fraud in commercial banks. The details of the
sampling frame, data collection and analysis of data are presented in the
succeeding chapters.
2.6. SURVIVAL OF COMMERCIAL BANKS IN NIGERIA b
In this section, we intend to highlight that profit is by far the most
significant goal in the set of strategic activities that banks and all other
corporate bodies embark on, so as to ensure their survival. Net profit is
assumed because it reflects the bottom line on the total operation of the
bank. It is needless to reiterate that Commercial Banks are Corporate
organization. An organization is a formal association of individuals with
common purpose and with stipulated objectives to attain under authority
and leadership. To attain these
goals that will enable it survive or to be is continuous existence, the
organisation has to operate effectively and efficiently. Effectiveness refers
to how well an organisation achieves its goals - producers expected results.
Similarly, Hofer and Schendel defined effectiveness as the optimal
37 relationship between a firm and its environment. Thus, effectiveness relates to
the organizations goals. Efficiency, however, is the amount of output per unit of
input and relates more to the nature of internal operations. It is not specifically
related to goals. An efficient organisation is one that does whatever it does with
the minimum consumption of resources.
With respect to banks, the survival and growth of Nigerian banks are
inextricably linked to the growth of national economy. This is as a result of the
central position and crucial roles played by bank in any economy. As Umoh
observed, the survival and growth of banks are of immense interest to government,
the public and banking promoters. These interest groups generally would like to
see a safe, sound, efficient, profitably and socially, conscious banking system
While the different interest groups rank these slightly differently, the differenbe in
the prioritization of these goals do not necessarily present a conflict. In the main,
the banking promoters have an eye on profitability and safety, and expectedly,
bank owners and operators are held primarily responsible for the survival and
growth of their institutions. The owners are usually represented on the banks
Board while operators ordinarily constitute the management team, except in a few
instances where there is an Executive Chairman who doubles as a managing
DirectorIChief Executive and the chairman of the Board. The directors of a bank
are responsible for setting policies and ensuring that such policies are
implemented by the management team.
Umoh further observed that the adequacy, timeliness, relevance and
perspicacity of board policies and the effectiveness of their implementation
determine the survival and growth of the banking institutions especially in a
3 8
competitive banking milieu. He identified the management team as the single
most important variable in bank survival and growth. He opined that as a result of
this, banks should endeavours to have experienced, mature and compatible
directors, a management team with foresight, experience and commitment, a
management compensation package which is tied to operating performance; and a
management team with a clear stake in the bank by way of shareholding.
From the foregoing , it is transparent that banks require sufficient earnings
to meet operating expenses, pay divided and for re-investment so as to ensure its
continued existence. Commercial banks adopt different strategies to enable them
earn higher profits in order to survive. Some of these strategies include mergers,
acquisitions, restructuring and diversification. Diversification may entail investing
to mortgage banking, merchant banking, Discount Houses, stock brdking
companies, Registry services, Trustee and executorship services etc. To buttress
this fact, Chonnon observed that the form of organization adopted by a bank is
extremely important element in successful strategy implementation. He opined
that a variety of organization form can be identified and the appropriate choice
structure will depend upon the product market position of the bank. Structures, he
noted, w e also evolving with the continued diversification of bank services
leading to changing demands of Account officers, and the need to introduce
product managers and market segment specialists to the creation of a market-
based business units. All the foregoing is undertaken in a bid to ensure the
profitability of the bank concerned. It goes to assert that profitability is frequently
used as the ultimate test of management's effectiveness in directing the firm
and ensuring that its liquidity needs are satisfied and to enable it to remain in
ST business (survival). In fact, as Okafor stated,' the management of a firm is
generally evaluated, on the basis of profit earned and that even total investment
worth of a firm is assessed on that basis.' In this regard, Sisk asserted that the
continuance and growth of any industrial enterprise depend upon its ability to
produce profit. He noted that this is not to say that profits are the only objective of
a firm nor that the level of profitability is the primary objective; it does mean that,
without profit, the industrial firm as we know it in our society cannot survive.
In all, for a bank (firm) to report higher returns, it must either take more
risk, price assets and liabilities better, or realize cost advantages compared to its
peers. These strategies aspects of banks operations will be better assessed if the
specific cost involvement can easily be ascertained. This has been a critical b
problem area within the banking industry, that is, estimation of underlying cost
structures. As opined by Chunnon than many bankers have traditionally claimed
that it is very difficult to accurately measure service costs due to shared facilities
such as branch and central expenses such as computing. As a result, they have
tended to price on the basis of judgment of the value of the service to customers
and without knowledge of underlying. Nevertheless, an increasing number of
books are now moving towards "cost visible pricing" where care is taken to
establish the underlying costs of individual services by the use of standard costing
and operational research techniques. The procedure entails:
- Service identification and measurement;
- Cost data base establishment that involves direct cost, other direct cost,
overhead cost, and
- Transaction volume cost.
40
It is in line with this current trend in "cost visible pricing" that this
study is intended to determine the effectiveness of the various fraud
prevention and fraud detection measures - internal control system,
employed by commercial banks in their relentless fight against the
incidence of fraud in the industry. It is with this principal task the
remaining work here are devoted.
2.7. CONCEPT AND DEFINITION OF INTERNAL CONTROL
The Auditing standards and Guidelines (As : 6) 3.204 defined internal
control system as:-
"The whole system of control both financial and otherwise
established by management in order to carryon the business'
of the enterprise in an orderly and eficient manner; ensure
adherence to management policies, safeguard the assets and
secure as far as possible, the completeness and accuracy of the
records".
Woolf E., commenting on the above definition stated that the
striking thing is its all embracing nature, and it is clear that internal control
is concerned with the controls operative in every area of corporate activity,
as well as with the way which individual event inter-relate. On the other
hand, the American Institute of certified Accountants, however, stated that;
"Internal Control comprises the plan of organization and
of the co-ordinate methods and measures adopted by a business
to safeguard its assets, check the accuracy and reliability of
41
its accounting data, promote operational efficiency and
encourage - adherence to presented managerial policies. "
From the above definitions, internal control may be viewed as a system of
controls, financial, administrative and otherwise, installed and maintained by
internal management to achieve set purposes. They include:
- Safeguarding the assets of the enterprise;
- Establishing and maintaining, the accuracy and reliability of accounting
data, information and records;
- Promote operational efficiency and effectiveness;
- Seek, encourage and obtain adherence to prescribed management policies
and methods.
Hence, it is apparent from the definitions above that the whole sfstem
theories is to evolve a system whereby, even though ownership is separated from
management, yet the owners will be left in no doubt at their assets and resources
are efficiently managed.
Since the internal control system is a tool set up by the management, it then
follows that the control system would be different from firm to firm. However,
Feyemi B. maintained that for there to be an effective internal control system , the
following condition, must exist;
- The control must be relevant to the size of the job that is being
performed;
- Variation from standards must be reported immediately;
- Distinctions must be properly set out;
- There must be a good control environment;
42 - Exception: to stated rutes and procedures must be avoided.
From the definitions so far given, internal control may be summarized as
consisting of internal check, internal audit, and other forms of control ie
administrative and financial.
The institute of chartered Accountants of England and Wales (ICAEW)
statement of Auditing defined internal check as:
"The allocation of authority and work in such a manner as to
afford checks on the routine transactions of day - to - day by
means of the work of one person being proved independently,
by another or the work of one person being complementary
to records; sometimes, continuous, undertaken within the
business by specially assigned staff"' b
Millichamp A - H however, defined internal check as:
"The check on the day-to- day transactions which operate
continuously as part of the routine system whereby the work
of one person is proved independently or is complementary
to the work of another, the object being the prevention or
early detection of errors or frauds, it includes matters such as
delegation and allocation of authority and the division of work,
the method of recording transactions, and the use of
independently ascertained totals against which a large
number of individuals items can be proved. "
In his own view, Victiery B. G. Sani internal check as denoting:
"The systematic organization of clerical duties and routine
procedures in such a way to ensure thatfvaud and irregularities
are impossible without collusion and that innocent mistakes are
detected and corrected at an early stage. This necessitates a
sub-division of duties by means of which no one person is
responsible for the entire work in connection with any on
transaction. "
From the above definitions, it could be deduced that internal check$
involve dividing the work in such a way that no one person takes charge of a work
from the beginning to the end rather different stages of a particular work will
require different persons.
An Auditing Guideline headed" Reliance on Internal Auditing" defined b I
Internal Audit as I
"An element of internal control system set up by management 1 of an enterprise to examine, evaluate and report on accounting
l
and other controls on operations. It exists either because of
a management decision or in certain circumstances because of
statutory requirements".
Nevertheless, the council of the Institute of Chartered Accountants of
England and Wales (ICAEW) DEFINES internal Auditing as a review of
operations and records; sometimes continuous, undertaken within a business by a
specially assigned staff to
- Review, monitor and evaluate compliance with policy matters;
- Report compliance and non-compliance to management for
necessary action.
44
One of the main objective of internal audit is to assure management that
the internal check and the accounting system areeffective in design and operation.
Other components of Internal control are the Administrative and Financial
controls.
Nwoko C. defined Administrative Control as consisting of all non-
accounting and non-financial systems and methods which are built into the system
to promote the attainment of the four major goals of internal control. They are
often non-pecuniary in nature and their effects usually non-quantifiable. He
maintained that administrative controls essentially consists of:
- The plan of the organization, appropriately designating authorities and
responsibilities for financial and other matters, including matters of
appraisal and rewards; b
- Administrative control evaluations, appraisals and reward measures
including promotion, recognition and commendation procedures and
methods;
- Discipline and code of business ethics and conduct;
- Rotation of duties, transfers and vacations;
- Education and training programmes, fidelity coverage for employees and
officials.
Nwoko C. defined Accounting and Financial control as consisting of all
accounting, financial and monetary control techniques and systems built into the
internal control. He further stated that Accounting and Financial control consist
of:
45 Internal accounting and financial policies, procedures and regulations
encompassing recording, safe-guarding, reconciliations and valuation of
transactions and assets;
Internal planning and budgetary control systems and procedures which are
often formalized for ease of operations;
An internal monitoring, review and audit unit charged with the functions
listed above.
A good internal control system is peculiar and internal to the
organization concerned. A control system imposed from outside is not
likely to be adequate in design and operation.
2.8 TYPES OF INTERNAL CONTROL B
The Auditing standard " The Auditors Operational Standard" sets
out some of the types of controls which the auditor may find in many
enterprise. These include:
Owanisation:- The standard states that enterprises should have a plan of
their organization, defining and allocating responsibilities and identifling
lines of reporting for all aspects of the enterprises operations, including the
controls. The delegation of authority and responsibility should be clearly
specified. This means that every function in an organization should be in
the charge of a specified person who might be called the responsible
official; an employee should always know the precise powers delegated to
him, the extent of his authority and to whom he should report.
46 Se~re~a t ion Of Duties:- One of the prime means of control is the segregation
of those responsibilities or duties which would, if combined enable one individual
to record and process a complete transaction. The involvement of several people
in a process reduces the risk of intentional manipulation or accident error and
increase the element of checking of work. The guideline specified such functions
to be segregated as including those of authorization, execution, custody, recording
and in the case of computer-based accounting system, systems development and
daily operations.
Physical:- These are concerned with mainly the custody of assets and involve
procedures and security measures designed to ensure that access to assets is
limited to authorized personnel. These include both direct and indirect access via
document. The guideline stated that these controls are especially important iti the
case of valuable, portable, exchangeable or desirable assets.
Authorisation And Approval:- All transactions should require authorization or
approval by an appropriate person. The limited of these authorities should be
specified.
Arthmetical And Accounting:- These are the controls associated with the
recording function which checks that the transactions to be recorded and processed
have been authorized, that they are induced and that they are correctly recorded
and accurately processed. Such controls according to the guideline includes
checking the arithmetical accuracy of the records, the maintenance and checking
the totals, reconciliations, control accounts and trial balances accounting for
documents.
47 Personnel:- There should be procedures to ensure that personnel have
capabilities commensurate with their responsibilities, inevitably, the proper
functioning of any system depends on the competence and integrity of those
operating it. The qualification, selection, remuneration, promotion, career
development prospects and training, assignment of tasks of the right level as well
as innate personal characteristics of the personnel involved aR important features
to be considered in setting up any control system.
Supervision:- The guideline provides that any system of internal control should
include the supervision by responsible officials of day-to-day transactions and the
recording thereof. In other words, all actions by all levels of staff, should be
supervised. The responsibility for supervision should be clearly laid down and
communicated to the person being supervised. b
Management:- These are the controls, exercised by the management outside
the day-to-day routine of the system. They include the overall supervising
controls exercise by management, the review of management accounts and
comparison thereof with budgets, the internal audit function and any other special
review procedures.
Acknowledgement Of Performance:- Persons performing tasks should
acknowledge their activities by means of signatures, initials, rubber stamps etc.
This, not only allows blame to be ascribed out but also have a powerful
psychological effect.
Budgeting:- A common technique used in business is the use of budgets, which
can be defined as quantitative plans of action. Budgets having been agreed, can be
compared with actual turn out and differences investigated.
2.9. INTERNAL CONTROL SYSTEM IN COMMERCIAL BANKS
The nature and operation of commercial banks require an effective
system of internal control. Attwood and Stein maintained that the highest
standard of internal control must be present in view of the large amount of
cash present in banks, and possible opportunities to manipulate accounts if
controls were absent. They opined that the following controls are necessary
for every branch of a bank:
Custody Control:- Access to bank vaults, strong room and other stores
require the presence of two designated bank officials, manager and
Accountant to open them and strict records are kept of the issue and !eceipt
of cash and securities.
Seegreeation No staff of the bank will be allowed to record
and process a complete transaction. The work will be so separated that a
transaction has to pass through more than one person for it to be completed.
Authorisation:- Procedures must be established governing the granting
of overdrafts and the monitoring of balances. Limit is normally placed on
the manager's authority. Beyond that limit, authorization will be needed
from a higher officer.
Re~ular Review Of Accounts Of Bank Staff:- This is aimed at detecting
unusual movements, possibly indicative of involvement of fraud.
49
Active Internal Audit:- Teams of internal auditors normally referred to in the
banking industry as inspectors, should be making surprise visits to branches to
count cash and review the operations of other branch controls.
- Reconciliation of accounts should be made with other banks.
- There should be reviews of securities held for loans and overdrafts to
confirm their continuing adequacy.
Savage H. J. proffered that internal auditors of a bank should, in a bid to
promote the internal control system, carry out the following functions:
- To note on a separate sheet any violation or any weakness in the internal
control system;
- Review the general ledger account with the source of entry, particularly as
to who originated and approved such entry, what other duties such person
have which might present possibility of a conflict from the standpoint of
internal control;
- To check and see how employees are rotated particularly in jobs where
contact with the public or with cash or negotiable items are involved;
- To determine who is responsible for the close scrutining of the outside
activities of all officers and employees;
- To review the systems of control and cashiers, vaults, mails, and other
vouchers with its books of accounts.
Savage further maintained that the internal auditors are to determine the
procedures as to who prepares, signs and issues cheque books and
certificates and also maintains the register or the copies of the outstanding
items so as to establish the degree of segregation between issuance,
50
subsequent payment and maintenance of records of outstanding items.
They should also check the control of unused certificates and cheques,
especially the reserve supply and whether or not numbers are ever
accounted for,
2.10 COMPUTER AND INTERNAL CONTROL SYSTEM
In companies relying on electronic data processing for their
information flows, computer is the center of internal check provided the sad
systems are related programshare correctly designed to include checks and
balances. According to Wilson R.M.S. if a program has certain dishonest
features, this may never come to light unless, for instance a system's study
results for a program revision. This means that internal control effort'must
be applied to those who formulate and amend computer programs. This is
very important as there may be those that create and manipulate programs
for their undesirable purposes.
Hence, since most commercial banks in recent times have
computerized, their operations, and some reported cases of bank fraud are
computer fraud. It becomes necessary therefore to maintain a system of
internal control over the operation of computers in banks. The input into
the computer system should be subjected to internal control procedures
before it gets into the computer. This is to ensure that the transaction was
duly authorized, recorded and information correctly processed.
Wilson suggested that for the internal control system of a typical
installation to be effective, f h e members of staff have to be divided into
5 1 sections - system analysis, programs, operations, personnel and so on.
He opined that procedures should exist to ensure that:
- Operation staff do not have access to the source documents and are not
allowed to amend programs or input day;
- Programmers do not have access to the computer than for testing of
programs;
- Unauthorized employees and outsiders are not allowed in the computer
room; and
- All computer routines are all documented.
2.11. EXPECTED QUALITIES OF A BANK STAFF FOR EFFECTIVE
INTERNAL CONTROL SYSTEM fi
It is a commonly accepted dictum that the proper functioning of any
system depends largely on the competence and integrity of those operating
it. Recognizing this, Santocki J. enumerated eight qualities expected of
bank staff in order to ensure effective system of internal control. These
qualities include:
Honesty:- A bank staff must be honest in all hisher work. This was
further explained by Lord Justice Lindley in the London and Control Bank
case that:
"a banker must be honest, that is, he must not certzfi what he
does not believe to be true, and he must take reasonable care
and skill before he believes that what he certiJies is true ". The integrity of the staff is absolutely essential.
Common Sense:-
common sense is a
52 A staff must take a detached view of the business, and a
pre- requisite of this. Common sense can be defined as
practical good sense, or good sense in everyday affair, or "practical intelligence",
and the staff in conducting his work should always apply a common sense
approach.
Tact:- A tactful person takes care and exercise his skill in dealing with people, - so as to avoid )usting or offending them. A banker should be polite, pleasant and
understanding but must also be firm, exact and strict whenever circumstances
makes it advisable.
Methodical And Painstaking Nature:- Most of the banking work is of a
somewhat mechanical and routine nature. It is, then, necessary that it is
thoroughly and carefully done. This demands that a staff must adapt methbdical
and painstaking nature. Short-cut theories should be avoided so that necessary
books will get easily balanced at close of business. For instance, a cashier who is
always in a haste will find it difficult to balance her day's job. In contrast, this
does not mean being dull in somebody's work.
Practical Nature: Staff must understand the practical nature of business, which
includes a mastery of business accounting system and a reasonable knowledge of
the technical details of any account or activity he is to control.
However, the International Labour Organisation publication on "Cash
Control Using a Cash Register" emphasized. The essence of proper instruction or
training". It further stated that "training of cashier is very important as the reverse
will lead to frequent shortages and overs".
5 3
Capacitv To Search And Explore:- This means the ability to task the right
person, the right question, at the right time and in the right form. The question
should always be in the right form, even though they may be some what
unpleasant and often embarrassing. This may not only require skill but courage,
too.
Capacitv To Assess, Evaluate And Jud~e:- This is a very essential quality. A
more assessment of fellow staffs behaviour or approval is good enough to arouse
your interest or suspicion especially in fraudulent practices. It will also help a
staff to ascertain the degree of carefulness and integrity of everyone around him,
be him an officer, staff or customer.
Capacity To Work Independently:- He must know what his duty is, and must
do it inspite of direct or indirect pressure. He must have the courage to sag no"
whenever the matter in dispute is material to the reliability of financial statements
upon which he is reporting. In addition, De Paula F. R. M. emphasized that:
"a staff must be responsible. This is because the responsibility
ofpreventingfiaud or error rests more upon the staff especially
the officers, of the bank. A staffshould satis& himself that
the accounts are not incorrect as a result offiaud or error having
been committed by the director, managers or employees".
From the foregoing, one can easily deduce that though much has been said
and written about fraud and internal control system in the Nigerian commercial
banks, none has specifically addressed the issue of "THE INTERNAL
CONTROL WEAKNESSES" as regards to curbing commercial bank fraud. But
this is very necessary as the internal control system is the whole system of
54
controls, financial and otherwise, established by the management in order to
carry on the business of the enterprise in an orderly and efficient manner, ensure
strict adherence to management policies, safeguard the asserts and secure as far as
possible, the completeness and accuracy of records.
The very issue that baffles someone is that with these kind of internal
control system installed in the Nigerian commercial banks, hardly can a day pass
by in this country without one hearing one kind of bank fraud or the other. One
then begin to wonder. the workability of the so called "INTERNAL CONTROL
SYSTEM" in our commercial banks.
The essence of this write-up, therefore, is to identi@ the weaknesses of the
internal control system in our commercial banks and make suggestions towards
arresting them in terms of curbing bank fraud. b
Nevertheless, it should be noted that this work is not a comprehensive one
due to the scope, limitation and deliminations itemized in chapter one of this work.
It is therefore, suggested that a more comprehensive work covering up to sixty
commercial banks in this country be carried out for more reality and probably,
perfection.
CHAPTER THREE
"The greatest thing in this world is not so much where we
are, but in what direction we are moving" ... 0. W. Holmes
RESEARCH DESIGN AND METHODOLOGY
This method deals with the methods used for the collection and
analysis of datq. It has to be noted that the research method adopted for any
study is to a large extent, determined bybe nature and objectives of the
study. Consequently, this study is aimed at curbing commercial banks
fraud through the use of well designed, meticulously instituted and
resolutely operated internal control system. The data collection appfoach
used in this study is the survey approach. This, entails a cross sectional
survey type of descriptive research design that requires selection of
respondents from a given population. It was properly monitored and
considered adequate for the achievement of the desired objective of the
study.
3.0 SOURCES OF DATA
The data for this study was derived primarily from two main
sources; the primary data and the secondary data.
56
The Primary Source:-
The primary data was generated from research population and
comprises both the use of questionnaire and personal interviews. We
believe that the combination of the two would be appropriate for collecting
data for the study.
The Secondary Source:-
The principal sources of secondary data involved intensive search
for published 'and unpublished previous works of different authors and
scholars by consulting libraries, information units of various commercial
banks, central bank of Nigeria, Nigeria Deposit Insurance Corporation and
non-bank public.
Hence, data were gotten from text books, newspapers, magatines;
journals; central Bank of Nigeria Annual Reports and statement of
Accounts; Nigeria Deposit Insurance Corporation Annual Reports and
statement of Account; Seminar, Workshop and Symposium papers on
topics related to the study and non-bank public.
Hence, data were gotten from text books, newspapers, magazines;
journals; central Bank of Nigeria Annual Reports and statement of
Accounts; Nigeria Deposit Insurance Corporation Annual Reports and
statement of Account; Seminar, Workshop and Symposium papers on
topics related to the study. These were very usefid for the literature and
theoretical framework of this study.
57
3.1 INTERVIEW QUESTIONS
The interview questions are designed to assess in details the
appropriateness, effectiveness and compliance of Internal Control Systems
in Commercial banks in Nigeria as a tool for fraud control.
The analysis will also be based on answers obtained from the
questions; and based on the empirical findings, appropriate
recommendation will be made about the reasonable conclusions, that can be
vividly made, 'the limitation of the findings and areas that require further
research will be high lighted. The question are t& divided as follows:
Questionnaire:
A standard type of questionnaire (see Appendix A) containing
twenty i9ht well structured questions were designed and was randomly
administered to a statistically determined sample size of the respondents
selected from the research population. The questions were constructed in
such a way as to satisfy the objective of this study. The questionnaire was
structured and contained open and close ended questions. This was
necessary to allow the respondents to make adequate presentation of their
case, thus making for a greater clarity and validity. Most of the questions
require a "Yes" or a "No" answers.
The questions sought information from the respondents about the
various forms of Internal Control Measures operating in their bank and the
problems if any resulting from the application of these measures.
58
Oral Interview:-
Moreover, due to the fact that not all the questions were deemed
expedient for inclusion in the questionnaire, the interview method was used
to complement the questionnaire method as another source of primary data.
Primarily constructive questions were drafted and used for the personal
interview of some bank officials. This is in order to get detailed and
objective answers. The interview questions were drafted in a such a way
that answers, will provide detailed information on internal control measures
as it affects the banks under-study. In addition, some officers occupying
sensitive position of some major section of the banks under-study were
interviewed based on scheduled appointments. Nevertheless, most of these
interviews were held when the banks had closed their doors to the baAking
public.
3.2 SAMPLES USED
Sample Size And Population
The commercial banks in Nigeria should form the population of this
study. The views of the staff of these banks should therefore, be sought-
But as a result of the constraints posed by time and finance, it was not
possible for a National Survey of all these commercial banks to be carried
out. However, according to the 1998 NDIC Annual Report and States of
Accounts, there are sixty four (64) commercial banks with 2229 branches
nationwide as at 31St December, 1998. Fifteen (15) of these banks are
either under the transitional supervisory board or managed by NDIC The
59 ten commercial banks selected as the relevant population of the study
represent 20.4 per cent of the remaining forty-nine commercial banks (see
3.5 for the criteria for selection). The banks are the ones with their
Head offices in LagosEnugu; some of their branches in these two cities
were covered. The research populations 80 senior staff of the selected
banks. Consequently, a total of 75 questionnaire were administered on the
selected sample of respondents, that is those whose rank ranges from
supervisors to that of managers (see appendix C)
Sixty six (66) of the questionnaire were returned as completed
representing 88 per cent of total of questionnaires administered. Out of the
sixty-six (66) returned, six (6) were rejected owing to unacceptable errors,
so that the usable number stood at 60 or 80 per cent response rate. TRs, in
our estimation is a favourable sample size and as such, forms the basis for
the response rating.
Finally, we call attention to the fact that the answers obtained during
the oral interview sessions were also used largely in explaining the collected
information in the questionnaires.
3.3 METHODS OF INVESTIGATION
This section explains the rationale for the indices used in measuring
the parameters of the study objectives. A good research instrument should
focus on the objectives of the study, as such, most of the questions in the
questionnaires were framed to embody a wide range of management practices
with respect to fraud control using efficient and effective internal control
60
systems. Questions were also asked on the weaknesses of the internal
control system. In this regard, the researcher makes use of survey research
method, to analyze the current trend of fiaud in our commercial
Banks and the internal control measures being used to check the incidence.
Moreover, the researcher made use of oral interviews and prognostic research
method to evaluate the current state of efficiency and effectiveness of
internal control systems of commercial banks in Nigeria and what the f u ~ r e
holds for it in meeting its objective of controlling fraud ie errors and
irregularities.
In testing the proposed hypothesis, the significant test of two means,
popularly known as Z test was adopted since the sample size was 60 making
it a large sample, thus, making the sample approximately a normal b
distribution;. According to statistical theory, sample sizes that are greater
than or equal to 30 are considered to be large.
One tail test was used as the study involved population proportion,
that is, there are only two possible mutually exclusive outcomes or the so
called binomial experiments. A 5% (0.05) level of significance was assumed.
As regards the decision on when to accept or reject the hypothesis, the table
of area under the normal curve gives the critical value of Z at 0.05 level of
significance for one tail test to be 1.64. Hence, the Null hypothesis is rejected
if the computed Z value is greater than or equal to the critical value (ie 1.64)
and accepted otherwise.
6 1
3.4 DETERMINATION OF SAMPLE SIZE AND RESPONSE RATE
SAMPLE SIZE:-
The research population for the study is 80 senior staff of the ten
selected commercial banks. The statistical parameters used for determining
the sample size is the Bowley's formula on which is concerned with the
application of the normal approximation with 97 per cent confidence
interval and a 3 per cent allowable error. The formula is as follows:-
n = N_
1 + N (el2
Where n = Sample size
N = Research Population
e = The Limit of Tolerable Error
I = Constant
Substituting, We have that,
= 75 Approximately
From the above calculation, the sample size for the study is 75. Therefore,
75 questionnaires were printed and distributed randomly among the senior staff of
62 the selected banks. We encountered problems while selecting an individual
respondent as an independent unit in ascertaining views of the banks staff. This
was resolved by the research questionnaires and the personal interview being
directed to the senior staffloffrcers of the banks, ranging from the rank of
supervisors to that of managers. These class of respondents are in a better position
to provide more reliable information about the banks internal control systems.
They are assumed to be well acquainted with the policies and policies of the bank.
Response Rate:-
Out of the 75 questionnaires administered, 66 was returned as completed.
However, 6 questionnaires were rejected due to unacceptable errors. Hence, 60
were adjudged properly completed. b
Determination of Response Rate (RR)
RR = Number of properly completed and returned questionnaires
No of questionnaires sent out by the research
Substituting, we have that
RR=6(Jx@
75 1
R R = 80%
3.5 BANK
CODE
(A)
1
2
3
4
5
6
7
8
9
10
THE CHARACTER OF THE BANKS IN THE SAMPLE
COMMERCIAL BANK
(B)
First Bank of Nig. Plc.
Union Bank of Nig. Plc.
Wema Bank Plc
Afribank Nig. Plc.
UBA Plc
Orient Bank of Nig. Plc.
Eko Int'l Bank Plc
Ecobnak Nig. Plc.
Guaranty Trust Bank Plc
FSB Int'l Bank Plc
YEAR
COMMENCED
OPERATIONS
(C)
1894
19 17
1945
SHAREHOLDING
%
NIGERIAN
(D)
91.1
100
100
60
60
100
100
60
100
100
%
FOREIGN
(E)
9.9
-
- 40*
40
-
-
40
- -
HEAD
OF FFICE
(F)
Lagos
Lagos
Lagos
Lagos
Lagos
Enug u
Lagos
Lagos
Lagos
Lagos
63
NUMBER OF
BRANCHES
(G)
293
264
8 1
129
205
90
11
11
8
9
* Shares are warehoused by the Bureau for Public Enterprises (BPE) following the
liquidation of the foreign shareholders.
Source: NDIC 1998 Annual Report and Statement of Accounts, and Nigeria
Banking, Finance & Commerce (NBFC), loth Edition by Research and Data
Services Ltd (Redase).
CHAPTER FOUR
"To love what you do and feel that it matters - how
could anything be more fun? " ... Katherine Graham
DATA PRESENTATION AND ANALYSIS
The data collected through the use of questionnaire and interviews
are presented and analysed in this chapter. Attention is particularly paid to,
determining the various internal control measures adopted by commercial
banks covered in this study. Also the effectiveness of these internal control
measures in the prevention of fraud were evaluated and analysed.
The answer to the research questions were statistically analystbd by
use of tables, percentages, and degrees analysis. The calculation of the
percentage was done based on the response from 60 properly completed
questionnaires.
Furthermore, the proposed hypothesis for this study were tested.
This was done using the significant test of two means, popularly known as
the Z - test. Statistical inference was used in deciding whether to accept or
reject a hypothesis.
Finally, analysis was done on the secondary data collected.
4.0 THE QUESTIONAIRE RESPONSE
A total of seventy -five questionnaires were administered to the
officers of the ten selected commercial banks. Out of this number, sixty
questionnaires representing eighty per cent (80%) were properly completed
65
and returned. The response rate of each of these banks in stated in table
4.01
TABLE 4.0: RESPONSE RATE OF QUESTIONNAIRE
BANK
CODE
NO OF QUESTIONAIRE
ADMINISTERED
NUMBER OF
RESPONSE
PERCENTAGE DEGREE
Nevertheless, all the respondent has been working in the banks for more than
five years.
From table 4.0, it was observed that 9 out of the total respondents came
from Bank 1 representing 15%. The same figure also goes to Bank 2 Bank Code 3
and 4 had 5 responses each representing 8% for each Bank. Bank Code 5 had 7
66 responses out of the 60 respondents representing 12% of the total percentage.
Other Banks responses and percentages attached are as see in the table above.
4.1. WHETHER MALE OR FEMALE
Table 4.1 QUESTION ON SEX
SEX I NUMBER OF RESPONSE / PERCENTAGE / DEGREE
FEMALE I 2 8 1 47 1 1 6 8
I I I
MALE
Out of sixty respondents, thirty-two were male representing fifty-
three percent of the total responses while twenty-eight were fanale
representing forty-seven percent of the total responses.
I I I
3 2
TOTAL
53
60
192
100 360
4.2: WHETHER THE BANK HAS EXPERIENCED FRAUD IN THE
PAST FIVE YEARS
TABLE 4.2 BANKS' EXPERIENCE OF FRAUD
QUESTION
Have your bank
experienced fraud
in the past five
years
TOTAL
BANK
CODE
RESPONSE YES
From table 4.3, It was observed that out of sixty respondents, fifty-six of
them representing 93.33% were of the opinion that their Banks had experienced
Fraud in the past five years while four of the respondents representing 6.67%
denied of their Bank experiencing fraud in the last five years.
68 TABLE 4.3: FRAUD WAS POSSIBLE BECAUSES OF LAPSES IN
INTERNAL CONTROL SYSTEM
QUESTION
Question 9. If you
think that this
fraud was possible
because of lapses
in your internal
control system.
BANK
CODE
Total
YES
RESPONSES
As to whether fraud in commercial banks was as a result of lapses in the
internal control system of the banks under study, 67% of the respondents agreed
that fraud was possible because of lapses in the internal control system while 33%
TOTAL
disagreed. Those that agreed were of the view that the inadequacy of that internal
control measures creates room for lapses and big opportunity for perpetrators of
fraud.
69 4.4 ADOPTION OF THE INTERNAL CONTROL SYSTEM
TABLE 4.4: DOES YOUR BANK ADOPT INTERNAL CONTROL
SYSTEM
QUESTION
Question 10. Does
your bank adopt
the internal control .
system of
Accounting
Record?
1 Total
RESPONSES
YES
9
9
5
5
7
6
5
5
4
5
All the respondents agreed that their bank adopts the internal control
system representing a 100% in percentage terms. This goes to buttress the fact
that as custodians of people resources, the nature and operations of commercial
banks require an efficient and effective system of internal control Atwood and
stein maintained that the highest standard of internal control must be present in
view of the large amount of cash present in banks, and possible opportunities to
manipulate accounts if controls were absent". We also sought to assess the
TOTAL
70
internal control system of each of ten commercial banks covered in this, study
in order to specifically assess their efficiency and effectiveness in relation to the
prevention and detection of fraud.
The result of our enquiry on the Orient Bank PLC show that the various
control measures adopted by the bank include:
- Proper control over the custody of the banks' vault by at least two bank
officials;
- A transaction is handled by at least two persons;
- There exist an effective periodic check by the inspectorate department;
- There is a periodic rotation of bank staff;
- The sectional heads make a periodic review of records and accounts;
- There is a limit to the amount of loans and overdraft granted by a madager
and there is also a proper authorization of such;
- There is a periodic review of the banks' operationlactivities by external
inspectors;
- The branch manager makes regular review of the account of the bank staff;
- There is a regular classification of dormant account;
- The manager reviews the fixed deposit account periodically and also checks
on the foreign exchange transactions;
- At least two officials are in control of all banks' instruments such as bank
cheque books, draft certificate of deposit, etc.
- During an interview with the Inspectors and bank managers, we were able
to gather that the rotation of the bank staff is made in a way that the
movement of the staff is very uncertain thus, the staff is not aware of where
a 1
next he will be place&This according to him is whey the staff has to undergo
various training programmes so as to fit into any position placed.
We also gathered that the periodic returns and accounts by sectional heads
is made on monthly basis, so as to ascertain or detect any mistake or fraud when
it occurs. The banks operatiodactivities are also reviewed on quarterly basis by
external inspectors to guard against malpractices and check compliance with
policies. Financial transactions involving bank staff are expected to be authorized
and sanctioned by the manager or by an appropriate officer. This also serves as a
check on their accounts.
Other control measures adopted by the banks include balancing of ledger
accounts at the close business; verification system, job authorization procedure,
references, constant checking or daily call-over and making telephone calk for
confirmation of an instrument like customer's cheque when in doubt.
We sought to determine whether the internal control measures adopted by
the banks aaeffective in operation and help in the prevention and detection of
fraud. The response from our questionnaires and interview conducted with some
bank officials show that the occurrence of fraud in the banks in some cases are as a
result of lapse in the internal control system in operation. Theywere of the view
that the inadequacy of the internal control system creates room for lapse and a big
opportunity for perpetrators of fraud.
To ensure a very adequate internal control system the bank staff should
maintain professional distance with customers, the remuneration of the bank staff
should be made more attractive, assured job security, there should be a formal
72 enlightenment programme organized for bank staff and that the cashiers should
not be kept too long in the cage . We also sought to determine the problems the banks are facing in adopting
their various internal control measures. The result of the enquiry showed that
there is a problem of time as a result of the volume of work undertaken by few
staff which made it almost impossible for some of these measures to be fully
adopted.
Another problem is the greater proportion of unenlightened and non-
professional bankers. An enquiry into the internal control system of the ten
commercial banks covered by this study was also made.
The result of our enquiry into the various internal control measures adopted
by the banks are shown in table 4.69 The table summarizes the responses 6f the
various respondents on a number by various relating to the internal control
measures adopted by their banks. The variable sought either a positive or a
negative answer. The responses are therefore, similarly analysed.
4.5: THE VARIOUS INTERNAL CONTROL MEASURES ADOPTED
IN YOUR BANK.
TABLE 4.5: SUMMARY OF RESPONSES FROM THE VARIOUS RESPONDENTS ON THE INTERNAL CONTROL MEASURES
I MEASURE I RESPONSE I RESPONDENTS 1 %
ADOPTED BY THEIR BANKS /No TYPE OF CONTROL I NATURE OF I NO OF
1. Proper control over the custody of the bank's vault by at least two bank officials
Positive Negative
60 Nil
100 Nil
A transaction is not started and completed by one person
Effective periodic check by inspectorate department
Periodic Rotation of Bank Staff
Periodic Review of Records and accounts by sectional heads
Limit to the amount of Loans and overdraft granted by a manager and proper authorization of such
Periodic review of the banks operationlactivities by external inspectors
Regular review of the account of bank staff
Regular classification of dormant account .
Review of fixed deposit accounts
Positive Negative
Positive Negative
Positive Negative
Positive Negative
Position Negative
Positive Negative
Positive Negative
Positive Negative
Positive Negative
60 Nil
5 3 7
60 Nil
60 Nil
60 Nil
6 0 Nil
60 Nil
5 6 4
60 Nil
100 Nil
88,33 1 1.67
100 Nil
100 Nil
100 Nil
100 Nil
100 Nil
6.67
100 Nil
Check on foreign exchange transaction
All banks instruments such as bank cheque books, drafts, certificate of deposits, etc are under the control of at least two bank officials The photograph of every customer withdrawing up to a certain amount is taken
Before effect is given to any transaction, the customers' signature is verified.
Positive Negative
Positive Negative
Positive Negative
Positive Negative
60 Nil
60 Nil
60 Nil
b
100 Nil
100 Nil
6 5 35
100 Nil
The result of our enquiry into the various internal control measures adopted
by these ten commercial banks as stated by our respondents and summarized in
table 4 6 shows that the banks adopt similar internal control measures. This,
however, is as a result of the fact that banks carry out similar operations and in
some cases adopt the practices of each other where it will be of help to them.
Nevertheless, 100% of our respondents were of the opinion that a
transaction is not started and completed by one person. On further enquiry, we
were able to gather that in the banking industry, it is one of the most operative of
the internal control measures adopted by any bank. This is geared towards
ensuring that fraudulent transactions are not carried out and when they occur that
they are easily detected unless where a collusion exists.
75
93.33 per cent of our respondents answered positive to our renquiry as to
the existence of regular classification of dormant accounts in their banks. During
the interview with some of the bank officials, we gathered that the review is
necessary as it places a check on the dormant accounts in order to ensure that such
accounts are not fraudulently tampered with by a bank staff.
The result of our enquiry into all the other measures stated in table 4. 6
above showed that all the respondents were positive to the response variable. This
suggests that all the ten commercial banks are adopting all those internal control
measures.
The other control measures adopted by the banks, according to our
respondents include arrangements to ensure that all vouchers and instruments
carry at least two signatories of A and B categories as necessary authorizatioh and
in some cases three. This form of control, according to them ensures the
authenticity of the voucher 1 instruments. Others include the segregation of
functions and ensuring that certain laid down rules are followed. Those rules
could include making sure that every voucher and instrument contains the date of
the transaction, the amount in words and in figures and other relevant information
in relation to the transaction.
Another control measure adopted by the banks is the retention of passport
sized photographs of the bank customer to be sighted before payment is made to
him or in the course of any other transaction with the bank. Maintaining a
signature and for the bank customers is another control measure adopted by the
banks. In this case, the bank customers are required to append a signature in the
card which is the signature they will be using in all their transactions with the
76 bank. Before an effect is given to any instruction by the customer or before a
customer is paid for money being withdrawn, the signature card will then be
consulted to confirm the customer's signature.
We also gathered during our interview that the banks use "call over" to
ensure/confirm the correctness of figures recorded against each voucher/document
by checking the entries against the voucher/document.
Regiscope camera is also used to take the photograph of any person
drawing large sums of money from the bank. Respondents from six banks out of
the eight interviewed stated that they use "CLOSE CIRCUIT TELEVISION" to
check the activities of the bank customers and the bank staff. This, according to
them, makes it possible for any fraudulent moves to be detected.
There also exist a graduated limit in the authority given to the offichs of
the bank. Thus the authority is defined and each officer is aware of the limit to his
authority. The response obtained from our interview showed that checks are
placed on both the paying and receiving cashiers to ensure that proper account is
given for any cash received or paid out. Dual control measures are also placed on
all the operations of the banks and accounts are reconciled/balanced at the close of
the business.
We also sought to determine whether the internal control system of the
banks are effective and help in the prevention and detection of fiaud. The result
obtained from the questionnaires and the responses during the interview conducted
on the various banks with some of the bank officials showed that the internal
control systems of the banks are effective in operation, considering the present
level of the world of technology, in relation to the prevention and detection of
77 frauds in the banks. They explained that as technology changes, the methods of
perpetrating fraud become more sophisticated, thus, a review of the existing
internal control system becomes necessary to meet up with the new technology
and sophistication. On the continued existence of fraud in commercial banks we
gathered that in some cases, it is as a result of lapse in the operation of the internal
control systems in operation.
To reduce the laps and ensure an effective control system for prevention
and detection of fraud in the banks, the respondents were of the opinion that
additional control should be made in some areas. In the computer section, some of
our respondents stated that the movement of people in and out of the computer
room should be checked to prevent undue assess to the computer. Some of the
respondents stated that additional control should be placed on the recruithent,
development and movement of staff and that the movement of cash to and from
the cashiers should be made at regular intervals in order to reduce the amount of
cash with the cashiers especially the receiving cashiers, at any point in time.
We sought to determine the other control measures the banks could adopt in
minimizing and controlling fraud. Our respondents were of the opinion that
proper identification should be made before huge amount is paid out, the bank
should make the salary more attractive in order to dissuade them from involving
themselves in fraud, ensure job security, professional in the field of banking
should be recruited, programmes should be organized which is geared towards
instilling discipline in the staff thereby uplifting their moral consciousness. In
addition to this, increased efficient computerized banking should be practiced.
78 We also sought to determine the possible problems faced by the banks in
adopting the various internal control measures. The result of our enquiry showed
that there are lapses in implementation of some of the internal control measures as
a result of dishonesty, laziness and non-challant attitude of some bank staff. Also,
in some cases, there are not enough time for full implementation due to the large
amount work carried out by a few staff. Some of our respondents identified
personal problems as a hindrance to strict compliance with the control measures.
4.6: BANK BRANCH ADOPT THE USE OF COMPUTER AS AN
INTERNAL CONTROL DEVICE
TABLE 4.6: DOES YOUR BANK ADOPT THE USE OF
COMPUTER
QUESTION
Question 23 : Does
your branch adopt
the use of
computer as an
internal control
measure?
BANK
CODE
1
2 3
4
5 6
7
8
9
10
Total
YES
9
9
5
5
7
6
5
5
4 5
RESPONSES
TOTAL
9
9
5 5
7
6
5
5 4
5
79 All the 60 respondents from the selected commercial banks indicated that
their bank brand make use of computerized internal control system. This
represents a 100% while none disagreed. An example was given, that as each staff
has a password to the computer system. The staff have been assigned
responsibility area and level. As a means of control, the computer system records
all unauthorised attempted access to any area of information. This log is printed at
the end of everyday for the internal control/inspection department for their
necessary action.
However, on whether computerized internal control system is the case with
all their branches or branch offices, we found that only Ecobank, FSB
International Bank and Guaranty Trust Bank operate on Wide Area Network
(WAN) MEANING THAT THEIR WHOLE COMPUTER SYSTEMS IMTHE
BRANCHES ARE LINKED WITH THE COMPUTER SYSTEM AT THE head
Office on On-Line-Real-Time basis. The rest of the banks our investigation
indicate, make use of computers in their internal control at both their Head Office,
Main branchedArea Offices and some major branch offices. The respondents
stated that as a result of the large sum of fund involved in the purchase and
installation of computers, most of their branch offices operations are yet to be
computerized. However, to remain competitive, most of the banks have embarked
on corporate re-structuring spanning up to five years, one of the objectives being
to achieve full company-wide automatiurn of their of their activities at the end of
the restructuring exercise.
80 4.7: COMPUTERIZED INTERNAL CONTROL SYSTEM WILL
ERADICATE BANKING MALPRACTICES/FRAUD
TABLE 4.7: INTRODUCTION OF COMPUTERIZED
INTERNAL CONTROL SYSTEM AS A
SOLUTION TO BANK FRAUD
QUESTION BANK
CODE
Question 26: Do
you think that the
introduction of
computerized
internal control in
all the branches of
your bank will
eradicate banking
malpractices/Fraud
' 1
2
3
4
5
6
7
8
9
10
Total
YES
5
4
3
3
4
3
3
3
2
3
3 3
RESPONSES
There is almost equally divided view on this issue, while 55% of the
respondents are of the view that computer internal control system will eradicate
fraud, 45% hold a contrary view. Those who disagreed emphasized that the
introduction of computer in the internal control of banks can only minimize the
level of fraudulent activities and not to eradicate it. This, they further opined
TOTAL
9
9
5
5
7 ~ 6 1
5
5
4
5
60
8 1 will only be possible if honest computer operators and programmers are
employed, since the computer can be manipulated by dishonest staff.
Wilson confirmed this when he wrote that if a program has certain
dishonest features. Thus, it may never come to light unless, for instance systems
study results programmes revision. This means that internal control effort must be
applied to those who formulate or amend computer programs. This is very
necessary as there may be those that create and manipulate programs for their
undesirable purposes. '
CONCRETE ATTEMPTS WAS EQUALLY MADE TO ASCERTAIN THE MAJOR CAUSES OF FRAUD IN OUR COMMERCIAL BANKS. THE RESULT OF THE
INVESTIGATION IS AS RANKED BELOW:
TABLE 4.8: MAJOR CAUSES OF FRAUD IN BANKS
MAJOR CAUSES OF FRAUD
Employment of dishonest staff
Lapses in implementation of internal
control measures
Poor security for documents
Staff Negligence
Lack of Staff Training
Lack of proper enlightenment
Lack of Experienced Staff
Volume of work
Number of Staff
NUMBER OF RESPONSE
PERCENTAGE
82 All respondents agreed that the major cause of fraud in our banks is the
employment of dishonest staff representing a 100 per cent positive response rate.
However, 8 1.67% per cent of the respondents agreed that fraud is caused by lapses
in the implementation of internal control measures, 75 per cent of the respondents
opined that poor security for document cause fraud. Security (70) per cent of the
respondents feel the staff negligence constitute major cause of fraud while 65 per
cent qee lack of training as a cause. Lack of proper enlightenment on the
implications of fraud, 56.67 per cent of the respondents think cause fraud while
lack of experience on the part of staff is 53.33 per cent; volume of work is 50 per
cent while low number of staff is 45 per cent. In the main, it was the consensus
that fraud is a people's problem more than a control issue.
But on the basis of oral interviews conducted during the study, the
following detailed explanation were gathered from the officers of the department
of the banks under study.
Control Section:- All the control officers of the ten selected banks emphasized
that all facet of banking work are built up as a control system. For instance, the
origination of vouchers are controlled and certified through signatory control. The
ledger clerk has to do necessary processing and verification before appending his
signature. The used voucher is taken to an officer who will re-check the
genuineness and correctness of the entire before signing on it. In order to avoid
circumvention, all vouchers must bear two official signatures of the Banks. In
some cases, category A and B signatures respectively are expected to appear on
one voucher. There are some other controls that are strictly secret.
83 However, as per the control section, three main control are identified in
all the banks. They are waste, journal and General Ledger
Waste:- This is the control pool of the branch, as all transactions in any particular
day within the branch must go through the waste. Although it is not a book of
Account, it is a system of control and it is guided by the double entry rule.
The waste clerk, after being satisfied with any voucher passed to him. will
record, the voucher and stamp his waste stamp on it. As a control measure, all ,
vouchers must bear waste stamp before it is absorbed by any section for their
day's job. Moreover, all the ledgers and sectional day' job must balance with the
waste. Any deviation or difference are reconciled immediately.
Journal:- The journal serves as a further check on the accuracy of the work of
the waste clerk. The officer in charge of journal breaks down all the transahions
that went into the waste into their respective ledgers. Invariably, journal must
balance with waste. If there is any manipulation or error of posting the journal
man will detect it and re-balance the waste. Moreover, individual sections
balances must agree with the journal. Journal is therefore, called books of
original entry and it is the source of posting to the General Ledger, which acts as
its control.
General Ledger:- This is the book that generally controls all the other books of
Accounts in a bank branch. It contains every transactions that goes on in the bank
everyday and it is self balancing. The net balance of General Ledger for any day
is NIL.
Again, all of the ten control supervisors interviewed agreed that honesty,
hard work and strict observance of all the control measures by all staff are the
84 ways to sustain effective internal control system. Moreover, the officer in
control of General Ledger should be extra - careful and always maintain his
integrity.
Entries Section:- Seven (7) officers from this section of the banks supplied
answers to the interview question. This section includes drafts, salaries, standing
order, mails and clearing operations.
The answers given by the concerned officers are summarized as follows:
Draft And Cheques:- This is controlled by officers in charge of the section
through their respective Registers. The officer sign for draft booklet from the
strong room. The booklet is numbered serially and bears a stamp duty as a
security document. The stamp duty account their stands as the major control of
the draft. This is normally balanced on daily basis. The Branch Accountah and
the officer in charge of General Ledger always compare their balance with the
stamp duty Accounts (sight draft). Also, the manager re-checks the unsold draft
daily. Furthermore, any draft issued must be coded by an officer. Coding is a
system by which all the bank officers have a code. This code can only be de-
coded by the Receiving Bank's officers. Furthermore, the entries in the draft
section are re-checked through the process of call-over. The journal and the
General Ledger is however the final control measure.
Clearins- All the officers concerned indicated that all the accounts of the
clearing operations are overnight accounts, and therefore has to bear a "BUK"
balance on maturitylclearing. Again, they indicated that the Central Bank of
Nigeria also serves as further control on activities carried out during clearing.
The bank makes use of presentation form which contains number of cheques for
85 various banks and their value. These cheques are credited in the presentation
form and it must balance with the wastes clearing column. Again, at the close of
clearing, the central Bank clearing officer locks the clearing box. The banks
clearing clerk will carry the box (which he has no key to open) to the Branch
Manager (who has a spare key to the box). The manager will verifL the entries
and re-check the clearing documents.
Furthermore, the entries will be re-checked through the process of call-
over. Other internal controls measures from other sections include waste,
individual ledgers of account holders, current Account day's work balance,
journal and General ledger.
stand in^ Orders:- The officers indicated that as it concerns standing order,
standing order card is regarded as a debit voucher. Bank officers ensur8 that
standing order card assigned to clerks are filled and put into working on due dates.
All payments effected are entered on the reverse side of the card and initialed.
The corresponding credit voucher has to be signed by two officers before it is
entered in the waste.
However, other internal control measures on the standing order are waste,
Day's work balancing and the normal morning call over. Also the journal and the
General ledger serves as final control measure
Cash Officers: Supplying answers to the question on the internal control
measures in their department or section, all the officers concerned stated that the
control system of cash include the cashier counter books, cash Reserve Register,
Balances of the physical cash in Treasury (ie strong room) and the balance of cash
in General Ledger. All the balance must be the same. The instance, the debit of
86
cash Account consists of all the cash payments by the cashiers and the net
balance (as at everyday) of the physical cash in the treasury.
Nevertheless, they indicated that at the end of each day's business, the cash
officer will write - up his cash Reserve Register. The Branch manager, will call
for the balance of the cash Account in the General ledger before signing the cash
Reserve Register. The General Ledger cash balance must therefore equal previous
day's cash balance plus total -1 receipts for the day less total payments for the day.
Saving: Accounts Officers:- The information from the saving Account sections of
the banks was equally provided through personal interviews. The few officers
from this section interviewed indicated that all the works in savings Accounts
section- starting from Tallying, Ledger keeping, supervisory, cashiers work and
others are controls in one way or the other. The Accounts in this sectidh are
arranged into pools, called ledgers, and are safely kept in ledgers stands. Ledgers
are assigned to different ledger-keepers who obtained appropriate signatures
before any transaction is affected. The respective ledger- keepers take care of
sorting and filling of ledger cards in their respective ledger stands. The keeper
records all the day's transaction, as per the ledger in kits respective jotters and also
go to the waste to sort out the respective ledger voucher.
At the close of the days business, the staff in charge of balancing the day's
work will assemble all jotters and balance the day's work. Also, savings Account
are balanced fort-nightly.
Moreso, savings ledger are called-over daily and this is usually done by two
people (ie a senior officer and a junior one). This is in order to ascertain the
87 accuracy and authenticity of entries made both in the jotter vouchers and
Individual customer's accounts.
Furthermore, other ledger accounts, waste, journal, Extract books and
General Ledger exert their respective controls on this section.
Current Account Officers:- Officers from the section indicated that every
verification and process involves a dual check system in their section. As a result,
both the clerks and officers are simultaneously checking each other entries.
Internal control among other ones, includes tallying, processing of cheques,
quthentication of ledger cards, blocking of ledger cards, grouping of individual
accounts into one ledger, balancing of current account daily and fortnightly, daily
call-over and Extract books. However, every ledger has its individual jotter for
recording daily transactions. Moreover, registers are maintained for unpaid and
stopped cheques.
However, in addition to these control measures, the cashiers exert their own
control in flow of cash as it concerns the section. Also, waste, journal and General
Ledger acts as extra controls to the operations in current Account section.
Advances Officers:- Three officers from this section indicated how over-draft
and loans Accounts are being controlled. All the three officers asserted that all
approved Head office Overdrafts have a Register for its records. There are certain
rules governing overdraft which every bank official is aware of. Moreover,
current Account Section prepares monthly returns of overdrawn Accounts which
are usually sent to the Head office.
On loan Account, it is a direct General ledger Account. The control system
of loan Account is such that the customers, current Account and the interest on
88 loan Account are fully involved. At the end of each month, the loan ledger is
balanced, call over of the entries in loan Accounts are also usually observed. The
waste journal and General Ledger also acts as additional controls in this section's
daily works.
Furthermore, due to the sections preparation of statement of Account for
customers and Head Office, this is seen as additional control measure for
customers Accounts in their different ledgers.
Inter-Branch Officers:- All the vouchers entered in the inter-branch ledger
Accounts come from the waste. As a result, it has been a controller voucher.
After sorting of vouchers from the waste, they are classified according to their
branches before it is duly recorded. In order to ensure correctness of entries, it is
called-over daily and balanced fort-nightly mostly. b
Moreover, the Reconciliation Section of the bank usually runs regular
reconciliation of outstanding items in inter-branch ledgers in order to prove its
balance. The cases of outstanding items may be as a result of one of the
following:
- Wrong and improper narration
- Use of unauthorized signatories
- Missing vouchers
- Wrong keeping of Accounts and records
- Bulking of figures where they ought to be identified singly.
- Wrong dating leading to doubts
- Bad writing and use of faint carbon copies
- Willful delay by staff.
89 Finally, the waste, Drafts, journal and General ledger exert their respective
controls on the whole of inter-branch section.
Supplying answers to the question, on the need for additional control, the
control officer of the First Bank of Nigeria PLC, said that their General Ledger
needs additional control measures in some of their branch offices other than the
normal call-over done by the branch Accountant and the manager. In addition,
he stated that different individuals should keep the two books of journal and
General ledger.
When the same question was put before the cash officers of the selected
banks, all agreed that the only problem is the inadequacy of adding machines
which poses a big problem in cashiers balancing of the day's work. At times,
the machine is faulty giving wrong figures. B
The inter-branch officers indicated that the problems common to the section
are balancing problems which may occur as a result of faulty machine or other
inherent factors. Moreso, additional adding machines are really needed by the
section. Some of this inherent factors are as follows:
- Delay in responding to inter-branch transactions
- In accurate narration and analysis of transactions
- Wrong coding of credit or Debit Vouchers
- Omission of items intended for a sister branch
- Delays occasioned by postage and missing of letter.
Answering question on what other improvement that can be made in the
internal control system in their branch directed to the managers and
Accountants of main branches of the Banks under study.
90 All the respondents answered that they have no idea of any other control
that is not in operation at their branch. They further stated that internal control
system of Accounting Records are almost the same in principle as regards to all
commercial banks. It is only the practice that differs.
On how banking malpractices like fraud can be curbed in Nigerian
commercial banks, the Branch Managers, Inspectors and the Accountants
suggested a lot of things among which are the recruitment of honest individuals,
fiaining of Staff on the legal implications of fraud, job security, adequate
remuneration, and above all personal integrity of bank workers. They emphasized
that the personnel Department should take care and undertake indepth study of
anybody before employing him. This is because of the fact that most of the staff
carrying out fraud were mostly those that have undertaken it in other banks. b
On training, staff should be exposed to the legal implications of fraud so
that they will never dream of involving themselves.
Finally, every banker and would-be bankers should have their motto as"
Trust and Honesty" in all their endeavours.
In the main, it should be noted that the foregoing explanations are the
bottom line application of the various principles of the banking process involved.
There are variations in the processes depending on the level of computerization
already attained by the individual banks.
91
4.9: TEST OF HYPOTHESIS
The Null hypothesis formulated in this study were tested by means
of Z test
z = Ps- Pu (/ Puqu
n
Where Z = Test statistic (one tail test)
Ps = Proportion sample
Pu = Population proportion
n = Number of Population
Qu = Ps
b
4.9.0. FIRST NULL HYPOTHESIS TESTING
Ho: Effective Internal control System will not ensure Good Performance
of Nigerian Commercial Banks
Hi: Effective Internal Control System will ensure Good Performance of
Nigerian Commercial Banks
Technique
z = Ps-Pu (/ Puqu
n Where Z = One Tail Test = ?
Ps = Proportion sample = 21.67
Pu = Population Proportion = 78.33
n = Number of Population = 60
Operational Assumption
Level of significance = 5%
Decision Rule
(i) Accept Ho if calculated value is greater than table value
(ii) Reject Ho if calculated value is less than table value (1.64)
TABLE 4.9.0 EFFECTIVE INTERNAL CONTROL SYSTEM WILL
ENSURE GOOD PERFOMANCE OF NIGERIAN
COMMERCIAL BANKS
QUESTION
Question 17: Do
you think that
effective internal
control system will
ensure good
performance of
Nigeria
Commercial banks.
BANK
CODE
Total
RESPONSES
YES TOTAL ~
Sample Distribution Z = Ps - Pu
d Puqu
n
Substituting, we have Z = 21.67 - 7833
d 1 78.33) (2 1.67)
60 - - -56.66
d l 697.4
60 - - -56.66 -
d 28.29
-56.66
V5.32 - - - 10.65
.a. Z = - 10.65 (calculated value)
Table Value = 1.64
Decision: The table area under the normal curve gives the critical value of Z at
0.05 level significance, one tail test to be 1.64.
Since the critical value (1.64) is greater than that obtained by computation
(10.65), we reject the null hypothesis and accept the alternative hypothesis, hence,
94
we conclude that effective internal control system will ensure good performance
of Nigerian Commercial Banks .
4.9.1 (SECOND NULL HYPOTHESIS TESTING)
Ho: Appropriate Installation of Internal Control System will not help
to curb Fraud In the Nigerian Commercial Banks.
Hi: Appropriate Installation of Internal Control System will help to
Curb Fraud In the Nigerian Commercial Banks.
Technique
z = Ps-Pu
JPU~U n
Where Z = One Tail Test = ?
Ps = Proportion Sample = 1 1.67
Pu = Population Proportion = 88.33
n = Number of Population = 60
qu = Ps
Operational Assumption
Level of significance = 5%
Decision Rule
(i) Accept Ho if calculated value is greater than table value.
(ii) Reject Ho if calculated value is less than table value (1.64)
TABLE 4.9.1 APPROPRIATE INSTALLATION OF INTERNAL
CONTROL SYSTEM WILL HELP TO CURB FRAUD IN
THE NIGERIAN COMMERCIAL BANKS
QUESTION
Question 18: Do you think
that appropriate installation
of internal control system
will help to curb fraud in the
Nigerian commercial banks.
Sample Distribution
BANK
CODE
Total
RESPONSES
YES TOTAL
z = Ps-Pu
JPU~U n
Substituting, we have Z = 11.67 - 88.33
J (88.33) (1 1.67)
60
= -76.66
Jl030.8 1
60
= - 76.66
J17.18
= - 76.66
4.14
= - 18.52
:. Calculated Value Z = - 18.52
Table Value = 1.64
Decision:
The table area under the normal curve gives the critical value of
Z at 0.05 level significance , one tail test to be 1.64.
Since the critical value (1.64) is greater than the calculated value (-18.52),
we reject the null hypothesis and accept the alternative hypothesis, hence,
"Appropriate Installation of Internal Control System Will Help To Curb
Fraud In the Nigerian Commercial Banks".
4.9.2: (THIRD NULL HYPOTHESIS TESTING)
Ho: The Qualifications Of The Nigerian Commercial Bank's Staff Will Not
Determine The Workability Of A Good Installed Internal Control System,
Hi: The Qualifications Of The Nigerian Commercial Bank's Staff Will
Determine The Workability Of A Good Installed Internal Control System.
Technique
Z = P s - P
Where Z = one Tail Test = ?
Ps = Proportion Sample = 36.67
Pu = Population Proportion = 63.33
n = Number of Population = 60
qu = Ps
Operational Assumption
Level of significance = 5%
Decision Rule
(i) Accept Ho if calculated value is greater than table value
(ii) Reject Ho calculated value is less than table value.
98
TABLE 4.9.2: QUALIFICATIONS OF THE NIGERIAN
COMMERCIAL BANKS WILL DETEERMINE THE
WORKABILITY OF A GOOD INSTALLED
INTERNAL CONTROL SYSTEM.
QUESTION
Question 19: Does the
qualifications of the Nigeria
Commercial Banks staff in
any way determine the
workability of a good
installed internal control
system.
Sample Distribution
BANK
CODE
Total
YES
RESPONSES
z = Ps-Pu
JPUW n
Substituting, we have Z = 36.67 - 63.33
J (63.33)(36.67)
60 - - - 26.66
J2322.3 1
60 - - - 26.66
J38.71
= - 26.66
6.22
= - 4.29
Calculated Value Z = - 4.29
Table value = 1.64
Decision:
Given the level of significance at 0.05, since the table value (1.64) is
greater than the calculated value (-4.29 ), we reject the null hypothesis and accept
the alternative hypothesis, hence, "The Qualifications of The Nigerian
Commercial Banks Staff Will Determine The Workability of A Good Installed
Internal Control System".
100 4.10. ANALYSIS OF SECONDARY DATA
The information contained in Appendix B represent the most
common types of frauds and forgeries occurred in the banking system
from the year 1992 to the year 1998. Fraud types like fraudulent transfer
and withdrawals, abuse of medical scheme, and suppression of cheques
appeared in all the years under review. However, there is a declining
trend on the number of the most common type of fraud and forgeries
perpetrated from 1992. This should be as a result of the various measures
put in place by the regulatory and supervisory authorities and most
especially, the banks themselves to check the incidence of fraud.
On the number of bank staff involved in fraud and forgeries as per
Appendix C, for the years under review, the number of staff invblved
peaked at 737 in 1994 from 436 in 1992 and declined to 552 in 1996 from
625 in 1995. The number increased to 566 in 1997 representing a 2.54%
increase in that year. However, in 1998, the staff involvement dropped to
31 1.
From the analysis, there is a high percentage rate of involvement of
senior staff ie supervisors and managers in the perpetration of fraud. For
the years under review, the percentage involvement range from 24.16% to
36.01%. These figures, we believe are high given thatit is these cadres of
staff the banks rely on to efficiently and effectively implement their policies
and plans.
On the amount involved in fraudulent activities as per Appendix D,
there does seem not to exist any established trend, however, in percentage
101 terms the proportion of ActualExpected Loss to Amount involved
indicate a range of 18.4% to 24.07% in 1998. The percentage figure of
24.07% was for the year 1996, the ActualtExpected loss has since declined
to 21.52% in 1998.
On the ten highest banks with fraud cases as per Appendix F, for
years under review, commercial banks accounted for nine out of the ten
each year accept for 1995 when all the ten banks were commercial banks.
The reason adduced is that, it is the case because of the preponderance of
commercial banks and their large branch network.
The percentage rate of this declined from 84.4% in 1992 to 65.76%
in 1996 but jumped to 97.1 1% in the year 1998. This is a source of
concern to the banking industry as a whole. B
Appendix E depict the returns of merchant banks on fraud and
forgeries, the figures speak for themselves, they are barely insignificant
compared with the figures pertaining to commercial banks. The table is
included here to derive home this point and on one part state as to why this
study focused mainly on commercial banks.
However, in spite of the hallowing effect of fiaud and the various
efforts Government, regulatory and supervisory authorize and the banks are
in no doubt yielding fruits at macro level at least. Also, with the increased
deposit, banks will be able to give out more credit to customers and thereby
making higher returns. The return on Equity and the return on Assets for
both the commercial and merchant banks have shown an increasing trend
since 1994.
10 2 Finally, all these positive indicators show that as we asserted easier in
chapter two of this work that profitability is the bottom line criterion that will
ensure tbg ~ontinuous survival of any corporate entity, banks inclusive. These
could only be achieved to a great extent if the internal control system is efficient
and very effective as the American Institute of Certified Public Accountants
(AICPA) states that, established to provide reasonable assurance that specifL
entity9 s
"An entity's Internal Control System consists of
policies and procedures objectives will be achieved".
CHAPTER FIVE
"Many receive advice, only the wise profit from it" .. . .. . Syrus.
RESEARCH FINDINGS, CONCLUSIONS, RECOMMENDATIONS
Our discussions on the findings of this study is summarized and
concluded in this chapter. We also make recommendations of viable
remedies to the problems that weaken internal control measures as it relates
to commercial banks fraud.
5.0 FINDINGS
The study examined an analysis of internal control s stem Y weaknesses as regards to curbing commercial bank fraud. The study was
specifically undertaken to asses that efficiency and effectiveness of the
commercial banks internal control system for prevention and detection of
fraud and also to unravel those weaknesses in commercial banks internal
control system.
The information obtained from the study indicated that banks
undertake various internal control measures to detect and prevent fraud.
The study further identified some of the measures adopted by the banks in
this respect. From the analysis of the data, the following measures were
identified: - Proper control over the custody of the banks vault by at least two bank
officials - A transaction is not started and completed by one person - Effective periodic check by inspectorate department
104
Periodic rotation of bank staff.
Periodic review of records and accounts by section heads
Limit to the amount of loans and overdrafts granted and proper
authorization of such.
Periodic review of banks operationlactivities by external inspectors.
Regular review of the accounts of bank staff
Regular classification of dormant account
Review of fixed deposit account
Check on the foreign exchange transaction
All banks instruments such as bank cheque book, drafts, certificate of
deposits etc are under the control of at leasttwo bank officials
Other control measures adopted by the barlks which were identified in this b
study includes:
Arrangements to ensure that all vouchers and instruments carry at least two
signatures of A : B categories as necessary authorization and in some cases
three.
Segregation of duties
Retention of passport sized photographs of the bank's customers within the
bank.
Maintaining a signature cards containing the signature of the banks
customers.
Call over where by figure recorded against vouchers/documents and
confirmed by checking the entries against the voucher/document
Use of regiscope to take the photographs of persons withdrawing large
sums.
105
- Installation of closed circuit television to check the activities of the bank
customers and that of the bank staff.
- Graduated limit of authority. - Dual control measures placed on all the operations of the banks - Reconciliation/Banking of accounts at the close of business.
Our analysis revealed that the following are some of the factors that
weakens a good internal control system:
-Insufficient time as a result of large volume of work by few staff.
-Lack of adequate professionals in the banking field.
- Insufficient amount of equipment
- Dishonesty of some bank staff
- Poor recruitment system in the banking industry
- Personal problems of some staff also affect the strict complian
Finally, from the hypothesis tested, the findings of this work suggest
that effective internal control system will ensure good performance of Nigerian
Commercial banks. Again, it suggest that appropriate installation of internal
control system will help to curb fraud in the Nigerian commercial banks. It
went fkther to suggest that the qualificatioaof the Nigerian Commercial bank -.
staff will determine the workability of a good installed internal control system.
5.1. CONCLUSIONS
Having come to the end of this study, it is the opinion of the
researcher, that for accelerated banking development in Nigeria, there
should be a sound basis for internal control system. By this, we meant that
the system should be APPROPRIATE, ADEQUATE, EFFICIENT AND
EFFECTIVE (AAEE)
Also, the management of banks should be at alert so as to discover
and eliminate any possible loophole that may arise in their internal control
system.
Since the perpetrators of these frauds are always discovering new
ways of carrying out activities, the management of banks should try to
establish the Research and development department that will ensure regular
research and review of the operations of the internal control system to keep
pace with the increasing technology and mental sophistication of the
society. This periodic review, in addition to staff qualities, are seen as a
bedrock in maintaining a sound system of internal control.
Furthermore, this study has proved that the present internal control
system as practiced in branches of commercial banks in Nigeria are b
appropriate, adequate, efficient and effective with regard to the detection
and prevention of fraud. However, more operative improvements are still
vital to make it more effective.
Also this researcher thinks that a thorough study on what it will take
the Banks to fight fraudulent practices in the system will be of interest to
the bank publics and this could be correlated and regressed with the profits
figures or other performance indicators of the commercial banks.
Finally, we are of the opinion that with a carehl application of the
recommendation of this study, the internal control system of our
commercial banks will be made more efficient and effective. This will
reduce the economic loss suffered by the banks and their customers
whenever there is a case of fraud and the resultant effect on the economy as
a whole.
107
RECOMMENDATIONS
Based on our findings, the following recommendations became
necessary to curb or eliminate the problems encountered by the banks in
ensuring strict compliance with the internal control system for active
control of fiaud in commercial banks.
Increasin~ The Staff Strenpth Of The Commercial Banks:-
Commercial banks are increasing and diversifjring their areas of operation,
day after day. But adequate provisions are not made to increase the staff
strength of these banks to take account of the increase in operations. As a
result, the volume of work for the existing staff become so large that they
have little time to carry out all the operations. The implication is that they
overlook certain procedures/rules in their attempt to meet up with their
work in the little time they have. b
We recommend that the commercial banks should increase their
staff strength. This will help to reduce the work load of the staff and allow
more time for the procedures involved in any transaction to be fully
applied. This will help to ensure strict compliance with the internal control
measures and eliminate the problem of insufficient time arising from the
large volume of work performed by few staff.
Recruitment Of Professionals In The Field Of Bankinw- One of the
major problems that hinders the strict compliance to the internal control
system of the commercial banks is that of insufficient professionals in the
field. Some internal control measures adopted by banks are not strictly
complied with because of lack of adequate knowledge of such control
measures. This problem will, however, be eliminated where professionals
are recruited to man the key positions in the bank.
It is therefore our opinion that the banks should recruit professionals to take
up key positions as they will help to ensure strict compliance with the internal
control system.
Provision Of Additional And More Sophisticated Equipments In The Banks:-
The result of our findings showed that some commercial banks do not have
sufficient equipment to improve their checks against fiaud. Such equipment
would include computers, closed circuit televisions, regiscope cameras, etc.
Where available, they help to place a check on the perpetrators of fraud. Their
availability or insufficiency creates a gap in the banks internal control system.
The banks should therefore make provision for such equipment to be made
available in sufficient number. This will help in the strict compliance with the
laid down internal control system. Where they are not in existence, the banks
should make provision for them as they will amount to additional control k the
banks.
Providing Assistance To The Bank Staff In Solvin~ Some of their personal
problems:- The banks should map out strategies towards providing assistance to
their staff in solving their personal problems. This will create a sense of
commitment in their staff. They will have a sense of belonging, thus, ensuring
strict compliance with the banks internal control system.
Call-Over:- Every bank should ensure regular call-over of ledger. The branch
manager should try to be involved in the call over especially as it concerns the
General Ledger and sight draft Register. At the end of every call over exercise,
the ledger checked, the jotter should be signed by officials carrying out such
duties.
109
Strict Control On The Movement Of Ledper Cards And Books Of Accounts:-
In order to minimize the issue of missing ledger cards and other books of
accounts, staff should be stopped from carrying ledger cards and other books of
Accounts from one section to another in the name of balancing or going home
with ledger cards or any other books of Accounts. This can help in minimizing the
chances of manipulation.
Dormant Accounts:- To avoid any fraudulent attempt on them, dormant
Accounts should be subjected to regular balancing. Also, they should be kept
under lock and key.
Research And Development Department:- Since the fraudsters are always
discovering new ways of perpetrating fraud in our banks, the banks should equally
be finding new ways of beating them to the game. Therefore, the management of
banks, should try to establish this department that will ensure regular research and
review of their operations to ensure efficiency and keep pace with the changing
technology and mental sophistication. This will help in updating the various
control measures fiom time to time.
Proper Maintenance Of Open Closed Account Re~isters:- In order to ensure
an effective control over the open and closed account, these accounts Registers
should always be maintained so that the number of live account in the bank can
always be known.
Personnel Department And Emplovment Of Staff:- The personnel department
of every bank should review their method of recruitment. An in-depth study of
every selected applicant, past life, through enquires should be undertaken. Also,
before the confirmation of any appointment, the person's full history must be
ascertained by this department. This is to ensure that only honest staff are
engaged.
11 0
Job Securi@:- Apart from boosting the morale of hard working and honest staff,
good remuneration, banks should in concert, work out an enduring and alluring
system that will ensure job security for their staff with reasonable carrier prospects
This will go a long way in making staffs involvement in fraudulent practices
unattractive.
Adoption Of Total Quality Management:- In addition, the adoption and full
implementation of Total Quality Management (TQM) as a management
philosophy for running the banks will see the Nigerian banking system far unto the
path of fraud eradication, as it involves the necessary mechanisms for process and
culture change.
Finally, we are of the opinion that with a careful application of the
recommendation of this study, the internal control system of the commercial banks
will be more efficient and effective in the area of fraud control. This will rdduce
the economic loss suffered by the banks and the customers whenever there is a
case of fraud.
SELECTED BIBLIOGRAPHY
BOOKS
ADEKANYE, Femi, (1 987), The Elements of Banking In Nigeria:
Graham Burn.
ANTHONY, N. et-al, (1980), Management Control System,
Home-wood: Irwin Inc.
ASIKA, Nnamdi, (1 99 I), Research Methodology In The Beharioural
Sciences, Lagos: Longman
ATTWOOD, et-al, (1986), De Paule's Auditing, London:
Pitman Publishing Ltd.
CHANNON, D. F., (1992), Bank Strategic - Management And marketink -
Great Britain: John Wiley and Sons Ltd. b
COMERFORD, R. A. et-al, (1985), Strategic - Management: - Test, Tools and
Cases for Business Policy, Boston Massacbusetts:
Kent Publishing Company.
DE PAULA, F. R. M., (1982), The Principles Of Audit: A Practical Manual
For Students And Practioners, London: Isaac Pitman
Sons Ltd.
ELIASON, J. A. et-al, (1979), Business Computer Systems and Applications,
Chicago: Science Research Associates Inc.
GALLINGER, G. W. et-al(199 l), Liquidity Analysis And Management,
New York: Addison - Wesley Publishing Co. Inc.
KOCH, W. T., (1992, Bank Management, USA: The Dryden Press
MILLICHAMP, A. H., (1990) Auditing - An Introduction Manual For
11 2
Accounting students, London: ELBs with DP
Publications.
OBELEAGU, Nzeribe, (1995), Business Statistics: Theory And
Application, Enugu: Optimal Publishers
OKAFOR, F. O., (1983), Investment Decisions: Evaluation Of Proiect
And Securities. London: Cassels Ltd.
OLUIKPE, B. 0 . A., (1982), Thesis Writing: Form And Style, Nigerie
African Publishers Ltd.
OYEKA, C. A., (1992), An Introduction To Applied Statistical
Methods In The Sciences, Enugu:
Nobern Avocations Publishing company.
PORTER, W. T. et-a1(1989), EDP- Controls And Auditing, California: b
Wadsworth Inc.
SISK, Henry L., (1969), Principles of Management - Process, USA:
South -Western Publishing Company.
WHITE, Donald A. et-al, (1989), Auditing EPD Systems,
New Jersy: Prentice - Hall International
WILSON, R. M. S., (1974), Financial Control: A system Approach, London:
Mc Graw - Hill Book Company Ltd.
WOOLF, Emile, (1979), Auditing - Today, Prentice - Hall International Ltd.
- JOURNALS
ADE KANYE, Femi, (1 986:7- 1 O), "Fraud In Banking Transactions",
The Nigerian Banker, July - December,
Vol. 6 No. 1, The Nigerian Institute of
Bankers, Lagos.
AWOSANYA, R.O., (1986), "What Banking Is about Fraud/Fraudstersfl - The Union Bank Case, The Stallion, The Staff
Magazine of Union Bank of Nigeria PLC.
SHONGOTOLA, I. O., (1994), "Fraud Detection And Control:
Role of Branch Management",
The Nigerian Banker, July - December
UMOH, P. N., (1992), "Strategies For Survival And Growth Of
Insured Banks; NDIC Quarterly, Vol. 2,2, J b
June.
OFFICIAL PUBLICATIONS
CRIMINAL CODE ACT, 1990, Laws of the Federation, Federal Ministry of
Justice, Vol. 5.
COMPANIES AND ALLIED MATTERS DECREE No. 1, 1990, Federal
Government Press, Lagos.
CENTRAL BANK OF NIGERIA DECREE N0.24~199 1, Federal
Government Press, Lagos.
BANKS AND OTHER FINANCIAL INSTITUTIONS DECREE No. 25,
-. 199 1, Federal Government Press, Lagos.
' Y
NIGERIA DEPOSIT INSURANCE CORPORATION DECREE No. 22,
1988, Federal Government Press, Lagos.
SPECIAL TRIBUNAL (MISCELLANEOUS OFFENCE) ACT, CAP 410
199, Laws of the Federation, Federal Ministry of
Justice.
BANKS EMPLOYEES, ETC (DECLARATION OF ASSESTS) ACT, CAP
27, 1990 Laws of the Federation, Federation
Ministry of Justice, Vol. 1 1.
FOREIGN CURRENCY DOMICILIARY ACCOUNTS ACT CAP 151,
1990, Laws of the Federation, Federal Ministry of
Justice, vol. lx.
NATIONAL DRUG LAW ENFORCEMENT AGENCY ACT CAP 253,
1990, Laws of the Federation, Federal Ministry of,
Justice, Vol. Xvi.
FAILED BANK (RECOVERY OF DEBTS) AND FINANCIAL
MALPRACTICES IN BANKS DECREE No. 18,
1994, Federal Government Press, Abuja.
NEWSPAPERS
FUJA, H. K., (1 993), "Frauds, Malpractices In The Banking Industry",
Business Times, April 12, Lagos.
NWANKWO, G. O., (1992), "Raising Confidence In The Banking
Industry", Business Times, October 10, Lagos
UDUK, P., (1 9E) , "Checking Fraud In The Financial System',
Business Times, October, Lagos
APPENDIX A
QUESTIONAIRE
UNIVERSITY OF NIGERIA, ENUGU CAMPUS
School 0 Post-Graduate Studies,
Department Of Banking & Finance,
Faculty Of Business Administration,
University Of Nigeria,
Enugu Campus.
8" September, 1999.
Dear SirMadam,
I am a post-graduate student of the Department of Banking and Finance in the
above named institution. As one of the pre-requisites for the award of Masterbof
Business Administration (MBA) Degree in Banking and Finance, I am
undertaking a research on "Towards Curbing Commercial Bank Fraud: An
Analysis Of Internal Control System Weaknesses".
Kindly answer the following questions for me. I assure you that any information
supplied will be treated with strict confidence and utilized only for academic
purposes.
I thank you in anticipation.
Yours faithfully,
- ONUZURUIKE, NWAEZE MARTINS
QUESTIONAIRE
SECTION A: PERSONAL DATA
Kindly tick ( 4 ) in the appropriate box in front of each of the statement that
best describe your situation.
1. Sex: (a) Male ( ), (b) Female ( ).
2. Age
(a) Under 30 ( ), (b) 30-40 ( ), (c) 41-50 ( ), (d) 5 1 and
above ( ).
3. Marital status:
(a) Single ( ), (b) Married ( ), (c) Divorced ( ),
(d) Widowed ( ).
................................. 4. Highest Education Qualification (Please state):
.......................................................................................... b
5. Your present positiordfunction in the Bank (Please state):
............................................................................................ 6. Your years of Banking experience (Please state). ..................................
............................................................................................ 7. The name of your Department (Please state): .....................................
SECTION B Below are the suggested issues that shall aid us in carrying out critical study of the
problem stated on the preceding page.
Please tick good ( 4 ) against the option that most correctly describe your view.
If the space provided for any answer is insufficient, please use additional sheets
and indicate the question number being answered -%
Has your bank experienced fraud in the past five years?
Yes ( ), No. ( ).
If yes, do you think that fraud was possible because of lapses in your
internal control system? Yes ( ), No ( ).
Does your bank adopt the internal control system of Accounting
records? Yes ( ), No ( ).
If Yes, what are the various internal control measures adopted in your
bank? Please list them:
(a) ................................................................................ (b) ................................................................................
(f) .............................................................................. #. . Do you think that the internal control measures adopted by your bank
are very effective in the prevention and detection of fraud? Yes ( ),
No ( ). Does your bank encounter any problems in carrying out the internal
Control
If yes, what are the problems encountered by your bank in adoptjq the
various internal control measures?
(a) .............................................................................. (b) ..............................................................................
(d) ..............................................................................
Ii5
15 Which of the following internal control measures is being adopted by
your bank?
Proper control over the custody of the banks vault by at least two
Officials Yes ( ), No ( ).
A transaction is not started and completed by one person
Yes ( ) , N o ( ). Effective periodic check by Inspectorate department
Y e s ( ' No ( ). Periodic rotation of bank staff. Yes ( ), No ( )
Limit to the amount of Loans and overdraft granted by a manager
And proper authorization of such. Yes ( ), No ( ).
Periodic review of the banks' operations and activities by
External inspectors. Yes ( ) No ( ).
Periodic review of records and accounts by sectional heads.
Yes ( , No ( 1. B
Regular review of the bank staff account. Yes ( ) No ( )
Check on foreign exchange transactions. Yes ( ), No ( )
Yes ( , No ( 1. Review of fixed Deposit Accounts. Yes ( ), No ( ).
All banks instruments such as bank cheques, books, draft,
certificates of deposit etc, are under the control of at least two
staff. Yes ( ), No ( ).
The photograph of every customer withdrawing up to a certain
Limit is taken. Yes ( ) No ( ).
Before effect is given to any transaction, the customers signature is
verified with that in the signature card kept by the bank.
Yes ( ) , N o ( ).
Is the present internal control system in Nigerian commercial banks
appropriate in this present world of technology and sophistication?
Yes ( 1, No ( 1. Do you think that effective internal control system will ensure good
Performance of Nigerian commercial banks? Yes ( ) No ( )
Do you think that appropriate installation of internal control system will
help to curb Fraud in the Nigerian commercial Banks?
Yes ( 1, No ( 1. Does the qualifications of the Nigerian commercial banks' staff in any way determine the workability of a good installed internal control system
Yes ( 1, No ( 1. The present internal control measures in your bank can pr&cnt fraud.
Yes ( 1, No ( 1. In your opinion, is there any other areas that needs additional control in'
your bank? Yes ( ), No ( ).
If Yes, please specifl ........................................................... ....................................................................................... Does your bank branch adopt the use of computers as an internal
Control measure? Yes ( ), No ( ).
Is this the case with all the branches of your bank?
Yes ( , No ( 1. If your answer to question 24 is No, please explain ......................... ........................................................................................ Do you think that the introduction of computerized internal
Control system in all the branches of your bank will help to curb
Banking malpracticesFraud? Yes ( ), No ( ).
The major causes of fraud in our commercial banks are:
(i) Volume of work ( )
(ii) Number of staff ( )
(iii) Lack of experience staff ( )
(iv) Lack of staff training ( )
(v) Poor Management ( )
(vi) Staff Negligence ( )
(vii) Poor security arrangement for document ( )
(viii) Lapses in the implementation of internal control measures ( )
(ix) Employment of dishonest staff ( )
(x) Lack of proper enlightenment on the implication of fraud to the Staff
( 1 28. What in your opinion are the possible solutions and
recommendations to the incidence of fraud in the banking system?
APPENDIX B - GENERAL NATURE OF FRAUDS AND FORGERIES
SINO. YEAR 1. 1992 The most Common types of frauds and forgeries
perpetrated during 1992 to 1998 as per the Returns
Rendered by Banks include the following:
(i) Diversion of unutilized foreign exchange;
(ii) Fraudulent withdrawal from customer account;
(iii) Granting unauthorized credit in exchange for
uncleared effects-cheque kiting;
(iv) Alteration of checks;
(v) Blotting of Account number of cheque and forging signature;
(vi) Fraudulent inflation of expenditure; (vii) Fraudulent suppression of application/operation
Loan Account; (viii) Transfer of customers' lodgement to staff account;
(ix) Withdrawal and suppression of cleared Cheques and (x) Fraudulent manipulation of CBN clearing cheques.
2. 1993 (i) Presentation of forged cheques; (ii) Conversion of Bank's Money; (iii) Unauthorised overdrafts; (iv) Fraudulent transfers and withdrawals; (v) Posting of fictitious credits; (vi) Abuse of Medical Scheme; (vii) Suppression of cheques; b
(viii) Loss of money to armed robbers (ix) Granting c$ unauthorized loans; (x) Raising cif spurious vouchers and illegal cash
advances;
(xi) Receipt of forged mails, and Defalcation of customers' chequeslcash lodgement.
3. 1994 (i) Presentation of forged cheques;
(ii) Conversion of banks money into personal use; (iii) Unauthorised overdraft; (iv) Abuse of Medical Scheme; (v) Fraudulent transfer and withdrawals; (vi) Posting of fictitious credits; (vii) Suppression of Cash vouchers/cheques;
(viii) Loss of money to armed robbers, and (ix) Granting of unauthorized loans.
4. 1995 (i) Unauthorised Overdraft (ii) Presentation of forged cheques; (iii) Posting of fictitious credits; (iv) Suppression of cheques (v) Fraudulent transfers and withdrawal (vi) Abuse of Medical Scheme
5. 1996 (i) Presentation of forged cheques (ii) Granting unauthorized loans; (iii) Unauthorised overdrafts; (iv) Posting of fictitious credits; (v) Suppression of cheques;
(vi) Abuse of Medical Scheme and (vii) Fraudulent transfer and withdrawals.
6. 1997 (i) Presentation of forged cheques (ii) Granting unauthorized loans; (iii) Unauthorised overdrafts; (iv) Posting of fictitious credits; (v) Suppression of cheques;
(vi) Abuse of Medical Scheme; and (vii) Fraudulent transfer and withdrawals.
7. 1998 (i) Presentation of forged cheques; (ii) Granting of unauthorized loans; (iii) Unauthorised overdraft; (iv) Posting of fictitious credits; (v) Suppression of cheques; and (vi) Fraudulent transfer and withdrawals.
SOURCE: NDIC Various Years Annual Report and Statement of Accounts.
1. Supervisors And Manaqers 132
2. Off icers , Accountants and dxecutive Assis tants 66
3. Clerks And Cashiers 1 56
4. Typists , Tech n ic i ans and S teno~rapher s 9
5. Hessengers, Drivers, Cleaners, Steward and - Secur i tv Guards 54
6. Temporary Staflf - 7. 1 E$;$gorised 1
Total 436
APPENDIX C
RETURNS OF STAFF INVOLVED I N FRAUDS AND FORZERIES
192 1 993 7 994
% & NO. B F NO. I OF TOTAL TOTAL TOTAL
30.3 127 24.6 211 28.6
% % NO. O F NO. O F
TOTAL TOTAL I
*Staff vhose ranks were not disclosed
SOUHZE: N D I C A M U ~ ~ Report and Statement of AccountsVarious Issues.
OF TOTAL TOTAL
12 6 0 1
APPENDIX D
RETlJRNS O F COIGUiRJIAL BANKS ON FRAUD3 AND FORGERIES
SOURCE: NDIC Annual Report And Statement of Accounts: Various I ~ s u e s .
-
Quarter
FIRST
SECOND
THIKD
Proportion of Actual/ Expected To Loss To Amount Involved
% 8.2
33.8 15.67 16.81 26.58
2.25 1 5.97 27.2 16.6 12.04 20.50 35.85 15.28 8.62
25.1 13.6 8.77
26N5 23.36 18.63 1 9.55
FOURTH
TO'IIUL
No. of Banks with fraud cases (No.. Pe Fraud cases)
22 48 33 30
1 31 149 125 22 27 36 29 26
11 7 1 61 26 24 38 36
1 90 99
1 51 . . . . - ,
Year
1 992 1993 1 994 1995 19% 1 997 1 998 1 992 1993 1 994 I 995 1 996 1 997 1 998 1992 1993 1 994 1995 1 996 1 997 1998 . - - - -
Amount Involved ( =N=M)
151 -70 149.03 426.30 31 2.90 563.57
2,888.97 279.76 57.67
31 5.48 227.51 175.30 179.99 275.81 625.01
32.5 336.1 3 556.60 240.77 327.22 236.40
1,843.23
No. of Banks rendering Re turns
52 48 47 5 1 40 44
49 47 46 35 , 24 34
48 48 56 40 61 40 38
Actual / Expected
Loss (=N=M)
12.46 50.35 66.82 52.60
149.80 64.92 44.28 15.67 52.50 27.41 35.95 64.53 42.15 53.87 8.15
45-83 48.84 62.74 76.44 44.03
360.44 -
110.06 576.51
1,445.30 277.31 427.1 3 189.1 3 381.16
1 , 2 E 2,655.71 1 ,006.28 1,542.91 3,590. 31 3,129.1 6
19 29 45 32
1 80 1 06 127
69 1 08 152 127 587 471 564
- - - - --
1 992 1 993 1 994 I 995 1 996 1997 1 998 I 992 1993 1 994 1 995 19% 1 99'7 1 998
5 5 56 4 9 4 7 45 36 38 - - - - - - -
28.52 92.32
71 0.48 75.09 80 31 73.44
214.91
2::: "0 883.55 226.38 371.08 224.54 673.50
25.9 16.0 51 -23 27-09 16.90 38.83 56.38
: % 33.26 22.49 24.07 6.25
21.52
Quarter
FIRST
THIRD
FOURTH - -. -
APPENDIX E
RETURNS OF HERCHANT BANKS ON FRAUDS AND FORGERIES
Year
No, of Banks rendering Returns
No. of Banks with fraud cases (No. of Fraud cases)
roportion of Actual/
Involved Expected To Loss To
( =N- ' lvl) Amount Involved
SOURCE: NDIC Annual Report And Statement of Accounts. Various Issues.
APPE
iiDIX
F
FIRST TEN (10) 3
AN
S
WITH
H
IGH
EST
FRA
UD
CA
SES
NOTE: F
or th
e Y
ears co
ve
red
by th
e stu
dy
Com
mercial b
ank
s accou
nted
fo
r n
ine
(9)
-
ou
t of
the
ten
ban
ks
ex
ce
pt f
or
1995 w
here
the
fir
st te
n b
ank
s were a
ll
Com
mercial
banks.
SOU
RCE: N
DIC
A
nnual R
epo
rt and Statem
ent of
Acco
un
ts. V
ariou
s Issu
es. '
I 1 992 %
S
ha
re
84.4
100.0
1993
Croup
To
tal f
or
the f
irs
t Ten
aa
nk
s
G-d T
ota
l for a
llBa
nk
s
Am
omt
Inv
olv
ed
(=N= IM)
1,341.42
1,419.03100.00
'Am
ount In
vo
lved
(aNal~)
346.77
411.75
%
Sh
are
1 994 A
mount
Inv
olv
ed
(=N='M)
94.532,303.54
3,399.39
1(
Sh
are
67.76
100.00
-
1995 A
mount
Inv
olv
ed
(d
bq
)
630.49
1,011.36
%
Sh
are
19% A
mount
Inv
olv
ed
(=N= 'M)
62.341,052.62
100.001,600.68100.00
%
Sh
are
1 997 A
mount
Inv
olv
ed
(=N= 'M)
65,763,649.1
1 998 %
Sh
are
96.6
Am
ount In
vo
lved
(=N= 'H)
3,104.3
3,196.52100.00 3,7?'7.92100.00
%
Sh
are
97.11
APPENDIX G
SUGGESTIONS FOR FURTHER RESEARCH Owing to some constraints as adduced in chapter one of this work, the researcher
could not carry out a comprehensive research work on the topic in question. It is,
therefore, suggested that a more comprehensive work covering at least sixty
commercial Banks in this country be carried out by future researchers for more
reality and probably the best results.
However, the work should be directed towards testing the following null
hypothesis.
(i) There is no relationship between commercial banks profitability and a good
installed internal control system. b
(ii) Commercial Banks fraud does not have adverse effect on the Nigerian economy.
These hypothesis need to be tested and results established given the role
commercial banks play in the economy.
Moreover, since the very topic is the concern of the society, future researchers
should engage in collection and documentation of related literature review so that
people can read a lot about commercial Bank fraud and internal control system.
ONUZURUIKE, NWAEZE M. PG/MBA/98/4505 1 Banking and Finance
November, 1999.