A study into the impact of internal control system on detection and prevention of fraud; a case study of mainstreet bank, aba branch

Project Abstract

Fraud remains a significant concern for financial institutions worldwide, leading to substantial financial losses and reputational damage. To mitigate this risk, organizations implement internal control systems to detect and prevent fraudulent activities. This study examines the impact of an internal control system on the detection and prevention of fraud, focusing on a case study of Mainstreet Bank, Aba Branch. The research employs a mixed-methods approach, combining qualitative and quantitative data collection methods to provide a comprehensive analysis. Qualitative data is gathered through interviews with key personnel involved in the internal control processes at Mainstreet Bank, Aba Branch. These interviews offer insights into the design, implementation, and effectiveness of the internal control system in place. Quantitative data is collected through a review of historical fraud incidents at the bank, focusing on the outcomes of fraud detection and the measures taken to prevent future occurrences. By analyzing these data sets, the study aims to identify patterns and trends that highlight the impact of the internal control system on fraud detection and prevention. Furthermore, the research assesses the perception of employees towards the internal control system and its role in reducing the risk of fraud. Employee surveys are conducted to gauge their understanding of internal controls, their compliance with control procedures, and their awareness of fraudulent activities within the organization. The findings of this study are expected to provide valuable insights for Mainstreet Bank, Aba Branch, and other financial institutions seeking to enhance their internal control systems to combat fraud effectively. By understanding the strengths and weaknesses of the current system, management can implement targeted improvements to bolster fraud detection and prevention mechanisms. In conclusion, this research contributes to the existing literature on internal control systems and their impact on fraud detection and prevention in financial institutions. The case study of Mainstreet Bank, Aba Branch, offers a practical perspective on the challenges and opportunities in implementing internal controls to safeguard against fraudulent activities. Ultimately, the study aims to provide actionable recommendations to enhance the effectiveness of internal control systems in mitigating fraud risks and protecting the interests of stakeholders.

Project Overview

<p> </p><p><b>GENERAL INTRODUCTION</b></p><ol><li><b>INTRODUCTON</b></li></ol><p>How extensive should a company’s<br>internal control system be? In today’s environment, this is a difficult<br>question to answer. The reason being that some current business, legal, and<br>social trends suggest that companies need to increase their emphasis on<br>internal control, while other trends indicate just the opposite. Bank failures<br>and widespread losses over the past two decades have elevated the importance of<br>effective internal control within the formal financial sector worldwide. In the<br>United States for example, bank failures rose over 200 percent in the 1980s<br>partly due to fraud and mismanagement. Internationally, the collapse of Barings<br>Bank and Yamaichi Securities further focused the financial sector’s attention<br>on internal control. The Basle Committee analyzed the problems related to these<br>losses and concluded that they probably could have been avoided had the banks<br>maintained effective internal control systems (banking, a regulatory and<br>auditing guide). In addition, a review of traditional banks affirmed that the<br>implementation of effective internal control systems played an important role<br>in reducing bank failures.</p><p>Internal control, the strength of<br>every organisation, has become of paramount importance today in Nigeria banks.<br>The reasons being that the control systems in any organization are a pillar for<br>an efficient accounting system as well as achievement of organizational goals.</p><p><b>1.2 BACKGROUND OF THE STUDY</b></p><p>As part of its on-going efforts to<br>address bank supervisory issues and enhance supervision through guidance that<br>encourages sound risk management practices, the Basel Committee on Banking<br>Supervision issued a framework for the evaluation of internal control systems.<br>A system of effective internal controls is a critical component of bank<br>management and a foundation for the safe and sound operation of banking<br>organizations. A system of strong internal controls can help to ensure that the<br>goals and objectives of a banking organization will be met, that the bank will<br>achieve long-term profitability targets, and maintain reliable financial and<br>managerial reporting. Such a system can also help to ensure that the bank will<br>comply with laws and regulations as well as policies, plans, internal rules and<br>procedures, and decrease the risk of unexpected losses or damage to the bank’s<br>reputation.</p><p>The Basel Committee, along with<br>banking supervisors throughout the world, has focused increasingly on the<br>importance of sound internal controls. This heightened interest in internal<br>controls is, in part, a result of significant losses incurred by several<br>banking organizations. An analysis of the problems related to these losses<br>indicates that they could probably have been avoided had the banks maintained<br>effective internal control systems. Such systems would have prevented or<br>enabled earlier detection of the problems that led to the losses, thereby<br>limiting damage to the banking organization.</p><p>A system of accounting and records<br>keeping will not succeed in completely and accurately processing all<br>transaction unless controls known as internal controls are built into the<br>system. The purposes of such internal controls are to ensure that transactions<br>are executed in accordance with proper general or specific authorisation and<br>again to ensure that all transactions are properly recorded with the correct<br>amount and in the appropriate account and in the proper accounting periods so<br>as to permit preparation of financial statement in accordance with relevant<br>legislation and accounting standards and for informed management decision<br>making.</p><p>Internal control will ensure that<br>errors and irregularities are avoided or made apparent. Internal control as a<br>system comprise of the control environment and procedures .It includes all the<br>policies and procedures adopted by the directors and management of an entity to<br>assist in achieving their objectives of ensuring as far as practicable the<br>orderly and efficient conduct of its business so as to safeguard assets, to prevent<br>and detect fraud and error to ensure accuracy and completeness of accounting<br>records and the timely preparation of reliable financial information (SAS<br>300.1)</p><p>The company code 1963, Act 197<br>section 123 states that “management will need to establish an effective<br>accounting system comprising a number of controls”. In an attempt to do this<br>there must be a well-defined organisational structure showing how<br>responsibility and authority are delegated clearly defined communication<br>channels or lines of reporting(i.e. upward , downward and horizontal lines of<br>reporting) for attainment of corporate objectives. These controls are such that<br>different people are assigned to do different task. No one person should fully<br>record and process transactions from commencement to the end.</p><p>This means that a company can only<br>achieve its corporate mission through the establishment of internal control<br>system which makes sure that those policies and procedures which are laid down<br>by management are efficient. Hence, it reduces the cost of operation without<br>reducing effectiveness.</p><p><b>1.3 STATEMENT OF THE PROBLEM</b></p><p>The regularity of fraud and<br>misappropriation of funds is creating fear, anxiety, and a loss of confidence<br>in the minds of bank customers. Also, poor internal control system leads to<br>increase in bank losses. Management is required to set up an internal control<br>system but this system varies significantly from one organization to the next,<br>depending on such factors as their size, nature of operations, and objectives.<br>Since internal controls operate in an environment which influences its<br>operations, proper care must be exerted into the implementation of these<br>systems in other to achieve the utmost aim of the bank. This heightened<br>interest in internal controls is, in part, a result of significant losses<br>incurred by several banking organizations. An analysis of the problems related<br>to these losses indicates that they could probably have been avoided had the<br>banks maintained effective internal control systems. Such systems would have prevented<br>or enabled earlier detection of the problems that led to the losses, thereby<br>limiting damage to the banking organization.</p><p><b>1.4 OBJECTIVES</b></p><ol><li>To find out the impact of internal control system, on<br>the overall management of Mainstreet bank Nigeria Aba branch.</li><li>To find out the employees knowledge base on the concept<br>of fraud in the banking sector.</li><li>To find out effective internal control systems<br>influence on prevention and detection of fraud.</li><li>To find out the problem of fraud and how to curb it.</li></ol><p><b>1.5 RESEARCH QUESTIONS</b></p><ol><li>Does Mainstreet bank have an internal control<br>system? If yes, how effective is it?</li><li>&nbsp;What kind of relationship exists between<br>detection and prevention of fraud and internal control system?</li><li>Is lack of good internal control system a major cause of<br>fraud in banks? And what other major causes exist?</li><li>Can banks with effective internal control system<br>prevent the menace of fraud?</li></ol><p><b>1.6 RESEARCH HYPOTHESIS</b></p><p>The research is intended to<br>investigate the impact of internal control system in the circumstances of<br>embezzlement and fraud detection in the bank.</p><p>Therefore the data to be collected<br>in this exercise will be used to test the following hypothesis.</p><p><b>H1</b>:<br>Effective internal control system can help to prevent and detection of fraud in<br>Mainstreet bank.</p><p><b>H0</b>:<br>That effective internal control system may not help to prevent and detect fraud<br>in Mainstreet bank.</p><p>Research is poised to confirm true<br>or otherwise, to achieve this purpose the research has formulated the above<br>hypothesis. That the general financial management and control system as regard<br>revenue and expenditure is effective, efficient and technical. Also the general<br>financial management and control system as related to the public opinion is<br>inadequate, ineffective, and this lacks improvement in its operation<br>achievements which will hinder general development.</p><p><b>1.7 THE SIGNFICANCE OF THE STUDY</b></p><p>The findings of the study would help<br>the management of the bank to maintain an enhanced controlled environment by<br>helping management and employees to establish and maintain an environment<br>throughout the bank that sets a positive and supportive altitude towards<br>internal control, reliable management, operating personnel for effecting<br>internal control and internal audit for evaluating whether appropriate controls<br>have been implemented and whether the internal controls are functioning as<br>intended. Other significance of the study includes:</p><ul><li>Help the bank in reducing fraudulent activities that<br>occur in the organisation. </li><li>Requirement for the award of a Master’s degree.</li><li>Reference for other research topics</li></ul><p><b>1.7 SCOPE OF THE STUDY</b></p><p>The content of this research should<br>not be seen as being totally exhaustive of all possibly situations available in<br>the Nigerian banking sector on the theme of this study. This is due to the vast<br>size of the banking sector and the boundless nature of the study under review.<br>Therefore, the scope of this research is limited to the study carried out on<br>Mainstreet Bank branch in Aba, Nigeria.</p><p><b>1.8 LIMITATIONS</b></p><p>The limitations of this research<br>work are as follows;</p><ol><li>The internal control involves human actions which<br>introduces the possibility of errors in processing or judgement.</li><li>Internal controls can also be overridden by the plan<br>among employees and evasion of controls or oppression by top management<br>and superior external influences.</li><li>&nbsp;Limited funds prevented the choice of more than<br>one study area.</li></ol><p><b>1.9 &nbsp; OPERATIONAL<br>DEFINITION</b></p><p><b>Internal control: </b>a control is “any action taken by management to enhance the<br>likelihood that established objectives and goals will be achieved” [institute<br>of internal auditors, 1993].in other words, controls are designed to ensure<br>that organizations conform to standards or plans. Examples of controls include<br>the use of sales or expense budgets, computer passwords, or even padlocks on<br>warehouses.</p><br> <br><p></p>