THE IMPACT OF INTERNAL CONTROL SYSTEM ON FRAUD PREVENTION IN FINANCIAL INSTITUTION [A CASE STUDY OF ACCESS BANK PLC]
ABSTRACT
The research work is aimed at finding out the impact that internal control system plays to prevent fraud in a financial institution. The case study for the study is Access Bank. The sample size of the respondents is 100 which comprised both the senior and junior cadre. The instruments employed to generate the information needed is Questionnaire and another financial document available as a secondary source. The statistical instrument used as an analysis to gather the data is simple percentage and Chi-square. The research was able to find out the following result at the end of the research work:
ﾢ That the effective "internal control system can prevent fraud
ﾢ That despite the introduction of the internal control system we still experience fraud
ﾢ That there is effective internal control over what goes in and comes out of computer
ﾢ That despite the fact that fraud is still experienced in the bank with the internal control system on ground. Internal control system is very important to check banking fraud.
TABLE OF CONTENTS
Title Page
Certification
Dedication
Acknowledgment
Table of content
Abstract
CHAPTER ONE: INTRODUCTION
1.0 Background to the Study
1.1 Statement of Problem
1.2 Purpose of the Study
1.3 Research Questions
1.4 Research Hypotheses
1.5 Scope of the Study
1.6 Significance of the Study
1.7 Research Methodology
1.8 Limitation of the Study
1.9 Definition of Terms
CHAPTER TWO : LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.0 Introduction
2.1 Meaning of Internal Control and Internal Check Internal Control
2.2 Qualities and Essentials of Internal Control
2.3 Objectives and Types of Internal Control
2.4 Available Controls to Stop Across the Counter Frauds in the Banking Industry
2.5 Limitations of the Effectiveness of Internal Control
2.6 Internal Audit
2.7 External and Internal Auditors Compared and Contrasted
2.8 Internal Controls in an Electronic Data Processing (EDP) Environment
2.9 Internal Control Questionnaire (ICQ)
2.10 Historical Background of Access Bank Plc
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population Size
3.3 Sample Size
3.4 Sources of Data
3.5 Research Instruments
3.6 Method of Data Analysis
CHAPTER FOUR:
DATA PRESENTATION AND ANALYSIS
4.0 Introduction
4.1 Data presentation
4.2 Data analysis
4.3 Test of hypotheses
CHAPTER FIVE:
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.
5.1 Summary
5.2 Conclusion
5.3 Recommendation
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
In contemporary business world, the need for effective internal control system cannot be over-emphasized. The growth and expansion in business activities necessitate the need for an efficient system of controls, financial and otherwise in order to safeguard the assets and secure as far as possible the completeness and accuracy of the records.
The responsibility falls on the management to establish a sound system of internal controls ensuring adherence to organizational policies.
Many businesses die prematurely due to absence of effective internal control deficiencies due to insufficient staff in relation to the ideal allocation and separation of functions (which could have helped to prevent and control fraud) and excessive domination of the business by one person (the proprietor/proprietors). In most business where one person has over riding influence on the activities of the organisation, there have been prevalent cases of fraud and embezzlement.
Where there is effective separation of duties, fraud will be reduced to its barest minimum. This is because no single person could perpetrate the crime of fraud. A very efficient internal control system will make it very difficult for any (single) person to carry out fraud except in the case of collusion. Financial institutions most especially banks need very efficient internal control system due to the sensitive nature of their operations. In today's banking business, the developments in the area of electronic banking and the use of Automated Teller Machine (ATM) card call for vigilance on the part of the management. The records and computer operations' need to be well controlled to check excessiveness or too much independence on the part of any member of staff to avoid fraud.
Any financial institution where there is weak or loose internal control will record high cases of fraud. Also, in any financial institution where the system of internal control is strong, fraud is discouraged or eliminated and/or reduced.
Though a system of internal control may be very complex as to cause some bureaucratic bottlenecks, the benefits in terms of fraud prevention and control are enormous. At times internal control measures may cause delay in expediting actions on certain issues, but its usefulness should not be under estimated.
Auditors (internal and external) are interested in seeing that a system of internal control is in operation and is continuously in operation. The effectiveness or otherwise of the internal control determines the extent to which the external Auditor may rely on the work of the internal Auditor when auditing the accounts.
1.1 STATEMENT OF PROBLEM
In today's increasingly complex organization, the growth in the network of branches (in most organizations) paved ways for unfaithful members of staff to engage in fraudulent practices. The farther these branches are from the headquarters, the easier fraud becomes. This is because supervision is less effective. This makes the job of reconciling the accounts of branch offices with the headquarters' accounts very rigorous. Most often auditors find most of these branches too remote to visit and/or time may not allow them to do so. In such cases, they are left with no choice than rely on the records and the Internal Audit department.
Besides, most small organizations are yet to embrace internal control measure. This may be partly due to the fact that there is shortage of manpower or the need to be cost effective. In that case, one person may double as two officers for example an Accounting Officer and an impress Holder or as a paying and receiving cashier.
In most small organizations, findings have shown that a signatory to account may also be a keeper of the cheque book - this is an easy way to encourage fraud.
In the banking industry for example, some banks today use one person to do more than one specific job. For example, a Cashier whose job should be mainly paying or receiving money in the cage may go to the extent of entering transactions he/she carried out in other records that are meant to be handled by a separate person. Also, some workers stay too long in a particular post or branch without transfer. This makes it easy for collusion to take place to carry out fraud.
Most one man businesses employ staff based on family ties or trust thereby making internal control to be of little or no significance. Findings have shown that such businesses end up losing substantial amount of money to fraudulent staff. Where there is internal control system at all, this is most often over ridden by the owner of the business.
Most cases of fraud are as a result of pressure or abuse of authorization. A senior officer may veto his decision to aid fraud. This may be the case where the effectiveness of internal control is restricted to lower cadre of staff. Internal check (which should be a routine exercise to prove independently the work of each staff which is complimentary to that of another) with its objective of preventing or detecting early any fraud or error has become an occasional exercise or periodic exercise in some organizations.
In some Electronic Data Processing (EDP) environment, there is little or no control over input, output, processing and master files. Too much independence of computer personnel (operators, programmers) may be an open gate to fraud and error. Since most of organization's activities these days are computerized, the internal control system should beam more light on input, output, processing and master files control.
1.2 PURPOSE OF THE STUDY
To identify the importance of internal control in fraud prevention and control. That is to point out how indispensable an effective internal control system can be to the overall success of a business enterprise most especially as it relates to record keeping and safe guarding the assets of an organization. Since most of these assets are used in generating the wealth of the business concern: they cannot therefore not be left at the mercy of reckless and fraudulent employees without doing anything to secure them.
This study is also being undertaken to point out that it is not only big organizations that need effective internal control but small business as well even sole trading. Most sole proprietors with few employees under them don't see the need for any serious internal control system since they are at the helm of affairs themselves. But fraud can be perpetrated by anybody and at any time unless enough precautions are taken to nib its occurrence in the bud.
Another purpose of this study is to show how vulnerable a bank could be to fraud and errors if a working internal control system is not in place. This study intends to stress that banks more than any other business organization need to have a very strong internal control system which can hardly be over ridden either as a result of collusion or abuse of authorization. This is because banks dealing money and other valuables that can easily be converted to cash.
Moreover, this study intends to show that internal control system should be dynamic in accordance with the waves of changes in operations. For example, in today's business where greater reliance is placed on the use of computer, there is therefore the need to protect computer facilities as well as have firm control over files, storage procedures, reconstruction procedures and system development controls. So, as the operation of an organization expands in internal control to cope with such expansion or change.
1.3 RESEARCH QUESTIONS
This study will seek to find answers to the following questions:
1. To what extent does internal control system affect the operation of a business most especially as it relates to finance and record keeping?
2. Does fraud have any effect on profitability in an organization?
3. Is effective internal control system a dependable tool for fraud prevention and control?
4. Can a system of internal control be so effective that it will scale the hurdles of collusion and abuse of authorization?
5. To what extent can the internal control system be useful in detecting errors early?
6. To what extent can the external auditor rely on the internal control system in carrying out his duties?
1.4 RESEARCH HYPOTHESES
A statistical hypothesis is an assumption about the frequency function of a random variable. A hypothesis is a statement in which we express ideas or guesses based on a few known facts that has not yet been proved to be true or correct.
The hypothesis can be
i. Null Hypothesis (Ho)
ii. Alternative Hypothesis (Hi)
The following hypotheses are tested in the course of the study:
1. Ho: There is no significant difference between internal control
system and fraud prevention and control.
Hi: There is significant difference between internal control
system and fraud prevention and control.
2. Ho: There is no significant difference between internal check
and fraud prevention and contro1.
Hi: There is significant difference between internal check and fraud prevention and contro1.
3. Ho: There is no significant relationship between management
attitude to internal control and fraud prevention and control.
4. Ho: There is significant relationship between management
attitude to internal control and fraud prevention and
control.
1.5 SCOPE OF THE STUDY
This research focuses attention on effectiveness of internal control system or fraud prevention and control in the banking industry with particular reference to Access Bank Plc. This work intends to show the entire internal control network in the bank. That is all the measures put in place by the management of the bank to prevent fraud or detect error early are in focus here.
This work also focuses on the various types of control available in an electronic data processing environment. Among such controls are: administrative control, system development control, procedural control, or application control, organizational control and general control. These various types of control give an insight into how tall the hierarchy of internal control is. It also shows how difficult it will be for the system of internal control under review to be beaten in order to carry out fraud.
This study also covers the area of security of computer system and other records and facilities. It points out some of these measures such as restriction of access to computer facilities, fire prevention and stand by arrangement, file backup procedures, prompt return of files by operators after use to mention but a few.
The areas of common interest and conflicts between the external and internal auditors are also examined. That is, the extent to which the work of the internal audit department and that of internal auditor can be relied upon is addressed. When and why the internal audit or internal control system may not be reliable is considered in this study.
1.6 SIGNIFICANCE OF THE STUDY
This study will help to establish that there is a correlation between effective internal control and the level of fraud in organization. That is, a weak internal control system might result in high incidence of fraud while an effective internal control might reduce the rate of fraud.
Besides, this research work will help in pointing out that fraud is a canker worm which can be got ridden off or reduced to its possible lowest limit if there is a working and consistent internal control in an organization. That is, a good internal control may serve as a watch dog scrutinizing the activities of all employee thereby making it very difficult if not impossible to commit a crime of fraud.
Furthermore, this work will be of importance in exposing some of the possible difficulties any internal control system may face. Such difficulties as overriding internal control, abuse of authorization, personal intention, pressure and collusion. Knowing these weaknesses which may befall a system of internal control, management will be able to do something to work on these weaknesses.
1.7 RESEARCH METHODOLOGY
This research work is intended to be carried out on Access Bank Plc. The target respondents are the members of staff of the bank and other accounting students who might find this subject very interesting.
In carrying out this research work, some non-probability sampling techniques will be used. Under these sampling techniques, there is no equal chance of being selected, neither is there a reliable way of measuring the number of errors in our estimates. Some of the sampling techniques which will be used here are snowball sampling, Accident or Convenient sampling and purposive sampling.
The research design intended to be used here is correlation design which will make it possible to establish the relationship between effective internal control system and fraud prevention and control. This research design is a non-experimental research design.
The research instruments intended to be used are questionnaire and personal interview. The interview questions will be both structured and unstructured.
For the questionnaire, this will be a combination of fixed alternative or closed ended questions, open ended questions and scale items.
1.8 LIMITATION OF THE STUDY
This research, because of its nature, is bound to encounter various problems. One of the problems which is likely to limit the extent to which the research could be carried out is the time factor. There can never be enough time to satisfactorily carry out is the time factor. There can never be enough time to satisfactorily carry out any research work and so this work is not an exception to that limiting factor.
Another limitation is lack of co-operation from respondents. It is not uncommon to find out that a group of respondent might not be willing to give away some vital information about their organizations. This may be as a result of fear of criticisms.
Also related to the above limitation is dishonesty on the part of the respondents in providing responses to the questionnaire. Respondents most of the time provide answers to questions in the questionnaire without much seriousness thereby making such information unreliable.
Due to the sensitive nature of this research work, the researcher may not be able to gather enough facts about the internal control system in the bank. Since information gathered cannot be adequately tested, much reliance will be placed on whatever information the researcher is able to gather. Also, many respondents who may be willing to supply information may not have sufficient time to do so due to the busy nature of their jobs. Since much reliance is placed by the organization on the internal control system to prevent fraud, the respondents might not be willing to give away much information about the internal control network.
1.9 DEFINITION OF TERMS
Internal Control System
Internal Control system can be defined as the whole system of controls financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensuring adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.
Internal Check
Internal check is defined as the checks 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 with the sole aim of preventing or early detection of errors and fraud; it includes matters such as the 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.
Internal Audit
Internal Audit is an independent appraisal activity within an organisaiton for the review of operations as a service to management, it is a management control which functions by measuring and evaluating the effectiveness of other controls.
Internal Control Questionnaire (ICQ)
Internal control Questionnaire is a document designed to evaluate the system of internal control in order to ascertain how good the system is.
Error
Error can be defined as unintentional mistakes in financial statements such as mathematical mistakes in financial statement in the underlying records and accounting data, oversight or misinterpretation of facts and misapplication of accounting policies.
Irregularity
The word "irregularity" is used to refer to intentional distortions of financial statements for whatever purpose and misappropriation of assets.
Fraud
The word fraud refers to intentional misrepresentation of financial information by one or more individuals among the management, employees or third parties which may involve manipulation, falsification or alteration of records, misappropriation of assets, suppression or omission of transaction from records or documents, recording of transactions without substance and misapplication of accounting policies (if this is intentional)
Teeming and Lading
Teeming and lading is a type of fraud which is signified by the misappropriation of funds by falsifying records in respect of subsequent transactions. For example, where money received from debtors has been misappropriated, it is common to find that in order to prevent debtor's account appearing other debtor is credited to the account of the debtor whose remittance was originally misappropriate.
Snowball Sampling
It is a sampling technique where we first identify subjects who meet researcher's interest and he/she is relied on to introduce us to other subjects with similar characteristics. It is used where people are not likely to volunteer to strangers.
Accident or Convenient Sampling
It is a sampling technique where the researcher decides to use as subjects, those that have the characteristics of his target population. It is convenient to him to use those he accidentally meet.
Purpose Sampling
This is when a researcher uses the purpose of the research to convince respondents in order to enlist their cooperation.
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