Appraisal Of Fraud Control Techniques In Nigerian Commercial Banks

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Appraisal Of Fraud Control Techniques In Nigerian Commercial Banks


Abstract


This study aims to appraise fraud control techniques in Nigerian commercial banks using First Bank Plc, Ethiope East Local Government Areas in Delta State as a case study. The study adopted the survey research design and randomly enrolled participants in the study. It recorded cases of fraud in the Nigerian Commercial banks, what constitutes fraud, causes of fraud, most common types of fraud and their effects on the banking industry, fraud detecting methods and recommendations for controlling and prevention of frauds in the banking sector. The findings revealed that the level of fraud awareness in commercial bank is very high; fraud is very rampant; the ineffective and inefficient control system is the major cause of fraud. The principal function here is to review the audit plans and scope of examination of both independent auditors and the bank internal audit dimension.


Chapter One


Introduction

1.1 Background of the Study

Among the Nigerian industrial sectors today, one can say that the banking industry is the most visible and arouses the most public interest. The importance of the banking sector in any economy stems from its role of financial intermediation, provision of an efficient payment system and facilitation of the implementation of monetary policies. In intermediation, banks mobilize savings from the surplus units of the economy and channel these funds to the deficit unit, particularly private business enterprises, for the purpose of expanding their productive capacity.
Today, the very integrity and survivability of these laudable functions of Nigerian banks have been called into question in view of incessant frauds and accounting scandals.

According to Oseni (2006:16), “the incessant frauds in the banking industry are getting to a level at which many stakeholders in the industry are losing their trust and confidence in the industry”. Corroborating the views of Oseni, Idolo (2010:63), stressed that “the spate of fraud in Nigerian banking sector has lately become a source of embarrassment to the nation as apparent in the seeming attempts of the law enforcement agencies to successfully track down culprits”.

Although the incidence of fraud is neither limited to the banking industry nor peculiar to Nigeria economy, however the high rate of fraud within the banking industry, calls for urgent attention with a view to finding solutions. Fraud in its effect reduces organizational assets and increases its liabilities. With regards to banking industry, it may engender crises of confidence among the banking public; impede the going concern status of the bank and ultimately lead to bank failure.The Central Bank of Nigeria (CBN) reported that cases of attempted fraud and forgery in banks, as at half-year 2007 exceeded what was recorded in the whole of 2006. For instance, the CBN half-year report for 2007, disclosed that a total of 741 cases of attempted fraud and forgery, involving N5.4 billion (US $34.8 million), were reported as at June, 2007. Whereas in 2006, the entire cases of fraud reported were 1,193, involving the sum of N4.8 billion (US $30.97). The CBN also maintained that the dwindling situation is occasioned by weaknesses in the internal control system of the affected banks. The foregoing statistics clearly unfolds the extent to which fraud had eaten deep into the financial strength of Nigeria banks.

The bulk of fraud required by investing sector of most developed and developing business economies of the world is provided by the bank industry in the services of mobilizing fund from the saving that is simple to the investing sector provided by the banking industry accounted for the high status the banking industry is placed in the development of any economy. The rate of economic development of the nation has hence been very closely associated with the effectiveness and efficiency of the banking system of the nation.

Commercial banks as case study of the research work provided services like acceptance of deposit, sake keeping of valuables, offering of pieces of advice like investment, create credit and other business published in the gazette by the governor of central bank designed to make commercial banking business of all the components of the banking system. Incidence of fraud occurrence is also found in other spheres of life, in government and in commence and industries.

Fraud is a complex universal phenomenon, it is rampant in both developed and developing countries and varies across time and place in to magnitude, it effect on administration, performance development, political, economical, socio-cultural and attitudinal factors combine to contribute and circulate beyond the national boundaries. Fraud is a matter of individual choice and opportunity. The banking sector provides such opportunity in abundance as they deal with cash and near money instrument.

In the history of Nigeria banking, a total of 185 banks were registered by the financial secretary to the colonial administration to carryout banking business. From 1892-1952 was known as the era of free for all banking. Between this point banking businesses, there were high expectation that trend will continue to prove as a matter of time, but because high expectation never observed. As in the first half of 1950s the industry collapsed.

Many banks folded up and involve in frauds in commercial banks which rises to N1, 377 -15 million in 1993. Whereas the actual loss from N688million to N241.0 million.

We are aware that fraud are across all sectors of the economy and that the size of enterprises determine the volume of fraud penetration. We are also unaware of manpower training, poor internal control system, inadequate incentive and unsuitable legal framework for dealing with offenders protracting frauds in addition to these lacks of commitment on the part of staff and employees, policies of some banks tend to make frauds and forgeries attractive.
We consider the higher rate of fraud in bank as clearly unacceptable; some thing attractive ought to be done so urgently. We therefore, call the management of bank to adopt strategies that will block all loopholes that encourages frauds in their organization. In specific terms, we advice that banks should critically examine option for prevention and timely defection of fraud and forgeries as these are likely to scare the perpetrators. Adequate internal control such as redeployment of staff and adequate internal check without notice should be put in place.

Staff should be kept abreast of sophisticated and other development through continuous training. Bank staff should be adequately remunerated and motivated to give the best while working with satisfaction.

Poor remuneration in banking environment may constitute a menace to the system as temptations are likely to occur and the urge to succumb becomes irresistible. I believe that computerization can go a long way as a strategy for internal control in banks. I therefore urge all banks to embrace and install computers in their organizations.
No effort should be spared in the fight against this crime in order to reduce it to the barest minimum.


1.2 Statement of the Problem

The monumental growth and transformation witnessed by the Nigerian banking industry brought with it some sharp practices which metamorphosed into wide spread fraud which is contrary to the desire of any economy. Considering the Nigerian experience in recent past, where fraud, corruption failures and distress have become the order of the day, the question that comes to ones mind is: can we leave this crucial sector\industry to the idea and behaviors of the operators? In order to prevent a collapse of the payment mechanism, encourage monetary stability, ensure an efficient and competitive financial system, protect customers’ interest and ensure a safe and sound banking industry, government has taken steps to regulate the banking industry and various banks have sent their staff on a variety of training to enable them provide better services. But despite all these, operators and staff of the banking industry however, engage in activities that are contrary to the objectives and ethics of banking. The problem here includes: what are these activities? Who are the perpetrators? What are the reasons why such acts exist, and what can be done to minimize, if not eradicate them? It is so for many reasons a matter of growing concern the increasing incidence of fraud in the banking industry. The concern is that over the last decade or so, fraud and irreregularities have assumed an alarming dimension in terms of magnitude, sophistication, audacity and damaging propensity. Fraud results in Unwarranted losses for the bank andvery importantly, fraud literally clips off a bit of the publics confidence in the orthodox financial institution that banks are, and delay the full development of banking habits in the citizens and in extreme cases leads to the complete failure of the bank. A more growing concern of recent is the categories of staff involved in fraud. More and of the middle and senior/management staff of banks are increasingly being attracted by the lure of fraud, and the successful prevention of a specific fraud, gives rise to a more complex one by the perpetrators.


1.3 Research Objectives

The primary objective of this study is to appraise fraud control techniques in Nigerian commercial banks.

Specifically, the study seeks to:

  1. Find out the level of fraud awareness in commercial banks
  2. Find out the how rampant fraud isin Nigerian Commercial banks?
  3. Find out if ineffective and inefficient control system is the major cause of fraud in the banking sector.
  4. Find out how to control fraud in Nigeria commercial banks.

1.4 Research Questions

  1. What is your level of fraud awareness in commercial banks?
  2. To what extent do you agree that fraud is rampant in the banking industry?
  3. To what extent do you agree that ineffective and inefficient control system is the major cause of fraud in the banking sector?
  4. How can fraud in commercial banks be controlled?

1.5 Scope of the Study

The study centers on fraud in the Nigerian banking industry with a keen interest on commercial banks using First Bank Plc Ethiope East Local Government Areas in Delta State as case study. It recorded cases of fraud in the Nigerian commercial banks, what constitute fraud, causes of fraud, most common types of fraud, their effects on the banking industry, fraud detecting methods and recommendations for controlling and prevention of frauds in the commercial banks in Nigeria.


1.6 Significance of the Study

The study will be useful to the general public because the banking industry touches the life of everyone in an economy. Banks all over the world have contributed immensely to the economic growth and development of nations. As such, problems such as fraud which can hinder the smooth operations of the banking industry should be viewed with all seriousness in other not to intercept or destroy the rate of development.

The efficiency of the banking industry is a necessity for the proper working of a nation. Thus, this study would be of great use to authorities concern with banking operations, managements, staff customers and prospective investors in the industry. In Nigeria, bank fraud have assumed a frightening scale and sophistication consequent upon the general economic depression of the last decade and the continuing travails of the banking sector in the wake of government frantic policy experimentation. The study will therefore identify the various means (Theft, embezzlement, forgeries etc)employed in defrauding banks. It will also identify the cause of fraud in banks which may be institutional and societal i.e. factors traceable to the internal and external environments of banks respectively.

The study will also identify the various types of fraud and forgeries (ranging from misappropriation of money, goods or other resources belonging to the employers, forging signatures of important officials and falsification of records and accounts) perpetrated in banks.


1.7 Limitations of the Study

Limitations are those factors inherent in research sturdy that might have affected the process of data collection for this research work.

One of the major limitations is the organizations Unwillingness to give out necessary data that will have assisted in the conduct of this research work effectively. Reports from the Nigerian deposit Insurance Corporation on cases incomplete. Also, the information obtained from the known members of staff-retired or dismissed, during the period with in which the fraud cases of fraud filed by various banks were in most cases incomplete. Also, the information obtained from the known members of staff of the banks was given on the condition of anonymity because of the sensitive nature of the research topic. Likewise, the researcher could not reach old members of staff-Retired or dismissed, during the period within the fraud cases were perpetrated to telltheir own part of the story, and what could have been the cause or the motivating factor for their fraudulent acts.

Another limitation is the current harsh economic conditions in the country. Time was another factor which limited the coverage of the scope of this study adequately. All these factors prevented the researcher from going round as many banks as possible in order to survey large quantity opinion on the research topic.


1.8 Definition of Terms

1. Bank:

An organization that provides various financial service, for example keeping or lending money.

2. Fraud.

Any act of deceiving in order to make money or obtain goods

3. Commercial Bank

Banks that concentrate on cash deposits and transfer of service to the general public, offer to be fraud on the high streets.

5. Errors

Mistake or something done wrongly

6. Dud Cheque

A forged or worthless cheque.

7. Perpetrator

A person who commits the act of fraud

8. Cheque Kitting

Method where a depositor utilized the time required for cheque to clear to obtain an authorized loan without interest charge.

9. Call Over

A system of check and balance in banking operations

10. Collusion

The act of fraud perpetrated with the connivance of different people.


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

In this study, our focus was to appraise fraud control techniques in Nigeria Commercial banks using First bank Plc, Ethiope East Local Government, Delta State as a case study. The study specifically was aimed at afinding out the level of fraud awareness in commercial bank; Find out the how rampant fraud isin Nigerian Commercial banks; Find out if ineffective and inefficient control system is the major cause of fraud in the banking sector; Find out how to control fraud in Nigeria commercial banks.

The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent are active workers First bank Plc, Ethiope East Local Government, Delta State.

The findings revealed that the level of fraud awareness in commercial bank is very high; fraud is very rampantin Nigerian Commercial banks; the ineffective and inefficient control system is the major cause of fraud in the banking sector.


5.2 Recommendation

Based on the responses obtained, the researcher proffers the following recommendations:

  1. The staff should be properly screened before they are employed and satisfactory references must always be obtained. Names of terminated or dismissed staff of banks should be circulated among banks. The institute of bankers should also give such a list, which it should check before registering a student, while black listing those who have been involved in fraud before.
  2. Police personnel should be trained in basic banking principles and practices through manuals and formal institutions in Police College and at the financial training centre.
  3. The Banking act of 1969, for instance should be amended to allow individual banks to prosecute cases of forgery and fraud privately. Alternatively, provision should be made for special court to try frauds and defalcation. For example, the failed bank tribunal. In addition, stiffer penalties should be prescribed for all bank fraud by bank staff and customers.
  4. Staff should be rotated periodically and should not be allowed on one function for long a period in order to avoid the possibility of exploring existing operational loopholes and short comings for personal gains.
  5. It is recommended that banks should watch out for the printing of bank stationeries and carving of bank rubber stamps. Such forged papers and stamps are used by unscrupulous people to prepare forged letters of credit and other international trade instruments which are circulated all over the world with a view of obtaining goods worth millions of Naira under false pretence.
  6. The Federal High Court should be given adequate powers to speedily handle offences related to bank frauds and impose heavily penalties on those convicted.
  7. The establishment of audit committee in all financial institutions to make staff members independent of external influence.
  8. Sound management through effective checks and balance systems. Management information systems and review procedures.
  9. Quarterly meetings of the members of the board of Directors and the specific bank public Accountants, its principal Financial Officers (Accounting) and the chief auditor are recommended. The principal function here is to review the audit plans and scope of examination of both independent auditors and the bank internal audit dimension.
  10. Most importantly, the idea to defraud can vanish if the punishments for fraudulent activities are adequate. Generally, the highest level of punishment given to fraudsters is few years of prison terms, and some even go free with the money or properties. This level of punishments is not sufficient to serve as a deterrent to others. Part of the punishments should include the total recovery of the money stolen either in cash or in kind. In addition to that, the Nigerian Government in particular should publish a magazine wholly and exclusively to report fraudsters. In line with that, every state should have a special programmes, say some hours every week to televise and broadcast pictures and respectively of fraudulent individuals. This will reduce the cases of fraud to the bearest minimum.

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