A Study Into The Impact Of Internal Control System On Detection And Prevention Of Fraud

Project and Seminar Material for Criminology And Security Studies

A Study Into The Impact Of Internal Control System On Detection And Prevention Of Fraud


Management, not the auditor is responsible for setting up and monitoring of the internal control system. Internal control system cannot fully be regarded as effective not even when the design and implementation is properly done; this is because the effectiveness of an internal control system depends on the competency and dependability of the people using it. Bank failures and widespread losses over the past two decades, have clearly pointed out the picture of how fraud has penetrated the financial strength of banks; it has however, elevated the importance of effective internal control system within the formal financial sector worldwide.

Organizations set up internal control system most at times because they are required by law to do so; but then, how many has actually made it a point of duty to train and educate employees on how to use these internal control system since its effectiveness depends on the competency and dependability of the people using it. This research paper defines internal control, as a means to an end; it is aimed at verifying the conception that an efficient and effectively implemented internal control system is the best strategy for preventing and detecting fraud especially in the banking sector; thus the objective of this research is to examine the effect of the internal control system, when it comes to prevention and detection of fraud. Data captured in this study, was analyzed through descriptive method.

Quantitative technique was also used to analyze the response of the respondents as well as a computer program known as SPSS. The descriptive analysis involves the use of percentage, tabulations, and graphical presentation. The sources of data for the research were both primary and secondary sources. Census technique was used for the study instead of a sampling technique. Questionnaires and interviews were used as the data collection methods for the study. Based on the analysis, internal control system was seen to be significant in detection and prevention of fraud in banks in Ghana, hence the need for an effective and adequate internal control system. xi

Chapter One

General Introduction

1.1 Introduction

How extensive should a company’s internal control system be? In today’s environment, this is a difficult question to answer. The reason being that some current business, legal, and social trends suggest that companies need to increase their emphasis on internal control, while other trends indicate just the opposite. Bank failures and widespread losses over the past two decades have elevated the importance of effective internal control within the formal financial sector worldwide. In the United States for example, bank failures rose over 200 percent in the 1980s partly due to fraud and mismanagement. Internationally, the collapse of Barings Bank and Yamaichi Securities further focused the financial sector’s attention on internal control. The Basle Committee analyzed the problems related to these losses and concluded that they probably could have been avoided had the banks maintained effective internal control systems (banking, a regulatory and auditing guide). In addition, a review of traditional banks affirmed that the implementation of effective internal control systems played an important role in reducing bank failures.

Internal control, the strength of every organisation, has become of paramount importance today in Ghana banks. The reasons being that the control systems in any organization are a pillar for an efficient accounting system as well as achievement of organizational goals.

1.2 Background Of The Study

As part of its on-going efforts to address bank supervisory issues and enhance supervision through guidance that encourages sound risk management practices, the Basel Committee on Banking Supervision issued a framework for the evaluation of internal control systems. A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the bank’s reputation.

The Basel Committee, along with banking supervisors throughout the world, has focused increasingly on the importance of sound internal controls. This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations. An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization.

A system of accounting and records keeping will not succeed in completely and accurately processing all transaction unless controls known as internal controls are built into the system. The purposes of such internal controls are to ensure that transactions are executed in accordance with proper general or specific authorisation and again to ensure that all transactions are properly recorded with the correct amount and in the appropriate account and in the proper accounting periods so as to permit preparation of financial statement in accordance with relevant legislation and accounting standards and for informed management decision making.

Internal control will ensure that errors and irregularities are avoided or made apparent. Internal control as a system comprise of the control environment and procedures .It includes all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objectives of ensuring as far as practicable the orderly and efficient conduct of its business so as to safeguard assets, to prevent and detect fraud and error to ensure accuracy and completeness of accounting records and the timely preparation of reliable financial information (SAS 300.1)

The company code 1963, Act 197 section 123 states that “management will need to establish an effective accounting system comprising a number of controls”. In an attempt to do this there must be a well-defined organisational structure showing how responsibility and authority are delegated clearly defined communication channels or lines of reporting(i.e. upward , downward and horizontal lines of reporting) for attainment of corporate objectives. These controls are such that different people are assigned to do different task. No one person should fully record and process transactions from commencement to the end.

This means that a company can only achieve its corporate mission through the establishment of internal control system which makes sure that those policies and procedures which are laid down by management are efficient. Hence, it reduces the cost of operation without reducing effectiveness.

1.2.1 Company Profile

According to Merchant bank Ghana.com, Merchant Bank Ghana Limited (MBG) is a limited liability company is one of the leading Banks in the country. It was incorporated in August 1971 and commenced business in March 1972 as the first merchant bank in Ghana. Merchant Bank Ghana Limited (MBG) provides a comprehensive range of banking services to its customers and clients, using its worldwide network of correspondent banks and their agencies. The range of MBG’s banking services includes:

Domestic and International Banking Operations for Corporate Customers, Small & Medium Enterprises (SMEs) and, High Net-worth Individuals;

  1. Treasury Services
  2. Money and Capital Market Operations
  3. Hire Purchase and Leasing Services; and
  4. Foreign Remittances

The Bank has two wholly owned specialised subsidiaries namely;

Merban Investment Holdings Limited (MIHL) – dealing in Funds/Portfolio Management, Money Market Operations, Investment Advisory Services, Trustee Services and Custodial and Nominee Services;

Merban Stockbrokers Limited (MSL) – dealing in Brokerage Services, Underwriting of new Issues, and Investor Search & Joint Venture Arrangement; and

The MBG group also has the following additional specialist services tailored to meet its customers’ needs:

Registrar Services – maintaining records of Shareholders and Creditors, facilitating dividend payments to Shareholders; and

Corporate Finance & Advisory Services (CFAS)- handling Corporate restructuring, Joint Venture Arrangement, Company Valuation, Project Finance; Funds Sourcing, Issuing House Services and General Financial Advisory Services. And also dealing in Hire Purchase transactions and Leasing.

The bank has taken advantage of the opportunities offered by the introduction of Universal Banking Business in Ghana and MBG has fully developed all three areas of universal banking namely; Retail, Corporate and Investment. The branch network of Merchant Bank currently stands at twenty-two (22).


As a universal Bank in Ghana, Merchant Bank (Ghana) limited is committed to providing quality financial products and services to our customers across our chosen market and maintaining our place as a leading and preferred financial institution in Ghana.


To become the leading, the most influential and best performing financial service provider in Ghana by 2012 and one of the leading banks in West Africa by 2015

Core Values

Performance-oriented organization

All decisions and actions must be based on Unshakable Facts.

Must at all times conduct business with a sense of Competitive Urgency.

We must maintain High Ethical Standards in all our internal and external relationships.

The bank has over its 30 years of existence achieved a lot, notable amongst which are:

The establishment of hire purchase and leasing business in Ghana.
The promotion and formation of the first Discount House in Ghana.
Handled the share issues of 8 out of 10 companies when there was no Stock Exchange in Ghana in the 1970’s.
The initiation of the preparatory work in the establishment of the Ghana Stock Exchange (GSE).
The sponsorship and registration of about 50% of the companies on the GSE.
The arrangement and the formation of the mortgage company (which is now the HFC Bank Limited)
Served as an advisory body in the acquisition of SSB Bank by Societe’ Generale; and the merger of Ashanti/AngloGold.

1.3 Statement Of The Problem

The regularity of fraud and misappropriation of funds is creating fear, anxiety, and a loss of confidence in the minds of bank customers. Also, poor internal control system leads to increase in bank losses. Management is required to set up an internal control system but this system varies significantly from one organization to the next, depending on such factors as their size, nature of operations, and objectives.

Since internal controls operate in an environment which influences its operations, proper care must be exerted into the implementation of these systems in other to achieve the utmost aim of the bank. This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations.

An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization.

1.4 Objectives

  1. To find out the impact of internal control system, on the overall management of Merchant bank Ghana Koforidua branch.
  2. To find out the employees knowledge base on the concept of fraud in the banking sector.
  3. To find out effective internal control systems influence on prevention and detection of fraud.
  4. To find out the problem of fraud and how to curb it.

1.5 Research Questions

  1. Does merchant bank have an internal control system? If yes, how effective is it?
  2. What kind of relationship exists between detection and prevention of fraud and internal control system?
  3. Is lack of good internal control system a major cause of fraud in banks? And what other major causes exist?
  4. Can banks with effective internal control system prevent the menace of fraud?

1.6 The Significance Of The Study

The findings of the study would help the management of the bank to maintain an enhanced controlled environment by helping management and employees to establish and maintain an environment throughout the bank that sets a positive and supportive altitude towards internal control, reliable management, operating personnel for effecting internal control and internal audit for evaluating whether appropriate controls have been implemented and whether the internal controls are functioning as intended. Other significance of the study includes:

  1. Help the bank in reducing fraudulent activities that occur in the organisation.
  2. Requirement for the award of the BBA degree.
  3. Reference for other research topics

1.7 Scope Of The Study

The content of this research should not be seen as being totally exhaustive of all possibly situations available in the Ghanaian banking sector on the theme of this study. This is due to the vast size of the banking sector and the boundless nature of the study under review. Therefore, the scope of this research is limited to the study carried out on Merchant Bank branch in Koforidua, Ghana.

1.8 Limitations

The limitations of this research work are as follows;

  1. The internal control involves human actions which introduces the possibility of errors in processing or judgement.
  2. Internal controls can also be overridden by the plan among employees and evasion of controls or oppression by top management and superior external influences.
  3. Limited funds prevented the choice of more than one study area.

1.9 Operational Definition

Internal control

a control is “any action taken by management to enhance the likelihood that established objectives and goals will be achieved” [institute of internal auditors, 1993].in other words, controls are designed to ensure that organizations conform to standards or plans. Examples of controls include the use of sales or expense budgets, computer passwords, or even padlocks on warehouses.


Within this context of the study it means measure of productivity in utilizing an entity’s resources.


It means measure of cost control in performing recurring function within an entity


Intentional deception made for personal gain or to damage another individual.

1.10 Chapter Organisation

The whole study consists of chapters and the breakdown is as follows;

Chapter One

Chapter one highlights on the background of the study and explains the need and purpose of the study. It also goes on to talk about the statement of the problems, objectives, scope limitations as well as definition of terms.

Chapter Two

Chapter two gives a conceptual framework about the literature review as well definition of terms.

Chapter Three

Chapter three describes the research methodology and how the research was under taken.

Chapter Four

Chapter four deals with findings from data collected, presentation and analysis of the result.

Chapter Five

Chapter five is centred on the summary, recommendations and conclusions drawn from the study.

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