CHAPTER ONE
1.1
Background to the study
It is common to hear of fraud and error in an organization. The
financial institutions in Nigeria are not left out of this Malady.
Consequently, this has distorted the original intention of most Financial
Institutions. The strength of every organization has become of paramount today
in Nigerian Banks. The reason being that the control systems in an organization
is a pillar for an efficient accounting system. The need for the internal
control systems in the organizations, especially financial institutions cannot
be undermined due to the fact that the financial institution which has a
crucial role to play in economic development of a Nation is now being
characterized by Macro economic instability, slow growth in real economic
activities, corruption and the risk of fraud and errors.
However, any form in which the reformation might takes
there is the need for the appliance of the principle of control in any
organization if goals are to be actualized.
Pendey (1994) states, “control is the process of ensuring that plans are
being attained. It is a feedback system. It tells how effective and efficient
the objectives, goals and plans are accomplished, what went wrong and what can
be done to assure adherence to planned activities in future. Control entails
measure and evaluation of performances”. Therefore, the need for control cannot
be overemphasized.
The whole system of controls, Financial and otherwise,
established by the management for the attainment of the determined objectives
is regarded as internal control system. In some few years back, the topic of
internal control. Internal control is a veritable
tools in the hands of management to continually gauge policy implantations
against established policies to ensure that performance are in accordance with
the laid down policies, waste and misuse are eliminated or at least minimized
and strict adherence to prescribed procedures, methods, rules etc. are
achieved.
The subject matters of internal auditing (internal
control) have a recent development in Nigeria. Firstly, with the private sector
and most recently with the public sector, Internal auditing appeared or the
business scene much later than auditing by public accountants. The principle
factor in its emergency was the extended span of control felt by management in
concerns employing thousands of people conducting operations from wide spread
locations. What is more; defalcation and improperly maintained accounting
records were obvious problems under these circumstances and the growth in the
volume of transaction presented substantial problems for public accountants.
The need was of course not only to provide the needed auditing services on an
internal basic but have an internal approach to audit problem, since internal
auditors tended to be better acquainted with procedures and problems, of the
company. More important, the auditing authority could be carried on continuous
rather than once a year when outside
external auditing services were utilized.
It is against this background that this research topic
was selected by the researcher to examine the effectiveness of internal control
system as tools for preventing and detecting fraud and errors in financial
institutions with a view to suggesting better measure that would be adopted by
management to enhance total eradication or a drastic reduction in fraud
perpetration.
1.2 Statement of
the problems
This study is motivation by the recognition given,
with the deregulation of the banking sector; by the Ibrahim B. Babangida administration,
were the number of commercial banks rose abysmally. So many of these banks
liquidated and others merely remained because of the protection from some
interest groups in the country. The failure control noticed in these banks is
due to lack of effective internal control or the complete absence of it.
The researcher believes that if the appropriate
control systems are applied, effectiveness can gain its stand. To ensure
continuity of the organization as well as their healthy performance, the following
areas shall be examined:
a. The impediments that could hinder the effectiveness of
internal control.
b. Whether there are any forms of fraud and errors that
could escape the detection of internal control system.
c. Whether in the organization structure, internal
control could be used effectiveness in preventing or reducing fraud and error.
d. To what extend could fraud be reduced by internal
control system
e. The strength and weakness of internal control system
in fraud reduction.
f. Lack of internal control system in an organization as
a result of inadequate fund.
g. Lack of qualified personnel changed with the duty of
operating internal control, thereby causing errors, frauds and wastes.
h. Deficiencies in policies adopted by management.
i. Lack of harmonious relationship between internal
control staff and other members.
1.3 Objectives of study
The main objective of this study is to examine carefully some of the
various factors that pose problems in internal control, particularly in the
banking sector. The means of over-coming or avoiding or minimizing these
problems shall be preferred as well.
a.
The specific
objective are to ascertain the level of compliance with the various factors and
various policies lay down by the management of the bank, if regulations are
observed as they should be, and whether
the financial position is sound and inter-departmental relationship harmonious.
b.
To ascertain if the
internal control system is the organizations meet the need of specific banking
division/department as set up by the management of the bank.
1.4 Significance of the study
The important of this study this study is that financial institution
cannot be over-emphasized because most organization are not aware or have refused to acknowledge the fact that
success or failure of an organization depends on the effectiveness of the
internal control system in firms daily transaction or operations. The woeful
performance and eventual collapse of most banks can be traced to either the
absence or the presence of inadequate internal control.
Banks will generally benefits from this research work on the
effectiveness of internal control system as a tool for detecting and preventing
of errors and frauds.
The entrepreneur who is looking forward to the optimization of profit in
his organization through improvement in his operations will find the
recommendation of this work useful.
The work will reveal to internal auditors the loopholes or at least
minimize than to a level that will not hinder the attainment of the goals of
the organization.
Shareholders and intending investors who have lost confidence in the
banking sectors will have their hope restored when this works get into their
hands. The work shall be found educative, enlightening and useful as a source
of information to the general public. Scholar who wants to do further work in
his might find this project work useful as something to start work or to be
improved upon.
1.5 Research Questions
Research question which serves as a beacon of any research work are
question to which the project intends to provide possible solutions.
The most likely questions of this project are;
a.
Do you consider the
system of internal control and staffing of first bank of Nigeria Plc adequate
and credible?
b.
Can deposit be
received but not properly recorded in the accounting records?
c.
Does internal control
system quarantine the existence of structural frame-work for the efficient and
effective utilization of resources?
d.
Are there surprise
cash counts by independent officials?
e.
Does inadequate
internal control measure affects the profit earning capacity of financial
institutions?
1.6 Research Hypothesis
Based on the problem definitions and objectives of this study, the
following research hypotheses are formulated in order to explain this study;
a.
Null Hypothesis (H0)
b.
Alternative Hypothesis
(Hi)
H0 –
The loopholes in accounting activities do not give way to the perpetration of
fraud and loss of assets in and establishment.
Hi -
The loopholes in accounting activities give way to the perpetration of fraud
and loss of assets in an establishment
H0 -
The absence of internal controls in an organization does not affect it in any
way.
Hi -
The absence of internal controls in an organization affects it adversely.
H0 –
Inadequate internal control measure do not affect the profit earning capacity
of financial institutions.
Hi –
Inadequate internal control measure affects the profit earning capacity of
financial institutions.
1.7 Scope of the Study
Internal control is a management technique which is adopted virtually in
all organization for reasons which may be many, for instance carrying on
business in an orderly and efficient manner, ensures adherence to management
policies, safeguard the assets and secure as far as possible the completeness
and accurate of the record etc.
This research work does not make any pretense at perfection for so many
reasons. The content of this research should not be seen as being totally
exhaustive of all possibly solutions available in the Nigeria banking sector on
the theme of the vast size of the banking sector and the boundless nature of
the study under reviews.
The effectiveness of internal control as a tool for preventing and
detecting fraud and error in financial institution as the title of the study
concentrates on how internal control prevent and detect frauds errors, but only
the banking sector has been made a case study. It is worth to note that
internal control system adopted varies from one organization to another, owing
to their differences in size and objectives. Therefore, the researcher narrowed
the study to first bank of Nigeria (PLC) for convenience sake.
1.8 Limitation of the Study
Limitation in any research study could be taken as any factor,
circumstance or action that in any way can hinder the success in the completion
of the research. Although high degree of success was recorded in the collection
of data, this does not mean were no limitation.
During the
course of this study, so many problems were encountered which will give rise to
a number of errors like, for instance, ”non-respond errors” which arose as a
refused to respond to the questionnaire administered on them. Some vital
information regarded as “confidential by the management was not accessed,
therefore resulting in non-disclosure of some aspects of internal control of
the organization. A scarce resource was also an impediment since not many
branches were visited because of transport cost and time.
Another limiting factor was the researcher himself. This is because the
researcher is a mediocre trying to present something for reference in this area
of study, no matter how poor it might be; no matter how good this work might
be, it will still lack the touch of a professional. As earlier pointed out in
the introductory chapter, this aspect of study appeared on the business scene
much later, hence not many texts abound for reference purpose.
We shall however, try to discuss exhaustively all important factors of
internal control, frauds and errors within the limit of the resource materials
at our disposed.
1.9 Definition of Terms
Management:
Management is an activity to get people together to accomplish desired goals
and objectives. Management comprised planning, organizing, staffing, leading
/directing and controlling. It is also the process of designing and maintaining
an environment in which individual, working together in groups, efficiently
accomplish with selected aims.
Manager: A
manager is defined as one who co-ordinates the efforts of different individuals
and enable them reach a pre-determined individual goals. An organization is
made up of people working as a group and efforts in order to achieve the goals
of the organization.
Business Organization: A business organization can be defined as an
enterprise set up by individuals and government for the purpose of maximizing
profit. Therefore, profit maximization is the sole aim of establishing such
organization.
Internal Control: Internal control can be defined as “the whole system of control,
financial and otherwise, established by the management 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.
Control:
Control is checking current performance against pre-determined standards
contained in the plans, with a view to ensure adequate progress and
satisfactory performance. The individual components of an internal control
system are known as controls or internal controls.
Internal Audit:
This is the type of exercise that internal audit staffs carry out in order to
guarantee smoothness of operations, control and prevent fraudulent activities
and ensure compliance. It helps to achieve the goals of an organization in
order to conform with management policy.
Errors:
This refers to internal distortions of financial statements, whether of
mathematical or clerical nature, or whether in the application of accounting
principle, like over-casting and under-casting, mis-interpretation of fact and
mis-application of accounting policy.
Irregularities:
This refers to the international distortions of financial statement for
whatever purpose and to mis-appropriation of asset whether or not accomplished
by distortions of financial statement.
Fraud:
This is an internal mis-representation of financial information by one or more
individuals among management, employees or third parties.
Internal Auditor: This is a person appointed by an organization to review the operation
and records of the organization and report to the management.