CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
Internal control, the strength of every organization has become of paramount importance today in Nigerian bank. The reason being that the control system in any organization is a pillar for an efficient accounting system. The need for the internal control system in organizations, especially banks, cannot be undermined, due to the fault that the banking sector, which has a crucial role to pray in the 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.
Fraud, which is the major reason for setting up on internal control system, has become a grate pain in the neck of many Nigerian Bank Managers. It has also become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigerian banking system and that any bank with a weak internal control system, is dangerously exposed to bank fraud.
The CBN reported that cases of attempted fraud and forgery in banks, as at half-year 2007 have surpassed what was recorded for the whole year 2006. The CBN also reported that the backward development was attributed to weaknesses in the internal control systems of the banks. This has clearly pointed the picture of how fraud has penetrated in the financial strength of Nigerian Banks.
Internal control system is defined by the internal Auditory guidelines’ 6 (1AG6) as the whole system of control financial or 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 fare possible the completeness and accuracy of the record. It may therefore be said that internal control is an umbrella beneath which are included financial controls, internal checks audits and non financial controls.
The individual components are known as “control” or “internal control”. Mill Champ. A.U. (1990) in his instructional manual for accounting students also defined internal control as related to the definition given by English institutes.
The damage caused by fraud to many banks is innumerable and needs urgent attention. Therefore, the attempt to put an end to this economic degradation, gave rise to the topic of this research study “the impact of internal control in the banking sector with Wema Bank of Nigeria PLC and Main Street Bank as a case study”. However, this study is aimed at verifying the conception that an effective and efficient internal control system is the best control measure for preventing and detecting fraud, especially in the banking sector.
It is interesting to note that “Audit” originated from the Latin word “Audile” which means “to hear” because in ancient time, the owner of a business used to hear a report made by the Auditor about the book keeping and financial records of his business. This was because the primitive ways of keeping and financial records which inducted making marks on ward, keeing figures off hand without any documentation and back of machaniciated with it.
In modern times, auditors have been affected by the need to encourage public investment by providing an environment for ensuring that investors fund is put into proper uses.
A comprehensive definition OF AUDITING SYSTEM GIVEN BY Robert of Schleps as quoted by Jadish Dakash in hv book “Audited Principles, practice and problem” (1990:8) says Auding is a system examination of financial statement, records and released operations to determine adherence to general accepted accounting principles management polices stated requirement.
Another definition which is widely accepted is that given by the chartered accountants of England, defining Auditing as an independent examination and investigation of books, records and vouchers so as to enable the Auditor to report whether they have been properly drawn up, so as to show a true and fair view of the profit and loss and balance sheet and of the state of affairs of the business in accordance with the best information and explanation given to the Audit.
In these definitions, emphases were laid on Auditing being related to operations and how far they adhere to management policies on stated requirements. In other words, we find out that there is need to introduce an effective control system, a lack of which can lead to business failure also resulting to other multiple problems.
In June 1999, the Board of Direction of the instate of internal Auditors approved internal audit to be defined as “an independent, objective assurance and consulting activity designed to add value and improve an organizations operation. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.
Some banks have chosen to introduce control self-assessments. These can be d3escribed as a formal and documented process whereby management and I or a staff team analyses their activity or function and evaluate the efficiency of the related internal control p[procedures. It may be considered as a useful technique in evaluating the efficiency of internal control without being a substitute for internal audit.
The changes in technology have been so fast and so dramatic that their effects on the auditor are truly significant. Relying so heavily on computer based controls, understanding of the various information technology or general controls such as systems implementation, maintenance and computer operations.
Internal Control Into Its Two Not Words: Internal and control. Internal according to Oxford Advanced Learners Dictionary refers to a thing “existing or happening entirely witting an organization and not involving people from the outside”. Control by its dictionary meaning and in context of our discussion of today refers to organizationally set limits to regulate or limits activities for the attainment of the organizational goal
1.2 STATEMENT OF PROBLEM
With reference to what was mentioned in the introduction that business failure could result from ineffectiveness of internal control system, the research work therefore will look into the effect of internal control system on prevention of bank fraud in Nigeria today, this passes as a problems which cold be detrimental to a business.
1.3 OBJECTNES OF THE STUDY
The objective of this study is to determine the impact of internal control, on the overall management of Nigerian banks. Also, to examine the effect of the internal control systems, when it comes to fraud prevention and detection. Summary, the specific objectives are;
a, To highlight the major causes of fraud and actors that contribute to the incidence of frauds in banks.
b, To determine the problem of fraud and how to curb it by.
c, To make recommendation based on the finding?
1.4 SIGNIFICANCE OF STUDY
The usefulness of this study entitled effective internal control in Nigeria banking system in other to prevent fraud and other multiple problems. The result of this study cold be of immense benefit to numerous group of persons such as Auditors, External Examiners, Managers, the Accounting and Banking Professionals, Regulatory Bodies of banks and other Operations in the banking system. It is believed that the effective management, by example should be the watch word of every banker, be the directory, manager, supervisor, clerk or messenger. Every one should be made to comply with the laid down policy and procedure in performance of any banking function.
1.5 RESAERCH QUESTION
- i) Can lack of good internal control cause fraud in a bank?
- ii) Can forgeries and fraud be prevented through good internal control of banks?
iii) Can internal control system read to effectiveness in the role of auditors?
1.6 RESEARCH HYPOTHESIS
Three hypothesis are formulated and tested in this study.
Ho: The lack of a good internal control is not a major causes of fraud in bank.
Hi: The lack a good internal control is a major causes of fraud in bank.
Ho: Bank with good internal control system cannot prevent the menace of fraud.
Hi: Banks with good internal control system cannot prevent the menace of fraud.
Ho: The efficiency and effectiveness of auditors in banks is ensured through a good internal control system.
Hi: The efficiency and effectiveness of auditors in banks is ensured through a good internal control system.
1.7 SCOPE AND LIMLTATION OF THE STUDY
The nature of this study entails the ascertainment of the effectiveness of internal control system in the being a very large topic, could therefore be said that it would be difficult to look at all department of internal control in an organization. As a result we will unit the research to the study carried out on Wema Bank branches and Main Street Bank branches in the South-Western part of Nigeria.
Due to difficulties encountered for information the researcher wanted to gather, we were restricted to certain details. There are constraints that many likely hinder the research from carrying out a successful research work.
1.8: DEFINITION OF TERMS
Audit: In modern sense, an audit is a process carried out by suitable qualified auditors, whereby the accounts of business enterprise, includes limited companies, charities trust and professional firms and fairies. The opinion is embodied in an Audit report addressed to these interested parties who commissioned the audit, or to whom the auditors are responsible under statues.
Effectiveness: this is the degree to which predetermined objectiveness of through are met.
Enquiry: Seeking revelation information from knowledgeable persons inside or outside the enterprise whether formally or informally.
Internal Audit: This is an independent appraisal function, within an organization for the review of system and the quality of performance as a service to the organization. It objective examines adequacy and reports on the adequacy of internal control as a contribution to the proper economic, efficient and effective use of resources.
Internal Check: This is an aspect of internal control which is exclusively concerned with the prevention and early detection of errors and fraud and this involves the arrangement of books keeping and other clerical duties.
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