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INTERNAL CONTROL SYSTEM AS A MEANS OF PREVENTING FRAUD IN FINANCIAL INSTITUTION

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

It is feared that the inability of management to ensure effective enforcement to rules and regulation have rendered the operation of internal control system in the Banking industry open to abuse. The net effect could be that every one carries out his schedule off duties in any manner he likes which consequently gives those wishing to commit fraud their long expected golden opportunity. Prior to 1952, there was no form of Banking art or ordinance to regulate the establishment and operations of Commercial Banks or a Central Banks to supervise the control of Banking Nigerian. During that time many Banks was registered some of which never operated and even since that period, fraud has remained a permanent feature in the banking industry. This resulted in the loss of faith and trust in the financial institutions by Nigeria and consequently, under-development of the banking habit in the country. However with the introduction of the first banking ordinance in 1952, and the central Bank of Nigeria (CBN) Act in 1959 and other subsequent Acts and ordinances with their amendments over the years, used to regulate and control the activities and operations of financial institutions in the country, fraud in financial institution have rather increased in magnitude and the methods used to perpetrate them acquire greater sophistication day after day. Now with the introduction of modern procedures and advancement in information technology such as those in communication system, automatic electric gadgets and computer into the banking system coupled with the various precautionary measures taken by bank agent, fraud have rather taken nuclear dimensions and the size of sums involved increased at a geometric rate and also with the held of Anipkitan (1976) a banker of repute, I Ashimi (1976, p6) a banker of prudent, Ughamadu N. (1991) observed to be liable in its banking sector and be very porous to fraud and many others who have contributed to maintain a prudently measured to the ascertainment of financial banking assets and liabilities.
Consequently, the confirmed existence of financial institutions rests delicately on the maintains of public confidence. This calls for the establishment of an effective system of internal control which among other things will help to ensure that the laid down procedures standard and statuary requirement. To establish a sound internal control system various organization adopt scope of their operations. Internal control system requires a continues check and rechecking of day-to-day activities of the business in order to ensure the correctness and firmness of the accounting records, and to detect and expose any deviation when it has accord. Most financial institutions loose confidence of the people not only through fraudulent use of funds but also through some detect in fraudulent practices and or syndication of some dishonest staff facilitated by defects in the Bank internal control system. There is therefore a great need to climate or minimize the defects loopholes and make money effective and operational to quard against the occurrence and re-occurrence of fraud in our financial institutions.
AN OVERVIEW OF FIRST BANK PLC
First Bank of Nigeria Plc was incorporated on 31st March 1894 as a limited liability company with an authorized share capital of 2 stilling, but today it has been registered at the companys house for I,II years. The establishment of First Bank of Nigeria Plc predates the birth the Nigeria nation as a sovereign entity. The Bank which was registered as Bank of British WEST African in 1894, has therefore evolved along the path of political, social and economic chaps and development of Nigeria. It thus sheared in the process of its growth, the final experiences of the nation which in retrospect were sources of strength. First Bank of Nigeria Plc is en-gad in Commercial Banking Business. It’s head office is located in Lagos. It is the policy of the board of Directors that the bank should play an important role in the Commercial Banking industries in Nigeria Accordingly the Bank is committed to the expansion of it’s branches net word with a view of eventually making it’s services available through the country. New the bank has branches all over the country and overseas, large they embarked on the increase in publicity, it therefore well equips and computerized in order to enhance the delivery of its services and as well took internal control system to check the level of fraud attitude against customers an members of the coy. The bank is committed to successful restricting and development of the nations economy as it’s rural objective. Towards this end, the bank is interested in assisting small scale industries, farmers, cooperatives societies and community development efforts. The service include savings account current account, standing orders and direct debit current services, fixed deposits, loans and advances, corporate finance international operations, these services are being carried out by efficient human resource of the bank which made up to both senior and junior cadres. 
1.2  STATEMENT OF PROBLEM 
The focus of this study is to provide evidence bearing on the nature and factors leading to ineffective management in bank, also it actually evaluates the incremental effect of FRUAD and finally shows INTERNAL CONTROL as a basis to prevention and detection of fraud. 
INADEQUATE INTERNAL CONTROL SYSTEM
Owing to perculias nature of banks in trading on financial asset and liabilities, there is high propensity towards fraudulent manipulation by both employees and those outside the bank to install internal control system that will help to eliminate stop and arrest fraudulent tendencies and ensure effectiveness in performance of its functions. It is the function of the internal control Unlit to assist management in achieving effective. The consequences of lack of adequate internal control system in direct and financial term can not be over whelmed. Thus banking sub sector has been witnessing as phenomenal increase in reported bank fraud ruing in hundreds of million of naira annually. These occur in form of computers frauds, deflation misrepresentation of document outright disappearance with physical cash by employees and outsiders and the re occurring problem of banks branch mangers granting credie over their discretionary as approval by the top management without adequate security hence resulting to losses and increased bad debt 
INNEFFICIENT WAYS OF TRANSACTING BANKING OPERATION
Most banks operate business in such inefficient way that their target and budget becomes always unrealistic thus leading to negative result and poor performance. The end result is that while efficiently managed banks are seeking approved to open new branched the mismanaged ones are busy clamoring to be allowed to close unlivable branches one even close their door entirely. The problem of lack of economy and efficiently in operator is more serious than fraud as it is mammals of procedures. Recording of some transaction of bank by employees are not done in conformity with established standard hence resulting to back of unbalanced book and records.
LOAN LOSSES AND INCREASING BAD DEBT PORTFOLIO OF BANK Increasing bad debt portfolio of banks inherent from high credit default by loan users has been giving bankers sleepless night as a substantial part of their income is low used as a provision against these debt in view of the requirement of initial guidelines for licensed bank issued by the central bank of Nigeria in off Nigeria in 1990, in 1991, financial year, most of the existing bank will hinge portfolio after report losses or very minimal profile position ,after making the necessary provision are required by the guidelines. It is because the continuous concerns of government and other regulatory bodies about the problem of banks and the serious need for effectiveness by their management that various registrations and directive were made in the recent time. the CBN issued directive to bank for recapitalisation up to N25 billion, in January 1991 CBN issued circulated to all bank directors an information book lets (pocked Guide for bank Directors) Equally in 1991, the Bank and other financial institution decree was promulgated by government.
1.3  PURPOSE OF THE STUDY 
This research work concentrates essentially on the financial institutions with special a view to providing suitable recommendations and suggestions that will help in their prevention and minimization of fraud. It is therefore the main objective of this study to examine the internal control system in the operation of this bank in Nigeria and evaluate the appropriateness and the effectiveness of the system as a toll for fraud prevention. The study also has its objectives as follows; 
1. To ascertain the degree of compliance of the banks staff with the internal control measures.
2. To identify possible defect, or loop holes (if any) in the system. 
3. To examine the relevance and appropriative of the presently adopted control measures in preventing frauds. 
4. To offer useful recommendation based on the finding on how best to prevent the occurrences of fraud through an effective internal control system. 
1.4   SIGNIFICANCE OF THE STUDY
Even through this study is not a very comprehensive and exhaustive one as a result of some limitations of all aspects of the work is very relevant in one way or the other to the Nigerian Banking Industries as a whole, primarily, this study is designed for all those may be interested in carrying out further study on internal control system as it related to fraud prevention in financial institutions in Nigeria. Moreover, banks in Nigeria will deprive great assistance from this research work in detecting fraud in bank system and subsequently preventing and minimizing fraud. This can be achieved by adopting and implementing the various suggestions and recommendation made this study in their control systems.
Finally, there is no need over emphasizing the fact that if banks are able to reduce the incidence of fraud in their operation to the least level. That will be able to operate on a more profitable ground. Again, the bank customers detecting confidence on the banking industries will once more be restored and thereby help in building up good banking habit in Nigeria. 
1.5   SCOPE OF THE STUDY 
This research work is carried out to examined fraud prevention and control, a management effort to avoid dishonesty and fast play in financial institutions. The work is focused on Nigerian banking sector with particular reference to first bank of Nigeria Plc Onitsha, due to certain obvious factors like easy accessorily of research material, financial and time constraints and non-disclosure of certain information from the management due to bank’s secrecy. 
1.6   LIMITATION OF THE STUDY
Here the limitation composed on this study is that of shortage of time and financial constraints. The time limit set for the submission of these project work was short and this made to be carried out. This problem of time and finance account for the limitation of the sample size to only the first bank of Nigeria Plc in Onitsha. 
1.7   DEFINITION OF TERMS 
The following terms or concepts need to be clarified other terms will be defined of course of the study. 
a. FRAUD: There is no commonly accepted definition of the term fraud. Experts and academicals alike have defined if in various ways; The oxford advanced learners dictionary defined fraud as “act of deceiving somebody illegally in order to make money or obtain goods”. In other way, I can say “It is an act of criminal deception, out of deceptive trick cheating , swingding person on things that deceives. 
b. INTERNAL CONTROL SYSTEM: The whole system of control both financial and other wide established by management in order to carry on the business of the enterprise in an orderly and efficient manner to ensuring adherence to management policies, safeguard then assets and secure as for as possible, the completeness and accuracy of the records.
c. PREVENTION: The system of stopping the bad attitude of fraud from happening. 
d. FINANCIAL INSTITUTION: This refer to organizations, societies, buildings established for the purpose of taking care of monetary affairs, bonds, securities etc, in a given economic, it embraces banks, insurance companies, stock exchange etc.

e. PLC PUBLIC LIMITTED COMPANY This is in line with the provisions stipulated order Sec 29 (2) of the company and allied matters decree (CAMD) 1990 which look effect from 2nd May 1990 for the purpose of banking issues.

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