CHAPTER 2

LITERATURE REVIEW
2.1 INTRODUCTION

A usual adage says prevention is better than cure; so also, people say that one should look before
one leaps. These statements are more or less the equivalent of an internal control system. It is very
important to state that the success of the operations of banks worldwide is strictly guided and
dependent among other things, on the existing quality of their internal control system. The basic
purpose of internal control is providing a reasonable assurance that adequate internal controls and
best practices are in place by which the objectives of the company/ organisation are achieved. In
September 1998, following wide consultation, the Basel Committee published a document entitled
‘Framework for internal control systems in the banking organisation’. The paper makes many
familiar claims for the benefits of a strong internal control system:

a. Helping to meet goals and objectives;

b. Helping to achieve long-term profitability targets;
c. Maintaining reliable financial and management reporting;
d. Ensuring compliance with laws and regulations;
e. Ensuring compliance with policies, plans, internal rules, and procedures;
f. Decreasing the risk of unexpected losses or damage to reputation.

According to the Basel Committee, it is believed that banks would be less likely to suffer significant
losses if they have internal controls designed to prevent or detect the problems.

2.2 DEFINITION OF INTERNAL CONTROL

Millichamp and Taylor (2008) defined “internal control system- the whole system of controls,
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,
safeguarding the asset and secure as far as possible the completeness and accuracy of the records.
The individual components of an internal control system are known as “control” or “internal
control.”

Mary A Lannoye defined internal control as a process, affected by the director, management, and
support staff of each State department, designed to provide reasonable assurance towards
accomplishment of each principal department’s mission, objectives and goals.

The Committee of Sponsoring Organisation’s (COSO) defines internal control as a process effected by
an entity’s board of directors, management and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following categories:

• Effectiveness and efficiency of operations

• Reliability of financial reporting
• Compliance with applicable laws and regulations.
It goes further to define it as “policies, procedures, practices, and organizational structures designed
to provide reasonable assurance that business objectives will be achieved and that undesired events
will be prevented or detected and corrected.

Messier Jr (2000), defined internal control as the process effected by an entity’s board of director’s,
management and other personnel that is designed to provide reasonable assurance regarding the
achievement of objectives in the following categories;

1. Effectiveness and efficiency of operations.

2. Reliability of financial reporting
3. Compliance with applicable laws and regulations.

According to him internal control is a way of providing stewardship to meet the responsibilities of
management.

Dictionary of Finance and Investment Terms defined internal control as method, procedure, or
system designed to promote efficiency, assure the implementation of policy, and safeguard assets.

The Institute of Internal Auditors defines internal control as “all means designed to promote, govern
and check upon various activities for the purpose of seeing that enterprise objectives are met”.

2.3 OBJECTIVES OF INTERNAL CONTROL

According to Alvin et al (1987), internal control related to accounting is employed basically to attain;

a. Sound management
b. Safety of assets
c. Reliability of accounting records
d. Compliance with statutory requirement and
e. Prevention and early detection of errors and fraud

2.3.1 SOUND MANAGEMENT

Control is necessary to ensure that management policies and directions are properly adhered to. In
large business organisations, the professional supervision of employers or business operations is not
possible therefore as a substitute that the management must rely on various control techniques to
carry on the business in an orderly manner.

According to F. Messier (1997), internal control system provides a way to meet its stewardship or
agency responsibilities. Such internal control does not ensure safety of records and assets but also
creates an environment in which efficiency and effectiveness are encouraged and monitored.

In fact every strong management should have a performance review as its control activity to check
the performance of individuals or processes in the system. For example, management in an attempt
to know its performance with budgets, forecast and prior –period performance can investigate/
review the operating financial data, and make analysis of the unexpected differences and finally put
in place corrective actions. It is important for management to employ methods and techniques such
as development of plans and monitoring the progress towards accomplishment of these plans in
other to exercise control over authority delegated to its employees.
2.3.2 SAFETY OF ASSETS

Protection of assets of business is important against various possible losses ranging from
embezzlement, careless use of property and outright theft. In order to ensure effective control over
assets Whittington (1986), said only individuals who are properly authorised should be allowed
access to the organisations assets

According to Pany (1995), security over both records and other assets are control activities for
physical control. Safeguarding of assets should include maintaining control at all-time unused
renumbered documents, as well as other books and restricting access to computer programs and
data files. Only individuals authorised should be allowed access to the organisations assets. To
prevent falsification of the financial records direct and physical control such as the use of safe, locks,
fences and guards should be encouraged.

2.3.3 RELIABILITY OF RECORDS

Most information needed by management in order to carry out its functions properly depends on
the value of information through accounting records. The information has to be reliable, complete
and available as quickly as possible. Consequently all aspect of accounting system has to be designed
to suit the management needs. There should be techniques to ensure that internal controls on
accounting information and records suit the management needs.

According to L. Hall (1979), information required by management needs to be accurate, Up-to- date
information as the basis of all management functions. Without it, management is unable to forecast,
plan or control.

2.3.4 COMPLIANCE WITH STATUTORY REQUIREMENT

Banking activities are governed by law. Some of these laws setting organization include the Basle
committee. Banks are expected to abide by the banking laws and regulations, internal policies, and
internal procedures set.

2.3.5 PREVENTION AND EARLY DETECTION OF ERRORS AND FRAUD

Through the objectives underlying internal control are providing safety to assets and attaining
reliability of records encompass the aspect of prevention and early detection of fraud, the issue of
prevention and detection of fraud is all pervasive and needs a distinct thrust in a system of internal
control. To ensure effective internal controls, there should be in-built mechanism in the total
scheme of the internal to see to it that fraud and errors do not take place and even they are
detected at the earliest possible time to prevent major losses (Sharma, 2002)

2.4 THE TYPES OF INTERNAL CONTROL

According to Millichamp and Taylor (2008) the types of internal control can be categorised as;

2.4.1 ORGANISATION

An enterprise should; Have a plan of organisation which should-Define and allocate responsibilities-
every function should be in the charge of a specific person who might be called the responsible
official. Thus the keeping of petty cash should be entrusted to a particular person who is then
responsible for the function .Identify lines of reporting. In all cases, the delegation of authority and
responsibility should be clearly specified.
2.4.2 SEGREGATION OF DUTIES

No one person should be responsible for the recording and processing of complete transaction. The
involvement of several people reduces the risk of institutional manipulation or accidental error and
increase the element of checking of work. Function which for a given transaction should be
separated initiation authorisation, execution, custody and recording.

2.4.3 PHYSICAL

This concern physical custody of assets and involves procedures designed to limit access to
authorised personnel only. These controls are especially important in the case of valuable, portable,
exchangeable or desirable assets.

2.4.4 AUTHORISATION AND APPROVAL

All transaction should require authorisation or approval by an appropriate person. The limits to
these authorisations should be specified.

2.4.5 ARITHMETICAL AND ACCOUNTING

These are the controls in the recording function which checks that the transactions have been
authorised, that they are all included and that they are correctly recorded and accurately processed.
Procedures include checking the arithmetical accuracy of the records, the maintenance and checking
of totals, reconciliations, control accounts, trial balances, accounting for document and preview.
Preview means that before an important action involving the company’s property is taken, the
person concerned should review the documentation available to see that should have been done,
has been done.

2.4.6 PERSONNEL

Procedures should be designed to ensure that personnel operating a system are competent and
motivated to carry out the tasks assigned to them, as the proper functioning of the system depends
upon the competence and integrity of the operating personnel. Measures include appropriate
remuneration and promotion and career development prospects, selection of people with
appropriate personal characteristics and training, and assignment to tasks of the right level.

2.4.7 SUPERVISION

All actions by all levels of staff should be supervised. The responsibility for the supervision should be
clearly laid down and communicated to persons being supervised.

2.4.8 MANAGEMENT

These are controls exercised by management which are outside and over and above the day –to-day
routine of the system. They include overall supervisory controls, review of management accounts,
comparisons with budgets, and internal audit and any other special review procedures.

2.4.9 ACKNOWLEGEMENT AND PERFORMANCE

Persons performing data processing operations should acknowledge their activities by means of
signatures, initials; rubber stamps etc. Acknowledge of performance not only allows blame to be
ascribed but also has a powerful psychological effect.

2.5 TYPES OF CONTROLS

According to ACCA study test (paper2.6) there are three key types of control that any auditor should
consider.

2.5.1 PREVENTIVE CONTROLS

These are controls that prevent risk occurring. For example, authorisation controls should prevent
fraudulent or erroneous transaction taking place. Other preventive controls include segregation of
duties, recruiting and training the right staff and having an effective control culture.

2.5.2 DETECTIVE CONTROLS.

These are controls that detect if any problems have occurred. They are designed to pick up errors
that have not been prevented. These could be exception reports that reveal that controls have been
circumvented (for example, large amount paid without being authorised).Other example could
include reconciliations, supervisions and internal checks.

2.5.3 CORRECTIVE CONTROLS

These are controls that address any problems that have occurred .So where problems are identified,
the controls ensure that they are properly rectified. Examples of corrective controls include follow
up procedures and management action.

2.6 THE COMPONENT OF INTERNAL CONTROL

According to Whittington et al, the formality of any control system will depend largely on a bank’s
size, the complexity of its operations, objectives and its risk profile. Less formal and structured
internal control systems at community banks can be as effective as more formal and structured
internal control systems at larger and more complex banks. Every effective control system should
have:

• A control environment.

• Risk assessment.

• Control activities.

• Accounting, information, and communication systems.

• Self-assessment or monitoring.

2.6.1 CONTROL ENVIRONMENT

The control environment reflects the board of directors’ and management’s commitment to internal
control. It provides discipline and structure to the control system. Elements of the control
environment include.

• The organizational structure of the institution; (Is the bank’s organization centralized or
decentralized? Are authorities and responsibilities clear? Are reporting relationships well
designed?).
 • Management’s philosophy and operating style. (Are the bank’s business strategies formal or
informal? Is its philosophy and operating style conservative or aggressive? Have its risk
strategies been successful?
• The integrity, ethics, and competence of personnel.
• The external influences that affect the bank’s operations and risk management practices
(e.g., independent audits).
• The attention and direction provided by the board of directors and its committees, especially
the audit or risk management committees.
• The effectiveness of human resources policies and procedures.

2.6.2 RISK ASSESSMENT

Risk assessment is the identification, measurement, and analysis of risks, internal and external,
controllable and uncontrollable, at individual business levels and for the bank as a whole.
Management must assess all risks facing the bank because uncontrolled risk-taking can prevent the
bank from reaching its objectives or can jeopardize its operations. Effective risks assessments help
determine what the risks are, what controls are needed, and how they should be managed.

2.6.3 CONTROL ACTIVITIES

Control activities are the policies, procedures, and practices established to help ensure that bank
personnel carry out board and management directives at every business level throughout the bank.
These activities help ensure that the board and management act to control risks that could prevent a
bank from attaining its objectives. They should include:

• Reviews of operating performance and exception reports. For example, senior management
regularly should review reports showing financial results to date versus budget amounts,
and the loan department manager should review weekly reports on delinquencies or
documentation exceptions.
• Approvals and authorization for transactions and activities. For example, an appropriate
level of management should approve and authorize all transactions over a specified limit,
and authorization should require dual signatures.
• Segregation of duties to reduce a person’s opportunity to commit and conceal fraud or
errors. For example, assets should not be in the custody of the person who authorizes or
records transactions.
• The requirement that officers and employees in sensitive positions be absent for two
consecutive weeks each year.
• Design and use of documents and records to help ensure that transactions and events are
recorded. For example, using pre-numbered documents facilitates monitoring.
• Safeguards for access to and use of assets and records. To safeguard data processing areas,
for example, a bank should secure facilities and control access to computer programs and
data files.
• Independent checks on whether jobs are getting done and recorded amounts are accurate.
Examples of independent checks include account reconciliation, computer-programmed
controls, management review of reports that summarize account balances, and user review
of computer generated reports.

Banks are required to develop and maintain written procedures or controls for certain areas,
including real estate lending, asset management, and emerging market and trading activities, as well
as areas subject to insider transactions, the Bank Secrecy Act, and the Bank Bribery Statute.
Although banks are encouraged to have written internal control procedures in all areas, having them
is not enough. Personnel must understand control procedures and follow them conscientiously.

2.6.4 ACCOUNTING, INFORMATION, AND COMMUNICATION SYSTEMS

Accounting, information, and communication systems capture and impart pertinent and timely
information in a form that enables the board, management, and employees to carry out their
responsibilities. Accounting systems are the methods and records that identify, assemble, analyze,
classify, record, and report a bank’s transactions. Information and communication systems enable all
personnel to understand their roles in the control system, how their roles relate to others, and their
accountability. Information systems produce reports on operations, finance, and compliance that
enable management and the board to run the bank. Communication systems impart information
throughout the bank and to external parties such as regulators, examiners, shareholders, and
customers.

2.6.5 SELF-ASSESSMENT OR MONITORING

Self assessment or monitoring is the bank’s own oversight of the control system’s performance. Self-
assessments are evaluations of departmental or operational controls by persons within the area.
Ongoing monitoring should be part of the normal course of daily operations and activities. Internal
and external audit functions, as part of the monitoring system, may provide independent
assessments of the quality and effectiveness of a control system’s design and performance. All bank
personnel should share responsibility for self-assessment or monitoring; everyone should
understand his or her responsibility to report any breaches of the control system. Strong control
cultures typically incorporate qualified personnel, effective risk identification and analysis, clear
designation and appropriate separation of responsibilities, accurate and timely information flow, and
established monitoring and follow-up processes. For example, the lending area should have (1) a
board of directors active in approving and monitoring loan policies and practices; (2) a loan review
function that evaluates the risk and quality of loan portfolios; (3) policies and procedures governing,
among other things, types of loans, loan approvals, maturity limits, rate structure, and collateral
requirements; and (4) information systems that allow for proper management and monitoring of the
lending area.

2.7 ROLES AND RESPONSIBILITIIES IN INTERNAL CONTROLS

According to the COSO Framework, everyone in an organization has responsibility for internal
control to some extent. Virtually all employees produce information used in the internal control
system or take other actions needed to effect control. Also, all personnel should be responsible for
communicating upward problems in operations, noncompliance with the code of conduct, or other
policy violations or illegal actions. Each major entity in corporate governance has a particular role to
play:

2.7.1 MANAGEMEMT

The Chief Executive Officer (the top manager) of the organization has overall responsibility for
designing and implementing effective internal control. More than any other individual, the chief
executive sets the “tone at the top” that affects integrity and ethics and other factors of a positive
control environment. In a large company, the chief executive fulfills this duty by providing leadership
and direction to senior managers and reviewing the way they’re controlling the business. Senior
managers, in turn, assign responsibility for establishment of more specific internal control policies
and procedures to personnel responsible for the unit’s functions. In a smaller entity, the influence of
the chief executive, often an owner-manager is usually more direct. In any event, in a cascading
responsibility, a manager is effectively a chief executive of his or her sphere of responsibility. Of
particular significance are financial officers and their staffs, whose control activities cut across, as
well as up and down, the operating and other units of an enterprise.

2.7.2 BOARD OF DIRECTORS

Management is accountable to the board of directors, which provides governance, guidance and
oversight. Effective board members are objective, capable and inquisitive. They also have knowledge
of the entity’s activities and environment, and commit the time necessary to fulfill their board
responsibilities.

Management may be in a position to override controls and ignore or stifle communications from
subordinates, enabling a dishonest management which intentionally misrepresents results to cover
its tracks. A strong, active board, particularly when coupled with effective upward communications
channels and capable financial, legal and internal audit functions, is often best able to identify and
correct such a problem.

2.7.3 AUDITORS

The Internal Auditor and external auditors of the organization also measure the effectiveness of
internal control through their efforts. They assess whether the controls are properly designed,
implemented and working effectively, and make recommendations on how to improve internal
control. They may also review Information Technology Control, which relate to the IT systems of the
organization. There are laws and regulations on internal control related to financial reporting in a
number of jurisdictions. In the U.S. for instance, these regulations are specifically established by
Sections 404 and 302 of the Sarbanes-Oxley Act. Guidance on auditing these controls is specified in
PCAOB Auditing Standard No.5 and SEC guidance, further discussed in top-down assessment. To
provide reasonable assurance that internal controls involved in the financial reporting process are
effective, they are tested by the external auditor (the organization’s public accountants), who are
required to opine on the internal controls of the company and the reliability of its financial reporting.

2.8 WHO IS RESPONSIBLE FOR INTERNAL CONTROLS?

• Management is responsible for establishing and maintaining a controlled environment.

• Operating personnel are responsible for effecting internal control,
• Internal Audit, in an advisory/consultant role, is responsible for evaluating whether
appropriate controls have been implemented and whether internal controls are functioning
as intended.

2.9 WHY INTERNAL CONTROLS INTEREST THE INTERNAL AUDITORS

A key objective of the internal auditor is to review the organization’s system of internal control and
to prevent and provide assurance that the corporate governance requirements are being met.
Therefore the internal controls are fundamental to the work of the internal auditor. Like external
auditors, internal auditors have to make decisions to the extent of reliance on control to manage risk
and therefore the level of testing to be carried out.
2.10 LIMITATIONS

According to Millichamp and Taylor, internal controls are essential features of any organization that
is run efficiently. However, it is important to realize that internal controls have inherent limitations
which include:

• Internal control involves human action, which introduces the possibility of errors in
processing or judgment.
• A requirement that the cost of an internal control is not proportionate to the potential loss
which may result from its absence.
• Internal controls tend to be directed at routine transactions. The one-off or unusual
transaction tends not to be the subject of internal control.
• Abuse of responsibility
• The possibility of circumvention of controls either alone or through collusion with parties
outside or inside the entity.
• Management overriding controls.
• Fraud
• Changes in environment making controls inadequate
• Human cleverness – however secure the computer code designed to prevent access, there is
always some hacker who gets in.

Because of this inherent limitations to internal controls and because auditors cannot have more than
a reasonable assurance of their effectiveness, complete reliance cannot be placed on a system of
internal control.

2.11 THE CONCEPT OF FRAUD

What is fraud? The term fraud has been widely defined in literature by scholars and experts. Hornby
(1998) defines fraud as an action or an instance of checking somebody in order to make money or
obtain goods illegally. The same dictionary defines the perpetrators of frauds as fraudsters.

According to ICAN study pack (2006a, b) fraud consists of both the use of deception to obtain an
unjust or illegal financial advantage and intentional misrepresentations, affecting the financial
statements by the one or more individuals among management, employees, or third parties.

Archibong (1992) describes fraud as a predetermined and well planned tricky process or device
usually undertaken by a person or group of persons, with the sole aim of checking another person or
organization, to gain ill-gotten advantages, be it monetary or otherwise, which would not have
accrued in the absence of such deceitful procedure.

From the above, fraud can be said to be an intentional deception made for personal gain or to
damage another individual; and the related adjective is fraudulent.

The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation.
Defrauding people or entities of money or valuables is a common purpose of fraud, but there have
also been fraudulent “discoveries”, e.g. in science, to gain prestige rather than immediate monetary
gain.
2.12 COST OF FRAUD

According to [Link], the typical organization loses 5 percent of its annual revenue
to fraud, with a median loss of $160,000. Frauds committed by owners and executives are more than
nine times as costly as employee fraud. The industries most commonly affected are banking,
manufacturing, and government. Even great Companies have experienced fraud in the workplace.
This is why you have heard about it, seen it in the news and may have experienced it yourself. Fraud
hurts. It removes the hard work and value you and your honest employees have earned.

2.13 THE FRAUD TRIANGLE

A good first step to understanding why fraud is committed is to study “the Fraud Triangle” created
by famed criminologist Donald Cressey. It conveys the three key fraud elements – opportunity,
motivation, and rationalization of why fraud is committed.

SOURCE: [Link]

According to the Association of Certified Fraud Examiners (ACFE) report “Occupational Fraud” issued
in early 2009, the biggest factor regarding the rise in fraud was increased pressure. With these
uncertain times and the bombardment of bad news for families, employees and others may be
under a tremendous amount of pressure to make ends meet. One should be prepared to feel the
effects on the company/ banks.

Fraud may involve:

a. Falsification or alteration of accounting records or other document.

b. Misappropriation of assets or theft
c. Suppression or omission of the effect of transactions from records or documents.
d. Recording of transactions without substances.
e. Intentionally misapplication of accounting policies.
f. Willfully misrepresentation of transactions of the entity’s state of affairs.

From whichever way, fraud is looked at; it is simply a deceitful and dishonest act, which involves
taking a property unlawfully from its owner, without his or her knowledge, permission or consent, or
to misstate a situation knowingly or by negligence.

This issue of fraud is a traditional occurrence in the society in which we find ourselves today. In the
government as well as private sector, it seems to be the other of the day. In Nigeria banks, fraud is
slowly on the increase whereas in other African countries like Nigeria, its effects have been over
whelming. In the banking sector especially, fraud is causing more harm than good; hence, efforts
must be taken to ensure that it is dealt with.

2.14 CLASSIFICATION OF FRAUD

Within the scope of this study, attempts will be made to critically examine the two broad schemes of
frauds. The classifications of fraud are:

• Management fraud
• Employee fraud

In some other books, like Millichamp and Taylor (2008) fraud is being classified into two namely:
 • Misappropriation of assets and consequent misstatements arising from that, i.e. a cover up
involving the alteration of the accounting records to disguise the theft.
• Misstatements arising from fraudulent financial reporting.

2.14.1 MANAGEMENT FRAUD

According to Fakunle (2006), management fraud involves the manipulation of the records and the
account, typically by the enterprise’s senior officers with a view to benefiting in some indirect way.
An example could be obtaining finance under false pretense, or concealing a material, worsening off
the company’s true position (window dressing).

Robertson (1996) defines management fraud as a deliberate fraud, committed by management that
injures investors and creditors, through materially misleading financial statements. Management
frauds are sometimes referred to as fraudulent financial reporting.

From the above definitions, it can be deduced that management fraud is usually perpetrated by the
management staffs of the organization, which includes the directors, general managers, managing
director’s etc. The class of victims of management fraud are the investors as well as the creditors
and the instrument of perpetration is financial statement. The essence of management fraud most
times is to attract more shareholders to come and invest in the organization will be in better position
of obtaining loans from banks, because , a good statement will shoe a healthy look, hence it will be a
good collateral security.

2.14.2 EMPLOYEE FRAUD

Employee fraud also known as non-management fraud could be said to be frauds perpetrated by
employees of the organization. Robertson (1996) defines employee fraud as the use of fraudulent
means to make money or other property from an employer. It usually involves falsification of some
kind, like false document, lying, exceeding authority, or violating an employer’s policies,
embezzlement of company’s funds, usually in form of cash or other assets. Employee’s frauds are of
three phases namely:

 The fraudulent act

 The conversion of the money or property to the fraudsters

 The cover up

Employee’s frauds are more likely to be encountered where internal controls are weak.

2.15 CHARACTERISTICS OF FRAUD

According to Millichamp and Taylor (2008), Misappropriation of assets is what most people
immediately think of when fraud is mentioned. This can often be frauds committed by employees for
relatively minor amounts which may not in themselves, be material and which may not be detected
by routine audit checking work. However, it encompasses management fraud where managers are
in a position to disguise misappropriation in ways that are difficult to detect. This includes:

• Embezzling receipts, e. G misappropriating sales revenue.

• Stealing physical assets or intellectual property, e. G stock theft, theft of scrap for resale.
 • Causing the business to pay for goods not received, e. G payments to fictitious suppliers,
payment for fictitious employees.
• Using the business’s assets for personal use, e. G as collateral for loan.

2.16 TYPES OF BANK’S COMMON FRAUDULENT PRACTICES

According to Ovuakporia (1994) there are thirty- three types of bank frauds in the banking sector.
These includes: theft, embezzlement, defalcations, forgeries, substitution, suppression, payment
against unclear effects, unauthorized lending, lending to ‘ghost’ borrowers, kite flying and cross
firing, unofficial borrowing, foreign exchange malpractice, impersonation, over- involving,
manipulation of vouchers, fictitious accounts, over and under valuation of properties, false
declaration of cash shortages, falsification of status reports, duplication of cheque books, mail
transfer, interception of clearing cheques, computer frauds, fake payments, teeming and lading,
robbers, etc.

The above mentioned types of fraudulent practices in banks, serve as threats to the success of many
banks. If adequate preventive and detective measures are not put in place, it could lead to a
complete failure of financial institutions especially banks in Nigeria.

2.17 CAUSES OF BANK FRAUDS

There are many identified causes of bank frauds but these causes, vary from institution to economic,
social, psychological, legal and even infrastructural. The immediate causative agents of frauds in
general are provided by Ogbunka (2002) as follows:

• Availability of opportunity to perpetrate frauds and forgeries.

• Human greed, avarice, instability.
• Poverty and the widening gap between the rich and the poor.
• Prevailing misplaced social values, moral and spiritual decadence.
• Increasing incidence of unemployment.
• Increasing financial burdens on individuals.
• Misapplied intelligence- say for adventure.
• Job insecurity.
• Social misconceptions that banks’ money is nobody’s money and therefore, can be
defrauded.
• Societal expectation
• Inadequate training of personnel.
• Unhealthy comparison and competition.
• Revenge
• Peer group pressure
• Non-adherence to ethical standards
• Leadership by bad example
• Poor or weak recruitment policies
• Weak internal control system of the bank
• Poor or weak management control, monitoring and supervision
• Lack of effective machinery that guarantee severe punishment for fraudsters and forgers
• Possibility of identifying or stopping a fraud is very little.
• Increasing and changing sophistication in technological equipment
When critically looked at, it is true to say that there are several causes of bank frauds, but, weak
internal control system stands as a major cause of frauds in banks. It is therefore of great importance
that adequate, efficient and effective internal control system is installed in banks in order to reduce
this disaster known as fraud.

2.18 FACTORS INFLUENCING THE EXISTENCE OF FRAUDS IN BANKS

Despite the numerous causes of bank frauds, there exist some other factors that influence the risk of
fraud within the bank and accordingly steps ought to be taken to minimize them. According to
Izedonmi (2000), these factors are:

• Where authority is concentrated in a few hands within the bank

• Where management continually fails to implement internal control recommendations made
by an external auditor
• Where there is a high rate of turnover in key accounting functions
• Where the accounting system is inadequate and the books of accounts, cannot be reconciled
with the financial statements
• Where transactions occurring within the year are reversed after the year end.
• Where fees paid to legal advisers appear to be out of proportion with the actual service
rendered.
• Where there are material transactions during and around the year end date.
• Where the bank is experiencing slovenly problems.
• Where it is difficult to obtain explanation from management and staff of the banks during
the audit.
• Where documentation supporting transactions are usually not available.

Other factors according to Raji (1997) may include:

• Experience: when too much confidence is reposed on a staff because of his apparent ability
to work with minimum supervision due to his experience, it could degenerate into a
situation that could breed an opportunity for committing fraud.
• Understaffing: most banks today, strife that strenuous efforts are made to cut down cost.
This idea is however, over stretched that at times, result to entrusting too many functions to
a staff. No matter how good a staff is, carrying out his functions efficiently may not be easy
to sustain. Understaffing will thus, create room for fraud as there will be no much form of
supervision.

2.19 EFFECTS OF FRAUD

Every step or action that we take in life has its consequences; sometimes, it may be bad and
sometimes good. The consequences of fraudulent acts undertaken by fraudsters to banks are
negative consequences. According to the provision of the NDIC published report (1996) they
consequences are as follows:

• The distress syndrome: bank frauds tend to jeopardize the industrial growth of a nation.
Bank frauds have led to the winding up of some banks while some are still battling with the
distress syndrome.
 • Loss of bank funds: frauds have caused hardship in banks, especially those whose liquidity
state was already in doubt. As fraud cases in banks keep increasing so will bank losses in
terms of money.
• Bank staff involvement: when staff of these financial institution get into fraudulent activities,
and they end up caught ,the bank obviously punish them by termination of appointment,
dismissal and suspension, which would certainly affect their homes adversely.
• Illiquidity: when banks experience fraud, some amount of money is lost in the process,
which in turn affects the banks liquidity position, thus leading to their inability to meet their
re-capitalization requirements.
• Bad name: non prevention or detection of fraudulent acts could bring about bad name /
reputation for the bank as well as the country. Let’s take for example, our Nigerian
counterpart; according to BBC news on Nigerian bank frauds (2007) Nigeria has become
synonymous with fraud as some of its citizens use the boom in the internet cafes to send
spam mails, promising millions in exchange for the gullible recipient’s bank details. This
proves to us that fraud has become an unfortunate staple in Nigeria’s international
reputation.

From the above mentioned effects, it can be clearly deduce that fraud is really a destructive force
that seeks to destroy financial institutions, render so many employers of labour jobless, close down
banks and erase the confidence of people in the country’s banks. This is not acceptable hence;
efficient and effective internal control system must be installed in banks and fully in effect.

2.20 RESPONSIBILITIES FOR PREVENTION AND DETECTION OF FRAUD

According to Millichamp and Taylor (2008), the primary responsibility for the prevention and
detection of fraud rest with management. This responsibility arises out of contractual duty of care by
directors and managers and also because directors and other managers act in a stewardship capacity
with regard to the property entrusted to them by shareholders or other owners. How they exercise
this duty of care is a matter for them, but in most cases their duty may be discharged by instituting
and maintaining a strong system of internal control. There are many ways the directors can
discharge their duty toward prevention and detection of fraud. These include:

• Complying with the combined code on corporate governance;

• Developing a code of conduct, monitoring compliance and taking action against breaches;
• Emphasizing a strong commitment to fraud prevention. This involves establishing a culture
of honesty and ethical behavior within the organization with clearly communicated policies
on the corporate attitude to fraud and fraudsters;
• Establishing a strong environment, monitoring its effectiveness and taking corrective action;
• Establishing an internal audit function;
• Establishing a compliance function, that is a separate department of the enterprise
specifically charged with ensuring compliance with regulation of all sorts;
• Having an audit committee.

2.21 IMPACT OF INTERNAL CONTROL SYSTEM ON FRAUD

One of the objectives of internal control system is to help the banking organization in the prevention
and early detection of errors and fraud. This shows that internal control system has a bearing with
prevention and detection of fraud in banks. More so, according to a research conducted by Olaoye
Clement Olatunji, internal control systems has a lot of role to play when it comes to the effective
operations of the banking sector. According to the researcher, effective and adequate internal
control is the best measure for adoption in protecting the bank against banking vices or unexpected
situations. Since bank fraud is one of the unexpected situations in the banking sector, this conclusion
drawn by Clement however shows that internal control system has an impact on prevention and
detection of fraud in the banking sector.

In conclusion, management of any banking organization is responsible for the prevention and
detection of fraud, through the establishment of an effective and efficient internal control system.
Since based on the literature review, there is a relationship between fraud and established internal
control system; it is pertinent that the management establishes an adequate, efficient and effective
internal control system in the banks.