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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Internal control, the strength of every organization has become of paramount importance today in Nigeria banks. The reason being that the control systems in any organization is pillar for an efficient accounting system. The need for the internal control system in the organizations, especially banks, cannot be undermined due to the fact that the banking sector, which has a crucial role to play in the economic development of a nation, is now being characterized by macroeconomic instability, slow growth in real economic activities, corruption and the risk of fraud. The fraud, which is the major reason for setting up on internal control system, has become a great 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 with a weak internal control system is dangerously exposed to bank fraud. 

The Central Bank Of Nigeria (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 Central Bank Of Nigeria (CBN) half year report for 2007, revealed a total of 741 cases of attempted fraud and forgery, involving 5.4billion , $35,401.1, 150 Euros were reported as at June, 2007. In 2006 1,193 cases were reported involving 4.6billion, $1.8million and 14, 389.7pound sterling. The Central Bank Of Nigeria (CBN) also reported that the backward development was attributable 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 Nigeria banks. In a nut-shell, the damage which this menace called fraud has done to the 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 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. 

The questions are: what can be said to be the cause or causes of the increasing rate of fraud in banks? What are the effects or damage has fraud caused banks, her customers? What is the impact of internal control in the prevention and detection of fraud in banks?

1.2 STATEMENT OF THE RESEARCH PROBLEM

According to Ola (2011) primary responsibility for the prevention and detection of errors and irregularities rest with management. This responsibility arises out of a contractual duty of care by directors and mangers and also because directors and other managers act in a stewardship capacity with regard to the properly entrusted to them by the shareholders or other owners.

Izedonmi (2010) also said that the responsibility for the prevention or detection of fraud and errors, within an enterprise rest with the management. This responsibility is discharged by management through the establishment of an adequate system of internal controls, including internal check and internal audit. It is therefore, pronounced that the management of any banking organization is totally responsible for the prevention and detection of fraud, majorly by the establishment of an adequate, efficient and effective internal control system. 

The bank continued the operations with this level of capitalization until 1968 when a new banking decree was promulgated by the Federal Military Government. The decree which raised the minimum share capital of indigenous commercial banks to 300000 and the inability of the minority shareholders to meet up with the demand resulted to a marked difference in the ownership and control structure of the bank. To effect therefore, the true ownership structure of the bank and restore the much needed public confidence necessary for continuous customer patronage, the name Agbonmagbe bank limited was changed to Wema Bank limited on the 1st of June, 1970. Also the share capital of the bank was 500,000. 

Wema Bank Ltd. Was converted to a public limited liability company in April 1987 and was subsequently listed on the floor of the Nigeria Stock Exchange in January, 1990.  On February 5, 2001, the Central Bank of Nigerian granted a Universal banking license to the bank, thus, allowing the bank to undertake a wide range of financial services to its numerous customers across the country. Presently Wema Bank Plc. is adequately capitalized. Its shareholders funds is in excess of 25,000,000. Oduas investment company limited holds 10% equity stake in the bank, while private individual investors and staff of the bank own the remaining 90%. The authorized share capital of the Bank is 7,000,000 divided into 14,000,000 ordinary shares of 50kobo each. 

1.3 OBJECTIVES OF THE STUDY

The objectives of the study:

Is to determine the impact of internal control, on the overall management of Nigeria Banks.

To examine the effect of the internal control system, when it comes to fraud prevention.

To highlight the major causes of fraud and actors that contribute to the incidence of fraud in banks.

To determine the problem of fraud and how to curb it.

To make recommendation based on the findings. 

1.4 RESEARCH HYPOTHESIS

Hypothesis tested: two hypothesis are formulated and tested in this study. 

Ho: The lack of a good internal control is not a major cause of fraud in banks.

H1: The lack of a good internal control is a major cause of fraud in banks.

Ho: Banks with internal control system cannot prevent the menace of fraud.

H1: Banks with internal control system can prevent the menace of fraud. 

1.5 SCOPE OF THE STUDY

The content of this research should not be seen as being totally exhaustive of all possibly situations available in the Nigerian 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 Wema Bank branches in the South-Western part of Nigeria particularly 50 selected branches. In the followings states, Ekiti, Ondo, Oyo, Ogun, Osun and Lagos.

1.6  SIGNIFICANCE OF THE STUDY

The functions of fraud prevention, detection and control are interwoven, as the three works together to eliminate fraud and fraudulent tendencies. The knowledge of the possible causes of a disease will assist a medical doctor to give adequate prescription and panacea, for the prevention and cure of the disease. Similarly, it is pertinent to recommend the following preventive, detective and curative measures to control fraud in the banking sector. 

ADEQUATE INTERNAL CONTROL SYSTEM: Internal control which has been earlier mentioned and defined as all types of checks and balances, both operational and financial, should be employed by the management of every bank. To ensure that the bank’s assets are safeguarded of which cash is one of this would go along way in reducing and curbing fraud in banks. 

EFFECTIVE INTERNAL AUDIT DEPARTMENT: Bank should try as much as possible to have an effective internal audit department which should be leaded by a qualified accountant. In addition, the accountant should be headed by a qualified responsible to the managing director or a higher authority in the bank. 

PROPER ATTENTION SHOULD BE PAID TO CASH: From the findings, it is observed that cash is the most vulnerable asset to theft, as it can be seen that such accounted 64.52% of fraud committed in Banks. The study also reveals that cashiers are the major culprits in perpetrating fraud hence, their recruitment must be thorough, proper guarantee should be requested from the applicant before given the post of cashier. Banks should also arrange for cash in consist insurance cover in order to prevent the risk of loss of any cash in transit. 

ATTRACTIVE PAY PACKAGES: The maintenance of a rewarding workmen compensation scheme will enable an average banker live above poverty level hence; he will shun the temptation to defraud his/her employer.
FORMULATION OF GOOD PERSONNEL AND RECRUITMENT POLICIES: This is alike with No.3 above recruitment not based on sentiment but no personal knowledge guarantee and reference from people of high integrity will go a long way in preventing the recruitment of kleptomance greedy and ungodly individuals in the banking sector. 

GOOD MANAGEMENT: Management by example should be the watch word of every banker be it director, manager, officer or messenger. Everyone should comply with the laid down policies and procedures in the performance of any banking function. 

OTHER MEASURES INCLUDES: Keeping of adequate records, putting, operating procedures manual in writing, observing the attitude of the staff towards work and their spending habit, whether amount spent is commensurate with income earned e.t.c. if the aforementioned measures are strictly adhered to the ever increasing menace of fraud which has ruined many Nigerian Banks will be drastically reduced to its barest minimum and eventually eradicated. 

1.7  LIMITATION OF THE STUDY

In the cause of carryout this study, the researcher encountered some constrains such as finance, time and the response rate of the respondents. 

Financial Constraints: Finance is largely needed to tour wider regions or locations just to gather data for processing. But this was not adequately available to sufficiently meet the purpose of this study. 

Time constraints: This study coincided with the first band second semester academic demands which made it enormously tasking. 

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