CHAPTER 1

GENERAL INTRODUCTION

1. INTRODUCTON

How extensive should a company’s
internal control system be? In today’s environment, this is a difficult
question to answer. The reason being that some current business, legal, and
social trends suggest that companies need to increase their emphasis on
internal control, while other trends indicate just the opposite. Bank failures
and widespread losses over the past two decades have elevated the importance of
effective internal control within the formal financial sector worldwide. In the
United States for example, bank failures rose over 200 percent in the 1980s
partly due to fraud and mismanagement. Internationally, the collapse of Barings
Bank and Yamaichi Securities further focused the financial sector’s attention
on internal control. The Basle Committee analyzed the problems related to these
losses and concluded that they probably could have been avoided had the banks
maintained effective internal control systems (banking, a regulatory and
auditing guide). In addition, a review of traditional banks affirmed that the
implementation of effective internal control systems played an important role
in reducing bank failures.

Internal control, the strength of
every organisation, has become of paramount importance today in Nigeria banks.
The reasons being that the control systems in any organization are a pillar for
an efficient accounting system as well as achievement of organizational goals.

1.2 BACKGROUND OF THE STUDY

As part of its on-going efforts to
address bank supervisory issues and enhance supervision through guidance that
encourages sound risk management practices, the Basel Committee on Banking
Supervision issued a framework for the evaluation of internal control systems.
A system of effective internal controls is a critical component of bank
management and a foundation for the safe and sound operation of banking
organizations. A system of strong internal controls can help to ensure that the
goals and objectives of a banking organization will be met, that the bank will
achieve long-term profitability targets, and maintain reliable financial and
managerial reporting. Such a system can also help to ensure that the bank will
comply with laws and regulations as well as policies, plans, internal rules and
procedures, and decrease the risk of unexpected losses or damage to the bank’s
reputation.

The Basel Committee, along with
banking supervisors throughout the world, has focused increasingly on the
importance of sound internal controls. This heightened interest in internal
controls is, in part, a result of significant losses incurred by several
banking organizations. An analysis of the problems related to these losses
indicates that they could probably have been avoided had the banks maintained
effective internal control systems. Such systems would have prevented or
enabled earlier detection of the problems that led to the losses, thereby
limiting damage to the banking organization.

A system of accounting and records
keeping will not succeed in completely and accurately processing all
transaction unless controls known as internal controls are built into the
system. The purposes of such internal controls are to ensure that transactions
are executed in accordance with proper general or specific authorisation and
again to ensure that all transactions are properly recorded with the correct
amount and in the appropriate account and in the proper accounting periods so
as to permit preparation of financial statement in accordance with relevant
legislation and accounting standards and for informed management decision
making.

Internal control will ensure that
errors and irregularities are avoided or made apparent. Internal control as a
system comprise of the control environment and procedures .It includes all the
policies and procedures adopted by the directors and management of an entity to
assist in achieving their objectives of ensuring as far as practicable the
orderly and efficient conduct of its business so as to safeguard assets, to prevent
and detect fraud and error to ensure accuracy and completeness of accounting
records and the timely preparation of reliable financial information (SAS
300.1)

The company code 1963, Act 197
section 123 states that “management will need to establish an effective
accounting system comprising a number of controls”. In an attempt to do this
there must be a well-defined organisational structure showing how
responsibility and authority are delegated clearly defined communication
channels or lines of reporting(i.e. upward , downward and horizontal lines of
reporting) for attainment of corporate objectives. These controls are such that
different people are assigned to do different task. No one person should fully
record and process transactions from commencement to the end.

This means that a company can only
achieve its corporate mission through the establishment of internal control
system which makes sure that those policies and procedures which are laid down
by management are efficient. Hence, it reduces the cost of operation without
reducing effectiveness.

1.3 STATEMENT OF THE PROBLEM

The regularity of fraud and
misappropriation of funds is creating fear, anxiety, and a loss of confidence
in the minds of bank customers. Also, poor internal control system leads to
increase in bank losses. Management is required to set up an internal control
system but this system varies significantly from one organization to the next,
depending on such factors as their size, nature of operations, and objectives.
Since internal controls operate in an environment which influences its
operations, proper care must be exerted into the implementation of these
systems in other to achieve the utmost aim of the bank. This heightened
interest in internal controls is, in part, a result of significant losses
incurred by several banking organizations. An analysis of the problems related
to these losses indicates that they could probably have been avoided had the
banks maintained effective internal control systems. Such systems would have prevented
or enabled earlier detection of the problems that led to the losses, thereby
limiting damage to the banking organization.

1.4 OBJECTIVES

1. To find out the impact of internal control system, on
   the overall management of Mainstreet  bank Nigeria Aba branch.
2. To find out the employees knowledge base on the concept
   of fraud in the banking sector.
3. To find out effective internal control systems
   influence on prevention and detection of fraud.
4. To find out the problem of fraud and how to curb it.

1.5 RESEARCH QUESTIONS

1. Does Mainstreet  bank have an internal control
   system? If yes, how effective is it?
2.  What kind of relationship exists between
   detection and prevention of fraud and internal control system?
3. Is lack of good internal control system a major cause of
   fraud in banks? And what other major causes exist?
4. Can banks with effective internal control system
   prevent the menace of fraud?

1.6 RESEARCH HYPOTHESIS

The research is intended to
investigate the impact of internal control system in the circumstances of
embezzlement and fraud detection in the bank.

Therefore the data to be collected
in this exercise will be used to test the following hypothesis.

H1:
Effective internal control system can help to prevent and detection of fraud in
Mainstreet bank.

H0:
That effective internal control system may not help to prevent and detect fraud
in Mainstreet bank.

Research is poised to confirm true
or otherwise, to achieve this purpose the research has formulated the above
hypothesis. That the general financial management and control system as regard
revenue and expenditure is effective, efficient and technical. Also the general
financial management and control system as related to the public opinion is
inadequate, ineffective, and this lacks improvement in its operation
achievements which will hinder general development.

1.7 THE SIGNFICANCE OF THE STUDY

The findings of the study would help
the management of the bank to maintain an enhanced controlled environment by
helping management and employees to establish and maintain an environment
throughout the bank that sets a positive and supportive altitude towards
internal control, reliable management, operating personnel for effecting
internal control and internal audit for evaluating whether appropriate controls
have been implemented and whether the internal controls are functioning as
intended. Other significance of the study includes:

• Help the bank in reducing fraudulent activities that
  occur in the organisation. 
• Requirement for the award of a Master’s degree.
• Reference for other research topics

1.7 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
Mainstreet  Bank branch in Aba, Nigeria.

1.8 LIMITATIONS

The limitations of this research
work are as follows;

1. The internal control involves human actions which
   introduces the possibility of errors in processing or judgement.
2. Internal controls can also be overridden by the plan
   among employees and evasion of controls or oppression by top management
   and superior external influences.
3.  Limited funds prevented the choice of more than
   one study area.

1.9   OPERATIONAL
DEFINITION

Internal control: a control is “any action taken by management to enhance the
likelihood that established objectives and goals will be achieved” [institute
of internal auditors, 1993].in other words, controls are designed to ensure
that organizations conform to standards or plans. Examples of controls include
the use of sales or expense budgets, computer passwords, or even padlocks on
warehouses.

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