FRAUD MANAGEMENT AND INTERNAL CONTROL AS CORRELATES OF ORGANIZATIONAL EFFECTIVENESS (A STUDY OF NIGERIAN DEPOSIT MONEY BANKS)

ABSTRACT

No organizations can be effective towards the attainment of its desired goals without the formulation and enforcement of fraud management policies and standard internal control systems. The study examined fraud management and internal control as correlates of organization effectiveness in some selected Nigerian Deposit Money Banks in Enugu State. 450 staff across management, senior and junior level was purposively selected in Skye Bank, Access Bank and EcoBank. The study made use of primary data via the administration of a questionnaire to generate data from the respondents. The data were analyzed using the descriptive statistic analysis and the Pearson correlation analysis. The results revealed that a positive and significant relationship exists between fraud management and organizational effectiveness (r=0.772; p<0.05); and between internal control and organizational effectiveness (r=0.896; p<0.05) in the selected banks. Based on this, the study suggests that internal control, both operational and financial should be employed the management of every bank, to ensure that bank’s assets are safeguarded, cash inclusive. This will go a long way in reducing fraud in banks to the barest minimum and ensuring effectiveness in banks’ operations.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Internal control, the strength of every organization, has become very crucial in Nigerian banks. The reason for its high importance is that control system in any organization is fundamental to an efficient accounting system. The need for the internal control systems in any organizations, especially in financial institutions such as the Deposit Money Banks, cannot be underestimated, based on the fact that the banking sector, which has important role to play in the economic development process of a nation, is now being invaded by macroeconomic instability, corruption, fraud etc.

Fraud, which is among the reasons for implementing internal control, has become pervasive in the Nigerian banking industry. It has tarnished the global reputation of the country, in which Nigeria was identified as a “fantastically corrupt nation” by the advanced world economies. Fraud has totally penetrated the Nigerian banking industry and that any bank with a weak internal control system, is highly susceptible to bank fraud.

The Central Bank of Nigeria reported that cases of attempted fraud in banks, between 2007 and 2015, have exceeded what was recorded between 2001 and 2006. The CBN report showed that a total of 771 cases of attempted fraud, involving 5.4 billion naira were reported as at June, 2014. In 2015, 1,193 cases of fraud were reported involving 11.9 billion naira. This menace can be attributed to weak internal control systems of banks. This clearly chows the picture of the pervasiveness of fraud in Nigerian Deposit Money Banks (Ahmed, etal, 2014; CBN, 2015).

Fraud management is now becoming an issue that top bank chiefs and regulators in the Nigerian banking industry face, due to the alarming rate of bank fraud. The implementation of internal control systems alone cannot totally address the issue of fraudulent activities that occurs in banks. Fraudulent acts are common in every organization, but more common in Deposit Money Banks because of the instruments of their trade. Banks are highly susceptible to financial fraud as a result of money and quasi-money instruments used in the process of their operations. The acts of financial fraud have defied solutions despite the implementation of internal control systems put in place in Nigerian Deposit Money Banks (Chibuzor, 2013). Internal control system sometimes negates the efficient operations, banks put in place to curtail cases of fraud, but it has not been totally successful in mitigating the amount of funds that goes into fraud. Thus, internal control systems have become both preventive and protective of banks’ financial resources, sometimes perceived as inimical to the primary operations of these banks

Most banks are litigation-shy as judicial officers find it uninteresting to that the internal control process put in place by the banks was planned and done by their employees (Adetiloye, etal, 2014). In addition, where the banks are litigious, courts often sympathize with customers whose infractions resulted into larger losses of funds irrespective of whether collusion with an employee had existed. These cases are not funny outside the banking halls when financial fraud occurred and parties have to prove their innocence.

One of the reasons for the use and review of internal control systems in Deposit Money Banks is to minimize cases of fraudulent activities, to promptly detect any intended fraudulent acts before they are actually carried out. Fraud management and internal control are therefore pertinent predictors that determine organizational effectiveness, which implies the rate at which organizations’ achieve their desired goals.

1.2 STATEMENT OF PROBLEM

Managing fraud in Nigerian Deposit Money Banks is bedeviled with series of problems. Firstly, the inability of bank management to effectively implement the policy and operational procedures of banks, which has led to the ineffective establishment of accounting system and the mode of accounting information, has encouraged perpetration of fraud.

Secondly, lack of adequate motivation incentives coupled with poor working conditions has resulted into fraud. Thirdly, weakness in the internal control systems such as lack of proper documentation of records has led into fraud. Fourthly, poorly designed organizational structure, poor devolution of responsibility, non-compliance to directives has resulted into fraud.

Lastly, ineffective supervision, evaluation and monitoring of bank operations by bank management and regulatory agencies have also encouraged fraudulent activities.

1.3 OBJECTIVES OF THE STUDY

The objectives of the study are:

To examine the relationship between fraud management and organizational effectiveness in Nigerian Deposit Money Banks.
To examine the relationship between internal control and organizational effectiveness in Nigerian Deposit Money Banks.

1.4 RESEARCH QUESTIONS

The study is aimed to provide satisfactory answers to the following questions.

What is the relationship between fraud management and organizational effectiveness in Nigerian Deposit Money Banks?

What is the relationship between internal control and organizational effectiveness in Nigerian Deposit Money Banks?

1.5 RESEARCH HYPOTHESES

Two hypotheses are formulated to guide the study, and they are stated as follows:

H01: There is no significant relationship between fraud management and organizational effectiveness in Nigerian Deposit Money Banks.

H02: There is no significant relationship between internal control and organizational effectiveness in Nigerian Deposit Money Banks.

1.6 JUSTIFICATION FOR THE STUDY

The damage which fraud has done to banks is inestimable. Fraud has highly eaten the wool and fabric of Deposit Money Banks in Nigeria due to the nature of their operations. Even at that, internal control, which has been regarded as panacea to fraud has not been fully embraced by the Nigerian Deposit Money Banks. Effective internal control and fraud management has been adjudged to be powerful tools to mitigate the incidence of fraud as well predictors of organization effectiveness, which is usually measured in terms of net profitability, wealth maximization, growth in industry’s market share and expansion of customer base.

Therefore, in an attempt to stop this financial degradation, the research work was carried out. It is therefore believed that the study through its findings will be beneficial to all stakeholders in the banking industry. Also, government will be informed on the need to adopt effective fraud management policies and internal control to minimize the incidence of fraud in among public and civil servants. This study will be of immense usefulness to students in their prospective future undertakings in the areas of fraud management, internal control and organizational effectiveness.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

The study examined the nexus of fraud management and internal control as they correlates to organizational effectiveness in Nigerian Deposit Money Banks. The study placed strong emphasis on Skye Bank, EcoBank and Access Bank in Enugu State, Nigeria.

In the course of carrying out the study, the researcher faced certain constraints, otherwise known as limitations, namely time constraint and financial constraint.

The time given to conduct a study of this magnitude is relatively short, given other academic engagement of the researcher. Also, due to limited fund, the study was able to covered three commercial banks in Enugu State namely: Skye Bank, EcoBank and Access Bank.

Nevertheless, a robust and fact-finding study was carried out.

1.8 ASSUMPTIONS

The study is premised on the two assumptions, which are.

That all respondents are staff of the selected Nigerian Deposit Money Banks.

That all the information given by the respondents are regarded as true and genuine devoid of sentiments or biasness.

1.9 METHOD OF ANALYSIS

The study adopted the descriptive survey design in conjunction with the purposive sampling technique to select 450 staff of Skye Bank, EcoBank and Access Bank in Enugu State. The study made use of a primary data, through the administration of a well-developed questionnaire for data collection. The data generated from the respondents were subjected to the descriptive statistics technique- tables, frequency, percentage and means and inferential statistics technique- Pearson Correlation Analysis.

1.10 DEFINITIONS OF TERMS

Deposit Money Banks: These are resident depository corporations and quasi-corporations which have liabilities in the form of deposits payable on demand, transferable by cheques or otherwise usable for making payments.

Fraud: A deliberate deception to secure an unfair or unlawful gain, mostly in monetary terms, or to deprive a victim of a legal right.

Fraud Management: Strategies and policies implemented by an organization to reduce fraud.

Internal Control: Process of assuring achievement of organization’s objectives in operational effectiveness and efficiency, reliable financial reporting and compliance with laws, regulations and policies. It simply involves everything that controls risks to an organization.

Organizational Effectiveness: Ability of an organization to meet its set goals and objectives given the resources at its disposal.