EVALUATION OF FRAUD CONTROL MEASURES IN THE NIGERIAN BANKING SECTOR (A CASE STUDY OF CENTRAL BANK OF NIGERIA, KADUNA BRANCH)

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EVALUATION OF FRAUD CONTROL MEASURES IN THE NIGERIAN BANKING SECTOR (A CASE STUDY OF CENTRAL BANK OF NIGERIA, KADUNA BRANCH)

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Over the years, irregularities have been the problems of commercial banks. The term irregularities are used to refer to intentional distortion of financial statement and misappropriation of assets for whatever purpose. Fraud is one type of irregularities. Fraud, in auditing guideline, is used to refer to irregularities involving the use of criminal deception to obtain unjust or illegal advantages.

Fraud may entail that proper accounting records have not been properly maintained, it may also point out that some internal control system are not effective and could not form a reliable source of information for an auditor. Existence of fraud in a financial statement endangers it from showing a true and fair view and complying with the provision of the companies and Allied Matter Acts (CAMA) 1990.

Therefore, fraud in banks must be looked at generally as “acts that involves the loss of assets by banks through dishonest and deceitful means. The fraudster intentionally but dishonestly benefit himself to the detriment of the bank, the bank staff, bank customers and any other member of the public via banking operations. Fraud can be committed by bank staff, bank customers or a third party that is non-customer (Eze, 2004).

1.2 STATEMENT OF THE PROBEM

Fraud in the Nigerian Commercial banks has been notable and has remained an unavoidable problem and has resisted all practicable treatment. This incidence has not only become an incessant phenomenon but also been on the increase in the recent past.

In recent years, the volume and frequency of fraudulent practices in Nigeria banks have been on the increase. According to the Nigerian Deposit Insurance Corporation (NDIC), the level of reported fraud in Nigeria banks rose from N 804m in 1990 to N3, 199m in 1998. Furthermore, the actual/expected loss to the amount involved in fraud rose from 3 percent in 1990 to 22 percent in 1998. This is evidenced in the report, which is the highest fraud ever reported in any particular year by a Nigerian bank in 1998, when united Bank for Africa Plc wrote of N786m on account of fraud.

The growing scope and scale of fraud in the Nigerian banking industry is surprising and the general confidence reposed in the banking institutions has become eroded since the new concept of distress, bank failure and closures in the recent years. From available records, out of about 114 financial institutions operating in the country as at 1996, 52 were distressed while 6 were acquired. With the frequent fraud, people are no longer at ease keeping their monies in the commercial banks but instead prefer to keep them in their houses or prefer to hold them in wares.

The commercial banks shares 90% of all cases of malpractices, forgeries and frauds (Wikipedia 2007).

1.2 OBJECTIVES OF THE STUDY

The main objective of the study includes the following.

To access the impact of frauds on banking public and on bank performances.

To identify the causes of bank fraud in Nigeria.

To examine the effectiveness of the supervisory and oversight functions of the CBN.

To ascertain the incidence of fraud in the Nigerian banking industry

1.4 RESEARCH QUESTIONS

The study poses the following research questions.

What are the impacts of fraud on banking and on bank performance?

What are the causes of bank fraud in Nigeria?

How effective is the supervisory and oversight functions of the CBN?

What are the incidences of fraud in Nigerian banking industry?

1.5 RESEARCH HYPOTHESES

The following research hypotheses will be formulated for the purpose of the study.

Ho: Economic down turn and termination/retirement of staff are not impact of fraud ob banking and o bank performance.

Hi: Economic down turn and termination/retirement of staff are impact of fraud ob banking and on bank performance.

2.Ho: Poor Management and security arrangement in commercial banks do not cause fraud in Nigerian banking industry.

Hi: Poor Management and security arrangement in commercial banks causes fraud in Nigerian banking industry.

3.Ho:The supervisory and oversight function of CBN in protecting the depositors, economy, and banks‟ customers is not effective.

Hi: The supervisory and oversight function of CBN in protecting the depositors, economy, and banks‟ customers is effective.

Ho: The spate of fraud in Nigerian banking industry is low. Ho: The spate of fraud in Nigerian banking industry is high.

1.6 SIGNIFICANCE OF THE STUDY

The study of these kinds is very important and timely, especially at this period when the Nigerian central bank, Nigeria deposit insurance corporation (NDIC) and government and its agencies are doing something to curb the menace of fraud in commercial banks. The study will not only raise public awareness of the presence of fraud in the commercial

bank but also grants public awareness of the existence of anti-fraud investigators, thus assisting and encouraging those who may witness or suspect act of fraud being committed by people to report it and provide evidence.

The study will go a long way to sensitizing the public on the adverse effect of fraud on commercial banks and the Nigeria economy at large. In addition, it will equally serve as a reference material for researchers in the same field.

1.7 SCOPE OF THE STUDY

The scope of the study seeks to deliberately delineate the boundaries of the study (Onodugo, 2010). In this research work, treating the problems as a whole will be too much for the requirement of this work. Therefore, Kaduna state is used for the analysis of the work to determine the role of CBN in the management of fraud in Nigerian commercial banks.

1.8 LIMITATIONS OF THE STUDY

The study focuses only on the management of fraud in Nigeria commercial banks. Constraints to the study are enumerated;

Time Constraint: The limited nature of time available for the researcher could not allow him to collate all the information needed for the study.

Financial Constraint: Finance which is the driving force of any research work was insufficient. Due to this constraint, the researcher could not visit places where relevant information for the study could be obtained.

Attitude of the Respondents:Some of the respondents show negative attitude towards the study because they felt that there is no financial benefits attachment.

1.9 DEFINITION OF TERMS

Assets: Assets are what a person or business owns. Castle and Owen (1992).

Commercial Banks: Commercial bank is any bank whose business include the acceptance of deposit withdrawable by cheque or cash (Okeke, 1996).

Fraud: Fraud refers to an intentional act by one or more individuals among management employees or third parties which results in a misrepresentation of financial statement. (Adeniyi, 2004).

Auditor: An auditor is an independent person or body charged with the responsibilities of detecting financial irregularities (fraud) which might impair the truth and fairness of the view given by the financial statement (Eze, 2001).

Auditing: Auditing is the process carried out by the independent examination of and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation (Adeniyi, 2004).

Central Bank f Nigeria (CBN): CBN takes financial policy and regulations as well as supervision of other financial institutions.

Nigeria Deposit Insurance Corporation (NDIC): NDIC is an independent agency of the federal government of Nigeria established to protect depositors and guarantee the settlement of insured funds when a deposit-taking financial institution can no longer repay the deposits. Thereby helping to maintain financial system stability.

Capital Base: Capital base is the amount contributed by the powers of a business which gives them right to enjoy all the future earnings (Anyanwokoro, 1996).

Shareholders Funds: Shareholders funds are paid up capital, share premium statutory reserves. Retained earning, general reserves, minority interest and other subsidiary reserves excluding preferences shares and revaluation reserves (Iganiga and Anyanwokoro, 1996).

1.10 HISTORICAL BACKGROUND OF CBN AND COMMERCIAL BANKS IN NIGERIA

In 1948, an enquiry under the leadership of G.D Paton was established by the colonial administration to investigate banking practices in Nigeria. Prior to the enquiry, the banking industry was largely uncontrolled. The G>D Paton report, an offshoot of the enquiry became the cornerstone of the first banking legislation in the country; the banking ordinance of 1952. The ordinance was designed to prevention viable banks from mushrooming, and to ensure orderly commercial banking. The banking ordinance triggered a rapid growth in the industry and with growth also came disappointment. By 1958, a few numbers of banks had failed. In 1958, a bill for the establishment of Central Bank of Nigeria was presented to the House of Representatives of Nigeria. The Act was fully implemented on July 1, 1959, when the Central Bank of Nigeria Came into full operation.

The Nigerian banking industry which is regulated by the Central Bank of Nigeria, is made up of; deposit money banks referred to as commercial banks, development finances institutions and other financial institutions which includes; micro-finance banks, finance companies, bureau de changes, discount houses and primary mortgage institutions.

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