THE ROLE OF AUDITORS IN PREVENTION OF FRAUD IN THE BANKING INDUSTRY

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THE ROLE OF AUDITORS IN PREVENTION OF FRAUD IN THE BANKING INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Fraud as defined by Otusunya (2009) as “Deceit or trickery deliberately practiced in other to gain some advantage dishonestly”. Fraud is a hydra headed phenomenon that displays its presence in different forms. Such various form includes: money transfers fraud, fraudulent lending, cheques kitting, transaction fraud, letter of credit fraud, borrowing from the till, Anti-money laundering, credit and debit card fraud, first party fraud, internet fraud to mention but a few.

The level of fraud in the present day Nigeria had assumed an epidemic dimension. It had eaten deep into every aspect of our life to the extent that a three year old child talks about cybercrimes and internet fraud (419), newly discovered sobriquet for advanced free fraud that is hunting our banking industry. Nigeria, with all of its natural and human resources lies on the brink of destruction because of fraud. Much of what we do is “cutting leaves” instead of dealing with the root problem.

Generally, fraud takes its roots from the human heart. It is an axiom that the heart is deceitful above all things and is desperately wicked. Fraud is the number one enemy of the business world, no company is immune to it and it is in all works of life, Nwankwo (1992). The fear is now rife that the increasing wave of fraud in the financial institutions in recent years, if not arrested might pose certain threats to stability and the survival of individual financial institution and the performance of the industry as a whole and no area of the economy is immune from fraudsters and even the banking system. Fraud if not checked might cause ruin in the banking sector.

The existence of financial intermediaries automatically takes care of the sizes of fund existing in the economy. Financial intermediaries are financial institutions that intermediate between the surplus sector of the economy (household) and the deficit sector of the economy (government, business enterprise) by mobilizing the surplus sector of the economy to save part of their income that are not consumed and repackage it for lending to the deficit unit at a considerable interest rate. Examples of financial institutions we have in Nigeria are: Banks, Insurance companies, savings and loans. The major problems confronting the financial institution today is “fraud”, which has sent many of them out of business and is making the industry customers to lose confidence in them since they have not been able to curb the ugly event called “fraud”.

The annual report of the Nigeria Deposit Insurance Corporation (NDIC) over the year indicates that bank fraud remains unabated and this still threatens the well-being of the banking industry. NDIC warns the nation year after year about dangers posed to the banking sector by fraud and also explained to the players in the industry that the sad and unfortunate incidence of increasing frauds and forgeries in the industry will not only deplete the bank’s capital but will contribute to the erosion of depositors confidence in the system. Before 1986, banks reporting cases on fraud were of no consequence, Comer (1985). Returns were very low or just moderate, the number of banks was few and salary levels were low compared to other sectors of the economy.

By and after 1986, with the introduction of Structural Adjustment Program (SAP) profits rose to high levels returns on investment rose, salaries became more attractive and public attention to banking increased. By 1989, some banks recorded 310.5 million frauds with commercial banks having 392.2 million and merchant banks having 37 million, (Business Times, 1990).

Fraud does not just happen, but is perpetrated by human beings with reasons or motivations. The two main causes of fraud are both external and internal factors. Bank fraud and robbery are manifestations of deviant social behavior. Today, the rising trend in bank fraud and robbery can be traced to certain antecedents of the contemporary society, Nwankwo (1992). In Nigeria of recent years and today, there is prevalent moral decadence reflecting fast weakening and debased value system. For example, wealth, irrespective of its source now commands a high premium in Nigerian society.

The internal cause of fraud today in commercial banks can be traced to the following internal environmental factors: corrupt or weak management, ineffective control system, poor personnel practices, shortage of experienced and expertise staff, because the installation and day-to-day implementation of a bank are the responsibilities of the top management of the bank, Karwai (2002). In fact, as affirmed by Comer (1985), “the scale of fraud in an organization is a reflection of the ability of its managers to manage”, i.e. in a bank where the top management is known to engage in corrupt banking practices, fraud will be common among the junior staff.

To minimize or control the alarming rate of fraud in the banking industry, there ought to be need for the players in the industry to set up and implement an effective and efficient control system that will adequately monitor the daily activities of the industry without leaving any gap, Anyanwu (1993). Consequently, appropriate personnel policies and practices should be put in place since fraud is committed by people of moral decadence. Therefore, qualified auditors should be employed to ensure effective and efficient detection and prevention of fraud and financial reporting in Nigerian Commercial banks.

1.2 Statement of the Problem

The Nigerian banking industry has come a long way and has been flooded with so many banks at different times. With the exception of a negligible number of those banks that have always disappeared no sooner than they are established. The result is that new banks have always cropped up in the banking industry.

Having pinpointed fraud and corruption as the factors responsible for the failure of most banks in Nigeria, we are faced with the task of finding out what is responsible for the fraud in our banks. The problem which militates against fraud management in Nigerian commercial banks which this study seeks to proffer solution to are:

i). Lack of efficient and effective internal control system in the commercial banks.

ii). Inability of the bank officials to consistently follow the established banks procedures in the course of their operation.

iii). Inadequate training opportunities to the bank officials on fraud detection.

iv). Non availability of developed process of identifying fraud, related control designed to minimize the risk involved constantly, review and update.

v). Lastly, ineffective physical control system of operation.

1.3 Research Questions

To guide the conduct of this research, the following questions are raised:

i). What effective role do auditors play in fraud detection and prevention in Nigerian commercial banks?

ii). How effective are fraud detection and prevention in improving financial reporting quality?

iii). Is fraud detection and prevention effective for improving internal controls?

1.4 Justification for the study

The importance of this research work could benefit an individual reader, the world is continuously changing, thus, a research work like this significant would expose the readers mind. It will serve as a reference source for subsequent researchers on the issue involved. Through this study, bank customers would be sensitized and be cautious in dealing with the bank as to the occurrence of fraud. Also, the officials of the bank would be educated to be cautious when rendering their services and help their customers against fraud. It is essential to note that fraud can erode the assets of the banks thereby causing the untimely death of the bank, if not controlled or minimized. This study will be relevant to the banking industry to help check fraudulent activities.

1.5 Objectives of the Study

The general objective of this study is to determine the role of auditors in fraud detection, prevention, and financial reporting in Nigerian Commercial Banks. The Specific objectives of this study are to:

i). Assess the impact of auditing in fraud detection and prevention in Nigerian commercial banks.

ii). Determine the effectiveness of fraud detection and prevention in improving financial reporting quality in Nigerian commercial banks.

iii). Assess the effectiveness of internal controls put in place by Nigerian commercial banks.

1.6 Research Hypotheses

The following hypotheses seek to answer the research questions:

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