CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

There is currently considerable interest in the topic of internal control systems and its

contribution to exact management of any business economic resources (Rittenberg, 2006). This

developing role of the internal controls is also reflected in its current definition as posited by

Cahill (2006) which states that internal control is the system of internal administrative and

financial checks and balances designed by management, and supported by corrective actions, to

ensure that the goals and responsibilities of the organization are achieved”. Meanwhile, the

growth in international financial markets, the emergence of the universal banking policy amongst

others has given banks the opportunity to design new products and to provide a wide range of

services which has come with increases in associated risks (Palfi & Muresan, 2009).

Consequently, there is growing management recognition of the importance of implementing a

good internal control system as the activities of internal controls are now seen as critical

elements in the assurance process. Internal control system is at present a very crucial area of

interest for organizations globally.

With particular emphasis on banks, strong internal control systems have long been identified as

really important due to the nature of financial business and also because of their susceptibility to

fraud (Cahill, 2006). Therefore, a system of effective internal controls can be seen as a very vital

part of a company’s management structure intended to ensure proper workings of the

organizations. Effective internal controls can create the needed environment that can facilitate

the achievement of organizational goals and objectives. In addition, the presence of effective

internal controls will also ensure that companies deliver reliable financial and non-financial

1
reporting to stakeholders, compliance with relevant laws, regulations and policies. According to

Basle (1998), an evaluation of the problems and challenges that resulted in the collapse several

reputable organizations reveals that the losses acquired by these organizations could have been

prevented if there were effective internal control systems in place. Such systems would have

prevented or enabled earlier detection of the problems that led to the losses, thereby limiting

damage to the organization. The committee report emphasized that the internal control systems

must be structured so that it can deliver reasonable assurance to management and stakeholders

that to all revenues accrue to its benefit, all expenditure is duly authorized and properly

disbursed, all assets are adequately safeguarded, all liabilities are recorded, all statutory

requirements relating to the provision of accounts are complied with and all financial reporting

provisions followed.

In addition, in recent times there has been emphasis on not just the presence of internal control

but also on the effectiveness of internal controls. It is possible for internal control unit to be

present but they are not being effective. In the Nigerian banking industry, there is the perception

by stakeholders that the quality of internal control appears to be inadequate. The persistence of

financial fraud and fragility in the system resulting to several bail out attempts by the apex

financial institution strengthens the suspicion of a deep-rooted internal control challenge.

Though studies in this regards have been largely anecdotal, the Basle (1998), report provides a

comprehensive framework that provides insight into what could determine the internal control

weakness. The focus of the study therefore is to examine and provide empirical findings on the

relationship between internal control effectiveness and financial fraud in Nigerian banks.

1.2. Statement of the Research Problem

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In recent years instances of fraudulent financial reporting have increased with such frequency

and in such dramatic ways that stakeholders at all levels have been astounded (Palfi & Muresan,

2009). Globalization of business, technological advancements, increasing business failures, and

widely publicized fraud demand that entities place more emphasis on their internal control

systems functions (Basle, 1998). The trend analysis of fraud in the banking sector as indicated in

the NDIC (2016) report reveals that in 2003, the total number of attempted fraud was 850, in

2004 it increased to 1175, in 2005 it further increased to 1229. The total number of attempted

frauds declined to 1193 in 2006 and increased again to 1553 in 2007. The experience in 2008 -

2010 showed above 30% increment in the number of fraudulent attempts. The total expected

losses to the banking sector from 2003- 2005 were 857.46million, 2610.00million,

5602.05million respectively. In 2006, it stood at 2768.67million while in 2007, it stood at

2970.85million. The amounts seem to have increased progressively from 2011-2014 with an

average increment rate of above 25% (NDIC, 2016). This trend calls for concern and hence the

need for this study to investigate the effect of internal control on financial fraud for the Nigerian

banking industry and this defines the contribution and relevance of this study.

In addition, in recent times there has been emphasis on not just the presence of internal control

but also on the effectiveness of internal controls. It is possible for internal control unit to be

present but they are not being effective. Previous studies have used different approaches to

investigate the internal audit effectiveness. Some adopted International Standards for

Professional Practice of Internal Auditing (ISPPIA) as a guideline to investigate and determine

internal control effectiveness while (Mihret & Yismaw,2007; Arena & Azzone, 2009) developed

their own models to determine internal control effectiveness. Moreover, in the literature, factors

and the measurement of effectiveness have been used differently among the researchers (Arena

3
& Azzone, 2009); and until today, there is no consensus on the best framework for effectiveness.

In this study, we introduce a set of measures for internal control effectiveness in the banking

industry such as internal control quality, internal control size, internal control Quality, internal

control independence and internal control diligence. These measures have not been extensively

utilized in addressing internal control effectiveness for banks in Nigeria.

1.3. Objective of the Study

The main objective of this study is to determine the effect of internal control on the detection and

prevention of financial fraud in Banking Industries: case study of Guarantee Trust Bank (GTB),

Jalingo branch Other specific objectives are:

i. To examine the internal control used in Nigerian banking industry

ii. To determine the impact of internal control independence on financial fraud elimination

in Nigerian banking industries

iii. To determine the measures of fraud prevention, use in Nigerian banking industry.

iv. To establish the relationship between internal control and fraud prevention in banks

1.4. Research Questions

This study will try to answer the following questions in trying to determine the effect of internal

control on financial fraud detection and prevention of financial fraud in Banking Industries.

i. What are the major internal control used in GT bank?

ii. To what extend does internal control independence affect financial fraud elimination in

Nigerian banking industries?

iii. What is the impact of internal control independence in financial fraud elimination in

Nigerian banking industries?

iv. What are the measures of fraud prevention in place at GT bank?

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 v. What kind of relationship exist between internal controls and fraud prevention in banks?

1.5. Research Hypotheses

Based on the above objectives and research questions the following hypotheses were made:

H01: Internal control quality has no significant impact on financial fraud detection in Nigerian

banking industries

H02: Internal control size has no significant impact on financial fraud detection in Nigerian

banking industries

H03: Internal control independence has no significant effect on financial fraud detection in

Nigerian banking industries

1.6. Scope of the Study

The content of this research work on internal control system should not be seen as been totally

exhaustive of all possible situation available in Nigerian banking industries on the theme of this

study due to the vast size of the banking sector and boundless nature of the study Based on this

fact, therefore the researcher is limiting his activities to the effects of internal control on financial

fraud in Nigerian banks; case study of guarantee trust bank (GTB) Jalingo branch, Taraba state

Nigeria. The scope of the variables for the study includes financial fraud, internal control quality

and independence and size.

1.7. Significance of the Study

A study of this nature holds numerous benefits across an eclectic range of stakeholders. Firstly,

the study will be useful to management in evaluating the like determinants of internal control

quality. The research objectives clearly delineate critical factors that may be perceived as basis

5
for the tendencies for weakness of internal control system and findings about these factors will

be useful.

Secondly, the study will be a significant contribution to the literature especially as it provides

evidence from a developing economy like Nigeria.

Thirdly, the study will be of immense benefits to policy institutions as well as other key

regulatory bodies. The study and the subsequent findings could provide the necessary theoretical

framework needed for effective policy formulation, simulation and implementation.

Fourthly, other researchers interested in similar issues as those highlighted in the study, may also

find this study very useful. Other stakeholders such as shareholders will find the study insightful

and providing a broad view of internal control quality and related challenges.

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 CHAPTER TWO

LITERATURE REVIEW

2.1. Introduction

This section discusses the major concepts of fraud, concept of internal control, internal control

quality, internal control size and internal control independence. The dependent variable is

financial fraud which is an act of deception which is deliberately practiced by some members of

an organization to gain something. Dependent variable is one that responds to the independent

variable. It is called dependent variable because we are looking for the possible effect on the

dependent variable that might be caused by changing the independent variable.

2.2. Concept of Internal Control Independence

According to Song and Windram, (2004), an audit committee is to be constituted entirely of

independent directors. Such increased requirements of having an independent internal control

unit not only act as an internal control mechanism to mitigate unwanted interventions and

conflicting pressures of powerful groups in the firm, but also to improve oversight and

monitoring of executives. Therefore, it is expected that with the relatively high proportion of

independent directors in the boards and internal control unit as internal control tool, would

enhance the objectivity, reliability and transparency of the financial reporting and disclosures;

which in turn would strengthen investors’ confidence, (Duchin et al., 2010).

The internal control unit plays an important role in monitoring and overseeing the financial

matters of a company. Thus, any effort made or steps taken by management to engage in

manipulation of earnings or misappropriation of assets should be detected and stopped by the

audit committee. At least three members of the internal control unit in a company should be

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independent and non-executive directors (Kamarudin & Ismail, 2014). An independent internal

control unit has a negative association with fraudulent financial reporting.

2.3. Concept of Internal Control Quality

The most effective way of reducing frauds is to establish an effective internal control system.

Effectiveness is a word that has been defined by different researchers, for instance Agwu (2013)

defined internal control quality as the capacity to obtain results that are consistent with targets

objective, while, Dittenhofer (2001) view internal control quality as the ability toward the

achievement of the objectives and goals. Internal control systems operate at different levels of

effectiveness. Internal control can be judged effective in each of the three categories,

respectively, if the board of directors and management have reasonable assurance that: They

understand the extent to which the entity's operations objectives are being achieved, published

financial statements are being prepared reliably, applicable laws and regulations are being

complied with. Also effective internal control requires; appropriate accounting procedure and

system, division of duties i.e. separation of responsibilities, especially those of authorization,

regular verification of supervision of each person’s work by their superior officers (Badara,

2012).

The effectiveness of an internal control system is dependent on how fluid the system interacts

with itself and how embedded it is into the organizations business processes. Again for an

internal control system to be effective and provide that needed assurance to the board, there

should be some agents of effectiveness (Ayagre et al., 2014).

2.4. Concept of Internal Control Size

The magnitude of the internal control is the sum of memberships of the group chosen by the

governing bodies. This figure of memberships is taken as a sign of means accessible to the

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group. Where a large audit committee member exists, it is likely that possible challenges

emanating from financial reporting task has the likelihood of being exposed and settled

(Mohammed-Nor et al 2010). Lipton and Lorsch (2011) remarked that the ability of the internal

control unit oversight function rises when the figure of its memberships increases. Yermack

(1996) posits that, a lesser audit committee magnitude improves on firms‟ worth. This stand

corresponds with Jensen (1993) assertion that a small sized internal control unit enhances the

efficiency with which the internal control unit engages in oversight and control. However, Mansi

and Reeb (2004) noted that an internal control unit size that is large spends a considerable period

and means to check the financial reporting process and internal control mechanism.

2.5. The Types of Internal Control

According to Millichamp and Taylor (2008) the types of internal control can be categorised as;

Organisation: An enterprise should have a plan of organisation which should define and

allocate responsibilities- every function should be in the charge of a specific person who might

be called the responsible official. Thus the keeping of petty cash should be entrusted to a

particular person who is then responsible for the function. Identify lines of reporting. In all cases,

the delegation of authority and responsibility should be clearly specified.

Segregation Of Duties: No one person should be responsible for the recording and processing of

complete transaction. The involvement of several people reduces the risk of institutional

manipulation or accidental error and increase the element of checking of work. Function which

for a given transaction should be separated initiation authorisation, execution, custody and

recording.

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Physical: This concern physical custody of assets and involves procedures designed to limit

access to authorised personnel only. These controls are especially important in the case of

valuable, portable, exchangeable or desirable assets.

Authorisation and Approval: All transaction should require authorisation or approval by an

appropriate person. The limits to these authorisations should be specified.

Arithmetical and Accounting: These are the controls in the recording function which checks

that the transactions have been authorised, that they are all included and that they are correctly

recorded and accurately processed. Procedures include checking the arithmetical accuracy of the

records, the maintenance and checking of totals, reconciliations, control accounts, trial balances,

accounting for document and preview. Preview means that before an important action involving

the company’s property is taken, the person concerned should review the documentation

available to see that should have been done, has been done.

Personnel: Procedures should be designed to ensure that personnel operating a system are

competent and motivated to carry out the tasks assigned to them, as the proper functioning of the

system depends upon the competence and integrity of the operating personnel. Measures include

appropriate remuneration and promotion and career development prospects, selection of people

with appropriate personal characteristics and training, and assignment to tasks of the right level.

Supervision: All actions by all levels of staff should be supervised. The responsibility for the

supervision should be clearly laid down and communicated to persons being supervised.

Management: These are controls exercised by management which are outside and over and

above the day –to-day routine of the system. They include overall supervisory controls, review

of management accounts, comparisons with budgets, and internal audit and any other special

review procedures.

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Acknowledgement and Performance: Persons performing data processing operations should

acknowledge their activities by means of signatures, initials; rubber stamps etc. Acknowledge of

performance not only allows blame to be ascribed but also has a powerful psychological effect.

2.6. Types Of Controls

According to ACCA study test (paper2.6) there are three key types of control that any auditor

should consider.

Preventive Controls: These are controls that prevent risk occurring. For example, authorisation

controls should prevent fraudulent or erroneous transaction taking place. Other preventive

controls include segregation of duties, recruiting and training the right staff and having an

effective control culture.

Detective Controls: These are controls that detect if any problems have occurred. They are

designed to pick up errors that have not been prevented. These could be exception reports that

reveal that controls have been circumvented (for example, large amount paid without being

authorised). Other example could include reconciliations, supervisions and internal checks.

Corrective Controls: These are controls that address any problems that have occurred. So where

problems are identified, the controls ensure that they are properly rectified. Examples of

corrective controls include follow up procedures and management action.

2.6.1. The Component of Internal Control

According to Whittington et al, the formality of any control system will depend largely on a

bank’s size, the complexity of its operations, objectives and its risk profile. Less formal and

structured internal control systems at community banks can be as effective as more formal and

structured internal control systems at larger and more complex banks. Every effective control

system should have:

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 i. A control environment.

ii. Risk assessment.

iii. Control activities.

iv. Accounting, information, and communication systems.

v. Self-assessment or monitoring.

2.6.2. Control Environment

The control environment reflects the board of directors’ and management’s commitment to

internal control. It provides discipline and structure to the control system. Elements of the

control environment include.

i. The organizational structure of the institution; (Is the bank’s organization centralized or

decentralized? Are authorities and responsibilities clear? Are reporting relationships well

designed?).

ii. Management’s philosophy and operating style. (Are the bank’s business strategies formal

or informal? Is its philosophy and operating style conservative or aggressive? Have its risk

strategies been successful?

iii. The integrity, ethics, and competence of personnel.

iv. The external influences that affect the bank’s operations and risk management practices

(e.g., independent audits).

v. The attention and direction provided by the board of directors and its committees,

especially the audit or risk management committees.

vi. The effectiveness of human resources policies and procedures.

2.6.3. Control Activities

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Control activities are the policies, procedures, and practices established to help ensure that bank

personnel carry out board and management directives at every business level throughout the

bank. These activities help ensure that the board and management act to control risks that could

prevent a bank from attaining its objectives. They should include:

i. Reviews of operating performance and exception reports. For example, senior management

regularly should review reports showing financial results to date versus budget amounts,

and the loan department manager should review weekly reports on delinquencies or

documentation exceptions.

ii. Approvals and authorization for transactions and activities. For example, an appropriate

level of management should approve and authorize all transactions over a specified limit,

and authorization should require dual signatures.

iii. Segregation of duties to reduce a person’s opportunity to commit and conceal fraud or

errors. For example, assets should not be in the custody of the person who authorizes or

records transactions.

iv. The requirement that officers and employees in sensitive positions be absent for two

consecutive weeks each year.

v. Design and use of documents and records to help ensure that transactions and events are

recorded. For example, using pre-numbered documents facilitates monitoring.

vi. Safeguards for access to and use of assets and records. To safeguard data processing areas,

for example, a bank should secure facilities and control access to computer programs and

data files.

vii. Independent checks on whether jobs are getting done and recorded amounts are accurate.

Examples of independent checks include account reconciliation, computer-programmed

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 controls, management review of reports that summarize account balances, and user review

of computer-generated reports.

Banks are required to develop and maintain written procedures or controls for certain areas,

including real estate lending, asset management, and emerging market and trading activities, as

well as areas subject to insider transactions, the Bank Secrecy Act, and the Bank Bribery Statute.

Although banks are encouraged to have written internal control procedures in all areas, having

them is not enough. Personnel must understand control procedures and follow them

conscientiously.

2.7. Roles and Responsibilities in Internal Controls

According to the COSO Framework, everyone in an organization has responsibility for internal

control to some extent. Virtually all employees produce information used in the internal control

system or take other actions needed to effect control. Also, all personnel should be responsible

for communicating upward problems in operations, noncompliance with the code of conduct, or

other policy violations or illegal actions. Each major entity in corporate governance has a

particular role to play:

Management: The Chief Executive Officer (the top manager) of the organization has overall

responsibility for designing and implementing effective internal control. More than any other

individual, the chief executive sets the "tone at the top" that affects integrity and ethics and other

factors of a positive control environment. In a large company, the chief executive fulfills this

duty by providing leadership and direction to senior managers and reviewing the way they're

controlling the business. Senior managers, in turn, assign responsibility for establishment of

more specific internal control policies and procedures to personnel responsible for the unit's

functions. In a smaller entity, the influence of the chief executive, often an owner-manager is

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usually more direct. In any event, in a cascading responsibility, a manager is effectively a chief

executive of his or her sphere of responsibility. Of particular significance are financial officers

and their staff, whose control activities cut across, as well as up and down, the operating and

other units of an enterprise.

Board of Directors: Management is accountable to the board of directors, which provides

governance, guidance and oversight. Effective board members are objective, capable and

inquisitive. They also have knowledge of the entity's activities and environment, and commit the

time necessary to fulfill their board responsibilities.

Management may be in a position to override controls and ignore or stifle communications from

subordinates, enabling a dishonest management which intentionally misrepresents results to

cover its tracks. A strong, active board, particularly when coupled with effective upward

communications channels and capable financial, legal and internal audit functions, is often best

able to identify and correct such a problem.

Auditors: The Internal Auditor and external auditors of the organization also measure the

effectiveness of internal control through their efforts. They assess whether the controls are

properly designed, implemented and working effectively, and make recommendations on how to

improve internal control. They may also review Information Technology Control, which relate to

the IT systems of the organization. There are laws and regulations on internal control related to

financial reporting in a number of jurisdictions. In the U.S. for instance, these regulations are

specifically established by Sections 404 and 302 of the Sarbanes-Oxley Act. Guidance on

auditing these controls is specified in PCAOB Auditing Standard No.5 and SEC guidance,

further discussed in top-down assessment. To provide reasonable assurance that internal controls

involved in the financial reporting process are effective, they are tested by the external auditor

15
 (the organization's public accountants), who are required to opine on the internal controls of the

company and the reliability of its financial reporting.

2.8. Limitations of Internal Control

According to Millichamp and Taylor, internal controls are essential features of any organization

that is run efficiently. However, it is important to realize that internal controls have inherent

limitations which include:

i. Internal control involves human action, which introduces the possibility of errors in

processing or judgment.

ii. A requirement that the cost of an internal control is not proportionate to the potential loss

which may result from its absence.

iii. Internal controls tend to be directed at routine transactions. The one-off or unusual

transaction tends not to be the subject of internal control.

iv. Abuse of responsibility

v. The possibility of circumvention of controls either alone or through collusion with parties

outside or inside the entity.

vi. Management overriding controls.

vii. Fraud

viii. Changes in environment making controls inadequate

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ix. Human cleverness – however secure the computer code designed to prevent access, there is

always some hacker who gets in.

Because of these inherent limitations to internal controls and because auditors cannot have more

than a reasonable assurance of their effectiveness, complete reliance cannot be placed on a

system of internal control.

2.9. Concept of Financial Fraud

Fraud is a universal phenomenon that has been in existence for so long. Its magnitude cannot be

known for sure, because much of it is undetected and not all that is detected is published.

Fraud however has been defined by many scholars; Olufidipe (1994) defined fraud as “deceit or

trick deliberately practiced in order to gain some advantages dishonestly”. According to

Boniface (1991), fraud is described as „any premeditated act of criminal deceit, trickery or

falsification by a person or group of persons with the intention of altering facts in order to obtain

undue personal monetary advantage‟. Another scholar Idowu (2009) also sees fraud as a

deliberate falsification, camouflage, or exclusion of the truth for the purpose of dishonesty/stage

management to the financial damage of an individual or an organization. Fraud literally means a

conscious and deliberate action by a person or group of persons with the intention of altering the

truth or fact for selfish personal gain (Badara, 2012). According to Webster (1972) the word

fraud means deceit, a trick, dishonest practice or a breach of confidence. The Oxford Advanced

Learner’s English Dictionary defines fraud as a criminal deception. That is to say, a fraud is any

act of deception which is deliberately practiced in order to gain something dishonestly.

Therefore, for any action to constitute a fraud, there must be a proof of dishonest intention to

benefit one major person at the expense of the other.

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According to Robertson (1996) fraud “consists of knowing or making material misrepresentation

to a fact with an intention to inducing someone to believe to suffer a loss or damage. Fraud,

involves the use of deception to obtain an unjust or illegal financial advantage (Okezie 1995).

Ogidefa, (2008) also opined that fraud is an anti-economic process and must properly be dealt

with. Barnabas (2011) sees fraud as a virus which spreads from the banking sector to other

economic activities and organization even the government. EFCC Act (2004) defines fraud as

illegal act that violates existing legislation and these include any form of frauds, narcotic drug,

trafficking, money laundering, embezzlement, bribery, looting and any form of corrupt

malpractices and child labour, illegal oil bunkering and illegal mining, tax evasion, foreign

exchange malpractice including counterfeiting, currency, theft of intellectual property and

piracy, open market abuse, dumping of toxic waste and prohibited good (Aduwo, 2016). This

definition is all-embracing and conceivably includes financial crimes in corporate organization

and those discussed by various authors (Khan, 2005; William, 2005). The Institute of

Professional Practises Framework (Sommer, 2014) defines fraud as any illegal act characterized

by deceit or concealment or violation of trust which do not directly depend on the use of

violence, perpetrated in firms to obtain money, property, or services; to avoid payment or loss of

services; or to secure personal or business advantage.

Williams (2005) describe fraud to include bribes, cronyism, nepotism, political donation,

kickbacks, artificial pricing and frauds of all kinds. According to Agwu (2013), fraud is any

illegal act characterized by deceit, concealment, or violation of trust. These acts are not

dependent upon the threat of violence or physical force. Frauds are perpetrated by parties and

organizations to obtain money, property, or services; to avoid payment or loss of services; or to

secure personal or business advantage. It has also been viewed as an illegal act involving the

18
obtaining of something of value through willful misrepresentation. According to another

definition, fraud is to create a misjudgment or maintain an existing misjudgment to induce

somebody to make a contract (Agwu 2003).

Barnabas (2011) view fraud as the act of depriving a person underhandedly of something, which

such a person would or might be entitled to but for the perpetration of fraud in its lexical

meaning, fraud is an act of trickery which is intentionally practiced in order to gain illegitimate

advantage. Therefore, for any action to constitute a fraud there must be deceitful objective to

benefit (on the part of the perpetrator) at the disadvantage of another person or group. Fraud

typically requires stealing and manipulation of accounts, frequently accompanied by cover up of

the theft. Chakrabarty (2013) defines fraud as any behavior by which one person intends to

obtain a dishonest advantage over another where the person makes an illicit gain while the other

party incurs a loss.

Beasley (1996) argues that fraud encompasses the acquisition of property or economic

advantages by means of deception, through either a misrepresentation or concealment. Fraud is

the act of intentionally deceiving someone in order to gain an unfair or illegal advantage

(financial, political or other). The primary responsibility for the prevention of fraud rests with

both those charged with governance of the entity and management. It is important that

management, with the oversight of those charged with governance, place a strong emphasis on

fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence.

Fraud can also be defined as the use of deception to obtain an unjust or illegal financial

advantage. The internal control auditing guidelines (number 11, Aeufa, Kola and Oluwookere,

2001) describe fraud as; misappropriation of fund; Misapplication of assess; Recording of

transaction with substance (source documents); Misapplication of accounting management

19
policies; and Suppression and omission of the effect of transaction from records and documents.

Other forms of fraud include, bribery, carryover fraud, electronic media fraud, alteration of

invoice, double payment involve, false declaration, teaming and lodging, actual theft cash

balance, forgery. Because fraud negatively impacts organizations in many ways financial,

reputational, and through psychological and social implications it is important for organizations

to have a strong fraud prevention program. It should include awareness, prevention, and

detection programs, as well as a process to identify risks within the organization. To prevent

fraud, it is necessary to build controls in all the five areas of resources namely; man power,

machinery and time factor (Adetiloye, et al., 2016).

2.3.1. Classification of Fraud

Within the scope of this study, attempts will be made to critically examine the two broad

schemes of frauds. The classifications of fraud are:

i. Management fraud

ii. Employee fraud

In some other books, like Millichamp and Taylor (2008) fraud is being classified into two

namely:

i. Misappropriation of assets and consequent misstatements arising from that, i.e. a cover up

involving the alteration of the accounting records to disguise the theft.

ii. Misstatements arising from fraudulent financial reporting.

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Management Fraud: According to Fakunle (2006), management fraud involves the

manipulation of the records and the account, typically by the enterprise’s senior officers with a

view to benefiting in some indirect way. An example could be obtaining finance under false

pretense, or concealing a material, worsening off the company’s true position (window dressing).

Robertson (1996) defines management fraud as a deliberate fraud, committed by management

that injures investors and creditors, through materially misleading financial statements.

Management frauds are sometimes referred to as fraudulent financial reporting.

From the above definitions, it can be deduced that management fraud is usually perpetrated by

the management staff of the organization, which includes the directors, general managers,

managing director’s etc. the class of victims of management fraud are the investors as well as the

creditors and the instrument of perpetration is financial statement. The essence of management

fraud most times is to attract more shareholders to come and invest in the organization will be in

better position of obtaining loans from banks, because , a good statement will shoe a healthy

look, hence it will be a good collateral security.

Employee Fraud: Employee fraud also known as non-management fraud could be said to be

frauds perpetrated by employees of the organization. Robertson (1996) defines employee fraud

as the use of fraudulent means to make money or other property from an employer. It usually

involves falsification of some kind, like false document, lying, exceeding authority, or violating

an employer’s policies, embezzlement of company’s funds, usually in form of cash or other

assets. Employee’s frauds are of three phases namely:

i. The fraudulent act

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ii. The conversion of the money or property to the fraudsters

iii. The cover up

Employee’s frauds are more likely to be encountered where internal controls are weak.

2.3.2. Characteristics Of Fraud

According to Millichamp and Taylor (2008), Misappropriation of assets is what most people

immediately think of when fraud is mentioned. This can often be frauds committed by

employees for relatively minor amounts which may not in themselves, be material and which

may not be detected by routine audit checking work. However, it encompasses management

fraud where managers are in a position to disguise misappropriation in ways that are difficult to

detect. This includes:

i. Embezzling receipts, e. g misappropriating sales revenue.

ii. Stealing physical assets or intellectual property, e. g stock theft, theft of scrap for resale.

iii. Causing the business to pay for goods not received, e. g payments to fictitious suppliers,

payment for fictitious employees.

iv. Using the business’s assets for personal use, e. g as collateral for loan.

2.3.3. Types of Bank’s Common Fraudulent Practices

According to Ovuakporia (1994) there are thirty- three types of bank frauds in the banking

sector. These includes: theft, embezzlement, defalcations, forgeries, substitution, suppression,

payment against unclear effects, unauthorized lending, lending to ‘ghost’ borrowers, kite flying

22
and cross firing, unofficial borrowing, foreign exchange malpractice, impersonation, over-

involving, manipulation of vouchers, fictitious accounts, over and under valuation of properties,

false declaration of cash shortages, falsification of status reports, duplication of cheque books,

mail transfer, interception of clearing cheques, computer frauds, fake payments, teeming and

lading, robbers, etc.

The above mentioned types of fraudulent practices in banks, serve as threats to the success of

many banks. If adequate preventive and detective measures are not put in place, it could lead to a

complete failure of financial institutions especially banks in Nigeria.

2.3.4. Causes of Bank Frauds

There are many identified causes of bank frauds but these causes, vary from institution to

economic, social, psychological, legal and even infrastructural. The immediate causative agents

of frauds in general are provided by Ogbunka (2002) as follows:

 Availability of opportunity to perpetrate frauds and forgeries.

 Human greed, avarice, instability.

 Poverty and the widening gap between the rich and the poor.

 Prevailing misplaced social values, moral and spiritual decadence.

 Increasing incidence of unemployment.

 Increasing financial burdens on individuals.

 Misapplied intelligence- say for adventure.

 Job insecurity.

23
 Social misconceptions that banks’ money is nobody’s money and therefore, can be

defrauded.

 Societal expectation

 Inadequate training of personnel.

 Unhealthy comparison and competition.

 Revenge

 Peer group pressure

 Non-adherence to ethical standards

 Leadership by bad example

 Poor or weak recruitment policies

 Weak internal control system of the bank

 Poor or weak management control, monitoring and supervision

 Lack of effective machinery that guarantee severe punishment for fraudsters and forgers.

 Possibility of identifying or stopping a fraud is very little.

 Increasing and changing sophistication in technological equipment

When critically looked at, it is true to say that there are several causes of bank frauds, but, weak

internal control system stands as a major cause of frauds in banks. It is therefore of great

importance that adequate, efficient and effective internal control system is installed in banks in

order to reduce this disaster known as fraud.

2.3.5. Factors Influencing the Existence of Frauds in Banks

24
 Despite the numerous causes of bank frauds, there exist some other factors that influence the risk

of fraud within the bank and accordingly steps ought to be taken to minimize them. According to

Izedonmi (2000), these factors are:

i. Where authority is concentrated in a few hands within the bank

ii. Where management continually fails to implement internal control recommendations made

by an external auditor

iii. Where there is a high rate of turnover in key accounting functions

iv. Where the accounting system is inadequate and the books of accounts, cannot be reconciled

with the financial statements

v. Where transactions occurring within the year are reversed after the year end.

vi. Where fees paid to legal advisers appear to be out of proportion with the actual service

rendered.

vii. Where there are material transactions during and around the year end date.

viii. Where the bank is experiencing slovenly problems.

ix. Where it is difficult to obtain explanation from management and staff of the banks during

the audit.

x. Where documentation supporting transactions are usually not available.

Other factors according to Raji (1997) may include:

i. Experience: when too much confidence is reposed on a staff because of his apparent ability

to work with minimum supervision due to his experience, it could degenerate into a

situation that could breed an opportunity for committing fraud.

25
ii. Understaffing: most banks today, strife that strenuous efforts are made to cut down cost.

This idea is however, over stretched that at times, result to entrusting too many functions to

a staff. No matter how good a staff is, carrying out his functions efficiently may not be easy

to sustain. Understaffing will thus, create room for fraud as there will be no much form of

supervision.

2.3.6. Effects Of Fraud

Every step or action that we take in life has its consequences; sometimes, it may be bad and

sometimes good. The consequences of fraudulent acts undertaken by fraudsters to banks are

negative consequences. According to the provision of the NDIC published report (1996) they

consequences are as follows:

i. The distress syndrome: bank frauds tend to jeopardize the industrial growth of a nation.

Bank frauds have led to the winding up of some banks while some are still battling with the

distress syndrome.

ii. Loss of bank funds: frauds have caused hardship in banks, especially those whose liquidity

state was already in doubt. As fraud cases in banks keep increasing so will bank losses in

terms of money.

iii. Bank staff involvement: when staff of these financial institution get into fraudulent

activities, and they end up caught, the bank obviously punish them by termination of

appointment, dismissal and suspension, which would certainly affect their homes adversely.

iv. Illiquidity: when banks experience fraud, some amount of money is lost in the process,

which in turn affects the banks liquidity position, thus leading to their inability to meet their

re-capitalization requirements.

26
v. Bad name: non prevention or detection of fraudulent acts could bring about bad name /

reputation for the bank as well as the country. Let’s take for example, our Nigerian

counterpart; according to BBC news on Nigerian bank frauds (2007) Nigeria has become

synonymous with fraud as some of its citizens use the boom in the internet cafes to send

spam mails, promising millions in exchange for the gullible recipient’s bank details. This

proves to us that fraud has become an unfortunate staple in Nigeria’s international

reputation.

From the above mentioned effects, it can be clearly deduced that fraud is really a destructive

force that seeks to destroy financial institutions, render so many employers of labour jobless,

close down banks and erase the confidence of people in the country’s banks. This is not

acceptable hence; efficient and effective internal control system must be installed in banks and

fully in effect.

2.3.7. Responsibilities for Prevention and Detection of Fraud

According to Millichamp and Taylor (2008), the primary responsibility for the prevention and

detection of fraud rest with management. This responsibility arises out of contractual duty of

care by directors and managers and also because directors and other managers act in a

stewardship capacity with regard to the property entrusted to them by shareholders or other

owners. How they exercise this duty of care is a matter for them, but in most cases their duty

may be discharged by instituting and maintaining a strong system of internal control. There are

many ways the directors can discharge their duty toward prevention and detection of fraud.

These include:

27
 i. Complying with the combined code on corporate governance;

ii. Developing a code of conduct, monitoring compliance and taking action against breaches;

iii. Emphasizing a strong commitment to fraud prevention. This involves establishing a culture

of honesty and ethical behavior within the organization with clearly communicated policies

on the corporate attitude to fraud and fraudsters;

iv. Establishing a strong environment, monitoring its effectiveness and taking corrective action;

v. Establishing an internal audit function;

 Establishing a compliance function, that is a separate department of the enterprise

specifically charged with ensuring compliance with regulation of all sorts;

 Having an audit committee.

2.3.8. Impact of Internal Control System on Fraud

One of the objectives of internal control system is to help the banking organization in the

prevention and early detection of errors and fraud. This shows that internal control system has a

bearing with prevention and detection of fraud in banks. More so, according to a research

conducted by Olaoye Clement Olatunji, internal control systems has a lot of role to play when it

comes to the effective operations of the banking sector. According to the researcher, effective

and adequate internal control is the best measure for adoption in protecting the bank against

banking vices or unexpected situations. Since bank fraud is one of the unexpected situations in

the banking sector, this conclusion drawn by Clement however shows that internal control

system has an impact on prevention and detection of fraud in the banking sector.

28
In conclusion, management of any banking organization is responsible for the prevention and

detection of fraud, through the establishment of an effective and efficient internal control system.

Since based on the literature review, there is a relationship between fraud and established

internal control system; it is pertinent that the management establishes an adequate, efficient and

effective internal control system in the banks.

2.4. Empirical Review

Adetiloye, Olokoyo and Taiwo (2016) examined the issues of internal control viz., fraud

prevention in the banking industry, adopting both primary and secondary data. Primary data was

used to test internal control while secondary data were employed to test fraud prevention. The

main primary variables were separation of duties, monitoring, and staff qualifications while the

main secondary variables are bank profit, regulation, technology and Money supply. In both

cases regression techniques were adopted. The results show that internal control on its own is

effective against fraud, but not all staff are committed to it, while the secondary data is quite

supportive of the primary data but more exemplifying in that money supply, staff qualifications

and technology were significant throughout the various dependent variables. It is also clear from

the regressions that technological based fraud is significant.

Ozigbo (2015) carried out a study to examine internal control and fraud prevention in

Nigerian business organizations. A survey was undertaken in some selected firms in Warri

metropolis. It was discovered that internal control has a significant relationship with fraud

prevention. They therefore concluded that internal control was a necessary safeguard which

assures absentee owners of business that their fund is being utilized efficiently. It was

recommended among others that proper accounting record should be kept at all times and

29
authorization and approval limits of jobs and funds should be setup and communicated to all

concerned interest groups.

Oguda, Odhiambo and Byaruhanga (2015) in a paper ascertained the effect of internal controls

on fraud prevention and detection in district treasuries of Kakamega County. Purposive sampling

method was used to select Treasury Staff while simple random sampling method was used to

select Heads of Departments to respond to the data collection instruments. The study used closed

ended questionnaires designed for treasury staff and their clients and was administered by the

researcher though drop and pick method. Key respondents were Senior Treasury Staff and Heads

of Departments in Kakamega County.

Oguda, Odhiambo and Byaruhanga (2015) in a paper ascertained the effect of internal controls

on fraud prevention and detection in district treasuries of Kakamega County. Purposive sampling

method was used to select Treasury Staff while simple random sampling method was used to

select Heads of Departments to respond to the data collection instruments. The study used closed

ended questionnaires designed for treasury staff and their clients and was administered by the

researcher though drop and pick method. Key respondents were Senior Treasury Staff and Heads

of Departments in Kakamega County. Data collected was analysed using both descriptive and

inferential statistics using Statistical Package for the Social Science (SPSS). Reliability and

Validity of data collection instruments was ascertained through the test retest method. Findings

of the study revealed that there was a statistically significant and positive relationship between

the adequacy of internal control systems and fraud prevention and detection in district treasuries

in Kakamega County.

Data collected was analysed using both descriptive and inferential statistics using Statistical

Package for the Social Science (SPSS). Reliability and Validity of data collection instruments

30
was ascertained through the test-retest method. Findings of the study revealed that there was a

statistically significant and positive relationship between the adequacy of internal control

systems and fraud prevention and detection in district treasuries in Kakamega County.

Puttick, (2001) in a study evaluated the control environment and monitoring activities

components of Internal Control Systems of Ghanaian Banks using COSO‟s principles and

attributes of assessing the effectiveness of internal control systems in helping to prevent fraud. A

five point Likert scale was used to measure respondent’s knowledge and perception of internal

controls and the bank’s internal control system effectiveness. Responses ranged from strongly

disagree to strongly agree, where 1 represented strongly disagree (SD) and 5 represented

strongly agree (SA). Statistical Package for Social Sciences (SPSS) was used to analyze data and

presented in the form of means and standard deviations for each question and each section of the

questionnaire. The study found out that, strong controls exist in the control environment and

monitoring activities components of the internal control systems of banks in Ghana and this

invariably assists in the deterrence of fraud.

Grieves (2001) examined the effect of internal control systems on financial performance among

Small and Medium scale Enterprises in Kisumu city, Kenya; specifically assessing the

relationship between internal control systems and return on investment; and establishing the

level of business knowledge of an entrepreneur in internal control systems and its effect on

financial performance. The sample was selected from the study population through stratified and

simple random sampling techniques. The research was conducted using both quantitative and

qualitative approaches; adapting cross-sectional survey research design. The study used both

primary and secondary data. Primary data was collected using structured questionnaire and

interview, while secondary data was obtained from financial statements of the sampled

31
enterprises. Data was analyzed using descriptive statistics as well as inferential statistics. The

study specifically revealed that a significant change in financial performance is linked to internal

controls systems. Based on the findings of the study, it is concluded that internal control systems

as supported by the study findings significantly influence the financial performance of Small and

Medium scale Enterprises. The investigation recommends training on the significance of internal

controls among proprietors of Small and Medium scale Enterprises.

Holmes et al. (2002) sought to determine the effect of internal control system on financial

performance of manufacturing firms in Kenya. To achieve the objective of this study, the study

used hypothesis testing research design. The study tested the following hypotheses: H1: Internal

Controls and Financial Performance are positively related; H2: Internal Controls have a

significant impact on Financial Performance. The population chosen for this study was 65

manufacturing firms registered by ministry of industrialization in Kenya. The study selected a

sample of 20 manufacturing firms from a target population of 65 manufacturing firm. The

sample was drawn using stratified random sampling technique. The study relied on both primary

and secondary data. Primary data was collected using structured questionnaires while the

secondary data was gathered from financial statements based on availability and accessibility of

data. The findings revealed that most manufacturing firms had a control environment as one of

the functionality of internal controls of the organization that greatly impacts on the financial

performance of the firms. It was also established that the management had put in place

mechanisms for mitigation of critical risks that may result from fraud.

Josiah, Adediran and Akpeti (2012) focused on the role of auditors in the use of internal control

system in fraud detection: a survey of selected firms in Nigeria. The data collection technique

used for this study is questionnaire and oral interview was also supportive. The data was

32
analyzed through the use of chi-square, the findings of this work are that the firm’s produced and

published financial statement as well as engaging the services of auditors and that detection of

fraud and errors is inevitable. And also, the case of fraud in these organizations is due to poor

management, lack of internal auditors, poor internal control system and corruption.

Chukwu (2012) carried out a study to examine the relationship between internal measures to

proper accounting records. A survey research design was adopted for this research study and a

sample size was selected using Yaro Yamane sampling technique as data used were obtained

from both primary and secondary sources. Four research questions were formulated out of which

three hypotheses were formulated using regression co-efficient analysis method at 5% level of

significance and the Z table was also used for comparison between calculated value of

significance B and table value. The finding from the analysis indicates that internal control

measure management performance. The study also found that fraud perpetration and losses of

revenue in an organisation are not a result of internal control system.

Badara (2012) in a paper assessed the role of internal auditors in ensuring effective internal

control and preventing financial crime/ detecting fraud at local government level, a case of

Alkaleri L.G.A Bauchi State. The methodology employed for data collection is only primary

source, which involved the use of questionnaires, in which 50 questionnaires were administered

to the staff of Accounting and Internal audit department of Alkaleri L.G.A, out of which only 35

questionnaires were completed and returned. The data generated for the study were interpreted

using simple percentage. The main finding of the study include among other; lack of proper

independent exercise by the internal auditor, understaffing in the side of internal audit unit, the

internal control system is very weak toward financial and other controls. The paper recommends

33
that the internal control system should be efficient in such a way that it will prevent any act of

financial crime and detection of fraud.

2.10. Theoretical Review

2.4.1. Agency Theory

Agency theory is concerned with resolving problems that can exist in agency relationships; that

is, between principals such as shareholders and agents of the principals for example, company

executives. The two problems that agency theory addresses are: the problems that arise when the

desires or goals of the principal and agent are in conflict, and the principal is unable to verify

what the agent is actually doing and the problems that arise when the principal and agent have

different attitudes towards risk. Because of different risk tolerances, the principal and agent may

each be inclined to take different actions. Bicuilaitis (2007) in his article stated that agency

theory can provide for richer and more meaningful research in the internal audit discipline.

Agency theory contends that internal auditing, in common with other intervention mechanisms

like financial reporting and external audit, helps to maintain cost-efficient contracting between

owners and managers. Agency theory may not only help to explain the existence of internal

controls and internal audit in firms but can also help explain some of the characteristics of the

internal audit department, for example, its size, and the scope of its activities, such as financial

versus operational auditing. Agency theory can be employed to test empirically whether cross-

sectional variations between internal auditing practices reflect the different contracting

relationships emanating from differences in organizational form.

2.4.2. Self-Control Theory

Holtfreter, (2004) the hypothesis expresses that people with low levels of discretion will

probably carry out a wide assortment of wrongdoing and wrongdoing related practices.

34
Individuals lacking self-control have a tendency to be incautious, uncaring, physical rather than

mental, chance taking, shallow and nonverbal. Likewise, hypothesis expresses that low poise is

found out from youth through parental sustain. Seemingly, conflicting child rearing practices

result in kids who can't postpone satisfaction, maintain a strategic distance from dangerous

conduct, control their motivations and consider the sentiments of others (Holtfreter, 2004).

People with more elevated amounts of discretion have a tendency to understand the low

likelihood of long haul advantage and high likelihood of trepidation is related with criminal

endeavo. Discretion is essential if fraud is to be avoided from in any association. Be that as it

may, abnormal state of discretion is truant in the greater part of province governments and

Kiambu County isn't an exemption of the same.

2.4.3. The Fraud Triangle

As indicated by Fraud Triangle Theory (Mawanda, 2008), fraud is made out of three components

namely; a perceived pressure, a perceived opportunity and rationalization of the act of fraud. The

three components are known as the misrepresentation triangle. Each act of fraud, regardless of

whether done against a substance or for the benefit of an element, is constantly made out of the

three components (Mawanda, 2008). The components in the fraud triangle are intelligent, for

example the greater the perceived opportunity or the more intense the pressure, the less

rationalization it takes for someone to commit fraud (Wamanda, 2008). This hypothesis is a

mind boggling matter and is a component of a blend of variables (Rae and Subramaniam, 2008).

At times, albeit interior controls were poor, there were no episodes of extortion, while in

different cases despite the fact that great inward controls existed workers still figured out how to

evade the inside controls to submit misrepresentation (Rae and Subramaniam, 2008).

35
An understanding of how opportunities, pressures and rationalizations contribute to fraud in

associations can help administration to effectively perceive the regions of helplessness to

misrepresentation and reinforce. Misrepresentation culprits have had approaches to justify their

activities as being satisfactory. Support of any false conduct is because of a fraudster's absence

of individual honesty or other good thinking (Rae and Subramaniam, 2008). People tend not to

submit extortion unless they can legitimize it as being reliable with their very own code of

morals, since individual trustworthiness might be the key constraining component in shielding a

man from misusing resources (Farber, 2005). Justification by fraudsters comes about because of

the inclination that the casualties owe them and along these lines, they merit more than they are

getting (Mansi and Reeb, 2004). A few people have a disposition, character or set of moral

esteems that enable them to purposely and deliberately submit unscrupulous acts (Curtis, 2008).

Strong moral code much of the time keep people from utilizing justifications to legitimize

unlawful conduct; inward examiners however ought to expect that anybody is equipped for

advocating the commission of fraud (Farber, 2005).

This work is hinged on the Agency theory which is concerned with resolving problems that can

exist in agency relationships; that is, between principals such as shareholders and agents of the

principals for example, company executives.

36
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This section describes the methodology used in obtaining data. It describes the research design,

target population, Sample and sampling technique, instrument, data collection procedure, data

analysis and presentation.

3.2 Research Design

In carrying out the study, the survey research was employed by the researcher. Survey design is

concerned with the collection, presentation, analysis and interpretation of data for the purpose of

describing vividly existing conditions. The purpose of the design is to get details and factual

information about an issue, event, problems, and describe it as there are.

3.3 Types and Sources of Data

Primary data was used for this study. Primary data was collected from the structured

questionnaires, the researcher made use of questionnaires to obtain data that are relevant to this

study. The decision to use primary data is because there is no available secondary to use and

achieve the objectives of the study.

3.4 Population of the Study

The population of the study consists of the branch manager Guarantee Trust Bank (GTB) Jalingo

branch, the various heads of department and staff of the bank were used as the sample for the

study.

37
3.5 Sample and Sampling Technique

The sampling was done using both the purposive and simple random sampling technique.

Purposeful sampling was used in selecting the part of the population that is considered useful for

the study while simple random sampling was used in selecting the participants from the

identified sample. A sample of 50 respondents was be selected.

3.6 Method of Data Analysis

The study used Ordinary Least Squares (OLS) regression analysis as the data analysis method.

The OLS regression was adopted because it is the appropriate techniques for examining the

relationship between variables (Gujarati, 2009). The techniques have been credited with been

able to produce the best linear unbiased estimates of the population parameters. The techniques

helped the researcher examine how the explanatory variables (quality, internal control size and

internal control independence) impacts on financial fraud detection. The OLS regression

technique was adopted because it is the appropriate techniques for examining the relationship

between variables especially when the dependent variable is not limited in nature. In this study

descriptive statistics was also used.

Model Specification The model for the study is specified to examine the effect of internal control

in financial fraud detection. The model is specified as;

FINFD = β1 + β2INTCQ+ β3INTCS + β4INTCIND+ µ

Where;

FINFD= Financial fraud Detection

INTCQ=Internal control quality

38
INTCS= Internal control size

INTCIND= Internal control independence

µ= error term.

β1- β4= slope coefficients

Aprori expectation; β1- β6> 0

39
 CHAPTER FOUR

RESULT AND DISCUSSION

4.1 Introduction

This chapter presents the result of the analysis carried out to determine the effect of internal

control independence on detection and prevention of financial fraud in banking industries. Where

financial fraud was used as the dependent variable while internal control quality, internal control

size and internal control independence were used as independent variables.

4.2.1 Analysis of The Respondent’s Personal Profile

Table 4.1: Sex composition of respondents

SEX FREQUENCY PERCENTAGE

Male 35 70 %

Female 15 30 %

Total 50 100 %

Source: field survey 2024.

The distribution of respondents by sex indicated that out of fifty (50), thirty-five (35)

respondents representing (70%) were males while five (30) representing (10%) were females.

40
Table 4.2: Age variation of Respondents

AGE FREQUENCY PERCENTAGE

25-30 years 4 8%

35-40 years 6 12 %

41-45 years 14 28 %

46 years and above 26 52 %

Total 50 100 %

Source: field survey 2024.

From the table (4.2) above, it has shown that twenty-six (25) or 52% of the respondents were at

the productive age and also represent the majority of the respondents.

Table 4.3: Educational qualification of respondents

QUALIFICATION FREQUENCY PERCENTAGE

O’level/SSCE 19 38 %
Diploma/NCE 15 30%
B.Sc/HND 10 20%
M.Sc/MBA 5 10%
PhD 1 2%
Others Nil Nil
Total 50 100 %
Source: field survey 2024

The above table (4.3) indicates that majority of the respondents i.e. nineteen (19) or 38% are

O’level/SSCE holders, while fifteen (15) or 30% are Diploma/NCE and ten (10) or 20% are

B.Sc/HND holders who are knowledgeable to understand and respond to the questionnaires

administered.

41
Table 4.4: Working experience of respondents

EXPERIENCE FREQUENCY PERCENTAGE

1-5 years 10 20%

6-10 years 23 46%

11 years and above 17 34%

Total 50 100%

Source: field survey 2024.

The above table (4.4) indicates that ten (10) or 20% are between 1 to 5 years experience,

twenty-three (23) or 46% are between 6 to 10 years of experience who are majority of the

respondents, seventeen (17) or 34% are of 11 years and above experience.

Table 4.5: Carder of Respondents

STATUS FREQUENCY PERCENTAGE

Junior 12 24 %

Senior Staff 17 34 %

Part time 21 42 %

Total 50 100 %

Source: field survey 2024.

The table (4.5) above shows the majority of the respondent’s i.e. twenty-one (21) or 42% are

junior staff, while seventeen (17) or 34% are senior staff who are knowledgeable to understand

and respond to the questionnaires administered, while twelve (12) or 24% while are part time

staff.

42
4.2.2 Topical Issues

4.2.2.1 Internal Control Size

Table 4.6: Do you agree that management composition has been effective to guarantee the

prevention of fraud in the organization

RESPONSES FREQUENCY PERCENTAGE

Very effective 6 12 %

Effective 11 22 %

Moderately effective 15 30 %

Slightly effective 10 20 %

Not effective 8 16 %

TOTAL 50 100 %

Source: field survey 2024.

From the table 4.6 above fifteen (15) or 30% moderately agreed to the fact that management

composition has been effective to guarantee the prevention of fraud in the organization, eleven

(11) or 22% said it is effective, while ten (10) or 20% said it to be slightly effective.

43
4.2.2.2 Internal Control Quality

Table 4.7: How effective has good remuneration reduced the level of fraud

RESPONSE FREQUENCY PERCENTAGE

Very effective 21 42 %

Fairly effective 19 38 %

Not effective 10 20 %

Total 50 100 %

Source: field survey 2024.

From the table 4.7 above, twenty-one (21) or 42% representing majority of the respondents agree

to the fact that good remuneration reduced the level of fraud; nineteen (19) or 38% said it is

fairly effective, while ten (10) or 20% said it is not.

Table 4.8: Do operational staff have good supervisors that can easily detect fraud

RESPONSE FREQUENCY PERCENTAGE

Yes 9 18 %

No 33 66 %

Undecided 8 16 %

Total 50 100 %

Source: Field survey 2024.

From the table 4.8 above nine (9) or 18% of the respondents said yes to the fact that operational

staff have good supervisors that can easily detect fraud, while thirty-three (33) or 66% said no

to the fact, eight (8) or 16% of the respondents were undecided.

44
4.2.2.3 Internal Control Independence

Table 4.9: Do you agree that effective and close supervision of operation staff can reduce

the rate or level of fraud in the organization.

Response Frequency Percentage

Agree 36 72 %

Undecided 6 12 %

Disagree 8 16 %

Total 50 100 %

Source: field survey 2024.

From the table 4.9 above thirty-six (36) or 72% of the respondents agree that effective and close

supervision of operation staff can reduce the rate or level of fraud in the organization, six (6) or

12% where undecided and eight (8) or 16% disagreed to the fact.

4.2.2.4 Internal Control

Table 4.10: To what extent do you think internal control can be used to prevent fraud in

your organization.

RESPONSE FREQUENCY PERCENTAGE

To a large extent 26 52 %

To a fair extent 14 28%

Not to any extent 10 20 %

Total 50 100 %

Source: field survey 2024.

From the table 4.10 above twenty-six (26) or 52% representing majority of the respondents

agree to a large extent to the fact that internal control can be used to prevent fraud in an

45
organization, while fourteen (14) or 28 % agree but a fair extent but, only ten (10) or 20%

refused the fact.

Table 4.11: Do you agree funds allocated for government programs are lost due to weak

internal controls

Response Frequency Percentage

Agree 35 70 %

Undecided 7 14 %

Disagree 8 16 %

Total 50 100 %

Source: field survey, 2024

From the table 4.11 above thirty-six (35) or 70% of the respondents agree that funds allocated

for government programs are lost due to weak internal in the organization, seven (7) or 14%

where undecided and eight (8) or 16% disagreed to the fact.

46
4.3 Regression Analysis

In order to achieve the objectives of this study regression analysis is conducted. The results are

presented below;

Table 4.12: Summary of OLS

Variable Coefficient t-Statistic p-value.

C 4.6545 0.7111 0.0000

INTCS 0.01323 0.0054 0.0000

INTCQ 0.17432 0.0289 0.0000

INTCIND 1.5667 0.7301 0.0231

Source: Author’s Statistical Analysis using SPSS (2024)

Table 4.13: Regression Result

R-squared 0.812

Adjusted R-squared 0.7566

F-statistic 12.871

Prob(F-statistic) 0.000000

Durbin-Watson stat 2.022

Source: Author’s Statistical Analysis using SPSS (2024)

Table 4.13 above is the regression result for the estimation of the model specified earlier in the

previous chapter. The focus of the study is on the effect of internal control on fraud detection.

The R2 for model is very impressive at 0.812 which implies that the model explains about 81.2%

of the systematic variations in the dependent variable while the adjusted R 2 is 75.66%.The F-stat

is 12.871 (p-value = 0.00) is significant at 5% and suggest that the hypothesis of a significant

47
linear relationship between the dependent and independent variables cannot be rejected. It is also

indicative of the joint statistical significance of the model. The D. W statistics of 2.022 indicates

the likely absence of stochastic dependence in the model. Focusing on the performance of the

coefficients, we observe that the coefficient for INTCS is positive (0.01323) and statistically

significant at 5% level (p=0.000) and this implies that an increase in internal control size

improve the ability to detect fraud. The nature and frequency of financial frauds in corporations

presupposes that stakeholders must incorporate ensure that internal audit units are adequately

staffed. INTCQ is positive (0.17432) and also statistically significant at 5% level (p=0.000)

which implies that the quality of internal control departments has a very strong positive effect on

the fraud detection. In other words, the result suggests that an improvement in the quality of

internal audit training and techniques will enhance their role in fraud detection. The effect of

INTCIND is also positive (0.5667) and significant at 5% level (p=0.0231) which suggest that the

independence of the internal audit department has a positive effect on fraud detection and as

such the more independent internal audit departments become, the less likely the occurrence of

fraud and the more likely the detection of fraud.

48
Hypotheses Testing Decision Rule: We accept the null hypothesis if the probability value for the

coefficient is> 0.05 at 5% significance level, otherwise we reject the null and accept the

alternative. Ho1: Internal Control Size (INTCS) has no significant effect on financial fraud

detection. Focusing on the performance of the coefficients, we observe that the coefficient for

INTCS is positive (0.01457) and statistically significant at 5% level (p=0.000) and this implies

that an increase in internal control size will improve the ability to detect fraud and hence we

reject the null hypothesis that Internal Control Size (INTCS) has no significant effect on

financial fraud detection.

Ho2: Internal Control Quality (INTCQ) has no significant effect on financial fraud detection.

INTCQ is positive (0.16824) and also statistically significant at 5% level (p=0.000) which

implies that the quality of internal control departments has a very strong positive effect on the

fraud detection.

Ho3: Internal Control Independence (INTCIND) has no significant effect on financial fraud

detection. The effect of INTCIND is positive (0.1673) and significant at 5% level (p=0.0241)

which suggest that the independence of the internal control department has a positive effect on

fraud detection and as such the more independent internal control departments become, the less

likely the occurrence of fraud and the more likely the detection of fraud. Hence we reject the null

hypothesis that Internal Control Independence (INTCIND) has no significant effect on financial

fraud detection.

49
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

This research study was carried out on an investigation into fraud preventive measures in

Guarantee Trust Bank (GTB), Jalingo branch. In this study, the impact of internal control on

financial fraud detection is examined. Specifically, the study examines three core internal control

features; internal control size, internal control quality and internal control independence. Using a

combination of both descriptive and inferential statistics, the study found that all three core

internal control features; internal control size, internal control quality and internal control

independence have a significant positive impact of financial fraud detection. Focusing on the

performance of the coefficients, we observe that the coefficient for INTCS is positive (0.01457)

and statistically significant at 5% level (p=0.000) and this implies that an increase in internal

control size will improve the ability to detect fraud, INTCQ is positive (0.16824) and also

statistically significant at 5% level (p=0.000) which implies that the quality of internal control

departments has a very strong positive effect on the fraud detection. The effect of INTCIND is

positive (0.1673) and significant at 5% level (p=0.0241) which suggest that the independence of

the internal control department has a positive effect on fraud detection and as such the more

independent internal control departments become, the less likely the occurrence of fraud and the

more likely the detection of fraud. Internal control is expected to bring about benefit such as

reduce corruption and parasitic mentality; strengthen the economy; generate funds for

investment; promote efficiency, transparency and better management; create more employment

opportunities as a result of expansion and so on.

50
5.2 Conclusion

The growing level of crimes, corruption and fraudulent activities has led to great concerns. In

Nigeria, many banks are faced with the challenges of irregularities, illegitimacy and inaccuracies

which are as a result of inadequate external audit systems. Thus, the need of a good external

audit system cannot be over emphasized. In financial organizations, errors and irregularities are

not disclosed to the public because it might terminate their image and goodwill. A new wave of

bank fraud that has challenged the recently upgraded internal risk control measures ordered by

the Central Bank of Nigeria has become a source of concern for the authorities. The public’s

expectations of boards and senior management, and those charged with providing an independent

review of the company’s operations and financial accounts have been raised. Internal control is

thus very pertinent and its size, quality and independence should be considered.

5.3 Recommendations

Based on the study findings, the following recommendations are made;

i. Internal Control Size (INTCS) was found to have a significant effect on financial fraud

detection and hence there is the need for banks to increase the size of their internal control

departments.

ii. Internal control quality was found to have a significant effect on fraud detection and hence

the study recommends that banks improve the quality of their internal control units through

constant training of the personnel.

iii. Internal control Independence (INTCIND) has a significant effect on financial fraud

detection. Hence the study recommends on the need to enhance internal control

independence

51
52
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 Appendix

Department of Accountancy,
Faculty of Social and Management Sciences,
Taraba State University, Jalingo
P.M.B 2076 Yola.
Adamawa State

25th February, 2024

Dear Respondent,

LETTER OF REQUEST

I am a final year student of the above-mentioned department in Taraba State University,

Jalingo. I am currently undertaking a research on Effect Of Internal Control Independence On
Detection And Prevention Of Financial Fraud In Banking Industries, using Guarantee Trust Bank
(GTB), Jalingo Branch as the case study.

I kindly request that you spare out time to fill out the questionnaire attached herewith.

This is solely for academic purpose and information provided will be treated with utmost
confidentiality.

Thank you for your cooperation.

Yours faithfully

Lucy Ephraim Cheto

TSU/FSMS/AC/18/1061

62