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Effective Internal Control of Frauds in
Banks: A Case Study of Commercial and Merchant Banks in Nigeria
Chapter One
1.1. Introduction
Banks, especially commercial banks, are
the major mobilizers of saving in any economic system by offering savings
facilities to the public. Some of the functions of the banks include the
acceptance of deposits from the public and channeling such deposits to the
deficit sectors of the economy who are in need of inventible funds. These two
related and dependent functions bring the banks face to face with the public
who come to obtain their services. This implies that banks attend to a large
number of customers who they may not, most of the time, personally know, or
whose identity the banks may not immediately known. This shows that banks will
be unable to have an immediate identity of these customers all of whom either
have honest or fraudulent intentions.
The word fraud is described as a social
menace perpetuated by a person or a group of persons with the intention of
altering the truth and, or fact, for selfish personal gain.
Fraud occurs when a person in a position
of trust and responsibility, in defiance of prescribed norms, break the rules
to advance his personal interests at the expense of the public interest he has
been entrusted to guard and promote. It also occurs when a person through
deceit, trick or highly intelligent, cunning, gains an advantage he could not
otherwise have gained through lawful, just, or normal processes.
Worried by this rising tide of bank
frauds, the International Corporate Development Agency (ICDA) recently
organized a two-day seminar on strategies for minimizing bank frauds.
According to Dr. Falorunsho Abudu, a
deputy general manager with First Bank PLC, a resource person at the seminar,
major consequences of bank frauds include loss of capital by banks and their
shareholders as well as loss of public confidence, litigations, regulatory
sanctions and negative publicity.
According to the Nigerian Deposit
Insurance Corporation (NDIC) the amount involved in frauds in the nation’s
banking system rose from N804, 196 million in 1990 to N3.309 billion in 1994.
NDIC records also show that commercial banks are most hit in this fraud virus
as the growth rate of frauds in commercial banks rose by over 700 percent
between 1991 and 1994. The higher tendency of frauds in commercial banks may be
attributed to the fact that commercial banks operate from chains of branches
compared with merchant banks with as small number of outlets.
Frauds in banks could be committed
through many ways. These include forgeries on accounts whether savings deposit
or current, forgeries of transfer instruments such as drafts and mail over
invoicing for services rendered to banks and the opening and operation of false
accounts as well as creation of false credit balances.
Dr. Abudu also observed that frauds in banks
can be committed through suspension of cheques, diversion of bank frauds,
foreign exchange malpractices and embezzlement or outright theft of cash. Other
methods are by advances to non-existing customers, misuse of various suspense
accounts and the suppression of cash lodgments.
Unfortunately, too, the bank’s internal
control systems are only fairly effective. In cases where they try to obey the
internal control procedures, they waste so much of the customers’ time that one
could not help wondering whether the bank staff are not sabotaging the internal
control procedures.
Studies have also shown that there is a
very high customer-bank ratio. Hence, working side by side with this Nigerian
banks lack adequate, well trained and committed staff to render effective and
efficient services to these customers. This has therefore informed the
intention of the writer to examine the effectiveness of an internal control
system as an aid to check fraud in banks.
Effective Internal Control of Frauds in Banks: A Case Study of Commercial and Merchant Banks in Nigeria
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