THE EFFECT OF INTERNAL CONTROL ON DETECTING AND PREVENTING FRAUD IN COMMERCIAL BANKS
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Due to the fact that fraud has existed throughout history and has taken on numerous forms, internal controls are designed to detect fraud before it is too late.
The purpose of this study was to determine the influence of internal controls on fraud detection and prevention.
Additionally, this study used a case study methodology with a total population size of 15 staff members at the NFC bank Buea branch. With the assistance of the questionnaire, the purposive sampling strategy was applied.
The study analyzed primary sources of data. We utilized a standard linear regression model. The regressions were conducted using SPSS version 21.
The study’s findings indicate that appropriate measures are being taken to address instances of malfeasance in the operation of the Accounting & Finance Management System, that the NFC Bank Buea institution maintains a clear separation of roles, that elaborate mechanisms are in place to address control weaknesses, and that the bank’s security system identifies and safeguards Institutional Assets.
Internal control has a favorable and significant effect on the detection and prevention of fraud in commercial banks, namely in the case of the NFC Bank Buea branch.
The purpose of this study was to determine whether there is a substantial relationship between internal control and fraud detection and prevention in commercial banks. Based on the findings, we conclude that there is a relationship between the two variables, and so reject the null hypothesis.
This study proposes that severe sanctions be imposed and applied against persons discovered engaging in fraudulent bank transactions; this sanction can go a long way toward reducing the occurrences of bank fraud.
Internal controls are procedures that provide reasonable assurance that management is achieving operational effectiveness and efficiency, financial reporting reliability, and compliance with applicable laws and regulations (Grant, Miller, & Alali, 2008).
Internal controls have the capacity to avoid mistakes and fraud by monitoring and improving organizational and financial reporting procedures and guaranteeing compliance with applicable laws and regulations (Rae and Subramanian, 2008).
When cost-effective measures are implemented to keep deviations, such as incorrect or unlawful conduct, to a tolerable level, reasonable assurance is provided. Internal auditing examines the effectiveness of the internal control system in order to determine whether it is operating as intended (Fadzil, Haron & Jantan, 2005).
Internal controls are intended to identify fraudulent activity before it is too late (Firozababdi, Tan & Lee, 1999). This is true simply because when fraud occurs, all that could be lost is lost. However, bank management are responsible for preventing fraud in the first place (Weygtandt et al., 2010).
While fraud is detrimental to company and its prevention is a priority for every banker, fraud occurs regardless (Olatunji, 2009).
Internal control systems should emphasize risk identification, measurement, and monitoring, control activities at each level of operation, the establishment of reliable information systems capable of reporting anomalies promptly, and detailed reporting and monitoring of all operations and activities (Opromolla & Maccarini, 2010).
Internal controls are implemented by a company’s board of directors, management, and other employees and are intended to assure operational effectiveness and efficiency, financial reporting reliability, and compliance with applicable laws and regulations (Spira & Page, 2003).
Management should evaluate and communicate to stakeholders the effectiveness of an institution’s internal controls (Rezaee, 1995). Internal controls should consist of the following components: a control environment, risk assessment, control actions, information and communication, and monitoring (Basel Committee, 2011).
These interdependent internal control components must be present and functioning effectively in order for an internal control system to be adequate and effective (Rezaee, 1995).
Fraud has existed throughout history in a variety of forms. Bank fraud has increased in popularity since the banking industry’s inception, boosted by technological advancements and widespread usage of the Internet.
According to the fraud triangle (Cressey, 2003), three conditions must exist for fraud to occur: pressure, rationalization, and opportunity.
Bank workers have access to systems and secret and confidential information, which, when combined with technology innovation, provides them with the opportunity to conduct fraud. All they require is some coercion and reasoning, and they will join fraud gangs that are robbing banks of millions of shillings.
Internal control systems that are effective are critical for detecting and preventing fraud. The contrary is also true, if the absence or ineffectiveness of internal controls impedes fraud detection and prevention (MicroSave, 2007).
According to a June 2003 publication by the Institute of Internal Auditors, “risk and control are virtually inseparable like two sides of the same coin,” meaning that risks must first be identified and assessed, and then managed and mitigated through the implementation of a strong internal control system.
Financial institutions’ objectives are to maximize growth, profitability, and sustainability, or to really accomplish their mission, while minimizing the risk of loss or failure in the course of business.
To accomplish their objective, financial institutions must manage their risks effectively through effective internal controls. This means that internal control systems contribute positively to financial organizations’ growth, profitability, and sustainability (Njagi, 2009; Kiprop, 2010).
Internal control is a critical component of any institution, as demonstrated above, and this study appears to shed additional insight on how internal control rules improve the operational operations of banking institutions in Cameroon.
1.2 Statement of the Problem
Although banks make every effort to detect and prevent fraud, there are still criminals out there taking consumer money by circumventing all preventative measures (Olatunji, 2009).
Meanwhile, banks in Cameroon are now opening to the rest of the world, introducing ATM machines and cash withdrawal services, as well as international debit and credit cards.
These facilities are known to attract a large number of fraudsters (Levi, 2000), making Somali banks even more vulnerable to fraud. Thus, a study is required to determine how internal controls, more precisely control activities, can aid in the identification of fraud in Somali banks.
The frequency with which fraud and money laundering occur instills dread, anxiety, and a lack of confidence in bank consumers. Additionally, a deficient internal control system results in a rise in bank losses (ACFE, 2010).
Management is essential to establish an internal control system, but the system will vary widely amongst organizations, based on their size, nature of activities, and aims.
Because internal controls function in an environment that has an effect on their operations, due diligence must be exercised in their implementation in order to achieve the bank’s ultimate goal.
This increased interest in internal controls is partly a result of some banking institutions suffering big losses (Hochberg, Sapienza & Jorgensen, 2009).
According to a review of the issues behind these losses, they could very certainly have been averted had the banks maintained efficient internal control systems.
Such technologies would have avoided or detected the difficulties that resulted in the losses earlier, thereby limiting the banking organization’s damage (Levi, 2008).
In Cameroon, little or no research on the influence of internal control on fraud detection and prevention in the banking industry has been conducted. Thus, this study will examine the influence of internal control on fraud detection and prevention in Cameroon’s commercial banks.
1.3 Research Issues
The primary research objective was to determine the effect of internal controls on the identification and prevention of fraud in commercial banks, specifically in the case of NFC bank Buea.
1.3.1 Research Question Specific
To what extent do control actions have an effect on the degree of fraud prevention and detection in commercial banks?
In a case study of NFC Buea, how does the control environment affect the level of fraud prevention and detection?
What influence does monitoring have on the level of fraud prevention and detection in commercial banks?
1.4 Research Goals
The primary purpose of this study was to determine the effect of internal controls on fraud detection and prevention in commercial banks using NFC Buea as a case study.
1.4.1 Specific Objectives of Research
To ascertain the effect of control actions on the level of fraud prevention and detection in commercial banks, using the NFC Buea case study as an example.
The purpose of this study was to investigate the effect of the control environment on the level of fraud prevention and detection in a case study using NFC Buea.
To examine the influence of monitoring on the level of fraud prevention and detection in commercial banks using the NFC Buea case study as an example.
H0: Internal controls have no discernible influence on the detection and prevention of fraud in commercial banks, as demonstrated by the NFC Buea case study.
H1: Internal controls have a considerable impact on the detection and prevention of fraud in commercial banks, as demonstrated by the NFC Buea case study.