THE ROLE AND STRATEGIES OF AN AUDITOR IN FRAUD PREVENTION AND DETECTION IN BANKING INDUSTRIES

CHAPTER ONE

• INTRODUCTION

Fraud detection is becoming increasingly important to managers of organizations, to internal and external auditors, and to regulators. Recent events, such as revelations of fraud-related problems at HEALTHSOUTH, Enron, and WorldCom, and the Sarbanes-Oxley Act stress the importance of early detection of fraud.  Financial statement frauds have weakened investor confidence in corporate financial statements, led to a decrease in market capitalization, and have contributed to four of the 10 largest bankruptcies in history. 

Case of Fraud, Several years ago, a senior vice president of a bank embezzled nearly $14 million over a 16-year period[1]. 

When the fraud was discovered through a customer complaint, the bank sued its external auditors for negligence in not detecting the fraud.  The fraud had been committed by manipulating, looting and abusing customer accounts and maintaining several slush accounts with sufficient funds to handle problems when customers complained. 

To determine whose responsibility it was to detect the fraud, a strategic approach was used.  For this fraud, the various kinds of symptoms[2] that could have been present were identified and catalogued.  Once the possible symptoms were known, 16 years of bank records (from microfiche and corporate databases) were combined into a searchable database.  Using the searchable database, queries for possible symptoms previously identified were made. 

• BACKGROUND OF THE STUDY

          In the primitive days, man started his transaction with his follow man with the methods of “Trade by Barter” the need for recording, keeping or auditing did not rise, however, the advert of money and the consequent increase in the number of transaction made keeping of record and accounts and their audit avoidable.

          In those days keepers need “to account to the selected men integrity who listen to oral evidence, who heard them and testifies to their correctness or otherwise, later on the complexity of the modern business transaction necessitates the voluminous account keeping and intimately the scientists examination of account now called modern auditing.

          The origin of auditing is as a result of the separation of ownership from control.

It is instituted to protect the interest of the owners by ensuring the financial statement is justified. Because of the separation of ownership from control, it becomes necessary for those managers entrusted with owners financial resource report (Stewardship Reports) to their employer(s). The presented might contain errors, refusal to disclose fraud and irregularities.

          The audit of the book and records of a bank is similar to the audit of any other commercial organization in the sense that the audit has to report to the account present at true and fair view of the state of the affairs of the banks and of the profit and loss covered by the account. However, because of the peculiarities of a banks operation, which are governed by the bank and financial institutions Decree 25 of 1991 as amended, the audit procedure for a bank defers from that of a typical commercial organization.

• STATEMENT OF THE PROBLEM

          Fraud is a phenomenon, which cut across all sphere of business society. Recently; the incidence of fraud has got attention of all sundry and has been the focus of government attentions.

          In this project, we attempt to say the role and strategies of an auditor in fraud prevention and detection. Also to analyze bank fraud causes, effect on the growth of the banking system in particular and the overall socio-economic development and likely solution.

• OBJECTIVE OF THE STUDY

                   The main aim of this study is to find a practical means of minimizing the incidences of fraud in Nigeria banks. While specific objectives are to :

1. Identify various means employed in defrauding banks.
2. Determine the effects of fraud on the banking business.
3. Determine the magnitude and frequency of fraud in banks.
4. Suggest measures of reducing the incidence of bank fraud.
5. To acquire the readers with menace of fraud in the banking industry with a view to assist banks and customers in minimizing and trading the risks in their day to day transaction.
6. To guide and educate the general public as to the role and impact of auditor in fraud prevention in commercial banks of Nigeria and strategies by the auditors to reduce the effect of fraud to the minimum.
7. To have in-depth knowledge of manifestation and causes of bank frauds.
8. To identify and outline various types and nature of frauds.