Effective Internal Control as the Basis for Prevention And Detection Of Fraud in Banks in Nigeria



This chapter review literature related to theme and sub theme of the study major idea of this section are group and presented under the following sub heading

  • Organization of internal control
  • What is fraud in banking industry
  • Sources form and caused of fraud in our bank
  • The effects and danger of fraud in our banks.
  • The law relating to and the legal process of protecting fraud in banks.
  • Common fraudulent practices
  • Technique off internal control
  • The plan of the bank
  • Authorization Recording and custody procedures
  • Managerial supervision and reviews
  • Audit Quality control. Nature and content
  • Need for Audit Quality control Measure
  • The Main objective of audit Quality control
  • Summary of relates reviewed literature

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Management in the new millennium will be saddled with greater challenges than it has been in the case of past. The are of easy money or armchair banking witnessed in bank as at 1980 is gone. What are likely to be experience in this new millennium will be uncertainty and lack of stability in the banking environment. Before the advent of large business concern, businesses were mainly carried on individually. In other word., the  owner was his own internal Adulator. However with present complexity. It is advisable that he has a continuing appraised of work a s the hasty of his employee.

In this view Archibony EE (1992) increase in regular activities, the trend towards decentralization and greater geographical dissension coupled with continuous change capitalization and operating guideline diversification of product, computer  and other  technology call for  outstanding performance by all level of management. These problem he, continued, contributed to increase the burden of manger’s. Consequently, management can not delegate its duties, management has  t urn to the control specialist, the  Auditor for assistance in maintaining surveillance over the management control network

According to ovuate porie (1994) Internal control as a serious processes and technique through which an organization own employees ascertain for the management by means of first hard on the job reservation weather established  management control are adequate and effectively maintained, records  and report financial accounting  and other wise reflect the octual operation and result accurately  and promptly and each division or unit is carrying out plans, policies and procedure for which it is responsible.

In the word of Omotosho (1992) the internal Auditor function as top management chief intelligent officer and chief executive, principal Adiver. It is the internal Auditor  dusty to  provide top management will the making and measuring  cooperate  performance,  he break his confinement to budgeting ,  cashflow, panning and expenses budgeting and planning and  expenses, budgeting and play the larger role of controlling  entire bank operation and activities  geared toward achieving cooperate goal and objectives as determined in the mission vision and message  set out by the representative  of the owner the bank, that is board of directors.  It is pertinent at this juncture to  say that Auditing is defined by the institute of chartered Accountant of  Nigeria (ICAN) is an examination of by an auditor of the exidence from, which the final revenue  account and balance sheet of an organization has been prepared in order to ascertain that they present a true and fair view of the summarized transaction for the year ended, enabling the auditor report them there on. In the word of word of Adeigbe (1984) plans for operation of internal control should be designed tentatively before establishing the department of internal control Audit. He asset that at early stage the advantage of such a division to bank as well as its initial one the cost of maintaining the department  does not out weigh considerably the benefit accusable. It is note worthy that internal control play an essential function in fraud detection and control. The form internal  play an essential role in fraud prevention it intend to make a clear that  this is an activity carried on within the organization using it own employee Adeigbe (1999) how ever opined that internal control is not a  substitute for proper evaluation of the  overall control present in a company. The English illustrate detionary defined fraud as a deceitfulness, criminal deception and using false representation to obtained an unjust advantage.  Again Fagbemi (1986) defined fraud  as an act  of depriving a person dishonesty of  some thing to which he or she would be entitles.

Aderigbe (1999) indentified the following as the factor that could contribute to fraud.

  1. The ease with which the particular asset can be consented after they are appraise such as cash, securities, good purchase for resale
  2. Independent control of individual over asset (That is where there is inadequate segregation of duties
  3. Possibility of refusing to comply with laid down policy, procedure without any penalty or sanction and.
  4. Collusion between interacting agents changed with the duties responsibilities to safe guard, protecting the asset and other interest of the organization.

For example an official driver in bank may take petrol reciepl from petrol station not actually sold to him and make clain on it from bank.

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The dictionary of banking by bery defined  fraud as “ an act or course of action directed to the determent of another said Bunmmi Fagbemi in his article fraud and the law. He went on to  say that in Rvserit viscount Dalton Observation  that to  defraud  ordinarily means to deprive a person al monetary gain this is sace to involve the use of deceit and trick and sometimes high intelligent canny and Lenown how. The action he also said  usually take the form of forgery  falsification of document and under  fund and outright chief.  The  researcher found the above definition rather appropriate  and   adequate for the purpose of research work because they concerned the included.

  1. Theme must be decent or breach of confidence
  2. Theme must be an unfair and dishonest advantage based on the concept of one man loss is another mans gain

Having defard  what frayed is in banking industry, it will be appraise  at their  juncture to determine the  source and  reasons for perpetrating fraud and various form the take.



Alhayi Uiman E Brllo, Chief inspector of the Bank of the  North Plc on the occasion of the 18th yearly seminar of Nigeria institute of Bank held in leano in 1986, indentified two may or reason for  fraud in fraud in Nigeria banking system vis fraud and forery involve professional workers who are  thoroughly conversant with banking operation and system  and procedure and who seek to enlist the support and cooperation of the people whose intention is much higher than average banker. The fraudster think foul and act foul because that is their stock   in trade. Alahayi Bellow went further to determine some of the factor that facilitated  in the Nigerian Baking sector. These according to him are

  1. Dishonest staff

He supported this idea by saying that seven out of ten reported cases of fraud in bank involves members of the staff of the bank. The problem is dishonesty of staff of the bank who contribute the greater shall to fraudster in perpetrating fraud.

  1. Breakdown of internal control of bank. This is one of the most latest means by which fraud are perpetrated in banks in Nigeria. Once dishonest staff discover that there are a weave internal control, that is a clear chance for him her to have a field day in carrying out their criminal activities. Account are  inflated at will cheque are paid and deliberately not debited  customer account and other instrument of cash are destroyed freely
  2. Lose and ineffective system in banks: This also one the variable means that influenced fraud in bank. Normal reasonable precaution when account are operates.

One experience are that the account humied opened by relatively unknown customer have been used to perpetrate fraud in bank, when cheque book, draft credit advance forms bank  payment and indeed other is security document  are not kept in proper hand and are made accessible to un authorized, person, unscrupulous people will take advantage to try to perpetrate fraud .

  • Police unskilled in handling fraud in bank in our kind they can always have their way    with the police. The law of the country does not allow private prosecution of fraud cases. If you can take to official of commercial bank in Nigeria, you will be a ghost will the number of cases when are pending with the police. Some of which  have just noticed to act on. The situation is horrible and terrifying will apparent discouragement from the police, it is on wonder then that the fraudster have become hardened in their fraudulent activities. The battle to minimize or eliminate fraud in bank can never be won without the willing co-operation, understanding of member of the police force the co-operation which unfortunately seem not be forth coming. While one appreciate the handicap and frustration of police force one naturally prays for a change of hearth l have always held that order to ensure a successful banking practice Nigeria, The police and banks should be partners in progress. The situation is so bad that bank generally hesitate e to report fraud cases to police for action except of course where insurance claim are unvolve. Some times, the police take action that is directly destructive of bank operation. This adding to the exposure when influenced banks.

Fraud by  nature cannot be detected easily and this tends to encourage frauds in bank  because fraudster sincerely but disastrously believe that they will not be caught. And really a number of fraud have taken place without any body being identified with then. Fraud is an operation in “secrecy” which cannot be detected without divine guidance of God and willing co-operation of banks staff and member of the general public.

It even more unfortunate that when fraudster are caught and are chang4es to could and found guilty, they are sentences to such fine or term to unprisionnersit which are not certainly commensurable      with the offense committed


Having unidentified the various factors that contributes to the effective perpetration of fraud in our banking industry.

Femi Adeanye (1986) identifies the following types  of frauds in his articles in banking transition

  1. Forged cheque: These are by for the commonest sources of loss to bank and their customers. They occur manly on the company accounts and are invariable perpetrately by staff within the company who hs access to the company cheque book usually the collude with dishonest staff of the paying bankers.
  2. TELEX

This is one of the most recent serious crime in  banking industry which has threaten its existence. Telex fraud is common occurrence in Nigeria but it usually involve huge sum of money when it occurs. As we know Nigerian banks are allowed to transfer fund from abroad, on the order and application of banks customer in settlement of financial obligation after necessary exchange control approval must have been obtained. The transfers system used by most banks is through coding of transfer message which are transported abroad for a fee through the Nigerian telecommunication limited, Intel

Telex fraud occur when among authentic message which are to be tested and sent by banks telex officials, spurious telex message are introduced. Test key are manipulated usually much the collusion of NITEL official, the message after being tested are submitted abroad. As a result of the message, money is paid to a fictitious account abroad through a correspondent bank and are later eashed by the oversea., collaborators.

The correspondent bank without notice of fraud would credit the fictitious account after decoding the telex message.


oversea supplies have continued to receive spurious letter of credit from individual  in this country. Such letters of credit are usually accompanied with spurious “Bank draft” on the reverse of which are take endorsement which gnerontes payments.


Bank customers who are familiar with banking operation procedure know that it takes some day to clear cheque. Through the banking system even when accounts are within the same cleaning area. The fraudster indulging in the practices usually have two or more account at two or more different bank or branched. He draw a cheque into his account with bank X  knowing fully  Y. he then draws on the  inoculated fund at banking and immediately deposit in bank “X” another cheque drawn on non existing fund in his account at bank “Y” This is a simple example of hatting. Thus customers can fraudulently makes used of bank fund without proper authority. Some indication of letting suspect as ememerated by BL lcofarall a staff of then Savannah bank an experience operations officer include the following

  1. Consistent increase in deposit account
  2. Excessive account activity on relation to types of account, with consistent low daily balances.
  3. Repositor unusual concern with daily staff of accounts.
  4. A paltern of daily deposit made to cover cheque received for payment in the current day.
  5. Fraudulent purchase of cashes of bank draft in fervor of the customer related companies or other banks
  6. Printing of banks stationary and carving of banks rubber stamp.

Such porged paper and stamps and used by unscrupulous people to prepare forged letters of credit and  other international trade instrument which are circulated all over the world with the view to obtaining goods worth’s millions of naira under false pretence.

  1. Fraud committed through opening account. The next of easy commitment is through the opening of account. This result easily when accounts are opened in a hurry making authorizing officer and mangers subject to pressure. fraud can result when inadequate retrenches and urron statistic inquiry are made. Customers ho are not properly interviewed and vended may give room for opening fraudulent  accounts

Fraud committed through opening of account rises as a result of carelessness of the officer concerned to make proper procedure for opening new account. And yet another area fraud can occur in bank is through careless used of cashiers stamp and security  pountry in used by them. This is because fraud syndicate can easily for cashiers signature and lay hand on the deposit slip and perfach all the technique involved and then account dily credited even where no lodgment had been made This type of fraud can succeed with strong elaboration of staff.


there type of fraud are committed by machines and computer operator who are acting ignorently innocently or with proven criminal intent. Most devastating   fraud in banking industry are caused by the use of computer, which involved very large sum of money. A part from the above ways the machinist commits fraud by inflating to credit company wrong balance forward in favour of the customer or taking over drawing current account debit balances as credit. In each of these cases the original ledger cards are destroyed


Evidently there are three types of fraud

  • Swapping of clearing cheque.

Hene the cheque bank a is fraudulently sutmulted in transit with another cheque having only the amount in common. In any case the collecting bank will refuse to accept the cheque back since it could be the cheque presented for collection.

And this will Crete problem in the draw or paying back and before the problem could be resolved, the auditory days allowed for clearing cheque may have expired

Although this raw of fraud would eventually be discovered before this  happen much harm have been doe and the fraudster  would have  with draw the money and disappeared into the society never to be traced.


In this bank “A” sand a cheque to bank “B” through the normal cleaing  system. In between the clearing houses the victims bank the cheque get stoles of removed and replaced with two or more cheque adding  up to the same amount bearing the crossing stamp of bank “C” and “D” etc. as cheque are returned to banks “C” and “D” for reason the clearing period allowed to clear cheque has elapsed bank “A” gives value to the original cheque for  default of before “B” in not returning  the original cheque. Before the confusion is  resolved  the fraudster would have made away with the money.

  • FLASE PROCEED COLLECTION: In the case a customer pays in cheque request his bank to give value but to send it through him of his chosen agent who may even be a bank staff to the paying bank. The customer ensure that the cheque does not reach the paying banks and that a forged credit device(serving as proceed of the cheque ) is sent to the collecting bank. The collecting bank relying innocently on the inter bank credit device would credit the customers account the forged inter branch device. The customer will conveniently  withdraw the money and  vans before  the fraudulent will be discovered. In all the cases  banto staff must conive with the outsider to facilitate this act of fraud they  involve the opening of account with false document

One of the most serious fraud in banking industry one often involving  management  or superior officers in bank. For instance, some branch managers who  fraudulent tendency in them may try to open fictitious current account where they grant anonymous facility and use the fraud in merchandising of goods and other trading activities. They make sure that appropriate lending formalities are completed for such account there by making it difficult for bank inspector and auditors to discover. Another very dangerous situation that can involve  senior staff is transfer of fund from one branch of a bank to another through clearing item and they are signed by authorized official and document through collusion of senior bank official and documents involved property.

Similarly fund can be transferred abroad through collusion of senior bank official, telex message  telegraphic transfer, which sometime required coding and also use nail transfers. The operation technique are often handled by senior staff in banks. Fraud resulting from any of thus above mentioned procedure could be disastrous for bank since it can result in the closure of bank



This section shall concentrate on the effect or otherwise, consequence of fraud on the banking system together with the banking depositor in particular and on the entire Nigeria economy in general. Bank that is threaten by cases of fraud fin itself involved in unfamiliar process utter with potential hazards standard management, other operational and administrative procedure and established behavioral palterns are suddenly subjected to ailing criteria of judgement. the effect of fraud on the banking system are as follows:

  1. Customers of bank nowadays faces lot of inconveniences in receiving banking services as a result of fraud the services, according to among which are long quicues delay frustration. The rigid procedure with the bid to forestalling fraud. The bank official are convinces that but thus method as earlier mentioned does not go well much the public. Also the power customer suffers when  security measure are tightened with the bank as safeguard against fraud what of the unruly attack on the customer by security dogs.


When a fraud occurs, there is confusion and tension being generated. The adverse effect of police and management engquiry produces an atmosphere of distrust and disruption of normal banking activities normal work flow staff are frightened of taking normal decision and processing normal work for  fear of being implicated  in fraudulent transaction. The police suffers while investigation are young with in the bank often it is necessary  to restrict or curtail services during inquires or withdraw suspected staff or be maked away if the police are called in .it is the customer that suffered during this disruption of  normal work flow for they have to wait for  longer period


When  fraud is discovered the usual recrimination involved to lower the interest o the staff and generally an apathy towards lending services would result and their dynamism is impaired



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