BUSINESS ADMINISTRATION

FRAUD DETECTION AND FRAUD CONTROL IN A COMPUTERIZED ACCOUNTING SYSTEM

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO STUDY

In this dynamic world, the role of Banks, whether in a developed or developing economy consists of financial intermediation, provision of an efficient payment system and serving as conduit for the implementation of monetary policies, it has been postulated that if these functions are efficiently carried out, the economy would be able to mobilize meaningful level of savings and channel these funds in an efficient  and effective manner to ensure that no viable project is frustrated due to lack of funds. The role of banks in economic development has been richly articulated in literature.  Pioneer contribution of Schumpeter (1934) was of the view that financial institutions are necessary conditions for economic development.  This view has been variously corroborated by other scholars such as Goldsmith (1969), Cameron et at (1972) and Patrick (1966). Valentine and Mason (1997:1), in the bid to throw more light on how the banking sector exhibit or justify their strength of necessity and importance, said that it is an established fact that banking consists of three basic functions namely; the acceptance of deposits from customers, the transfer of these deposits from one account to another and the lending of money by way of loan or overdraft to customers.  By this daily deposits accepted are credited and money withdrawn is debited. An efficient manual accounting system has been in use before the use of computer came into place.  Customers deposit money with banks either with the use of cheque or passbooks (for the operators of the current and savings account respectively).

Account operators issue cheques to people, instructing the bank to pay a named person a specific sum of money on their behalf.  When the branch of each bank receives the cheque, they had to authorize payment of the amount and also debit the customers account.  This arrangement was satisfactory when the daily number of cheques and their users were relatively very small.  The system began to break down when a larger number of people started making use of the banking services.  This made the manual system of keeping customers account an increasingly difficult and expensive task. The above development prompted the use of computer to overcome the above problems.

The use of computer is still very new in our society; the computer technology emerged in the late 1940’s in the advanced countries of America and Europe and was introduced into Nigeria in the 1970’s by the multinational corporations like UAC, NCR, etc. while the banks embraced it in the early 80’s. Banking industry has in the past suffered a great number of loses through fraud such that a lot of them now face serious financial problem/hardship and eventually were forced to fold up.  The industrial and commercial Banks (1947-1952) are typical examples of banks that failed as a result of Fraud. Fraud as the word implies could mean different things to different people depending on the angle from which it is been looked at.

According to the Chartered Institute of Public Finance and Accountancy, United Kingdom, “Fraud” is that intentional distortion of financial statement or otherwise for gain.  While the international Auditing Guidelines (IAG) defines “fraud” as a particular type of irregularity, involving the use of deceits to obtain an illegal or unjust advantage and may involve the following: Manipulation, falsification or alteration of records, documents or figures.  Misappropriation of assets.  Omitting transactions from records or documents.  Misstatement of facts. Recording transaction without substance (fact).  Misapplication of accounting policies.

Professor G.O. Nwankwo (1991:166) classified fraud in three ways: by flow, by victim, by the act or method.  By victim are those identified by the victim of the fraud.  By flow fraud is two types; smash or grab and drip fraud smash and grab are usually small in number, high in value and occurs over a very short period of time.  While the drip type of fraud occurs through bypassing of routine controls and employing a large number of fraudulent act. Lastly, by act are fraud facilitated by the increase in volume and value of the payment traffic, passing through the inter bank transmission payment systems by the computer and by increasing and modernization of the banking computer networks and widespread of Aims (Automated Teller Machines) all of which have made the financial system more vulnerable to a wide variety of vandalism and fraud. From my own understanding; fraud is defined or seen as a deliberate act of cheating in order to get money or goods illegally. The question then is with the computerization of most Banks, do they still face fraud risk?  How vulnerable is the computer to fraud? The study attempted to sort out what the use of computer in the banks is likely to be, whether, prone to fraud or fraud proof.  The various internal control measures, level of safety, detection of fraud and possible control measures are also highlighted.

1.2   STATEMENT OF PROBLEM

The basic need for information and consequent requirement for means of processing data speedily and accurately applies to a wide range of work area in business.  Perhaps the most important factor worthy of consideration in every business is Financial Information, which is denied from processing financial data. Banks have decided to introduce computer in their operation because of the benefit derived from there.  Looking at the other side of the coin, one begins to wonder how safe the computer is too. Major questions on the integrity and security of Computer now comes to mind on the abuses of computer such as, how easy it is for disgruntled staff or outsiders to gain access into the computer room to change the hardware or even steal it? How easy is it for data to be altered fraudulently for the benefit of the perpetrator and if these are done, can the system detect them quickly? In this case, data element may leave the source in a particular state but may enter into the computer in another state.  This may mean the fraudulent insertion of new data, alteration of existing data and even detection of any entry. Computer crime or abuse occurs as a result of the following: a.  Natural phenomenon b. Accident c. Mistake d.  Intentional. This study is therefore designed to solve the following specific problems. What are the types of fraud associated with computer usage in banks?  What are the possible ways of detecting and preventing fraud associated with the use of computers in banks?

1.3   OBJECTIVE OF STUDY

In Nigeria, fraud contributed significantly to the failure of 36 Banks in liquidation (Ogunleye, 2001).  Fraud is one of the serious economic crimes being perpetrated in our banking industry today.  Frauds result in huge financial loses to banks and their customers, the depletion of shareholder’s fund and banks capital base as well as loss of confidence in the sector.  Fraud is therefore of special concern to the regulatory authorities that are saddled with the responsibility of ensuring the safety and soundness of the entire banking system.  The incidence of fraud in the Nigerian banking system should be of serious concern to all stakeholders.

1.4   SCOPE OF THE STUDY

Computer is now been commonly used in business activities especially in financial houses.  Banks as we all know operate in different fields of human endeavours such as commerce, agriculture, industrial, merchant and commercial banks.  It is therefore necessary to scale down the scope of the research to the extent that can be reasonably handled with regard to time, materials and financial resources available to the researchers.

1.5   SIGNIFICANCE OF STUDY

Fraud has become the most reported case in establishment in Nigeria, invariably resulting in the shrinking of funds and loss of assets, increasing the liquidation rate of organization. The primary motive of this study are already stated, is to expose various areas of the computerized banking operations where fraud can be perpetrated, the type of fraud involved and the possible ways of keeping the management informed on how to detect such frauds.  Thus, it is of mutual benefit to management and shareholders whose funds are being managed. So, to say this research is significant in that it puts management and auditors at alert regarding various possible loopholes in computer usage in banks.  The research will be of benefit to banks, customers, shareholders, researchers and the general public in identifying the possible areas where fraud can be perpetrated and how they can be minimized.  This enables the overall security of funds and assets of the bank for the achievement of management objective and the Nigerian economy in general.

1.6   STATEMENT OF RESEARCH HYPOTHESIS

Hypothesis is a statement about any set of phenomenon which can be rejected or accepted after some findings through study.  Hypothesis are formulated on the basis of a given research problem.  It is a theoretical proposition, which may be true or false. On the basis of the above definition, the hypotheses of this research are:

Ho: Fraud does not occur in a computerized accounting system.

Hi: Fraud does occur in computerized accounting system.

Ho: The use of computer has not increased the efficiency and performance of staff.

Hi: The use of computer has increased the efficiency and performance of staff.

Ho: The use of computer does not help to prevent the occurrence of fraud.

Hi: The use of computer helps to prevent the occurrence of fraud.

1.7   LIMITATION OF STUDY

It must be noted that this research is not without flaws.  One cannot claim to be an embodiment of knowledge in this field.  And as such the researcher cannot guarantee perfection in carrying out this research. I encountered numerous constraints in the course of carrying out this project. Time frame, considering the sensitivity of the topic of this research, the time given to research into it was insufficient and as such one cannot claim to have done an exhaustive job.

Another major limitation lies in the area of unwillingness of staff to release such sensitive information and data that relate to fraud and fraud control in a computerized accounting system of their bank.  They claimed that such data or information were sensitive and as such not for public consumption. Furthermore, finance as we know contribute to the success of any venture or activity.  The financial difficulties experienced by the researcher deterred this research.  Such difficulties in areas of cost of transportation, buying of exorbitant materials, costs of browsing the internet, cost of browsing the internet, cost of typing the work for presentation for supervision by the supervisor.

Besides, the problem of convincing the bank staff or our selected population to respond to administer questionnaires was another limitation.  While some respondent treated questionnaire with resentments, some others believe it is a time wasting exercise considering the job they have to do for the day.  The greatest problem in this area was getting the senior staff to release vital information that would have been useful to this research work.

1.8   METHODOLOGY OF RESEARCH

This research was carried out with well defined methods.  The method used for a research is usually through the available and relevant variables. In the course of carrying out this project work, both primary and secondary sources of data were used. Primary source data will be gathered through the primary source of information.  The two sources used in generating primary data are:  The used of structured questionnaires and personal interview with the employees.

REFERENCES

Aigbokhaevbolo Oziegbe M. (200) Fraud and Commercial Banks in Nigeria.  “The Noble Accountant. Journal Publication.

Awenlimbor A.E. (1991) Computers in Banking, Uses and Abuses.  NDIC Quarterly Vol. 1, No. 4.

First Bank of Nigeria Plc (1992). Annual Report and Account.

First Bank of Nigeria Plc (1994). Annual Report and Account.

Iyoha, E. Glory (2000). An overview of Fraud, prevention and control:  Whose Duty?  The Noble Accountant.

Ndekwu, E.C. (1994), First Bank of Nigeria: A Century Banking. Spectrum Books Ltd. Ltd.

NDIC Quarterly June (2003). Volume 13. No. 2, pp. 51-58.

Nwankwo, G.O. (1991) Bank Management, Principle and Practice. Mathouse Press Ltd. Lagos.

The Nigerian Stock Exchange: Factbook 2003.

Valentine S.P. and Mason S. (1997) Basics of Banking. David Mckay Co. UK. Pp.1