Abstract

Fraud has been in existence throughout history and has taken many different dimensions thus Internal controls are designed to detect fraud before it’s too late.

This study sought out to examine the effect of internal control on fraud detection and prevention, furthermore this study employed a case study design with a total population size of 15 staff of NFC bank Buea Branch. The purposive sampling technique was used with the help of the questionnaire.

The study used primary data. An ordinary linear regression model was used. The regressions were conducted using a statistical package for social sciences (SPSS) version 21.

The results of the study revealed that those appropriate measures are taken to correct misfeasance in the operation of Accounting & Finance Management System, NFC Bank Buea institution has clear separation of roles, there are elaborate mechanisms put in place to address weaknesses of controls, the bank’s security system identifies and safeguard Institutional Assets.

The study concluded that internal control positively and significantly affects the detection and prevention of fraud in commercial banks’ case of NFC Bank Buea branch.

The study sought to see if there exists a significant effect between internal control and detection and prevention of fraud in commercial banks, and from the findings, we conclude that there is a significance between the two variables, thus, we reject the null hypothesis.

This study recommends that Serious sanction should be given and implemented on individuals found carrying out fraudulent transactions in the bank, this sanction can go a long way to limit the occurrences of frauds in banks.

CHAPTER ONE

INTRODUCTIONS

1.1 Introduction

Internal controls are processes designed to provide reasonable assurance that management achieves effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations (Grant, Miller, & Alali, 2008).

A system of internal controls potentially prevents errors and fraud through monitoring and enhancing organizational and financial reporting processes as well as ensuring compliance with pertinent laws and regulations (Rae and Subramanian, 2008).

Reasonable assurance is provided when cost-effective actions are taken to restrict deviations, such as improper or illegal acts to a tolerable level. The internal audit reviews the effectiveness of the internal control system to ascertain whether the system is functioning as intended (Fadzil, Haron & Jantan, 2005).

Internal controls are designed to detect fraud before it’s too late (Firozababdi, Tan & Lee, 1999). This is simply true because when fraud happens, all that could be lost is lost. However, making sure that fraud does not happen in the first place is the responsibility of the bank managers (Weygtandt et al., 2010).

Although fraud is being bad for the business and its prevention a must for every banker, fraud is happening regardless (Olatunji, 2009).

The system of internal controls should emphasize, proper identification measurement and monitoring of risks, control activities for each level of operation, creation of reliable information systems that promptly report anomalies, and detailed reporting of all operations and monitoring of all the activities (Opromolla & Maccarini, 2010).

Internal controls are affected by a company’s board of directors, management, and other personnel and are designed to ensure effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations (Spira & Page, 2003).

The management should assess and report the effectiveness of an institution’s internal controls to its stakeholders (Rezaee, 1995). Internal controls should have the following as its components, control environment, risk assessment, control activities, information and communication, and monitoring activities (Basel Committee, 2011).

These interrelated components of internal control must be present and functioning properly in order to have an adequate and functioning internal control system (Rezaee, 1995).

Fraud has been in existence throughout history and has taken many different dimensions. Bank fraud has grown with the advent of the banking industry and has been facilitated by technological innovations and the widespread use of the Internet.

According to the fraud triangle (Cressey, 2003) for fraud to occur the three factors; pressure, rationalization, and opportunity should be present.

Bank employees have knowledge of the systems as well as classified and confidential information which together with technological advancement can give them the opportunity to commit fraud. All they need is some pressure and rationalization and that way they become part of fraud cartels that are fleecing millions of shillings from the banks.

Effective Internal control systems are crucial in detecting and preventing fraud. The converse where nonexistence and ineffectiveness of internal controls do not facilitate fraud detection and prevention is also true (MicroSave, 2007).

A June 2003 publication by the Institute of Internal Auditors wrote that “risk and control are virtually inseparable like two sides of a coin meaning that risks first must be identified and assessed; then managed and mitigated by the implementation of a strong system of internal control”.

The goals of financial institutions are to enhance growth, profitability, and sustainability, that is, to actually achieve their mission, and to minimize the risk of loss or failure in the process of conducting business.

To fulfill their mission, financial institutions’ risks must be managed through effective internal controls. This implies that internal control systems play a positive role in the growth, profitability, and sustainability of financial institutions (Njagi, 2009; Kiprop, 2010).

It is clear from the above that internal control is a fundamental component in any institution and this study seems to throw more light on how internal control policies aid the operational processes of banking institutions in Cameroon.

1.2 Problem Statement

Although banks try to watch out for frauds and prevent them from occurring, there are still fraudsters out there stealing customer money by avoiding all measures taken to prevent them from occurring (Olatunji, 2009).

Meanwhile, banks in Cameroon are now opening to the world and introducing ATM machines and cash withdrawal facilities including debit and credit cards that have international access.

These facilities are known to attract fraudsters in droves (Levi, 2000) which Somali banks even more susceptible fraud to occur. Thus a study is required to investigate how banks’ internal controls, specifically control activities can help fraud detection in the Somali banks.

The regularity of fraud and misappropriation of funds is creating fear, anxiety, and a loss of confidence in the minds of bank customers. Also, a poor internal control system leads to an increase in bank losses (ACFE, 2010).

Management is required to set up an internal control system but this system varies significantly from one organization to the next, depending on such factors as their size, nature of operations, and objectives.

Since internal controls operate in an environment that influences its operations, proper care must be exerted into the implementation of these systems in other to achieve the utmost aim of the bank.

This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations (Hochberg, Sapienza & Jorgensen, 2009).

An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems.

Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization (Levi, 2008).

Little or no sufficient work has been carried out in Cameroon on the effect of internal control on fraud detection and prevention in the banking industry. Thus, this work will seek to investigate the effect of internal control on fraud detection and prevention in commercial banks in Cameroon.

1.3 Research Questions

The main research question was to examine the effect of internal controls on fraud detection and prevention in commercial banks in the case of NFC bank Buea.

 1.3.1 Specific Research Question

1. To extend does control activities affect the level of fraud prevention and detection in commercial banks case study of NFC Buea?
2. how does the control environment affect the level of fraud prevention and detection in a case study of NFC Buea?
3. what is the effect of monitoring on the level of fraud prevention and detection in commercial banks case study of NFC Buea?

1.4 Research Objectives

The main research objective was to investigate the effect of internal controls on fraud detection and prevention in commercial banks case study of NFC Buea.

1.4.1 Specific Research Objectives

1. To establish the effect of control activities on the level of fraud prevention and detection in commercial banks case study of NFC Buea.
2. To determine the effect of control environment on the level of fraud prevention and detection in a case study of NFC Buea.
3. To investigate the effect of monitoring on the level of fraud prevention and detection in commercial banks case study of NFC Buea.

1.5 Hypothesis

H0: Internal controls have no significant effect on fraud detection and prevention in commercial banks case study of NFC Buea.

H1: Internal controls have a significant effect on fraud detection and prevention in commercial banks case study of NFC Buea.