The Role Of Internal Auditors In Fraud Prevention
[CASE STUDY OF NIGERIA BANKS]

1 INTRODUCTION 

Fraud can be damaging to a business, especially in today`s unsettled economy. Its occurrence is ever-increasing on daily basis despite the fact that the banking industry is one of the most supervised and well-coordinated sectors in Nigeria. This leaves a doubting question in the heart of many people as to why it is so. Hence, the need for this research work, which helps explore how fraud occurs in the industry and the role of auditors in preventing it. The banking sector is the bedrock of an economy. For any economy to be thriving, the financial sector must be solid, efficient, and effective because it is the sector that ensures the circulation of money into every other sector of an economy. The existence of a viable banking industry cannot be underestimated in a growing economy. Although the banking sector has been given out its vital function of being a change off in economic development in Nigeria in all branches, yet its operation over the years has not been healthy. This is because of fraud and other related activities that undermined the banks’ full potentials (Ningi S.I. and Dutse A.Y. 2008). 

Fraud has been identified as one of the major threats to the growth and development of the banking sector; even while control systems, policies and procedures are designed to bring errors to light, they cannot expose all fraud (Coenen, T.L., 2008, 2). The issue of fraud is not attributed to Nigeria only, but a global issue. Internationally, it has been a major problem given a precise definition of what is all about, but the definition of fraud according to business dictionary involves an act of deception, an intentional concealment, misrepresentation of data, or omission of truth in order to gain unlawful advantage. This definition requires auditors to understand the legal implication of the terms in the definition. The term misrepresentation in the context indicates false representation of accounting figure or material fact rather than a simple opinion (Vona, 2008, 5). 

To make the explanation of fraud clear, it is also important to explain what bank fraud is all about which is the main reason for this research work. Bank fraud according to the legal dictionary is the use of deceptive measures to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently misrepresenting to be a bank or financial institution. For an action to be termed fraud there must be an untruthful intention and the ac- 9 tion must be intended to benefit perpetrators to the detriment of another person. Bank fraud ranges from cheque kiting, money transfer fund, account opening, computer fraud, telex fraud, loans fraud etc. (Legal dictionary). 

According to Oseni (2006), the perpetual frauds in the banking sector are getting to a level at which many stakeholders in the industry are losing their trust and confidence in the industry. Stakeholders are all those who have interests in the integrity of the bank: for example, shareholders, employees, suppliers, customers, or members of the general community (who could be affected by the social or environmental consequences of an organization`s activities). When this set of people lose their interest in the industry as a result of fraud, the bank tends to lose customers and money, because these shareholders are the major contributors of capital. Efforts have also been made by the Apex bank to curb the incidence of fraud in the banking industry. For instance in July 2004, Central Bank of Nigeria (CBN) unveiled new banking guidelines such as the guideline on Automated Teller Machine (ATM) Operations, payment guidelines, credit guidelines etc. designed to consolidate and restructure the industry through mergers and acquisition process. Banks and other Financial Institution Act (BOFIA) 1991, section 15, were also designed to prevent fraud and to make Nigerian banks more competitive and active in the global market. The Nigeria Deposit Insurance Corporation (NDIC) raises concern over high incidence of fraud and forgeries in the banking sector.

 In a statement released by the Corporation public affairs unit, He noted that fraud cases within the banking industry contracts stood at 12,279 in 2015. This figure represented an increase of 15.71 per cent over the 10,612 cases reported in 2014. Thou, the amount involved decreased by 7.59 billion naira (17,555,221.46 Euro) or 29.63% from 25.608 billion naira (59,229,790.67 Euro) in 2014 to 18.021 billion naira (41,681,508.03 Euro) in 2015. The types and nature of frauds and forgeries were largely web-based, ATM card related, fraudulent transfer, among others. The regulator noted that out of the 12,279 fraud cases reported by the commercial banks, 425 were attributed to staff while the highest percentage of frauds and forgery cases of 38.59 per cent by temporary staff (Www.Naija247news.com, Tuesday, June 28, 2016). The above statistical data reveals the level to which fraud had affected the finan- 10 cial strength of the banking industry in Nigeria. The frequent occurrence of fraud in the banking sector brings a doubtful question to mind as regards the competence, skills, due care, honesty, and integrity of auditors’ role in banks. They are believed to hold a strategic position of trust which the general public rely on. It is this very strategic position and duty of trust bestowed on auditors that Ioasase (2004) notes that when fraud occurs in the work place, the question that readily comes to mind and always asked is “where were the auditors?” According to Agbaje (1996), while commenting on the distressed condition of commercial banks in Nigeria in 90’s stated that “it is a matter of regret that the confidence reposed on the auditors responsible for the affected banks has been dashed”. This statement clearly shows the level of responsibility and trust the general public have in auditors as regard fraud detection and prevention in the banking sector. The detection and prevention of fraud in the bank should be considered as one of the main responsibilities of the bank auditors whether explicitly or implicitly stated in the bank statutory requirement in order to ensure the effective management and performance of the bank.

 1.1 Research Problem All organizations in one way or the other felt the consequences of fraud and its occurrence has resulted in financial loss. The existence of fraud in the banking industry has been a long time threatening factor which has affected their performance and profitability and in the long run may lead to distress. The evidence of this distress was a huge collapse of the commercial banks due to massive accounting and misappropriation related frauds. This problem resulted in the establishment of Asset Management Company of Nigeria (AMCON) to prevent distress especially in the Nigeria banking sector by acquiring and financing distress companies. Fraud is a major threatening issue to the successful operation of the banking industry; all banks are vulnerable to it and in all facets of life (Olorunsegun, 2010). 

The bank`s customers expect banking operation to be accountability, fairness, transparency in their daily operation for effective intermediation. Though, there has been some reported cases of fraud in the banking sector, one major problem remained unsolved as to the nature and different means at which fraud is been perpetrated by the banks. According to Adeyemo (2012), he stated that fraud is only possible in the bank with support from an 11 insider (employees of the bank). The banks are expected to carry out their duties with sincerity of purpose that will not undermine the public trust in them. This is of great importance if the banking sector wants to gain public trust and goodwill. Another constraint is that the management has not put in place effective measures in the prevention of bank fraud. The management has failed to design accurate control measures which will help auditors to tackle some cases of fraud which are routine in nature and obtain sufficient understanding of the bank operating environment in order to assess and evaluate risk of material misstatement of the financial statement whether due to error or fraud and to design the nature and timing of audit procedures. 

The management might also override controls since they were the ones who established them and this might also pose a problem to auditors because over reliance on the punctured internal controls by management will cause a great havoc. In Nigeria, despite the banking regulation and examination by the Central Bank of Nigeria (CBN), the supervisory role of Nigerian Deposit Insurance Corporation (NDIC), and the Chartered Institute of Bankers of Nigeria (CIBN), there is still a concern about fraud and other illegal practices in the banking industry. Evidence from the NDIC report (2008) shows that the report of examinations and special investigations showed that some banks were still bedeviled with the problem of fraud, weak board and management oversight; inaccurate financial reporting; poor record keeping practices; nonperforming insider-related credit; declining asset quality and attendant large provisioning requirements; inadequate debt recovery; non-compliance with banking law, rules and regulations; and significant exposure to the capital market through share and margin loans (Uchenna, C.& Agbo, J. 2013, 14).