ABSTRACT
This research work takes a critical analysis on the study of the need for good accounting system
in selected commercial small scale business as it effectively applied to Butterfield Bakery and as
a case study. The system was analyzed after sampling the opinion of staff of the company in
order to get findings on the concept of good accounting system management. The research work
has conclusively established that optimal utilization of organization resources be it private or
public, big, small or medium. It must be ensure adequate and up to date training of its human
resources as they are the need to carry out and manipulate other Input in order to make the
organization effective. This means that for an organization to be developed and be efficient,
scientific and rational approach to good accounting system management is the key an underlying
factor to achieve this project however, related literature review were revised and recommended
for improvement were revised and recommended for improvement were also made for the
consideration of company good accounting system.
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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification ……………………………………………………………………………………iii
Dedication………………………………………………………………………………………iv
Acknowledgements……………………………………………………………………………….v
Abstract ………………………………………………………………………………………..vi
Table of Contents………………………………………………………………………………vii
List of tables……………………………………………………………………………………x
CHAPTER ONE: INTRODUCTION
1.1 Introduction……………………………………………………………………………..1
1.2 Background to the study………………………………………………………………3
1.3 Statement of the problem………………………………………………………………5
1.4 Objectives of the study………………………………….………………………………..6
1.5 Research questions……………………………………………………………………..7
1.6 Statement of the hypotheses…………………………………………………………..7
1.7 Significance of the study……………………………………………………………….8
1.8 Justification of the study……………………………………………………………….8
1.9 Scope of the study………………………………………………………………………8
1.10 Definitions of terms ……………………………………………………………………9
CHAPTER TWO: LITERATURE REVIEW
viii
2.0 Introduction……………………………………………………………………………10
2.1 Conceptual frame work…………………………………..……………………………12
2.2 Theoretical frame work…….………………………………………………………….15
2.3 Literature on subject matter……………………………………………………………20
CHAPTER THREE: METHODOLOGY
3.0 Introduction……………………………………………………………………………….30
3.1 Area of study……………………………………………………………………………30
3.2 Research design ………………………………………………………………………..30
3.3 Population of the study..…………………………………………………………………31
3.4 Sample size determination……………………………………………………………….31
3.5 Instrumentation………………………………..…………………………………………31
3.6 Limitations of the study…………………………………………………………………32
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………….33
4.1 Findings of the study……………………………………………………………………34
4.2 Test of hypothesis………………………………………………………………………44
4.4 Discussion of the findings………………………………………………………………48
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CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Introduction……………………………………………………………………………49
5.1 Summary of findings……………………………………………………………………49
5.2 Conclusion..……………………………………………………………………………49
5.3 Recommendations..…………………………………………………………………….50
5.4 Proposal for further studies………………………………………………………………51
References………………………………………………………………………………52
Appendix………………………………………………………………………………..56
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LIST OF TABLES
4.1.1 Gender of the respondents…………………………..…………………………………….34
4.1.2 Age of the respondents…………………………………………………………………..34
4.1.3 Status of the respondents………………………………………………………………..35
4.1.4 Educational background of the respondents..………………….………………………..35
4.1.5 Years of experience of the respondents……………..…………………………………..36
4.1.6 Is accounting system necessary in small scale business….……………………………..36
4.1.7 Is accounting system a key to the growth of small scale business………………………37
4.1.8 Does accounting system have any effect in your company product….…………………37
4.1.9 Does accounting system make any contribution to the expansion of your business…….38
4.1.10 Do you sell directly to the customers….…………………………………………………38
4.1.11 Does channel of distribution affect your pricing system………………………………..39
4.1.12 Does accounting system determine the survival of your business………………………39
4.1.13 Is your company policy aimed at customers’ satisfaction……………………………….40
4.1.14 Do transportation cost cause additional cost for your company..……………………….40
4.1.15 Is trend of sales of your company fluctuating during the season………………………..41
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4.1.16 Does information system have appropriate effect on your company…………………….41
4.1.17 Does your company embark on any promotional activities/exercise to
persuade customers to buy produce of your company………………………………………….42
4.1.18 Do you think your company employs necessary machinery to carry
out their accounting system…………………………………………………………….42
4.1.19 Do you agree that accounting information remain essential information
in foreseeable future…………………………………………………………………….43
4.1.20 Does accounting information system affect decision of your company…………………43
4.2.1 Testing of the 1st Hypothesis…………………………………………………………….45
4.2.2 Testing of the 2nd Hypothesis……………………………………………………………47
1
CHAPTER ONE
INTRODUCTION
Internal control systems can be described as the whole system of control, financial and otherwise
established by management in order to carry on the business of the enterprises in an orderly and
efficient manner. It involves the control environment and control procedure, all the policy and
procedure adopted by the directors and management of an entity to assist in achieving their
objectives, including adherence to internal policies, the safe-guarding of assets, the prevention
and detection of fraud and error as well as the completeness and accuracy of records, with the
timely preparation of reliable financial information (Benjamin, 2011).
It is necessary that every bank must have an internal audit department to ensure that accounting
systems provide an efficient means of recording and reporting financial transactions, providing
management information and protecting the company’s asset from fraud and misappropriation
(Achibong, 2013). One of the most effective systems for detecting fraud is internal control,
which is a system by definition, operating in the same environment as the fraud itself and serving
as an effective, formidable adversary to the fraud scheme and that the definition of internal
control, described as a process, framework, or function, do not touch upon systematic concepts
(McShane, 2012).The most widely used definition is that of the Committee of Sponsoring
Organizations of the Tread way Commission (COSO,ICIF, 1994): a process, effected by an
entity’s board of directors, management, and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following categories: Effectiveness and
2
efficiency of operations, reliability of financial reporting, compliance with applicable laws and
regulations. (COSO, ICIF, 1994).
Fraud, on the other hand, can be defined as an act of deliberate deception with the aim of
securing a personal benefit by taking advantages of other. Also, it could simply be put as the
misappropriation, theft or embezzlement of corporate assets in a particular economic
environment in the simplest thinking” it is also known as “stealing by tricks” (Achibong, 2013).
It is the trusted and valued employee who generally commits business fraud. When frauds are
discovered, there is often shock and disbelief that they could have committed such an act. The
perpetrator of business fraud could be “the person next door.” This person is likely to be a
married male with a family, religious affiliation, and above average education (Russell and
Norvig, 2013).
In most cases, offenders do not view stealing from companies as harmful; they may think that the
crime was victimless; and they do not view their theft as being devastating or costly to the
business. Many frauds occur because the opportunity exists and the perpetrator does not believe
he/she will be caught. In many cases the offender has “little or no criminal self-concept and
offenders view violations as part of their work” Further; they usually minimize their crime since
it results in minor losses for a large volume of clients; no one client is usually targeted for the
crime.
It has been an ongoing issue for thousands of years and continues to be a problem today. There
are several definitions for fraud as a legal (or criminal) concept. According to the Encyclopedia
Britannica, (2012), it is “the deliberate misrepresentation of fact for the purpose of depriving
someone of a valuable possession. Although fraud is sometimes a crime in itself, more often it is
an element of crimes such as obtaining money by false pretense or by impersonation” To
3
understand the components of fraud, a systematic approach is in order. As a system, fraud
involves victims and perpetrators, and as a structure, it involves a fraud scheme. It can be
evaluated as an open system, and the challenge is to evaluate the weaknesses of this system in
order to impact it (detect, prevent, or deter).
It can be seen as the intention, deception, misrepresentation, omission or concealment of the
truth for the purpose of obtaining unlawfully the assets of the bank, which is the major reason for
setting up on internal control system, has become a great pain in the neck of many Nigerian bank
managers. It has also become an unfortunate staple in Nigeria’s international reputation. It is
really eating deep into the Nigerian banking system and that any bank with a weak internal
control system is dangerously exposed to bank fraud (Adeduro, 2014).
The cost of fraud to a business is difficult to estimate because not all fraud and abuse is
discovered, not all uncovered fraud is reported, and civil or criminal action is not always
pursued. Therefore, the main thrust of this study is to examine whether the internal control
system in banking sector in Nigeria is effective in fraud detection or not, and also to appraise
effectiveness of employee training within the context of internal control system as fraud detector.
The menace of financial fraud as certainly emerged as one of the hindrances to bank
performance in Nigeria. Although fraud is a worldwide phenomenon, it is the single most
important financial problem in Nigeria. The nation has suffered severe losses financially. Banks
in Nigeria may not be talking about fraud they persistently suffer, especially because of the
sensitivity and response to such exposure (Muhammed 2012)
1.2 Background to the Study
A system of internal controls is a critical component of bank management and a foundation for
the safe and sound operation of banking organizations. A system of strong internal controls can
4
help to ensure that the goals and objectives of a banking organization will be met, that the bank
will achieve long-term profitability targets, and maintain reliable financial and managerial
reporting (Markowski & Mannan, 2012). Such a system can also help to ensure that the bank will
comply with laws and regulations as well as policies, plans, internal rules and procedures, and
decrease the risk of unexpected losses or damage to the bank’s reputation. The Basel Committee,
along with banking supervisors throughout the world, has focused increasingly on the
importance of sound internal controls. This heightened interest in internal controls is, in part, a
result of significant losses incurred by several banking organizations. 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. A system of accounting and records keeping will not succeed in
completely and accurately processing all transaction unless controls known as internal controls
are built into the system (Opromolla & Maccarini, 2015).
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, 2014). 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, 2013). 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, 2011).
5
The system of internal controls should emphasize on, proper identification measurement and
monitoring of risks, control activities for each level of operation, creation of reliable information
systems that promptly reports anomalies and detailed reporting of all operations and monitoring
of all the activities (Opromolla & Maccarini, 2015). 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, 2013). The management should assess and report
the effectiveness of an institution’s internal controls to its stakeholders (Rezaee, 2015). 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, 2015).
1.3 Statement of the Problem
The regularity of fraud and misappropriation of funds is creating fear, anxiety, and a loss of
confidence in the minds of bank customers. Also, poor internal control system leads to 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
which 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, 2014). An analysis of the problems related to these losses
indicates that they could probably have been avoided had the banks maintained effective internal
6
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, 2013). Nigeria
has the highest incidences of fraud in the world, based on a global ranking of 78 Countries
surveyed (PwC, 2011). Commercial banks in Nigeria are more susceptible to fraud than
commercial banks in her neighboring countries.
Duffield & Grabosky, 2011; Zahra, Priem & Rasheed, 2012; Mustafa & Youssef (2010)
concentrated on the causes and motivations to defrauding by staff. Other scholars, Alleyne and
Howard, 2011; Bakre, 2012 & Lange (2013), studied the role of external auditors in fraud,
detection and prevention and they produced conflicting findings. This shows that different
opinions exist as to the effect of internal controls on fraud detection and prevention.
It is for this research gaps that this study sought to answer the following research question; what
is the effect of internal controls on fraud detection and prevention among commercial banks in
Nigeria?
1.4 Objectives of the Study
The general objective of the study is to ascertain whether Internal Control System has a
significant impact on the prevention and detection of fraud in a commercial bank. The specific
objectives of the study are hereby stated as follows:
i. To find out the employees’ understanding and awareness of Internal Control System in the
bank’s operations.
ii. To find out the existence of effective internal control systems in the bank under study.
iii. To find out the impact of internal control system, on the overall management of a
commercial bank.
7
iv. To evaluate the impact of the Internal Control System on the prevention and detection of
fraud in the bank under study.
1.5 Research Questions
i. Does the Bank employees understand and aware of Internal Control System in the bank’s
operation?
ii. Are there existences of effective of Internal Control System in the bank’s operations?
iii. Are the existing Internal Control System has impact on the bank’s overall management?
iv. Can banks with effective internal control system prevent the menace of fraud in their
operations?
1.6 Statement of the Hypotheses
The research is intended to investigate the impact of internal control system in the
circumstances of embezzlement and fraud detection in the bank.
Therefore, the data to be collected in this exercise will be used to test the following
hypotheses.
Hypothesis One:
H0: Are the existing Internal Control System has no impact on the bank’s overall
management?
H1: Are the existing Internal Control System has impact on the bank’s overall management
Hypothesis Two:
8
H0: Banks with effective internal control system does not prevent the menace of fraud in their
operations.
H1: Banks with effective internal control system prevent the menace of fraud in their
operations.
1.7 The Significance of the Study
The findings of the study would help the management of the bank to maintain an enhanced
controlled environment by helping management and employees to establish and maintain an
environment throughout the bank that sets a positive and supportive altitude towards internal
control, reliable management, operating personnel for effecting internal control and internal
check for evaluating whether appropriate controls have been implemented and whether the
internal controls are functioning as intended. Other significance of the study includes:
Help the bank in reducing fraudulent activities that occur in the organization serve as good
reference materials for other researchers on the subject matter.
1.8 Justification of the Study
To highlight the weakness of the Internal Control System and in banks.
To provide remedies to these weaknesses highlighted.
To know the various measures put in place in prevention of fraud and misappropriation by
commercial banks.
To stir up the bank employees awareness to effective mechanism for internal control System.
1.9 Scope of the Study
The content of this study should not be seen as being totally exhaustive of all possible situations
available in the Nigerian banking sector on the theme of this study. This is due to the vast size of
9
the banking sector and the boundless nature of the study under review. Therefore, the scope of
this study is limited to the study carried out on Wema Bank Plc, Sango Ibadan branch.
1.10 Definition of Terms
Internal Control System: This is the whole system of controls financial and otherwise
established by the management in other to carry on the business of the enterprises in an orderly
and efficient manner, ensure adherence to management policies, safeguard the assets and secure
as far as possible the completeness and accuracy of the records.
Fraud: Fraud is defined as any intentional or deliberate act to deprive another of property or
money by guile, deception or other unfair means.
Effectiveness – within this context of the study, it means measure of productivity in utilizing an
entity’s resources for the attainment of the organization’s objectives.
Efficiency- It means measure of cost benefit in performing recurring functions within an entity.
Fraud Detection –This is the act of using or applying a combination of statistical,
methodologies and pattern identification algorithms to figure out where the fraud is taking place
in an organization.
Fraud Prevention- This can be defined as the various ways or means in which fraud can be
eradicated.
Commercial Bank- Commercial bank is a financial institution that provides various services,
such as accepting deposits, making business loans and offering basic investment products.
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