FRAUD AND FRAUD CONTROL IN A COMPUTERIZED ACCOUNTING SYSTEM
TABLE OF CONTENTS
Title Page i
Table of Contents v
Chapter One: Introduction
1.1 Background of the study 1
1.2 Statement of Problem 7
1.3 Objective of the Study 10
1.4 Scope of the study 13
1.5 Significance of study 14
1.6 Statement of Research Hypothesis 15
1.7 Limitation of Study 17
1.8 Methodology of Research 19
Chapter Two: Literature Review
- The Historical Development of Computer in
Banking Industry 21
- Nature of Fraud 26
- What then is Fraud? 27
- Types of Fraud 33
- Nature of Computer Fraud 40
2.4 Types of Fraud peculiar to Banks 44
2.5 Computer fraud in banks 54
2.6 Fraud as a Computer Abuse 57
2.7 Stages of Computer Fraud in Banks 62
2.8 Control of Computer Frauds 68
Chapter Three: Research Methodology
- Introduction 77
- Research Design 78
- The Population of the Study 79
- The sampling Design 80
- Data Collection 81
- Primary Sources 81
- Secondary Sources 83
- Analytical Procedure 84
4.0 Data Presentation, Analysis and Interpretation 86
4.1 Data Analysis 87
4.2 Presentation and Interpretation of Data 89
4.2.1 Hypothesis 1 89
4.2.2 Hypothesis 2 90
4.2.3 Hypothesis 3 91
4.3 Presentation of Special Question of the question 92
4.4 Test of Hypothesis 94
Findings, Recommendations and Conclusion 104
- Findings 104
- Recommendations 106
- Conclusion 109
Appendix I 114
Appendix II (Questionnaire) 116
- BACKGROUND OF 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 literatures. 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.
- 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:
- Natural phenomenon
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?
- 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. The cases of attempted fraud reported to the Nigerian Deposit Insurance Corporation, in compliance with the provision of the NDIC Act, are presented in the table below. The table shows the trend in reporting cases of frauds and forgeries among the insured banks between 1998-2002. The table reveals that in the last two years there had been significant increases in the number of reported cases and the amount involved.
TREND IN REPORTED CASES OF FRAUD AND FORGERIES (N’M)
|YEAR||NO OF REPORTED CASES||AMOUNT INVOLVED||EXPECTED/ ACTUAL LOSS|
SOURCE: NDIC ANNUAL REPORTS
The above write-up was a contribution made by Dr. Donli J.G. (Director of Research, NDIC) who wrote on the topic “the state and future of the banking industry – Fraud in the banking sector” in one of their quarterly publication.
Apart from his write-up, the researcher observed that, the topic of “fraud and fraud control in a computerized accounting system has received a considerable and sustainable attention in recent years, among both practicing software managers and researchers. One has got to ask supervisors and Banks what their most teething problem is, for the evidence of its importance to researchers.
Several factors appear to account for the prominence of this topic as a focal point of interest for which reason the researchers are motivated to undertake the study to find out why such frauds persist despite the existing effort to curb their occurrence; hence it is the desire of the researchers to achieve the following:
- Bring into limelight the various types of fraud that are associated with computer usage in banks.
- Find possible ways of detecting and preventing these frauds associated with the use of computer in Banks.
- 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.
- 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.