THE EFFECT OF FINANCIAL FRAUD ON BUSINESS FAILURE

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THE EFFECT OF FINANCIAL FRAUD ON BUSINESS FAILURE

TABLE OF CONTENT

Title page

Approved page

Certification

Dedication

Acknowledgement

Abstract

Table of content

Chapter one: introduction

Overview

Statement of the problem

Purpose of the study

Research of the study

Research questions

Statement of hypothesis

Significance of the study

Scope of the study

Definition of terms

References

Chapter two: Literature review

Introduction

Structure of Nigerian Financial system

Types of banks & Functions

Fraud & Forgery

Types of Fraud

Fraud and the law

Fraud in the inducement

Fraud in the Execution

Employee Embezzlement

Summary

References

Chapter three: Research Methodology

Introduction

Research Design

Sample Procedure

Questionnaires Design

Data collection

Data Analysis techniques

Reference

Chapter four: Data Presentation & Analysis

Introduction

Responses to Questions

Data presentation

Testing of Hypothesis

Chapter five: findings, Conclusion & Recommendation

Introduction

Findings

Conclusion

Recommendation

Bibliography

Appendix A

Appendix B

ABSTRACT

This study attempts to look at the effect of fraud in commercial banks performance. It does so by taking case study of commercial banks within Rivers State. The purpose is to determine the causes of fraud in the commercial banking sub-section and its subsequent effect on banking operations and the bank profitability as a whole.

Data were collected from sixteen (16) commercial banks within Rivers state. These were selected by employing simple random sample procedure through the administration of questionnaires. Data collected were computed and analysed.

The major findings of the study revealed that the main cause of fraud in commercial banks is lack of effective internal control system and insatiable lust for wealth, with other factors like internal security system of the bank contributing their own quota.

It was discovered that fraud could be reduced if not eradicated from the industry. Some recommendations were made in the study to this effect.

CHAPTER ONE

OVERVIEW

The functions and activities of banking industry in supporting growth, stability and development of the monetary system in Nigeria, was complimented by the introduction and establishment of the first commercial bank in 1892. According Emeka et al (1998), the existences of the first commercial bank was short lived because of trade recession which hit Lagos as a result of local uprising between the Ijebus and the Egbas in March 1892. Commercial banking in Nigeria pre-dates central banking and provides the foundation stones of the Nigerian financial system, in general, as far back as the late nineteenth century. Chinedu et al (1998:3). The ownership structure of commercial banks in the country reflected early expatriate domination, which metamorphosed into indigenous participation following the indige4nisation policy of 1972 and 1974. As a rule then, external ownership of any bank in Nigeria did not exceed 40%. This requirement was revolved by the late Abacha’s Administration during the 1996/97 fiscal periods. As a result, foreign investors can own up to 100% of the share of a bank. As universal banking system was introduced during 2001 fiscal period and capital base of banks raised to one billion, more and more foreign participation is currently being recorded. Banks have started wooing foreign investors for equity participation to increase their capital base.

However, in spite of the lofty ideas and objective put forward for the establishment of the commercial banks, there has been a growing incidence of fraud in the banking sector. As a result, the Federal government of Nigeria set up the National committee on Banks and other financial malpractice. This body was charged with finding lasting solution to the riding fraud and other cases of financial improprieties. Prior to its setting up, the Federal Ministry of Justice also hosted a National Seminar, there were astonishing revelations about computer/automated system theft in the banking sector, aiding and abetting fraud, organised forgeries and barefaced or outright stealing bank staff in concert with customers.

In a recent report of the Nigerian Deposit Insurance Corporation (NDIC) published in the Punch Newspaper’s editorial column of Monday August 14, 2000. It was asserted that banks generally in the country lost N 2.73 billion to fraud and forgery cases in 1999, compared with N692.25 million in 1998, an increase of N 2.04 billion or 294.37 percent. In all, about 596 bank employees were involved in the frauds and forgeries.

The Nigerian Deposit Insurance Corporation (NDIC) report further revealed that the most prevalent of the cases has to do with forged cheques, unauthorised loans, posting of fictitious credits, suppression of cheques and the unauthorised transfer and withdrawal of customer’s funds.

The results of the incidence are damaging. The effect of Fraud is so much that it leads to unwarranted losses to the banks and put the management of each institution on its toes while expending hard earned resources engaging in fraud prevention and detection.

Most unfortunately, every incident of commercial bank fraud literally chip off a bit of the public confidence in the orthodox financial institution, especially commercial banks that normally transact business, especially commercial banks normally transact business with small, medium and large scale industries. Bankers are generally respected in the society because of their honesty, carefulness, dedication and faithfulness.

The impact of staff/management sharp practices is that respect and honour normally due bankers has reduced considerably.

Fraud can be described as a conscious premeditated action of a person or group of persons with the intention of offering the true and or selfish personal monetary gain. It involves the use of deceit and tricks and most times highly intelligent but cunning strategies. The action usually takes the rom of forgery, falsification of documents and unauthorised signatures of outright theft.

Employees, as well as clients of firms other than banking also engage in one form of fraud or the other all over the world. Whilst it cannot, strictly speaking, said to be an ordinary thing expected of human behaviour, its preval33nce in all societies of the world including the socialist societies, show that it is part of basics human behaviour.

According to Desmond Fitzgerald (1986:112), although the existence of fraud and other unprofessional practices in banks are not uncommon or unexpected phenomenon, it becomes more disturbing because of all the negative tendencies it seems to unload on developmental needs of the commercial banks and economies of the third world countries.

The banking industry is worried more about fraud because of the rather obvious demeaning effect of the act on the health and corporate existence of the commercial banks / Financial Institutions.

Fraud in commercial banks lead to loss of monies that ordinarily belong to someone other than the banks. Commercial Bank fraud leads to loss of confidence in the banking industry and consequently adversely affecting a fragile economy. \

Another reason why the industry worry about fraud is that, it varies very widely in nature, character and methodology. The control of an identified scam possible would give birth to another, which control of an identified scam possible would give birth to another, which could even be more sophisticated and complex. Thus each case can be a variant of another and undoubtedly an instructive study in human negative use of ingenuity and endowment. Fraud thus is an enemy to all concerned with the growth and development of our commercial banks.

In such state of affairs, various commercial banks management have been pondering on whom amongst them, top, medium or lower management staff is involved in the fraud. What is the impact of fraud on such related banks years and why is it perpetrated? This therefore brings us to the immediate reasons for this study.

STATEMENT OF THE PROBLEM

According to Baridam (1995:22), the statement of the problem in research writing constitute the corner stone upon which the entire research plan is based; therefore it is an important step in the total process of research.

Ideally, commercial banks as an industry in Nigeria is expected to be one of the most profitable within the economy. A higher performance could have been attained in terms of their returns and obligations to the society, part of that is confidence building, in order to perform a leading role in its question to improving Nigerian financial system.

The impact of fraud on commercial banks however, have led to the sub-optimal performance in the industry and this issue has caused an array of problems particularly in our commercial banks, making it the most intractable and monumental.

The magnitude of this problem and its impact/implications to the Nigerian commercial banks is what this researcher sets out to investigates.

PURPOSE OF THE STUDY

The primary objective of this work is to unveil the impact of fraud in Nigerian commercial banks over the years as well as finding out practical means of reducing their incidences. To achieve this goal therefore, the following secondary objectives have been specified:

To identify the effect of fraud on commercials banks over the years.
To identify the various types of fraud perpetrated in commercial banks.
To identify the various means employed in defrauding commercial banks
To determine the effect of fraud on the business of banning generally
To recommend measures for reducing the incidence of fraud in commercial bank.
To identify the means through which the recommended measures can be effectively implemented.

RESEARCH QUESTIONS

What are the major causes of fraud in commercial banks?
What are its effects on commercial banks and their operations?
How has bank frauds affected commercial banks performance level?
How has it affected customer patronage of their services?
What is its relationship with commercial bank failure?

STATEMENT OF HYPOTHESIS:

There is a positive relationship between commercial banks patronage.
There is a significant relationship between commercial banks fraud and commercial banks profitability.
There is a positive relationship between the level of fraud in commercial banks and high societal acquisitive instinct.

SIGNIFICANCE OF THE STUDY

Fraud is a negative phenomenon and a big threat to the Nigerian commercial banking system. Whatever form it takes, it is capable of denting the corporate image of the banking industry and hence impairing public confidence in the system. Considering the fat that confidence is the corner stone of banking, it will amount to becoming an enviable enterprise that cannot survive should it loss such confidence.

The study will provide a comprehensive and instructive knowledge of commercial bank fraud.

Measures recommended would assist banker, investors and in future studies improve their knowledge on the subject matter. It will assist the management of commercial banks in adopting more effective and efficient control measures aimed at reducing the incidence/ effect of fraud.

LIMITATIONS OF THE STUDY

Every research work has certain limitations affecting the actualisation of the desired objective. Thus, this research work cannot be an exception. Given the very critical and sensitive nature of the study, a number of problems that could hinder a successful completion are envisaged. This includes time, finance and respondents not willing to divulge vital information considered secretion and confidential to the corporate existence of the commercial bank.

SCOPEE OF THE STUDY

This research work is being restricted to commercial banks in Rivers State. Since the function and objectives for which the banks have been established are generally the same, it is the view of this researcher that limiting the scope to commercial banks within Rivers State will serve the purpose of the study.

DEFINITION OF TERMS

FRAUD: Fraud is described as a conscious but premeditated action of a person or group of persons with the intention of offering the true and or selfish personal monetary gain. It involves the use of deceit and tricks and most times highly intelligent cunning (false) strategies.

FORGERY: Fraudulently making or altering anything in order to deceive or cheat.

COMMERICAL BANKS: A commercial bank is a financial institution established to cater for savings/current account and to provide short-term and medium-term credit facilities to small, medium and large scale industries and also to individual customers who are qualified for such loans, advances and overdraft. They also give professional advice to individuals and investors alike.

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