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A STUDY INTO THE IMPACT
OF INTERNAL CONTROL SYSTEM ON DETECTION AND PREVENTION OF FRAUD
ABSTRACT
Management, not the
auditor is responsible for setting up and monitoring of the internal control
system. Internal control system cannot fully be regarded as effective not even
when the design and implementation is properly done; this is because the
effectiveness of an internal control system depends on the competency and
dependability of the people using it. Bank failures and widespread losses over
the past two decades, have clearly pointed out the picture of how fraud has
penetrated the financial strength of banks; it has however, elevated the
importance of effective internal control system within the formal financial
sector worldwide. Organizations set up internal control system most at times because
they are required by law to do so; but then, how many has actually made it a
point of duty to train and educate employees on how to use these internal
control system since its effectiveness depends on the competency and
dependability of the people using it. This research paper defines internal
control, as a means to an end; it is aimed at verifying the conception that an
efficient and effectively implemented internal control system is the best
strategy for preventing and detecting fraud especially in the banking sector;
thus the objective of this research is to examine the effect of the internal
control system, when it comes to prevention and detection of fraud. Data
captured in this study, was analyzed through descriptive method. Quantitative
technique was also used to analyze the response of the respondents as well as a
computer program known as SPSS. The descriptive analysis involves the use of
percentage, tabulations, and graphical presentation. The sources of data for
the research were both primary and secondary sources. Census technique was used
for the study instead of a sampling technique. Questionnaires and interviews
were used as the data collection methods for the study. Based on the analysis,
internal control system was seen to be significant in detection and prevention
of fraud in banks in Ghana, hence the need for an effective and adequate
internal control system.
xi
CHAPTER 1
GENERAL INTRODUCTION
1.1 INTRODUCTON
How extensive should a
company’s internal control system be? In today’s environment, this is a
difficult question to answer. The reason being that some current business,
legal, and social trends suggest that companies need to increase their emphasis
on internal control, while other trends indicate just the opposite. Bank
failures and widespread losses over the past two decades have elevated the
importance of effective internal control within the formal financial sector
worldwide. In the United States for example, bank failures rose over 200
percent in the 1980s partly due to fraud and mismanagement. Internationally,
the collapse of Barings Bank and Yamaichi Securities further focused the
financial sector’s attention on internal control. The Basle Committee analyzed
the problems related to these losses and concluded that they probably could
have been avoided had the banks maintained effective internal control systems
(banking, a regulatory and auditing guide). In addition, a review of
traditional banks affirmed that the implementation of effective internal
control systems played an important role in reducing bank failures.
Internal control, the
strength of every organisation, has become of paramount importance today in
Ghana banks. The reasons being that the control systems in any organization are
a pillar for an efficient accounting system as well as achievement of
organizational goals.
1.2 BACKGROUND OF THE STUDY
As part of its on-going
efforts to address bank supervisory issues and enhance supervision through
guidance that encourages sound risk management practices, the Basel Committee
on Banking Supervision issued a framework for the evaluation of internal control
systems. A system of effective 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 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. 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. The purposes of such internal controls are to ensure that transactions
are executed in accordance with proper general or specific authorisation and
again to ensure that all transactions are properly recorded with the correct
amount and in the appropriate account and in the proper accounting periods so
as to permit preparation of financial statement in accordance with relevant
legislation and accounting standards and for informed management decision
making.
Internal control will
ensure that errors and irregularities are avoided or made apparent. Internal
control as a system comprise of the control environment and procedures .It
includes all the policies and procedures adopted by the directors and
management of an entity to assist in achieving their objectives of ensuring as
far as practicable the orderly and efficient conduct of its business so as to
safeguard assets, to prevent and detect fraud and error to ensure accuracy and
completeness of accounting records and the timely preparation of reliable
financial information (SAS 300.1)
The company code 1963,
Act 197 section 123 states that “management will need to establish an effective
accounting system comprising a number of controls”. In an attempt to do this
there must be a well-defined organisational structure showing how
responsibility and authority are delegated clearly defined communication
channels or lines of reporting(i.e. upward , downward and horizontal lines of
reporting) for attainment of corporate objectives. These controls are such that
different people are assigned to do different task. No one person should fully
record and process transactions from commencement to the end.
This means that a
company can only achieve its corporate mission through the establishment of
internal control system which makes sure that those policies and procedures
which are laid down by management are efficient. Hence, it reduces the cost of
operation without reducing effectiveness.
1.2.1 COMPANY PROFILE
According to
MerchantbankGhana.com, Merchant Bank Ghana Limited (MBG) is a limited liability
company is one of the leading Banks in the country. It was incorporated in August
1971 and commenced business in March 1972 as the first merchant bank in Ghana.
Merchant Bank Ghana Limited (MBG) provides a comprehensive range of banking
services to its customers and clients, using its worldwide network of
correspondent banks and their agencies. The range of MBG's banking services
includes:
Domestic and
International Banking Operations for Corporate Customers, Small & Medium
Enterprises (SMEs) and, High Net-worth
Individuals;
Treasury Services
Money and Capital
Market Operations
Hire Purchase and
Leasing Services; and
Foreign Remittances
The Bank has two wholly
owned specialised subsidiaries namely;
Merban Investment
Holdings Limited (MIHL) - dealing in Funds/Portfolio Management, Money Market
Operations, Investment Advisory Services, Trustee Services and Custodial and
Nominee Services;
Merban Stockbrokers
Limited (MSL) - dealing in Brokerage Services, Underwriting of new Issues, and
Investor Search & Joint Venture Arrangement; and
The MBG group also has
the following additional specialist services tailored to meet its customers'
needs:
Registrar Services -
maintaining records of Shareholders and Creditors, facilitating dividend
payments to Shareholders; and
Corporate Finance &
Advisory Services (CFAS)- handling Corporate restructuring, Joint Venture
Arrangement, Company Valuation, Project Finance; Funds Sourcing, Issuing House
Services and General Financial Advisory Services. And also dealing in Hire Purchase
transactions and Leasing.
The bank has taken
advantage of the opportunities offered by the introduction of Universal Banking
Business in Ghana and MBG has fully developed all three areas of universal
banking namely; Retail, Corporate and Investment. The branch network of
Merchant Bank currently stands at twenty-two (22).
Mission
As a universal Bank in
Ghana, Merchant Bank (Ghana) limited is committed to providing quality
financial products and services to our customers across our chosen market and
maintaining our place as a leading and preferred financial institution in
Ghana.
Vision
To become the leading,
the most influential and best performing financial service provider in Ghana by
2012 and one of the leading banks in West Africa by 2015
Core Values
Performance-oriented
organization
All decisions and
actions must be based on Unshakeable Facts.
Must at all times
conduct business with a sense ofCompetitive Urgency.
We must maintain High
Ethical Standardsin all our internal and external relationships.
The bank has over its
30 years of existence achieved a lot, notable amongst which are:
The establishment of
hire purchase and leasing business in Ghana.
The promotion and
formation of the first Discount House in Ghana.
Handled the share
issues of 8 out of 10 companies when there was no Stock Exchange in Ghana in
the 1970's.
The initiation of the
preparatory work in the establishment of the Ghana Stock Exchange (GSE).
The sponsorship and
registration of about 50% of the companies on the GSE.
The arrangement and the
formation of the mortgage company (which is now the HFC Bank Limited)
Served as an advisory
body in the acquisition of SSB Bank by Societe' Generale; and the merger of
Ashanti/AngloGold.
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. 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. 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.
1.4 OBJECTIVES
a) To find out the impact of internal
control system, on the overall management of Merchant bank Ghana Koforidua
branch.
b) To find out the employees knowledge base
on the concept of fraud in the banking sector.
c) To find out effective internal control
systems influence on prevention and detection of fraud.
d) To find out the problem of fraud and how
to curb it.
1.5 RESEARCH QUESTIONS
Does merchant bank have
an internal control system? If yes, how effective is it?
What kind of relationship exists between
detection and prevention of fraud and internal control system?
Is lack of good
internal control system a major cause of fraud in banks? And what other major
causes exist?
Can banks with
effective internal control system prevent the menace of fraud?
1.6 THE SIGNFICANCE 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 audit 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 organisation.
Requirement for the
award of the BBA degree.
Reference for other
research topics
1.7 SCOPE OF THE STUDY
The content of this
research should not be seen as being totally exhaustive of all possibly
situations available in the Ghanaian banking sector on the theme of this study.
This is due to the vast size of the banking sector and the boundless nature of
the study under review. Therefore, the scope of this research is limited to the
study carried out on Merchant Bank branch in Koforidua, Ghana.
1.8 LIMITATIONS
The limitations of this
research work are as follows;
The internal control
involves human actions which introduces the possibility of errors in processing
or judgement.
Internal controls can
also be overridden by the plan among employees and evasion of controls or
oppression by top management and superior external influences.
Limited funds prevented the choice of more
than one study area.
1.9
OPERATIONAL DEFINITION
Internal control: a
control is “any action taken by management to enhance the likelihood that
established objectives and goals will be achieved” [institute of internal
auditors, 1993].in other words, controls are designed to ensure that
organizations conform to standards or plans. Examples of controls include the
use of sales or expense budgets, computer passwords, or even padlocks on
warehouses.
Effectiveness – within
this context of the study it means measure of productivity in utilizing an
entity’s resources.
Efficiency-
it means measure of cost control in performing recurring function within
an entity
Fraud - intentional
deception made for personal gain or to damage another individual.
1.10 CHAPTER ORGANISATION
The whole study consists of chapters and
the breakdown is as follows;
CHAPTER ONE
Chapter one highlights on the background of
the study and explains the need and purpose of the study. It also goes on to
talk about the statement of the problems, objectives, scope limitations as well
as definition of terms.
CHAPER TWO
Chapter two gives a
conceptual framework about the literature review as well definition of terms.
CHAPTER THREE
Chapter three describes
the research methodology and how the research was under taken.
CHAPTER FOUR
Chapter four deals with
findings from data collected, presentation and analysis of the result.
CHAPTER FIVE
Chapter five is centred on the summary, recommendations and
conclusions drawn from the study.
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