A STUDY INTO THE IMPACT OF INTERNAL CONTROL SYSTEM ON DETECTION AND PREVENTION OF FRAUD; A CASE STUDY OF MERCHANT BANK GHANA LTD, KOFORIDUA BRANCH
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A STUDY INTO
THE IMPACT OF INTERNAL CONTROL SYSTEM ON DETECTION AND PREVENTION OF FRAUD; A
CASE STUDY OF MERCHANT BANK GHANA LTD, KOFORIDUA BRANCH
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 of Competitive Urgency.
We must
maintain High Ethical Standards in 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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