CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

In recent years, a series of scandals in Nigerian commercial banks has weakened public confidence in published financial and non-financial statements. The result has been tighter regulation of both the banking sector and accounting record-keeping practices. Accountants and auditors have been called on to fill the gap in fraud prevention through services such as litigation support, expert testimony and the investigation of fraud. International experience shows that legislation alone is not enough. Even after the Sarbanes-Oxley Act of 2002 in the United States, and the collapse of Enron and other large companies, employees have continued to find ways around even the best internal controls for personal gain. Such scandals have caused heavy financial losses to employees and investors and damaged the reputation of auditors, analysts and corporate managers. Various initiatives have therefore been introduced to make sure that the right people, tools, techniques and insight are used to prevent and detect fraud. Modern information technology has also accelerated electronically committed fraud in an increasingly complex business environment.

Accounting records are the foundation of fraud prevention. They include the books of account, ledgers, vouchers, invoices and electronic transaction logs that show what a business has done. They provide the evidence trail on which managers, auditors and investigators depend. Shagari et al. (2018) note that internal control is closely associated with fraud, and argue that for banks to detect and prevent fraud effectively, the accounting information system must serve as a tool of effective internal control. Reliable records make irregularities visible, and poor or manipulated records hide them.

The scale of the problem in Nigeria is large. According to the Nigeria Deposit Insurance Corporation (NDIC) 2020 annual report, as summarised by Emejo (2022), fraud and forgery in banks involved a total of ₦120.79 billion in 2020. The number of reported cases rose by 177.10 per cent, from 52,754 in 2019 to 146,183 in 2020. ATM and card-related fraud was the most frequent type at 39.81 per cent of cases, followed by mobile banking at 17.35 per cent. The NDIC also noted that digital channels contributed to the rise, and that 474 bank staff were involved in fraud and forgery cases during the year. These figures show that fraud now takes new forms as banking technology changes, and that insiders remain part of the problem.

Researchers have looked at the main preventive measure, internal control. Adetiloye et al. (2016) examined internal control and fraud prevention in the Nigerian banking system using both primary and secondary data. Akinola (2024) investigated the internal control procedures of two Nigerian commercial banks and found that the procedures of most banks have effectively reduced fraud from external sources. Ohwovoriole (2023) surveyed senior staff of the 22 commercial banks then operating in Nigeria and found a positive and significant relationship between internal control systems and fraud prevention. In that study, risk management, the control environment, and information management and technology were each significantly related to fraud prevention, while control supervision was positively but not significantly related.

This study therefore examines accounting records and fraud preventive measures in Nigerian commercial banks. It takes the view that when people know that their fraudulent activities are likely to be discovered through sound accounting records and effective audit, they are less likely to commit fraud in the banking industry.

1.2 Statement of the Problem

Statutory audit has often failed to prevent or reduce the misappropriation of funds, and corporate crime has continued to increase. This has put pressure on professional accountants and legal practitioners to find better ways of exposing financial crime. Incessant financial crime in the corporate world calls for regular and effective audit. Auditors are expected to uncover fraud through the application of auditing, accounting-record analysis and investigative techniques that produce sufficient evidence for use in court proceedings.

A number of studies have examined internal control and fraud prevention in Nigerian banks. However, fewer have focused on how the quality and use of accounting records affect fraud prevention and detection, and on how they affect bank audit, in commercial banks. This gap makes the present study justifiable. It seeks to establish whether the application of sound accounting records has an impact on the prevention and detection of fraud in Nigerian financial institutions.

1.3 Objectives of the Study

The general objective is to appraise accounting records and fraud preventive measures in Nigeria. The specific objectives are to:

1. ascertain how audit has been a useful tool in preventing and detecting fraud in financial institutions;
2. determine the most prevalent type of fraud among commercial banks in Nigeria; and
3. determine the effect of accounting records on bank audit in Nigeria.

1.4 Research Questions

The following research questions were raised to guide the study:

1. Why is audit considered a useful tool in the prevention and detection of fraud in financial institutions?
2. What is the most prevalent type of fraud among commercial banks in Nigeria?
3. What is the effect of accounting records on bank audit?

1.5 Statement of Hypotheses

A hypothesis is a tentative statement about how the variables of a study are related, and it provides the criterion against which the data are tested. The following null hypotheses were formulated:

H₀₁: There is no significant need to employ an auditor in a financial institution.

H₀₂: There is no significant difference in the prevalence of the different types of fraud among commercial banks in Nigeria.

H₀₃: The application of accounting records in banks has no significant impact on bank audit.

1.6 Significance of the Study

The study will be of value to several groups:

1. Government. It will help in determining the actual income of companies and banks so that the correct tax is paid, and will offer insight into how to fight corruption.
2. The corporate world. Effective audit helps prevent, reduce and detect fraud and other corporate crime within organisations.
3. Investors and depositors. It will help them understand the financial position of an institution before they invest in it or deposit money with it.
4. Schools, students and researchers. It will serve as a reference for future research on the topic.

1.7 Scope of the Study

The study discusses accounting records and fraud preventive measures in Nigeria. It is restricted to nine selected banks in Enugu State.

1.8 Limitations of the Study

The researcher faced the following problems in carrying out the study:

1. Uncooperative attitude of some respondents. Some respondents refused to complete the questionnaire, and some did not return the completed copies.
2. Financial constraints. The success of the research depended on the availability of funds, and the finance available to the researcher was not enough to carry out the study as effectively as desired.

1.9 Definition of Terms

Accounting records: The books of account, ledgers, vouchers, invoices, bank statements and electronic transaction logs in which a business records its financial transactions, and which serve as evidence of those transactions.

Fraud preventive measures: The policies, controls and procedures, such as internal control, audit and staff vetting, that an organisation puts in place to stop fraud from occurring.

White-collar crime: A term introduced by the sociologist Edwin Sutherland in 1939 for a financially motivated, non-violent crime committed for illegal monetary gain by a person of respectability and high social status in the course of his or her occupation.

Fraud: A criminal activity involving abuse of position, false representation or prejudice to another person's rights for personal gain.

Auditing: The examination and evaluation of a firm's or individual's financial information. Where it is carried out as an investigation, its findings can serve as evidence in court to prosecute a party for fraud, embezzlement or other financial claims.

Bank auditing: The examination of a bank's accounts by internal and external auditors.

Financial institution: An establishment that conducts financial transactions such as investment, loans and deposits.

Commercial bank: A financial institution that accepts deposits, makes business loans and offers basic investment products.

References

Adetiloye, K. A., Olokoyo, F. O., & Taiwo, J. N. (2016). Fraud prevention and internal control in the Nigerian banking system. International Journal of Economics and Financial Issues, 6(3), 1172–1179.

Akinola, A. (2024). Fraud prevention and internal control mechanisms in selected banks in Nigeria. International Journal of Research and Innovation in Social Science, 8(7), 287–298.

Emejo, J. (2022, October 3). NDIC: Bank fraud, forgeries amounted to N120.79bn in 2020. ThisDay. https://thisdaylive.com/index.php/2022/10/03/ndic-bank-fraud-forgeries-amounted-to-n120-79bn-in-2020

Ohwovoriole, E. O. (2023). Internal control system and fraud prevention in the Nigerian banking sector [Unpublished project, University of Benin].

Shagari, S. L., Abdullah, A., & Mat Saat, R. (2018). A proposed model on the impact of internal control quality on accounting information system effectiveness in Nigeria. Social and Management Research Journal, 15(2).