ROLE OF FRAUD MANAGEMENT IN THE PROFITABILITY OF NIGERIAN BANKS (A STUDY OF FIRST BANK NIGERIA LTD)

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The failure of banks to adequately fulfill their role arises from the several risks that they are exposed to; many of which are not properly managed. One of such risks which is increasingly becoming a source of worry is, the banking risk associated with incessant frauds and accounting scandals. The major problems confronting the financial institution today is “fraud”, which has sent many of them out of business and is making the industry customers to lose confidence in them since they have not been able to curb the ugly event called “fraud”.

          Fraud, which literarily means a conscious and deliberate action by a person or group of persons with the intention of altering the truth or fact for selfish personal gain, is now by far the single most veritable threat to the entire banking industry. It is indeed worrisome that while banks are constantly trying to grapple with the demands of monetary authorities to recapitalize up to the stipulated minimum standards, fraudsters are always at work threatening and decimating their financial base. Also more worrying is the rise in the number of employees who are involved in the act as well as the ease with which many escape detection thus encouraging many others to join in perpetuating fraud (Onibudo, 2007).

Idolor (2010) stressed that the spate of fraud in the banking industry has lately become an embarrassment to the nation as apparent in the seeming inability of the law enforcement agents to successfully track down culprits. Whereas the activities of armed robbers are given widespread reviews in the pages of newspapers, especially during major thefts, it is an irony that what they cart away from banks is only a slice of what fraudsters remove from bank tills. Corroborating the view of Idolor, Oseni (2006), stated that the incessant frauds in the banking industry are getting to a level at which many stakeholders in the industry are losing their trust and confidence in the industry .Fraud may take the form of; theft of inventory assets, misuse of expense account, secret commission and bribery, false invoicing, electronic and telecommunication fraud, unauthorized use of information, cheque forgery, cheque clone, false financial statements, and so on, but whichever form it takes, the fundamental point is that the banking industry falls victim to fraudulent acts suffers and bears the brunt.

Statistics the activities of fraudsters in the industry have been both amazing and confounding. In 2001, 943 fraud cases involving 11.2 billion were recorded. Ogbu (2000)stated that frauds in Nigerian banks continued to rise in2002 with 77 banks of the 90 in operation, recording cases involving the sum of N12.9 billion. Onyeogocha (2001) attributed it to insider abuses and even board tussles. The NDIC 1996/7 Annual report and Statement of Accounts that the number of frauds reached a magnitude of N1,006 million in 127 cases reported in commercial banks and 587 cases involving N1,543 million. Also the number of insiders (staff) who connive with outsiders to perpetuate the act is alarming. Equally worrisome is the rise in the number of top management staff that have either been indicted or accused of engaging in bank fraud.

          As a result of the involvement of staffs and top management staffs in fraudulent activities in the banking industry, Fraud control is becoming an issue that the regulators and top banking executives who are in saddle when fraudulent activities takes place or more succinctly when someone commit an act of fraud in the financial institutions under their management. Owing to the fact that fraud affects the profitability and reputations of banking institutions, to minimize or control the alarming rate of fraud in the banking industry, there ought to be need for the players in the industry to set up and implement an effective and efficient control system that will adequately monitor the daily activities of the industry without leaving any gap, (Anyanwu,1993). Consequently, appropriate personnel policies and practices should be put in place since fraud is committed by people of moral decadence. Therefore, qualified auditors should be employed to ensure effective and efficient detection and prevention of fraud and financial reporting in Nigerian Commercial banks. Against these backgrounds, the main purpose of this study is to thus, ascertain the role of fraud management in the profitability of Nigeria banking system.

1.2 Statement of Problem

The larger society expects greater accountability, fairness, transparency and effective intermediation from banks, ensuring that they carry out their responsibilities with sincerity of purpose and unquestionable integrity with respect to their operations as a means towards earning public trust and goodwill. The banking business has become more complex with the development in the field of Information and Communication Technology (ICT) which has changed the nature of bank fraud and fraudulent practices. Berney(2008) observes that customers rely heavily on the web for their banking business which leads to an increase in the number of online transactions. Gates, Jacob and Malphrus(2009) assert that the internet provides fraudsters with more opportunities to attack customers who are not physically present on the web to authenticate transactions. In Nigeria, in spite of the banking regulation and bank examination by the Central Bank of Nigeria (CBN), the supervisory role of the Nigeria Deposit Insurance Corporation (NDIC), and The Chartered Institute of Bankers of Nigeria (CIBN), there is still a growing concern about fraud and other unethical practices in the banking industry. Evidence from the NDIC Report (2008) revealed that the report of the examinations and special investigations from the banks were still bedeviled with problems of fraud, weak board and management oversight; inaccurate financial reporting; poor book-keeping practices; non-performing insider-related credits; declining asset quality and attendant large provisioning requirements; inadequate debt recovery; non-compliance with banking laws, rules and regulations;

and significant exposure to the capital market through share and margin loans. This is a problem which makes the activities of the fraud management difficult or impossible and affects the profitability of the banking system and the economy at large.

1.3 Objectives of Study

The broad objective of the study is to conduct an empirical study into the role of fraud management in the profitability of Nigeria banks with special reference to First Bank of Nigeria Plc.

The specific objectives of this study are: