FRAUD AND FRAUD CONTROL IN A COMPUTERIZED ACCOUNTING SYSTEM

CHAPTER ONE

INTRODUCTION

In this dynamic world, the role of Banks, whether in a developed or developing economy consists of financial intermediation, provision of an efficient payment system and serving as conduit for the implementation of monetary policies, it has been postulated that if these functions are efficiently carried out, the economy would be able to mobilize meaningful level of savings and channel these funds in an efficient  and effective manner to ensure that no viable project is frustrated due to lack of funds.

The role of banks in economic development has been richly articulated in literatures. A Pioneer contribution of Schumpeter (1934) was of the view that financial institutions are necessary conditions for economic development.  This view has been variously corroborated by other scholars such as Goldsmith (1969), Cameron et at (1972) and Patrick (1966).

Valentine and Mason (1997:1), in the bid to throw more light on how the banking sector exhibit or justify their strength of necessity and importance, said that it is an established fact that banking consists of three basic functions namely; the acceptance of deposits from customers, the transfer of these deposits from one account to another and the lending of money by way of loan or overdraft to customers.  By this daily deposits accepted are credited and money withdrawn is debited.

An efficient manual accounting system has been in use before the use of computer came into place.  Customers deposit money with banks either with the use of cheque or passbooks (for the operators of the current and savings account respectively).

Account operators issue cheques to people, instructing the bank to pay a named person a specific sum of money on their behalf.  When the branch of each bank receives the cheque, they had to authorize payment of the amount and also debit the customers account.  This arrangement was satisfactory when the daily number of cheques and their users were relatively very small.  The system began to break down when a larger number of people started making use of the banking services.  This made the manual system of keeping customers account an increasingly difficult and expensive task.

The above development prompted the use of computer to overcome the above problems.

The use of computer is still very new in our society; the computer technology emerged in the late 1940’s in the advanced countries of America and Europe and was introduced into Nigeria in the 1970’s by the multinational corporations like UAC, NCR, etc. while the banks embraced it in the early 80’s.

Banking industry has in the past suffered a great number of loses through fraud such that a lot of them now face serious financial problem/hardship and eventually were forced to fold up. The industrial and commercial Banks (1947-1952) are typical examples of banks that failed as a result of Fraud.

Fraud as the word implies could mean different things to different people depending on the angle from which it is been looked at.

According to the Chartered Institute of Public Finance and Accountancy, United Kingdom, Fraud is that intentional distortion of financial statement or otherwise for gain. While the international Auditing Guidelines (IAG) defines fraud as a particular type of irregularity, involving the use of deceits to obtain an illegal or unjust advantage and may involve the following:

Manipulation, falsification or alteration of records, documents or figures.

Misappropriation of assets.

Omitting transactions from records or documents.

Misstatement of facts

Recording transaction without substance (fact).

Misapplication of accounting policies.

Professor G.O. Nwankwo (1991:166) classified fraud in three ways: by flow, by victim, by the act or method.  By victim are those identified by the victim of the fraud. By flow fraud is two types; smash or grab and drip fraud smash and grab are usually small in number, high in value and occurs over a very short period of time. While the drip type of fraud occurs through bypassing of routine controls and employing a large number of fraudulent act.

Lastly, by act are fraud facilitated by the increase in volume and value of the payment traffic, passing through the inter bank transmission payment systems by the computer and by increasing and modernization of the banking computer networks and widespread of Aims (Automated Teller Machines) all of which have made the financial system more vulnerable to a wide variety of vandalism and fraud.

From my own understanding; fraud is defined or seen as a deliberate act of cheating in order to get money or goods illegally.

The question then is with the computerization of most Banks, do they still face fraud risk?  How vulnerable is the computer to fraud?

The study attempted to sort out what the use of computer in the banks is likely to be, whether, prone to fraud or fraud proof.  The various internal control measures, level of safety, detection of fraud and possible control measures are also highlighted.

1.2     STATEMENT OF PROBLEMS

The basic need for information and consequent requirement for means of processing data speedily and accurately applies to a wide range of work area in business.  Perhaps the most important factor worthy of consideration in every business is Financial Information, which is denied from processing financial data.

Banks have decided to introduce computer in their operation because of the benefit derived from there.  Looking at the other side of the coin, one begins to wonder how safe the computer is too.

Major questions on the integrity and security of Computer now comes to mind on the abuses of computer such as, how easy it is for disgruntled staff or outsiders to gain access into the computer room to change the hardware or even steal it?

How easy is it for data to be altered fraudulently for the benefit of the perpetrator and if these are done, can the system detect them quickly?

In this case, data element may leave the source in a particular state but may enter into the computer in another state.  This may mean the fraudulent insertion of new data, alteration of existing data and even detection of any entry.

Computer crime or abuse occurs as a result of the following:

Natural phenomenon

Accident

Mistake

Intentional

This study is therefore designed to solve the following specific problems.

What are the types of fraud associated with computer usage in banks?

What are the possible ways of detecting and preventing fraud associated with the use of computers in banks?.

1.3     OBJECTIVES OF STUDY

In Nigeria, fraud contributed significantly to the failure of 36 Banks in liquidation (Ogunleye, 2001). Fraud is one of the serious economic crimes being perpetrated in our banking industry today. Frauds result in huge financial loses to banks and their customers, the depletion of shareholder’s fund and banks capital base as well as loss of confidence in the sector. Fraud is therefore of special concern to the regulatory authorities that are saddled with the responsibility of ensuring the safety and soundness of the entire banking system. The incidence of fraud in the Nigerian banking system should be of serious concern to all stakeholders. The cases of attempted fraud reported to the Nigerian Deposit Insurance Corporation, in compliance with the provision of the NDIC Act, are presented in the table below.  The table shows the trend in reporting cases of frauds and forgeries among the insured banks between 1998-2002. The table reveals that in the last two years there had been significant increases in the number of reported cases and the amount involved. The objectives of this study are as follows

1.        To find out the role of computer in fraud detection.

2.        To determine how computer can be used to prevent fraud.

3.        To identify the causes of fraud.

4.        Suggesting measures of preventing fraud.

5.        To ascertain the consequences of fraud in business organization.

6.        To make recommendation based on the findings.

1.4     RESEARCH QUESTIONS

To guide the study, the following research questions were raised.

1.    What is the role of computer on fraud detection ?

2.    How can computer be used to prevent fraud ?

3.    What are the causes of fraud in business organization ?

5.    What are the consequences of fraud in business organization ?

1.5  SIGNIFICANCE OF THE STUDY.

The significance of this study lies on the great importance attached to the computer in business organization from the findings of this research, people will know  the importance of computer in fraud detection and thus prevention.

This work is significant in the sense that it will be an eye opener to the pubic at large.  Another significance is that people will know that there is no means of manipulation of fraud where computer is installed. Interested organization, business centers, institution and many others having know the role of computer will make use of computer in their organization for them to curb this fast growing problem will benefit from the study. It will help the organization to know when their money is embezzled.

1.6    SCOPE OF THE STUDY

First Bank Plc Enugu of Enugu State has been chosen as the study area.

1.7    DEFINITION OF CONCEPTS.

These are the definitions of terms used in the study.

COMPUTER:  Computer is an electronic device with in built programs which enable it to receive, store, process and procedure large amounts of data for the execution of a more range of arithmetic and logical operation.

CRIME: Crime is any act of commission or omission believed to be socially harmful to a group and thus forbidden by the designated authority of that group under threat of punishment states another way or a specific element or act of human behaviour which vary in time and place which is considered repayment or harmful enough to be forbidden by the group and this subject to a penalty.

FRAUD:   Criminal deception or act of manipulation of fund by criminal act.

PREVENTION:  Serving or designed to prevent, precautionary.

THIEF:  Person who steal, especially secretly and without violence.

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