Prevention of fraud and control in commercial banks in Pakistan

Prevention of fraud and control in commercial banks in Pakistan

Abstract

Much thought and research are increasingly being directed at the study of fraud prevention and control as the rate of its perpetration is on the increase. Frauds in commercial banks is as old as the industry itself. The research carried out delved into salient issues on types of fraud, causes of fraud and the effectiveness of frauds preventive measures. The major causes of frauds in commercial banks include social and economic conditions, misplaced social values, insufficient internal control system and lack of corporate culture against fraud. Preventive measures range from greater supervision of staff, proper training and rotation of staff, prompt prosecution of Fraudsters amongst others. The study and the findings therein, have provided some useful recommendations which include; surveillance over long serving officers in entrusted positions by management, thorough effective checks and balance system, management information system and review procedures. The incidence of fraud in commercial banks can only be minimized once there obtains a greater sense of discipline, accountability and patriotism within the wider Pakistan society.

Chapter one

Introduction

• Background of the study

Fraud is a `cankerworm’ that has eaten deep into the nation’s fabrics. It is visible in all the sectors of the economy. In the financial sector, fraud is an `offshoot’ of financial crimes which covers offences, which are securities, related and involves the movement, transfer or use of monetary instruments in circumstances, which render such acts unlawful. The above definition can be extended to include any dishonest, unethical or unprofessional conduct which results in financial loss to someone or institution for the benefit of another. Financial fraud include but are not limited to the following, cheque-kiting, loan fraud, advance fee frauds securities frauds, account opening frauds, inconsiderately clearing frauds, computer-frauds, telex fraud and money laundering.

Fraud as stated earlier is not peculiar to the banking industry but cuts across other sectors of the economy. Frauds in banks are not new, in fact, it is as old as the industry itself. But in recent times, the practice has assumed an alarming proportion. Sometimes, the act is carried out by outsiders while in most cases there is a collaborated effort between outsiders and staff to perpetrate this financial crime.

Furthermore, fraud and corruption in today’s banks certainly constitutes one of the most serious threats to the practices and spread of bank in Pakistan. It has assumed such an alarming proportion that there is no visible sign that the tread will be reversed. In legal terms, fraud is seen as the act of depriving a person of something, which such a person would or might be entitled to, it can also be seen as an act of trickery which is intentionally practiced in order to gain illegitimate advantage. Therefore, for any action to constitute fraud there must be deceitful objective to benefit (on the part of the perpetrator) at the disadvantage of another person or group. Fraud typically requires stealing and manipulation of accounts, frequently accompanied by cover up of the theft. It also involves the translation of the stolen resources or property into own resources or property.

Statement of the problem

Fraud in national bank of Pakistan is growing at an alarming rate, mainly because the major perpetrators are internal staff and some corrupt members of the top management, this fact was also supported by the studies of Nwaze (2009), Okpara (2009), CBN report(1995) who emphatically stated that no fraud will be successful without the input of management employees. Therefore, the problem of this study is to consider why, the most trusted member of the management staff, are often the brains behind fraud committed in most financial institution. Furthermore, existing researchers such as Ola(2001),Izedonmi (2000) has amplified the fact, that fraud prevention can be completely prevented and controlled by the management of most commercial bank of Pakistan. It is against this backdrop that this research paper attempt to examine the fraud control and prevention in commercial banks in Pakistan with of aim of determining why management have been unable to grapple with the issue of fraud in most commercial Banks.

Objective of the study

The objectives of the study are;

1. To examine if management control has contributed to the breakdown in the internal audit systems of the selected commercial banks in Pakistan
2. To determine if Management control have effect on Whistle blowing in the selected commercial banks in Pakistan
3. To ascertain the way of preventing fraud in commercial bank of Pakistan

Research hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:   management control has not contributed to the breakdown in the internal audit systems of the selected commercial banks in Pakistan

H₁: management control has contributed to the breakdown in the internal audit systems of the selected commercial banks in Pakistan

 H₀₂: there is no way of preventing fraud in commercial bank of Pakistan.

H₂: there is way of preventing fraud in commercial bank of Pakistan

Significance of study

 Although this research work is not exhaustive one because of the non availability of some important information and limited time all part of this work is to financial institution.

Moreover, this study is prepared for these who may be interested or willing in carrying out further investigation on fraud with special reference to financial institutions. However the banks will benefit greatly from this research work in preventing and controlling of frauds in their banks and this they cab achieve by adopting and implanting the different ways suggested by this study in management control system.

Scope and limitation of the study

The scope of the study covers Prevention of fraud and control in commercial banks in Pakistan.  The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7 DEFINITION OF TERMS

Prevention: the action of stopping something from happening or arising.

Fraud: wrongful or criminal deception intended to result in financial or personal gain.

Commercial bank: A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products that is operated as a business for profit.

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