ASSESSING THE IMPACT OF INTERNAL CONTROL SYSTEMS ON FRAUD

PREVENTION AT COMMERCIAL BANKS IN SUNYANI

CHAPTER ONE: INTRODUCTON

1.1 Background to The Study

The banking sector is a critical component of any economy, serving as a custodian of

financial resources and facilitating economic activities. However, the sector is vulnerable to

various risks, including fraud, which can undermine its stability and integrity. Internal control

systems play a pivotal role in mitigating these risks by establishing checks and balances

within commercial banks.

Bank failures and widespread losses over the past two decades have elevated the importance

of effective internal control within the formal financial sector worldwide. Internationally, the

collapse of Barings Bank and Yamaichi Securities further focused the financial sector’s

attention on internal control. In the United States for example, bank failures rose over 200

percent in the 1980s partly due to fraud and mismanagement 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 system in any organization is a

pillar for an efficient accounting system as well as achievement of organizational goals

(Qasaimeh et al,2022).
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 (Khan and Malaika,

2021). 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.

According to Papp (2023), 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 (Smith, 2023). Hence, it reduces the cost of operation

without reducing effectiveness.

1.2 Statement of The Problem

confidence in the minds of bank customers. Also, poor internal control system leads to

increase in bank losses. According to Turner et al (2022), 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.

1.3 Objectives of The Study

1. To analysed the internal control systems implemented by commercial banks in

Sunyani

2. To assess the effectiveness of internal controls in preventing and detecting fraud.

3. To identify challenges and areas for improvement in existing control mechanisms,

4. To provide recommendations for strengthening internal control systems to

enhance fraud prevention efforts.

1. What are the internal control systems currently in place at commercial bank in

Sunyani?

2. How effective are these internal control systems in preventing and detecting

fraudulent activities?

3. What are the challenges faced by the commercial bank in Sunyani regarding fraud

prevention?

4. What strategies can be implemented to strengthen internal control systems and

mitigate fraud risks?

1.5 Significance 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:

Understanding the impact of internal control systems on fraud prevention is crucial for

ensuring the stability and trustworthiness of commercial banks in Sunyani. The findings of

this study will provide valuable insights for policymakers, regulators and banking

professionals, enabling them to develop targeted interventions to enhance the resilience of the

banking sector against fraudulent activities.

since it will contribute to the body of knowledge in the subject by expanding on the literature

already available on how effective internal control systems are.

1.6 Scope and Limitations 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 Ghana Commercial

Bank Sunyani branch.

It may not encompass all aspects of fraud prevention or capture the experiences of banks in

other regions. Additionally, limitations may arise due to access to confidential information

and the willingness of banks to disclose internal control practices.

1.7 Organization of the Chapters

Chapter one highlights the introduction with special emphasis on the background of the

study, statement of the problems, objectives of the study, research questions, significance of

the study, scope and limitations of the study and organisation of the chapters. Chapter two

examines relevant related literature where various definitions from different authors are

viewed. Chapter three deals with the methodology used for the study. Chapter four focuses on

the data interpretation, analysis and discussion of data. Chapter five covers the summary,

conclusion and recommendations of the study.