1.1 Introduction
Forensic audit has emerged as a critical tool in the arsenal of financial institutions worldwide, particularly in Nigeria where the banking sector faces persistent challenges related to fraud. Deposit Money Banks in Nigeria operate within a complex financial landscape, characterized by rapid technological advancements, evolving regulatory frameworks, and heightened risk exposures. Consequently, the need for robust mechanisms to prevent and detect fraud has become paramount.
According to Ajibade and Enofe (2020), fraud remains a significant threat to the stability and integrity of Nigeria's banking sector, with instances of financial malfeasance undermining investor confidence and eroding public trust. In this context, forensic audit, defined as a detailed examination and analysis of financial records to uncover irregularities or fraudulent activities, has gained prominence as an essential component of risk management and corporate governance in Deposit Money Banks.
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
The banking sector in Nigeria plays a pivotal role in the nation's economy, serving as a catalyst for economic growth and development. However, this sector has faced persistent challenges related to fraud, which have the potential to undermine financial stability and erode public trust. Deposit Money Banks (DMBs) are particularly vulnerable to fraudulent activities due to the nature of their operations, which involve handling large volumes of financial transactions and sensitive customer information.
Auditing fraud is a million dollar business, as several research studies reveal. Among them are important surveys of Price Waterhouse & Coopers (PwC, 2007) and of the Association of Certified Fraud Examiners (ACFE, 2006). The study conducted in the United States by the ACFE in 2004-2005 and the worldwide study, held by PwC in 2006-2007 yields the following insights. No industry seems to be safe and bigger companies seem to be more vulnerable to fraud than smaller ones. Small businesses however suffer disproportionate fraud losses. 43% of companies worldwide have fallen victim to economic crime in the years 2006 and 2007.
The average financial damage to companies subjected to the PwC survey was US$ 2.42 million per company over two years. Participants of the ACFE study estimate a loss of 5% of a company’s annual revenues to fraud. Applied to the 2006 United States Gross Domestic Product of US$ 13,246.6 billion, this would translate to approximately US$ 662 billion in fraud losses for the United States only. These numbers all address corporate fraud, more precisely internal fraud.
According to Olatunji, Agbele, and Adetayo (2019), the prevalence of fraud in Nigerian DMBs poses significant threats to the integrity of the banking system, as well as the broader economy. Various forms of fraudulent activities, including insider abuse, cyber fraud, and accounting manipulations, have been identified as key risks facing the banking sector. These challenges necessitate proactive measures to prevent and detect fraud, thereby safeguarding the interests of depositors, and other stakeholders.
Forensic audit has emerged as a critical tool in addressing the complexities of fraud within the Nigerian banking sector. As defined by Arowolo and Babajide (2018), forensic audit involves the systematic examination and analysis of financial records, transactions, and other relevant data to uncover evidence of fraud or financial misconduct. Unlike traditional audits, forensic audit employs specialized techniques and methodologies tailored to identify irregularities and provide evidentiary support for legal proceedings.
Given the evolving nature of fraud schemes and the increasing sophistication of perpetrators, there is a growing recognition of the importance of forensic audit in enhancing fraud prevention and detection mechanisms. However, the adoption and implementation of forensic audit practices in Nigerian DMBs are not without challenges. Factors such as resource constraints, regulatory compliance, and organizational culture may impede the effectiveness of forensic audit initiatives.
Against this backdrop, there is a need for empirical research to assess the impact of forensic audit on fraud prevention and detection within Nigerian Deposit Money Banks. By examining the experiences, perceptions, and outcomes associated with forensic audit interventions, researchers can provide valuable insights into the efficacy of these measures in mitigating fraud risks and strengthening corporate governance practices.
1.3 Statement of Problems
Investigation revealed that despite the growing recognition of the importance of forensic audit in mitigating fraud risks within Nigerian Deposit Money Banks (DMBs), several challenges persist that hinder its effectiveness. According to Ajibade et al., (2020), these challenges include:
- Inadequate Regulatory Framework: The absence of comprehensive regulations specifically addressing forensic audit practices within the Nigerian banking sector may undermine the consistency and quality of forensic audit procedures.
- Resource Constraints: Limited financial and human resources allocated to forensic audit initiatives within Deposit Money Banks (DMBs) may impede the thoroughness and frequency of fraud examinations, leaving vulnerabilities unaddressed.
- Technological Sophistication of Fraud: The rapid evolution of technology has facilitated the emergence of sophisticated fraud schemes, including cyber fraud and digital manipulation, posing challenges for traditional forensic audit methodologies.
- Organizational Culture and Resistance to Change: Resistance to adopting forensic audit practices may stem from entrenched organizational cultures that prioritize secrecy and resist external scrutiny, hindering the implementation of proactive fraud prevention measures.
- Skills Gap and Capacity Building: The shortage of skilled forensic auditors and professionals proficient in advanced forensic techniques may limit the ability of DMBs to effectively detect and investigate fraudulent activities.
- Collaboration and Information Sharing: Limited collaboration and information sharing among DMBs, regulatory agencies, and law enforcement entities may hamper the timely detection and prosecution of fraudsters, allowing fraudulent activities to persist.
Addressing these challenges is crucial for enhancing the impact of forensic audit in preventing and detecting fraud within Nigerian DMBs and promoting the integrity and stability of the banking sector.
1.4 Aim and Objectives of Study
The aim of the study is to investigate the Impact of Forensic Audit in the Prevention and Detection of Fraud in Deposit Money Banks (DMBs) in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To evaluate the challenges and limitations associated with the implementation of forensic audit practices within Nigerian Deposit Money Banks;
- To assess the effectiveness of forensic audit in identifying and mitigating various forms of fraud in Nigerian deposit money banks;
- To examine the theoretical foundations and conceptual framework of forensic audit in deposit money banks; and
- To explore the role of organizational culture and governance mechanisms in shaping the adoption and efficacy of forensic audit initiatives within Nigerian deposit money banks.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Can objective evaluation and measurement of the effectiveness of other controls by forensic audit put a stop to fraud?
- Can well organized forensic audit change orientation of workers towards frauds?
- What are the challenges and limitations associated with the implementation of forensic audit practices within Nigerian Deposit Money Banks?
- What is the effectiveness of forensic audit in identifying and mitigating various forms of fraud in Nigerian deposit money banks?
- What are the theoretical foundations and conceptual framework of forensic audit in deposit money banks?
- What is role of organizational culture and governance mechanisms in shaping the adoption and efficacy of forensic audit initiatives within Nigerian deposit money banks?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between an effective forensic audit system and occurrence of fraud in a public sector
- H1: There is a significant relationship between an effective forensic audit system and occurrence of fraud in a public sector.
Hypothesis Two
- H0: There is no significant impact of forensic audit on the prevention and detection of fraud in Deposit Money Banks (DMBs) in Nigeria.
- H1: Forensic audit has a significant impact on the prevention and detection of fraud in Deposit Money Banks (DMBs) in Nigeria.
1.7 Significance of Study
The significance of the findings will inform policymakers and regulators in Nigeria about the need for regulatory reforms to enhance the legal and institutional framework governing forensic audit practices within the banking sector. Also, by elucidating the impact of forensic audit on fraud prevention and detection, this study can offer practical insights and recommendations for DMBs to strengthen their internal control systems and mitigate fraud risks effectively.
Additionally, through its exploration of challenges and best practices in forensic audit implementation, this study can contribute to capacity building initiatives aimed at enhancing the skills and competencies of forensic auditors and professionals in Nigeria.
Furthermore, by promoting transparency, accountability, and corporate governance within Nigerian DMBs, the study's findings can bolster investor confidence and market integrity, thereby fostering sustainable economic growth and development.
Finally, the study adds to the body of academic literature on forensic audit and fraud management in the banking sector, providing a foundation for further research and scholarly inquiry into this critical area of study.
1.8 Scope of Study
The scope of this research focuses on the Impact of Forensic Audit in the Prevention and Detection of Fraud in Deposit Money Banks in Nigeria using First Bank Nig Plc as a case study.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Establishment Policies: Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definition of Terms
Audit Risk: These are the areas in which international auditors should be on the lookout, in the course of their audit exercise.
Audit Scope: This is the coverage of the firm’s operation in the audit exercise that shall be specifically covered.
Audit Procedure: This is the step by step technique which an auditor follows in his/her work duties or exercise.
Internal Audit Committee: This normally comprises of the managing director, the finance controller of the head of finance and account and head of internal audit. This committee is mostly required to review the audit control of the organization.
Audit Manual: An audit manual describes in writing, the objectives and procedure of internal audit programme.
