INTERNAL CONTROL SYSTEMS AS A TOOL FOR CHECKING FRAUD IN RURAL AND COMMUNITY BANKS

The economic downturn that has affected the major world economies such as 

• Unites States of America
• Japan
• China
• United Kingdom
• Germany
• European countries 

came about because of laxity and non-enforcement of accountability requirements which undermine internal control systems. These systems were supposed to serve as warnings to Board of Directors and Managers of rural and community banks (RCBs) and the survival of their banks depend squarely on effective internal control systems.

The upsurge of fraudulent activities in the rural banking industry in recent times according to Bank of Ghana and ARB Apex Bank on-site examination reports collaborated by various External Auditors and Management reports that huge deposits mobilized by Rural Banks amounting to GHc343.89 million and loans and advances of GHc224.69 million as captured in the December 2008 ARB Apex Bank Limited efficiency monitoring report underlines the need for the institutionalization of Internal Control Systems as a mandatory requirement for continuous operations. 

The Banking Act 2004 which is supposed to regulate the operations of banks in the country was formulated purely for the Commercial and Universal banks with little or no thought of the Rural and Community Banks.

 

This has led to a situation where the Board of Directors and Senior Management in most cases take decisions that favor their personal interests thereby defeating the convention of accountability expected of stewards.

The collapses of Bank for Housing and Construction and Ghana Cooperative Bank in the late 1990’s are largely attributable to weak internal control systems.  To prevent the collapse of the rural bank system, it is imperative on the Central Bank to act as a regulator to formulate guidelines to deal with some identified causes of fraud in rural banks as stated below:

·         Poor conditions of service/inadequate rewards

·         Lack of non-adherence to Human Resource Policies and Practices

·         Low or non-participation of Board of Directors or Audit Committee in periodic review of systems, procedures and practices to ascertain compliance level

·         Lack of timely flow of information across the organization

·        Nepotism, cronyism, and favoritism on the part of directors and senior Management in the recruitment and placement of staff

·         Conflict of interest on the part of directors in decision-making

Workers at Banks have access to client's information like account numbers, security codes and much more. Banks are known to handle billions belonging to individuals or an organization. This act of internal control helps reduces the chance of employees allegedly misusing customer’s money and/or getting involved in the act of stealing.

 

Many things are considered in this case to reduce the amount of money spent on solving these issues. Moreover, money spent cannot be retrieved which makes Banks reluctant to spend much on it. Banks set up a committee to help federal agency to help check for fraudulent acts. This committee is set secretly to investigate every transaction made in the Bank.

This committee is to control regulatory of actions, these are some elements of Internal Control listed below:

1.      Risk Assessment

2.      Control Activity

3.      Monitoring

I intend to demonstrate that the existence of the above weaknesses and practices that facilitate fraud in Rural Banks.