ST.

MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES

THE EFFECT OF INTERNAL CONTROL ON PREVENTING

AND DETECTING FRAUD IN BANKS: THE CASE OF ABAY
BANK S.C ADDIS ABABA BRANCHES

BY:

ESKINDIR FIKRU

(SGS/0497/2013A)

JUNE, 2022
ADDIS ABABA, ETHIOPIA
 THE EFFECT OF INTERNAL CONTROL ON PREVENTING AND
DETECTING FRAUD IN BANKS: THE CASE OF ABAY BANK S.C
ADDIS ABABA BRANCHES

BY:

ESKINDIR FIKRU

(SGS/0497/2013A)

ADVISOR:

HABTAMU ABEBAW (Ph.D)

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY, SCHOOL OF

GRADUATE STUDIES IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTERS OF BUSINESS
ADMINISTRATION (MBA)

JUNE, 2022
ADDIS ABABA, ETHIOPIA
 DECLARATION

I, the undersigned, declare that this thesis is my original work, prepared under the guidance
ofHabtamuAbebaw (Ph.D). All sources of materials used for the thesis have been duly
acknowledged. I further confirm that the thesis has not been submitted either in part or in full to
any other higher learning institution for the purpose of earning any degree.

EskindirFikru Signature ________________ June. 2022

St. Mary’s University, Addis Ababa

 ST. MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES

THE EFFECT OF INTERNAL CONTROL ON PREVENTING AND

DETECTING FRAUD IN BANKS: THE CASE OF ABAY BANK S.C
ADDIS ABABA BRANCHES

BY:

ESKINDIR FIKRU

APPROVED BY BOARD OF EXAMINERS

_______________________ __________________
Dean, Graduate Studies Signature

_______________________ ___________________
Advisor Signature

_______________________ ____________________
External Examiner Signature

_______________________ ____________________
Internal Examiner Signature
 ENDORSEMENT

This thesis has been submitted to St. Mary‟s University, School of Graduate Studies for
examination with my approval as a university advisor.

______________________

HABTAMUABEBAW (Ph.D)

JUNE, 2022

ADDIS ABABA, ETHIOPIA

 ACKNOWLEDGEMENTS

I would like to thank God, for letting me through all the difficulties. I would like to acknowledge

and give my warmest thanks to my advisor HabtamuAbebaw (Ph.D)who made this paper

possible. His guidance and advice carried me through all the stages of writing my paper. I would

also like to thank my examiners for their brilliant comments and suggestions, thanks to

you.Finally,I would also like to give special thanks to my wifeand my family as a whole for their

continuous support and understanding when undertaking my research and writing my project.

Your prayer for me was what sustained me this far.

i
 Table of Contents

ACKNOWLEDGEMENTS ........................................................................................................................................... I
LIST OF TABLES ...................................................................................................................................................... V
LIST OF FIGURES.................................................................................................................................................... VI
LIST OF ACRONYMS/ABBREVIATIONS ..................................................................................................................VII
ABSTRACT ...........................................................................................................................................................VIII
CHAPTER ONE ........................................................................................................................................................ 1
INTRODUCTION ..................................................................................................................................................... 1
1.1 BACKGROUND OF THE STUDY...............................................................................................................................1
1.2 STATEMENT OF THE PROBLEM .............................................................................................................................2
1.3 OBJECTIVE OF THE STUDY ....................................................................................................................................3
1.3.1 GENERAL OBJECTIVE ..........................................................................................................................................3
1.3.2 SPECIFIC OBJECTIVES ..........................................................................................................................................3
1.4 RESEARCH QUESTIONS .......................................................................................................................................4
1.5 RESEARCH HYPOTHESES......................................................................................................................................4
1.6 SCOPE OF THE STUDY .........................................................................................................................................4
1.7 SIGNIFICANCE OF THE STUDY................................................................................................................................5
1.8 LIMITATIONS OF THE STUDY .................................................................................................................................5
1.9 ORGANIZATION OF THE PAPER .............................................................................................................................5
1.10 OPERATIONAL DEFINITION OF KEY TERMS ...............................................................................................................6
CHAPTER TWO ....................................................................................................................................................... 7
LITRATURE REVIEW ................................................................................................................................................ 7
2.1 THEORETICAL REVIEW ........................................................................................................................................7
2.1.1 Concepts of Internal Control ....................................................................................................................7
2.1.2 Objectives of the Internal Control ............................................................................................................8
2.1.3 Components of Internal Control System ..................................................................................................9
2.1.4 Functions of Internal Controls ................................................................................................................10
2.1.5 Types of Internal control Activities .........................................................................................................11
2.1.6 Limitations of Internal Control ...............................................................................................................12
2.1.7 Concepts of Fraud ..................................................................................................................................13
2.1.8 Types of Fraud in Banks .........................................................................................................................13
2.1.9 Reasons for Fraud ..................................................................................................................................16
2.1.10 Methods of Preventing Fraud ................................................................................................................17
2.2 REVIEW OF EMPIRICAL STUDIES .........................................................................................................................18
2.3 RESEARCH GAP ANALYSIS .................................................................................................................................20
2.4 CONCEPTUAL FRAMEWORK ...............................................................................................................................20

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CHAPTER THREE ................................................................................................................................................... 21
RESEACH METHODOLOGY .................................................................................................................................... 21
2.1 RESEARCH APPROACH ......................................................................................................................................21
2.2 RESEARCH DESIGN...........................................................................................................................................21
2.3 TYPES AND SOURCES OF DATA ...........................................................................................................................21
2.4 TARGET POPULATION OF THE STUDY ...................................................................................................................22
2.5 SAMPLE SIZE AND SAMPLING TECHNIQUE ............................................................................................................22
2.6 DATA COLLECTION PROCEDURES .........................................................................................................................23
2.7 VALIDITY AND RELIABILITY TEST .........................................................................................................................23
2.7.1 Reliability ...............................................................................................................................................23
2.7.2 Validity ...................................................................................................................................................24
2.8 DATA ANALYSIS METHOD .................................................................................................................................25
2.9 MODEL SPECIFICATION.....................................................................................................................................25
2.10 MEASUREMENT OF VARIABLES...........................................................................................................................25
2.11 ETHICAL CONSIDERATIONS.................................................................................................................................26
CHAPTER FOUR .................................................................................................................................................... 27
PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS ........................................................................... 27
4.1 RESPONSE RATE OF RESPONDENTS .....................................................................................................................27
4.2 DEMOGRAPHIC PROFILE OF RESPONDENTS:..........................................................................................................28
4.2.1 Gender Distribution of Respondents ......................................................................................................28
4.2.2 Age Distribution of Respondents............................................................................................................29
4.2.3 Education Qualification of Respondents ................................................................................................29
4.2.4 Position Held by Respondents ................................................................................................................29
4.2.5 Job Tenure of Respondents ....................................................................................................................29
4.3 THE EXTENT OF THE EXISTING IC PRACTICES IN ABAY BANK ......................................................................................30
4.3.1 Control Environment ..............................................................................................................................30
4.3.2 Risk Assessment .....................................................................................................................................31
4.3.3 Control Activities ....................................................................................................................................31
4.3.4 Information and Communication ...........................................................................................................32
4.3.5 Monitoring Activities ..............................................................................................................................33
4.4 THE LEVEL OF FRAUD PREVENTION AND DETECTION IN AB .......................................................................................34
4.5 THE RELATIONSHIP BETWEEN INTERNAL CONTROL AND FRAUD PREVENTION AND DETECTION ........................................34
4.5.1 Correlation Analysis ...............................................................................................................................34
4.6 THE EFFECT OF IC ON FRAUD PREVENTION AND DETECTION IN AB ............................................................................38
4.6.1 Assumptions Tests..................................................................................................................................38
4.6.2 Regression Analysis and Hypothesis Testing ..........................................................................................40

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 4.7 CHALLENGES OF INTERNAL CONTROL ..................................................................................................................44
CHAPTER FIVE ...................................................................................................................................................... 46
SUMMARY, CONCLUSION AND RECOMMENDATION ........................................................................................... 46
5.1 SUMMARY OF MAJOR FINDINGS ........................................................................................................................46
5.2 CONCLUSION ..................................................................................................................................................47
5.3 RECOMMENDATION.........................................................................................................................................48
5.4 SUGGESTION FOR FURTHER STUDY .....................................................................................................................49
REFERENCES......................................................................................................................................................... 50
APPENDICES......................................................................................................................................................... 57
APPENDIX I: QUESTIONNAIRE .................................................................................................................................57

iv
 LIST OF TABLES

Table 3. 1: Internal Consistence Results of Composite Reliability ............................................................ 23

Table 3. 2: Content Validity for questionnaire............................................................................................ 24

Table 4. 1: Response Rate ........................................................................................................................... 27

Table 4.2: Demographic Profile of Respondents ........................................................................................ 28
Table 4. 3: Control Environment in fraud prevention and detection .......................................................... 30
Table 4. 4: Risk Assessment in fraud prevention and detection ................................................................. 31
Table 4. 5: Control Activities in fraud prevention and detection ................................................................ 31
Table 4. 6: Information and Communication in fraud prevention and detection ........................................ 32
Table 4. 7: Monitoring Activities in fraud prevention and detection .......................................................... 33
Table 4. 8: The level of fraud prevention and detection ............................................................................. 34
Table 4. 9 : Pearson Correlation Matrix between IC components and Fraud Prevention and Detection... 35
Table 4. 10: Summary of Skewness and Kurtosis Statistic ......................................................................... 38
Table 4.11: Multicollinearity of Determinant Factors ................................................................................ 39
Table 4. 12: Model Summary ..................................................................................................................... 40
Table 4.13: ANOVA Result for Regression Model .................................................................................... 41
Table 4.14: Multiple Regressions of Internal Control Elements on Fraud Prevention and Detection ........ 41
Table 4.15: Challenges of Internal Control in Preventing and Detecting Fraud in AB ............................. 44

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 LIST OF FIGURES

Figure 2. 1 : Fraud Triangle....................................................................................................................... 17

Figure 2. 2: The Conceptual Framework of Internal Control in fraud prevention and detection ............ 20

vi
 LIST OF ACRONYMS/ABBREVIATIONS

AB Abay Bank S.C

ACFE Association of Certified Fraud Examiners

ATM Automated Teller Machine

BOD Board of Directors

CIMA Chartered Institute of Management Accountants

CA Control Activities

CE Control Environment

COSO Committee of Sponsoring Organizations of the Treadway Commission

FCIB Federal crime investigation bureau

IIA Institute of Internal Auditors

INTOSAI International Standards of Supreme Audit Institutions

IPPF International Professional Practice Framework

IC Information and Communication

ICAEW Institute of Chartered Accountants in England and Wales

ISA International Standard on Auditing

MA Monitoring Activities

NBE National Bank of Ethiopia

RA Risk Assessment

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 ABSTRACT
This study aims to determine the effect of internal control on fraud detection and prevention in
Abay Bank. The factors tested in this study are internal control as an independent
variable and fraud prevention and detection as dependent variables. The research method used
inthis research is descriptive and explanatory research methods. The type of data used in this
studyis primary data with data collection using a questionnaire instrument. The population in
this study is both managerial and non-managerial employees of Addis Ababa city branches, with
273 respondents using random sampling technique. The analytical methods used in this study
areboth descriptive and inferential.Data processing using Statistical Package for Social Sciences
(SPSS) Ver.26.0.The results of the study showed that internal control has a significant effect on
fraud prevention and detection.The study revealed that all the five internal control components
have positively and significantly affect the fraud prevention and detection practices in Abay
Bank. There observed a positive relationship between the independent variables (the five
components of internal control) and the dependent variable (fraud prevention and detection).
This means an increase in one component of internal control system will bring an increment on
fraud prevention and detection. Moreover, collusion between internal or internal and external
parties, human judgment under pressure, system error, override by management and
breakdowns imply the presence challenges in the proper implementation of internal control
System in preventing and detecting fraud in AB. So as to make the control system brought the
required fraud prevention and detection, the management of the bank should communicate the
employees objectives of IC and what is expected of them, identifying and assessing risks of fraud
occurring on an on-going basis, establish channels of communication to report suspected breach
of laws and regulations and monitor the effective application of policies on an on-going
basis.The level of fraud prevention and detection is must be enhanced by effectively utilizing
vigorous fraud hotline so that both internal and external stakeholders of the bank reported
actual and suspected fraudulent activities within the bank. Lastly, as no internal control system
gives absolute assurance regarding fraud prevention and detection, challenges on proper
implementation of internal control should be given important emphasis by management of the
bank.

Key Words:Internal Control System, Fraud Prevention and Detection

viii
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study

According to Putra and Kansil (2020), banking is a business entity that collects funds from the
public in the form of savings and distributes them to the public in the form of credit and or other
forms in order to improve the standard of living of the people at large.Therefore, bank
management muststrive to maintain public trust in order to gain sympathy from potential
customers as public trust is the main factor in the banking business(Sapariyah, Choerudin,
Setyorini, &Khristiana, 2017).One of them is by obeying the rules and not making mistakes that
can lead to irregularities and fraud. Fraud that occurs within the company, whether committed by
the employees themselves, collusion by several employees, or by people outside the company
will not only cause financial losses but will reduce the good name/reputation of the company.
Fraud acts can be reduced through prevention or deterrence, detection, and investigation
measures. (Reding et al., 2013).

Fraud is a global phenomenon and is a broad term that affects all sectors of economy. It is
defined by National Bank of Ethiopia (2014), as “an act or omission by shareholders,
directors,employees, customers committed with intention of gaining dishonest or unlawful
advantage for the party committing fraud or for other parties”. Frauds are perpetrated by parties
and organizations to obtain money, property, or services; to avoid payment or loss of services; or
to secure personal or business advantage”. According to Chartered Institute of Management
Accountants(CIMA, 2008), though there is no single reason behind fraud, it is necessary to take
account of motivation of potential offenders, conditions under which offenders can rationalise
their prospective crimes away, opportunities to commit crime, perceived suitability, technical
ability of the fraudster, expected and actual risk of discovery, expectations of consequences of
discovery and actual consequences of discovery.

As Idowu et.al (2013) stated, the cost of fraud to a business is difficult to estimate because not all
fraud and abuse is discovered, not all uncovered fraud is reported, and civil or criminal action is
not always pursued. According to internal report, Abay Bank S.C haslost a lot of money
tofraudulent practices.

1
The necessity of an effective internal control system in the banking sector cannot be undermined
as all activities of the economy rely heavily on the strength and stability of this sector (Gamage,
Lock & Fernando, 2014). Internal control is a broad term with a wide coverage encompassing
the whole management system that helps the business of the enterprise in an orderly and efficient
way by developing an automatic check and balance overall the transaction. Existence of properly
designed and consistently enforced internal controls are the foundation for safe and sound
banking organization and it helps a bank‟s board of directors and management to safeguard the
bank‟s resources, produces reliable financial reports, and complies with laws and regulations
(Kumuthinidevi, 2016).

Internal controls should have the following as its integrated components: control environment,
risk assessment, control activities, information and communication and monitoring activities
(COSO, 2012). According to Ayodele et.al (2021), there are many studies which emphasises the
necessity and importance of internal control system in the banking system. A deficient internal
control system often causes an inability to detect fraudulent activities and a decrease in the
performance of the bank.

Therefore, the main thrust of this study is to examine whether the internal control system in
Abay Bank has an effect in fraud prevention and detection or not.

1.2 Statement of the Problem

Fraud is a complex global problem affecting organizations through loss of funds and can erode
customers‟ confidence on the organizations and waste time to investigate it (Chelangat, 2014).
Although banks make every effort to prevent and detect fraud, there are still criminals out there
taking consumer money by circumventing all preventive measures (Olatunji, 2009)

According to an estimate report from the Association of Certified Fraud Examiners (ACFE,
2020), organisations are losing around 5 percent of their annual revenues to fraudulent activity
and also lack of appropriate internal controls contributed to 1/3 of the perpetrated fraud.

Bank fraud in Ethiopia has increased and will continue to increase because it is a part of
everyday life. According to Bob koig(2016), the Commercial Bank of Ethiopia has lost more
than $314,000 to a bank fraud perpetrated at its headquarters in December 2012 and in March

2
2016 $852,000 was transferred from the Ethiopian Shipping Lines & Logistics Services
Enterprise‟s (ESLSE) account at the Commercial Bank of Ethiopia to the account of a fake
company. Moreover, data from NBE and FCIB states that fraudsters have stolen lost birr
326,343,280 from Ethiopian banks.

Over the yearsAbay Bank S.C has been losing a lot of money and resources tofraudulent
practices. According to March 31, 2022 report, the bank has fraud outstanding balance of birr
33.4 million and birr 3.6 million provision kept for same. Embezzlement, cheating on withdrawal
and forgeries are the main types of fraud prevailing in the bank (Internal Report, 2022)

According to Kalkidan (2017), reasons for frauds are; poor ethics and moral standards, lack of
online auditing, lack of background check in recruitment process lack of risk assessment by risk
and compliance department, existence of weak information and communication system,
weakness in the controlling and monitoring activities also play a major role in the occurrence of
fraud. Therefore, emphasis should be given to improving the internal controls so as to tackle
frauds.

According to the review of the issues behind these losses, they could very certainly have been
averted had the banks maintained efficient internal control system. In Ethiopia, little or no
research on the influence of internal control on fraud prevention and detection in the banking
industry has been conducted. Thus, thus study examines the effect of internal control on fraud
prevention and detection on AbayBank S.C.

1.3 Objective of the study

1.3.1 General objective

The general objective of the study isidentifying the effect of internal controls on fraud detection
and prevention at AbayBank.

1.3.2 Specific objectives

The specific objectives of the study were to:

1. To identify the extent of the existing internal control practices in AB in preventing and
detecting fraud
2. To assess level of fraud prevention and detection in AB
3
 3. To identify the relationship between IC and fraud prevention and detection in Abay
Bank
4. To identify the effect of IC on fraud prevention and detection in Abay Bank
5. To identify the challenges to the effective implementation of internal control system in
detecting and preventing fraud in AB.

1.4 Research Questions

This research tried to answer the following questions:“Does internal control has significant effect
on fraud prevention and detection in Abay Bank S.C?”

1.5 Research Hypotheses

Based on the conceptual framework, we formed the following hypotheses:

H1: Control environment has a significant effect on fraud prevention and detection in Abay
Bank

H2: Risk Assessment has a significant effect on fraud prevention and detection in Abay Bank

H3: Control Activities has a significant effect on fraud prevention and detection in Abay Bank.

H4: Information and communication has a significant effect on fraud prevention and
detectionin AbayBank.

H5: Monitoring Activities has a significant effect on fraud prevention and detection in Abay
Bank.

1.6 Scope of the study

Even though it is very important to cover all 332 branches of the bank across the country, due to
the wide geographical dispersion of branches as well as time and money constraints, the study
wasconducted in Abay Bank S.C branches located in Addis Ababa. The total numbers of
respondents of the research were employees in 102 branches located in Addis Ababa city. The
study focused on respondents from both managerial and clerical staff. Due to time and resource
limitation only questionnaires were used as data collection tool on the study. The study was
undertaken in 2022. In this study the independent variable (Internal control system) was

4
examined in terms of theeffect of the five components of internal control system which are
ControlEnvironment, Risk Assessment, and Control Activities, Information and communication
andmonitoring. The dependent variable (fraudulent prevention and detection) was examined in
terms of the extent of the existing internal control practice, the level of fraud prevention and
detection, the relationship between internal control and fraud prevention and detection, the
challenges to effective implementation of internal control system in detecting and preventing
fraud in Abay Bank.

1.7 Significance of the study

The result of this study helps the government through the NBE to formulate policies on fraud
risk management and internal control systems. The study has a huge significance to the Board of
Director (BOD) and management of AbayBank to maintain an enhanced controlled environment.
The research also helps operating personnel for effecting internal control for evaluating whether
appropriate controls have been implemented and whether the internal controls are functioning as
intended. Finally, for the academic world, the study increase body of knowledge to scholars and
academicians on the selected topic. The study suggests areas for further research studies so that
future scholars in the field of business can undertake new research issues.

1.8 Limitations of the study

The study mainly focused on Abay Bank Addis Ababa city branches. In spite of the fact that
other operating units, like Head Office and district offices are existing, the researcher conducted
his research on branches as it is the core process area of the bank. Moreover, as branches outside
of Addis Ababa are sparsely located in different regional states of the country and far from Addis
Ababa had not been incorporate in the study, as a result of time and resource constraints. The
researcher has been conducted the study within the limitations mentioned achieved the
objectives.

1.9 Organization of the paper

The study structured under five chapters. The first chapter concerned with introduction which in
turn contains background of the study, statement of the problem, Research question, objectives
of the study, Scope of the study, and so forth. Chapter two presents and elaborates theoretical
literatures, empirical review, research gaps and conceptual framework. Whereas, chapter three
5
introduces the research methodologies to be applied. Chapter four presents the results and
discussions of the study. And finally, chapter five presents the summary, conclusions and
recommendations based on the study findings.

1.10 Operational definition of key terms

Monitoring: Monitoring can be regarded as the continue assessment of internal Fraud: Fraud is
any act, expression, omission, or concealment calculated to deceive another to his or her
disadvantage, specifically, a misrepresentation or concealment with reference to some fact
material to a transaction that is made with knowledge of its falsity.

Internal control system: For the purposes of this study internal control system may be regarded
as Control Environment, Risk Assessment, Information and Communication, Control Activities,
and Monitoring put in place by the board of directors, management and other personnel to
prevent and detected fraud.

Control Environment: control environment refers to the management attitudes toward control,
integrity and ethical values, commitment to competence, management‟s philosophy and
operational.

Control activities: Control activities refer to the policies, procedures and directives by the
management of an entity to ensure achievement of organizational goals.

Risk assessment: Risk assessment is an on-going process of management‟s identification and

analysis of relevant risk of fraud occurring and the risk to preparation of financial statements and
achievement of organisation objective that are critical to internal control system.

Information and communication: Refer to the process of recognizing, capturing, analyzing

classify, summary and communicating of relevant information timely and appropriately in order
to achieve the financial reporting objectives.

6
 CHAPTER TWO
LITRATURE REVIEW

This chapter explores the literature that constructs a theoretical framework regarding banking
internal control and its effect on the prevention and detection of fraud provides a discussion
focused on the research questions. The chapter commence by reviewing the theories relevant to
the study. It then presents the empirical studies that discuss the link between internal control
system, detection and prevention of fraud. Lastly, the chapters review the research gaps that the
researcher identified and the conceptual frameworks also are presented in this chapter.

2.1 Theoretical Review

2.1.1 Concepts of Internal Control

It is the responsibility of management in every financial institution to put in place measures that
insures effective internal control system. If a bank fails to put in place a proper policies and
procedures, it may not be in a position to prevent or minimize the occurrence of fraud. Therefore,
a bank must put in place an effective internal control system (AgyemangJ., 2020). DiNapoli
(2016), emphasized that internal control is focused on the achievement of the organization's
mission. Even though, existence of good internal control cannot guarantee organizational
success, its presence will provide "reasonable assurance" that goals and objectives are met.
However, if there exists poor internal control, goals and objectives are much less likely to be
achieved.

According to DiNapoli (2016), the standards and guidelines on internal control have been
published by different groups and organizations and they defined it in various ways. Each of
those definitions has captured the basic concept of internal control using different words. Those
definitions find common ground in recognizing the extensive scope of internal control, its
connection to an organization's mission, and its dependence on the people in the organization.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued

Internal Control – Integrated Framework 1992, which define Internal control as a “process,
effected by an entity‟s board of directors, management, and other personnel, designed to provide
reasonable assurance regarding the achievement of objectives relating to operations, reporting,
7
and compliance” (COSO, 1992). As per COSO‟s (1992) definition, internal control is seen as: a
system geared toward objective achievement; a continuous activity with no definite end;
achieved by the various persons or parties involved and not solely policies, forms and
documents; acknowledges that the implemented internal control cannot give absolute assurance
that the business‟s goals will be accomplished rather it provides reasonable assurance; and the
system is flexible in application.

The ICAEW (1999) define internal control as: the policies, procedures, tasks, behaviors, and
other aspects that facilitate the effective and efficient operations by enabling the company to
respond appropriately to the different risks; ensuring the quality of both internal and external
reporting; and ensuring adherence to applicable laws and regulations, and other internal laws of
the company.

2.1.2 Objectives of the Internal Control

According to Basle (1998), internal control is not solely a procedure or policy that is performed
at a certain point in time, but rather it is continually operating at all levels and effected by the
board of directors, senior management and all levels of personnel within the bank. The
responsibility of facilitating the establishing the appropriate culture to of internal control rests on
board of directors and senior management; however, each individual within an organisation must
participate in the process.

According to Basle, the main objectives of the internal control process can be:

 efficiency and effectiveness of activities (performance objectives);

 reliability, completeness and timeliness of financial and management information
(information objectives); and
 compliance with applicable laws and regulations (compliance objectives).

8
2.1.3 Components of Internal Control System

COSO (1992) identifies that there are five interrelated components make up the internal control
system: the control environment, the entity‟s risk assessment process, control activities (internal
controls), information and communication, control activities, and the monitoring of controls.

1. Control Environment

The Control Environment also referred to as the internal environment of an organization is the
most vital component of the internal control system that addresses the condition of the company,
affecting the control consciousness of its people, Romney &Steinbart (2009, as cited on
Agyapong, 2017). The vital constituents of an effective control environment include: the
integrity, ethical values and competence of the entity‟s people; management‟s philosophy and
operating style; the way management assigns authority and responsibility, organizes and
develops its people; and the attention and direction provided by the board of directors (COSO,
2012).

2. Risk Assessment

In order to minimize errors and irregularities management assesses risks as part of designing and
operating internal control system and risk assessment should be done for all components of
internal control elements, from control environment to monitoring (Hayes et.al, 2005). Risk
assessment is the identification and analysis of relevant risks to achievement of the objectives,
forming a basis for determining how the risks should be managed. Mechanisms should be placed
to identify and deal with risk since economic, industry, regulatory and operating conditions will
continue to change (COSO, 1992).

3. Control Activities

Control Activities are policies and procedures established and executed to ensure that actions
identified by management are necessary to mitigate risks. More specifically, control activities are
the policies and procedures that help ensure that the management directives are carried properly
and in a timely manner. Necessary actions are taken to manage, reduce and to address risks
towards the achievement of the entity‟s objectives (COSO, 1992)

9
 4. Information and Communication

Information is a compulsory for the organization to perform internal control responsibilities so

that it supports the achievement of its objectives. Internal and external communication provides
the organization with the information necessary to perform its day-to-day internal control
activities (COSO, 2012). Agyapong (2017) stated that Information and Communication
component are systems or processes that identify, capture, and exchange information in a form
that enables people carry out their day-to-day responsibilities. The control structure of a
company should be such that enable it to assure that information can be identified, captured, and
exchanged within the company and with external parties. And the information communicated
should be timely, accurate and reliable so that it achieves its intended purpose.

5. Monitoring

Whittington &Pany, (2009, as cited on Agyapong ,2017) monitoring of internal controls assess
the quality of internal control performance over time and is necessary to monitor whether the
functioning of internal control as expected or not and whether changes are needed to improve its
functioning. Organization can achieve internal control monitoring through ongoing activities
such as conducting regular supervision.

2.1.4 Functions of Internal Controls

Different writers have come out with different types of Internal and the most commonly known
are grouped into preventive, detective and corrective control. These types of internal controls are
explained below.

1. Preventive Controls

These are controls designed to deter the occurrence of an undesirable event. The development of
these controls involves anticipating potential problems before they occur and implementing ways
to avoid them (DiNapoli, 2016).

2. Detective Controls

These are controls which are aimed at detecting and uncovering problems such as fraud,
irregularities and errors after they have been committed. Although, detection is necessary

10
prevention is more desirable. These controls are in the form of post-audits, exception reports and
validation. They provide evidence that a loss has occurred but do not prevent a loss from
occurring. Examples of detective controls are reviews, analyses, variance analyses,
reconciliation, physical inventories and audits. However, detective controls play critical role in
providing evidence that the preventive controls are functioning and preventing losses (Wells A.,
2006).

3. Corrective Controls

The corrective controls are put in place to address anything which is foreign and every problem
that has occurred in the system. Examples of corrective control are system redesign, follow-ups,
post audits and application of punishments by management for wrong doing (Simmos, 1995).

2.1.5 Types of Internal control Activities

According to Hayes, (2005) Control activities (sometimes called “control procedures”) are
policies and procedures that help ensure management directives are carried out. They help ensure
that necessary actions are taken to address risks to the achievement of the entity‟s objectives for
operations, financial reporting, or compliance.

The categories of control activities given in ISA 315 and Basle (1998) are:

 Top level reviews – Presentation of periodic performance report to the Boards of

directors and senior management enable them to review the bank‟s progress toward its
goals and detect problems such as control weaknesses, errors in financial reporting or
fraudulent activities.
 Activity controls – Management at department or division level receives and reviews
standard performance and exception reports on a daily, weekly or monthly basis.
Whereas functional reviews occur more frequently than top-level reviews and usually
are more detailed..
 Physical controls - Physical controls generally focus on restricting access to tangible
assets, including cash and securities, physical limitations, dual custody, and periodic
inventories.

11
  Compliance with exposure limits – it is the establishment of prudent limits on risk
exposures is an important aspect of risk management.
 Approvals and authorisations- Requiring approval and authorization for transactions
over certain limits ensure that an appropriate level of management is aware of the
transaction or situation, and helps to establish accountability.
 Verifications and reconciliations - Verifications of transaction details and activities
and the output of risk management models used by the bank are important control
activities. Periodic reconciliations, such as those comparing cash flows to account
records and statements, may identify activities and records that need correction.
 Segregation of duties. Assigning different people the responsibilities of authorizing
transactions, recording transactions, and maintaining custody of assets and it is intended
to reduce the opportunities to allow any person to be in a position to both perpetrate and
conceal errors or fraud in the normal course of the person‟s duties.

2.1.6 Limitations of Internal Control

No matter how well conceived and operated, an effective internal control system can provide
only reasonable – not absolute – assurance to management about the achievement of an entity's
objectives or its survival.

INTOSAI (2004), ISA 315, and COSO describes factors (amongst others) that will limit the
effectiveness internal control as:

 The effectiveness of the internal control system depends on the competency and
dependability of the people using it. The human factor plays a role in design, mistakes
and errors of judgment/interpretation, collusion or abuse of internal control, and
therefore errors are more likely to occur;
 Challenges in the work flow may result in the breakdown of internal control;
 Employees in pressurised environments may circumvent normal work processes, thereby
compromising internal control and
 In most instances, management can easily override internal control procedures

12
2.1.7 Concepts of Fraud

Fraud is an irregularities and illegal acts which are done intentionally for certain purposes such
as deceive or providing a misleading image to other parties. It is designed to takeun honest
advantage over others, which directly or indirectly harm other parties. Albrecht et al. (2009),
states that though most people and even most researchers believe that fraud is increasing both in
size and frequency, it is difficult to get statistics about how much fraud is occurring, what
percentage of fraud perpetrators are caught, whether all frauds eventually discovered. However,
all signs indicate that fraud is increasing both in frequency and amount.

Although there are many formal definitions of fraud, probably the most common are the
following:

National Bank of Ethiopia (2014), defines fraud as “an act or omission by shareholders,
directors, employees, customers committed with intention of gaining dishonest or unlawful
advantage for the party committing fraud or for other parties”. Whereas, the Institute of Internal
Auditors‟ (IIA‟s) IPPF (2009), defines fraud as “any illegal act characterized by deceit,
concealment, or violation of trust. These acts are not dependent upon the threat of violence or
physical force. Frauds are perpetrated by parties and organizations to obtain money, property, or
services; to avoid payment or loss of services; or to secure personal or business advantage”.

It is evidence from various definitions given by different institutions and different authors that
the word fraud is universal. They share the same view that fraud an unlawful behaviour which
the management, employees and stakeholders of an organization use deliberately dishonesty
methods for profit gain.

From the above definitions one can reach to a conclusion that fraud is an act of deceitful for a
personal gain and it is committed by the management, employees and third parties.

2.1.8 Types of Fraud in Banks

Ovuakporie (2004, as cited on Oraka et.al, 2016), identify that fraud is perpetrated in many
forms and guises, and usually have insiders (staff) and outsiders conniving together to

13
successfully implement the act. The following, though not completely exhaustive, are the most
common types of bank frauds;

1. Theft and Embezzlement

This is a form of fraud which involves the unlawful collection of monetary items such as cash,
traveler‟scheque and foreign currencies. It could also involve the deceitful collection of bank
assets such as motor vehicles, computers, stationeries, equipment, and different types of
electronics owned by the bank.

2. Defalcation

This involves the embezzlement of money that is held in trust by bankers on behalf of their
customers. Defalcation of customers deposits either by conversion or fraudulent alteration of
deposit vouchers by either the bank teller or customer is a common form of bank fraud. Other
forms of defalcation involves colluding with a customer‟s agent when he/she pays into the
customer‟s account and when tellers steal some notes from the money which are billed to be paid
to unsuspecting customers/clients.

3. Forgeries

Forgeries involve the fraudulent copying and use of customer‟s signature to draw huge amounts
of money from the customer‟s account without prior consent of the customer. Such forgeries
may be targeted at savings accounts, deposit accounts, current accounts or transfer instruments
such as drafts. Experience has shown that most of such forgeries are perpetrated by internal staff
or by outsiders who act in collusion with employees of the bank who usually are the ones who
release the specimen signatures being forged (Oraka et.al, 2016).

4. Unofficial Borrowing

In some instances, bank employees borrow from the vaults and teller tills informally. Such
unofficial borrowings are done in exchange of the staff post-dated cheque or even nothing.

14
 5. Foreign Exchange Malpractices

This involves the falsification of foreign exchange documents and diversion of foreign exchange
that has been officially allocated to the bank, to meet customer‟s needs and demand, to the black
market using some „ghost customers” as fronts.

6. Impersonation

Impersonation involves assuming the role of another person with the intent of deceitfully
committing fraud. Impersonation by third parties to fraudulently obtain new cheque books which
are consequently utilized to commit fraud is another popular dimension of bank fraud. Cases of
impersonation have been known to be particularly successful when done with conniving bank
employees, who can readily make available, the specimen signatures and passport photograph of
the unsuspecting customers (Oraka et.al, 2016).

7. Manipulation of Vouchers

This type of fraud involves the substitution or conversion of entries of one account to another
account being used to commit the fraud. This account would naturally be a fictitious account into
which the funds of unsuspecting clients of the banks are transferred. The amounts taken are
usually in small sums so that it will not easily be noticed by top management or other
unsuspecting staff of the bank. Manipulation of vouchers can thrive in a banking system saddled
with inadequate checks and balances such as poor job segregation and lack of detailed daily
examination of vouchers and all bank records (Ravisankar, et al 2016).

8. Falsification of Status Report

A common type of fraud is falsification of status report and/or doctoring of status report. This is
usually done with the intent of giving undeserved recommendation and opinion to unsuspecting
clients who deal with the bank customers. Some clients for example will only award contracts to
a bank customer if he/she providers evidence that he/she can do the work and that they are on a
sound footing financially. Such a fraudulent customer connives with the bank staff to beef up the
account all with the aim of portraying himself not only as being capable but also as a persons
who will not abscond once the proceeds of the contracts has been paid. The inflation of statistical
data of a customer‟s account performance to give deceptive impression to unsuspecting third

15
parties (which is very common in Nigeria), for whatever reasons, is a fraudulent behaviour
(Ovuakporie, 2004).

9. Money Laundering

This involves the deceitful act of legitimizing money obtained from criminal activity by saving
them in the bank for the criminals or helping them transfer it to foreign banks, or investing it in
legitimate businesses (Oraka, et.al, 2016).

10. Fake Payments

It involves the teller introducing a spurious cheque into his/her cage. It is done with or without
the collaboration of other members of staff or bank customers. This type of fraud is however
easy to detect if the bank has a policy of thoroughly examining all vouchers, checks, and
withdrawal slips and payments on a daily basis (Oraka, et.al, 2016).

11. Computer Frauds

This involves the fraudulent manipulation of the bank‟s computer either at the data collection
stage, the input processing stage or even the data dissemination stage. Computer frauds could
also occur due to improper input system, virus, program manipulations, transaction
manipulations and cyber thefts. In this epoch of massive utilization of ATMs and online real time
e-banking and commerce; computer frauds arising from cyber thefts and crimes has assumed a
very threatening dimension.

2.1.9 Reasons for Fraud

According to CIMA (2008), there is no single reason behind fraud and any explanation of it
needs to take account of various factors. Looking from the fraudster‟s perspective, it is necessary
to take account of:

 motivation of potential offenders

 conditions under which people can rationalise their prospective crimes away
 opportunities to commit crime(s)
 perceived suitability of targets for fraud

16
  technical ability of the fraudster
 expected and actual risk of discovery after the fraud has been carried out
 expectations of consequences of discovery (including non-penal consequences such as
job loss and family stigma, proceeds of crime confiscation, and traditional criminal
sanctions)
 actual consequences of discovery.
A common model that brings together a number of these aspects is the Fraud Triangle. This
model is built on the premise that fraud is likely to result from a combination of three factors:
Perceived Pressure/motivation, opportunity and rationalisation (IIA‟s IPPF, 2009, CIMA, 2009
Alberecht et.al, 2009).

Figure 2.1 : Fraud Triangle

Source:WellsJ.T.(2005)

 Perceived Pressure/Motivation- the need the fraudster is trying to satisfy by

committing the fraud
 Perceived Opportunity- the fraudster‟s ability to commit the fraud.
 Rationalization- the fraudster‟s ability to justify the fraud in his or her mind.

2.1.10 Methods of Preventing Fraud

Fraud prevention eliminates opportunities to commit fraud by developing and implementing risk
management (especially fraud risk management), internal control and honest corporate

17
governance (Priantara, 2013). According to Priantara (2013) states that fraud that may occur
must be prevented, among others, by the following methods:

 Build a good internal control structure. The more a company develops, the task of
management to control the company‟s operations becomes increasingly heavy. So that
the goals set by top management can be achieved, the security of company assets is
guaranteed, so that the management needs to establish a good as well as effective internal
control structure to prevent fraud can be carried out efficiently and effectively.

 Making the control activities effective. Making effective control activities can be done
by reviewing employee performance, processing information to become information that
has accuracy and completeness, physical control of assets by adequate safeguarding
facilities that are protected from access to assets, and segregation of duties is useful to
give responsibilities to people different in order to avoid double duty and authority.

 Improve organizational culture. Improving organizational culture is done by

implementing the principles of the GCG (Good Corporate Governance) principle that are
interrelated to encourage the organization resources‟ performance to work efficiently

 Making the internal audit function effective. Although the internal auditor cannot
guarantee that fraud will not occur, he must use the proficiency of his position carefully
so that fraud detection is expected and be able to provide useful suggestions to
management to prevent fraud.

2.2 Review of Empirical Studies

Wubalem (2021) sought to investigate effectiveness of internal control on fraud prevention with
focus on selected commercial banks in Ethiopia. The study was guided by the following specific
objectives, that is, effectiveness of internal control measures on fraud detection and prevention,
effectiveness of preventive measures on fraud mitigation, causes of fraud in Ethiopian banking
industry and challenges to implementing effective internal control system to detect and prevent
fraud. The target population of this study was 9 (nine) commercial banks in Kenya. The study
adopted simple random sampling with the sample been drawn from the senior internal control

18
department staffs. The study used primary data. Both qualitative and quantitative analysis was
carried out.

The study concluded that, fraud has been committed by integration of employee with customer
of the banks. The study also concluded that fraud protection systems were not updated on a
timely basis, in different private banking sector despite the fact that fraudulent transactions are
becoming more complex and focused on technological innovation. Based on the result of the
study, though, the components of the internal control system (Control environment, risk
assessment, control activities, information and communication and monitoring activities) are
effective in addressing or alleviating and preventing the frequent occurrence of fraud in different
private banks of Ethiopia, still in some aspects of the control system it needs re arrangement and
implementing a clear polices to minimize the effects of fraud on financial growth of the private
banking sectors.

Kalkidan (2017), assessed fraud control practice with focus on selected branchesDashen Bank
S.C. The study was guided by the following specific objectives, that is, identify the existence of
anti-fraud policy and controlling mechanism to protect the bank from fraud, the types of fraud
experienced in the Dashen Bank, assess the effectiveness of the controlling system of the Bank,
to evaluate the awareness of employees about fraud and its controlling mechanisms. The target
population of this study was 9 (nine) commercial banks in Kenya. The study adopted simple
random sampling with the sample been drawn from the senior internal control department staffs.
The study used primary data. Both qualitative and quantitative analysis was carried out. The
study concluded that, the control control system components are inadequate with regard to
effectiveness.

Hussaini et.al (2021) revealed that there is a significant positive effect of information and
communication on fraud prevention and detection in deposit money banks in Nigeria. In
addition, it also revealed that quality of information, effectiveness of communication, fraud
investigation, and monitoring and fraud disclosure were the effective information and
communication on fraud prevention and detection in Deposit money banks in Nigeria.

19
2.3 Research Gap Analysis

Most of the literature reviewed will be adopted from countries whose strategic approach and
financial footing differs from the Ethiopian perspective. For example; Hussaini et.al (2021) did a
study in Nigerian banking sector, Ayodele (2021) did a study on Nigerian Banking sector,
Kashona (2019) did a study on Namibian banking sector, Nyakarimiet.al (2020) did a study on
Kenyan banking industry and Samuel et.al (2021) did a study on Kenyan banks.

Thus, the researcher believes that there is a research gap on the subject matter in the Ethiopian
banking sector. Therefore, this study sought to fill this gap by establishing the effect of internal
control system (control environment, risk assessment, control activities,

2.4 Conceptual Framework

The purpose of the framework is to show the relationship between prevention and detection of
fraud in AB in by implementing effective internal control components (Control environment,
risk assessment, control activities, information and communication and Monitoring activities).

Independent Variables Dependent Variables

Internal Control Components Prevention and Detection of

Fraud
 Control Environment
 Risk Assessment
 Control Activities
 Information and
Communication
 Monitoring

Figure 2.2: The

Monitoring
Conceptual Framework of Internal Control in fraud prevention and detection

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 CHAPTER THREE
RESEACH METHODOLOGY

This chapter discusses the methods that will be used in the collection and analysis of data to the
basic questions of the study. It explains the research approach, types and sources of data,
sampling techniques and data collection methods used; and describe how data collected from the
research has been analyzed.

2.1 Research Approach

According to Cresswell J. (2014), research approaches are plans and procedures for research that
spend the step from broad assumptions to detailed methods of data collection, analysis and
interpretation. This study used quantitative approaches only as this approach is useful for testing
objective theories by examining the relationshipamong variables. These variables, in turn, can be
measured, typically on instruments, so thatnumbered data can be analyzed using statistical
procedures.

2.2 Research Design

The research design is a framework specifying the study‟s variables and it starts with a plan for
selecting the sources and types of information used to answer the research question (Saunders
et.al, 2009). The research designs employed are both explanatory and descriptive study design.
Explanatory study designs are important in answering the “how” questions. Such designs seek to
explain how one variable affects another. Explanatory study design was utilized because the
study needs to establish the effect of internal control system on the detection and prevention of
fraud in Abay Bank. Whereas, descriptive study design was utilized to describe thecharacteristics
of respondents, ICS, and fraud prevention and detection in AB.

2.3 Types and Sources of Data

The study used primary data. These are data collected specifically for the purpose of the research
work or could be described as those data that were observed and recorded for the first time. The
research used primary data obtained by undertaking self-administered questionnaire to branch
staffs. The research obtained primary data by undertaking self-administered questionnaire to
selected branch staffs.

21
The questionnaire employed for this study was mostly closed ended where answer was provided
for the respondent from which they were required to tick the appropriate one (s).

2.4 Target Population of the Study

According to Mugenda and Mugenda (2003), a population is a complete set ofindividuals, cases
or objects with some common observable characteristics. The target population of the study was
860 employees of 102 Addis Ababa city branches. The population was obtained from Human
Capital Management Department as at 28th February 2022.Of the 860 employees, 116
aremanagerial and the rest 744 are clerical employees.

2.5 Sample Size and Sampling Technique

The sample that is used for this study constitutes managerial and non-managerial (clerical)
employees that are working at Addis Ababa branches. Simple random sampling was used to
select the respondents at 102 Addis Ababa city branches. Simple random sampling wasused to
select the managerial level and other employees. This was to ensure that employees atall level
are well represented in the study and all of them were given equal chance of beingselected to
participate in the study as respondents.

Accordingly, using Yamane T.(1967) sample size determining formula at 95% confidence level,
degree of variability=0.5 and level of precision/sampling error ±5%, 273 respondents from 102
branches were administered through questionnaire to undertake this research the researcher will
select Addis Ababa city branches bases of their length of service and number of customer they
serve using to select respondents for the questionnaire.

Where:

n= Sample size = 273

N= Population size = 860
e= Acceptable sampling error = 0.05

22
2.6 Data collection procedures

The researcher randomly selected managerial and non-managerial staffs working at selected
branches and distributed the structured questionnaire for those staffs. Employees wererandomly
selected from city branches.For the purpose of this research study self- administered instruments
was designed. Pre-testing of the questionnaire was conducted to get accurate and
relevantinformation in advance from the participant of the research.

2.7 Validity and Reliability Test

2.7.1 Reliability

To ensure reliability of instruments, the measurement variables were taken from other associated
researches and modified to suit the purpose of the study the survey was conducted as follows: i)
a pilot survey was conducted to ensure the reliability of the questionnaire. Accordingly, the
researcher distributed ten (10) copies of the questionnaire to AB staffs who are not part of the
sample; ii) the reliability of the instrument was tested using Cronbach‟s Alpha (α) test, where
values 0.9 or higher indicate excellent reliability, values starting from 0.8 to .89 indicate good
reliability, values starting from 0.7 to .79 indicate acceptable reliability, values starting from 0.6
to .69 indicate questionable reliability, values starting from 0.5 to .59 indicate poor reliability,
George and Mallery (2010). With the aid of SPSS 26, CronbachAlpha (a) test was conducted on
all the constructs with multiple items to see if the benchmark of 0.70 was adhered to. The table
below displayed the result:

Table 3.1: Internal Consistency Results of Composite Reliability

Construct No of Cronbach Internal
Items Alpha (a) Reliability
Control Environment 5 0.808 Good
Risk Assessment 5 0.756 Acceptable
Control Activities 5 0.749 Acceptable
Information and Communication 5 0.883 Good
Monitoring Activities 5 0.754 Acceptable
Detection and Prevention of fraud 5 0.745 Acceptable

Source: Computation from survey data (2022)

23
Table 3.1shows that all the Cronbach‟s Alpha (α) values exceeded the recommended value
of0.70 indicating an acceptable internal consistency. Thus, the items on each construct of the
study were reliable.

2.7.2 Validity

Whereasvalidity refers to the degree to which a data collection instrument measures what it is
expected to measure. The test instrument used in this study was questionnaire. A questionnaire is
said to be valid if it collects the information the researcher intends to obtain from the
respondents. To ensure the validity of the survey instrument, it was pilot tested before use in
actual data collection. The survey instrument was pilot tested and the results used in removing
ambiguities, refining, and improving the data collection instruments in order to increase the level
of instrument validity.

Copies of questionnaire were given to two experts to judge the validity of the questions
according to the objectives. After the assessment of the questionnaires, necessary adjustments
were made bearing in mind the objectives of the study. A content validity index (CVI) was
computed using the following formula,

CVI = No of questions declared valid/ Total no of questions in the questionnaire

Table 3.2: Content Validity for questionnaire

Construct Expert 1 Expert 2 Average
Control Environment 0.8 1.0 0.9
Risk Assessment 0.8 0.8 0.8
Control Activities 1.0 0.8 0.9
Information and 1.0 1.0 1.00
Communication
Monitoring 0.8 0.8 0.8
Detection and Prevention of 0.8 1.0 0.9
Fraud
Average .86 0.9 .88
Source: Computation from survey data (2022)

From table 3.7.1 CVI 0.85 which is greater than 0.70 the research instrument is considered Valid

24
2.8 Data Analysis Method

The researcher used both descriptive and inferential statistics method to analyze the data
collected through questionnaire. The particular descriptive statistics were mean scores, frequencies
and standard deviations. Whereas, the particular inferential statistics were regression analysis. The
researcher used SPSS version 26 software to analyze the questionnaires and describe the result.

2.9 Model Specification

This study applied a multiple regression model to establish the relationship between the dependent
variable (detection and prevention of fraud) and the independent variables (components of internal
control). The model took the following format:

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 + β5X5+ Ɛ

Where Y – dependent variable (level of fraud prevention and detection)

X1 – control environment
X2 – risk assessment
X3 –control activities
X4 – monitoring activities
X5 – information and communication
β0 = the intercept term- constant which would be equal to the mean if all slope
coefficients are 0.
β1, β2, β3, β4, and β5 are the coefficients associated with each independent variable
which measures the change in the mean value of Y, per unit change in their respective
independent variables.
Ɛ – is the error term which is assumed to be normally distributed with mean zero and
constant variance

2.10 Measurement of Variables

The independent variables of this study are components of internal control (control environment,
risk assessment, control activities, information and communication, and monitoring activities)
and the dependent variable is the detection and prevention of fraud

25
2.11 Ethical considerations

To ensure confidentiality of the information provided by the respondents and to ascertain

theethical coded and practice in this study, the researcher implemented the following activities:

The researcher tried to avoided personality identification questions of therespondents rather the
respondents were coded and presented in a generalized manner.

The researcher duly and appropriately informed the respondents of the purpose of the study,why
and how they were chosen to participate in the study and assured them of theirconfidentiality in
their responses which are unanimous.

Authors quoted and cited are duly acknowledged in this study through referencing. Findingsfrom
this study were presented in a generalized manner.

Honesty was maintained in the course the study by ensuring that data collected,
presented,analyzed and interpreted were strictly based on the findings

In the course of data management, quantitative results were reported in aggregated form using
such measures as percentage, means, correlations and regression coefficients.

26
 CHAPTER FOUR
PRESENTATION,ANALYSIS AND INTERPRETATION OF RESULTS

This chapter discusses the results and analysis of the survey that was conducted. The main aim of
the survey was to collect data that would give a wider picture of the effect of internal control in
fraud prevention and detection in AB. The data was analyzed and presented informs of frequencies
percentages, and tables charts. Data was collected from managerial and clerical staffs. The
questions were focused in five areas, including background of the respondent, types and causes of
fraud, effectiveness of internal control components in fraud prevention and detection,employee
awareness with regard to effectiveness of the bank in detecting and preventing fraud and finally
challenges or limitations of internal control in fraud prevention and detections.

All tables as well as graphs in the analysis were generated from survey data using the
statisticalpackage SPSS 26 after being coded.

4.1 Response Rate of Respondents

Table 4.1: Response Rate

Questionnaire Frequency Percentage

Returned 209 76.56
Not Returned 64 23.44
Total 273 100
Source: Computation from survey data (2022)

As the above table shows out of 273 copies of questionnaire administered to various branch staffs
of Addis Ababa city branches, 209copies of questionnaire were fully filled and returned which
represent 76.56% while the remaining 64 copies of questionnaire which represent 23.44% were
not returned to the researcher.According to Mugenda and Mugenda, (2003), this response rate was
excellent as it represents and conforms a response rate of 50% is adequate for analysis; a response
rate of 60% is good and a response rate of 70% and over is excellent.

27
4.2 Demographic Profile of Respondents:

Table 4.2:Demographic Profile of Respondents

Profile Category Frequency Percent

Male 142 67.9
Gender Female 67 32.10
25 and below 54 25.8
Age 26-35 years 135 64.6
36-45 years 20 9.6
Diploma 1 0.5
st
Educational 1 Degree 169 80.9
nd
Background 2 Degree 39 18.6
Manager 36 17.2
Assistant Manager 8 3.8
Job position Accountant 22 10.5
Auditor 49 23.4
Credit Officer 13 6.2
Cashier 7 3.3
CSO 74 35.4
Job tenure 1-3 years 77 36.8
(experience) 4-6 years 82 39.2
7-9 years 49 23.4
10 years and above 1 0.5
Source: Computation from survey data (2022)

4.2.1 Gender Distribution of Respondents

Regarding the gender distribution of the employees of the selected Addis Ababa city branches
included in the study, more than half of the respondents, 67%(140out of 209) were males and the
remaining proportion,33 % (69 out of 209) representing females respondents. This may imply that
male respondents were slightly more willing to respond to the questionnaire than female
respondents.

28
4.2.2 Age Distribution of Respondents

Concerning the age distribution of the respondents of the bank, more than half of the respondent,
64.6% (135 out of 209) were within the age group of 26-35 years, 25.8% (54 out of 209) of the
respondents were within the age group of 25 and below years and 9.6% (20 out of 209) of the total
valid respondents were within the age group of36-45 years. No respondent was found to be 46 and
aboveyears.This implied that most of the respondentsin the study are adult and energetic, within
the active labour age.

4.2.3 Education Qualification of Respondents

Regarding the educational background of the respondents, majority, 90% (188 out of 209) of the
respondents had first degree qualification, 0.5% (1 out of 209) respondent had diploma
qualification and the remaining 9.5% (20 out of 209) of respondents who were found to have
master‟s degree qualification. However, no respondent was found with Ph.D qualification. This
implies that the respondents were capable of understanding the issues and respond the
questionnaire.

4.2.4 Position Held by Respondents

With regards to the position held by respondents in the bank, 16.3% (34 out of 209) were
managers, 3.8% (8 out of 209) were assistant managers, 10.5% (22 out of 209) were accountants,
23.4.9% (49 out of 209) were auditors, 6.2% (13 out of 209) were credit officers, …% (….. out of
209) and the remaining 3.3% (7 out of 209) and 36.4% (76 out of 209) were cashiers and CSOs
respectively.The results confirm that most of the respondents were in their adulthood and hada
sound academic background.

4.2.5 Job Tenure of Respondents

Concerning the duration of work of the respondents in the bank, 36.8% (77 out of 209) had
between 1-3 years working experience with the bank, 39.2% (82 out of 209) had between 4-6
years of working experience with bank, 23.4% (49 out of 209) of the respondents had been
working with the bank for 7-9 years, and finally the remaining 0.5% (1 out of 209) was found to
have been working with the bank for 10 years and above. On the average, all the respondents had
29
at least 1.88 years working experience with the bank. The results of the survey shows that the
respondents have the essential experience to provide the required answers to the questionnaire

4.3 The extent of the existing IC practices in Abay Bank

The first objective of the study was to highlight the extent of the existing internal control practices
on preventing and detecting fraud in AbayBank as perceived by the employees.

4.3.1 Control Environment

Table 4.3: Control Environmentin fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 The bank has clear objectives 3.87 1.066 Agree
2 The management communicate the objectives so 3.21 1.229 Neutral
as to provide effective direction to employees
3 There is significant compliance in operational 3.63 1.106 Agree
and financial rules and regulations
4 The bank has a culture, code of conduct that 3.55 1.118 Agree
reward performance systems that support the
business objectives
5 The management demonstrate, through its actions 3.31 1.245 Neutral
and policies the commitment to competence,
integrity and trust
Average Mean 3.51 Agree
Source: Researcher Computation, (2022)

As illustrated in Table 4.3respondents agree with “the bank has clear objectives “with mean of 3.87
and SD of 1.066; “compliance to operational and financial rules and regulations”with mean of
3.63 and SD of 1.106;similarly on culture and code of conduct the result shows employee
agreement with the mean of 3.55 and SD of 1.118; finally respondents are neutral on “the
management demonstrate through its actions and policies the commitment to competence, integrity and
trust” withmean of 3.31 and SD of 1.245 and the communication of objectives to employees the
result also shows neutral with mean 3.21 and SD of 1.229

Therefore the construct Control Environment has an overall average mean 3.51 which was rated
as agreement, implying that the bank‟s overall control environment is generally good.

30
4.3.2 Risk Assessment

Table 4.4: Risk Assessmentin fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 The Board has clear strategies for dealing with the 3.67 1.051 Agree
significant risks of frauds occurring
2 There are policies on how to manage these risks 3.20 1.224 Neutral
3 Risks of frauds occurring are identified and assessed on 3.00 1.246 Neutral
an on-going basis
4 Authority, responsibility and accountability are clearly 3.64 1.123 Agree
defined in the bank
5 The management have the knowledge, skills and tools to 3.81 1.177 Agree
effectively manage risks to the achievement of their
objective
Average Mean 3.46 Agree
Source: Researcher Computation, (2022)

Table 4.4 shows that on “the management has the knowledge, skills and tools to effectively
manage risks the result indicated respondents‟ agreement with a mean of 3.81 and SD of 1.177;
similarly respondents agree on “the board has clear strategies for dealing with risks of fraud
occurring” with the mean of 3.67 and SD of 1.051; and on “authority, responsibility and
accountability are clearly defined in the bank” with the mean of 3.64 and SD of 1.123; finally on
the on-going basis of assessing Risks of frauds occurring and policies to manage risks the results
indicated neutral with mean of 3.20 and SD of 1.224 and mean 3.00 and SD of 1.246
respectively. In general Risk Assessment was rated well with an overall average mean of 3.46,
implying that risk assessment of fraudulent practices in the bank is good in the bank.

4.3.3 Control Activities

Table 4.5: Control Activitiesin fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 The bank communicate to its employees what is expected of 3.90 .993 Agree
them and the scope of their freedom to act
2 The management follow the bank rules, regulations, 4.05 .894 Agree
procedures in recruitment of employees
3 The employees in the bank have the knowledge, skills and 4.12 .840 Agree

31
 tools to support the achievement of the bank objectives
4 There is proper segregations of duties 4.10 .811 Agree
5 There is proper authorization and approval of transactions 3.96 .932 Agree
Average Mean 4.03 Agree
Source: Researcher Computation, (2022)

Regarding Control activities which help to ensure that employee follow lay down procedures;
Table 4.5 indicates that respondents agree on the employees‟ knowledge and skills with mean of
4.12 and SD of .840 implying the bank has high skill personnel; proper segregations of duties
towards control the results indicated agreement with a mean of 4.10 and SD of .811. Similarly,
management follows the bank rules, regulations, procedures results indicate agreement with a mean of
4.05 and SD of .894. Finally, respondents agree on proper authorization and approval of transactions
and on the communication of what is expected of employees with the mean of 3.96 and SD of
.932 and mean of 3.9 and SD of .993 respectively. Control activities construct indicated that the
rating was generally well with the overall mean of 4.03, hence, implying that management
emphasis the necessity of following the lay down procedure.

4.3.4 Information and Communication

Table 4.6:Information and Communication in fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 The management receive timely, relevant and reliable reports 3.53 1.165 Agree
on progress against the bank objectives
2 The management receive timely, relevant and reliable reports 3.48 1.136 Agree
on indicators of change, such as employee attitudes etc.
3 The information needs and related information systems are 3.53 1.065 Agree
reassessed to meet objectives.
4 The periodic reporting procedures are effective in 3.91 1.144 Agree
communicating accounts of the bank position and prospects
5 There are established channels of communication for 3.27 1.227 Neutral
individuals to report suspected breaches of laws or regulations
Average Mean 3.54 Agree
Source: Researcher Computation, (2022)

The result on table 4.6 indicated that effective communicating accounts the results show
agreement with the mean of 3.91 and SD of 1.144 implying that timely report are received as

32
expected; similarly respondents agree „on the received of timely, relevant and reliable
reports‟with the mean of 3.53 and SD of 1.165; information needs and related information
systems the results indicated agreements with a mean of 3.53 and SD of 1.065. Similarly, on the
on indicators to changes, the result shows agreement with mean 3.48 and SD of 1.136. Finally,
on report of suspected breaches of laws and regulations the respondents are neutral with a mean
3.27 of SD of 1.227. The construct Information and communication overall mean 3.54 this
implied that there are effective or timely communication of accounting results.

4.3.5 Monitoring Activities

Table 4.7: Monitoring Activitiesin fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 There are on-going processes, which monitor the effective 3.41 1.141 Agree
application of the policies, process
2 Such processes may include control self-assessment, 3.49 1.249 Agree
confirmation by personnel of compliance with policies and
codes of conduct.
3 There are effective follow-up procedures to ensure that 3.65 1.073 Agree
appropriate action or changes against defaulters
4 There are appropriate communication to the Board on the 3.58 1.081 Agree
effectiveness of the on-going monitoring processes
5 The monitoring personnel report any significant failure or 3.99 0.925 Agree
weaknesses on a timely basis.
Average Mean 3.62 Agree
Source: Researcher Computation, (2022)

With respect to Monitoring and supervision of employee activities to improve in work process
and the entire system, the results in table 4.7 indicated that respondents agree monitoring
personnel report of any significant failure or weaknesses the results indicated disagreement with
a mean of 3.99 and SD of .925; effective follow-up of procedures mean of 3.65 and SD of
1.075;appropriate communication to the board on the effectiveness of the on-going monitoring
processes mean of 3.58 and SD of 1.081. Similarly, monitoring personnel report of any
significant failure or weaknesses and on-going processes of monitoring policies and process the
results indicated agreement with mean of 3.49 and SD of 1.249 and mean 3.41 and SD of

33
1.141.The construct monitoring overall mean indicated well rated performance with an average
mean of 3.62, hence, implying that monitoring and evaluation in AB is also good.

The overall average mean of all the five constructs stood at 2.339 which is low rated implying
that the internal control System of AB is weak and not effective enough prevent and detect
fraudulent activities.

4.4 The level of fraud prevention and detection in AB

Table 4.8: The level of fraud prevention and detection

No Item Mean SD Mean

Interpretation
1 The bank has effective internal audit 4.13 .878 Agree
2 The bank has vigorous fraud hotlines 3.74 .982 Agree
3 The bank has a structure for regulatory compliance strategies 3.92 .937 Agree
4 The bank Probe suspect financial performance 3.80 .963 Agree
5 The bank has a risk assessment culture 3.89 1.032 Agree
Average Mean 3.90 Agree
Source: Researcher Computation, (2022)

As the above table depicts the average mean of the extent of the existing IC practices on
preventing and detecting fraud is 3.90, this implying that most of the bank‟s existing IC practices
are helpful or effective on preventing and detecting fraud.

4.5 The Relationship between Internal Control and Fraud Prevention and Detection

4.5.1 Correlation Analysis

This study employs correlation analysis, which investigates the strength of the relationships
between the studied variables. Pearson correlation analysis was used to provide evidence of
convergent validity. Pearson correlation coefficients reveal magnitude and direction of
relationships (either positive or negative) and the intensity of the relationship (-1.0 + 1.0).
Correlations are perhaps the most basic and most useful measure of association between two or
more variables (Marczyk, Dematteo and Festinger, 2005).

A correlation analysis with Pearson´s correlation coefficient (r) was conducted on all variables in
the study to explore the relationships between Internal Control and Fraud Detection and

34
 Prevention. To interpretthe strengths of relationships between variables, the guidelines suggested
by Field (2005) were followed, mainly for their simplicity. His classification of the correlation
coefficient (r) is as follows: 0.1– 0.29 is weak; 0.3 – 0.49 is moderate; and > 0.5 is strong

Under this topic, the Correlation analysis was conducted to investigate the relationship between
Internal Control components (CE, RA, CA, IC and MA)) with Fraud Prevention and Detection.

Table 4.9: Pearson Correlation Matrix between IC components and Fraud Prevention and
Detection

Correlations
Fraud
Prevention
CE RA CA IC MA and Detection
** ** ** ** **
CE Pearson Correlation 1 .421 .347 .466 .436 .427
Sig. (2-tailed) .000 .000 .000 .000 .000
N 209 209 209 209 209 209
** ** ** ** **
RA Pearson Correlation .421 1 .352 .525 .507 .457
Sig. (2-tailed) .000 .000 .000 .000 .000
N 209 209 209 209 209 209
** ** ** ** **
CA Pearson Correlation .347 .352 1 .410 .495 .735
Sig. (2-tailed) .000 .000 .000 .000 .000
N 209 209 209 209 209 209
** ** ** ** **
IC Pearson Correlation .466 .525 .410 1 .734 .509
Sig. (2-tailed) .000 .000 .000 .000 .000
N 209 209 209 209 209 209
** ** ** ** **
MA Pearson Correlation .436 .507 .495 .734 1 .572
Sig. (2-tailed) .000 .000 .000 .000 .000
N 209 209 209 209 209 209
** ** ** ** **
Fraud Pearson Correlation .427 .457 .735 .509 .572 1
Prevention Sig. (2-tailed) .000 .000 .000 .000 .000
and N 209 209 209 209 209 209
Detection
**. Correlation is significant at the 0.01 level (2-tailed).

Source: Researcher Computation, (2022)

1. Correlation Analysis between CE with Fraud Prevention and Detection

35
Hypothesis: 1

 H1: Control Environment has positive and significant association on fraud prevention and
detectiondimensions of AB.
 H0: Control Environment has negative and insignificant association on fraud prevention
and detection dimensions of AB.

The result on the above table 4.9 shows that, the control environment of the bank has moderate,
positive and statistically significant association (r= 0.427, p<0.01) with fraud prevention and
detection. This means an increase in control environment of the Bank will bring an increment on
fraud prevention and detection. Therefore, the null hypothesis (H0) is rejected.

2. Correlation Analysis between RA with Fraud Prevention and Detection

Hypothesis: 2

 H1: RA has positive and significant association on fraud prevention and detection
dimensions of AB.
 H0: RA has negative and insignificant association on fraud prevention and detection
dimensions of AB.

As indicated in the above table 4.9, the correlation coefficient result (r=0.457 p<0.01) between
RA and Fraud Prevention and Detection is moderate positive and significant association in Abay
Bank S.C. This implies that, when RA increase fraud prevention and detectionof the Bank also
increased. Therefore, the null hypothesis (H0) is rejected.

3. Correlation Analysis between CA with Fraud Prevention and Detection

Hypothesis: 3

 H1: CA has positive and significant association on fraud prevention and detection
dimensions of AB.
 H0: CA has negative and insignificant association on fraud prevention and detection
dimensions of AB.

36
From the above table 4.9, it can be seen that CA (r=0..735, p<0.01) is positively correlated with
Fraud Prevention and Detection. This implies the presence of moderate positive relationship
between CA and Fraud Prevention and Detection in Abay Bank S.C. This implies that, when CA
increase fraud prevention and detection of the Bank also increased. Therefore, the null
hypothesis (H0) is rejected.

4. Correlation Analysis between IC with Fraud Prevention and Detection

Hypothesis: 4

 H1: IC has positive and significant association on fraud prevention and detection
dimensions of AB.
 H0: IC has negative and insignificant association on fraud prevention and detection
dimensions of AB.

The above table 4.9, it can be shows that IC (r=0.509, p<0.01) is positively correlated with Fraud
Prevention and Detection. This implies the presence of moderate association between IC and
fraud prevention and detection in the Bank and which is also statistically significant at 99%
degree of confidence interval. Therefore, the null hypothesis (H0) is rejected.

5. Correlation Analysis between MA and IC with Fraud Prevention and Detection

Hypothesis: 5

 H1: MA has positive and significant association on fraud prevention and detection
dimensions of AB.
 H0: MA has negative and insignificant association on fraud prevention and detection
dimensions of AB.

As indicated in the above table 4.9, the correlation coefficient result (r=0.572, p<0.01) between
MA and Fraud Prevention and Detection.is moderate positive and significant association in
AbayBank S.C. This implies that, when MAincrease fraud prevention and detection of the Bank
also increased. Therefore, the null hypothesis (H0) is rejected.

37
In general, the correlation analysis revealed that Internal Control Elements (CE, RA, CA, IC and
MA) are positively and significantly correlated with fraud prevention and detection of the bank.

4.6 The effect of IC on Fraud Prevention and Detection in AB

4.6.1 Assumptions Tests

It is important to determine whether all the necessary model assumptions are valid before
performing inference. In constructing our regression models we assumed normality, no or little
multicollinearity, and no auto-correlation.

4.6.1.1 Sample Size

Different statisticians and researchers tend to give different guidelines concerning the number of
cases required for multiple regressions. Tabachnick&Fidell (2001), give a formula for
calculating sample size requirements, taking into account the number of independent variables to
use: N > 50 + 8m (where m = number of independent variables). In this study five independent
variables had existed and cases were 209. Therefore, the study satisfied sample size assumption.

4.6.1.2 Normality Assumption

The study used two methods of assessing normalitynumerically (Skewness and Kurtosis).
Skewness and Kurtosis values greater than 1 and less than -1 are considered being abnormally
distributed (Gamst, Meyers, &Guarino, 2008). Table 4.10below summarizes the Skewness and
Kurtosis values of the constructs.

The Skewness and Kurtosis values for the independent variables (C.E, R,A, C.A, I.C and M.A )
and the dependent variable (Prevention and detection of fraud) were all below 1 and greater than
-1 indicating that the data is normally distributed for these elements and there is no a serious
violation of normality.

Table 4.10: Summary of Skewness and Kurtosis Statistic

Variables Skewness Kurtosis

38
 Std.
Statistic Statistic Std. Error
Error
Control Environment -.624 .168 .065 .335
Risk Assessment -.304 .168 .176 .168
Control Activities -.724 .168 .372 .168
Information and Communication -.695 .168 .342 .168
Monitoring Activities -.429 .168 -.104 .168
Prevention and Detection of Fraud -.796 .168 .823 .168
Source: Computation from survey data (2022)

4.6.1.3 Multicollinearity Test

Before running regression, one should check for the problem of multicollinearity which is
present if there is high correlation between some of the independent variables. The study checks
this with the Variance Inflation Factor (VIF) which calculates the influence of correlation among
the independent variables on the precision of regression estimates. The VIF should not exceed
10. Tolerance is an indicator of how much of the variability of the specified independent variable
is not explained by the other independent variable in the model and is calculated using the
formula 1-R2 for each variable. If this value is less than 0.1 it indicates that there is possibility of
multicollinearity, but if it is greater than 0.1 it means that there is no multicollinearity
problemwith in the model.

The below multicollinearity statistics shows the tolerance value to be greater than 0.1 and VIF
value to be significantly below 10. This shows that there is no multicollinearity problem with in
the model.

Table 4.11: Multicollinearityof Determinant Factors

Collinearity Statistics
Model
Tolerance VIF
(Constant)
Control Environment .718 1.393
Risk Assessment .657 1.522
1 Control Activities .727 1.376
Information and
Communication .415 2.410
Monitoring Activities .403 2.484

39
 a. Dependent Variable: Prevention and Detection of fraud
Source: Computation from survey data (2022)

4.6.2 Regression Analysis and Hypothesis Testing

For the purposes of determining the extent to which the explanatory variables (Internal Control
elements such as control environment, risk assessment, control activities, information and
communication, and monitoring activities) explain the variance in the explained variable (fraud
detection and prevention), regression analysis was employed after the study met the regression
assumptions. The significance level of 0.05 with 95% confidence interval was used.

The combined effect of the independent variables on the dependent variable was detected using
multiple regression analysis. The result has been shown in table 4.12 below.

4.6.2.1 Model Summary

Table 4.12:Model Summary

Std. Error of the

Model R R Square Adjusted R Square
Estimate
a
1 .789 .623 .613 .48351
a. Predictors: (Constant), Control Environment, Risk Assessment, Control Activities,
Information and Communication, and Monitoring Activities
b. Dependent Variable: Fraud prevention and Detection
Source: Computation from survey data (2022)

The result indicated that correlation (R) of the internal control elements (independent variables)
with fraud prevention and detection (dependent variable) is 0.789. The R Square statistic tells us
the proportion of variance in the dependent variable that is accounted for by the independent
variables. In this case the co-efficient of determination (R2) 0.623 which means 62.3% of the
variance on fraud detection and prevention can be explained by the five internal control elements
(i.e., Control Environment, Risk Assessment, Control Activities, Information and
Communication, and Monitoring Activities), and the rest 37.7% to be explained by other factors

40
4.6.2.2 ANOVA

Table 4.13: ANOVA Result for Regression Model

Model Sum of Squares Df Mean Square F Sig.

Regression 78.313 5 15.663 66.997 .000b
1 Residual 47.457 203 .234
Total 125.770 208
a. Dependent Variable: Fraud prevention and Detection
b. Predictors: (Constant), Control Environment, Risk Assessment, Control Activities,
Information and Communication, and Monitoring Activities

Source: Computation from survey data (2022)

The above Table 4.14 showed an analysis of variance (ANOVA). F-ratio is a test of the null
hypothesis that the regression coefficients are all equal to zero. For this data, F= 66.997which is
greater than 1 and P<0.01; hence, which is statistically significant andrejects the null
hypothesis.Therefore, the model explains the relationship between the independent variables
(Internal Control Elements) and the dependent variable (Fraud Prevention and Detection). The
ANOVA test table confirms the acceptability of the model.

4.6.2.3 Regression Coefficient

Table 4.14:Multiple Regressions of Internal Control Elements on Fraud Prevention and

Detection

Standardized
Unstandardized Coefficients
Model Coefficients T Sig.
B Std. Error Beta
(Constant) .119 .214 .554 .580
Control
.840 .046 .088 1.729 .085
Environment
Risk Assessment .107 .052 .110 2.070 .040
1 Control Activities .603 .54 .564 11.148 000
Information and
Communication .063 .059 .071 1.067 .287
Monitoring
Activities .132 .061 .147 2.157 .032

41
a. Dependent Variable: Fraud prevention and Detection
b. Predictors: (Constant), Control Environment, Risk Assessment, Control Activities,
Information and Communication, and Monitoring Activities
Source: Computation from survey data (2022)

As stated earlier, this study aims to identify the most contributing, independent variable in the
prediction of the dependent variable. Thus, the strength of each predictor (independent variable)
influencing the criterion (dependent variable) can be investigated via standardized Beta
coefficient. The beta is the amount that the dependent variable increases or decreaseswhen the
independent variable increases by one unit of standard deviation. The independent variable that
has the larger value of Beta coefficient brings more support to the independent variable as it is
more important determinant in predicting the dependent variable.

As it is depicted in the above table 4.14, the results of the regression analysis highlighted that not
all Internal Control elements contribute equally to the fraud prevention and detection of AB. The
study indicated that among the five Control Elements, Control Activities is the first with the
largest β value of 0.564 followed by Monitoring Activities with β value of 0.147, Risk
Assessment with β value of 0.110, Control Environment with β value of 0.088 and Information
and Communication with β value of .071 respectively.

As illustrated in the above table 4.14, the Sig. values of control environment, risk assessment,
control activities, information and communication, and monitoring activities are <.005.This test
shows that the coefficients of the five predictors are statisticallysignificant at less than 5% level
of significance. Thus, all five variables were found to be significant predictors of Fraud
Prevention and Detection in AB. The interpretation for this outcome can be, among the five
Internal Control Elements, Control Activities relatively superior contribution for Fraud
Prevention and Detection in case of AB.

The objective of the regression in this study is to find such an equation that could be used to find
the impact of predictors on dependent variable. The specified regression equation takes the
following form:

Y= α + β1X1 + β2X2 + β3X3 + β4X4 + β5X5 + ε

Y= Fraud Prevention and Detection at AB

42
α= Y intercept
β1to β5 = regression coefficients
X1 = Control Environment
X2 = Risk Assessment
X3 = Control Activities
X4 = Information and Communication
X5 = Monitoring activities
ε = Error Term

So the equation comes as:

Fraud Prevention and Detection = 0.119 + (0.088) X1 + (0.110) X2+ (0.564) X3 + (0.071) X4+
(0.147) X5

The hypothesis test results based on standardized coefficient beta and P-value to test whether the
hypothesis to reject or not reject. As shown from above Table 4.14 the Control Environment of
AB, P-value is significant (P< 0.0) and the beta value is positive (beta= 0.088). Therefore, the
result supported the initial hypothesis and infers that Control Environment has a positive effect
on Fraud Prevention and Detection of AB. The finding was supported by (Gedion, 2021)
investigated the effect of internal control on fraud prevention in commercial banks Ethiopia and
concluded that control environment has a positive and strong impacts detection and prevention of
fraud.

Regarding to Risk Assessment of AB, P-value is significant (P< 0.05) and the beta value is
positive (beta = 0.110). Therefore, the result supported the initial hypothesis and infers that Risk
Assessmenthas a positive effect on Fraud Prevention and Detection of AB. The finding was
supported by (Wubalem, 2021) investigated the effectiveness of internal control system for
detection and prevention of fraud the case of selected commercial banks in Ethiopia and
concluded that Risk Assessment has a positive and strong impacts detection and prevention of
fraud.

Control Activities of AB, P-value is significant (P< 0.05) and the beta value is positive (beta =
0.564). Therefore, the result supported the initial hypothesis and infers that Control Activities has
a significant and positive effect on Fraud Prevention and Detection of AB. The finding was
supported by (Gedion, 2021) investigated the effect of internal control on fraud prevention in
43
commercial banks Ethiopia and concluded that control activities have a positive and strong
impacts detection and prevention of fraud.

The same is true for Information and Communication of AB, P-value is significant (P< 0.05) and
the beta value is positive (beta = 0.071). Therefore, the result supported the initial hypothesis and
infers that Information and Communication has a positive effect on Fraud Prevention and
Detection of AB. The finding was also supported by (Wubalem, 2021) investigated the
effectiveness of internal control system for detection and prevention of fraud the case of selected
commercial banks in Ethiopia and concluded that information and communication has a positive
and strong impacts detection and prevention of fraud.

Finally, Monitoring Activities of AB, P-value is significant (P< 0.05) and the beta value is
positive (beta = 0.147). Therefore, the result supported the initial hypothesis and infers that
Monitoring Activities has a positive effect on Fraud Prevention and Detection of AB. The
finding was supported by (Wubalem, 2021) investigated the effectiveness of internal control
system for detection and prevention of fraud the case of selected commercial banks in Ethiopia
and concluded that monitoring activities has a positive and strong impacts detection and
prevention of fraud.

4.7 Challenges of Internal Control

The last objectives of the research was to identify the challenges that can hinder the effective
implementation of internal control system in detecting and preventing fraud in bank and the
responses are analyzed in the table below.

Table 4.15: Challenges of Internal Control in Preventing and Detecting Fraud in AB

No Item/Question Mean SD Mean

Interpretation
1 Breakdowns (personnel misinterpret instructions) 3.58 1.085 Agreed
2 Management override (management deviates from the bank‟s 3.61 .945 Agreed
policies or procedures for fraudulent reasons)
3 Collusion between internal or internal and external parties 3.94 1.061 Agreed
4 Human judgment under pressure to conduct business based on 3.78 1.113 Agreed
the information at hand
5 System errors (the risk that automated system controls 3.71 1.030 Agreed

44
 breakdown without notice)
Average Mean 3.724 Agreed
Source: Researcher Computation, (2022)

The result in Table 4.10 shows that the mean on the collusionconstruct is 3.94and SD of 1.061
which implies respondents agreed that collusion between internal or internal and external parties
make the detection and prevention of fraud challenging; followed by human judgment under
pressure with mean of 3.78 and SD of 1.113; system error with mean of 3.71 and SD of 1.030;
override by management with mean of 3.61 and SD of .945, and finally Breakdowns (personnel
misinterpret instructions) with mean of 3.58 and SD of 1.030.

The overall average mean of all the five constructs stood at 3.724 which implythe presence
challenges in the proper implementation of internal control System in preventing and detecting
fraud in AB.

45
 CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION

This chapter deals with summary, conclusion and recommendations. In this chapter first, a
summary of the study was presented. Second, conclusions of the major findings are drawn.
Lastly, some possible recommendations are forwarded on the basis of the major findings of the
study.

5.1 Summary of Major Findings

The purpose of the study was to examine the effect of internal control on fraud prevention and
detection in AB, the case of Addis Ababa City Branches. Primary method of data collection were
utilized where 273 questionnaires were distributes to AB Addis Ababa city branch staffs from
which 209 were responded and used for this study. The study employed the use of descriptive
statistics and inferential statistics methods like mean scores, frequencies and standard deviations
and regression analysisandSPSS version 26 software was used to analyze the questionnaires and
describe the result. The study has used five explanatory variables of internal control
Components(CE, RA, CA, I.C and MA) to measure their effect in detecting and preventing fraud
in AB.

Respondents agreed with the extent of the existing control practices in Abay Bank on fraud
prevention and detection. Accordingly:

The study revealed thatthe control environment components like having clear objective,
significant compliance to operational financial rules and regulations, effective code of conducts
that reward performance system; risk assessment components like management‟s having
knowledge, skills and tools to effectively manage risks,board‟shaving clear strategies for dealing
with the significant risks of frauds and existence of authority, responsibility and accountability;
control activities components like employees having the knowledge, skills and tools, existence
proper authorization and approval of transactions and management follow the bank rules,
regulations, procedures; Information and communication components like presence of effective
periodic reporting procedures, availability of timely, relevant and reliable report to management;
and finally, the monitoring activities components like presence report of any significant failure

46
or weaknesses on a timely, existence of reporting system on the effectivenessof the on-going
monitoring system and maintenance of procedure of follow-ups actions against defaulters All
the five internal control components have positively and significantly affect the fraud prevention
and detection practices in Abay Bank.

Regarding the level of fraud prevention and detection in AB, the study showed that most of the
bank‟s existing IC practices are helpful or effective on preventing and detecting fraud in Abay
Bank.

As per the findings of the study, there observed a positive relationship between the independent
variables (the five components of internal control) and the dependent variable (fraud prevention
and detection). This means an increase in one component of internal control systemwill bring an
increment on fraud prevention and detection. Therefore, the null hypothesis (H0) describing
internal control components have negative and insignificant association on fraud prevention and
detection dimensions of AB are all rejected.

Regarding challenges on internal control components in preventing and detecting fraud, the
result showed that collusionconstruct collusion between internal or internal and external parties
make the detection and prevention of fraud challenging; followed by human judgment under
pressure. Whereas,system error, override by management and Breakdowns implythe presence
challenges in the proper implementation of internal control System in preventing and detecting
fraud in AB.

Finally, Pearson correlation result shows that all five explanatory variables (internal control
components) have positive and statistically significant relationship with fraud detection and
prevention. Moreover, Regression result shows that all internal control components have
statistically significant or it does have a cause and effect relationship with fraud detection and
prevention in Abay Bank.

5.2 Conclusion

The study concluded that the model developed in the study is significant and sufficient in
predicting the level of fraud prevention and detection. From the above findings, a conclusion is
made that control activities components lead to higher extent of fraud prevention and detection.

47
Proper segregations of duties, proper authorization and approval of transactions, employees‟
knowledge, skills and tools,management follow the bank rules, regulations, procedures in
recruitment of employees, communication to employees what is expected of them and the scope
of their freedom to act plays a major role in fraud prevention and detection.

There is a strong positive correlation between internal control and fraud prevention and detection
in Abay Bank, which implied that CE, RA, CA, IC and MA have capability of reducing
fraudulent practices.Therefore it can be concluded that all controls if not properly designed and
implemented may create opportunity forfraudulent practices to take place.

Regarding challenges on internal control components in preventing and detecting fraud, the
result showed the presence challenges in the proper implementation of internal control System in
preventing and detecting fraud in AB due to collusion, human judgment under pressure, system
error, override by management and Breakdowns.

5.3 Recommendation
The study concluded that internal control system (control environment, risk assessment,
information and communication, control activities and monitoring) have a significant effect on
fraud prevention and detection in Abay Bank. The following recommendations are made based
on the findings of the study:

Though the extent of the existing Internal Control practices in Abay Bank is generally good, to
prevent and detect the occurrence of fraud the management should communicate the employees
objectives of IC and what is expected of them, identifying and assessing risks of fraud occurring
on an on-going basis, establish channels of communication to report suspected breach of laws
and regulations and monitor the effective application of policies on an on-going basis.

The level of fraud prevention and detection is must be enhanced by effectively utilizing vigorous
fraud hotline so that both internal and external stakeholders of the bank reported actual and
suspected fraudulent activities within the bank.

A positive relationship between the independent variables (the five components of internal
control) and the dependent variable (fraud prevention and detection) means an increase in one
component of internal control system will bring an increment on fraud prevention and detection.

48
Therefore, the bank‟s management shall strive for the proper implementation internal controls
throughout the bank by all units.

No internal control system gives absolute assurance regarding fraud prevention and detection
rather it gives reasonable assurance. Challenges on proper implementation of internal control like
collusion between internal or internal and external, human judgment under pressure, system
error, override by management and breakdowns should be given important emphasis by
management of the bank.

5.4 Suggestion for Further Study

Based on the information gathered and the knowledge gained in this study, the researcher has
suggested some areas for further research:

The research work is only limited to Addis Ababa city branches (case study) of AB which is not
extended to bank level, further research can be done on Ethiopian Banks, primary data was
solely utilized in the study; alternative research can be employed using secondary sources of
data. This can approve or disapprove the current findings

49
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 APPENDICES
APPENDIX I: QUESTIONNAIRE

QUESTIONNAIRE FOR SAMPLED EMPLOYEES OF ABAY BANK S.C ADDIS

ABABA CITY BRANCHES
TOPIC: The Effect of Internal Control in Preventing and Detecting Fraud in Bank:-The
Case of AB Addis Ababa Region”

Dear Respondents,

The questionnaire below is aimed at achieving the aforementioned topic, and the successful
completion of it will lead to the award of onMasters Degree in Business Administration at St.
Mary‟s University. The researcher pledge to conceal the anonymity and confidentiality of all
persons who give out information as required by this questionnaire.

SECTION A: Bio-graphic Data of Respondents

1) Gender of respondent:
A. Male [ ] B. Female []
2) Age of respondent:
A. 25 years and below [ ] B. 26- 35years [] C. 36-45 years [] D. 46-55 years [ ] E.
56 years and above []
3) Educational level of Respondent:
A. Diploma [] B. 1st Degree [] C. 2nd Degree [] D. Ph.D [] E.
Any other please specify ______________________________
4) Position held at AB:
A. Manager [] B. Assistant Manager [] C. Accountant [] D. Auditor [ ] E.
Credit Officer [] F. Cashier [] G. Customer Service Officer [] H. Any
other?please specify ____________________________
5) How long have you been working with AB? (Tenure of work)
A. 1-3 years [] B. 4-6 years [] C. 7-9 years [] D. 10 years and above []
SECTION B: Fraud related questions.

6) What are your views on the types of fraud in AB? (put thick mark on the number closest to your view)

57
 Use a scale of 1 to 5 where, 5= highly frequent, 4=frequent, 3=less frequent, 2=rarely frequent, and 1=
notfrequent,
No Types of Fraud Highly Frequent Less Rarely Not
Frequent Frequent Frequent Frequent

5 4 3 2 1
1 Loan and Letter of credit related
fraud
2 Forgeries and falsification of
documents
3 Accessing dormant account
4 Account opening fraud
5 Theft and embezzlement
6 Fraudulent money transfer
7 Misuse of the bank‟s asset
8 Money Laundering
9 Bribery

7) What are your views on the causes of fraud in AB?(put thick mark on the number closest to
your view)
Use a scale of 1 to 5 where, 5= highly agree, 4=agree, 3=indifferent, 2=disagree, and 1= highly
disagree,
N Causes of Fraud Highly Agree Indifferent Disagree Highly
o Agree 3 Disagree
5 4 2 1
1 Refusal of employees to comply with laid-down
procedures without any
penalty or sanction
2 Poor internal control system
3 Lack of improved information Technology track
fraudsters
4 Inadequate staffing
5 Inadequacy of fraud detection and prevention
strategies
6 Inadequate training and re-training of staff
7 Inadequate staff compensation
8 Presence of unqualified staff
9 Ineffective internal auditing
10 Greed on the part of employees
11 Conspiracy between interacting agents in-charge
with the responsibility of
protecting the assets and other interest of the
bank
12 Poor record-keeping practices
13 Poverty and infidelity on the part employees

58
 SECTION C: Effect of internal control components in fraud detection and prevention
8) What are your views on the effect of internal control components in fraud prevention and
detection?
Please rank the following statements ranging from strongly disagree to strongly agree where: 5= Strongly
Agree; 4= Agree; 3=Neutral; 2= Disagree; and 1= Strongly Disagree

I. Control Environment Strongly Agree Neutral Disagree Strongly

No Agree Disagree
5 4 3 2 1
1 The bank has clear objectives
2 The management communicate the objectives so as to
provide effective direction to employees
3 There is significant compliance in operational and
financial rules and regulations
4 The bank has a culture, code of conduct that reward
performance systems that support the business
objectives
5 The management demonstrate, through its actions and
policies the commitment to competence, integrity and
trust
II. Risk Assessment

1 The Board has clear strategies for dealing with the

significant risks of frauds occurring
2 There are policies on how to manage these risks

3 Risks of frauds occurring are identified and assessed

on an on-going basis
4 Authority, responsibility and accountability are clearly
defined in the bank
5 The management have the knowledge, skills and tools
to effectively manage risks to the achievement of their
objective
III.Control activities Strongly Agree Neutral Disagree Strongly
Agree Disagree
5 4 3 2 1
1 The bank communicate to its employees what is
expected of them and the scope of their freedom to act
2 The management follow the bank rules, regulations,
procedures in recruitment of employees
3 The employees in the bank have the knowledge, skills
and tools to support the achievement of the bank
objectives
4 There is proper segregations of duties
5 There is proper authorization and Approval of

59
 transactions
IV. Information and communication Strongly Agree Neutral Disagree Strongly
Agree Disagree
5 4 3 2 1
1 The management receive timely, relevant and reliable
reports on progress against the bank objectives
2 The management receive timely, relevant and reliable
reports on indicators of change, such as employee
attitudes etc.
3 The information needs and related information systems
are reassessed to meet objectives.
4 The periodic reporting procedures are effective in
communicating accounts of the bank position and
prospects
5 There are established channels of communication for
individuals to report suspected breaches of laws or
regulations
V. Monitoring activities Strongly Agree Neutral Disagree Strongly
Agree Disagree
5 4 3 2 1
1 There are on-going processes, which monitor the
effective application of the policies, process
2 Such processes may include control self-assessment,
confirmation by personnel of compliance with policies
and codes of conduct.
3 There are effective follow-up procedures to ensure that
appropriate action or changes against defaulters
4 There are appropriate communication to the Board on
the effectiveness of the on-going monitoring processes
5 The monitoring personnel report any significant failure
or weaknesses on a timely basis.

SECTION D detecting and preventing fraud

9) What are your views on detection and prevention of fraud in AB?

Please rank the following statements ranging from strongly disagree to strongly agree where: 5= Strongly
Agree; 4= Agree; 3=Neutral; 2= Disagree; and 1= Strongly Disagree
Detection and Prevention of fraud Strongly Agree Neutral Disagree Strongly
No Agree Disagree
5 4 3 2 1

1 The bank has effective internal audit

2 The bank has vigorous fraud hotlines
3 The bank has a structure for regulatory compliance
strategies
4 The bank Probe suspect financial performance
5 The bank has a risk assessment culture

60
 SECTION E: Challenges of Internal Control in detecting and preventing fraud

9) What are your views on the challenges of internal control in detection and prevention of fraud
in AB?
Please rank the following statements ranging from strongly disagree to strongly agree where: 5= Strongly
Agree; 4= Agree; 3=Neutral; 2= Disagree; and 5= Strongly Disagree
Challenges of Internal Control Strongly Agree Neutral Disagree Strongly
No Agree Disagree
5 4 3 2 1

1 Breakdowns (personnel misinterpret instructions)

2 Management override (management deviates from
the bank‟s policies or procedures for fraudulent
reasons)
3 Collusion between internal or internal and external
parties
4 Human judgment under pressure to conduct business
based on the information at hand
5 System errors (the risk that automated system
controls breakdown without notice)

61