International Academic Institute International

for Science and Technology Academic Journal of

Accounting
International Academic Journal of Accounting and Financial and
Management Financial Management
Vol. 3, No. 1, 2016, pp. 13-36.

ISSN 2454-2350 www.iaiest.com

An Assessment of the Role of External Auditor in the

Detection and Prevention of Fraud in Deposit Money Banks
in Nigeria (2005-2014)

Agbeja, O. (Ph.D)a, Sokunle, O.T,b

a
Department of Accounting, College of Management Sciences, Joseph Ayo Babalola University, Ikeji-Arakeji, PMB 5006, Ilesa,
Osun State, Nigeria.
b
Department of Accounting, College of Management Sciences, Joseph Ayo Babalola University, Ikeji-Arakeji, PMB 5006, Ilesa,
Osun State, Nigeria.

Abstract
The study investigated the role of external auditor in the prevention of frauds in the Nigerian Deposit
Money Banks. Secondary data obtained from CBN and NDIC reports and bank databases were used.
Ordinary Least Square method and Analysis of Variance (ANOVA) were employed. The results revealed
that there was significant relationship between incidence of frauds and changes in banks deposit;
incidence of non-performing loans consequent on fraud; bank contribution to the economy consequent on
non-performing loans. The paper recommended that external auditor should continue to reduce fraud and
loans to insiders be reduced.
Key words: Operational Risk, Gross Undercapitalisation, Front Door Securities, Firewalls, Packet
filtering, Hacking.

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Introduction
1.1 Background of the Study
Fraud is an enrichment attained by an individual wrongfully which is detrimental to individual(s)
or organization(s). Fraud is either internal (employees, management) or external (customers or non-
customers). In the past ten years, depositors have lost billions of naira (millions of dollars) to fraudsters.
According to Yishau (2013), bank fraud worth N28 billion was recorded in 2011, N4.071 billion was lost
to fraudsters in 2010, N7.5 billion in 2009, N17.5 billion in 2008, and N2.9billion in 2007. Fraud has
eaten deep into the fabric of the global financial system and financial intermediation is worst hit. Bank
fraud is on the rise. Stakeholders are experiencing increasing losses through fraud while the cost is borne
by government.
Over the years, e-banking has eased life generally. Bank account holders can make deposits or
withdrawals without physically being at the bank premises. Computer theft through hacking, insider
abuse, incompetent audit committee and data breaching constitute a major obstacle an adversity that co-
exists with e-banking. Fighting this adversity is the challenge of our time. The external auditor plays a
leading role in this challenge. The accounting, audit and forensic tools of the auditor are supposed to be
sharpened to confront this adversity. In his advisory role, the auditor is also expected to competently
counsel his client (bank) against moral hazard behaviour such as excessive risk taking, negligence of duty
and general incompetence on the part of bank employees. However, bank management concerned with
huge bank losses to fraud, is supposed to embrace even extraordinarily painful fraud preventive systems.
Of course, the external auditor is expected to put in all his expertise in discovering and preventing fraud
in the banking sector.
Safeguarding depositors funds is a must for the financial system. In the past ten years, depositors have
lost billions of naira (millions of dollars) to fraudsters. According to Yishau (2013), bank fraud worth
N28 billion was recorded in 2011, N4.071 billion was lost to fraudsters in 2010, N7.5 billion in 2009,
N17.5 billion in 2008, and N2.9 billion in 2007. According to CBN (2014), nearly 741 cases of
attempted fraud and forgery involving N5.4 million (US $34.8 million) were recorded. In 2006, 1,193
frauds were reported involving the sum ofN4.8 billion (US $ 30.97 million).
According to Erunke (2014), the CBN approved the liquidation of 83 microfinance banks because of the
latters engagement in fraudulent activities. Consequently, N102 billion was earmarked in the budget for
Nigeria Deposit Insurance Corporation (NDIC) to pay the depositor of the affected banks. This shows that
losses sustained from frauds are shifted to the government through the NDIC. Funds lost to fraudsters
have led to the liquidation of some banks like Gulf bank and others that were acquired by the UBA. Every
year, banks lose billions of naira to fraud which comes in all sizes and shapes from external perpetrators
and employees. In recent times, frauds have resulted in the undercapitalization of banks and their eventual
takeover.
It seems no terrain is immune to hacking. On February 17, 2015, hackers pulled off USD $80 billion from
bank Heist. E-banking has eased life generally. Bank account holders can make deposits or withdrawals
without physically being at the bank premises. Computer theft through hacking, insider abuse,
incompetent audit committee and data breaching constitute a major obstacle-an adversity that co-exists
with e-banking.
1.2 Objectives of the Study

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1. The general objective of this study is to examine the role of the external auditor in the prevention
and detection of fraud in Nigerian banking sector. This broad objective is further broken down into the
following specific objectives:
2. To ascertain the extent of frauds prevented by the external auditor.
3. To examine the extent to which depositors funds have been compromised by way of theft in the
last decades.
4. To determine the extent of depositors funds that has been passed on to unworthy borrowers.
5. To determine the relationship between non-performing loans and banks contribution to the
economy.
1.3 Research Hypotheses
In order to achieve the above objectives, the following propositions will be tested empirically:
Hypothesis 1
Ho: External auditors have not prevented any fraud in the banking sector in the last decades.
Hypothesis 2
Ho: There is no relationship between changes in bank deposit and incidence of fraud in the Nigerian
banking sector.
Hypothesis 3
Ho: There is no incidence of non-performing loans in the Nigerian economy as a result of fraud in
the Nigerian banking sector.
Hypothesis 4
Ho: There is no significant relationship between non-performing loans and bank contribution to the
economy.
1.4 Significance of the Study
Provides an assessment of the professional-the external auditor in coping with fraud prevention.

2.0 LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1. Theoretical Literature
Information theft, virus attacks could erode retained earnings and decimate owners equity and render
bank grossly undercapitalized. This operational risk has the potential to terminate banks going-concern
status.
2.1.1 The Challenge of Fraud Detection
Fraud detection in different organizations is a major challenge which must be successfully
carried out in order to preserve the integrity of organizational assets and thus enhancing the psychological
well-being of all stakeholders. Fraud detection and prevention is an invidious-arduous task. It is battle
royal against the evil geniuses who are determined to render the systems of internal control incapable of
detecting their acts-culpable behaviour. The fingerprints of these offenders are in 0s and 1s somewhere
in the computer memory. They have turned themselves to a shadow that is difficult to chase and catch.
They can be caught and deterred! This is the promise of forensic science. The question to be asked is why
fraud is so difficult to detect? This is as a result of the followings:
2.1.1.1. Management Controls
According to Farell and Franco (1999) organizations with one hundred or fewer employees have the
greatest median losses per capita and this is as a result of the internal controls being less sophisticated and

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stringent in smaller organizations. Too much work is given to an employee no room for check and
balances, there is no segregation of duties and separation of functions. This situation has made fraud easy
for employees to carry out and difficult for the management to detect because the mess would have been
cleaned up before any check by management.
2.1.1.2 Labour Turnover
Management has turned the hiring and firing of employees to bi-annual task. It recruits any time it likes
and it layoffs whenever it deems it fit, not minding the psychological trauma and physical deformity it
will create in the life of the individual. They have rendered so many children fatherless due to this act
because so many family men could not stand the trauma of not being able to fend for their families. Many
employees in the banking sector now have this evil foreknowledge of gathering enough resources to live
large and to keep their family because they always think their employment is for a short while.
2.1.1.3. Screening
Adequate employee screening is not always carried out by the management, due to the urgency of
employees to fill vacant spaces. The management entrusts so many functions in the hands of such
employees. The management is invariably unaware that the so called employee is a computer genius that
knows how the software is designed, the loopholes in the software, how figures can be erased without
leaving any visible traces, and these are some of the difficulties confronting the external auditor in the
detection of computer fraud. Seemingly, the perpetrators of computer fraud are one step ahead of the
external auditor.
2.1.2 Effect of Fraud in Banks
According to Olaoye (2014) frauds deplete owners equity and lead to loss of money belonging to
customers. This loss invariably, results in reduction of the available resources, which could lead to the
collapse of the bank. Fraud causes dismissals and retrenchment of innocent member of staff who may not
be fraudsters, which results in losing experienced staff. Staff welfare may also be adversely affected in a
bank with persistent fraudulent practices. No staff will have the courage to fight for staff welfare matters
such as promotion, increment in salaries and conducive working condition.
Bank frauds erode public confidence in the banking system. This constitutes a serious setback to the
efforts made in promoting banking habit in a country where many people prefer to keep their money at
home.
The effects of fraud in banks are far reaching and include among others huge financial loses to both bank
and their customers. The time, energy and money that would have been expended in improving customer
services are being expended in setting up fraud control and prevention system. Frauds have led to the
closure of some banks, while some merged and others were acquired.

2.1.3. Optimal Prevention of Fraud in Banking Sector

Prevention is the capability to stop and uncover fraud in real time, that is, the ability to uncover threats
and immediately stop or halt risky transactions. The losses that the banking sector has incurred cannot be
overemphasized due to the effect of fraud. In order to combat fraud in the deposit money banks, the
following tools and strategies of preventing fraud are considered.
2.1.3.1. Tools of Fraud Prevention in Deposit Money Banks
Lynch (2012), mentioned some points on how fraud can be prevented, and they are:

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I. Front Door Securities: these are measures like passwords, digital certificates and tokens. It is all
about keeping of an individuals personal record and also authenticating the entry or transaction of an
individual online.
II. Process and Review Based Controls: these focus on early detection of fraud through measures
like daily reviews of audit logs and identification processes. Clients researching public information,
retrieval of material, segregation of set up and authorization activities, one-time authentication codes and
dual authorization are applied to transactions for checks and balances.
III. Transactional Controls: this provides additional layers of security an identification processes that
relate to the client personnel actual activity.
IV. Employee Education: this is an intellectual security that safeguards penetration from professional
fraudsters. Employees must be highly educated on areas that are exposed to attacks by fraudsters.
2.1.4. External Auditors Responsibilities in Fraud Detection and Prevention
According to Okaro and Okafor (2013) external audit is a formal and independent review of an
institutions financial statements, records, transactions and operations and is usually performed by
professional accountants who attest to the true and fair view of the statements presented by the client
organization. External auditor also examines the internal control systems of their clients and issue
management letters accordingly.
According to Zachariah et al (2012) external auditor has an important role to play in the fight
against fraud and allied malpractices in the banking sector. By virtue of duty, the external auditor is
supposed to serve as watchman on behalf of the management, shareholders, customers and government,
opined (Zachariah et al, 2012). The detection and prevention of fraud in the banking sector should be
considered by the external auditor of the banks as one of their most important duties whether it is clearly
stated in the statutory requirements. External auditor should be able to detect areas in which management
themselves override controls. Though the task of uncovering management fraud may be a difficult one
since they are in a position to override internal controls and can conceal any misstatement, but the
external auditor can still put in his expertise by following the under laid rules and regulations for audit.
Deshmukh et al (1998) states that audit can detect management fraud by evaluating the internal control
system of the bank and pin point their weaknesses and giving ways of overcoming them. It is essential for
the auditor to review the system in order to be rest assured that a reliable internal check is in practice
which is capable of forestalling fraud and if proven otherwise, a better system should be suggested by the
auditor.
The external auditor may have to rely on the internal auditors work, the degree of reliance should strictly
be based upon the organization, qualifications and effectiveness of the internal audit department of the
bank (Watoseniyi, 1996 and Dandago, 2002). The internal auditor should not be involved in any
operational responsibility and must report directly to the chief executive officer.

2.1.5. Tools External Auditors Use in Detecting and Preventing Fraud

It has been discussed earlier that external auditors have serious roles to play in the detection and
prevention of fraud in the banking sector. In order to evaluate clients system, external auditors make use
of the following method:
I. Audit Around the Computer

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This is one of the several methods external auditors use to evaluate a clients computer controls. It
involves picking source documents at random and verifying the corresponding outputs with the inputs.
According to Hassan (2013), audit around the computer means that the processing done by the computer
system need not to be audited as auditors expect that sufficient appropriate audit evidence can be obtained
by reconciling inputs with outputs.
Audit around the computer approach is used in situation when auditor is of the opinion that computer
system is reliable and often comparison of inputs i.e. some documents to output i.e. financial reports is
done which in external auditors judgment is enough. In order words, external auditor will not assess
whether required controls are in place and if they are working, operating effectively while inputs are
processed. Due to the same reason; relying too much on this approach is not recommended for important
aspects of the audit, especially where assessed risk is high as this may result in effective audit and
ultimately inappropriate audit opinion being expressed by the external auditor (Hassan, 2013).
II. Audit Through the Computer
This explains the various steps taken by external auditors to evaluate clients software and hardware to
determine the level of reliance of operations that are hard to view easily and also test how the related
computer controls are effective. e. g. access control.
So many companies / businesses make use of computerized information systems and this in turn have
significant control embedded in them. If these computer controls are ignored, it will make auditors not to
have the required insight into the effectiveness and reasonableness of the clients internal control, and the
report will not comply with the relevant laws and regulations that govern auditing as a profession.
Though, external auditors most times use this technique to test the controls in simple applications, but,
internal auditors more frequently use auditing through the computer technique to ensure that errors that
may not be easily detected from the output are discovered and corrected (auditingauditors, 2010).
2.1.6. Audit Forensic Tools
According to Purita (2006), the banking sector is facing some security issue like data breaching,
hacking attacks, viruses, and insider threats. So many organizations in the world make use of computer
forensics to discover illegal usage of computer and illegal intrusion apart from the preventive measures
put in place, such as the use of firewalls and intrusion detection devices to prevent breaching of data and
also stop external attacks. Computer forensic has really helped in internal and external audit.
The forensic investigations discover where computer has been misused, which includes fraud, Internet
and e-mail abuse, hacking, as well as accidental deletions or alterations of data but this study is
emphasizing on hacking.
2.1.6.1. Hacking
Hacking has been the greatest challenge faced by most organizations both locally and internationally.
Hackers are like tiny bones that stick into the throat of an individual. Hacking can be legal or illegal.
Here, we focus on illegal hacking which can be handled in the following ways:
2.1.6.1.1The Prevention of Hacking
Black hat hackers stealthily enter computer systems to steal information and corrupt files. Organizations
with no adequate backups measure can experience information losses in millions of dollars (billions of
naira). According to WikiHow (2015), the following steps can be taken to prevent black hat hackers from
perpetrating their evil deeds:

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I. Follow Forums: when hacking forum is followed, it is going to enable someone to get the latest
method used by hackers;
II. Change Default Password immediately: it is necessary to change built- in passwords after the
first log in of installation which must be easy for the user to remember and difficult for a perpetrator to
guess. Then, it must be internally one-way encrypted, and also must be changed periodically, e.g every 30
days;
III. Identify Entry Points: employ an ethical hacker to install scanning software programs in order
to identify all entry points from the internet into the internal network of the company;
IV. Perform Attack and Penetration Test: this test will enable you to identify the weak points in
the network that can be easily accessed by both internal and external users. Therefore, you will be able to
stop attacks from external sources and correct the pitfalls that could become the entry points for intruders
to hack into your network;
V. Make User Awareness Campaign: awareness must be made to all the users of the network
about the pitfalls of security of the network and the necessary security practices to minimize these risks
VI. Configure Firewalls: a good firewall prevents your computer from being intruded by hackers
while it is connected to the internet. It also prevents confidential information from being sent out from
your computer without your permission.
According to Blair and Durai (2009), firewalls are of two types.
Type 1: Packet Filtering: this connotes that whatever is not permitted should be denied. It therefore
prevents anyone from accessing the system unless the person is an approved user or has made contact
from pre-approved remote sites;
Type 2: Proxy Servers: the user will stop the connection from the source and start a second connection to
the destination. Proxy servers are capable of translating network address i.e. they can hide internal
addresses from outsiders. Any potential intruder that tries to capture packets sent through this firewall
would only see the firewalls IP address, not the individuals network address which makes the internal
network.
VII. Implement and Use Password Policies: the rules of password must be adhered to strictly.
Wikipedia (2015) states some, which are:
Password should be five to eight characters in length because anything shorter is too easy to
guess and anything longer is too hard to remember;
password should be the combination of at least three of the following characters: alpha, numeric,
upper and lower case, and special characters;
Password should not be identifiable with the user e.g. first name, last name, pets name, spouses
name; and
Once a password has been dropped, it must take at least a year before it can be used again;
VIII. Delete Comments in Website Source Code: comments used in source code should be deleted
because these may contain information that may crack the site, usernames and passwords;
IX. Remove Unnecessary Services from Devices: do not depend on the reliability of the modules
you do not use. Remove default, test and examine pages and applications that usually come with web
server software;

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X. Install Anti-Virus Software: it is necessary to install anti-virus software because this will help
to detect and prevent any form of virus attack that might want to occur on the system. This software must
be regularly updated;
XI. Ensure Physical Security: aside the internal security of the network that has been put in place,
the physical security is highly necessary. The organization must be designed in a way that it will be very
difficult for intruders to penetrate;
XII The detection of Hacking
Illegitimate hackers have perpetrated numerous attacks on the networks of several organizations. These
have led some of the organizations to confidentiality loss, physical loss and financial loss e.t.c.
According to Stack (2015), the utmost way of tracing hacking back to hackers is by tracing an IP (internet
protocol) address down to its source. Although, hackers try to make this difficult but ways can be made
around it and these are:
The forum for hackers must be followed in order to be able to trace the hackers IP address to
where it is originated;
The server logs often preserve the IP address in the VPN chain, therefore it must be checked.
Get the time stamped logs of the right traffic data, because this can expose the person behind a
VPN redirection. The following are the steps to be taken for the detection of hacking:
Use the user advent string from a web request as a sort of fingerprint;
See the language of compilation or comments. It gives little information;
Tracing an IP. If it is done successfully, a competent hacker will be using some sort of
redirection to hide themselves;
Find a distinctive sequence of command in some malware that links to some previous malware.

2.2 Empirical Literature and Theoretical Framework

Alleyne and Howard (2005) discover that the expectation gap is wide, as auditors felt that the detection of
fraud is managements responsibility, while users issue in Barbados and that companies who have internal
auditors, sound internal controls and effective audit committees are better equipped to deal with fraud
prevention and detection.
Monroe and Woodliff (1994); Epstein and Geiger (1994); Humphrey et al (1993); Low (1980);
Leung and Chau (2001); Dixon et al (2006) and Fadzly and Ahmad (2004) discover that many financial
report users believe that the sole responsibility of the auditor is to detect all irregularities. This is a
misconception that shows the existence of an audit expectation gap between the auditor and financial
report users with respect to the actual duties of the auditor.
Bierstaker et al (2006), in their research found out that firewalls, virus and password protection, and
internal control review and improvement are quite commonly used to combat fraud. However, discovery,
sampling, data mining, forensic accountant, and digital analysis software are not often used, despite
receiving high ratings of effectiveness. In particular, organizational use of forensic accountants and digital
analysis were the least often used of any anti-fraud method but had the highest mean effectiveness ratings.
The lack of use of these highly effective methods may be driven by lack of firm resources.
Beasley and Carcello (1999) highlighted many efforts the profession has taken (both academic and
professional) to resolve the problem of fraud. These efforts include studies undertaken to understand the
problems being faced, research into changes required regarding the role of auditors in an engagement and

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efforts related to the roles of management, boards of directors and audit committees in fraud prevention
and detection. Oberholzer (2002) contends that auditing is an independent examination of accounting
records of an entity that seeks to increase financial statement audit effectiveness and execute accounting-
related fraud investigations to enhance the validity, reliability, consistency and transparency of audit work
and related results.
Archibong (1992) discovered that a predetermined and well planned tricky process or device usually
undertaken by a person or group of persons with the sole aim of cheating another person or organization
to gain an ill-gotten advantage be it monetary or otherwise, which would not have been accrued in the
absence of such deceitful procedure is fraud. This implies that fraud involves the use of deception with
the intention of obtaining an undue advantage, avoiding an obligation or causing loss to another party.
Ayodele (2013) identified the causes of fraud perpetrated in bank, likewise ascertains the
effectiveness of various fraud control measures adopted by banks and also determined the effects of fraud
in the banking industry and the economy in general. The findings revealed that the impact of banking
industry is a means of prevention and control. The impact of fraud is either in the positive direction to the
individual perpetrating fraud as the accuracy move within the possession and on the negative direction to
bank. It also revealed the types and causes of fraud in bank and ways in detecting and preventing it, what
differentiate errors from fraud or irregularities and also how fraud control could be achieved in banks.
Okaro and Okafor (2013) discovered that despite the multifarious institutions involved in fraud
management in the incidence of fraud in Nigerian banking system like a sore thumb has remained
intractable. They also discovered that there are 3 trillion naira toxic assets in 10 banks and high level of
insider abuses that were never disclosed. In 2010, investigations into the liquidity strength of banks in
Nigeria showed that corruption and fraud in the banking industry have included a range of unlawful and
unethical practitioners. These include granting of unauthorized loans, posting of fictitious credits,
fraudulent transfers or withdrawals and blatant financial theft.
Olaoye (2009) highlighted the major causes of fraud and actors that contribute to the incidence
of fraud in banks, the problems of fraud and how to curb it. The findings revealed that the lack of good
internal system is a major cause of fraud in banks and those banks with effective internal control system
can prevent against the menace of fraud.
Farell and Franco (1999) identified the responsibility of Auditors including searching for fraud.
The findings showed that auditors perception of their responsibility is not widely held by the public at
large. After the costly savings and loan failures of the 1980s, the general public and congress felt that the
CPAs were partly responsible and was the reason for this legislation. The public was outraged the
auditors were not aware of the financial improprieties and wanted the independent auditor to take a more
proactive role in looking at the financial statement.
Deshmukh, Karim and Siegel (1998) carried out a study on auditors detection of managerial
fraud using Signal Detection Theory (SDT) model which established that auditors can detect management
fraud. The findings revealed that external auditors correct decision making concerning management
fraud depends on the assumption that there is occurrence of management fraud which leads to thorough
investigation to ascertain the true position of things.
Purita (2006) conducted a research on computer forensics and discovered that a forensic auditing
can be conducted on any device that stores electronic data such as a computer hard drive, smart card or
palm pilot. He also discovered that auditors can use computer evidence in a variety of crimes where

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incriminating documents can be found including cases involving financial fraud, embezzlement or data
theft.
Njanike, Dube and Mashayanye conducted a research on the effectiveness of forensic auditing in
detecting, investigating and preventing bank frauds and discovered that computer fraud and accounting
fraud pose a big challenge to the forensic auditor because of the complexity of the crimes particularly
where the computer software or system is manipulated.
Owolabi (2010) conducted a research on fraud and fraudulent practices in Nigerian banking
industry and he discovered that fraudulent transfers and withdrawals increased from 2003-2005 and that
the trend at which the fraudulent withdrawals is increasing needs serious check. He also found out that
managers and supervisors are more involved in fraudulent practices and also temporary staffs are
involved and that there employment must be given a second look.
In this concept, the external auditor has developed greatly in their expertise in combating fraudulent
activities in the banking sector. The measures of controlling attacks by perpetrators mentioned above has
enlightened the customers of banks on the necessary security measures that can be used to prevent
intrusion by fraudsters.
METHODOLOGY
3.1. Area of Study
In this chapter, the methods of achieving the objectives of the study are discussed. Section 3.2 is devoted
to the discussion of the population of study. Section 3.3 deals with the research design while section 3.4
discusses the sampling technique and sample size. Section 3.5 discusses how data were sourced while the
analytical technique of the study is discussed in section 3.6. Section 3.7 analyses the model specification.
3.2. Population of Study
All Deposit Money Banks in Nigeria automatically qualify to be examined. Therefore, all the
twenty two (22) banks with data over the study period (2005-2014) are included in the sample.
3.3. Research Design
This study analyses the role of the external auditor in the prevention of fraud and reveals the
extent of fraud in Nigerian banks. The research design used for this study is survey-research design; the
purpose is to study a group or inanimate objects, CBN and NDIC publications by collecting and analyzing
the data collected.
3.4. Sampling Technique and Sample Size
In order to meet the required objectives of this study, the researcher used systematic sampling. This
technique is used because of its simplicity and its unbiased result.
3.5 Data Analysis
Secondary data collected through internet, journals, newspapers and books were analyzed using simple
linear regression analysis which was used to test the hypothesis postulated. All hypotheses were tested at
0.05 alpha levels / 0.95 confidence level.
3.7. Model Specification
The model adopted for this study is as follows:
For the first hypothesiss

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Where,
Y is the dependent variable, that is, (AOFI) is the amount of fraud incidence in the banking sector in
Nigeria
X is the independent variable, that is, external auditor (EXTAUD)
0 and 1 are the regression parameter
is Stochastic term or error term (Variables outside the model).
For the second hypothesis

Where,
Y is the dependent variable, that is, changes in bank deposit (CHABDEP).
X= independent variable, that is incidence of fraud (INCOFRAU).
Also, 0 and 1 are the regression coefficients.
is Stochastic term or error term (Variables outside the model).
For the third hypothesis

Where,
y= dependent variable, that is, non-performing loan (NONPERLON).
X= independent variable, that is, incidence of frauds (INCFRAUD).
Also, 0 and 1 are the regression parameters.
is Stochastic term or error term (Variables outside the model).
For the fourth hypothesis

Where,
y= dependent variable, that is banks contribution to the economy (BCONECO).
X= independent variable, that is, non-performing loans (NONPERLOAN).
Also, 0 and 1 are the regression parameter.
is Stochastic term or error term (Variables outside the model).

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4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

This chapter deals with the presentation, analysis and interpretation of data. The prime objective of the
study is to examine the role of the external auditor in the prevention and detection of fraud in Nigerian
Deposit Money Banks. In order to critically evaluate the cardinal objective of the research, a time series
data extracted from the Central Bank of Nigeria Statistical Bulletin from the periods 2005-2014 are used.
The four hypotheses formulated for testing will be verified through the use of simple linear regression
analysis. However, the significance or otherwise of the hypotheses formulated for testing will be
confirmed through the use of statistical tests of; F-test, T-test and coefficient of determination.
4.1 Data Presentation
The data for the analysis are presented in the table below:
Table 4.1: Showing the number of fraudulent practices discovered by external auditors in Nigerian banks
and the amount of fraud involved in millions of naira for the periods, 2005-2014
Years Frequency of frauds Fraudulent Fraudulent Fraudulent practices e- fraud in
discovery by auditors practices due to practices due to due to deliberate Millions of
forged cheques in deliberate wrong transfer in millions of naira
millions of naira entry in millions naira
of naira
2005 12 5.60 2.31 1.32 4.56
2006 16 6.78 3.56 2.54 5.00
2007 23 7.67 4.11 3.00 6.23
2008 23 7.77 4.56 3.33 7.45
2009 30 8.98 5.78 4.17 8.23
2010 33 10.00 6.78 5.11 9.00
2011 35 12.45 8.00 7.67 12.23
2012 38 12.67 8.67 7.89 12.45
2013 42 12.79 8.87 8.00 13.63
2014 52 15.00 9.45 9.00 21.56
Source: CBN Annual Bankers Report, 2005-2014
Table 4.2: Showing the relationship between external auditors frequency of fraud discovered and
amount of frauds committed in Nigerian banking sector for the periods, 2005-2014
Years External auditors frequency of fraud Amount of fraud involved in
discovered (X) Billions of Naira (Y)

2005 12 13.79

2006 16 17.88

2007 23 21.01

2008 23 23.11

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2009 30 27.16

2010 33 30.89

2011 35 40.44

2012 38 41.68

2013 42 43.29

2014 52 55.01

Source: CBN Annual Bankers Report, 2005-2014

Table 4.3: Showing total deposit of Deposit Money Banks in Nigeria and amount of fraud involved in
fraudulent practices in millions of naira in Nigerian Deposit Money Banks for the periods, 2005-2014
Years Total deposits in billions of naira Amount of fraud committed in
(Y) billions of naira (X)
2005 357.89 13.79
2006 561.78 17.88
2007 675.34 21.01
2008 745.78 23.11
2009 845.98 27.16
2010 895.67 30.89
2011 899.45 40.44
2012 934.67 41.68
2013 945.67 43.29
2014 998.89 55.01
Source: Nigeria Deposit Insurance Corporation and CBN Report, 2005-2014
Table 4.4: Showing amount of non-performing loans incidence in Nigerian Deposit Money Banks and
amount of money involved in fraud at the bank due to insider loans for the periods, 2005- 2014
Years Amount of non-performing loans Amount of money involved in
in billions of naira (Y) fraudulent practices due to
insider loans in billions of naira
(X)
2005 56.88 5.89
2006 67.12 12.56
2007 68.99 17.56
2008 73.56 23.56
2009 83.66 45.00

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2010 88.76 49.67

2011 90.11 53.45
2012 95.34 62.23
2013 102.78 65.00
2014 112.45 72.13
Source: NDIC Annual Report, 2005-2014
Table 4.5: Showing the amount of non-performing loans in Nigerian banks and loans and advances
extended to priority sectors by Deposit Money Banks in Nigeria for the periods, 2005-2014

Years Amount of non-performing loans Loans and advances (Y) in

(X) billions of naira

2005 56.13 213.45

2006 67.12 190.55

2007 68.99 186.76

2008 73.56 167.89

2009 83.66 156.44

2010 88.76 144.90

2011 90.11 132.00

2012 95.34 120.67

2013 102.78 104.34

2014 112.45 103.65

Source: NDIC and CBN Report, 2005-2014

4.2 Test of Hypotheses
The hypotheses formulated for the research will be tested with the aid of simple linear regression analysis.
The test statistics to be used to test the significance or otherwise of the hypotheses are; F-test, T-test and
Coefficient of determination (R2).
4.2.1: Test of Hypothesis One
Null Hypothesis One (HO1): External auditors have not prevented any fraud in the banking sector
in the last decades.
(A) Model for testing the influence of external auditor on fraud prevention

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Where, y= dependent variable, that is, amount of fraud incidence in the banking sector in Nigeria (AOFI).
This is measured by using the total amount of money involved in fraudulent practices in Nigerian banking
sector from the periods, 2005-2014. Also, 0 and 1 are the regression parameter. In addition, X is the
independent variable, that is, external auditor (EXTAUD). This is measured by using the frequency or
number of fraudulent practices discovered in Nigerian banking sector by the auditors from the periods
2005-2014. Meanwhile, ei is the error term.
By substituting, AOFI and EXTAUD into equation one, we have;

More so, since, AOFI and EXTAUD are not in the same unit, then, the equation 2 will be transformed to
its logarithms version. This gives;

Table 4.6: Showing the F-calculated for testing the overall significance of the ability of the external
auditors to prevent fraud in the banking sector
ANOVA
SV SS DF MS F-CAL SIGN
Regression 1386.224 1 1386.224 59.054 0.000
Residual 187.790 8 23.474
Total 1574.014 9
Source: Authors Computation, 2015
Table 4.7: Showing T-calculated for testing the significance of external auditors on fraud prevention in
Nigerian banking sector
Model Unstandardized Standardized T-calculated Sign
coefficient coefficient
B std.error Beta
Ln(EXTAUD) 27.516 3.581 0.938 7.685 0.000
Constant -60.225 12.024 -5.009 0.001
Source: Authors Computation, 2015
Table 4.8: Showing the coefficient of determination (R2) for determining the amount of fraud prevented
in Nigerian banking sector due to the activities of external auditor
R R2 Adjusted R2 Standard error of the
estimates
0.938 0.881 0.866 4.845

Interpretation of Test of Hypothesis One

Tables 4.6 to 4.8 present the result of test statistics obtained for the null hypothesis one which states that
external auditors have not prevented any fraud in the banking sector in the last decades. In table 4.6, the
p-value of the F-calculated for testing the significance of the joint hypothesis of 0.000 is less than the
critical value of 5%. This implies that the null hypothesis which states that external auditors have not
prevented any fraud in the banking sector in the last decades will be rejected. This shows that external
auditors have helped in preventing fraud in the Nigerian banking sector in the last decades. Therefore, the

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activities of external auditors through proper auditing of prepared financial statement of banks in Nigeria
have helped in preventing and detecting incidence of material mis-statement in the prepared financial
statement of banks in Nigeria. In fact, the activity of external auditors in terms of gathering of evidence
concerning a particular transaction that has occurred has contributed in no small measure to the reliability
and accuracy of the prepared financial statement. Adesida and Adesoji (2010) conclude that the activities
of independent external auditors could contribute in no small measure to shareholders confidence in
managerial ability of the management team of any enterprises. They revealed further by implying that
external auditors in any organization are needed to verify and authenticate the degree of truthfulness of
the prepared financial statement in any organization.
More so, in table 4.7, the p-value of the t-statistics calculated for external auditors of 0.000 is less than the
critical value of 5%. This indicates that the null hypothesis which states that external auditors are not
significant on fraud prevention in Nigerian banking sector will be rejected. This means that the activities
of external auditors have helped in no small measure in preventing and controlling fraud in Nigerian
banking sector. Also, the regression coefficient obtains for external auditors of 27.516 indicate a positive
value. This reveals the fact that there is a positive relationship between external auditors and fraud
prevention in banking sector in Nigeria. In short, a unit increase in the activity of external auditors in
Nigerian banking sector will lead to a more than a unit improvement in fraud prevention in Nigerian
banking sector. In addition, the regression parameter calculated for intercept of -60.225 reveals a negative
value. This reveals that without the activities or engagement of external auditors to audit the financial
statement of banks in Nigeria, the incidence of fraud should have led to 6022.50% loss in profit.
Therefore, external auditors are important in preventing fraud in Nigerian banking sector.
Furthermore, the coefficient of determination (R2) obtained for testing the amount of fraud prevention that
is due to activities of external auditors in banking sector gives a value of 0.881. This means that 88.10%
of fraud prevention in Nigerian banking sector are as a result of the activities of external auditors.
Therefore, external auditors are good predictor variables for fraud prevention in Nigerian banking sector.
4.2.2: Test of Hypothesis Two
Null Hypothesis Two (HO2): There is no relationship between changes in bank deposit and incident of
fraud in the Nigerian banking sector.
(B) Model for testing the influencing of fraud on changes in bank deposit

Where, y= dependent variable, that is, changes in bank deposit (CHABDEP). This is measured by using
the total liability of Deposit Money Banks in Nigeria for the periods 2005-2014 as proxy.
Also, 0 and 1 are the regression coefficients.
X= independent variable, that is incidence of fraud (INCOFRAU). This is measured by using the total
amount of frauds recorded in Nigerian banking sector for the periods, 2005-2014 as proxy.
Also, ei= error term.
By substituting, CHABDEP and INCOFRAU into equation 4, we have;

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Table 4.9: F-calculated for testing the overall influence of incidence of fraud on changes in banks
deposits
SV SS DF MS F-CAL SIGN
Regression 286133.184 1 286133.184 27.680 0.001
Residual 82698.197 8 10337.275
Total 368831.381 9
Source: Authors computation, 2015
Table 4.10: T-calculated for testing the significance of incidence of fraud on changes in bank deposit
Model Unstandardized Standardized T-calculated Sign
coefficient coefficient
B std.error Beta
INCFRAUD (X) 13.483 2.563 0.881 5.261 0.001
Constant 362.402 86.716 4.179 0.003

Table 4.11: Coefficient of determination (R2) for testing the overall contribution of incidence of fraud on
changes in bank deposits
R R2 Adjusted R2 Standard error of the
estimate
0.881 0.776 0.748 10.672
Source: Authors computation, 2015
Interpretation of Test of Hypothesis Two
Tables 4.9 to 4.11 present the test statistics calculated for the test of hypothesis two. In table 4.9 the p-
value of the F-calculated for testing the overall significance of the null hypothesis of 0.001 is less than the
critical value of 5%. This means that the null hypothesis which states that there is no significant
relationship between changes in bank deposit and incident of fraud in the Nigerian banking sector will be
rejected. This further implies that there is a significant relationship between changes in bank deposit and
incidence of fraud in Nigerian banking sector. In fact, the prevalence of fraud in Nigerian banking sector
can lead to a decline in customers deposit. This is so, in the sense that no rational depositor will continue
to put his or her money in a bank where the safety of such money is not guaranteed, due to the activities
of scrupulous employees at the bank. More so, an increase in bank deposit can be as a result of low level
of fraud in the banking sector. Adegoke (2012) concludes that the effect of fraudulent practices on bank
deposit cannot be underestimated. He reveals further that the incidence/occurrence of frauds in the
banking system can bring about a geometrical reduction in customers deposits since no sane customer or
prospective customer will continue to put his or her savings in a bank where such savings are not safe due
to the activities of insiders scrupulous employees. Therefore, it can be inferred that incidence of frauds in
Nigerian banking sector can bring about changes in bank deposit.
Also, in table 4.10, the p-value of the t-calculated for testing the significance of fraud incidence on
changes in bank deposit of 0.001 is less than the critical value of 5%. This implies that the null hypothesis
which states that incidence of fraud is not significant on changes in bank deposit will be rejected. This
indicates that incidence of fraud is significant on changes in bank deposit. The non-existence of frauds in

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any bank in Nigeria can improve the image of the bank thereby contributing to increase in deposits for the
bank. Conversely, high incidence of frauds in a bank can bring about a reduction in that bank deposits as
alluded to by (Adegoke,2012).
In table 4.11, the coefficient of determination (R2) obtains of 0.776 means that 77.60% of changes in bank
deposit can be as a result of incidence of frauds in Nigerian banks. Therefore, the higher the incidence of
frauds in Nigerian banking sector, the lower the changes in bank deposit and vice-versa. This further
means that the incidence of frauds in Nigerian banks can bring about 77.60% decreases in bank deposit.
Therefore, incidence of fraud is a good explanatory variable for changes in bank deposit in Nigeria.
4.3 Test of Hypothesis Three
Null Hypothesis Three (HO3): There is no incidence of non-performing loans in the Nigerian economy as
a result of fraud in the Nigerian banking sector.
(C) Model for testing the null hypothesis three

Where, y= dependent variable, that is, non-performing loan (NONPERLON). This is measured by using
the amount of loan due to insiders source that is, non-performing loans for the periods, 2005-2014 as
proxy.
Also, 0 and 1 are the regression parameters.
X= independent variable, that is, incidence of frauds (INCFRAUD). This is measured by using total
amount of money loss in the banking sector as a result of frauds as proxy for the periods 2005-2014 while
ei = error term.
By substituting NONPERLON and INCFRAUD into equation 6, we have;

Table 4.12: F-calculated for testing the overall influence of frauds on non-performing loans
ANOVA
SV SS DF MS F-CAL SIGN
Regression 2606.853 1 2606.853 211.405 0.000
Residual 98.649 8 12.331
Total 2705.502 9
Source: Authors Computation, 2015
Table 4.13: T-calculated for testing the significance of incidence of frauds on non-performing loans
Model Unstandardized Standardized T-calculated Sign
coefficient coefficient
B std.error Beta
INCFRAUD(X) 0.712 0.049 0.982 14.540 0.000
Constant 54.966 2.283 24.079 0.000
Source: Authors computation, 2015
Table 4.14: Coefficient of determination for testing the amount of non-performing loans due to incidence
of frauds in banking sector
R R2 Adjusted R2 Standard error of the

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estimate
0.982 0.964 0.959 3.512
Source: Authors Computation, 2015
Interpretation of Test of Hypothesis Three
Tables 4.12 to 4.14 above present the test-statistics computed for the null hypothesis three. In table 4.12,
the p-value of the F-calculated for testing the overall significance of the null hypothesis three of 0.000 is
less than the critical value of 5%. This shows that the null hypothesis which states that there is no
incidence of non-performing loans in the Nigerian economy as a result of fraud in the Nigerian banking
sector will be rejected. This implies that there is incidence of non-performing loans in the Nigerian
economy as a result of frauds in the banking sector. This further indicates that there is a significant
relationship between incidence of frauds and non-performing loans in the Nigerian economy. Therefore,
the high incidence of frauds in the banking sector can be traceable partly to incidence of non-performing
loans to insiders sources such as managers, directors and other employees of banks in Nigeria. Sanusi
(2013) concludes that the existence of toxic loans in Nigerian banks is due partly to high incidence of
fraudulent practices of bank managers. He concludes that non-performing loans remained un-performing
based on the fact that the bulk of the loans are given to directors of banks and their retinue of friends and
relations. Based on this argument therefore, it can be inferred that there is a significant relationship
between incidence of frauds and non-performing loans in Nigerian banks. In fact, the majority of the non-
performing loans incidences in Nigerian banks are fraudulently given by banks directors and managers to
cronies and friends.
More so, in table 4.13, the p-value of the t-calculated of 0.000 is less than the critical value of 5%. This
means that the null hypothesis which states that incidence of frauds is not significance on non-performing
loans in Nigerian banking sector will be rejected. Therefore, incidence of frauds is significant on non-
performing loans of banks in Nigeria. Also, the regression coefficient computed for incidence of frauds of
0.712 reveals the fact that a unit increase in incidence of frauds will lead to 7.12% increase in non-
performing loans. Therefore, the higher the incidence of frauds in Nigerian banks the higher will be the
amount of money lost to loan not performing. Moreover, the regression coefficient obtains for intercept
of 54.966 indicates the fact that without the incidence of non-performing loans that will be much more
than a unit increase in performance of loans and advances given out to customers by Nigerian banks.
In table, 4.14, the coefficient of determination (R2) computed for testing the overall contribution of
incidence of frauds on non-performing loans of 0.964, reveals the fact that 96.40% of non-performing
loans recorded in Nigerian banking sector is as a result of incidence of frauds in the sector. Based on this
premises, incidence of fraud is a good predictor for non-performing loans in Nigeria banking sector.
4.4 Test of Hypothesis Four
Null Hypothesis Four (HO4): There is no significant relationship between non-performing loans and bank
contribution to the economy.
(D) Model for testing the null hypothesis four

Where, y= dependent variable, that is banks contribution to the economy (BCONECO). This is measured
by using the amount of loans and advances given to priority sector of the economy by banks as proxy for
the periods 2005-2014.
Also, 0 and 1 are the regression parameter.

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X= independent variable, that is, non-performing loans (NONPERLOAN). This is measured by using the
amount of loans and advances classified as non-performing for the periods, 2005-2014 as proxy while
ei=error term.
By putting BCONECO and NONPERLOAN into equation 8, we have;

Table 4.15: F-calculated for testing the overall influence of non-performing loans on bank contribution to
the economy
ANOVA
SV SS DF MS F-CAL SIGN
Regression 12393.014 1 12393.014 253.702 0.000
Residual 390.798 8 48.849
Total 12783.803 9
Source: Authors Computation, 2015
Table 4.16: T-calculated for testing the individual significance of non-performing loans on bank
contribution to the economy
Model Unstandardized Standardized T-calculated Sign
coefficient coefficient
B std.error Beta
NONPERLOAN(X) -2.124 0.133 -0.985 -15.928 0.000
Constant 330.261 11.404 28.961 0.000
Source: Authors computation, 2015
Table 4.17: Coefficient of determination (R2) for testing the amount of banks contribution to the
economy due to non-performing loans
R R2 Adjusted R2 Standard error of the
estimate
0.985 0.969 0.966 6.989
Source: Authors computation, 2015
Interpretation of Test of Hypothesis Four
The tables above present the results of the test statistics computed for the null hypothesis four which
states that there is no significant relationship between non-performing loans and bank contribution to the
economy. In table 4.15, the p-value of the F-calculated of 0.000 is less than the critical value of 5%,
therefore, the null hypothesis which states that there is no significant relationship between non-
performing loans and bank contribution to the economy is rejected. This implies that there is a significant
relationship between non-performing loans and bank contribution to the economy. In fact, the higher the
non-performing loans, the lower the banks contribution to Nigerian economy in terms of giving loans and
advances to priority sectors of the economy. Banks are into business of money and for them to make
profit, there is need for the loans and advances given to economy players to perform. Therefore, no sane
bank in Nigeria will continue to give loans and advances to individual and organization that will fail to
pay back the loans as at when due. According to Okoro (2001) the relevance of banks to the economy is
to ensure that the priority sectors of the economy are given necessary support in terms of access to loans

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and advances they needed to continue in business but these individual and organization must ensure that
the said facilities extended to them are paid back as at when due, failure to pay back implies that the
banks will not be in a better position to issue same assistance to other sector or individual. This
assessment above reveals the fact that the higher the incidence of non-performing loans in Nigerian banks
then the lower the banks contribution to the economy.
Furthermore, in table 4.16, the p-value of the t-statistics calculated of 0.000 is less than the critical value
of 5%. This indicates that the null hypothesis which states that non-performing loans is not significant on
banks contribution to the economy will be rejected. This therefore means that non-performing loans is
significant on banks contribution to the economy. In fact, the regression parameter computed for non-
performing loans of -2.124 reveals the fact that there exist a negative relationship between non-
performing loans and banks contribution to the economy. This shows that a unit increase in non-
performing loans will lead to more than a unit decrease in banks contribution to the economy. More so,
the regression coefficient computed for the intercept of 330.261 indicates the fact that without non-
performing loans, banks contribution to the economy will increase in a hyper geometrical ways.
Therefore, the existence of non-performing loans in Nigerian banks can affect the contribution of banks to
the economy.
Also, in table 4.17, the coefficient of determination (R2) computed for testing the overall contribution of
non-performing loans on banks contribution to the economy reveals a value of 0.969, this means that
96.90% of banks contribution to the economy can be denied by the economy as a result of incidence of
non-performing loans in Nigerian banking sector. Therefore, non- performing loans is a good predictor
variable for banks contribution to the economy of Nigeria.

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of findings
In order to achieve the cardinal objective of the research, four operational objectives are set out by the
researcher for investigations. The result of the finding reveals that there is a significant relationship
between external auditors and fraud prevention in Nigerian banking sector. This infers that the p-value of
the F-calculated of 0.000 is less than the critical value of 5%. In fact, the coefficient of determination
indicates the fact that the engagement of external auditors by banks in Nigeria can lead to 88.10% of
frauds control in Nigerian banks.
Also, there is a significant relationship between changes in bank deposit and incidence of frauds in
Nigerian banks. This is based on the fact that the p-values of t-test and F-test calculated of 0.001 are less
than the critical value of 5%. Therefore, the higher the incidences of frauds in the banking sector in
Nigeria the higher the changes in banking deposit. In addition, the coefficient of determination computed
for overall contribution of incidence of frauds on changes in bank deposit reveals that 77.60% of changes
in banks deposit are as a result of fraud in the banking sector.
Moreover, it can be inferred that there is incidence of non-performing loans in banking sector as a result
of frauds in the banks. This implies that the prevalence of frauds in the banking sector has led to
incidence of non-performing loans in Nigerian economy. In fact, 96.40% of non-performing loans in
Nigerian economy is as a result of frauds in the banking sector.
Also, it is found that there is a significant relationship between non-performing loans and banks
contribution to the economy. This is based to the fact that the p-value of the F-test and t-test computed of

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Vol. 3, No. 1, pp. 13-36.

0.000 is less than the critical value of 5%. More so, the coefficient of determination computed for the test
reveals the fact that the economy is deprived of 96.90% of banks contribution as a result of incidence of
non-performing loans and advances in the banking sector. Therefore, there is a significant correlation
between incidence of non-performing loans and banks contribution to the economy.

5.2 Conclusions
Based on the results of the findings summarized above, the following conclusions are made.
1. External auditor can prevent frauds in Nigerian banking sector. This conclusion is based on the
fact that the p-value of the F-calculated of 0.000 is less than the critical value of 5%.
2. There is a significant relationship between incidence of frauds and changes in bank deposit.
3. There is incidence of non-performing loans in Nigerian economy as a result of frauds in the
banking sector.
4. There is a significant relationship between non-performing loans and banks contribution to the
economy. In fact, it is found that the higher the non-performing loans of banks, the lower their
contribution to the economy. This assertion is evident by the value of -2.124 computed for the regression
coefficient non-performing loans see Table 4.15.
5.3 Recommendations
The finding of the study reveals that external auditors activities are needed in controlling and preventing
frauds in Nigerian banking sector. Therefore, based on the results of the findings and conclusions derived
therein, the following recommendations are made.
1. Nigerian banks should continue to make use of the external auditor in order to check the
incidence of frauds and intentional material mis-statement in the prepared financial statement.
2. Banks management in Nigeria should continue to implement strategies and motivational
packages that will help in reducing frauds among its employees in order to encourage depositors.
3. External auditors engaged by banks should ensure that they carry out their work in line with their
professional code of conducts and ethical standards guiding their job. Therefore, external auditors must
ensure that they do not have a vested interest in any of their clients business interest.
4. Banks must ensure that they reduce to a bare minimum the issue of insiders loans and advances
to employees. This is due to the fact that majority of the loans classified as non-performing in Nigerian
banks today are due to the activities of insiders sources (Sanusi, 2013).
5. Nigerian banks must ensure that they minimize their non-performing loans through accurate
management of their loans portfolio in order to contribute significantly to priority sector of the economy.
The study has shown that external auditors are necessary in preventing and controlling frauds in Nigerian
banking sector. More studies need to be carried out on the influence of external auditors activities on
banks performance in Nigeria.

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Vol. 3, No. 1, pp. 13-36.

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