EVALUATING THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEMS IN MITIGATING FRAUD RISKS IN THE CASE OF HIBRET BANK S.C

Abstract

This research determines the effectiveness of the internal control system in mitigating fraud risks in the case of Hibret Bank S.C. Internal control defined as a process that has been accepted by the board, management and staff of an organization that provides reasonable assurance over objectives, the effective functioning and reporting of the company, compliance with regulations and maintaining the reputation of the company. The key aims of the research to test the usefulness of internal control system in detecting fraud risk. Internal control system components (control environment, risk assessment, control activities, information & communication, and monitoring activities) were considered as independent variables in this research whereas fraud risks were the dependent variable. Descriptive, explanatory and qualitative research methods were carried out in this study. The primary data was gathered using questionnaire tool and the qualitative data was gathered by interviewing five people within Internal Audit and Risk & Compliance Departments. The populations of the research to be carried out were Hibret Bank employees who were occupying a managerial job in both Head office and Branches located only in Addis Ababa, and by using simple random sampling method 244 employees were selected. The sample size used to obtain the quantitative data comprises 232 employees. The research utilized both descriptive and inferential statistics in the data processing with the help of Statistical Package for Social Sciences (SPSS) Version 25. The research established that the five components of internal control positively and significantly contribute to the prevention of the bank fraud risks at Hibret Bank. It was also found in the study that there is negative and strong correlation between independent variables (the five components of internal control systems) and the dependent variable (occurrence of bank fraud risks). This means that a increase in one element of internal control system would result into the reduction of incidences of the common kinds of bank frauds within the Bank. In addition to that the qualitative information indicated the significance of the efficient internal control systems in mitigating risks of frauds along with the necessity of the sufficient implementation, employee awareness, and continuous monitoring in terms of the effectiveness of these systems. Therefore, the research concludes that the internal controls as applied by Hibret Bank have a great role in minimizing risk in case they are effectively utilized. Nevertheless, the potential is hampered by the ambiguities in communication and unproductive monitoring. It is crucial to fight such areas which are led by qualitative understanding of the matter along with the quantitative evidence in order to achieve greater overall effectiveness in the fight against fraud. It can therefore be concluded that, all controls unless well designed and implemented could provide room through which fraudulent practices could occur.