Fraud Incidence and Performance of Banking Industry in Nigeria: The Moderating Role of Internal Control

Abstract

This study examined the moderating role of internal control systems on the effect of fraud incidence on the performance of Nigerian banks. Specifically, the study assessed the effects of asset misappropriation and financial statement fraud on the operating efficiency of banks, as well as how internal control systems moderated these relationships. A cross-sectional survey research design was adopted, with a population of 41,719 employees drawn from five major deposit money banks in Nigeria, and a sample size of 396 determined using the Taro Yamane formula. Primary data were collected through a structured questionnaire administered to employees in operations, audit, and internal control departments. The hypotheses were tested using moderated multiple regression analysis with the aid of SPSS software. Findings revealed that: asset misappropriation fraud had a negative but non-significant effect on bank operating efficiency (β = -0.051, p = 0.804); financial statement fraud had a negative but non-significant effect on bank operating efficiency (β = -0.324, p = 0.096); internal control system positively and significantly moderateed the effect of asset misappropriation fraud on bank operating efficiency (β = 0.149, p = 0.002); internal control system positively and significantly moderates the effect of financial statement fraud on bank operating efficiency (β = 0.179, p = 0.000). the study concluded that, effective internal controls played a crucial moderating role in mitigating the effect of fraud on bank performance. The study recommended that audit committees and internal auditors should enhance oversight on financial reporting processes by adopting automated control systems and routine reconciliation checks, ensuring that fraudulent alterations in financial statements are detected quickly and corrected to sustain operational performance.