Effect of Internal Control Systems on Fraud Prevention in Nigerian Deposit Money Banks

Abstract

This study investigates the effect of internal control systems, conceptualised through the five components of the COSO Integrated Framework—control environment, risk assessment, control activities, information and communication, and monitoring activities—on fraud prevention in listed Nigerian deposit money banks. Secondary data were obtained from audited annual reports of 14 purposively selected banks for 2019–2024 and supplemented with Central Bank of Nigeria supervision reports and Nigeria Deposit Insurance Corporation publications. Fraud prevention was measured using the fraud occurrence ratio, defined as fraud losses divided by total assets, while each internal control component was assessed through a disclosure-based index derived from corporate governance and risk reports. The Hausman specification test supported a fixed-effects panel regression, with diagnostic tests conducted for multicollinearity, heteroscedasticity and serial correlation. The results show that control activities and monitoring activities have the largest negative and statistically significant effects on fraud occurrence. Control environment and information and communication also have significant negative effects, although of smaller magnitude, whereas risk assessment has no statistically significant effect (p = 0.318). The model explains a significant proportion of the variation in fraud occurrence, and the results remain robust under an alternative fraud measure and a lagged specification. The findings indicate that the operational and oversight dimensions of internal control are more effective in preventing fraud than risk identification alone. Bank boards should therefore prioritise transaction-level controls and continuous monitoring, while regulators should assess the operational effectiveness, rather than merely the existence, of disclosed controls.