Effect of the Capability Component of Fraud Theory on Fraud Risk Management in Nigerian Banks

Abstract

The incidence of bank fraud is a fundamental problem with diverse consequences to banks and their stakeholders. Therefore, this study examined the effect of the capability component of fraud theory on fraud risk management in Nigerian banks. The specific objectives of the study are to: examine the effect of malicious insider abuses on fraud risk management efficiency of Nigerian banking sector; evaluate the effect of internal control bypasses on fraud risk management efficiency of Nigerian banking sector; investigate the effect of information security breaches on fraud risk management efficiency of Nigerian banking sector, and ascertain the effect of fraud risk governance on fraud risk management efficiency of Nigerian banking sector. The study adopted ex-post factoresearch design. Secondary data were gathered from the quarterly report on fraud and forgeries of the Financial Institutions Training Centre (FITC) from the first quarter of 2011 to the second quarter of 2020 given a total of thirty-eight (38) observations. The dependent variable of the study was fraud risk management efficiency (FRMη) while the independent variables were malicious insider abuses (MIA), Internal Control Bypasses (ICB), Information Security Breaches (ISB), and fraud risk governance (FRG). Four hypotheses were formulated and tested using robust linear regression analysis. The study employed Stata 14.2 and SPSS 22 in data analyses. We also conducted Skewness/Kurtosis and Shapiro-Francia W’ normality tests, Variance Inflation Factor (VIF) of multicollinearity, Breusch-Pagan/Cook Weisberg test of heteroskedasticity, and Durbin-Watson test for autocorrelation. The results revealed statistically significant negative effects of internal control bypasses and information security breaches on fraud risk management efficiency. The study also found an insignificant positive effect of malicious insider threats and fraud risk governance on fraud risk management efficiency. The implication of these findings is that the Nigerian banking sector is confronted with both internal and external fraud capability challenges which require management attention and stakeholders’ education and awareness. Based on these findings, the study offers comprehensive fraud vulnerability suggestions integrating all banking stakeholders (internal and external) to improve fraud risk management efficiency in Nigerian banking sector.