By: Enoch AKUFFU-DJOBI (PhD)
Banks and specialized deposit-taking institutions have the attention of the Bank of Ghana (BoG), which is worried about the number of employees engaged in fraudulent activities (SDIs).
The Central Bank’s fraud report for 2023 shows that there was a 46% increase, from 188 cases in 2022 to 274 cases in 2023, in staff-related fraud involving banks and SDIs.
In the banking sector, where trust and security are paramount, maintaining effective internal controls is critical to prevent fraud, errors, and financial mismanagement.
One of the cornerstones of these internal controls is Segregation of Duties (SoD), a system designed to ensure that no single employee has control over all aspects of a financial transaction.
This practice reduces the risk of fraud and ensures that errors or irregularities are promptly detected. However, the reality of staff constraints—where banks operate with fewer resources than ideal—often puts pressure on these vital internal controls, creating vulnerabilities that can lead to violations and, in some cases, fraud.
In this article, I deemed it appropriate, and with all seriousness, to explore how staff constraints impact segregation of duties in banks, focusing on the human factor.
I will also discuss the risks associated with inadequate SoD, the consequences of violations, and practical ways banks can address these challenges.
The Importance of Segregation of Duties in Banking
Segregation of duties is a fundamental principle in banking operations. The goal is to divide responsibilities so that no single employee has the ability to both initiate and approve transactions, access sensitive financial data, or carry out multiple critical tasks without oversight.
By splitting these responsibilities across multiple individuals, banks reduce the risk of fraud, errors, and oversight.
For example, in a typical transaction, one employee might initiate a payment, while another verifies and authorizes it.
This separation ensures that no individual has the power to initiate a fraudulent transaction and cover it up. In an ideal world, SoD creates an environment of checks and balances, where fraudulent activities or mistakes can be easily detected and prevented.
Staff Constraints and the Erosion of Segregation of Duties
In many banks, particularly those reporting fantastic profits or smaller institutions, staff constraints are a common reality. Fewer employees are available to perform a variety of functions across different departments.
To cope with this shortage, banks may ask their employees to take on multiple roles, inevitably leading to a weakening of segregation of duties.
For example, one employee may be tasked with both approving loans and processing payments, or a cashier might also reconcile accounts, combining roles that should otherwise be split to ensure proper oversight.
When staff constraints force employees to take on multiple roles, several issues arise:
Increased Risk of Fraud: With fewer people involved in each process, the opportunity for fraudulent activity increases.
An employee who handles both initiating and approving transactions has the potential to carry out fraudulent activities, such as diverting funds or falsifying records. Without a second layer of oversight, these activities may go undetected for a longer period.
Human Error and Oversight: When employees are stretched thin and have too many responsibilities, the chances of human error rise. Under such pressure, mistakes in financial calculations, record-keeping, or transaction processing are more likely. Without proper segregation, these errors may not be noticed until significant financial discrepancies arise.
Decreased Accountability: When employees take on too many roles, it becomes difficult to assign responsibility for errors or fraud.
For instance, if a transaction is mishandled or funds are misappropriated, it is harder to pinpoint the individual responsible. This lack of accountability creates an environment where errors and fraud can persist unchecked.
Real-World Impact: Fraud and Compliance Failures
The relationship between staff constraints and segregation of duties violations has had real-world consequences for banks. In several instances, insufficient staffing and the resulting breakdown in SoD have led to financial mismanagement and fraud.
Example 1: The Case of the Stolen Funds
In 2021, a regional bank in Ghana faced a scandal when it was discovered that an employee had embezzled a significant amount of money from customer accounts.
The employee, who had control over both the initiation and approval of transactions limits, was able to manipulate the bank’s records without detection.
The lack of adequate segregation of duties, caused by a shortage of staff, allowed the fraud to continue for months before it was discovered. This led to not only financial losses but also a tarnished reputation and regulatory scrutiny.
Example 2: Errors in Loan Processing
In another case, a local bank was found to have made errors in the processing of loan applications due to insufficient staff for appropriate oversight. Loan officers were tasked with both processing and approving loans, leading to mistakes in loan terms and miscalculations of interest rates.
Customers complained about incorrect loan amounts, and the bank faced regulatory penalties for failing to meet compliance standards. These issues were exacerbated by the pressure on employees to manage multiple responsibilities, highlighting the risks of neglecting proper segregation of duties.
The Human Factor: Stress, Pressure, and Ethical Concerns
The human element in banking operations is critical. When staff are under pressure to perform multiple roles, stress and burnout can contribute to poor decision-making.
Overworked employees may make errors in judgment, cut corners, or fail to adhere to company policies out of frustration or a desire to meet deadlines. In the worst cases, they may be tempted to engage in fraudulent activities, particularly if they feel there is little oversight or accountability.
Moreover, employees in overstretched environments may begin to view SoD controls as burdensome rather than protective measures. They may become complacent about following internal controls or even bypass them to simplify their work. This creates a toxic culture where staff are either too tired to care or too overworked to notice the consequences of their actions.
Addressing the Human Factor: Solutions for Banks
While staff constraints are a challenge, they are not an insurmountable obstacle. Banks can take several steps to reduce the risks associated with weakened segregation of duties:
Investing in Technology: Automation and digital tools can help alleviate the strain on employees by automating repetitive tasks and reducing the need for manual intervention. For example, automated transaction approval systems can help separate roles without requiring additional staff, while fraud detection systems can monitor transactions for irregularities in real-time.
Cross-Training with Caution: While cross-training can help cover staffing shortages, it must be done carefully. Cross-trained employees should not be responsible for handling both sides of a financial transaction or performing multiple critical tasks. Instead, their roles should be clearly defined, and additional oversight should be provided.
Hiring Additional Staff: Although this may not always be feasible in the short term, increasing staffing levels is one of the most effective ways to restore proper segregation of duties. By hiring staff for critical functions, banks can ensure that they have enough resources to maintain robust internal controls.
Regular Audits and Monitoring: Continuous monitoring, audits, and internal reviews are essential to detecting potential SoD violations early. Regularly checking that SoD policies are being adhered to, even in understaffed departments, can help prevent fraud and errors from going unnoticed.
Employee Training and Ethical Culture: Promoting an ethical work culture and providing ongoing training can help employees understand the importance of segregation of duties and encourage them to follow internal controls. In an environment where staff constraints are a reality, fostering a sense of responsibility and accountability is key.
Conclusion
Staff constraints in the banking industry can create significant challenges for maintaining effective segregation of duties. The combination of human error, the temptation for fraudulent behavior, and the lack of accountability can leave banks vulnerable to financial mismanagement and regulatory failures.
However, by investing in technology, implementing effective monitoring, and ensuring that staff receive adequate training and support, banks can address the human factor and mitigate the risks associated with SoD violations.
Ultimately, protecting the integrity of financial operations and ensuring customer trust requires not only robust controls but also a commitment to maintaining a balanced, well-supported workforce.
Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected]). Contact: +233244201383
