The Effect of Corporate Governance on Occurrence of Fraud in Commercial Banks in Kenya

Abstract

The purpose of the study was to examine the effect of corporate governance on occurrence of fraud in commercial banks in Kenya. The study was guided by four research questions as follows: To what extent does top leadership's tone at the top affect occurrence of fraud in commercial banks in Kenya? To what extent do the prudential control systems set by commercial banks' regulator impact on occurrence of fraud? To what extent does the alignment of top leadership's compensation structures to fraud risk affect occurrence of fraud? To what extent do the fraud response strategies by commercial banks in Kenya affect occurrence of fraud? The study adopted positivism research philosophy and descriptive correlational research design. The population of the study were 13,092 top management staff of 43 commercial banks regulated by CBK. A sample size of 169 top management staff stationed in Nairobi City were drawn using stratified random sampling method. Primary data was collected through structured questionnaires. Data was analyzed using descriptive statistics and inferential statistics of Pearson's Correlational Analysis, Analysis of Variance and regression analysis using statistical tool of SPSS.

In relation to the effect of top leadership's tone at the top on occurrence of fraud, the study found significant correlations between top leadership's tone at the top and amount of fraud loss and frequency of fraud and increases fraud loss recovery rates. In respect to effect of prudential control systems set by CBK on occurrence of fraud, the study showed a correlation of prudential control systems set by CBK lowers the amount of fraud loss and enhances the fraud loss recovery rates. In relations to effect of alignment of top leadership's compensation structure to occurrence of fraud, the grouped correlations show significance relationship with amount of fraud loss and increase in fraud loss recovery rate .In regards to effect of fraud response strategies on occurrence of fraud, the grouped correlational results of the showed that that robust fraud response strategies by the banks, lower amount of fraud loss The study evidenced that effectiveness of fraud response strategies yield higher fraud loss recovery rates.

The study concluded that the more the positive tone at the top the lower the likelihood of occurrence of fraud, the more stringent the prudential control systems set by the regulator the lower the likelihood of occurrence of fraud, the more commensurate the compensation, the less likelihood of occurrence of fraud and finally, the more the established the procedures are for reporting incidences of fraud, the less the likelihood of fraud through falsification of documents by staff.

The study recommended extension of fit and proper test for all commercial banks' staff in fraud prone departments and making it periodic for the top management teams, improvement of banking supervisions by creation of fraud specific prudential reports, legislative amendments to create fraud specific courts with judicial support systems and structural review of BFID reporting line. In relations to further research, the study suggested inclusion of all fraud typologies and getting the perception of board of directors and non-top leadership staff, replication of the same study to all CBK regulated financial institutions and also assessing the impact of fraud awareness initiatives by all the stakeholders on occurrence of fraud.