An Exploration of the Factors Influencing Fraudulent Activities in Stock Brokerage Firms and Investment Banks in Kenya

Abstract

In today’s business environment, fraud can no longer be considered a secondary concern as its effects can be quite costly. Smart companies know that fraud may occur hence they develop effective strategies for preventing, detecting and responding to fraud risk.

The purpose of this study was to explore the factors influencing fraudulent activities in stock brokerage firms and investment banks in Kenya. This study was necessary because in the recent past, Kenyans have witnessed some of these firms collapse and millions of investments lost partly due to fraudulent activities. The objectives of the research were to find out whether the stock brokerage firms and investment banks complied with the operational procedures as per the legal regulatory framework of the capital markets intermediaries, investigate the internal controls the firms had put in place to prevent/deter fraudulent activities, establish whether fraudsters and organizational characteristics influenced acts of fraudulent activities, find out whether employees were trained on their jobs and how this affected incidences of fraudulent activities, and establish whether there were any legal actions taken against the fraudsters to serve as punishment and discouragement to further fraudulent activities.

The researcher used descriptive research design and targeted a population of 21 firms which included stock brokerage firms, investment banks and regulatory firms. All the firms in the population were studied. Purposive sampling design was used to select a sample of 82 individuals who included Managing Directors, Operations Managers, Finance Managers, IT Managers, Dealers and Compliance officers. Data was collected using questionnaires and interviews. Data was analyzed using Predictive Analysis Software (PASW) and presented using tables, pie charts and histograms.

Results revealed that fraud was high in stock market industry, non-compliance and failure to follow operational procedures contributed to fraudulent activities. Though the firms had internal controls in place, they were not strong enough to deter fraud. Inadequate employee training also influenced fraudulent activities. Organizational and employee characteristics also contributed to fraudulent activities.

The recommendations for the research were that the firms should develop effective systems of internal controls, assess employee training needs and develop fraud awareness and training program, instill a culture of sound ethics, develop a company policy on fraud and work in partnership with other organizations and bodies to share information. The government should enhance its strategy on fraud prevention and the regulatory body (CMA) should ensure that the firms have a strong anti-fraud culture.