TABLE OF CONTENTS
CHAPTER ONE INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research Question
1.5 Research Hypothesis
1.6 Significance of the study
1.7 Methodology of the Study
1.8 Scope and limitation of Study
1.9 Historical Background of Skye Bank pIc
1.10
Definition of Term
1.11
References
CHAPTER TWO LITERATURE REVIEW
2.0 Introduction
2.1 Component of Internal Control
2.2 Types of Internal Control System
2.3 Functional Characteristics of Internal
Control
2.4 The Role of the internal Auditor
2.5 Fraud and the Internal Control System
2.6 External Auditors and the Internal Control
System
2.7 Merits and Demerits of Internal Control
System
2.8 Summary
2.9 References
CHAPTER THREE RESEARCH
METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population of the study
3.3 Sample and Sampling Procedures
3.4 Data Processing Techniques
3.5 Procedures of data Collection
3.6 Test of Reliability and Validity of
Instrument
3.7 Method of Data Analysis
3.8 References
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND
INTERPRETATION OF RESULT
4.1 Introduction
4.2 Presentation of Socio-Demographic
4.3 Data Analysis and Interpretation
4.4 Test of Hypothesis
4.5 References
CHAPTER FIVE:
SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
5.4 Suggestions for Further Investigation
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The banking industry is the
live-wire or the equivalent to the central nervous system of the human in all
capitalist economics. The institution provide the vital link between the
surplus unit and the deficit unit of the economy. Banks promote investment by
providing facilities for mobilizing savings and appropriate instruments without
which either economic growth or development can take place smoothly and
efficiently. In the process of performing these functions, banks come to hold
the single largest proportion of the economy's financial resources and
correspondingly account for a similar lion share of the credit that propels the
engine of growth and development. In the light of this, the subject of internal
control in the industry is of interest to all western type economies of the
world.
The process of financial account
and data production should be based on a recognized, well-defined and
well-organized system of procedures. If the business transactions are to be
properly and correctly observed, documented, Recorded and collated, then there
must be a system which is designed to cope with these activities. For this
reason, management of the organization has in general, over a period of many
years, placed a great deal of emphasis on having strong system of internal
control, where possible. This system is intended to maintain adequate process
of accounting data production and safeguarding the organization against
possible financial loss due to fraud or error.
Internal control, in its
broadest sense, includes all controls, checks and procedures, formally
instituted by the management, to maintain the maximum administrative and operational
efficiency possible within the accounting and non-accounting function of the
business organization. However, in terms of financial accounting, the system is
mainly concerned with those controls which exist to aid the processing of
reliable accounting data and to safeguard companies' asset.
The International Auditing Standard and Guidelines
[2002] defined Internal Control as ''the whole system of controls, financial
and otherwise, established by the management in order to carry on the business
of the company in an orderly and efficient manner; ensure reliance to
management policies, safeguard its assets and secure as far as possible the
accuracy and reliability of its records. The special Report on Internal Control
of the Association of Certified Chartered Accountants, London, defines internal
control as follows: "Internal Control includes not only internal check or
internal audit but all systems of controls, financial or otherwise established
by management to carry on the business of the company in an orderly manner,
safeguard its assets and secure as far as possible the accuracy and reliability
of its records.
An important feature of the impact of Internal
control is the director review of company financial operations and position at
regular and frequent internals by means of interior account and report,
operating summaries and other appropriate financial and statistical. In addition
to regular view, management may from time to time call for special reviews of
particular items e.g. wages, stock, salary access etc. Managerial review and
supervision are essential element in an efficient and effective internal
control system.
Banks like other business organization achieve their
objective through the use of human and economic resources. In most cases, the
economic resources are provided by various interest group that do not
participate in the day today normal running of the operation of the business.
The onus is therefore, on the management to make sure these resources are
effectively and efficiently managed to achieve the set goal and to build up
public confidence, the desired control achieved through the setting up of a
good and valid internal control system.
Internal audit which is an integral aspect of
internal control. As a part of management team of the control function, it is
clearly described in the statement of responsibilities of the internal auditor
as an independent appraisal of activity within an organization for the review
of accounting, financial and other operation are basis for service to
management. For instance, Cadbury Nigeria sacked its Managing Director, Mr.
Bunmi Oni and Mr. Ayo Akadiri, the company's Finance Director recently, which
is a fallout of the financial book padding scandal and corruption that recently
rocked the company, and that is the way it should be commended. The Board
recently commissioned the firm of price water Coopers to review and investigate
the company's financials. The outcome of the investigation “has confirmed a
deliberate overstatement of the company's financial position over a number of
years to the tune of between N13 and N15 billion”! This is Nigeria's version of
the Enron Corporation scandal in the United State.
In case of ENRON which brings to mind the collapse
of the seventh largest company in the United States of America and the largest
bankruptcy seen by the country till date. There are many issues that were
raised with the collapse of Enron as described in the CRS Report for the
Congress in 2002:
·
Auditing - There
may have been a possibility that the auditors were misled into preparing the
wrong financials for the company. Often companies pay more to auditors for
non-audit fees than for audit fees, which may bring the auditors to compromise
their standards.
·
Accounting - There
are several questionable accounting techniques like subsidiary accounting,
derivatives and third party investors used by Enron. The loopholes in the
accounting system need to be rectified.
·
Pension - More than 60% of the assets
held in the 401(k) plan consisted of Enron stock, which when plummeted put
stockholders and employees in huge losses and setbacks. Such grave scenarios
need to be avoided in the future.
·
Corporate Governance - The board of
directors is meant to protect the interest of the shareholders. In Enron's case
the CFO was allowed to create private partnerships to deal with the company
which is against the best interest of the company.
·
Securities Analyst - The creditability
of analysts came under question following the collapse of Enron stock in
November 2001 as even the Wall Street analysts failed to predict the Enron
disaster.
This study is therefore established to evaluate
internal control as a management tool in banking industry using Skye Bank PIc
as a case study.
1.2
STATEMENT OF THE PROBLEM
A notable feature of the industry is low ethical
standard and transparency. These are manifesting in the rising cases of
unwholesome practices being recorded. A number of banks engage in some sharp
and unorthodox practices to achieve compliance with some regulatory
requirements "on paper" Many banks' returns provide inaccurate/misleading
financial report thereby preventing timely detection of emerging problems by
the supervisor.
The managerial incompetence of the top management of
some banks as evident in weak internal control system of the banks. Substantial
losses incurred by many banks on their credit portfolio, frauds and forgeries
and outright negligence have brought to the fore, the importance of sound
internal control system. Appraisals of fraud-related losses by Bank Examiners
revealed that such losses could have been prevented had the affected banks
maintained effective internal control systems.
The trend in deficiencies in banks' earning assets
especially loans and advances, arising from either poor loan administration or
unethical lending (such as insiders' abuse). This is an indication of
managerial problems in this regard.
The importance of internal control system cannot be
overemphasized where a variety of requirements, processes that are both manual
and information communication technology-based (ICT) are used. Organizations have
recognized internal audit function as a tool for ensuring effective workings of
the internal control system. Okolo (2001) describes the internal control
function as an aspect of control mechanism, within a business, manned by
specially assigned staff. However, in Nigeria, the internal control function in
the banking sub-sector has not been fully tapped; consequently, cases of errors
and intent to defraud and other fraud cases exist in the banking industry. The
distress in the banking sub-sector in the nineties reflected lack of effective
control mechanism of the audit function in the banking industry. The
experiences of failed bank in Nigeria have therefore called for the
reinforcement and the strengthening of the controls system in the Nigerian
banks.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to evaluate the
effectiveness of internal control as management tool in banking industry in
Nigeria. The specific objectives of the study are:
i. To
verify the existences of internal control and auditing system in banks.
ii. To ascertain whether the existing level controls and internal
audit procedure in banking industry are adequate to ensure staff efficiency,
services delivery, prevention of fraud and embezzlement forestalling occasion
of mismanagement.
iii. To identify the various type of fraud that can be penetrated in
banks and strategies of fraudsters.
iv. To determine the suitability or otherwise of the bank official in
charge of internal control system.
v. To
examine the possible effect of fraud on the earnings and profitability of
banks.
vi. To suggest meaningfully ways of improving quality of internal
control in banking industry.
vii. To what extent does inefficient staffing impede effective Internal
Control System in the Banking Industry?
1.4 RESEACH
QUESTIONS
The following are a few of the questions, which were
asked in the questionnaire in the carrying out of this research work.
i. Does
the internal audit system ensure that operations comply with set policies and
promote accuracy and reliability of transactions?
ii. Are internal/external auditors independent of those whose
functions they appraise?
iii. Based on the evaluation of the internal control system, is it effective
and efficient?
iv. Is the accounting and operational routine sit out in an accounting
Manual?
v.
What recommendation can effective and
efficient internal control system application to Nigerian banking industry?
1.5 RESEARCH
HYPOTHESES
The two hypotheses are formulated and tested in this
study.
Ho: The lack of a good internal control is not a major cause of fraud
in banks.
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