The impact of having internal control department in
all organizations and banking institution in this era of stiff competition and
financial regulation cannot be over emphasized. 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 transaction 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.
The objective of this study was to evaluate the
internal control system in operation at Skye Bank PIc. With a view to examines
the effectiveness of internal control system in Nigerian banks.
The population of the study consists of all banking
institutions in Nigeria, the sample is Skye Bank PIc, Lagos from the accounting
and internal control departments because of significant relationship with the
research topic and simple random sampling was employed to give members of staff
equal opportunity of being selected.
Data were collected through questionnaire as its
instrument and interview to assist in the data from the questionnaire and also
the examination of existing records. The collected data were analyzed using
simple percentage, chi-square analysis, and they were presented using tables.
The research study tested variables which were vital
for an internal control.
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
Definition of Term
CHAPTER TWO LITERATURE REVIEW
2.1 Component of Internal Control
2.2 Types of Internal Control System
2.3 Functional Characteristics of Internal
2.4 The Role of the internal Auditor
2.5 Fraud and the Internal Control System
2.6 External Auditors and the Internal Control
2.7 Merits and Demerits of Internal Control
CHAPTER THREE RESEARCH
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
3.7 Method of Data Analysis
DATA PRESENTATION, ANALYSIS AND
INTERPRETATION OF RESULT
4.2 Presentation of Socio-Demographic
4.3 Data Analysis and Interpretation
4.4 Test of Hypothesis
SUMMARY, CONCLUSION AND
5.4 Suggestions for Further Investigation
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
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
 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
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
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
This study is therefore established to evaluate
internal control as a management tool in banking industry using Skye Bank PIc
as a case study.
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 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
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:
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
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.
examine the possible effect of fraud on the earnings and profitability of
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?
The following are a few of the questions, which were
asked in the questionnaire in the carrying out of this research work.
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
iv. Is the accounting and operational routine sit out in an accounting
What recommendation can effective and
efficient internal control system application to Nigerian banking industry?
The two hypotheses are formulated and tested in this
Ho: The lack of a good internal control is not a major cause of fraud
Hi: The lack of a good internal control is a major cause of fraud in
Ho: Banks with internal control systems cannot prevent the menace of
Hi: Banks with internal control systems can prevent the menace of
OF THE STUDY
It enables managers of services,
organizations and government owned public utility establishments to bring the
accounting and the internal control procedures inherent in them in conformity
with internal accounting standards and practices.
It helps government owned establishments
to assess their internal control measures and make amends where necessary.
study could arouse further research into some other further research into some
other functional areas in the company by students and accountants. It will also
help to broaden (my) researchers' knowledge
research work helps in widening the researcher's knowledge of practical
application of internal control system in banking organization.
study also enhances the appreciation of internal control as a necessary tool in
the smooth and efficient running of an organization.
study also enable the readers to appreciate the operation of internal control
system in a business organization vis-a-vis its theoretical frame work.
The data needed for this research work were
collected from both primary and secondary sources of data.
Primary Sources: Personal interview of
some managers and staffs of the research section of Skye Bank PLC Lagos were
conducted. Structured questionnaires were administered to the manager and the
staff as well especially one staff in the research section in Skye Bank PIc.
Source: The research consulted books, journals, magazines and other relevant
literature to the topic.
The data collected from the administered
questionnaire were analyzed using descriptive statistics, and the hypotheses
were tested by using chi-square statistical tool for testing hypotheses.
SCOPE AND LIMITATION OF STUDY
The research study is limited to the evaluation of
internal control system as a management tool in banking industry in Nigeria,
with particular reference to Skye Bank PIc.
In carrying a research work, certain problems were
encountered which limits the precision of the research and the extent of
generalization of the research work.
The problems include, a time constraint which
renders one from delving into areas other than accounting and administrative
control in the organization, geographical location of the case study in
relation to researcher’s institution, and limitations to the amount of
information's obtainable from the respondents to the oaths of secrecy of the
HISTORICAL BACKGROUND OF SKYE BANK PLC
Skye Bank PLC is a public limited liability company
incorporated as 'Prudent Merchant Bank limited' on the 8th of
December 1989 in accordance with the provisions of the Companies and Allied
Matters Act, 1968. It was issued a banking license on February 7, 1990 to carry
on all classes of merchant banking business in accordance with provisions of
the Banking Act, 1969 and it commenced operations on the 2nd of
May 1990. The bank's name was changed to Prudent Bank Limited in 2000 following
an Approval in Principle by Central Bank of Nigeria (CBN) for the conversion of
the Bank to a commercial bank. The Bank commenced operations as a commercial
bank in 2001.
Skye bank PLC came about by the merger of five Institutions-Prudent
Bank PLC, Eko International Bank
PLC, Reliance Bank Limited, Cooperative Banks PLC and Bond Bank PLC which
was seamlessly completed in January 2006. The Head office of the Bank is
situate at No.3, Akin Adesola Street, Victoria Island, Lagos. The Bank is
currently engaged in the business of universal banking by virtue of its banking
license. It provides services to individual and corporate customers through its
network of branches and local and international subsidiaries.
Skye bank listed on the Nigeria Stock Exchange and
has over 450,000 diverse shareholders. The Bank's shareholders' fund is in
excess ofNl00b.The local subsidiaries of the Bank are Law union and Rock
Insurance PLC, Skye Stockbrokers Limited, Skye Mortgage Bankers Limited, Skye
Trustees Limited, Apex Integrated Technologies Limited, Skye Exchange (BDC)
Limited, Skye Resources Limited and Skye Financial Services Limited. The
international subsidiaries are Skye Bank Gambia Limited, Skye Bank Sierra Leone
Limited and Skye Bank Guinea Limited. The financial statements of the Bank'
subsidiaries have been consolidated.
The Central Bank of Nigeria repealed the universal
banking license and directed all banks to either divest from all their non-core
banking subsidiaries or create a non-operative holding company to hold all
such subsidiaries, including the core banking business. Pursuant to this
repeal, the Board of Directors of the Bank resolved to focus on the core
commercial banking subsidiaries of the Bank. Resolutions will be proposed at
the Annual General Meeting to authorize the Directors to divest of the Bank's
non- core banking subsidiaries in such manner as they consider necessary and to
take all necessary actions in order to give full effect to the divestment.
INTERNAL AUDIT: This can be
define as the independent appraisal of activities within the organization for
the review of accounting, financial and other operations as basis for service
INTERNAL CHECK: These are day to
day administrative control within the internal control system which aims at
detecting and minimizing the risk of fraud and error.
ACCOUNTING CONTROL: This
comprises of the plan of the organization and all methods and procedures that
are concerned mainly with and directly to reliability of the financial records.
TEST CHECKING: This is a method
of verifying the operations of a computer program by tracking likely
transactions through a print-out of the program.
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Adeniyi, A.A. (1997): Accounting
System and Internal control System, Macmillan publisher, Lagos.
Adeleke, J.O (2009): Audit
Investigation and assurance Services. Mixon Publishers. Lagos
Babs Ajayi (2006): Nigeria world
Feature Article: Thursday, December 14,2006 Skye Bank Annual Reports & Financial
Uchendu, O. A. (1998) "Concentration
in the Commercial Banking Industry m Nigeria" Economic and Financial
Review, Vol. 40 No.3, Central Bank of Nigeria.