ABSTRACT
This study investigates the “Impact of Internal Control System in the Nigerian Banking Industry”. 3 Research questions were formulated while three null hypothesis was also raised. Survey research design was used for the study. The population of study is total of sixty-nine (69) which comprised one (1) internal auditor and twenty-eight (28) staff of First Bank Nig. Plc, (Panseke Branch) and one (1) internal auditor and thirty-nine (39) staff of First Bank Nig. Plc, (Lafenwa Branch) situated at Abeokuta, Ogun state. Fifty two (52) questionnaires were distributed and (50) fifty were dully filled and recovered from the respondents. Frequencies and percentages were used to analyze the bio-data of respondents. Frequency tables, mean, standard deviation and grand mean were used to analyze the research questions. Chi-square statistic was used to test the hypothesis. It was found out that internal control measures involves monitoring and controlling the activities of the bank staff to prevent errors through adequate ICT training. Internal control measures involves monitoring day to day activities of the bank to prevent fraud by installing CCTV camera within the Bank. Segregation of duties, daily deposit of cash receipts, bank reconciliations and limiting access to check stock have effect role in internal control system and also a true reflection of organizational activities is presented in financial statement through the performance of internal control. Based on the findings, the study recommended that management should ensure that there are adequate organizational controls and that each staff knows his duties and equally ensures effective segregation of duties, the internal control system should be remolded and efficiently and effectively and at the same time evaluated periodically to strengthen its weaknesses in the organization and finally the management of the organization should be reviewed periodically so as to cope with modern trends in organizational fraud prevention.
TABLE
OF CONTENT
Title
Page i
Certification ii
Dedication iii
Acknowledgement iv
Table of
Content v
Abstract vi
CHAPTER
ONE
Introduction
1.1
Background
to the study 1
1.2
Statement
of problem 4
1.3
Aims
and Objective of the study 6
1.4
Research
Questions 6
1.5
Research
Hypotheses 7
1.6
Significance
of the study 7
1.7
Scope
and Limitation of Study 8
1.8
Operational
Definition of terms 9
CHAPTER
TWO
Literature Review
2.0 Introduction 9
2.1 Conceptual
Review 9
2.1.1 Internal
Control 10
2.1.2 Roles of Internal Control 13
2.1.3 Purpose of Internal Control 14
2.1.4 Characteristics of Internal Control 14
2.1.5 Types of Internal Control 16
2.1.6
Essential Features of Internal Control
in Financial Management 18
2.1.7
Internal Control in
Financial Institution and Statutory Guideline as 19
Tool against Fraud and Distress
2.1.8 Bearers of Internal
Control Responsibility 20
2.1.9 Key Success Factors of a Financial Institution 21
2.1.10 Function of Commercial Bank 21
2.1.11 Importance of Internal Control 22
2.1.12 Internal Audit 23
2.1.13 Internal Check 23
2.1.14 Relationship between Internal Auditing and Internal Check 24
2.1.15 Management and Internal Control System 25
2.1.16 Possible Solution to Detect Internal Control System 26
2.1.17 Limitation of Internal Control 27
2.1.18 Specific Method of Achieving Internal Control 28
2.1.19 Management Duties in Ensuring Internal Control System 29
2.1.20 The Objectives of Internal Control System 29
2.1.21 Essential Features of Internal Control 30
2.1.22 Internal
Control in Specific Areas of Business 31
2.2 Theoretical
Framework 35
2.2.1 Theoretical framework:
Open System Theory 35
2.3 Empirical
Review 39
2.4 Synthesis of
Gaps Identified 40
CHAPTER
THREE
Research
Methodology
3.0
Introduction 42
3.1 Research design 42
3.2
Population of the study 42
3.3 Sample size 42
3.4
Instrument for Data Collection 43
3.5
Procedure for Data Collection 43
3.6
Method of Data Collection 43
3.7
Validity of Research Instrument 44
3.8 Reliability of the
Research Instruments 44
3.9
Decision Rule 45
CHAPTER
FOUR
Presentation,
Analysis of Data and Discussion of Findings
4.0 Introduction
46
4.1 Analysis
of Demographic Data 46
4.2 Analysis of Research Questions 48
4.3 Testing For Hypotheses 53
4.4 Discussion of
Findings 59
CHAPTER FIVE
Summary,
Conclusion and Recommendations
5.0 Summary
60
5.1 Conclusion 61
5.2 Recommendations 61
5.3 Limitation
of the Study 62
References
63
Appendix
I 69
Appendix
II 70
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Every
organization both profit or non-profit organization has its objectives and
goals in mind to achieve. For the non-profit making organization, their goal is
to satisfy the social need of the citizens and in the effort to achieve these
purposes supervision more often than not play a vital role. For an organization
to carry out its business there must be some factors put in place for the
smooth running of the organization like materials, machines, money etc.
Internal
risk control is important for all forms of businesses and is a highly pertinent
issue within the domain of risk management since the beginning of the 21st
century. This has been propelled by a series of large corporate scandals and
failures (Crouch, 2012). The most well-known accounting scandals over the past
decades have probably been the cases of Enron and WorldCom (Ndege, 2015). In
the aftermath of the Enron debacle, it turned out that auditors had long
neglected several internal control deficiencies which contributed significantly
to the downfall of many companies (Cunningham & Harris, 2006).
Manufacturing SMEs are regarded as vulnerable during their expansion phases and
less likely to have in-house capabilities for sound control and risk management
systems (Jocumsen, 2004).
Organizations
face internal and external forces that call for a strategy to help them
continue to be relevant and competitive in the business environment (Strickland,
2012). The firm’s ability to meet their objectives with respect to remaining
competitive and relevant rests largely on the policies and strategies as well
as the effectiveness of procedures established to safeguard their operations
(Kaplan, 2012).
Owing
to the changing competitive surroundings, the extent to which internal control
systems of organizations must be extensively structured to safeguard continuous
increase in returns has become obvious (Ndungu, 2013). Internal control systems
are systems made up of procedures and policies that help to safeguard a
company’s assets, provide trustworthy financial reporting, enhance compliance
with rules and regulations and achieve efficient and effective operations
(Omani-Antwi, 2014). These systems of procedures and policies, according to
Gray and Manson (2016) are usually associated with internal and external
communication processes of an organization, as well as procedures for managing
corporate finance, the preparation of accurate and reliable financial reports
on a timely manner, and the maintenance of inventory records and properties.
The
framework for internal control systems developed by the Committee of Sponsoring
Organization of Treadway Commission (COSO) argue that every sound system
of internal control must have five components namely: control environment, risk
assessment, control activities, information and communication and monitoring of
internal control (COSO, 2009). According to Pickett (2015), these components
interact among each other, forming an integrated system that reacts dynamically
to changing conditions. In essence, the ICS is intertwined with the entity'
operating activities and is fundamental to the successful operation of the
enterprise (Steinberg, 2016).These need to be well coordinated in
order for the success of the organization to be achieved. Management use
internal control as a tool to check it staff due to the fact that managers
are not able to monitor the activities of the organization.
It
therefore adopts the internal control in such a way that the system checks
itself and any irregularity within the system is been detected and corrected.
To ensure that the system checks itself, management could use devices such as
segregations, supervision of work and acknowledgement of performance. The
effective arrangement and implementation of this control system would ensure
proper management. It has been discovered that due to lack of internal control
several banks have been discovered to have defrauded its customers mostly
foreign investors, Having discovered this, banks now take extra precaution
before clearing a cheque because of rampant incidence of fraud and
forgeries which have placed bank. Loss on average of N1m each
working day of the year in Nigeria. Due to this challenges, The central
Bank of Nigeria Governor, Professor Charles Soludo, issued a directive to banks
to increase its capital base to N25 billion in his statement on
July 6 ,2004.
Management use internal control as a tool to check it staff due to
the fact that managers are not able to monitor the activities of the
organization. It therefore adopts the internal control in such a way that the
system checks itself and any irregularity within the system is been detected
and corrected. To ensure that the system checks itself, management could use
devices such as segregations, supervision of work and acknowledgement of
performance.
1.2 Statement of the Problem
The
task of internal control system revolves around prevention and detection of
fraud in the organization. Internal control system is vital for the achievement
of efficiency and effectiveness of operations in an organization. While every
business aims to maximize profit, weak internal control implies that such
business may fail to achieve its set objectives. Efficient internal control
system creates an organization’s confidence in its ability to perform and
undertake its functions. For instance, financial scandals have been
witnessed by several firms in recent time, triggering reactions for tighter
regulation and enhanced standards for accounting and corporate
governance. In Nigeria, many firms have collapsed due to poor financial
management and overall weak system of internal control.
Globally,
internal control failure among small businesses often leads to loss of assets,
fraud, waste, mismanagement, inefficiency, loss of client assurance, and
failure to achieve business goals. Lack of internal control has a negative
effect on the profits and continuity of business. Thirty-eight percent of small
businesses have internal control departments while 88.3% of large companies
have these departments.
The
general business problem was that leaders Small and medium-sized enterprises
face internal control challenges. The specific business problem was that some
leaders of Small and medium-sized enterprises in Nigeria lack strategies for
improving internal control practices. All this needs to be amended by a
good internal control to secure the assets of the organization by assessing the
quality of internal control system in commercial bank. We might not really understand the impact of internal
control system in an organization and banking industry at large until probably
we run an organization void of internal control system. The absence of adequate
internal control measures exposes the financial management of an organization
to certain threats such as: Incorrect financial statement and /loss of the
company’s’ assets, Stealing and mis-management of organizational vital
documents which may be done by an employee to take undue advantage, Incorrect
and unreliable financial records which may lead to loss of organizational
integrity and Non implementation of accounting policies in consistent with the
applicable legislation appropriate in presentation of financial statement.
Despite the control systems put in place by the banks, banks still experience
liquidity problems, inefficient allocation of resources, and delay in
preparation of financial reports, malfunctioning and fraud in use of assets of
the banks.
The findings of the studies carried out and did not
focus specifically on Internal Control system in Nigerian Banking Industry and
it is clear that, there are many areas about internal control system in
relation to financial performance that have not yet been fully addressed. It is
against these problems that this research work is based.
1.2
Aim and Objectives of the Study
The aim of this study is to assess the impact of
internal control system in the Nigerian banking industry focusing on First bank
plc branch Situated in Abeokuta metropolis.
Specifically, the study seeks to:
1.
Determine the internal control measures
established by the bank to safeguard their assets
2. Evaluate
the role of the internal control system in a developing banking industry
3. Determine
how the internal control system can be made effective and efficient.
1.3.
Research Questions
This study attempt to provide answers to the following
research questions;
1.
What
are the internal control measures established by the bank to safeguard their
assets?
2.
What
are the roles of the internal control system in a developing banking industry?
3.
What
are the key success factors of a financial institution?
1.4. Research Hypotheses
Hypothesis
One
Ho: There is no significant relationship
between internal control measure and its impact on ensuring proper use of
banking funds and assets.
H1:
There is a significant
relationship between internal control measure and its impact on ensuring proper
use of banking funds and assets.
Hypothesis Two
Ho:
There is no significant
relationship between internal control measure and its impact on developing
banking industry
H1: There is a significant
relationship between internal control measure and its impact on developing
banking industry
Hypothesis
Three
Ho:
Fraud perpetration and
losses of revenue does not have significance effect on banking as a result of
weakness in the internal control system.
H1:
Fraud perpetration and
losses of revenue have significance effect on banking as a result of weakness
in the internal control system.
1.5 Significance of the study
This research work will go a long way in helping an
organization discover the quality of internal control system in an
organization. It will also reveal the problems caused by bad internal control
system. This study will provide useful information to auditors, top managers,
accountants and future researchers.
The
Auditor: it helps them to
assure an organization objective in operational effectiveness and efficiency,
reliable financial reporting.
The
top manager: it helps them to
maintain effective internal control and to maintain adequate policies and
procedures.
Accountants: it helps reduces the risk of asset loss,
and helps ensure that plan information is complete and accurate, financial
statement are reliable.
The future researchers: it helps them to have more knowledge on
internal controls measures.
1.6 Scope and Limitation of the Study
The
study intends to assess the impact of internal control system and
this study will be done in a commercial bank in Abeokuta south LGA, First
Bank Nig. Plc. Data will be obtained through checklist and
questionnaire, using an internal auditor and bank
staff as study sample. I was not able to carry out some adequate
research due to general problem accrues to all Banks in Nigeria both central
banks and commercial concerning the new note to make a good feasibility study.
1.7 Operational Definition of Terms
The
following terms will be used in the course of this research work and
as such need to be explained. They are stated below:
1. Internal Control: It has been
defined by the Auditing planning committee (APC) as “the whole system of
control financial and otherwise established by management in order to carry out
the business of the enterprise in an orderly and efficient manner to safeguard
the assets and secure as far as possible, the competence and accuracy of
records, the prevention and detection of errors and fraud in accordance with
the final preparation of financial statement.
2. Control: Is an exercise performed
in the present to achieve a plan drawn up for the future.
3. Commercial Bank: Is a financial institution which accepts
deposits from the public and gives loans for the purposes of consumption and
investment to make profit.
4. Assets: It is an item of property
owned by a person or company, regarded as having valve and available to meet
debts, commitments, or legacies.
5. Internal Control Measures: it
consists of all the measures taken by the organization for the purpose
of protecting its resources against waste, fraud, and inefficiency;
ensuring accuracy and reliability in accounting and operating
data, Securing compliance with the policies of the organization and
evaluating the level of performance in all organizational unit of the
organization
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