ABSTRACT
Internal control is an
indispensable tool in the efficient management of any Bank. It could be likened
to the “heart” which regulates the business “blood”. No business can succeed
without an efficient and effective internal control system. Internal control
can also be likened to the “brake and steering” in a vehicle which, if they are
not there, the business “Train” will crash. It can also be likened to the
laboratory or quality control machinery, which controls the quality of product
produced by an organization. It is the centre hob of all financial activities
of any establishment.
The study, in some detail reviewed what have been written about internal
control to ascertain experts opinion and position on the subject matter.
Data for the study where principally gathered through primary and
secondary sources.
The primary sources where based on questionnaires, interviews and
observations; while the secondary sources includes both published and
unpublished materials, textbooks, articles, journals and even newspapers.
The hypotheses were statistically tested at the 5% level of significance
using the non-parametric chi-square.
The findings from this study revealed that the internal control system of
Spring Bank is effective but still needs to be improved upon. Areas of strength
and weaknesses in the internal control system were clearly isolated and the
recommendations were based on how to improve upon those areas of weakness.
TABLE OF CONTENTS
Title page
Certification i
Dedication ii
Acknowledgement iii
Proposal v
Table of contents viii
CHAPTER ONE
1.1
Introduction 1
1.2
Background of the Study 2
1.3
Statement of Problems 3
1.4
Purpose/Objective of the Study 4
1.5
Statement of Hypotheses 7
1.6
Significance of Study 8
1.7
Limitation of Study 9
1.8
Definition of Terms 10
References 13
CHAPTER TWO
2.1
Introduction 14
2.2
Historical Development of Internal Control 15
2.3
Definition of Internal Control 17
2.4
Types of Internal Control System 23
2.5
Essential Features of Internal Control System 27
2.6
Internal Audit as part of the Internal Control
System 31
2.7
Internal Check as aspect of Internal Control
System 35
2.8
Management duty regarding Internal Control 37
2.9
Consideration in the Appraisal of Internal
Control of Commercial Banks 38
2.10
The purpose of Internal Control 39
References 41
CHAPTER THREE
RESEARCH
METHODOLOGY
3.1
Research Design 42
3.2
Area of Study 42
3.3
Population 43
3.4
Sampling and Sampling Techniques 43
3.5
Sources of Data 44
3.5.1 Primary
Sources 44
3.5.2 Secondary
Sources 45
3.6
Research Instrument 45
3.7
Methods of Data Analysis 46
References 48
CHAPTER FOUR
PRESENTATION, INTERPRETATION AND ANALYSIS OF DATA
4.1
Introduction 49
4.2
Data Presentation 51
4.3
Questionnaires Responses 51
4.4
Responses to Interview Questions 73
4.5
Test of Hypothesis 76
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION
AND RECOMMENDATIONS
5.1
Summary of Findings 85
5.2
Conclusions 86
5.3
Recommendations 89
5.4
Suggestions for Further Research 91
Bibliography 93
Questionnaires
Interview Questions
CHAPTER ONE
1.1
INTRODUCTION
Commercial Banks are sensitive organizations, which need
adequate and proper control to avoid distress. It is impossible to have an
effective operation if good system of internal control does not exist or not
effective. Internal control is the bedrock of efficient management in
organizations, particularity in Banks. The system of control differs from one
establishment to another.
According to
Mohammed (1982:20), where an effective system of internal control is employed
in an organization, it does not erase fraud and other irregularities completely
but makes prevention and early detection of fraud and errors possible. Also the
company’s assets are better safeguarded against loss damages and wastage, and
when accountability is in existence, management could make accurate decisions
based on the accurate records of financial transactions.
Auditors could
base their audit work and subsequently audit report on the system of internal
control in existence. But where internal control system is completely absent,
or where not effective, fraud and errors are suspected.
The increase in
size of most business units and the complexity of modern business techniques
have increased the attention and also encouraged the adoption of different
systems of control, though, under the umbrella of internal control.
Therefore, the
nature and size of any organization determines the system of control to be
adopted. The establishment and implementation of these different systems of
control such as accounting control and electronic data processing system lead
to effective and efficient management process.
Also, due to
increase acquisition of financial assets, physical Assets, increase
sophistication in financial recordings, the need arises for increased watch and
adherence to management plans and policies in the various businesses.
These call for
routine study and innovations on the system of internal control in existence.
From researches conducted so far, it is generally accepted that internal
control is an indispensable aid to efficient management because it provides
assurance to management of the dependability of the accounting data used in the
decision- making.
It keeps
management informed as to whether the company’s policy is being adhered to and
whether the financial position of the organization shows a true and fair view.
It is as important as the organization itself and as such should be carefully
designed and effectively implemented more especially in commercial banks where
they are established.
Failure to do
this may result to creation of loopholes for fraud.
1.2
BACKGROUND OF THE STUDY
The history of internal control system should be traced
back to the time when human beings began to form organizations to achieve
goals, which they could not have achieved individually. Management and co-ordination
of efforts became imperative once two individuals or more come together to
achieve a common goal.
Over the years,
these organizations have grown in physical size and expand vastly in operations
such that various kinds of irregularities have arisen ranging from
unintentional error or fraud to other major international and local defalcation
and falsification of records or even to extend to situation where individuals
connive to undermine the system of internal control in operation.
Daily media reports
have clearly indicated how some Chief Executives and top management personnel
of some organizations embezzle, misappropriate funds of their companies and
engage in many dubious and fraudulent acts as a result of the weakness and
lapses in the organizations internal control.
It is against
this background that this study seeks to provide solutions to ineffective
internal control systems, which have been the undoing of our banks in recent
times.
1.3 STATEMENT OF PROBLEMS
there is no
doubt that banks play very vital roles in the Nigerian economy. For this role
to be sustained, their profitability and continued existence should be assured.
Good management
of Banks does not only entail making profit, but also safeguarding the
organizations assets from frauds and irregularities. Several Banks failures in Nigeria have
been attributed to ineffective and unreliable control systems. Bank fraud has
indeed eaten deep into the fabrics of the nations economy and further caused
retardation in the industrial growth of this nation.
According to an
NDIC report in 1996, “Bank failures have griped more than N40billion from
innocent depositors”.
It is therefore
pertinent that studies of this nature are instituted to probe into and find
solutions to ineffective and inefficient control systems in Banks, which are
mostly responsible for bank distress cases in Nigeria.
Presently, to
caution the effect of systematic collapse of the banking industry, the Central
Bank of Nigeria (CBN) have beefed up the capital base of commercial banks to
Twenty-five billion naira (N25billion).
To provide
solution to this problem of lapses of internal control procedures, a number of
issues shall be raised and appraised in the study. Does the organization have a
chart and how are responsibilities defined? How are authorities delegated,
duties segregated and procedures designed to ensure proper custody of assets?
1.4 PURPOSE/OBJECTIVES OF THE STUDY
The main purpose
of this study is to make an objective inquiry into the impact of internal
control system in the management of organizations, particularly commercial
banks.
The study is an
attempt to have an indepth appraisal of the internal control procedures, in
Nigerian banks, the level of adherence and application, the loopholes/problems
in the existing system and recommendations/prospects.
In the light of
the above expressions, the objectives of study includes;
-
Whether the workers are paid their salaries as
at when due and whether it is adequate.
-
Whether the staff are motivated by management.
-
To identify the principal causes of workers
dissatisfaction and pin-point the implication of such problems to management
for control purposes.
-
Whether the management and staff adhere strictly
to the policies and procedures adopted in the internal control system.
-
Whether the existing internal control system has
need to be improved upon.
-
To find out how training of staffs can enhance
the productivity of the bank.
-
To investigate the influence of poor staffing
and inefficient workers in the
organizational growth.
-
To make recommendations towards the proper
design, installation and operation of a good internal control system.
1.5 STATEMENT OF HYPOTHESIS
In order to have
proper direction, and control for this project work, the following hypotheses
are formulated.
Ha: Workers are
paid their salaries as at when due.
Ho: Workers are not paid their salaries as at
when due.
Ha: Workers
are being motivated by management to enhance productivity.
Ho: There is
little or no motivation from management.
Ha: Management
and staff adhere strictly to the policies and procedures adopted in the system.
Ho: Both the
management and the staff do not adhere strictly to the policies and procedures
adopted in the internal control system.
Ha: The
internal control system is inadequate and therefore has need for improvement.
Ho: The
internal control system is adequate and therefore has no need for improvement.
Ha: Staff
training can enhanced the effectiveness and efficiency of internal control
system.
Ho: Staff
training has no impact on the effectiveness of the internal control system.
1.6
SIGNIFICANCE OF STUDY
In every modern
society, banks and the banking sector in general are the bedrock on which the
economy thrives.
Any study on the
successful management of banks is therefore of great significance. Any problem
in the banking sector would invariably have strong effect on the economy and
that is why this research work tries to study the internal control system in
the banking sector and see how its effectiveness and reliability could be used
to prevent bank failures. Also, the need for internal control in contemporary
business has become overwhelming that auditors currently demand for its
existence in all organizations.
Several groups
will benefits immensely from the articulate revelations that will emerge from
this study. Top managers of banks and other organizations, especially the
corporate decision makers will find this study as a guiding tool. This work
will also serve as a reference tool to accountants, auditors, consultants and
managers.
It will serve as
a basis of broadening the researcher’s knowledge on internal control and its
uses. To customers and investors, they would be confident that controls in
place can be reliedupon for the security of their investments. Management on
the other hand will be able to reduce losses and improve on internal control
system.
Finally, the
academic world can use this work as a basis for further research.
1.7 LIMITATIONS OF STUDY
This work will
not go into staff fidelity or probe management efficiency, as these may be a
separate topic for research.
The thoroughness
of this work has been limited by the vast number of organizations spanning the
banking industry. It is on the strength of this constraint that the study is
being conducted Spring Bank, Victoria Island Lagos and Apapa branch
respectively. Although, efforts would be made to examine data from other branches
before final recommendation can be made.
Other
limitations to this study may include, but not limited to the following;
a.
The respondents were only willing to give
limited information.
b.
Difficulties were encountered during information
gathering, and during interview, some information were regarded as top secrets
and too confidential to be divulged.
c.
The questionnaires sent out were not completely
returned.
1.8 DEFINITION OF TERMS
The following
terms and concepts below are defined for the purpose of this study.
-
SYSTEM
WU (1983:) submitted that a system is an entity which is composed of a
number of attributes and is also composed of
a set of relationships, which connect the object. It is a pre-arranged
and pre-designed set of rules and procedures to ensure continuity and
efficiency of activities. Oxford Advanced Learners Dictionary defined it as a
group of things or parts working together as whole.
-
INTERNAL CONTROL
Auditing 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 enterprise in an orderly and efficient manner,
ensure adherence to management policies, safeguard the assets and secure as far
as possible the completeness and accuracy of the records”.
-
CONTROL
Control is basically a management function that
deals with the measurement and correction of performance of the subordinates
with a view to achieving organizational objectives with maximum efficiency and
at a minimum cost.
-
INTERNAL CHECK
Internal check are those checks on the day to day
transactions, which operates on a continuous basis. They are routine checks
which are assured by complementing work of one person with that of another. It
is a live test rather than post-mortem.
-
FRAUD AND IRREGULARITIES
The term “fraud” is used sparingly in ‘practical
auditing’. The preferred term is irregularity. Fraud however, is defined as the
intentional distortion of the financial statements to secure particular
advantages such as the misappropriation of assets.
The term fraud is also used when it refers to irregularities involving
criminal deception to obtain an illegal or unjust advantage.
-
NDIC
Nigeria
deposit insurance comporation.
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