The study sought to determine the effect of internal control system on financial performance of deposit money banks in Nigeria. The study used hypothesis testing research design. The study tested the following hypotheses: H1: Internal Controls and Financial Performance are positively related; H2: Internal Controls have a significant impact on Financial Performance. The study selected a sample of 5 banks from a target population of 16 deposit money banks. The sample was drawn using stratified random sampling technique. The study relied on both primary and secondary data. Primary data was collected using structured questionnaires while the secondary data was gathered from financial statements based on availability and accessibility of data. The findings revealed that most banks had an internal audit as one of the functionality of internal controls of the organization that greatly impacts on the financial performance of the banks. It was also established that the management had put in place mechanisms for mitigation of internal check that may result from fraud. It was concluded that banks that had invested on effective internal control systems had more improved financial performance as compared to those banks that had a weak internal control system.
TABLE OF CONTENT
Background to the study
Statement of Problem
Purpose of the Study
Significance of the study
Delimitation /scope of study
Limitation of Study
Review of Related Literature
Summary of Literature Review
RESEARCH DESIGN AND METHODOLOGY
Population of Study
Sample and Sampling Techniques
Validity of Instrument
Administration of the Instrument
Method of Data Analysis
DATA PRESENTATION AND ANALYSIS
Data presentation and Analysis
Discussion of Results
SUMMARY, CONCLUSION AND RECOMMENDATION
1.1 Background of the Study
Globalization and the advancement in technology has become the hallmark for businesses today and the banking sector is no exception. Banks have been expanding their operations and activities beyond the domestic borders as a result of globalization and improved technology. The expansion of business, globalization and the advanced technology also exposes business to increased risk, fraud, altercations and other irregularities. This has made internal controls an imperative system to maintain by every business and for that matter the banking sector. Globalization of businesses, technological advancements, increasing risk of business failures, the fraud and altercations that emerged in the financial sector in Nigeria call for the proper maintenance of an effective internal control systems through.
Internal audit is to help an organization accomplish its objectives by bringing systematic disciplined approach to evaluate and improve the effectiveness of risk management control and governance processes. Internal check are duties whereby checks are imposed on all aspects of work so that no person is solely responsible for all parts the account procedure. Segregation of duty as a single control activity and the key to good internal control system and procedure design, that no single person should be responsible to recording and processing of a complete transaction in other to reduces the risk of intentional manipulation or accidental error. Whatever the decision taken in an organization internal control processes, effective and efficient measure with an appropriate manner of approach. These internal control tools are refers to a system within an organization which prescribe the decision of authority, responsibility of activities and their direction and recording for the purpose of creating a smooth operating procedure in an efficient and progressive manner, so ordered that a degree of check and restraint exist, resulting in the achievement of the organization’s purpose within a minimum of waste and a maximum of production or gain (GUPTA 2005).
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 Nlm each working day of the year in Nigeria. Due to this challenges, CBN issued a directive to banks to increase its capital base to N25 billion. 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.
Internal controls are to be an integral part of any organization’s financial and business policies and procedures. Internal controls consist 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 units of the organization. Internal controls are simply good business practices. (Kansas State University – USA June 30, 2003)
For some time now, risk management in general and internal control more specifically; have been considered as fundamental elements of organizational governance. As a consequence, risk management is beginning to be perceived as a new means of strategic business management, linking business strategy to daily risks and then optimizing those risks in order to realize value (Saarens and de Beelde 2006)
The Idea of internal control system becomes very important in an organization due to its vital role for example, the internal auditors of an organization are also part of the internal control system consist of both the internal auditors and the management team. So, it is the duty of every one to ensure conformity in the day -to-day activities of the organization also the need for profit maximization in an organization cannot be under estimated if the organization must remain in business this view bring about the idea of operational efficiency which can only be achieved through proper checks and balances within the organization.
The concept of internal control system covers all financial units, business activities including among other things:
- Mechanism of internal check in an organization.
- Financials cost and management accounting control functions.
- Internal audit.
1.2 Statement of Problem
There have been incessant cases and stories been told about high frequency of fraud, embezzlement, overcharging, manipulation, missing files and ledger cards and other banking malpractices in banks today, with the management and shareholders not knowing how to handle the adverse situation. Despite the fact that internal control system have been in existence for many years in most organisation, the problem of financial crimes, have continued to be on the increase. Examples of this financial crimes include; financial irregularities within the departments, collusion among senior or highly-trusted employees, breaches of control, to mention a few. Various researchers, have affirmed that internal control set by management in most organisation has not been able to completely prevent these fraudulent occurrences because these controls have not significantly reduced the reoccurring fraud and corruption perpetuated by employees in most organizations. More so, with the proliferation of banks and also the increase in rural banking, with commercial bank’s branches, the volume of accounting records has drastically increased, thereby necessitating the appraisal of the adequacy and reliability of records, and overall efficiency of operations. Furthermore, with the public interest in the “truth and fairness” of financial statements – profit and loss account and balance sheet, whose stratum of reliable is on the internal control system, the research is therefore aimed at investigating the extent of adherence to the internal control system and its impact on the profit performance of the banks.
1.3 Objectives of the Study
The study investigated the impact of internal Control systems on the financial performance of deposit money banks in Nigeria. The specific objectives are to:
- Ascertain if internal control has relationship with fraud perpetration in the organization.
- Examine the relationship that exists between internal control and attainment of the organization objectives.
- Examine the extent of adherence or compliance to the policies, standards and procedures by the members of the staff in order to recommend operating improvement.
- Identify possible deficiencies and weaknesses of the existing internal control to find means of ameliorating them.
1.4 Research Hypotheses
The study tested the following hypotheses:
H0: Internal Controls and Financial Performance are not positively related.
H1: Internal Controls and Financial Performance are positively related.
H0: Internal Controls have no significant impact on Financial Performance.
H2: Internal Controls have a significant impact on Financial Performance.
H0: There is no positive relationship between internal control system and financial performance of deposit money banks.
H3: There is a positive relationship between internal control system and financial performance of deposit money banks.
1.5 Significance of the Study
The research is intended to define the level of impact of internal control system on the financial performance of deposit money bank in Nigeria. It findings will be of great importance to the banking staffs especially the managers and officers whose interest are geared towards the enhancement of the chances of bank profitability; in serving as a guide in the performance of their duties. It will assess the effect of fraud, manipulations, errors, improper authorization, dishonesty, inadequate accounting records etc on profitability in view of the existing internal control system. A comprehensive knowledge of system of internal control will form a foundation on which the auditor’s report on “true and fair view” final account is based and as such, the study will be of immense values to the practicing Accountants, Auditors, Lawyers, shareholder and other interested parties for acceptance and reliance of financial statement. Furthermore, it will include more research in the improvement of banking services in Nigeria for the interest of the shareholders, customers and government. Finally, the study will provide the basis for recommendation to the management of the best approach to designing, installing and operating an improved system of internal control aimed at promoting operational efficiency and eliminating or at least minimizing waste.
1.6 Scope and limitations of study
This study covered the internal control systems adopted by various commercial banks in Nigeria. The population sample was taken from only five banks along with their branches in Lagos State. Other parts of the country were not covered, though empirically generalized view was made of them.
The study was restricted to two major areas of internal centre. They are:
- Administrative control
- Accounting and financial control (internal checks, internal audition and other financial system of control). This was done based on a comprehensive understanding of the principles of good internal control.
However, the study encountered a lot of constraints as regards time, money and sourcing of information. Effort geared towards obtaining adequate information proved abortive due to the uncooperative attitude of some interviewed staff. Besides, no bank likes the public to know the deficiencies in its internal control as the confidence reposed on it by the public might be lost. But, irrespective of these limitations, an in-depth study was still carried out. Another limitation of this study is that the study was focused on 5 banks only while we have others deposit money banks, therefore these findings may not be used for generalizations on all banks in Nigeria. It is therefore important for a study to be conducted using wider scope and coverage then, the findings can be compared and conclusions drawn.
1.7 Definition of Terms
The researcher at this point believes that some key words and terms that will be encountered while reading this research work will be defined.
Internal Control System: This is the whole system of controls, financial and otherwise established by the management in order to carry on the business of the enterprises in orderly and efficient manner, ensure adherence to management policies, safeguard the assistance and secure as far as possible the complements and accuracy of the records.
Internal Accounting/Financial Control: Measures that relate to protection of assets and to the reliability of accounting information and financial statements.
Internal Administrative Control: A sub category of internal controls which reply principally to operational efficiency and compliance with company policy and which do not bear directly on the dependability of financial statement.
Cheques: A cheque is a bill of exchange drawn on a banker, payable on demand” (Bill of exchange ordinance 1917 73).
Embezzlement: Theft by a person of assets entrusted to him or her
Internal Auditing: An activity carried on in some organization by a professional staff to investigate and evaluate the system of internal control on a year round basis. Also to evaluate the efficiency of individual department within the organization.
Documentation: This includes all the charts, firms, tapes, reports and other business papers that guide and describe the working of a company’s system of accounting and internal control.
Fraud: Dishonest acts intended to deceive, often involving the theft of assets and falsification of accounting records and financial statements.
Organization chart: A diagram showing organizational lines of authority and responsibility with emphasis on separation of function.
Irregularities: Acts by individuals in an organization aimed at perpetrating fraud or embezzlement.
Fidelity bond: A form of insurance contract is which a bonding company agrees to reimburse an employer for losses caused by theft by bonded employees.
Independent Auditor: Professional level accountants that examine the books and records of companies and express opinions the accounting records in the interest of third parties.
Effectiveness: Attainment of a predetermined goal.
Efficiency: Relationship between inputs and outputs
Collusion: Where two or more persons conspire to commit an illegal act such as fraud and embezzlement.
Illegal Acts: Actions that are not in conformity with prescribed company practices that is capable of leading to fraud.