EFFECTS OF INTERNAL CONTROL SYSTEMS ON THE PERFORMANCE NIGERIAN BANKS

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EFFECTS OF INTERNAL CONTROL SYSTEMS ON THE PERFORMANCE NIGERIAN BANKS

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

Banking institutions occupy a central position in the nations’ financial system and are essential agents in the development process of the economy. By intermediating between the surplus and deficit spending units, banks increase the quantum of National savings and investments and hence national output. By granting credits, banks create money thus influencing the level of money supply which is an essential item in the growth of national income as it determines the level of economic activities in the country. Banks are central to the payments system by facilitating economic transactions between various national and international economic units and by so doing encourage and promote trade, commerce and industry. For banks to be able to function effectively and contribute meaningfully to the development of a country, the industry must be stable, safe and sound. And for these conditions to be obtained there must be a sound accounting system, which is occasioned by an internal control system. In view of the economic growth in companies’ size and complexities, proper management of modern business undertakings are not possible unless they have an effective system of internal control. A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the Bank’s reputation. Internal control, the strength of every organization, has become of paramount importance today in Nigerian banks. The reason being that the control systems in any organization is a pillar for an efficient accounting system. The need for the internal control systems in organizations, especially banks, cannot be undermined, due to the fact that the banking sector, which has a crucial role to play in the economic development of a nation, is now being characterized by macro economic instability, slow growth in real economic activities, corruption and the risk of fraud. Fraud, which is the major reason for setting up an internal control system, has become a great pain in the neck of many Nigerian bank managers. It has also become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigerian banking system and that any bank with a weak internal control system, is dangerously exposed to bank fraud. The CBN reported that cases of attempted fraud and forgery in banks, as at half-year 2007 have surpassed what was recorded for the whole year 2006. The CBN half-year report for 2007, revealed a total of 741 cases of attempted fraud and forgery, involving 5.4 billion, $35,406.1, 150 Euros were reported as at June, 2007. In 2006, 1,193 cases were reported involving 4.6 billion, $1.8 million and 14,389.7 pound sterling. The CBN also reported that the backward development was attributable to weaknesses in the internal control systems of the banks. This has clearly painted the picture of how fraud has penetrated in the financial strength of Nigerian Banks. In a nut-shell, the damage which this menace, called fraud has done to the banks is innumerable and needs urgent attention. Therefore, the attempt to put an end to this economic degradation, gave rise to the topic of this research study the effect of internal control on organizational performance in the banking sector with Eco bank Nigeria PLC as a case study. However, this study is aimed at verifying the conception that an effective and efficient internal control system is the best control measure for preventing and detecting fraud, especially in the banking sector. Internal control is the methods employed to help to ensure the achievement of an objective. Internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and corrected, based on either compliance or management initiated concerns (Awe, 2005). The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control as the whole system of controls, financial or otherwise, established by management in order to carry on the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets and secure as far as possible, the completeness and accuracy of the records. They are tools used by management everyday for the smooth running of their organization or businesses. Internal controls also refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft and misuse of organization resources. Internal Controls are processes designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations (Mwindi, 2008). Enforcement of internal controls should be designed to promote operational efficiency and effectiveness, provide reliable financial information, safeguard assets and records, encourage adherence to prescribed policies, and comply with regulatory agencies. A sound internal control will ensure that transactions are: valid, properly authorized, recorded, properly valued, properly classified, reconciled to subsidiary records and not carried through by a single employee (i.e. ensure separation of duties) ( Adeyemo Kingsley A,2012). Organizations establish systems of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. In the words of ETUK IFIOK CHARLES (1999) et al “Internal Control is 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 possible the completeness and accuracy of the records”. All managers in an organizational department operate according to stated plans, objectives and the methods they use. The policies, procedures, organizational design and physical barriers constitute the internal controls structure of an institution. Managers should realize that a strong internal control structure is fundamental to the success of an organization in term of its purpose, operations and resources. Responsibility for providing an adequate and effective internal control structure rests with an organization’s management. Control is important because it single-handedly links with the effectiveness of other managerial functions such as planning. When it comes to planning, it determines whether activities are on going toward the achievement of goals and accomplishment of objectives. Control mechanisms keep the plans running smoothly and up to date. Control is also important in employee empowerment wherein performance of the employees could be properly managed. Performance is controlled in terms of appraisal, lessening haphazard decisions on allocation of positions/job titles. Nonetheless, control mechanisms are also important in keeping a balance within the workplace especially since controlling means to minimize unethical decisions of the employees and the organization as a whole. The questions are: what can be said to be the cause or causes of the increasing rate of fraud in banks? What is the impact of internal control in the prevention and detection of fraud in banks, what is the impact of internal control on the organizational performance of the Eco bank Nigeria plc?

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