INTERNAL CONTROL SYSTEM AND THE FINANCIAL MANAGEMENT OF AN ORGANIZATION (A CASE STUDY OF ECOWAS COMMISSION)

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INTERNAL CONTROL SYSTEM AND THE FINANCIAL MANAGEMENT OF AN ORGANIZATION (A CASE STUDY OF ECOWAS COMMISSION)

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Several studies have empirically examined the link between internal control system and firm performance in different economies. Studies such as Umar and Dikko (2018), Muhunyo and Jagongo (2018) and Ajala, Amuda and Arulogun (2013) examined the effect of internal control system on firm performance. These studies revealed that internal control system has positive and significant effect of firm performance. Umar and Dikko (2018) further emphasized that whatever types of internal control system like environmental control system, risk assessment, information and communication control and monitoring have positive and significant effect on bank performance. Similarly, Sang (2012) and Zuraidah, Mohd and Yusarina (2015) studied how internal control system prevent bank fraud and improve bank performance. These studies found that perpetrators of fraud in the commercial banks always have insight of the weaknesses of the internal procedures and had taken advantage and capitalize on the process to penetrate the system and commit fraud. Furthermore, Turedi and Celayir (2018) found that effective internal control structure is a crucial element in ensuring efficiency, profitability and sustainability across businesses and that effective control structure is the key to success desired/aimed for a business.

Dubihlela and Nqala (2017) found that internal risk control mitigate risks and ensure the reliability of performance reports and compliance with laws, policies and regulations, thus enhance firm performance. Omonyemen, Josiah and Godwin (2017) studied how internal control can serves as the basis for prevention, detection and eradication of frauds in banks in Nigeria. The study found that all three core internal control audit features; internal audit size, internal audit quality and internal audit independence have a significant positive impact of financial fraud detection.

Adu-Frimpong (2015) studied the effects of internal control in the operations of bond savings and loans financial institutions. His study found that inability of the internal control system to detect staff that do not comply with control policies; inadequate physical control measures and procedures over the company’s assets to protect those assets against theft and unauthorized access

Objectives of the study

Objectives of Internal Controls:

According to Howard (1984), increasing attention has been paid to the methods of internal control in recent years. He argues further that not only the complexity of modern business techniques but also the increased size of business units have encouraged the adoption of methods which, whilst increasing the efficiency of the business, also act as safeguards against error or fraud. The objectives that internal controls must meet to prevent errors and to be efficient so as to provide reasonable assurance are that:

• Recorded transactions are valid. The system should not permit the inclusion of fictitious or non – existent transactions in accounting records.

• The transactions are properly authorized. The system should ensure that transactions are properly authorized.

• Transactions are recorded. The procedures must provide controls to prevent omissions of transactions from the records.

• Transactions are properly valued. An adequate system must include procedures to avoid errors in calculating and recording transactions at various stages in the recording process.

• Transactions are properly classified. Proper account classification accounting to appropriate categories or divisions must be ensured by the system.

• Transactions are recorded at the proper time. The recording of transactions either before or after the time they took place increases the likelihood of failing to record transactions or recording them at the wrong amount. Therefore, effective control system should ensure timely recording of transactions.

Research Questions

• Which Recorded transactions are valid.

• Which of The transactions are properly authorized.

• What Transactions are recorded.

• What Transactions are properly valued.

• What Transactions are properly classified.

• What Transactions are recorded at the proper time.

Statement of Hypothesis

The problems of the internal control system of the enterprise are the relevant research issue. According to the scientists, the problem of internal control is the key of success to any company (Rahim et al., 2017). The mistakes made in the current financial statements, in daily production objectives, in the relationships with the suppliers and consumers, can result in bankruptcy. The success of internal control depends entirely on the quality of the labor resources of the company. To solve these problems, the COSO IC-IF internal control standard was updated. This standard enables the control risks assessment, the development of control procedures, the improvement of the information and data management (Montaño-Ardila et al., 2017). As noted in the studies, the internal control system is in constant motion and transformation (Wu, 2016). In this regard, it becomes very important to consider new methods of analysis to improve the internal control system (Ivanova et al., 2017).

Statement of Hypothesis

H01: Internal control system components (control environment, risk assessment, control activities, information and communication and monitoring) have no significant effect on bank efficiency of selected quoted deposit money bank in Nigeria; and

H02: Internal control system components (control environment, risk assessment, control activities, information and communication and monitoring) have no significant effect on operational performance of selected quoted deposit money bank in Nigeria

Causes of fraud:

The findings of the study confirm that reported by Asukwo (1999) and Idowu, (2009), who identified some of the immediate and remote causes of frauds in banks to include: poor internal control system, presence of unqualified staff, greed on the part of employees Inadequate staffing, poor record-keeping practices, and inadequate training and retraining of staff among others. The current study also found that these elements constituted the causes of fraud in Agricultural Development Bank as perceived by the employees of the bank.

Implementation of internal control system:

Asare-Bekoe (2010) on a risk-based assessment of Ecobank Ghana Limited revealed that Ecobank Ghana Limited‟s has relevant tools and management information systems as well as effective controls to ensure adequate and consistent identification, measurement, monitoring and controlling as well as reporting on the various risks the bank is exposed to. The current study also found that Agricultural Development Bank has strong internal control system and practices; in the area of the control environment, risk assessment, control activities, information and communication, and monitoring.

Effectiveness of internal control system in detecting and preventing fraud:

The current study found that internal control system in ADB was effective to controlling fraud in various forms. This finding is consistent with the finding of Udoayang and Ewa (2012) who in determining the impact of internal control design on banks‟ ability to investigate staff fraud and staff life style and fraud detection in Nigeria banks found that internal control design influences staff attitude towards fraud. That a strong internal control mechanism is deterrence to staff fraud while a weak internal control mechanism exposes the system to fraud and creates opportunity for staff to commit fraud.

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