INTERNAL CONTROL SYSTEMS AND CORPORATE SURVIVAL IN THE NIGERIAN BANKING INDUSTRY

ABSTRACT

This research thesis investigates the problem of corporate failures as a result of weak internal controls system, which brings about distressness, collapse and withdrawal of licences of banks by regulatory authorities in Nigeria, thereby bringing untold hardship to all stakeholders. The researcher used a sample of seven banks, systematically selected from a population of twenty-eight banks whose shares were traded on the floor of the Nigerian Stock exchange as at 22nd August 2003. Questionnaires were administered on 420 respondents, 60 from each of the seven banks, made-up of 20 from the management staff, 20 from audit staff and 20 from operation/banking staff. Out of this number, only 303 questionnaires were completed and returned. The primary data collected through the administration of questionnaires was analyzed using simple percentages and chisquare test (x² ), while the secondary data collected from the annual report and accounts of some of the sample banks was analyzed using spearman rank order correlation and t statistics. Thus it was found that effectiveness or otherwise of internal control system can make or mar corporate survival of banks in Nigeria. The research work concluded that internal control system is the responsibility of everybody in an organization and as such every staff must be aware of his role in its process and fully engaged in it. Finally it recommends that banks managements must put in place a sound approach to the selection of appropriate internal control practices and procedures, governed by a process of risk analysis and continuously monitor the overall effectiveness of the internal control system to ensure that it is in conformity with the nature, complexity and risk run by the banks.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

An organization’s internal control system is comprised of the control environment, risk assessment, control procedures, monitoring, and information & communication system. It includes all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objectives, ensuring, as far as practicable, the orderly and efficient conduct of their business, including adherence to internal policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The control environment is an organization’s overall attitude toward controls. It is the tone at the top. Risk assessment is the process of identifying the risks faced by an organization. Once these risks have been identified then specific control procedures can be designed and implemented to address them. Monitoring is important to ensure that controls are functioning as designed. And Management uses an organization’s information and communication system to maintain the system of internal controls. Every good system of internal control must be able to assist an organization carry on its business in an effective and efficient manner. It must be capable of sustaining credible adherence to management’s policies, safeguard its assets, and be able to guarantee complete recording of all its business transactions. A good system must exist to correlate responsibility with authority regarding the whole process of financial reporting and other spheres of the organization’s activity (Hamid, 2004:6). Internal control systems must be effective, particularly in banking organizations where their stock-in-trade is cash. Ineffective internal control systems can results to high financial losses to banking organizations and their customers, the depletion of shareholders’ fund, as well as loss of confidence by the public. Similarly, fraud, which may result from ineffective internal control system, could in extreme cases lead to closure of banks as had happened in the country (Tanko, 2003:186). Owoh (2003:6) contends that weak internal control system renders an organization very soluble to fraud and corrupt practices. It encourages non-productive pursuits such as embezzlement, falsification of records and accounts, insider dealing, betrayal of fiduciary relationships, etc. The management of an organization has a duty to institute a system of internal control that will be appropriate to the enterprise. This will assist in preventing, or at least, substantially reducing the incidence, not only of mistakes, but also of irregularities and intentional errors, including fraud. A system of effective controls is a critical component of a bank management and a foundation for safe and sound operation of banking organization. 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 14 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 (Hamid, 2004:7). This heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations. An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization (Hamid, 2004:6). Sound internal controls are therefore essential to the prudent operation of banks and to promoting stability in the financial system as a whole and ensuring corporate survival of banking organizations. Internal control is a process effected by the board of directors, senior management and all levels of personnel. It is not solely a procedure or policy that is performed at a certain point in time, but rather it is continually operating at all levels within the bank. The board of directors and senior management are responsible for establishing the appropriate culture to facilitate an effective internal control process and for continuously monitoring its effectiveness: however, each individual within an organization must participate in the system. The exact application of internal control systems depends on the nature, complexity and risks of a bank’s operations. The main objective of internal control in banking organizations is to attain, operational, information and compliance objectives (Hamid, 2004:7). Operational objectives of internal control pertain to the effectiveness and efficiency of the bank in using its assets and other resources in protecting the bank from loss. The internal control process seeks to ensure that personnel throughout the organization are working to achieve its objectives in a straight forward manner, without unintended or excessive cost or placing other interests (such as an employee’s, vendor’s or customer’s interest before those of the bank). Information objective of internal control address the preparation of timely, reliable reports needed for decision making within the banking organization. They also address the need for reliable annual accounts, other financial statements and other financial related disclosures, including those for regulatory reporting and other external uses. The information received by management, the board of directors, shareholders and supervisors should be of sufficient quality and integrity that recipient can rely on it in making decisions. Compliance objectives of internal control ensure that all banking business is conducted in compliance with applicable laws and regulations, supervisory requirements and internal policies and procedures. This objective must be met in order to protect the bank’s franchise and reputation, which are necessary for its survival. In varying degrees, internal control is the responsibility of everyone in a bank. Almost all employees produce information used in the internal control system or take other actions needed to effect control. An essential element of a strong internal control system is the recognition by every employee of the need to carry out his responsibilities effectively and to communicate to the appropriate level of management any problems that may arise in operations, instances of non-compliance with the code of conduct, or other policy violations or illegal actions that are noticed. Many internal control failures that resulted in significant losses for banks could have been substantially lessened or even avoided if the board and senior management of organizations had established strong control culture. Adamu (2004:3) contends that good internal control is necessary in ensuring the healthy survival and growth of any organization especially financial institution. Internal control is being put in place to achieve accountability, prudence and completeness. One common feature of all strong banks in the country is their common passion for controls. They do not compromise on them (Adamu, 2004:3). Adamu (2004:3) reported that available statistics has shown that all banks that have at one time or the other gone under have a weak internal control system in place. He argues that without weak internal control system there is no way that accounts could illegally be overdrawn, or be overdrawn with inadequate collaterals, or even be extended to a sector that is clearly under threat due to socio economic or other factors. Banking is a dynamic, rapidly evolving industry. Banks must continually monitor and evaluate their internal control systems in light of changing internal and external conditions, and must enhance these systems as necessary to maintain their effectiveness and ensue their survival.

TOPIC: 

INTERNAL CONTROL SYSTEMS AND CORPORATE SURVIVAL IN THE NIGERIAN BANKING INDUSTRY: A STUDY OF SOME SELECTED BANKS

Department: Accounting and Finance (M.Sc)

Format: MS Word

Chapters: 1 - 5, Preliminary Pages, Abstract, References, Questionnaire.
Delivery: Email

No. of Pages: 175

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN

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Masters Project Topics in Accounting and Finance

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