CHAPTER ONE
INTRODUCTION
1.1 Background to
the study
Banking industry is the live-wire or the equivalent to the
central nervous system of the human in all capitalist economics. The
institution provides the vital link between the surplus unit and the deficit
unit of the economy. Banks promote investment by providing facilities for
mobilizing savings and appropriate instruments without which either economic
growth or development can take place smoothly and efficiently. In the process
of performing these functions, banks come to hold the single largest proportion
of the economy’s financial resources and correspondingly account for a similar
lion share of the credit that propels the engine of growth and development. In
the light of this, the subject of internal control in the industry is of
interest to all western type economies of the world.
The process of financial account and data production should
be based on a recognized, well-defined and well-organized system of procedures.
If the business transactions are to be properly and correctly observed,
documented, recorded and collated, then there must be a system which is
designed to cope with these activities. For this reason, management of the
organization has in general, over a period of many years, placed a great deal
of emphasis on having strong system of internal control, where possible. This
system is intended to maintain adequate process of accounting data production
and safeguarding the organization against possible financial loss due to fraud
or error.
Internal control, in its broadest sense, includes all
controls, checks and procedures, formally instituted by the management, to
maintain the maximum administrative and operational efficiency possible within
the accounting and non-accounting function of the business organization.
However, in terms of financial accounting, the system is mainly concerned with
those controls which exist to aid the processing of reliable accounting data
and to safeguard companies’ asset.
An important feature of the impact of Internal control is
the director review of company financial operations and position at regular and
frequent internals by means of interior account and report, operating summaries
and other appropriate financial and statistical. In addition to regular view,
management may from time to time call for special reviews of particular items
e.g. wages, stock, salary access etc. Managerial review and supervision are
essential element in an efficient and effective internal control system.
Banks like other business organization achieve their
objective through the use of human and economic resources. In most cases, the
economic resources are provided by various interest groups that do not
participate in the day today normal running of the operation of the business.
The onus is therefore, on the management to make sure these resources are
effectively and efficiently managed to achieve the set goal and to build up
public confidence, the desired control achieved through the setting up of a
good and valid internal control system.
The impact of having internal control department in all
organizations and banking institution in this era of stiff competition and
financial regulation cannot be over emphasized. The process of financial
account and data production should be based on a recognized, well-defined and
well-organized system of procedures. If the business transaction is to be
properly and correctly observed, documented, recorded and collated, then there
must be a system which is designed to cope with these activities.
The Institute of Charter Accountants defines the concept
internal control system as “The whole system of control 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 fast as possible the completeness
and accuracy check and internal audit” It cannot be over emphasized here that
an effective internal control system does not only ensure financial accuracy of
transactions, but it reduces trade to the barest minimum. A good internal
control system can only operate in a fairly large organization that employs a
good number of staff.
It is also important to note that there is high rate of
fraudulent practices in Nigerian ministries and parastatals today and the
commercial banks are not an exception. That is why the internal control system
must not only be put in place, but is also having to be effective in removing
such irregularities.
Fraud is a threat common to most organizations. It is a
threat to the effective utilization of resources and as such, it will always
remain an important concern to management. Fraud needs to be deleted and
potential fraud needs to be prevented. Effective internal control system is vital
for the survival of any organization it serves as a check on fraudulent
activities of the management and employees of organization and it brings about
solutions to likely fraudulent acts in an organization. Management is totally
responsible for establishing the internal control system in an
organization.Auditing today is based on internal control.
Internal control system is a necessity in large
organizations especially where management is removed from day to day routine
operations of the organization. An effective internal control system and its
fraud preventive measures in an organization will help to prevent fraud and
errors in an organization thereby reducing fraud to its minimum than when
internal control is not in existence or when there is weakness in the
system.Internal audit which is an integral aspect of internal control. As a
part of management team of the control function, it is clearly described in the
statement of responsibilities of the internal auditor as an independent
appraisal of activity within an organization for the review of accounting,
financial and other operation are basis for service to management. For
instance, Cadbury Nigeria sacked its Managing Director, Mr. Bunmi Oni and Mr.
Ayo Akadiri, the company’s Finance Director recently, which is a fallout of the
financial book padding scandal and corruption that recently rocked the company,
and that is the way it should be commended. The Board recently commissioned the
firm of PricewaterCoopers to review and investigate the company’s financials.
The outcome of the investigation “has confirmed a deliberate overstatement of
the company’s financial position over a number of years to the tune of between
N13 and N15 billion”! This is Nigeria’s version of the Enron Corporation
scandal in the United State.
In case of ENRON which brings to mind the collapse of the
seventh largest company in the United States of America and the largest
bankruptcy seen by the country till date. There are many issues that were
raised with the collapse of Enron as described in the CRS Report for the
Congress in 2002.
1.2 Statement of
Problem
One of major challenges facing Nigerian Banks is low ethical
standard and transparency. These are manifesting in the rising cases of
unwholesome practices being recorded. A number of banks engage in some sharp
and unorthodox practices to achieve compliance with some regulatory
requirements “on paper” Many banks’ returns provide inaccurate/misleading
financial report thereby preventing timely detection of emerging problems by
the supervisors.
The managerial incompetence of the top management of some
banks as evident in weak internal control system of the banks. Substantial
losses incurred by many banks on their credit portfolio, frauds and forgeries
and outright negligence have brought to the fore, the importance of sound
internal control system. Appraisals of fraud-related losses by Bank Examiners
revealed that such losses could have been prevented had the affected banks
maintained effective internal control systems.
The trend in deficiencies in banks’ earning assets
especially loans and advances, arising from either poor loan administration or
unethical lending (such as insiders’ abuse). This is an indication of
managerial problems in this regard.
The importance of internal control system cannot be
overemphasized where a variety of requirements, processes that are both manual
and information communication technology-based (ICT)are used. Organizations
have recognized internal audit function as a tool for ensuring effective
workings of the internal control system. However, in Nigeria, the internal
control function in the banking sub-sector has not been fully tapped;
consequently, cases of errors and intent to defraud and other fraud cases exist
in the banking industry. The distress in the banking sub-sector in the nineties
reflected lack of effective control mechanism of the audit function in the
banking industry. The experiences of failed bank in Nigeria have therefore
called for the reinforcement and the strengthening of the controls system in
the Nigerian banks.
Okolo (2001) describes the internal control function as an
aspect of control mechanism, within a business, manned by specially assigned
staff. However, in Nigeria, the internal control function in the banking sub-sector
has not been fully tapped; consequently, cases of errors and intent to defraud
and other fraud cases exist in the banking industry. The distress in the
banking sub-sector in the nineties reflected lack of effective control
mechanism of the audit function in the banking industry. The experiences of
failed bank in Nigeria have therefore called for the reinforcement and the
strengthening of the controls system in the Nigerian banks.
1.3 Objectives of the Study
The main objective of the study is to evaluate the
effectiveness of internal control as management tool in banking industry in
Nigeria. The specific objectives of the study are:
To ascertain control activities in banks.
To ascertain the monitoring process in banks in Nigeria.
To determine risk assessment in banks in Nigeria.
1.4 Research
Questions
In pursuance of the objectives of the study, the researcher
was guided by the following questions:
How effective are control activities in banks kin Nigeria?
How effective is the monitoring process in banks in Nigeria?
To what extent is risk assessment process in banks in
Nigeria effective?
1.5 Research
Hypotheses
To achieve the above objectives, the following hypotheses
are postulated and will be tested for their validity.
Ho1: Control activities in banks in Nigeria are not
effective.
Hi: Control
activities in banks are effective.
Ho2: Internal control monitoring process are not effective
in banks in Nigeria.
Hi: internal
control monitoring process are effective in banks in Nigeria.
Ho3: Risk assessment
process in banks in Nigeria are not effective.
Hi: Risk
assessment process in banks in Nigeria are effective.
1.6 SIGNIFICANCE
OF THE STUDY
The study will assist the government/policy makers, banks,
scholars and the public in the following ways.
1. It enables
managers of services, organizations and government owned public utility
establishments to bring the accounting and the internal control procedures
inherent in them in conformity with internal accounting standards and
practices.
2. It helps
government owned establishments to assess their internal control measures and
make amends where necessary.
3. The study could arouse further research into some other
further research into some other functional areas in the company by students
and accountants, which will help scholars to broaden the scholar’s knowledge.
4. The research
work helps in widening the scholar’s knowledge of practical application of
internal control system in banking organization.
5. The study also
enhances the appreciation of internal control as a necessary tool used by the
policy makers in the smooth and efficient running of an organization.
6. The study also
enables the public to appreciate the operation of internal control system in a
business organization vis-a-vis its theoretical frame work.
1.7 Scope of the
Study
The study focused attention in the evaluation of the
effectiveness of internal control system adapted in Diamond Bank, avenue, Enugu
State.
1.8 Limitation of
the study
In carrying a research work, certain problems were
encountered which limits the precision of the research and the extent of
generalization of the research work.
The problems include a time constraint which renders one
from delving into areas other than accounting and administrative control in the
organization, geographical location of the case study in relation to
researcher’s institution, and limitations to the amount of information’s
obtainable from the respondents to the oaths of secrecy of the organization.
However, through persuasion and hard work we were able to
obtain data such that the quality of the research was not affected.
1.9 Definition of
Terms
Internal Audit: This can be define as the independent
appraisal of activities within the organization for the review of accounting,
financial and other operations as basis for service to management.
Internal Check: These are day to day administrative control
within the internal control system which aims at detecting and minimizing the
risk of fraud and error.
Accounting Control: This comprises of the plan of the
organization and all methods and procedures that are concerned mainly with and
directly to reliability of the financial records.
Test Checking: This is a method of verifying the operations
of a computer program by tracking likely transactions through a print-out of
the program