FINANCIAL IMPLICATION OF INTERNAL CONTROL SYSTEM IN AN ORGANISATION (A Case Study of Mercury Microfinance Bank)
Internal control systems is a topical issue following global
fraudulent financial reporting and accounting scandals in both developed
and developing countries.
This research work examine the implications of internal control
system in an organization with reference to Mercury Micro Finance Bank.
In today’s volatile business environment, banking sub-sector in Nigeria
faces a wide array of complex business challenges. These challenges come
in the form of regulatory compliance, litigation, competitive market
pressure, changing technology, investors demand, corporate governance,
business ethics and accountability.
The research examine the various types of internal control and the
components of internal control. A questionnaire was designed and
administered to the staff of Mercury Micro Finance Bank. The data
gathered from the questionnaire were presented on table with the
respective percentages. The formulated hypotheses were analysed with the
used of Chi square statistical tool. From the analysis it was concluded
· Effective internal control system make fraudulent practices
and other incidences of irregularities very difficult to perpetrate.
· Constant review of accounting and internal control system
will reduce incidence of fraud and irregularities in Microfinance banks.
· The internal control system currently in operation at
Mercury Microfinance Bank is inline with the International Accounting
Conclusion was deduced from the result of the analysis and recommendations were made.
TABLE OF CONTENTS
1.1 Background of the Study
1.2 Statement of Problem
1.3 Aim and Objectives of Study
1.4 Research Question
1.5 Statement of Hypothesis
1.6 Research Methodology
1.7 Significance of Study
1.8 Scope and Limitation of Study
1.9 Definition of Terms
2.1 Definition of Internal Control
2.2 Purposes of Internal Control System
2.3 Types of Internal Control
2.3.1 Directive or Entity Level Controls
2.3.2 Preventive Internal Control
2.3.3 Detective / Corrective
2.3.4 Compensating Control
2.4 Components of the Internal Control System
2.4.1 Definition of Responsibilities
2.4.2 The In-House Dissemination of Relevant and
2.4.3 A System for identifying and Analysing Risk
2.4.4 Control Activities
2.4.5 On-Going Monitoring of the Internal Control System
2.5 internal Control Players
2.5.1 The Board of Directors or the Supervisory Board
2.5.2 Executive Management / The management Board
2.5.3 Internal Audit
2.5.4 Company Staff
2.6 Conceptual Framework
2.6.1 Control Environment
2.6.2 Risk Assessment
2.6.3 Control Activities
2.6.4 Application Controls
2.6.5 Information and Communication
2.7 Effective Internal Control
3.2 Sources of Data
3.3 Population and Sample Size
3.4 Research Instrument Design
3.5 Administration of Research Instrument
3.6 Analysis of Data
DATA PRESENTATION AND ANALYSIS
4.2 Personal Characteristics of the Respondent
4.3 Response of Respondents of the Problem Areas
4.4 Testing and Interpretation of the Hypothesis
4.4.1 Test of Hypothesis One
4.4.2 Test of Hypothesis Two
4.4.3 test of Hypothesis Three
SUMMARY, CONCLUSION AND RECOMMENDATION
1.1 BACKGOUND OF THE STUDY
When companies suddenly collapse, the often resounding question is,
“what went wrong?” Abreakdown in the internal control system is the
usual cause. Internal control is a process that guides an organization
towards achieving its objectives. These objectives include operational
efficiency and effectiveness, reliability of financial reporting, and
compliance with relevant laws and regulations (COSO 1992). Absence of
these variables often results in organizational failure. The findings of
the Treadway Commission Report of 1987 in the United States (USA)
confirmed absence of, or weak, internal controls as the primary cause of
many cases of fraudulent company financial reporting.
The widespread global corporate accounting scandals that assumes near
epidemic proportionsin recent years inform this study. Cases of
accounting scandals have been recordedInternational Research Journal of
Finance and Economics - Issue 27 (2009) 125in JCI and Randgold and
Exploration companies. In Nigeria, the Managing Director and
ChiefFinancial Officer of Cadbury Nigeria plc were dismissed in 2006 for
inflating the profits of thecompany for some years before the company’s
foreign partner acquired controlling interest.
These scandals emphasize the need to evaluate, scrutinize, and
formulate systems of checks andbalances to guide corporate executives in
decision-making. These executives are legally and morallyobliged to
produce honest, reliable, accurate and informative corporate financial
The banking industry is a very important subsector of the financial
services of any economy. For effective operation and to beable to render
a good stewardship to the operations of a bank, it isimperative that
there should be reliable accounting and internalcontrol system. The
effectiveness of accounting system of any organization depends on the
manner and methods used in therecording of financial transactions, which
must be in agreement withthe International Accounting Standard,(IAS)
Installation of an effective accounting and internal control system
is compulsory for every banks especially the Microfinance Banks. If
proper records of accounts are not be given to the shareholders and
other users of accounting information. This may therefore leads to
shareholders, customer, and general public not having confidence in the
operation of Microfinance Banks.
There must be a periodic review of the accounting andinternational
control system of Microfinance Banks from time to time toensure proper
reporting and accounting.Proper keeping of accounting records will
enable themanagement to determine whether or. not the firm is operating
at a profit. If there is constant review of accounting and internal
controlsystem, it will prevent fraud/mismanagement of funds.
1.2 STATEMENT OF PROBLEM
Most Microfinance Banks do not have proper books of accounts and the
accounting records of some Microfinance banks in Nigeria are inefficient
and unreliable. Also, some of these Microfinance banks have collapsed
and closed for business due to improper keeping of records and maintain
adequate internal control system.
This research study will provide suggested solution to the above problem and if followed, will ensure proper accountability.
1.3 AIM AND OBJECTIVES OF STUDY
The aim of this research work is to evaluates the financial
implication of internal control systems with spcial reference to Mercury
Microfinance Bank. The obecjectives includes:
· Ascertains whether the internal control system provide
adequate internal framework of checks and balances of the fund of
· To investigate whether the internal control system currently
in operation at Mercury Microfinance Bank is inline with the
International Accounting Standard (IAS).
· Investigate if the internal control system has ever been compromised and led to a negative financial implication.
· Find out how they could overcome the negative financial implication caused by the poor internal control system.
· To find out whether books of account are kept by Microfinanace banks as required by statute.
The research work will also look into the methods and systems of
accounting to be adopted for day - to – daytransaction and means of
installing and effective internalcontrol system, and also provide
recommendation to solving various Internal control systems in
1.4 RESEARCH QUESTIONS
These objectives raise a number of questions, that requires answers
in a later chapter of this research work. Themajor question is whether
or not the established internal control systems in Mercury Microfinance
bank are effective. Thisraises the following minor but inter-related
· What role should internal control system play Microfinance banks?
· Does application of internal control system has any financial implication on Microfiinance banks?
· Does management of Microfinance banks appreciate, understand, and clearly respond to this rules?
· What internal control systems are currently in use?
· Do they include all the expectedelements of internal control systems?
· Are internal control systems of Microfinance banks adequately documented and regularly updatedas changes occur?
· Is Internal control system really useful on organization’s profit maximization decision making process?
Answering the research questions requires use of research methods to
address the concernsraised. A later section of this chapter discusses
the methods selected and the justification ofthe study.
1.5 STATEMENT OF HYPOTHESES
To provide answer to the research questions arising from this study, the following hypotheses are postulated.
Ho: Effective internal control system does not
make fraudulent practices and other incidences of irregularities very
difficult to perpetrate.
H1: Effective internal control system make
fraudulent practices and other incidences of irregularities very
difficult to perpetrate.
Ho: Constant review of accounting and internal
control system will not reduce incidence of fraud and irregularities in
H1: Constant review of accounting and internal
control system will reduce incidence of fraud and irregularities in
Ho: The internal control system currently in
operation at Mercury Microfinance Bank is not inline with the
International Accounting Standard (IAS).
H1: The internal control system currently in
operation at Mercury Microfinance Bank is inline with the International
Accounting Standard (IAS).
1.6 RESEARCH METHODOLOGY
Data for this research will be sourced from both Primaryand Secondary
source of data.Primary data will supply first hand information in form
ofQuestionnaires and oral interviews. . The distribution of the
questionnaires will be limited to only the staff of Microfinance banks.
Secondary data will be sourced from review of literature, textbooks,
journals and magazines. It will also be source fromstatutory books
relevant to the banking operations.
In this study, descriptive method will be used to present data and
also in testing hypothesis, chi-square (X2) will be employed.
1.7 SIGNIFICANCE OF STUDY
Corruption is prevalent and transparency often lacking in the Nigeria
banking industries including the Microfinance banks. Corporate
accounting scandalsoccur where the systems of internal controls are
abused by those responsible for their operationaleffectiveness. The
Corruption Perceptions Index (CPI) 2006, compiled by Transparency
Internationalcovering 163 countries, reveals that majority of the
African countries in the index scored within thelow range of 1.9 - 3.6.
Not more than five African countries scored within the range of 4.1 -
4.6. Incontrast, majority of the European countries scored between 7.4
and 9.6. The Corruption PerceptionsIndices suggest a prevalence of
corruption in African countries.
These issues further justify thisstudy that focuses on Microfinance
banks in Nigeria. The study investigates whether the controls used
fordirecting, controlling and governance of Microfinance banks in
Nigeriaare effective to ensure optimalutilization of funds.
1.8 SCOPE AND LIMITATION OF STUDY
The premise on which this study is based is, Financial Implication of
Internal Control System in Microfinance banks with special reference to
Mercury Microfinance Bank. The study will ascertains whether the
internal control system provide adequate internal framework of checks
and balances of the fund of Microfinance banks.
The study will further identify the fundamental limiting factors that
could hinder complying with internal control system of Microfinance
In the course of conducting this research work it is expected that
the following will constitute impediments to the effective conduct of
a) Time constraint within which the study must be completed.
b) Financial constraint
c) Inaccessible and inadequate data
d) Also, combining project work with several other activities is
another stressful task that may not allow me to cover research
Nevertheless, I believe the above limitations will in no way affect the reliability and validity of the research study.
1.9 DEFINITION OF TERMS
INTERNAL CONTROL: An accounting procedure or system
designed to promote efficiency or assure the implementation of a policy
or safeguard assets or avoid fraud and error etc.
INTERNAL CONTROL SYSTEM: An Internal Control System
(ICS) is the part of a documented quality assurance system that allows
an external certification body to delegate the periodical inspection of
individual group members to an identified body or unit within the
FINANCIAL MANAGEMENT: The management of the finances of a business / organisation in order to achieve financial objectives
OPERATING GOALS:At the heart of operations are the
systems and processes that keep information moving through a business
and provide structure for those doing the work
RISK ANALYSIS:A procedure to identify threats &
vulnerabilities, analyze them to ascertain the exposures, and highlight
how the impact can be eliminated or reduced.
RISK MANAGEMENT:The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making.
INTERNAL AUDIT: Frequent or ongoing audit conducted by a firm's own (as opposed to independent) accountants to monitor operating results, verify financial records, evaluate internal controls, assist with increasing efficiency and effectiveness of operations and, to detect fraud.
CONTROL ACTIVITIES: Control activities are the policies and procedures that help ensure management directives are carried out
CONTROL ENVIRONMENT: Actions, policies, values, and management styles that influence, and set the tone of a firm day-to-day activities