THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANK IN NIGERIA

THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANK IN NIGERIA

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ABSTRACT

 

The study sought to determine the effect of internal control system on financial performance of deposit money banks in Nigeria. To achieve the objective of this study, the study used hypothesis testing research design. The study tested the following hypotheses: H1: Internal Controls and Financial Performance are positively related; H2: Internal Controls have a significant impact on Financial Performance. The population chosen for this study was 16 banks listed by SEC. The study selected a sample of 5 banks from a target population of 16 deposit money banks. The sample was drawn using stratified random sampling technique. The study relied on both primary and secondary data. Primary data was collected using structured questionnaires while the secondary data was gathered from financial statements based on availability and accessibility of data. The findings revealed that most banks had a internal audit as one of the functionality of internal controls of the organization that greatly impacts on the financial performance of the banks. It was also established that the management had put in place mechanisms for mitigation of internal check that may result from fraud. The study examined the impact of segregation of duty on the financial performance of deposit money banks in Nigeria. The results also revealed that that the staff were trained to implement the accounting and financial management systems (M=0.9483, S.D=0.5888). The statistical results from the regression analysis show that there is a positive relationship between internal control system and financial performance of desposit money banks. The independent variables (internal audit, internal check and segregation of duty) contributed to 81.70% of the variation in financial performance as explained by adjusted R2 of 0.7907% which shows that the model is a good prediction. It was concluded that banks that had invested on effective internal control systems had more improved financial performance as compared to those banks that had a weak internal control system. The study further recommends that the governing body, possibly supported by the audit committee, should ensure that the internal control system is periodically monitored and evaluated. The limitation of this study is that the study was focused on 5 banks only while we have others deposit money banks, therefore these findings may not be used for generalizations on all banks in Nigeria. It is therefore important for a study to be conducted using wider scope and coverage then, the findings can be compared and conclusions drawn.

TABLE OF CONTENTS

Declaration - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      ii

Certification - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -       iii

Approval - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -     iv

Dedication - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -     v

Acknowledgement - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      vi

Abstract - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -    vii

Table of Content - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -    viii

CHAPTER ONE

1.1             Background of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      1

1.2             Statement of the Problem - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -        4

1.3             Objectives of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      5

1.4             Research Question - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      5

1.5             Statement of Hypothesis - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --       6

1.6             Significant of the Study - - - --  - - - - - - - - - - - - - - - - - - - - - - - - - - - --      6

1.7             Scope of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -      7

1.8             Definition of Terms - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -     8

CHAPTER TWO—Literature Review

2.1       Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --    9

2.2       Concept of Internal Control System - - - - - - - - - - - - - - - - - - - - - - - - -       9

2.3       Components of Internal Control System - - - - - - - - - - - - - - - - - - - - - -       14

2.3.1   Control Environment - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 14

viii

  2.3.2   Risk Assessment -- - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - -  15

2.3.3   Control Activities - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- 15

2.3.4   Information and Communication - - - - - - - - - - - - - - - - - - - - - - - - - - --     15

2.3,5   Monitoring - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  15

2.4       Ojectives of Internal Control System - - - - - - - - - - - - - - - - - - - - - - - - -     16

2.5       Role of Internal Audit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -   17

2.6       Limitations of Internal Control System - - - - - - - - - - - - - - - - - - - - - - - -    19

2.7       Financial Performance - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  20

2.8       Determinants of Financial Performance of Banks - - - - - - - - - - - - - - - -      21

2.9       Internal Controls and Financial Performance - - - - - - - - - - - - - - - - - - -      22

2.10    Theoritical Frame Work - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  24

2.11    Empirical Review - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -28

2.12    Summary  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  31

CHAPTER THREE—Research Methodology

3.1       Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -32

3.2       Research Design - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -32

3.3       Population and Sample  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -   32

3.4       Methods of Data Collection  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  33

3.5       Data Analysis - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -33

3.6       Measurement of Variables - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -   35

3.7       Test of Significant  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 36

3.8       Justification of Methods and Techniques Used  - - - - - - - - - - - - - - - - -      36

3.9       Summary  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 37

xi

 


CHAPTER FOUR—Data Analysis and Presentation of Findings

4.1       Introduction  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  38

4.2       Response Rate - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- -  38

4.3       Descriptive Statistics  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 38

4.3.1   Gender  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -39

4.3.2   Level of Education Attained  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 39

4.3.3   Working Experience - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  -40

4.4       Summary of Descriptive Statistics - - - - - - - - - - - - - - - - - - - - - - - - - - - - 41

4.5       Correlation Matrix Table - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -            42

4.6       Regrassion Matrix Table  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -43

CHAPTER FIVE—Summary, Conclusions and Recommendations

5.1       Introduction  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 46

5.2       Summary of Findings  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --  46

5.3       Conclusion  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 47

5.4       Recommendation  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -   48

5.5       Limitations of the Study - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  49

5.6       Suggestions for Further Study  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -    50

            Bibliography - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 51-52

            Appendix I  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - -53-55

            Appendix II - - - - - - -  -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 56


CHAPTER ONE

            INTRODUCTION

1.1             BACKGROUND OF THE STUDY

Globalization and the advancement in technology has become the hallmark for businesses today and the banking sector is no exception. Banks have been expanding their operations and activities beyond the domestic borders as a result of globalization and improved technology. The expansion of business, globalization and the advanced technology also exposes business to increased risk, fraud, altercations and other irregularities. This has made internal controls an imperative system to maintain by every business and for that matter the banking sector. Globalization of businesses, technological advancements, increasing risk of business failures, the fraud and altercations that emerged in the financial sector in Nigeria call for the proper maintenance of an effective internal control systems through :

Internal audit to help an organisation accomplishits objectives by bringing systematic disciplined approach to evaluate and improve the effectiveness of risk management control and governance processes. Internal check as duties wherby check are imposed on all aspects pf work so that no person is solely responsible for all parts the account procedure. Segregation of duty as a single control activity and the key to good internal control system and procedure design, that no single person should be responsible to recording and prcessing of a comlete transaction in other to reduces the risk of intentional manipulation or accidental error.

Whatever the decision taken in an organization internal control processes, effective and efficient measure with an appropriate manner of approach. These internal control tools are refers to a system within an organization which prescribe the decision of authority, responsibility of activities and their direction and recording for the purpose of creating a smooth operating procedure in an efficient and progressive manner, so ordered that a degree of check and restraint exist, resulting in the achievement of the organization's

purpose within a minimum of waste and a maximum of production or gain (GUPTA 2005).

It has been discovered that due to lack of internal control several banks have been     discovered to have defrauded its customers mostly foreign investors, Having discovered this, banks now take extra precaution before clearing a cheque because of rampant incidence of fraud and forgeries which have placed bank. Loss on average of Nlm each working day of the year in Nigeria. Due to this challenges, CBN issued a directive to banks to increase its capital base to N25 billion. Management use internal control as a tool to check it staff due to the fact that managers are not able to monitor the activities of the organization. It therefore adopts the internal control in such a way that the system checks itself and any irregularity within the system is been detected and corrected.

To ensure that the system checks itself, management could use devices such as segregations, supervision of work and acknowledgement of performance. The effective arrangement and implementation of this control system would ensure proper management.

Internal controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consist of all the measures taken by the organization for the purpose of :

1.      Protecting its resources against waste, fraud, and inefficiency;

2.      Ensuring accuracy and reliability in accounting and operating data:

3.      Securing compliance with the policies of the organization; and

4.      Evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices. (Kansas State University - USA June 30, 2003)

For some time now, risk management in general and internal control more specifically; have been considered as fundamental elements of organizational governance. As a consequence, risk management is beginning to be perceived as a new means of strategic business management, linking business strategy to daily risks and then optimizing those risks in order to realize value (Saarens and de Beelde 2006)

The Idea of internal control system becomes very important in an organization due to its vital role for example, the internal auditors of an organization are also part of the internal control system consist of both the internal auditors and the management team. So, it is the duty of every one to ensure conformity in the day -to-day activities of the organization also the need for profit maximization in an organization cannot be under estimated if the organization must remain in business this view bring about the idea of operational efficiency which can only be achieved through proper checks and balances within the organization.

The concept of internal control system covers all financial units, business activities including among other things :

a.      Mechanism of internal check in an organization.

b.      Financials cost and management accounting control function.

c.      Internal audit.

1.2       STATEMENT OF PROBLEM

The study investigated the reletionship between the impact of internal Control systems on performance of deposit money banks i




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