FINANCIAL IMPLICATION OF INTERNAL CONTROL SYSTEM IN AN ORGANISATION (A Case Study of Mercury Microfinance Bank)
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FINANCIAL IMPLICATION OF INTERNAL CONTROL
SYSTEM IN AN ORGANISATION (A Case Study of Mercury Microfinance Bank)
ABSTRACT
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
that;
· 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 Standard (IAS).
Conclusion
was deduced from the result of the analysis and recommendations were made.
TABLE OF
CONTENTS
CHAPTER ONE
INTRODUCTION
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
CHAPTER TWO
LITERATURE
REVIEW
2.0 Introduction
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
Reliable Information
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
(“The 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
2.6.6 Monitoring
2.7 Effective Internal Control
References
CHAPTER
THREE
RESEARCH
METHODOLOGY
3.1 Introduction
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
3.7 Methodology
CHAPTER FOUR
DATA
PRESENTATION AND ANALYSIS
4.1 Introduction
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
CHAPTER FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATION
5.1 Introduction
5.2 Summary
5.3 Conclusion
5.4 Recommendation
References
Appendix
CHAPTER ONE
INTRODUCTION
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 reports periodically.
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) regulations.
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 Microfinance banks.
· 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 Microfinance
banks.
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 questions:
· 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.
Hypothesis
One
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.
Hypothesis
Two
Ho: Constant review of accounting and internal
control system will not reduce incidence of fraud and irregularities in
Microfinance banks.
H1: Constant review of accounting and internal
control system will reduce incidence of fraud and irregularities in
Microfinance banks.
Hypothesis
Three
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 banks
Limitations
In the
course of conducting this research work it is expected that the following will
constitute impediments to the effective conduct of the study
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 materials extensively.
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 certified operator
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
MONITORING:
Monitoring is the assessment of internal control performance over time; it is
accomplished by ongoing monitoring activities and by separate evaluations of
internal control such as self-assessments, peer reviews, and internal audits.
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