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EFFECTIVENESS OF
INTERNAL CONTROL SYSTEM IN NIGERIAN BANKS [A CASE STUDY OF SKYE BANK PLC]
ABSTRACT
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 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.
The objective of this study was to evaluate the internal
control system in operation at Skye Bank PIc. With a view to examines the
effectiveness of internal control system in Nigerian banks.
The population of the study consists of all banking
institutions in Nigeria, the sample is Skye Bank PIc, Lagos from the accounting
and internal control departments because of significant relationship with the
research topic and simple random sampling was employed to give members of staff
equal opportunity of being selected.
Data were collected through questionnaire as its instrument
and interview to assist in the data from the questionnaire and also the
examination of existing records. The collected data were analyzed using simple
percentage, chi-square analysis, and they were presented using tables.
The research study tested variables which were vital for an
internal control.
TABLE OF CONTENTS
CHAPTER ONE INTRODUCTION
1.1 Background of
the study
1.2 Statement of
the problem
1.3 Objectives of
the study
1.4 Research
Question
1.5 Research
Hypothesis
1.6 Significance of
the study
1.7 Methodology of
the Study
1.8 Scope and
limitation of Study
1.9 Historical
Background of Skye Bank pIc
1.10 Definition of Term
1.11 References
CHAPTER TWO LITERATURE REVIEW
2.0 Introduction
2.1 Component of
Internal Control
2.2 Types of
Internal Control System
2.3 Functional
Characteristics of Internal Control
2.4 The Role of the
internal Auditor
2.5 Fraud and the
Internal Control System
2.6 External
Auditors and the Internal Control System
2.7 Merits and
Demerits of Internal Control System
2.8 Summary
2.9 References
CHAPTER THREE RESEARCH METHODOLOGY
3.0 Introduction
3.1 Research Design
3.2 Population of
the study
3.3 Sample and
Sampling Procedures
3.4 Data Processing Techniques
3.5 Procedures of
data Collection
3.6 Test of
Reliability and Validity of Instrument
3.7 Method of Data
Analysis
3.8 References
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULT
4.1 Introduction
4.2 Presentation of
Socio-Demographic
4.3 Data Analysis
and Interpretation
4.4 Test of
Hypothesis
4.5 References
CHAPTER FIVE:
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
5.4 Suggestions for
Further Investigation Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE
STUDY
The banking industry is the live-wire or the equivalent to
the central nervous system of the human in all capitalist economics. The
institution provide 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 andoperational 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.
The International Auditing Standard and Guidelines [2002]
defined Internal Control as ''the whole system of controls, financial and
otherwise, established by the management in order to carry on the business of
the company in an orderly and efficient manner; ensure reliance to management
policies, safeguard its assets and secure as far as possible the accuracy and
reliability of its records. The special Report on Internal Control of the
Association of Certified Chartered Accountants, London, defines internal
control as follows: "Internal Control includes not only internal check or
internal audit but all systems of controls, financial or otherwise established
by management to carry on the business of the company in an orderly manner,
safeguard its assets and secure as far as possible the accuracy and reliability
of its records.
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 group 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.
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:
·
Auditing - There may have been a possibility that the auditors were
misled into preparing the wrong financials for the company. Often companies pay
more to auditors for non-audit fees than for audit fees, which may bring the
auditors to compromise their standards.
·
Accounting - There are several questionable accounting techniques like
subsidiary accounting, derivatives and third party investors used by Enron. The
loopholes in the accounting system need to be rectified.
·
Pension - More than 60% of the assets held in the 401(k) plan consisted
of Enron stock, which when plummeted put stockholders and employees in huge
losses and setbacks. Such grave scenarios need to be avoided in the future.
·
Corporate Governance - The board of directors is meant to protect the
interest of the shareholders. In Enron's case the CFO was allowed to create
private partnerships to deal with the company which is against the best
interest of the company.
·
Securities Analyst - The creditability of analysts came under question
following the collapse of Enron stock in November 2001 as even the Wall Street
analysts failed to predict the Enron disaster.
This study is therefore established to evaluate internal
control as a management tool in banking industry using Skye Bank PIc as a case
study.
1.2 STATEMENT OF THE
PROBLEM
A notable feature of the industry 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 supervisor.
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. 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:
i. To verify the
existences of internal control and auditing system in banks.
ii. To ascertain
whether the existing level controls and internal audit procedure in banking
industry are adequate to ensure staff efficiency, services delivery, prevention
of fraud and embezzlement forestalling occasion of mismanagement.
iii. To identify the various type of fraud that
can be penetrated in banks and strategies of fraudsters.
iv. To determine the
suitability or otherwise of the bank official in charge of internal control
system.
v. To examine the
possible effect of fraud on the earnings and profitability of banks.
vi. To suggest
meaningfully ways of improving quality of internal control in banking industry.
vii. To what extent
does inefficient staffing impede effective Internal Control System in the
Banking Industry?
1.4 RESEACH QUESTIONS
The following are a few of the questions, which were asked in
the questionnaire in the carrying out of this research work.
i. Does the
internal audit system ensure that operations comply with set policies and
promote accuracy and reliability of transactions?
ii. Are
internal/external auditors independent of those whose functions they appraise?
iii. Based on the
evaluation of the internal control system, is it effective and efficient?
iv. Is the accounting
and operational routine sit out in an accounting Manual?
v. What
recommendation can effective and efficient internal control system application
to Nigerian banking industry?
1.5 RESEARCH
HYPOTHESES
The two hypotheses are formulated and tested in this study.
Ho: The lack of a
good internal control is not a major cause of fraud in banks.
Hi: The lack of a
good internal control is a major cause of fraud in banks.
Ho: Banks with
internal control systems cannot prevent the menace of fraud.
Hi: Banks with
internal control systems can prevent the menace of fraud.
1.6 SIGNIFICANCE OF
THE STUDY
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. It will also help
to broaden (my) researchers' knowledge
4. The research
work helps in widening the researcher'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 in the smooth
and efficient running of an organization.
6. The study also
enable the readers to appreciate the operation of internal control system in a
business organization vis-a-vis its theoretical frame work.
1.7 METHODOLOGY OF
STUDY
The data needed for this research work were collected from
both primary and secondary sources of data.
1.
Primary Sources: Personal interview of some managers and staffs of the
research section of Skye Bank PLC Lagos were conducted. Structured
questionnaires were administered to the manager and the staff as well
especially one staff in the research section in Skye Bank PIc.
2. Secondary
Source: The research consulted books, journals, magazines and other relevant
literature to the topic.
The data collected from the administered questionnaire were
analyzed using descriptive statistics, and the hypotheses were tested by using
chi-square statistical tool for testing hypotheses.
1.8 SCOPE AND
LIMITATION OF STUDY
The research study is limited to the evaluation of internal
control system as a management tool in banking industry in Nigeria, with
particular reference to Skye Bank PIc.
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.
1.9 HISTORICAL
BACKGROUND OF SKYE BANK PLC
Skye Bank PLC is a public limited liability company
incorporated as 'Prudent Merchant Bank limited' on the 8th of December 1989 in
accordance with the provisions of the Companies and Allied Matters Act, 1968.
It was issued a banking license on February 7, 1990 to carry on all classes of
merchant banking business in accordance with provisions of the Banking Act,
1969 and it commenced operations on the 2ndof May 1990. The bank's name was
changed to Prudent Bank Limited in 2000 following an Approval in Principle by
Central Bank of Nigeria (CBN) for the conversion of the Bank to a commercial
bank. The Bank commenced operations as a commercial bank in 2001.
Skye bank PLC came about by the merger of five Institutions-Prudent
Bank PLC, Eko International Bank PLC, Reliance Bank Limited, Cooperative Banks
PLC and Bond Bank PLC which was seamlessly completed in January 2006. The Head
office of the Bank is situate at No.3, Akin Adesola Street, Victoria Island,
Lagos. The Bank is currently engaged in the business of universal banking by
virtue of its banking license. It provides services to individual and corporate
customers through its network of branches and local and international
subsidiaries.
Skye bank listed on the Nigeria Stock Exchange and has over
450,000 diverse shareholders. The Bank's shareholders' fund is in excess
ofNl00b.The local subsidiaries of the Bank are Law union and Rock Insurance
PLC, Skye Stockbrokers Limited, Skye Mortgage Bankers Limited, Skye Trustees
Limited, Apex Integrated Technologies Limited, Skye Exchange (BDC) Limited,
Skye Resources Limited and Skye Financial Services Limited. The international
subsidiaries are Skye Bank Gambia Limited, Skye Bank Sierra Leone Limited and
Skye Bank Guinea Limited. The financial statements of the Bank' subsidiaries
have been consolidated.
The Central Bank of Nigeria repealed the universal banking
license and directed all banks to either divest from all their non-core banking
subsidiaries or create a non-operative holding company to hold all such
subsidiaries, including the core banking business. Pursuant to this repeal, the
Board of Directors of the Bank resolved to focus on the core commercial banking
subsidiaries of the Bank. Resolutions will be proposed at the Annual General
Meeting to authorize the Directors to divest of the Bank's non- core banking
subsidiaries in such manner as they consider necessary and to take all
necessary actions in order to give full effect to the divestment.
1.10 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.
1.11 REFERENCES
Abosede, A. et al(2000): Research Methodology for Management
Science. First Edition Lagos: Mixon Publishers.
Adeniyi, A.A.(1997): Accounting System and Internal control
System, Macmillan publisher, Lagos.
Adeleke, J.O (2009): Audit Investigation and assurance
Services. Mixon Publishers. Lagos
Babs Ajayi (2006): Nigeriaworld Feature Article: Thursday,
December 14,2006 Skye Bank Annual Reports &Financial Statements 2010.
Uchendu, O. A. (1998) "Concentration in the Commercial
Banking Industry m Nigeria" Economic and Financial Review, Vol. 40 No.3,
Central Bank of Nigeria
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