IMPACT OF INTERNAL CONTROL SYSTEM ON PROFIT PERFORMANCE OF COMMERCIAL BANKS

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ABSTRACT

            This study primarily aims at finding out the impact of internal control system on the profit performance of commercial banks in Nigeria with an empirical study on Orient Bank of Nig. Plc and United Bank of Africa Plc.

            Internal control systems impact on commercial banks might be as a result of non-adherence to the system or stringent, inflexible adherence on the system. These two extremes will invariably have adverse effect on the profit performance of the commercial banks and as such the management will always try to strike a balance or trade-off for their profit maximization.

            The paper therefore tends to evaluate the extent of adherence to internal control system, its impact on the profit performance of OBN PLC and UBA PLC and control strategies to be adopted to revitalize or moderate the system.

            This project is divided into five (5) chapters –

Chapter One: This is the introductory chapter that provides information about internal control system. This chapter gives insight of the problem identification, objectives and significant of study, hypothesis to be tested and scope and limitations of the study.

Chapter Two: This is the Literature Review which makes good references to people that carried out the studies on internal control. It includes the importance and qualities of good internal control and also qualities expected of bank staff. Chapter Three: This includes Research design, scope and methodology.

Chapter Four: This involves presentation and analysis of data collected.

Chapter Five: This includes the Summary, Recommendation and Conclusions.

TABLE OF CONTENT

PAGES

Title Page                                                                                                                   i

Approval sheet                                                                                                         ii

Dedication                                                                                                                 iii

Acknowledgement                                                                                                   iv

Preface                                                                                                                       v

Table of Content                                                                                                      vi

CHAPTER ONE:    INTRODUCTORY ANALYSIS

1.1       General Introduction                                                                                   1

1.2       Problem Identification                                                                                2

1.3       Statement of Objectives                                                                              3

1.4       Significant of Study                                                                   3         

1.5       Hypothesis (formulation and method of testing)                4         

1.6       Scope and Limitations                                                                                 7

1.7       Definition of terms                                                                                      8

CHAPTER TWO:   LITERATURE REVIEW

2 .1      Introduction                                                                                                  11

2.2       Definition of internal control                                                                     14

2.3       Types of Internal control                                                                            18

2.4       Structure of Internal control                                                                       21

2.5       Importance of Internal control                                                                   27

2.6       Qualities of good internal control system                                       28

2.7       Elements of financial / accounting internal control              38       

2.8       Specific areas of internal control                                         43       

2.9       Users of internal control system                                                                52

2.10    Electronic Data processing and internal control                      55

2.11    Banking Approach to Internal Control                                                     64

2.12    Expected qualities of banking staff for affective internal control 68

CHAPTER THREE:               RESEARCH METHODOLOGY

3.1       Research Design                                                                                           72

3.2       Scope                                                                                                             72

3.3       Methodology                                                                                    73

3.3a     Primary source of data                                                                                73

3.3b    Secondary source of data                                                                           81

3.4       Determination of sample size                                                                    82

3.5       Design of Strategic Position and Action Evaluation  (SPACE)       83

CHAPTER FOUR:  DATA PRESENTATION AND ANALSYSIS

4.1       Questionnaire distribution, collection and analysis                  84

4.2       Departmental collection and usage of questionnaire              84

4.3       Testing of Hypothesis and Analysis of Data                                           85

CHAPTER FIVE:   SUMMARY, RECOMMENDATION AND CONCLUSION

5.1       Summary                                                                                                       110

5.2       Limitation of Results                                                                                   111

5.3       Recommendation                                                                    112    

5.4       Conclusion                                                                                                    114

CHAPTER ONE

INTRODUCTION ANALYSIS

1.1       GENERAL INTRODUCTION

Internal control is the set of accounting and administrative control and practices that helps managers in operating their organization more effectively and efficiently. It ensures that both the accounting and administrative activities are in order with the laid down procedures, standards, and statutory requirements. It also detects deviation if any and calls for immediate corrective measure. In any profit oriented organization, the objective of management is to maximize profit, and internal control is a technique that can be of assistance in attaining such maximizations.

Banking is a venture undertaken primarily for profit and whose operation should at  least include taking money on account and releasing of such money wholly or partly on demand or authority of the depositor.

An important object of banking particularly in the developing countries is the promotion of economic development. In pursuance of this economic development as well as banks’ profitability, banks tends to improve on their services by devising methods of sound and effective system of internal control.

This study therefore, intends to evaluate how the internal control policies have affected the profit performance of commercial banks with particular reference to Orient Bank of Nigeria Plc and United Bank for Africa Plc.

1.2     PROBLEM IDENTIFICATION

There have been incessant cases and stories been told about high frequency of fraud, embezzlement, overcharging, manipulation, missing files and ledger cards and other banking malpractices in banks today, with the management and shareholders not knowing how to handle the adverse situation.

The Orient Bank of Nigeria (OBN) Plc and United Bank of Africa (UBA) Plc were not left out in these increase in crime – wave problems and banking malpractices, despite the existence of inter-control and devices adopted to detect fraud. This situation has culminated in the lack of confidence by the staff, shareholders and customer over the growth and profitability of the banks.

Moreso, with the proliferation of banks and also the increase in rural banking, with commercial bank’s branches, the volume of accounting records has drastically increased, thereby necessitating the appraisal of the adequacy and reliability of records, and overall efficiency of operations.

Furthermore, with the public interest in the “truth and fairness” of financial statements – profit and loss account and balance sheet, whose stratum of reliable is on the internal control system, the research is therefore aimed at investigating the extent of adherence to the internal control system and its impact on the profit performance of the banks.

  1. STATEMENT OF OBJECTIVE

The objective of this research include among others the following:

  1. To identify and appraise the internal control designed, installed and operated by the management of OBN and UBA with a view to assessing its impact on profit performance.
  2. To examine the extent of adherence or compliance to the policies, standards and procedures by the members of the staff in order to recommend operating improvement.
  3. To identify possible deficiencies and weaknesses of the existing internal control to find means of ameliorating them.
  4. To review the profit performance of the banks OBN and UBA and relate it to their internal control.
  5. To critically analyze the effectiveness, adequacy and applicability of the various internal control.
  6. To offer useful recommendation to proper design, installation and operation of an adequate and good internal control system.
IMPACT OF INTERNAL CONTROL SYSTEM ON PROFIT PERFORMANCE OF COMMERCIAL BANKS