INTRODUCTION
Internal control is an important factor for all business organizations , especially for the banking sector whose economic environment is subject to risks that must be controlled in order to ensure performance and profitability. Commercial banks in the UAE dominate the financial sector and therefore, have a significant impact on the nation’s economic growth and financial stability. Flamini et al. (2009) reported that studies conducted in the last two decades show that commercial banks in the UAE are more profitable with an average return on assets of 2%. In the spirit of identifying the factors that contribute to this performance, the study found that effective internal controls have a positive impact on the financial performance of the banking sector in the United Arab Emirate. Internal control systems are the basic elements of the organization that help management effectively provide services to interested parties. Internal controls help to ensure the reliability of financial statements and compliance with laws and regulations (COSO, 1992/2004). Organizations with little or no internal control system run the risk of failure or closure.
Internal controls can be referred to as systematic measures such as reviews, controls, methods and procedures established by organizations to conduct business in an orderly and efficient manner, to protect assets and resources (Business Dictionary.com).
Internal control is “the entire system of controls, established to provide a reasonable guarantee of efficiency, internal financial control and compliance with laws and regulations” (CIMA, 2006). The internal control process is integrated with all other processes in an organization. This is a method utilized by directors to help an organization achieve its set-out objectives. (Internal audit files Internal control summary August 2017). Appropriate internal controls allow managers to delegate responsibilities with reasonable assurance that what they hope to do is really happening. The three basic elements of planning, classification, guidance and control management are essential for any effective organization. However, there is a fourth function that is internal control. Internal control is required to account for the resources entrusted to them. To defend the benefits, the perfect quality of information and improve operational efficiency, administrators must create internal control systems for each activity for which they are responsible. To help an organization achieve its strategic goals and objectives, internal controls are established, controlled and maintained by individuals at all levels of the organization.
Internal control must be economically viable and the costs of implementation should not exceed the profits derived from the implementation of the control. The internal control system in an organization is the obligation of the directors, administration and personnel of the organization. These frames are intended for personnel to filter and execute. The main importance of executing financial control in an organization is to monitor the reliability of financial statements, timely feedback on the achievement of operational or strategic objectives and compliance with laws and regulations. Internal control, the strength of every organization, has become of paramount importance today in banks of the United Arab Emirates. The reason being that the control systems in any organization is a pillar for an efficient accounting system. The need for the internal control systems in organizations, especially banks, cannot be undermined, due to the fact that the banking sector, which has a crucial role to play in the economic development of a nation, is now being characterized by macro economic instability, slow growth in real economic activities, corruption and the risk of fraud.
Fraud, which is the major reason for setting up an internal control system, has become a great pain in the neck of many Emirati bank managers. It has also become an unfortunate staple in the United Arab Emirate’s international reputation. Fraud is really eating deep into the Emirati banking system and that any bank with a weak internal control system, is dangerously exposed to bank fraud. The establishment of an adequate and effective internal control structure is the responsibility of the organization’s management. Control is very important because it is related to the effectiveness of other management functions, such as planning. The control mechanisms allow the plans to function correctly and are updated. Control is also important in the empowerment of employees, in which employee performance can be properly managed. Performance is controlled in terms of evaluation, which reduces random decisions about jobs. However, control mechanisms are also important to maintain a balance in the workplace, especially because control minimizes unethical decisions of employees and the organization in general.
