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?” A breakdown
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 proportions in
recent years inform this study. Cases of accounting scandals have been recorded
International Research Journal of Finance and Economics - Issue 27 (2009) 125 in
JCI and Randgold and Exploration companies. In Nigeria, the Managing Director and
Chief Financial Officer of Cadbury Nigeria plc were dismissed in 2006 for
inflating the profits of the company 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 and
balances to guide corporate executives in decision-making. These executives are
legally and morally obliged 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 be able to render a good stewardship to the
operations of a bank, it is imperative that there should be reliable accounting
and internal control system. The effectiveness of accounting system of any
organization depends on the manner and methods used in the recording of
financial transactions, which must be in agreement with the 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 and international control system of Microfinance
Banks from time to time to ensure proper reporting and accounting. Proper
keeping of accounting records will enable the management to determine whether
or. not the firm is operating at a profit. If there is constant review of
accounting and internal control system, 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 – day transaction and means of installing and effective internal control
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. The major question is whether or not the established internal control
systems in Mercury Microfinance bank are effective. This raises 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 expected elements of internal control
systems?
·
Are internal control systems of Microfinance banks adequately
documented and regularly updated as 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 concerns raised.
A later section of this chapter discusses the methods selected and the
justification of the 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 Primary and Secondary source of data. Primary
data will supply first hand information in form of Questionnaires 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 from statutory 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 scandals occur where the
systems of internal controls are abused by those responsible for their
operational effectiveness. The Corruption Perceptions Index (CPI) 2006,
compiled by Transparency International covering 163 countries, reveals that
majority of the African countries in the index scored within the low range of
1.9 - 3.6. Not more than five African countries scored within the range of 4.1
- 4.6. In contrast, majority of the European countries scored between 7.4 and
9.6. The Corruption Perceptions Indices suggest a prevalence of corruption in
African countries.
These issues further
justify this study that focuses on Microfinance banks in Nigeria. The
study investigates whether the controls used for directing, controlling and
governance of Microfinance banks in Nigeria are effective to ensure
optimal utilization 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.
Click “DOWNLOAD NOW” below to get the complete Projects
FOR QUICK HELP CHAT WITH US NOW!
+(234) 0814 780 1594
Login To Comment