THE EFFECT OF INTERNAL CONTROL ON ORGANIZATIONAL PERFORMANCE

(A CASE STUDY OF ECOBANK NIGERIA PLC)

BY

AMOO TEMITOPE GRACE

ACT/2009/0036

ADEYIGA ADEBAYO

ECN/2009/0005

BEING A RESEARCH PROJECT CARRIED OUT AND SUBMITTED TO

THE DEPARTMENT OF ACCOUNTING,

FACULTY OF MANAGEMENT SCIENCES

OSUN STATE UNIVERSITY, OSOGBO

NIGERIA

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OFBACHELOR OF SCIENCES (B.Sc) DEGREE IN ACCOUNTING

1

JULY 2013

CERTIFICATION

It is certified that this research project, written by Amoo

Temitope Grace with matriculation number ACT/2009/0036 was

supervised by me and submitted to the Department of Accounting,

Faculty of management sciences. Osun State University Osogbo,

Okuku Campus.

Mr J.O Oyewole Date

Project supervisor

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PROF. Temi Ologunorisa Date

Head of Department

DEDICATION

This research work is specially dedicated to Almighty God in

Heaven, the one who loves me dearly, unconditionally and

eternally, the source and the strength with which I have been

able to pull through the challenges that came with this work, for

his protection and guidance over my life right from the inception

and towards successful completion of this academic programme.

Also, to my beloved parents; Mr and Mrs AMOO for their supports

both financially and morally to accomplish the great task of

passing through this practical project. My prayer to you is that

you will eat the fruits of your labor in Jesus name (Amen).

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ACKNOWLEDGEMENT

Nothing can man receive except it is given from above. I thank

God for sparing my life till today and being my help in the times

of need, and for giving me the strength and courage to complete

this programme. May his holy name be praised.

I also thank God for his faithfulness and love towards me,

for his mercy endures forever. Through him I went, I saw and I

conquered.

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My heartfelt gratitude goes to my supervisor Mr J.O Oyewole for

his support during the course of this project work may the

Almighty God bless him in Jesus name (Amen).I cannot thank you

enough for the personal advice that you gave me concerning my

career. May the Lord Almighty grant you all your heart desires in

Jesus name (Amen).

My profound gratitude also goes to my parents; Mr & Mrs Amoo for

their financial and moral support towards my education and

achievement. They have been there for me. May you live long and

enjoy the fruit of their labor in Jesus name (Amen).

I want to say a big thank you to my Head of Department Prof.

Temi Ologunorisa who gave all the necessary advice, co-operation,

assistance and correction through this research work, I will

forever be grateful. Special thanks to all the lecturers within

the department such as Mr Lere Adebayo, Mr Feyi Oluwaremi, Mr

Lanre Fatoki, Mr Adedire Odelabu, Mr Babatunde lawal, Mr Sunday

Sasona and Mr Gbadebo.

My profound gratitude goes to my siblings, Amoo Juwon, Tobi,

Adura, Gbenga, Esther, Abayomi, Segun for their support and

prayer towards the completion of this research work. May the Lord

Almighty bless them all.

I cannot but appreciate my special boy friend Adebayo Yinka

Adeyiga for his love, support and encouragement towards the

completion of this project. May the Almighty God greatly reward

him.

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I am grateful to the management of Ecobank for their great

assistance and cooperation in making this research work possible

and also I wish to acknowledge the various authors whose

literature I have used.

Finally, my appreciation goes to all my colleagues and

friends, Folarin Olamide, Ajayi Damilola, Olugbose Arinola,

Bisola Oyelade, Adegbenle Abisola, Ajiboye Abiola, Yemi Coker,

Olayide, Majekiodunmi Olabode, Sanni, to mention but a few. I

cannot forget you all, I love you all, I am so grateful.

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TABLE OF CONTENT

Pages

Title Page i

Certification ii

Dedication iii

Acknowledgement iv

Abstract xi

CHAPTER ONE 1-10

INTRODUCTION 1

1.0 Background to the study 1

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1.0.1 Historical Background 4

1.1 Statement of the problem 5

1.2 Research questions 6

1.3 Objective of the study 6

1.4 Hypothesis of the study 7

1.5 Significance of the study 7

1.6 Scope of the study 8

1.7 Limitations of the study 8

1.8 Organization of the study 9

1.9 Operational definition of terms 10

CHAPTER TWO 11-49

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Literature Review 11

2.0 Introduction 11

2.1 Theoretical framework 11

2.1.2 Theoretical concept 13

2.2 Empirical Review 18

2.3 The Concept of Internal Control 19

2.3.1The Objectives and roles of internal control framework 22

2.3.2 The major elements of an internal control process 23

2.3.3 Evaluation of internal control systems by supervisory authorities 35

2.4 Roles and responsibilities of external auditors 38

2.5 The concept of fraud 39

2.5.1 Classification of fraud 40

2.5.2 Type of bank’s common fraudulent practices 41

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2.5.3 Causes of bank frauds 42

2.5.4 Factors influencing the existence of fraud in banks 42

2.5.5 Internal control and fraud prevention 43

CHAPTER THREE 50-57

3.0 Introduction 50

3.1 Research Design 50

3.2 Population of study 51

3.3 Sample and sampling techniques 51

3.4 Sources of data collection 51

3.5 Research instrument 52

3.5.1 Procedure for administration of research instrument 52

3.5.2 Validity of the instrument 53

3.5.3 Reliability of the instrument 53

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3.6 Method of data analysis 54

3.7 Limitation of methodology 55

3.8 Model specification 55

CHAPTER FOUR 58-80

4.1 Introduction 58

4.2 Data Analysis, presentation and interpretation 58

4.3 Test of Hypotheses and discussion 74

4.4 Test of Hypotheses and discussion 75

CHAPTER FIVE 81-86

5.1 Introduction 81

5.2 Summary of major findings 81

5.3 Conclusion 82

5.4 Recommendations 83

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5.5 Areas for further research 86

Bibliography

Appendix I

Appendix II

LIST OF TABLES

4.1.1Introducton

4.2.1 Respondents analysis by age

4.2.2 Respondents analysis by sex

4.2.3 Respondents analysis by marital status

4.2.4 Respondents analysis by education

4.2.5 Respondents analysis by length of service

4.2.6 Respondents analysis by position held

4.2.7 There are adequate assets listing done by the management

4.2.8 Positions in place ensure assets additions, disposal, replacement and transfers for proper accountability

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4.2.9 Capital assets purchased are approved by appropriate level of management

4.2.10 Assets numbering is done to show location and protection of the assets

4.2.11 There is free access to cheque books and organization assets

4.2.12 A person responsible from inventory management is different from the book-keeper.

4.2.13 Stock taken is done following the procedures and in the presence of the internal auditor.

4.2.14 The petty cashier is different from the main cashier.

4.2.15 There are adequate policies to ensure effective collectionand follow up of due accounts.

4.2.16 Cost of production as been reducing dramatically for the past two years

4.2.17 The Company is now in a better position to serve clients more effectively and efficiently.

4.2.18 Effectiveness is measured through quality service and product.

4.2.19 The Company is able to build customers satisfaction through quality product and services.

4.2.20 Performance of the company result from asset financing, employee skils and processes involved in production.

4.2.21 There is evaluation and discussion of organization performance periodically by management.

4.2.22 Stock out increases the cost of production.

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4.3.1 Weaknesses in internal control system in Nigeria banks do not lead to fraud.

4.3.2 Analysis showing the weaknesses in the internal control system and fraud.

4.4.1 There is no significant relationship between internal control system and organizational performance.

4.4.2 Analysis showing the internal control system and organizational performance

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ABSTRACT

This project work takes a look at the effect of internal control

on organizational performance using a case study of Ecobank

Nigeria Plc. The main purpose of this study is to examine the

effect of internal control on organizational performance i.e how

as internal control aid organizational performance in Ecobank

Nigeria Plc.

The research design used during the course of this study was the

descriptive survey research design in which a population of 50

staff of Ecobank Nigeria Plc was look into. The researcher made

use of stratified sampling technique and the research instrument

used during the course of this research was questionnaire.

Statistical package for social sciences (SPSS) was being employed

to analyze data in form of frequency tables in knowing the effect

of internal control on organizational performance.

Findings reveals that the calculated t-statistics for the

parameter estimates was (t = 3.653), P < 0.01 which is greater

than tabulated t statistics (1.9960) at 0.01 level of

significance. Therefore, the Null hypothesis is rejected and

Alternative hypothesis is accepted, that is there is significant

relationship between internal control system and organizational

performance of Ecobank Nigeria Plc.

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Furthermore findings also reveals that the calculated t-

statistics for the parameter estimates was (t = 0.439), P < 0.01

is less than tabulated t statistics (1.9960) at 0.01 level of

significance. Therefore, the Null hypothesis is accepted and

Alternative hypothesis is rejected, that is, Weakness in the

internal control system in Ecobank Nigerian Plc does not lead to

frauds.

Based on the findings of the study, it is recommended that the

management of Ecobank Nigeria Plc should design more effective

internal control systems by ensuring that adequate asset listings

is done by management, capital assets purchased are approved by

appropriate level of management and asset numbering is done to

show location and protection of the assets. Also Management

should encourage staff to participate in decision making.

Employees feel encouraged and motivated in accomplishing the

goals of the company in which they have taken part in

formulating.

CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND TO THE STUDY

Banking institutions occupy a central position in the nations’

financial system and are essential agents in the development

process of the economy. By intermediating between the surplus and

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deficit spending units, banks increase the quantum of National

savings and investments and hence national output. By granting

credits, banks create money thus influencing the level of money

supply which is an essential item in the growth of national

income as it determines the level of economic activities in the

country.

Banks are central to the payments system by facilitating economic

transactions between various national and international economic

units and by so doing encourage and promote trade, commerce and

industry.

For banks to be able to function effectively and contribute

meaningfully to the development of a country, the industry must

be stable, safe and sound. And for these conditions to be

obtained there must be a sound accounting system, which is

occasioned by an internal control system.

In view of the economic growth in companies’ size and

complexities, proper management of modern business undertakings

are not possible unless they have an effective system of internal

control.

A system of effective internal controls is a critical component

of bank management and a foundation for the safe and sound

operation of banking organizations. A system of strong internal

controls can help to ensure that the goals and objectives of a

banking organization will be met, that the bank will achieve

long-term profitability targets and maintain reliable financial

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and managerial reporting. Such a system can also help to ensure

that the bank will comply with laws and regulations as well as

policies, plans, internal rules and procedures, and decrease the

risk of unexpected losses or damage to the Bank’s reputation.

Internal control, the strength of every organization, has become

of paramount importance today in Nigerian banks. 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

Nigerian bank managers. It has also become an unfortunate staple

in Nigeria’s international reputation. Fraud is really eating

deep into the Nigerian banking system and that any bank with a

weak internal control system, is dangerously exposed to bank

fraud.

The CBN reported that cases of attempted fraud and forgery in

banks, as at half-year 2007 have surpassed what was recorded for

the whole year 2006. The CBN half-year report for 2007, revealed

a total of 741 cases of attempted fraud and forgery, involving

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5.4 billion, $35,406.1, 150 Euros were reported as at June, 2007.

In 2006, 1,193 cases were reported involving 4.6 billion, $1.8

million and 14,389.7 pound sterling. The CBN also reported that

the backward development was attributable to weaknesses in the

internal control systems of the banks. This has clearly painted

the picture of how fraud has penetrated in the financial strength

of Nigerian Banks.

In a nut-shell, the damage which this menace, called fraud has

done to the banks is innumerable and needs urgent attention.

Therefore, the attempt to put an end to this economic

degradation, gave rise to the topic of this research study the

effect of internal control on organizational performance in the

banking sector with Eco bank Nigeria PLC as a case study.

However, this study is aimed at verifying the conception that an

effective and efficient internal control system is the best

control measure for preventing and detecting fraud, especially in

the banking sector.

Internal control is the methods employed to help to ensure the

achievement of an objective. Internal controls are policies,

procedures, practices and organizational structures implemented

to provide reasonable assurance that an organization’s business

objectives will be achieved and undesired risk events will be

prevented or detected and corrected, based on either compliance

or management initiated concerns (Awe, 2005). The Institute of

Chartered Accountants of England and Wales (ICAEW), defined

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internal control as the whole system of controls, financial or

otherwise, established by management in order to carry on the

business of an enterprise in an orderly and efficient manner, to

ensure adherence to management policies, safeguard the assets and

secure as far as possible, the completeness and accuracy of the

records. They are tools used by management everyday for the

smooth running of their organization or businesses. Internal

controls also refer to the measures instituted by an organization

so as to ensure attainment of the entity’s objectives, goals and

missions. They are a set of policies and procedures adopted by an

entity in ensuring that an organization’s transactions are

processed in the appropriate manner to avoid waste, theft and

misuse of organization resources. Internal Controls are processes

designed and effected by those charged with governance,

management, and other personnel to provide reasonable assurance

about the achievement of an entity’s objectives with regard to

reliability of the financial reporting, effectiveness and

efficiency of operations and compliance with applicable laws and

regulations (Mwindi, 2008). Enforcement of internal controls

should be designed to promote operational efficiency and

effectiveness, provide reliable financial information, safeguard

assets and records, encourage adherence to prescribed policies,

and comply with regulatory agencies. A sound internal control

will ensure that transactions are: valid, properly authorized,

recorded, properly valued, properly classified, reconciled to

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subsidiary records and not carried through by a single employee

(i.e. ensure separation of duties) ( Adeyemo Kingsley A,2012).

Organizations establish systems of internal control to help them

achieve performance and organizational goals, prevent loss of

resources, enable production of reliable reports and ensure

compliance with laws and regulations. In the words of ETUK IFIOK

CHARLES (1999) et al “Internal Control is the whole system of

controls, financial and otherwise, established by the management

in order to carry on the business of the enterprise in an orderly

and efficient manner, ensure adherence to management policies,

safeguard the assets and secure as far possible the completeness

and accuracy of the records”. All managers in an organizational

department operate according to stated plans, objectives and the

methods they use. The policies, procedures, organizational design

and physical barriers constitute the internal controls structure

of an institution. Managers should realize that a strong internal

control structure is fundamental to the success of an

organization in term of its purpose, operations and resources.

Responsibility for providing an adequate and effective internal

control structure rests with an organization’s management.

Control is important because it single-handedly links with the

effectiveness of other managerial functions such as planning.

When it comes to planning, it determines whether activities are

on going toward the achievement of goals and accomplishment of

objectives. Control mechanisms keep the plans running smoothly

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and up to date. Control is also important in employee empowerment

wherein performance of the employees could be properly managed.

Performance is controlled in terms of appraisal, lessening

haphazard decisions on allocation of positions/job titles.

Nonetheless, control mechanisms are also important in keeping a

balance within the workplace especially since controlling means

to minimize unethical decisions of the employees and the

organization as a whole.

The questions are: what can be said to be the cause or causes of

the increasing rate of fraud in banks? What is the impact of

internal control in the prevention and detection of fraud in

banks, what is the impact of internal control on the

organizational performance of the Eco bank Nigeria plc?

1.0.1 HISTORICAL BACKGROUND OF ECO BANK NIGERIA PLC

Eco bank Nigeria is a member of Eco bank, the leading independent

pan-African bank, with headquarters in Lome and East Africa. Eco

bank, which was established in 1985, has grown to network of over

1000 branches, employing over 10,000 people, with offices in 32

countries.

The bank began operation in 1986, it operates as a universal

bank, providing wholesale, retail, corporate, investment and

transaction banking services to its customers in the Nigeria

market. The bank divides its operations into three major

divisions; retail banking, wholesale banking and treasury and

financial institution.

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The bank also offers capital market and investment banking

services. During the fourth quarter of 2011, Eco bank Nigeria

acquires 100% of the shareholding in oceanic bank, creating the

expanded Eco bank plc. At December 2011, the expanded Eco bank

Nigeria controlled total assets value at approximately US$8.1

billion (NGN 1.3trillion) making it one of the five largest bank

in Nigeria. At that time the bank had 610 free-standing branches

making it the second largest bank in the country by branch

network. Internal control has been a way of evaluating the

performance of the management in Eco bank Nigeria plc.

1.1 STATEMENT OF THE PROBLEM

The series of business failures and corporate scandals have been

identified by KPMG to be as a result of weak internal control

system. The failure of Enron in 2001 caused a precipitous decline

in investor confidence in the capital markets. The federal

government through the regulatory authorities has responded to

this, by passing guidelines using SAS2 under information which is

to be disclosed in financial statements. The guidelines codified

the responsibilities of corporate executives, corporate

directors, lawyers, accountants and created a board oversight

regime for auditors of public companies. In seeking to enhance

accountability and restore investor’s confidence, the guidelines

emphasizes the critical role of internal control over financial

reporting. This gave rise to the need for corporate governance

especially in public institutions.

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International Auditing Guidelines (IAG) deals with the auditor’s

responsibility for detection of material misstatement resulting

from error when carrying out an audit of financial statements.

The guidelines in conjunction with the related SEC rules and

auditing standard No 2, established by the public company

Accounting Oversight Board (PCAOB), requires management of a

public accounting and the company’s independent auditor to issue

two new reports at the end of every fiscal year. These reports

must be included in the company’s annual report filed with the

Securities and Exchange Commission (SEC). In the past, a

company’s internal controls were considered in the context of

planning the audit, but were not required to be reported publicly

except in response to the SEC’s form requirements when related to

a change in auditor. The new audit and reporting requirements

have drastically changed the situation and have brought the

concept of internal control over financial reporting to the

forefront for audit committees, management, auditors, and users

of financial statements. The new requirements also highlight the

concept of a material weakness in internal control over financial

reporting, and mandate that both management and the independent

auditor must publicly report any material weakness in internal

controls over financial reporting that exists as a result of

physical year, at the end of assessment dates. Under both PCAOB

auditing standard NO 2 and the SEC rules implementing the

guidelines, the existence of a single material weakness requires

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management and the independent auditors to conclude that internal

control over financial reporting is not effective.

Against this background this study investigated the purpose of

ascertaining the effect of internal control system on

organizational performance.

1.2 RESEARCH QUESTIONS

This study seeks to tackle among others questions such as:

1) What is the relationship between internal control and

organizational performance?

2) What are the implication, consequence and benefit of internal

control on organizational performance?

3) What are those challenges which a weak internal control can pose

on organizational performance?

4) What are those things that must be done and put in shape by the

company to ensure an effective internal control system?

5) What are the limitations of internal control?

6) What are the various component of internal control?

1.3 OBJECTIVE OF THE STUDY

The main objective of this research study is to examine the

effect of internal control system on organizational performance

in the Nigerian banking industry using Eco Bank of Nigeria PLC as

a case study. Apart from the main objective, the research also

sets out to achieve some specific objectives which are;

1) To examine the various component of internal control system.

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2) To determine the effects of internal control on the

organizational performance of the financial institution.

3) To know the effect of the internal control in monitoring

compliance.

4) To critically examine how effective the internal control has been

used to reduce the level of risks.

5) To ascertain how useful is internal control to organizational

performance.

6) To recommend ways by which internal control can be used

effectively so as to achieve the organizational goal.

1.4 HYPOTHESIS OF THE STUDY

The following research hypotheses were generated for the study:

HO: Weakness in the internal control system in Nigerian banks

does not lead to frauds.

H1: Weakness in internal control system in Nigerian banks leads

to frauds.

HO: There is no significant relationship between internal control

system and organizational performance.

H1: There is significant relationship between internal control

system and organizational performance.26

1.5 SIGNIFICANCE OF THE STUDY

This study shall be of great benefits to the management of the

organization in order to deal extensively with effect of internal

control on organizational performance and this will eventually

lead to high productivity in the organization and also prevent

risks within the organization. This study will help organization

to have better understanding on how to install a good internal

control system for the effective running of their organization.

To managers of organizations and individuals, this study would

assist them in the area of identifying the effect of internal

control on organizational performance and its consequences. As

for managers in all organization within the country the result of

this research will help them to reduce the level of risk and

fraud within their organization so as to increase the confident

level of their shareholders. Managers ensure that as goods and

services are produced, machines or other equipment are properly

used so any malfunctions can be avoided. Improper usage of

company assets can create downtime if goods have to be re-

produced because of product defects.

Moreover, the study will be more relevant to management and

social science students because they will be exposed to the

effect of internal control on organizational performance and not

only that it would also serve as an eye opener to the fact that

as managers, there are lots of issue relating to internal control

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within the organization which if left unattended to will

jeopardized organizational goal of the company.

The study will also attempt to contribute to the available

literature or researches that will serve as a guide for

organizational staff in order to prevent fraud and risks within

the organization.

Policy makers would also benefit from this study in formulating

policies relating to the effect of internal control on

organizational performance.

The study of the effect of internal control on organizational

performance is another area of study that is wide for researchers

to tap into. So, this study would benefit researchers in looking

beyond the scope of the present study and impacting to the

knowledge already acquired.

The effect of internal control on organizational performance will

also help practitioners such as Auditor, tax practitioners, etc

in increasing their credibility.

1.6 SCOPE OF THE STUDY

This research by the grace of God is expected to go in-depth.

Meanwhile the scope of the study is to determine the effect of

internal control on organizational performance (Using a case

study of Eco Bank), The research focuses on Eco bank Nigeria plc.

This research work will cover the period between 2000 - 2012. The

entire organization’s staff of this bank will be concern in this

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research, as their view will be collected through detailed

questionnaire.

As Eco Bank Plc are located virtually throughout the geographical

area in Nigeria, this research work cover two major part of

geographical location in Nigeria southern part Osun State

(Osogbo) and West Central part Kwara State (Offa).

Lastly, the research laid emphasis on banking sector as one of

the main determinant of economic growth and development in the

country.

1.7 LIMITATIONS OF THE STUDY

In the course of this study, the researcher would encounter a

lot of hindrances among these, the most salient one include

finance which the researcher is faced with. Insufficient funds

required for expenses like transportation, acquisition of

research instruments, sourcing for both primary and secondary

data etc. Also information on the secondary source of data

available to the researcher was either outdated or incomplete and

the one available on the internet requires some form of

subscription before access is allowed.

Time also posed a constraint on this research work such as time

to study and time to attend lecture etc.

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Attitude of respondent is also another limiting factor to this

research work. Most respondent are often reluctant to part with

information even after being assured confidentiality they still

prefer to be secretive.

Despite the limitations of this study I still hope to do better

work on this field.

1.8 ORGANIZATION OF THE STUDY

This research work is divided into five chapters.

Chapter one contains introduction to the research work which

summarizes background to the study as well as the main feature of

the effect of internal control on the organizational performance

of the Eco bank plc. In this chapter, statement of the problem,

objective of the study, significance of the study, research

hypothesis, research questions, scope of the study, limitation of

the study, and organization of the study are discussed

extensively.

Chapter two of this research work is known as the review of

related literature otherwise known as the literature review and

the theoretical frame work, which reviews previous research work

in the field of study and analysis of various principles relating

to the research topic.

Chapter three is concerned with the research methodology. This

discusses research design, the population size to be studied,

sample size determination, sampling techniques applied , method

30

of data analysis and interpretation, the statistical tools used

in the analyzing the formulated hypothesis .

Chapter four of this research work is the data presentation,

analysis and interpretation.

Chapter five summarizes the whole research project stating the

findings useful conclusion and the recommendation and this

constitute the concluding part of the research work.

1.9 OPERATIONAL DEFINITION OF TERMS

Internal Controls: The Institute of Chartered Accountants of

England and Wales (ICAEW), defined internal control as the whole

system of controls, financial or otherwise, established by

management in order to carry on the business of an enterprise in

an orderly and efficient manner, ensure adherence to management

policies, safeguard the assets and secure as far as possible, the

completeness and accuracy of the records.

Internal Audit: It is an independent appraisal activity

established within an organization as a service to it. It is a

control which functions by examining and evaluating the adequacy

and effectiveness of other controls; a management tool which

analyses the effectiveness of all parts of an entity’s operations

and management.’ (CIMA’s Management Accounting Official

Terminology)

31

Monitoring: According to CIMA, it is a process that assesses the

quality of the system’s performance over time.

According to Sunny, New Palta and Root. It can be defined as the

final internal control standards, which assess the quality of

performance.

Control Environment: According to the first internal control

standard, it relates to the departments that set a positive and

supportive attitude towards internal control and conscientious

management.

Reasonable Assurance Concept: It refers to the fact that internal

controls even when they are appropriately designed and operating

effectively cannot provide absolute assurance of achieving

control objectives.

CHAPTER TWO

LITERATURE REVIEW

2.0 INTRODUCTION

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Fundamental to the success of any organization is the achievement

of its objectives. The objectives could be profit maximization,

shareholders’ wealth maximization, cost minimization, and

customer’s satisfaction (to mention but a few).

However, the achievement of organizational objectives is one

thing; the process of achieving such objectives is another. This

is more so in that the achievement of stated goals and objectives

rest mainly on having an effective internal control system that

ensures the organizational performance is according to plan.

Incidentally, corporate planning and control are independent

management functions especially in ascertaining performance and

assessing the future direction of an organization. In addition,

corporate planning and control are important in determining the

performance of any organization. Planning is concerned primarily

with the setting of goals and control is a mechanism that ensures

that an organization achieves its predetermined corporate goals

and objectives. It is important to note that no manager can

successfully accomplish his/her task unless he/ she performs

necessary functions. It is nevertheless true that control is

peculiarly dependent upon a well organized system.

2.1 Theoretical framework of the term “Internal Control” and

“Internal Control System”

In the modern business world, the term “ Internal Control “ is

being used to refer to two basic concepts; the internal control

system and the internal control itself.

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Internal Control System

The internal control system refers to an organized

amalgamation of functions and procedures, within a complete

system of controls established by the management and whose

purpose is the successful function of the business (Cheung,

1997). The internal control system encompasses all the methods

and procedures followed by the management in order to ensure, to

a great extent, as much successful cooperation as possible with

the director of the company, the insurance of the capital, the

prevention and the detection of fraud, as well as the early

preparation of all the useful financial information ( Meigs,

1984; Papadatou, 2005 ). According to Cook and Wincle (1976), the

internal control system resembles the human nervous system which

is spread throughout the business carrying out orders and

reactions to and from the management. It is directly linked to

the organizational structure and the general rules of the

business ( Cai, 1997 ).

Internal Control

The term was adopted by the Anglo- Saxons ( “ Internal

Auditing “ ) and it refers to the unit of internal control which

aims at the evaluation of the sufficient functioning of the

internal control system, that is the secondary functions

( Controls ) and suggests that there is room for improvements in

cases where weaknesses are being discovered ( Financial Postman

Magazine, 2004 ). What is indicative of the importance of

internal control is the sum of the definitions that have been

34

given for this term. According to the AICPA (American institute

of certified public accountants), (1963) a system of internal

control extends beyond those matters which relate directly to the

functions of accounting and the financial statements. In

addition, based on the ASOBAC (Committee on Basic Auditing

Concepts, 1973), internal control is a systematic procedure which

will lead to evaluate the degree of correlation between those

established criteria and the real results of the business.

Internal control, as defined by the APC (Auditing Practices

Committee, 1980), is an independent examination and certification

from an inspector appointed by the business to control the

finances according to the legal framework established each time.

Furthermore, according to Miller and Bailley (1989), internal

control is a systematic review and a subjective investigation of

one element and encompasses the verification of the specific

information as these are determined from the general practice.

The internal control helps the company to achieve its goals using

a systematic approach of assessing the effectiveness of handling

dangers (IIA, 1999). Internal control, as defined by the Hellenic

Institute of Internal Auditors (H.I.I.A., 2004) is an

independent, objective, adequately designed and organized

procedure, which through the technical and the scientific

approaches; assess how adequately the system of internal control

functions. From the above definitions, it is clear that the

internal control is not just a one-sided tool for controlling the

order and rightness of certain situations, but it is a method of

35

detecting the value added up to a company, achieving the index of

effectiveness and profitability of the company (Nagy and Cenker ,

2002) (Godwin, 2004). Besides, the purpose of this control that

is internal control is to detect the problem of risk and fraud

within the organization to be reformed in the future and anyone

that ought to exist (Mcnamee and Mcnamee, 1995). The deviation

between the already achieved and the programmed situation can

also become possible through controlling the parameter of correct

handling of danger situations.

Bounton and Kellerwalter (1996) claimed that the objective

purpose of internal control is, on the one hand, the allowance of

specific and high level of services offered towards the

management, and on the other hand, the allowance of assistance

towards the members of the organization for the most effective

practicing of their duties. The internal control systems are

being implemented in businesses as tools that add up value to the

company. In this way, we can achieve a systematic approach

towards the most effective operation of the organization, as a

unity (Schleifer and Greenwalt, 1996). Finally, as mentioned by

the COSO report (Committee of Sponsoring Organizations of the

Treadway Commission, 1992), internal control is defined as a

procedure which offers fundamental security to the business

concerning the credibility of financial affairs. The report

defines internal control and describes a framework for internal

control, but the difference of this report is that it also

36

provides criteria for the management to utilize so as to evaluate

controls. (Aldridge and Colbert, 1994).

2.1.2 Theoretical Concept of Fraud as Related to Internal Control

Fraud is an intentional strategy to achieve a personal or

organizational goal or human needs by deceit. A layman definition

of fraud includes dishonesty in the form of an intentional

deception or a willful misrepresentation of a material fact,

lying, the willful telling of an untruth, and cheating, the

gaining of an unfair or unjust advantage over another. Fraud

involves coercing people to act against their own best interest.

In order to explain why fraud is conceived in the society, the

following theories have been advanced by scholars.

1. Sociological theory of Crime/Fraud:

2. Culture Transmission Theory.

3. Psychological/physiological theory of crime:

4. The Fraud Triangle.

5. Fraud Deterrence Cycle.

Sociological theory of crime/fraud: According to this theory,

Fraud is a crime and it is important to remember that the concept

of what constitutes a crime is constantly being adapted to meet

the particular needs of any society. That most people are capable

of committing a crime in sudden anger, drunkenness or as a result

of stress and there may be little that we can do to prevent these

37

isolated acts by individuals. O’ Donnell, (1974) stated that we

may be able to reduce the amount of crimes by removing the

factors which predispose these individuals or groups towards

criminal acts and motivation. He thus suggests that there are

predisposing factors of crimes and there are the precipitating

factors which trigger off tendencies for frauds and criminal

motives in groups or individuals concerned. The theory states

that crime and criminal motives are a part of a ‘normal’ social

order in that it can be an expression of the same motivations

that give rise to accepted behavior. Oluwadare,(1993) stated that

the embezzler, the fraudster and the law abiding storekeeper are

concerned with making money. One makes money into his private

pocket (egoism) and the other making the money for the

organization (altruism). Durkheim, one of the founders of

sociology argued that crime is an integral part of all healthy

societies.

Psychological/Physiological theory: Oluwadare, (1993) posited

that there are explanations by some scholars that crime is a

personal rather than a social problem. That this approach varies

from those who believe that some people are innately wicked to

those who hold the view that there is a genetic cause for

criminality connected with the endocrine glands. Lombrose, (1876)

believed that criminality is inborn because after he examined the

skull of a notorious bandit and found characteristics which he

believed to be result of a “throw back” to an earlier

evolutionary type. He concluded that there was a criminal type

38

which resulted in “insensitivity to pain, extremely acute sight,

love of orgies, irresistible caring for evil for its own sake

etc” Rosenthal (1972) in his support for this theory suggested a

possible link with crime while quoting studies of twins made in

three continents over a period of forty years in which he claimed

identical twins shared crime traits at a rate more than double of

that of non identical twins. Culture transmission theory: This

theory views crime as the end product of a process of social

living. Tarde (1886) suggested that criminal behavior or criminal

motives is learned in the family and the community in areas where

this behavior is the ‘norm’ (i.e. a standard behavior shared by a

group and accepted within it).

The fraud triangle: The fraud triangle theory propounded by

Donald Cressey states that every fraud has three things in

common: (1) Pressure sometimes referred to as motivation and

usually an “un-shareable need”; (2) Rationalization of personal

ethics; and (3) Knowledge and opportunity to commit the crime.

Singleton et al in their work on the fraud triangle theory stated

that pressure or incentive or motivation refers to something that

has happened in the fraudster’s personal life that creates a

stressful need for funds and thus motivates him to steal. This

motivation may be some financial strain but it could be the

symptoms of other types of pressures. According to Kenyon and

Tilton (2006), Management or other employees may find themselves

offered incentives or placed under pressure to commit fraud. They

cited as an example that when remuneration or advancement is

39

significantly affected by individual, divisional or company

performance, individuals may have an incentive to manipulate

results or to put pressure on others to do so. Similarly,

pressure may come from the unrealistic expectations from

investors, banks or other sources of finance. They therefore

stated that incentives or pressures may take a variety of forms

within an organization. These include; bonuses or incentive pay

representing a large portion of an employee or group’s

compensation, triggers built into debt covenants tied to share

price targets and levels, significant stock option awards

throughout the organization but particularly to top management,

and aggressive earnings-per-share and revenue targets set by top

management and communicated to analysts, investment bankers, and

other market participants, with resultant pressure from these

groups. Rationalization and attitude according to Kenyon and

Tilton, (2006) in their write up on Potential Red Flags and Fraud

Detection Techniques stated that some individuals are more prone

than others to commit fraud. That the propensity to commit fraud

depends on people ethical values as well as on their personal

circumstances. The authors asserted that ethical behavior is

motivated both by a person’s character and by external factors.

External factors which include job insecurity such as during a

downsizing or redundancy or a work environment that inspires

resentment such as being passed over for promotion. Likewise,

external environment includes the tone at the top i.e. the

attitude of management toward fraud risk and management’s

40

response to actual instances of fraud. They posited that when

fraud has occurred in the past and management has not responded

appropriately, others may conclude that the issue is not taken

seriously and they can get away with it. Where instances exist

that create opportunities for management or other staff to commit

fraud, according to Kenyon and Tilton, (2006), those who might

not otherwise be inclined to behave dishonestly may be tempted to

do so. They therefore stated that absence or ineffective

controls, lack of supervision or inadequate segregation of duties

may provide such opportunities. Tommie W Singleton et al stated

that the ‘Report to the Nation (RTTN) (2004) research carried out

by Association of Certified Fraud Examiners showed that most

employees and managers who commit fraud tend to have a long

tenure with a company. A simple explanation deduced by the

scholars is that employees and managers who have been around for

years know quite well where the weaknesses are in the internal

controls and have gained sufficient knowledge of how to commit

the crime successfully.

The Fraud Deterrence Cycle: The Fraud Deterrence Cycle is an

interactive process which include establishment of corporate

governance, implementation of transaction-level control

processes often referred to as the system of internal accounting

controls, retrospective examination of governance and control

processes through audit examinations and investigation and

remediation of suspected or alleged problems. Fraud may be

categorized into Corporate, management Fraud and fraud as a tort.

41

Corporate fraud on the other hand is any fraud perpetrated by,

for or against a business corporation Singleton, Bologna,

Lindquist (2006). Management Fraud is the intentional

misrepresentation of corporate or unit performance levels

perpetrated by employees serving in management roles who seek to

benefit from such frauds in terms of promotions, bonuses or other

economic incentives and status symbols. Colbert, and Meany,

reiterated that an essential component of any entity’s internal

control system including fraud prevention and detection is the

‘tone at the top’. The actions and attitudes of management and

the board of directors set the tone at the top. Their views

towards controls and enforcement of established policies and

procedures permeate the organization and are an important factor

in the success of fraud related policies. In recent years, there

has been great concern on the management of banks’ assets and

liabilities because of large scale financial distress Adam,

(2009). The banking sector has been singled out for the special

protection because of the vital role banks play in an economy.

Bank supervision entails not only the enforcement of rules and

regulations, but also judgments concerning the soundness of bank

assets, its capital adequacy and management Volcker, (1992). In

Nigeria, the rising cases of bank distress have also become a

major source of concern for policy makers. McNamara, C (2009)

stated that performance management is a relatively new concept to

the field of management. That performance management reminds us

that being busy is not the same as producing results. It reminds

42

us that training, strong commitment and lots of hard works alone

are not results. That the major contribution of performance

management is its focus on achieving results -- useful products

and services for customers inside and outside the organization.

Despite the recent attention to achieving maximum performance,

McNamara (2009) stated that there is no standard interpretation

of what that means or what it takes to get it. However having

stated what people are suggesting that it takes for organizations

to achieve maximum performance he stated that, we should be aware

of the various views and be able to choose our own. Recent report

from the Nigerian Deposit Insurance Corporation (NDIC) stated

that Nigerian banks recorded 2007 cases of fraud involving over

=N=53 billion naira in 2008 compared to 1,533 cases involving

=N=10 billion in 2007. The report stated that =N=17.5 billion was

lost to fraud in 2008 as against =N=2.9 billion in 2007.

43

2.2 EMPIRICAL REVIEW

The Nigerian banking industry which is regulated by the Central

Bank of Nigeria is made up of; deposit money banks referred to as

commercial banks, development finance institutions and other

financial institutions which include; micro-finance banks,

finance companies, bureau de changes, discount houses and primary

mortgage institutions. The development in Nigeria banking sector

dated back to 1892 when the first commercial bank (The African

Banking Corporation) was established in Lagos. According to

Adekanye (1986) “the bank experienced some difficulties which led

to the establishment of British Bank of West Africa”.

According to Jigyasu Prani (2006) no banking legislation existed

until 1952, at which point Nigeria had three foreign banks (the

Bank of British West Africa, Barclays Bank, and the British and

French Bank) and two indigenous banks (the National Bank of

Nigeria and the African Continental Bank) with a collective total

of forty branches. The 1952 ordinance set standards, required

44

reserve funds, established bank examinations, and provided for

assistance to indigenous banks. Yet for decades after 1952, the

growth of demand deposits was slowed by the Nigerian propensity

to prefer cash and to distrust cheques for debt settlements.

British colonial officials established the West African Currency

Board in 1952 to help finance the export trade of foreign firms

in West African and to issue a West African currency convertible

to British pounds sterling, but colonial policies barred local

investment of reserves, discouraged deposit expansion, precluded

discretion for monetary management, and did nothing to train

Africans in developing indigenous financial institutions. In 1952

several Nigerian members of the Federal House of Assembly called

for the establishment of a central bank to facilitate economic

development. Although, the motion was defeated, the colonial

administration appointed Bank of England officials to study the

issue. He advised against a central bank questioning such a

bank’s effectiveness in an undeveloped capital market. In 1957,

the colonial office sponsored another study that resulted in the

establishment of a Nigerian central bank and the introduction of

a Nigerian currency. The Nigerian pound on a par with the pound

sterling until the British currency’s devaluation in 1967, was

converted in 1973 to decimal currency, the naira (=N=),

equivalent to two old Nigerian pounds. The smallest unit of the

new currency was the kobo, 100 of which equaled 1 naira. The

naira, which exchanged for US$1.52 in January 1973 and again in

march 1982 (or #0.67 = US$1), despite the floating exchange rate,

45

depreciated relative to the United State dollar in the 1980s. The

average exchange rate in 1990 was #8.004 =US$1. Depreciation

accelerated after the creation of a second-tier foreign exchange

market under World Bank structural adjustment in September 1986.

The Central Bank of Nigeria, which was statutorily independent of

the federal government until 1968, began operations on July 1,

1959. Following a decade of struggle over the relationship

between the government and the Central Bank, a 1968 military

decree granted authority over banking and monetary policy to the

Federal Executive Council. The role of the Central Bank, similar

to that of central banks in North America and Western Europe, was

to establish the Nigerian currency, control and regulate the

banking system, serve as banker to other banks in Nigeria, and

carry out the government’s economic policy in the monetary field.

This policy included control of bank credit growth, credit

distribution by sector, cash reserve requirements for commercial

banks, discount rates-interest rates the Central Bank charged

commercial and merchant banks-and the ratio of banks’ long-term

assets to deposits. Changes in Central Bank restrictions on

credit and monetary expansion affected total demand and income.

2.3 THE CONCEPT OF INTERNAL CONTROL

The structure of modern banking system and the high expectation

from the investors and the society at large has called for a more

tightened internal control system. Internal control has been

variously defined.

46

According to Princeton (2008) internal control is a process

effected by an organization’s structure, work and authority

flows, people and management information system, designed to help

the organization accomplish specific goals or objectives. From

the definition, the objective of any internal control should be

directed towards the attainment of the organizational objectives.

In the words of Okozie (1999)” internal control is the whole

system of controls, financial and otherwise, established by the

management in other to carry on the business of the enterprise in

an orderly and efficient manner, ensure adherence to management

policies, safeguard the assets and secure as far as possible the

completeness and accuracy of the records”. A sound internal

control system should provide the platform for recording and

processing transactions in such a way that it forms adequate

basis for the preparation of the financial statement. An

efficient internal control system involves a clear definition and

segregation of duties for various employees or groups within a

company. The intent of separating the duties is to protect

against fraud, waste, abuse and mismanagement of resources.

Effective internal control helps to assure the accuracy of

reports to management and the various supervising bodies (in the

case of banks).

According to Asuquo (2005) “Internal control is made up of

internal checks, internal audit, accounting controls and other

forms of control such as budgetary and physical control”. Okozie

47

(1999) posited that “the primary responsibility for the

maintenance of the effective internal control rest with the

management of any enterprise”. Management responsibilities are

normally discharged by:

Installation of an effective accounting system;

Ensuring that employees understand relevant codes of

conduct.

Monitoring relevant legal requirements and ensuring that

operating procedures and conditions meet these requirements.

The establishment of an independent Internal audit function.

The appointment of an audit committee where appropriate.

According to Van Creveld (2005), internal control has further

been defined as a process effected by an organization’s

structure, work and authority flows, people and management

information systems, designed to help the organization accomplish

specific goals and objectives. It is a means by which the

organization’s resources are directed, monitored and measured, it

plays an important role in preventing and detecting fraud and

protecting the organization’s resources both physical machinery

and property and intangible (e.g. reputation, intellectual

property such as trademarks and patents). At the organizational

level, internal control objectives relate to reliability of

financial reporting, timely feedback on the achievement of

operational or strategic goals and compliance with laws and

regulations. At the specific transaction level, internal control

refers to the action taking to achieve a specific objectives e.g.

48

how to ensure the organization’s payment to third parties are for

valid services rendered. A system of effective internal control

is a critical component of bank management and a foundation for

the safe and sound operation of banking organizations. A system

of strong internal control can help to ensure that the goals and

objectives of a banking organization will be met, that the bank

will achieve long term profitability targets and maintain

reliable financial and managerial reporting. Such a system can

also help to ensure that the bank will comply with laws and

regulations as well as policies, plans, internal rules,

procedures, and decrease the risks of unexpected losses or damage

to the bank’s reputation.

Internal control are policies, procedures, practices and

organizational structures implemented to provide reasonable

assurance that an organization’s business objectives will be

achieved and undesired risk events will be prevented or detected

and corrected, based on either compliance or management

initiated concerns (Awe,2005).

The institute of Chartered Accountants of England and

Wales (ICAEW), defines internal control as the whole system of

controls, financial or otherwise, established by management in

order to carry on the business of an enterprise in an orderly and

efficient manner, ensure adherence to management policies,

safeguard the assets and secure as far as possible, the

completeness and accuracy of the records. Mayo and BPP (1988)

defined it as a measure taken by an organization for the purpose

49

of protecting its resources against wastes, fraud, inefficiency;

ensuring accuracy and reliability in accounting and operating

data; securing compliance with organization policies and

evaluating the level of performance in all the divisions of the

organizations. From these definitions, it can be deduced that

internal control comprises the plan of an organization and all of

the coordinate methods and measures adopted within it, to

safeguard its assets, check the accuracy and reliability of its

accounting data, promote operational efficiency and encourage

adherence to prescribed managerial policies. Internal control

objectives are channeled towards ensuring adherence to managerial

policies and achieving organizational goals in general.

ICAN (2006a, b) categorized controls into three major

classifications:

Preventive controls: These are controls that predict

potential problems before they occur and make

adjustments. They also prevent an error, omission or

malicious act from occurring. Examples of preventive

controls includes: using well-designed documents to

prevent errors. Establishing suitable procedures for

authorization of transactions. Employing only qualified

personnel. E.g segregates duties.

Detective controls: These controls are designed to

detect and report the occurrence of an omission, an error or a

malicious act. Examples of detective controls include: duplicate

checking of calculations, Periodic performance reporting with

50

variance error message over tape labels and Hash totals counter

cheques post-due account reports.

Corrective controls: These controls help to minimize

the impact of a threat, identify the cause of a problem, correct

errors arising from the problem. They also correct problems

discovered by detective controls and modify the processing

system(s) to minimize future occurrence of the problem. Examples

of corrective controls are: contingency planning back up

procedures rerun procedures.

2.3.1 The Objectives and Roles of Internal Control Framework

Internal control is a process effected by the board of

directors, senior management and all levels of personnel. It is

not solely a procedure or policy that is performed at a certain

point in time, but rather it is continually operating at all

levels within the bank. The board of directors and senior

management are responsible for establishing the appropriate

culture to facilitate an effective internal control process and

for monitoring its effectiveness on an ongoing basis; however,

each individual within an organization must participate in the

process. The main objectives of the internal control process can

be categorized as follows:

1. Efficiency and effectiveness of activities (performance

objectives);

2. Reliability, completeness and timeliness of financial and

management information (information objectives); and

51

3. Compliance with applicable laws and regulations (compliance

objectives).

Performance objectives for internal controls pertain

to the effectiveness and efficiency of the bank in using its

assets and other resources and protecting the bank from loss.

The internal control process seeks to ensure that personnel

throughout the organization are working to achieve its goals

with efficiency and integrity, without unintended or excessive

cost or placing other interests (such as an employee’s, vendor’s

or customer’s interest) before those of the bank.

Information objectives address the preparation of

timely, reliable, relevant reports needed for decision-making

within the banking organization. They also address the need for

reliable annual accounts, other financial statements and other

financial –related disclosures and reports to shareholders,

supervisors, and other external parties. The information received

by management, the board of directors, shareholders and

supervisors should be of sufficient quality and integrity that

recipients can rely on the information in making decisions. The

term reliable, as it relates to financial statements, refers to

the preparation of statements that are presented fairly and based

on comprehensive and well-defined accounting principles and

rules.

Compliance objectives ensure that all banking business

complies with applicable laws and regulations, supervisory

requirements, and the organization’s policies and procedures.

52

This objective must be met in order to protect the bank’s

franchise and reputation.

2.3.2 The Major Elements of an Internal Control Process

The internal control process, which historically has

been a mechanism for reducing instances of fraud,

misappropriation and errors, has become more extensive,

addressing all the various risks faced by banking organizations.

It is now recognized that a sound internal control process is

critical to a bank’s ability to meet its established goals, and

to maintain its financial viability.

Internal control consists of five interrelated

elements: and these elements are explained with it and of

suitable principle to be followed by concern people in an

organization.

1. Management oversight and the control culture;

2. Risk recognition and assessment;

3. Control activities and segregation of duties;

4. Information and communication; and

5. Monitoring activities and correcting deficiencies.

The problems observed in recent large losses at banks can be

aligned and with these five elements. The effective

functioning of these elements is essential to achieving a bank’s

performance, information, and compliance objectives.

A. Management oversight and the Control Culture

1. Board of directors

53

Principle 1: The board of directors should have responsibility

for approving and periodically reviewing the overall business

strategies and significant policies of the bank; understanding

major risks run by the bank, setting acceptable levels for these

risks and ensuring that senior management takes the steps

necessary to identify, measure, monitor and control these

risks; approving the organizational structure and ensuring that

senior management is monitoring the effectiveness of the

internal control system. The board of directors is ultimately

responsible for ensuring that an adequate and effective system

of internal control is established and maintained.

The board of directors provides governance,

guidance and oversight to senior management. It is

responsible for approving and reviewing the overall business

strategies and significant policies of the organization as well

as the organizational structure. The board of directors has the

ultimate responsibility for ensuring that an adequate and

effective system of internal control is established and

maintained. Board members should be objectives, capable, and

inquisitive, with a knowledge or expertise of the activities of

and risks run by the bank. In those countries where it is an

option, the board should consist of some members who are

independent from the daily management of the bank. A strong,

active board, particularly when coupled with effective upward

communication channels and capable financial, legal and internal

audit functions, provides an important mechanism to ensure the

54

correction of problems that may diminish the effectiveness of

the internal control system.

One option used by banks in many countries is the

establishment of an independent audit committee to assist the

board in carrying out its responsibilities. The establishment of

an audit committee allows for detailed examination of

information and reports without the need to take up the time of

all directors. The audit committee is typically responsible for

overseeing the financial reporting process and the internal

control system. As part of this responsibility, the audit

committee typically oversees the activities of, and serves as a

direct contact for, the bank’s internal audit department and

engages and serves as the primary contact for the external

auditors. In those countries where it is an option, the

committee should be composed mainly or entirely of outside

directors (i.e., members of the board that are not employed by

the bank or any of its affiliates) who have knowledge of

financial reporting and internal controls. It should be noted

that in no case should the creation of an audit committee amount

to a transfer of duties away from the full board, which alone is

legally empowered to take decisions.

2. Senior management

Principle 2: Senior management should have responsibility for

implementing strategies and policies approved by the board:

developing processes that identify, measure, monitor and control

55

risks incurred by the bank: maintaining an organizational

structure that clearly assigns responsibility, authority and

reporting relationships; ensuring that delegated

responsibilities are effectively carried out; setting

appropriate internal control policies; and monitoring the

adequacy and effectiveness of the internal control system.

Senior management is responsible for carrying out

the directives of the board of directors, including the

implementation of strategies and policies and the establishment

of an effective system of internal control. Members of senior

management typically delegate responsibility for establishing

more specific internal control policies and procedures to those

responsible for a particular business unit. Delegation is an

essential part of management; however, it is important for

senior management to oversee the managers to whom they have

delegated these responsibilities to ensure that they develop and

enforce appropriate policies and procedures.

Compliance with an established internal control

system is heavily dependent on a well documented and

communicated organizational structure that clearly shows lines

of reporting responsibility and authority and provides for

effective communication throughout the organization. The

allocation of duties and responsibilities should ensure that

there are no gaps in reporting lines and that an effective level

56

of management control is extended to all levels of the bank and

its various activities.

3. Control culture

Principle 3: The board of directors and senior management are

responsible for promoting high ethical and integrity standards,

and for establishing a culture within the organization that

emphasizes and demonstrates to all levels of personnel the

importance of internal controls. All personnel banking

organization need to understand their role in the internal

controls process and be fully engaged in the process.

An essential element of an effective system of

internal control is a strong control culture. It is the

responsibility of the board of directors and senior management

to emphasize the importance of internal control through their

actions and words this includes the ethical values that

management displays in their business dealings, both inside and

outside the organization. The words, attitudes and actions of

the board of directors and senior management affect the

integrity, ethics and other aspects of the bank’s control

culture.

In varying degrees, internal control is the

responsibility of everyone in a bank. Almost all employees

produce information used in the internal control system or take

other action needed to effect control. An essential element of a

strong internal control system is the recognition by all

57

employees of the need to carry out their responsibilities

effectively and to communicate to the appropriate level of

management any problems in operations, instances of non-

compliance with the code of conduct, or other policy violations

or illegal actions that are noticed. This can best be achieved

when operational procedures are contained in clearly written

documentation that is made available to all relevant personnel.

It is essential that all personnel within the bank understand

the importance of internal control and are actively engaged in

the process.

In reinforcing ethical values, banking organizations

should avoid policies and practices that may inadvertently

provide temptations for inappropriate activities. Examples of

such policies and practices include undue emphasis on

performance targets or other operational results, particularly

short-term ones that ignore longer-term risks; compensation

schemes that overly depend on short performance; ineffective

segregation of duties or other controls that could allow the

misuse of resources or concealment of poor performance; and

insignificant or overly onerous penalties for improper

behaviours.

While having a strong internal control culture does

not guarantee that an organization will reach its goals, the

lack of such a culture provides greater opportunities for errors

to go undetected or for improprieties to occur.

58

B. Risk Recognition and Assessment

Principle 4: An effective internal control system requires that

the material risks that could adversely affect the achievement

of the bank’s goals are being recognized and continually

assessed. This assessment should cover all risks facing the bank

and the consolidated banking organization (that is, credit risk,

country and transfer risk, market risk, interest rate risk,

liquidity risk, operational risk, legal risk, and reputational

risk). Internal controls may need to be revised to appropriately

address any new or previously uncontrolled risks.

Banks are in the business of risk-taking. Consequently it is

imperative that, as part of an internal control system these

risks are being recognized and continually assessed. From an

internal control perspective, a risk assessment should identify

and evaluate the internal and external factors that could

adversely affect the achievement of the banking organization’s

performance, information and compliance objectives. This process

should cover all risks faced by the bank and operate at all

levels within the bank. It differs from the risk management

process which typically focuses more on the review of business

strategies developed to maximize the risk/reward trade-off

within the different areas of the bank. Effective risk

assessment identifies and considers internal factors (such as

the complexity of the organization’s structure, the nature of

the bank’s activities, the quality of the personnel,

organizational changes and employee turnover) as well as

59

external factors (such as fluctuating economic conditions,

changes in the industry and technological advances) that could

adversely affect the achievement of the bank’s goals. This risk

assessment should be conducted at the level of individual

businesses and across the wide spectrum of activities and

subsidiaries of the consolidated banking organization. This can

be accomplished through various methods. Effective risk

assessment addresses both measurable and non-measurable aspects

of risks and weighs costs of controls against the benefits they

provide. The risk assessment process also includes evaluating

the risks to determine which are controllable by the bank and

which are not. For those risks that are controllable, the bank

must assess whether to accept those risks or the extent to which

it wishes to mitigate the risks through control procedures. For

those risks that cannot be controlled, the bank must decide

whether to accept these risks or to withdraw from or reduce the

level of business activity concerned. In order for risk

assessment, and therefore the system of internal control, to

remain effective, senior management needs continually to

evaluate the risks affecting the achievement of its goals and

react to changing circumstances and conditions. Internal

controls may need to be revised to appropriately address any new

or previously uncontrolled risks. For example, as financial

innovation occurs, a bank needs to evaluate new financial

instruments and market transactions and consider the risks

associated with these activities. Often these risks can be best

60

understood when considering how various scenarios (economic and

otherwise) affect the cash flows and earnings of financial

instruments and transactions. Thoughtful consideration of the

full range of possible problems, from customer misunderstanding

to operational failure, will point to important control

considerations.

C. Control Activities and Segregation of Duties

Principle 5: Control activities should be an integral part of

the daily activities of a bank. An effective internal control

system requires that an appropriate control structure is set up,

with control activities defined at every business level. These

should include: top level reviews; appropriate activity controls

for different departments or divisions; physical controls;

checking for compliance with exposure limits and follow-up on

non- compliance; a system of approvals and authorizations; and,

a system of verification on reconciliation. Control activities

are designed and implemented to address the risks that the bank

identified through the risk assessment process described above.

Control activities involve two steps:

(1) the establishment of control policies and procedures; and

(2) Verification that the control policies and procedures are

being complied with. Control activities involve all levels of

personnel in the bank, including senior management as well as

front line personnel. Examples of control activities include:

Top level reviews – Boards of directors and senior management

often request presentations and performance reports that enable

61

them to review the bank’s progress toward its goals. For

example, senior management may review reports showing actual

financial results to date versus budget. Questions that senior

management generates as a result of this review and ensuring

responses of lower levels of management represent a control

activity which may detect problems such as control weaknesses,

errors in financial reporting or fraudulent activities.

Activity controls – Department or division level management

receives and reviews standard performance and exception reports

on a daily, weekly or monthly basis. Functional reviews occur

more frequently than top-level reviews and usually are more

detailed. For instance, a manager of commercial lending may

review weekly reports on delinquencies, payment received, and

interest income earned on the portfolio, while the senior credit

officer may review similar reports on a monthly basis and in a

more summarized form that includes all lending areas. As with

the top-level review, the questions that are generated as a

result of reviewing the reports and the responses to those

questions represent the control activity.

Physical controls – physical controls generally focus on

restricting access to tangible assets, including cash and

securities. Control activities include physical limitations,

dual custody, and periodic inventories.

Compliance with exposure limits – The establishment of prudent

limits on risk exposures is an important aspect of risk

management. For example, compliance with limits for borrowers

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and other counterparties reduces the bank’s concentration of

credit risk and helps to diversify its risk profile.

Consequently, an important aspect of internal controls is a

process for reviewing compliance with such limits and follow-up

on instances of non- compliance.

Approvals and authorizations – Requiring approval and

authorization for transactions over certain limits ensure that

an appropriate level of management is aware of the transaction

or situation, and help to establish accountability.

Verification and reconciliations – Verifications of transaction

details and activities and the output of risk management models

used by the bank are important control activities. Periodic

reconciliations, such as those comparing cash flows to account

records and statements, may identify activities and records that

need correction. Consequently, the results of those

verifications should be reported to the appropriate levels of

management whenever problems or potential problems are detected.

Control activities are most effective when

they are viewed by management and all other personnel as an

integral part of, rather than an addition to, the daily

activities of the bank. When controls are viewed as an addition

to the day-to-day activities, they are often seen as less

important and may not be performed in situations where

individuals feel pressured to complete activities in a limited

amount of time. In addition, controls that are an integral part

of the daily activities enable quick responses to changing

63

conditions and avoid unnecessary costs. As part of fostering the

appropriate control culture within the bank, senior management

should ensure that adequate control activities are an integral

part of the daily functions of all relevant personnel. It is not

sufficient for senior management to simply establish appropriate

policies and procedures for the various activities and divisions

of the bank. They must regularly ensure that all areas of the

bank are in compliance with such policies and procedures and

also determine that existing policies and procedures remain

adequate. This is usually a major role of the internal audit

function.

Principle 6: An effective internal control system requires that

there is appropriate segregation of duties and those personnel

are not assigned conflicting responsibilities. Areas of

potential conflicts of interest should be identified, minimized,

and subject to careful independent monitoring. In reviewing

major banking losses caused by poor internal controls,

supervisors typically find that one of the major causes of such

losses is the lack of adequate segregation of duties. Assigning

conflicting duties to one individual (for example,

responsibility for both the front and back offices of a trading

function) gives the person access to assets of value and the

ability to manipulate financial data for personal gain or to

conceal losses. Consequently, certain duties within a bank

should be split, to the extent possible, among various

individuals in order to reduce the risk of manipulation of

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financial data or misappropriation of assets. Segregation of

duties is not limited to situations involving simultaneous front

and back office control by one individual. It can also result in

serious problems when there are not appropriate controls in

other instances where an individual has responsibility for:

Approval of the disbursement of funds and the actual disbursement

;

Customer and proprietary account ;

Transaction in both the “banking” and “trading” books;

Informally providing information to customers about their

positions while marketing to the same customers;

Assessing the accuracy of loan documentation and monitoring the

borrower after loan origination ; and ,

Any other areas where significant conflicts of interest emerge

and are not mitigated by other factors.

Areas of potential conflict should be identified, minimized, and

subject to careful monitoring by an independent third party.

There should be a periodic review of responsibilities and

functions of key individuals to ensure that they are not in a

position to conceal inappropriate actions.

D. Information and communication.

Principle 7: An effective internal control system requires that

there are adequate and comprehensive internal financial,

operational and compliance data, as well as external market

information about event and conditions that are relevant to

decision making. Information should be reliable, timely,

65

accessable, and provided in a consistent format. Adequate

information and effective communication are essential to the

proper functioning of a system of internal control. From the

bank perspective, in order for information to be useful, it must

be relevant, reliable, timely, and provided in a consisted

format. Information includes internal financial, operational,

and compliance data, as well as external market information

about events and conditions that are relevant to decision

making. Internal information is part of a record-keeping process

that should include established procedures for record retention.

Principle 8: An effective internal control system requires that

there are reliable information systems in place that cover all

significant activities of the bank. These systems, including

those that hold and use data in an electronic form must be

secured, monitored independently and supported by adequate

contingency arrangements.

A critical component of a bank’s activities is the establishment

and maintenance of management information systems that covers

the full range of its activities. This information is usually

provided through both electronic and non electronic means. Banks

must be particularly aware of the organizational and internal

control requirements related to processing information in an

electronic form and the necessity to have and adequate audit

trail. Management decision-making could be adversely affected by

unreliable or misleading information provided by the systems

66

that are poorly designed and controlled. Electronic information

systems and the use of information technology have risk that

must be effectively controlled by banks in order to avoid

disruptions to business and potential losses. Since transaction

process and business applications have expanded beyond the use

of mainframe computer environment s to distributed systems for

mission-critical business function, the magnitude of risks also

as expanded. Control over information system and technology

should include both general and application controls. General

controls are controls over computer systems (for example,

mainframe, client/server, and end-user work stations) ensuring

their continued, proper operation. General controls include in-

house back-up and recovery procedures, software development and

acquisition policies, maintenance (change control) procedures

and physical/logical access security controls. Application

controls are computerized steps within software applications and

other manual procedures that control the process of transactions

and business activities. Application control include, for

example, edit checks and specific logical access controls unique

to business system. Without adequate control over information

system and technology including system that are under

development, bank could experience loss of data and programs due

to inadequate physical and electronic security arrangement ,

equipment or system failure and inadequate in-house back-up and

recovery procedure . In addition to the risk and control above,

inherent risk exists that are associated with the loss or

67

extended disruption of services caused by factors beyond the

bank’s control. In extreme cases, since the delivery of

corporate and customer’s services represent key transaction,

strategic and reputational issues, such problems could cause

serious difficulties for banks and even jeopardize the ability

to conduct key business activities. The potential, requires the

bank to establish business resumption and contingency plans

using an alternate off-site facility, including the recovery of

critical system supported by an external service provided. The

potential for loss or extended disruption of critical business

operation require an institution-wide effort on contingency

planning involving business management, and not focus on

centralized computer operations. Business resumption plans must

be periodically tested to ensure the plan’s functionality in the

event of an unexpected disaster.

Principle 9: An effective internal control system requires

effective channels of communication to ensure that all staff

fully understand and adhere to policies and procedure affecting

their duties and responsibility and that other relevant

information is reaching the appropriate personnel.

Without effective communication, information is useless. Senior

management of bank leads and establishes effective paths of

communication in order to ensure that the necessary information

is reaching the appropriate people. This information relates

both to the operational policies and procedures of the bank as

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well as information regarding the actual operational performance

of the organization. The organizational structure of the bank

should facilitate an adequate flow of information upward,

downward and across the organization. Structures that facilitate

the flow ensure that information flows upward so that the board

of directors and senior management are aware of the business

risks and operating performance of the bank. Information flowing

down through an organization ensures that the bank objective,

strategies and expectation as well as its established policies

and procedures are communicated to lower level management and

operations personnel. This communication is essential to achieve

a unified effort by all bank employees to meet the bank’s

objectives.

Finally, communication across the organization is necessary to

ensure that information that one division or department knows

can be shared with other affected divisions or departments.

E. Monitoring activities and correcting deficiencies

Principle 10: the overall effectiveness of the bank’s internal

control should be monitored on an ongoing basis. Monitoring of

key risks should be part of the daily activities of the bank as

well as periodic evaluations by the business lines and the

internal audit.

Since banking is a dynamic, rapidly evolving industry, banks

must continually monitor and evaluate their internal control

systems in the light of changing internal and external

69

conditions, and must enhance this systems as necessary to

maintain their effectiveness.

In complex, multinational organization, senior management must

ensure that the monitoring function is properly defined and

structured within the organization. Monitoring the effectiveness

of internal control can be done by personnel from several

different areas, including the business function itself,

financial control and internal audit for that reason it is

important that senior management makes clear which personnel are

responsible for which monitoring function. Monitoring should be

part of daily activities of the banks but also include separate

periodic evaluations of the overall internal control process.

The frequency of monitoring different activities of a bank

should be determined by considering the risks involved and the

frequency and nature of changes occurring in the operating

environment. Ongoing monitoring activities can offer the

advantage of quickly detecting and correcting deficiency in the

system of internal control. Such monitoring is most effective

when the system of internal control is integrated into the

operating environment and produces regular report for review.

Examples of ongoing monitoring include the review and approval

of journal entries and management review and approval exception

reports. In contrary, separate evaluation typically detect

problems only after the fact; however, separate evaluations

allow an organization to take a fresh, comprehensive look at the

effectiveness of internal control system and specifically at the

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effectiveness of the monitoring activities. These evaluations

can be done by personnel on several different area including the

business function itself, financial control and internal audit.

Separate evaluation of internal control system often takes the

form of self assessments when persons responsible for a

particular function determine the effectiveness of controls for

their activities. The documentation and the result of the

evaluation are then reviewed by senior management. All levels

review should be adequately documented and reported on a timely

basis to the appropriate level of management.

Principle 11: There should be an effective and comprehensive

internal audit of the internal control system carried out by

operationally independent, appropriately trained and competent

staff. The internal audit function, as part of the monitoring of

the system of internal controls, should report directly to the

board of directors or its audit committee, and to senior

management.

The internal audit function is an important part of the ongoing

monitoring of the system of internal controls because it

provides an independent assessment of the adequacy of, and

compliance with, the established policies and procedures. It is

critical that the internal audit function is independent from

the day-to-day functioning of the bank and that it has access to

all activities conducted by the banking organization, including

at its branches and subsidiaries. By reporting directly to the

board of directors or its audit committee, and senior

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management, the internal auditors provide unbiased information

about line activities. Due to the important nature of this

function, internal audit must be staffed with competent, well-

trained individuals who have a clear understanding of their role

and responsibilities. The frequency and extent of internal audit

review and testing of internal controls within a bank should be

consistent with the nature, complexity, and risk of the

organization’s activities. It is important that the internal

audit function reports directly to the highest levels of the

banking organization, typically the board of directors or its

committee, and to senior management. This allows for the proper

functioning of corporate governance by giving the board

information that is not biased in any way by the levels of

management that the reports cover. The board should also

reinforce the independence of the internal auditors by having

such matters as their compensation or budgeted resources

determined by the board or the highest levels of management

rather than by the managers who are affected by the work of the

internal auditors.

Principle 12: Internal control deficiencies, whether identified

by business line, internal audit, or other control personnel,

should be reported in a timely manner to the appropriate

management level and addressed promptly. Material internal

control deficiencies should be reported to senior management and

the board of directors.

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Internal control deficiencies, or ineffectively

controlled risks, should be reported to the appropriate

person(s) as soon as they are identified, with serious matters

reported to senior management and the board of directors. Once

reported, it is important that management corrects the

deficiencies on a timely basis. The internal auditors should

conduct follow-up reviews or other appropriate forms of

monitoring, and immediately inform senior management or the

board of any uncorrected deficiencies. In order to ensure that

all deficiencies are addressed in timely manner, senior

management should be responsible for establishing a system to

track internal control weakness and actions taken to rectify

them. The board of directors and senior management should

periodically receive reports summarizing all issues that have

been identified. Issues that appear to be immaterial when

individual control processes are looked at in isolation, may

well point to trends that could, when linked, become a

significant control deficiency if not addressed in a timely

manner.

2.3.3 Evaluation of Internal Control Systems by Supervisory

Authorities

Principle 13: Supervisors should require that all banks,

regardless of size, have an effective system of internal

controls that is consistent with the nature, complexity, and

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risk inherent in their on-and off-balance sheet activities and

that responds to changes in the bank’s environment and

conditions. In those instances where supervisors determine that

a bank’s internal control system is not adequate or effective

for that bank’s specific risk profile (for example, does not

cover all of the principles contained in this document), they

should take appropriate action, Although the board of directors

and senior management bear the ultimate responsibility for an

effective system of internal controls, supervisors should assess

the internal control system in place at individual banks as part

of their ongoing supervisory activities. The supervisors should

also determine whether individual bank management gives prompt

attention to any problems that are detected through the internal

control process. Supervisors should require the bank that they

supervise to have strong control culture and should take a risk-

focused approach in their supervisory activities. This includes

a review of the adequacy of internal controls. It is important

that supervisors not only assess the effectiveness of the

overall system of internal controls, but also evaluate the

controls over high-risk areas (e.g., areas with characteristics

such as unusual profitability, rapid growth, new business

activity, or geographic remoteness from the head office). In

those instances, where supervisors determine that a bank’s

internal control system is not adequate or effective for that

bank specific risk profile, they should take appropriate action.

This would involve communicating their concerns to senior

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management and monitoring what actions the bank takes to improve

its internal control system. Supervisors, in evaluating the

internal control systems of banks, may choose to direct special

attention to activities or situations that historically have

been associated with internal control breakdowns leading to

substantial losses. Certain changes in a bank’s environment

should be the subject of special consideration to see whether

accompanying revisions are needed in internal control system.

Those changes include: (1) a changed operating environment; (2)

new personnel; (3) new or revamped information systems; (4)

areas/activities experiencing rapid growth; (5) new technology;

(6) new lines, products, activities (particularly complex ones);

(7) corporate restructuring mergers and acquisitions; and (8)

expansion or acquisition of foreign operations (including the

impact of changes in the related economic and regulatory

environments). To evaluate the quality of internal controls,

supervisors can take a number of approaches. Supervisors can

evaluate the work of the internal audit department of the bank

through review of its working papers, including the methodology

used to identify measure, monitor and control risk. If satisfied

with the quality of the internal audit department’s work,

supervisors can use the reports of internal auditors as a

primary mechanism for identifying control problems in the bank,

or for identifying areas of potential risk that the auditors

have not recently reviewed. Some supervisors may use a self-

assessment process, in which management reviews the internal

75

control of a business-by-business basis and certifies to the

supervisor that its controls are adequate for its business.

Other supervisors may require periodic external audits of key

areas, where the supervisor defines the scope. And finally,

supervisors may combine one or more of the above techniques with

their own on-site reviews or examination of internal controls.

Supervisors in many countries conduct on-site examination and

review of internal control is an integral part of such

examinations. An on-site review could include both a review of

the business process and reasonable level of transaction testing

in order to obtain an independent verification of the bank’s own

internal control processes. An appropriate level of transaction

testing should be performed to verify:

The adequacy of, and adherence to, internal

policies, procedures and limits;

The accuracy and completeness of management

reports and financial records; and

The reliability (i.e., whether it functions as

management intends) of specific controls

identified as key to the internal control

element being assessed.

In order to evaluate the effectiveness of the five internal

control elements of a banking organization (or a unit/activity

thereof) supervisors should:

Identify the internal control objectives that are

relevant to the organization, unit or activity

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under review (e,g., lending, investing,

accounting);

Evaluate the effectiveness of the internal control

elements, not just by reviewing policies and

procedures, but also by reviewing documentation,

discussing operations with various levels of bank

personnel, observing the operating environment,

and testing transactions;

Share supervisory concerns about internal controls

and recommendations for their improvement with the

board of directors and management on a timely

basis, and;

Determine that, where deficiencies are noted,

corrective action is taken in a timely manner.

Banking supervisory authorities that have the legal basis or

other arrangements to direct the scope of and make use of the

work of internal auditors often or always do so in lieu of on-

site examinations. In those instances, the external auditors

should be performing the review of the business process and the

transaction testing described above under specific engagement

arrangements. In turn, the supervisors should assess the quality

of the auditors’ work. In all instances, bank supervisors should

take note of the internal auditors’ observations and

recommendations regarding the effectiveness of internal controls

and determine that bank management and board of directors have

satisfactorily addressed the concerns and recommendations

77

expressed by the external auditor, the level and nature of

effectiveness of a bank’s internal controls. Supervisors should

also encourage bank external auditors to plan and conduct their

audits in ways that appropriately consider the possibility of

material misstatement of bank’s financial statements due to

fraud. Any fraud found by external auditors, regardless of

materiality, must be communicated to the appropriate level of

management. Fraud involving senior management and fraud that is

material to the entity should be reported by external auditors to

the board of directors and/or the audit committee. External

auditors may be expected to disclose fraud to certain supervisory

authorities or others outside the bank in certain circumstances

(subject to national requirements). In reviewing the adequacy of

the internal control process at individual banking organizations,

home country supervisors should also determine that the process

is effective across business lines, subsidiaries and national

boundaries. It is important that supervisors evaluate the

internal control process not only at the level of individual

businesses or legal entities, but also across the wide spectrum

of activities and subsidiaries within the consolidated banking

organization. For this reason, supervisors should encourage

banking groups to use common auditors and common accounting dates

throughout the group, to the extent possible.

2.4 Roles and Responsibilities of External Auditors

Although external auditors are not, by definition, part of a

banking organization and therefore, are not part of its internal

78

control system, they have an important impact on the quality of

internal controls through their audit activities, including

discussions with management and recommendations for improvement

to internal controls. The external auditors provide important

feedback on the effectiveness of the internal control system.

While the primary purpose of the external audit function is to

give an opinion on the annual accounts of a bank, the external

auditor must choose whether to rely on the effectiveness of the

bank’s internal control system. For this reason, the external

auditors have to obtain an understanding of the internal control

system in order to assess the extent to which they can rely on

the system in determining the nature, timing and scope of their

own audit procedures. The exact role of external auditors and the

processes they use vary from country to country. Professional

auditing standards in many countries require that audits be

planned and performed to obtain reasonable assurance that

financial statements are free of material misstatement. Auditors

also examine, on a test basis, underlying transactions and

records supporting financial statement balances and disclosures.

An auditor assesses the accounting principles and policies used

and significant estimates made by management and evaluates the

overall financial statement presentation. In some countries,

external auditors are required by the supervisory authorities to

provide a specific assessment of the scope, adequacy and

effectiveness of a bank’s internal control system, including the

internal audit system. One consistency among countries, however,

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is the expectation that external auditors will gain an

understanding of a bank’s internal control process to the extent

that it relate to accuracy of the bank’s financial statements.

The extent of attention given to the internal control system

varies by auditor and by bank; however, it is generally expected

that material weakness identified by the auditors would be

reported to management in confidential management letters and, in

many countries, to the supervisory authority. Furthermore, in

many countries external auditors may be subject to special

supervisory requirements that specify the way that they evaluate

and report on internal controls.

2.5 The concept of fraud:

What is fraud? Fraud has widely been defined in literature by

scholars and experts. Hornby (1998) defined fraud as an action or

an instance of checking somebody in order to make money or obtain

goods illegally. The same dictionary defines the perpetrators of

frauds as fraudsters. According to the ICAN study pack (2006a, b)

fraud consists of both the use of deception to obtain an unjust

or illegal financial advantage and intentional

misrepresentations, affecting the financial statements by the one

or more individuals among management, employees, or third

80

parties. Archibong (1992) describes fraud as a predetermined and

well planned tricky process or device usually undertaken by a

person or group of persons, with the sole aim of cheating another

person or organization, to gain ill-gotten advantages, be it

monetary or otherwise, which would not have accrued in the

absence of such deceitful procedure.

From the above, the term fraud may be said to be as an

intentional misrepresentation of financial information by one or

more individuals among management, employees or third parties.

Fraud may involve:

Falsification or alteration of accounting records or other

documents

Misappropriation of assets or theft

Suppression or omission of the effect of transaction from

records or documents

Recording of transactions without substances

Intentional misapplication of accounting policies

Willful misrepresentation of transactions of the entity’s

state of affairs.

From whichever perspective, fraud is looked at, it is

simply a deceitful and dishonest act, which involves taking

a property unlawfully from its owner, without his/her

knowledge, permission or consent, or to misstate a

situation knowingly or by negligence. This issue of fraud

is a conventional phenomenon in the national life. In the

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government and private sectors, it is the order of the day.

In the banks, fraud is on the increase. Companies are

falling every day, through the activities of fraudsters.

2.5.1 Classification of fraud:

Within the scope of this study, attempts shall be made to

critically examine the two broad schemes of frauds. Fraud is

classified into two and are:

Management fraud

Employee fraud

According to Fakunle (2006), management fraud often involves

the manipulation of the records and the account, typically by the

enterprise’s senior officers with a view to benefiting in some

indirect way. An example is, obtaining finance under false

pretences, or concealing a material, worsening off the company’s

true position, i.e., window dressing.

Robertson (1996) defines management fraud as a

deliberate fraud, committed by management that injures investors

and creditors, through materially misleading financial

statements. Management fraud is sometimes called fraudulent

financial reporting. Management fraud is usually perpetrated by

the management staff of an organization, which includes

directors, general managers, managing directors etc. the class of

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victims of management frauds is investors and creditors and the

instrument of preparation is financial statement. The essence of

management fraud most times is to attract more shareholders to

come and invest in the organization. It is also perpetrated, so

that organization will be in better position of obtaining loans

from the banks, because, a good statement will show a healthy

look, hence it will be a good collateral security.

Employee fraud: Also known as non-management fraud: These are

frauds that are perpetrated by the employees of an organization.

Robertson (1996) defines it as the use of fraudulent means to

take money or other property from an employer. It usually

involves falsification of some kind, like false documents, lying,

exceeding authority, or violating an employer’s policies,

embezzlement of company’s funds, usually in form of cash or other

assets. It consists of three phases, which are:

The fraudulent act

The conversion of the money or property to the fraudsters

use

The cover up

The employee frauds are more likely to be encountered where

internal controls are weak: other types of employees frauds

according to Awe (2005) are as follows:

Fictitious payment of suppliers:

Alteration of invoices

Double payment of invoices

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Suppression of credit notes received

Missing returned cheques (so that it appears that

bills are paid)

Wages fraud (payroll fraud)

Misappropriated cash from credit sales

Payment for hours not worked for

It is important to note that all these

forms of employee fraud are perpetrated, so that the perpetrators

will have an undue benefit from all the irregularities made, as

embedded in the definition of fraud.

2.5.2 Type of bank’s common fraudulent practices:

Ovuakporia (1994) gave account of thirty-three types of bank

frauds in the banking sector. These include theft, embezzlement,

defalcations, forgeries, substitution, suppression, payment

against unclear effects, unauthorized lending, lending to ‘ghost’

borrowers, kite flying and cross firing, unofficial borrowing,

foreign exchange malpractice, impersonation, over-involving,

manipulation of vouchers, fictitious accounts, over and under

valuation of properties, false declaration of cash shortages,

falsification of status reports, duplication of cheque books,

mail transfer, interception of clearing cheques, computer frauds,

fake payments, teeming and lading, robbery and others.

The above numerous types of fraudulent practices in banks, serve

as threats to the success of many banks. If adequate preventive

and detective measures are not put into action, it could lead to

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the complete failure of financial institutions especially banks

in Nigeria.

2.5.3 Causes of bank frauds:

There are many identified causes of fraud in banks. They vary

from institutional to economical, social, psychological, legal

and even infrastructural causes. The immediate causative agents

of frauds in general as provided by Ogbunka (2002) are as

follows:

Availability of opportunities to perpetrate frauds and

forgeries

Human greed, avarice, instability

Misapplied intelligence-say for adventure

Job insecurity

Social misconceptions that banks’ money is nobody’s money/

property and therefore can be defrauded

Weak internal control system of the bank

Of a truth, there are many causes of bank frauds, but, weak

internal control system stands as the major cause of frauds

in banks. It is therefore, expedient that adequate,

efficient and effective internal control system be

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installed in every bank in order to reduce this disaster

called fraud.

2.5.4 Factors influencing the existence of fraud in banks:

Despite the numerous causes of bank frauds there exist some

other factors that influences the risk of fraud within the

bank and accordingly steps ought to be taken to minimize

them. According to Izedonmi (2000), these factors include:

Where authority is concentrated in a few hands within

the bank

Where, management continually fails to implement

internal control recommendations, made by an external

auditor

Where, there is a high rate of turnover in key

accounting functions

Where the accounting system is inadequate and the

books of account cannot be reconciled with the

financial statements

Where transactions occurring during the year are

reversed after the year end

Where fees paid to legal advisers appear to be out of

proportion with the actual service rendered

Where there are material transactions during and

around the year end date

Where the bank is experiencing slovenly problems.

86

Where it is difficult to obtain explanations from

management and staff of the banks during the audit.

Where documentation supporting transactions are

generally non-existent

2.5.5 Internal Control and Fraud Prevention

What could have been done to avoid fraud and embezzlement?

There are several procedures that could have aided banking

industry in the prevention or early detection of this loss.

1. Review of a sample of all new loans issued

Missing documentation is one of the most important symptoms of

fraud.

A supervisor may

regularly review a

sample of all new

loans issued and

determine that

required

documentation is

present, and if not,

confirm missing

information with

third parties.

Make sure loan

documentation is

complete: guarantee

87

titles, insurance,

or income

verification.

Make sure to follow

up on the exceptions

noted. Be aware of

counterfeit

collateral.

Fictitious loans

could be made in the

name of people taken

from the phone book

or in the name of

former borrowers.

2. Visit to the clients The most effective

way to mitigate the risk associated with frauds is for the

organization to conduct client visits to some of its

clients.

A supervisor may

visit a sample

clients of all new

loans issued (for

example, one client

out of every 10 new

loans) to verify

88

the authenticity of

the loans.

This way Ecobank

can also identify

fraudulent

practices by loan

officers or non

adherence to new

policies before

they are replicated

on a wide scale.

That In general,

Ecobank must audit

a larger number of

loans but a smaller

percentage of the

overall portfolio

than a traditional

financial

institution would.

To adequately

assess risk, the

key is for Ecobank

to audit a large

enough samples of

loans to get a good

89

overall picture of

the true quality of

the loan portfolio.

Ecobank should

generally employ a

combination of two

types of sampling:

random and

selective sampling.

Random sampling is

a process by which

the auditor selects

clients in a

haphazard manner,

with no attempt to

influence the list

of clients to

audit. Selective

sampling is a

process by which

the auditors

attempt to create a

list of clients to

visit bases on

predetermined

90

criteria (higher

risk clients).

For some branch of

Ecobank that use

group lending

methodologies, a

supervisor may

attend a group

meeting. The

supervisor may

verify that a group

only issue loans to

group members,

check the group’s

records to ensure

proper calculations

and accurate

reporting.

3. Segregation of duties The

segregation of duties is the design in the job

functions to properly segregate tasks so that the

same person does NOT record, approve and do the job

Combination of

duties may allow a

manager or

91

supervisor to

approve the loans,

set them up on the

system , issue the

checks, and then

cash them through a

teller drawer

No one should have

full control of the

loan process from

beginning to end

Make sure that

managers and

supervisors don’t

know the tellers’

passwords and make

sure the tellers

change their

password regularly.

Make sure returned

monthly account

statements are

carefully monitored/

People on vacation

or on material leave

should not be

92

allowed to keep

their office keys.

These people can

visit the branch

after working hours

to process loan

advances to make

payments under other

employees’ teller

codes.

4. Supervisory

Committee/internal audit

Department In smaller

Ecobank branch the supervisory committee often

oversees the internal controls, while in the larger

Ecobank, the controls are often monitored by the

internal audit

department.

5. Record keeping Inaccurate or

incomplete records are often used to hide fraud.

To keep the loans

current, the

employee may make

the monthly

93

payments in a

variety of ways. In

some cases, he/she

would take an

advance from loan

and use it to make

payments on several

other loans via

journal-voucher

transfers. At other

times, he/she would

take a loan advance

in cash and make

cash payments on

the loans coming

due. He/she can

also purchase bank

money orders with

stolen funds and

mail payments to

different branch

offices of the

Ecobank to ensure

that other

employees processed

94

transactions on the

accounts

Process of

reconciling the

accounts is

important. May hide

problems.

6. Bank reconciliation

Bank accounts should be reconciled and checked

weekly by a supervisor.

7. Audit trails

Make sure to maintain adequate audit trails. Audit

trails enable the tracing of any giving item

through the Ecobank books.

Software should

also have

thorough audit

trail built in.

the application

should log and

report the user

name and event,

date/time of all

entries and

95

deletion of

transactions and

also for

creating,

editing, and

deleting clients,

loans, and

schedules of

installments, and

loan product

definitions.

8. Auditing Audits

(required at least annually) and verifications

(required at least two Years) must be performed in

a timely manner, under controlled conditions, And

independent of Ecobank management and staff.

Although fraud

may be uncovered,

the annual audit

and regulatory

examination are

not intended to

detect fraud.

An example of

infraction to

reviewing the

96

loans is when the

auditors select

their sample from

the new-loan

listings and fax

the list to each

branch manager

before coming to

the branch to

review loan

files. This

seemingly minor

infraction may

provide the

embezzler with

notice of when

his/her ample

time to create

loan files-

complete with

altered

documentation

from legitimate

loan files.

The auditor

should pull all

97

loans files

him/herself. The

auditor should

keep in mind that

any person he/she

is asking to

assist could be a

thief. The

auditor should

verify every

explanation that

an employee

offers. In some

cases, the

auditor should

contact the loan

recipient.

CHAPTER THREE

RESEARCH METHODOLOGY

98

3.0 INTRODUCTION

Research is the process of arriving at a dependable solution to

problems through planned and systematic collection, analyzing and

interpretation of data (Osuala, 1993).

Green and Full (1975) defines research methodology as the

specification of procedures for collecting and analyzing the data

necessary to solve the problem at hand such that the differences

between the cost of obtaining various levels of accuracy and the

expected value of the information associated with each level of

accuracy is optimized.

Thus, in this chapter the method and techniques of data

collection and analysis for this study are discussed in details,

research design, population of study, sample and sampling

technique, sources of data collection, research instrument,

validity of the instrument, reliability of the instrument,

procedure for administration of research instrument, as well as

the limitation of the research methodology. This will be

important in order to assess the effect of internal control on

organizational performance.

3.1 RESEARCH DESIGN

The research design adopted in this research work is the

descriptive survey research design which involves the usage of

self designed questionnaire in the collection of data. Under the

99

survey research design, primary data of this study will be

collected from Eco Bank Plc in order to determine the effect of

internal control on organizational performance. The design was

chosen because it enables the researcher to collect data without

manipulation of any variables of interest in the study. The

design also provides opportunity for equal chance of

participation in the study for respondents.

3.2 POPULATION OF STUDY

The population of study is the census of all items or a subject

that possess the characteristics or that have the knowledge of

the phenomenon that is being studied (Asiaka, 1991). It also

means the aggregate people from which the sample is to be drawn.

Population is sometimes referred to as the universe. The

population of this research study will be the entire staff of Eco

Bank Plc.

3.3 SAMPLE AND SAMPLING TECHNIQUES

The researcher made use of stratified sampling technique because

all the members have the same probability of occurrence. The

researcher narrowed down the samples to the organization’s staff

in order to get the effect of internal control on organizational

performance on the entire organization’s staff.

100

As a result of complexity in the size and the possible high cost

of using aggregate information of the entire population a sample

being a representative of the total population becomes necessary.

A convenient sample of 50 employees of Ecobank Plc has been

chosen therefore random sampling technique have been adopted to

select the employees because it is a good representation of the

study population from which it is drawn.

3.4 SOURCES OF DATA COLLECTION

Basically, the source of data collection used in this study is

primary and secondary. The primary source involves the use of

questionnaire. The secondary source is by means of research into

journals, published work in the library as well as newspaper

articles.

The researcher adopted questionnaire in collecting relevant

information for the study. The questions asked in the

questionnaire were accompanied by multiple choice answers from

which the respondents were asked to pick one.

The main reason for using this method of collecting data is to

enable the researcher believe that this method will provide the

necessary information as well as the ease with which the method

will facilitate data collection. This will ensure balance and

comprehensive information reliable enough for conclusion to be

drawn.

3.5 RESEARCH INSTRUMENT

101

Questionnaires will be used as the basis of research instrument

in this work. The nature of the questionnaire was close ended

where options were given to respondents to choose from. The

questionnaire was divided into two parts. It’s also going to be

free from bias so as to get the required information needed to

proceed with the analyzing of the data.

The questionnaire designed for the respondents in the selected

organization that is Eco Bank PLC consisted of two sections A and

B. Section A focus on demographic information which embraces the

name of organization, age, marital status, working experience,

educational qualification e.t.c. While Section B focused on theother variables to be tested framed out of research questions

properly.

With regard to the scoring of responses, a five point numerically

scaled Likert-type questionnaire was constructed for the purpose

of this study. The first section (section A) of the questionnaire

needs no scoring since the information required is bio-data of

the respondents. The questions asked in the second section,

(section B) of the questionnaire were accompanied by multiple

choice answers ranged from 1-5 point scale in the following

pattern: Strongly Agree-1; Agree-2, Undecided-3, Disagree-4,

Strongly Disagree-5, from which the respondents were asked to

pick one.

3.5.1 PROCEDURE FOR ADMINISTRATION OF RESEARCH INSTRUMENT

102

The set of questionnaires were personally administered by the

researcher. The respondents were asked not to indicate their

names on the questionnaires so as to make the responses

anonymous. The researcher interpreted all aspects of the

questionnaire to the respondents. The respondents were assured of

confidentiality of information to be supplied.

The questionnaires will be sent to 50 employees of Ecobank Plc.

Few personal interview will also be conducted to reach a wider

conclusion of the research instrument used in this research work.

3.5.2 VALIDITY OF THE INSTRUMENT

Nworgu (1991) contended that after the items in a

questionnaire have been written, it is mandatory to subject the

questionnaire to validation process.

He maintained that in this way the items can be reviewed in

terms of their clarity, the appropriateness of the language and

expressions, the suitability of each item with references to the

research question. It is expected to answer the adequacy of the

quantity of items in the questionnaire.

In respect of this he says; after the items have been

written, the next crucial step is to subject the questionnaire to

103

a validation process. This is an extremely important exercise

that cannot be skipped in the development of an instrument.

The questionnaires were being validated by the investigator’s

project supervisor and some of his colleagues. Each of them was

given a copy of questionnaire for critical review and were

finally ratified and approved by the investigator’s project

supervisor.

Although, the responses of the respondents may be bias, the

questionnaire would still be able to capture the needed

information based on the respondents’ opinion. To allow for the

elements of bias that may be contained in the responses, 1% level

of significance would be allowed in the data testing. This will

take care of error, bias etc. that may be in the data collected.

3.5.3 RELIABILITY OF THE INSTRUMENT

Reliability is referred to as the degree to which the instrument

consistently measures what it intends to measure (Ojo, 2003). His

responds to this research study indicated that the questionnaire

was well structured to achieve the purpose of the research

thereby meeting the test of reliability. The reliability of the

research instrument would be tested through test-re-test

reliability. In this method the same measuring instruments is

used to take separate measurement on the same research population

or sample at different times. The higher the correlation between

the two measurements, the higher the reliability of the measuring

instruments.

104

3.6 METHOD OF DATA ANALYSIS

The data analysis method will deal with how the necessary data

collected, through primary source will be properly processed and

presented for meaningful analysis. The method that will be

adopted to analyze data collected will be less of manual and more

of computer aided method. The computer aided package known as

statistical package for social sciences (SPSS) will be employed

to analyze data in the form of frequency tables in knowing the

effect of internal control on organizational performance.

For the purpose of this study, the following analytical technique

will be used.

1. Mean: The arithmetic mean of a sort of observations is the

sum of all observations. It is denoted by x.

The formula is Ʃfx.

2. Simple percentages: Simple percentage will be used to

analyze the personal profile of respondent in Section A of

the questionnaire.

3. Standard deviation: It can be defined as the root of the

mean of square of deviations from the common mean of a set

of values. It is also the square root of the variance. It is

represented by:

105

or

4. Chi-Square: this statistical test is used to determine

whether there is any significant difference between the

observed and expected theoretical frequency obtained from a

distribution. It is also used to test the dependence of two

attributes such as marketing strategy and organizational

performance.

It is represented by:

OR

Where O= observed frequency

106

Χ2=∑ (o−e)2

e1 Χ2=∑ (obs−exp)2

exp

E= expected frequency

I = the number of items where 1= 1,2,3,

…n

The hypothesis will be tested using the chi-square (X2)

3.7 LIMITATION OF METHODOLOGY

The study would be carried out with the intention of assessing

the effect of internal control on organizational performance.

This does not imply that the methodology is not with its

constraints. A major constraint arises due to the heavy

dependence place on the questionnaire as well as the inherent

limitations of the statistical techniques used.

3.8 MODEL SPECIFICATION

A representation of a system that allows for investigation of the

properties of the system and, in some cases, prediction of future

outcomes. Models are often used in quantitative analysis and

technical analysis, and sometimes also used in fundamental

analysis.

The components of internal control are:

Control environment

Risk assessment process

Control activities

107

Information and communication

Monitoring

All these are proxy for internal control while the component for

organization performance are :

Employee productivities

Level of sales

Customer satisfaction

Model specification

OGPM =INTC …………………………………3.1

OGPM =organization performance

INTC =internal control

OGPM = f(INTC) ………………………………..3.2

INTC =f(INFT,RMG,FCG,CSD) ………………..3.3

INTC =f(β0INFT, β1 RMG, β2 FCG, β3 CSD) ………………..3.4

ALL are proxy for internal control.

INFT = internal control technology department (i.e IT deparment)

RMG =risk management group

FCG =finanacial control group

CSD =customer services department

108

Β1, β2, β3 = paramenter

β0 = intercept

therefore the model are as follow

OGPM= β0 + β1 INFT + β2 RMG + β3 FCG + β4 CSD +U…………………………3.5

U = STOCHASTIC TERM/ ERROR TERM

109

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 INTRODUCTION

This chapter is about the analysis and presentation ofdata collected from the field through questionnaire. Theanalysis of the data with particular question immediatelyfollowed by the presentation of findings.

As mentioned in chapter three, 50 questionnaires wereadministered and 50 were retrieved and necessary analysiswas carried out on them and presented as follows:

Table 4.1.1

QuestionnaireNumber

Percentageserved (%)

Questionnaire retrieved

Percentageretrieved(%)

50 100 50 100

4.2 DATA ANALYSIS , PRESENTATION AND INTERPRETATIONThis is the presentation of the quantitative data

collected from the respondents through the questionnairedrawn-tabulation and percent (%) age will be used to analyzethe data accordingly as follows:

Part A: Classification According To Bio-Data

4.2.1: “Respondents analysis by Age”

110

Age Frequency Percent(%)

Validpercent(%)

Cumulativepercent(%)

21 -30 27 54.0 54.0 54.031 – 40 11 22.0 22.0 76.041 – 50 8 16.0 16.0 92.0ABOVE 50 4 8.0 8.0 100.0Total 50 100.0 100.0Source: Field survey (2013)

The table above shows that 27 (54.0%) of the entire respondents are between the age 21-30 years, 11 (22.0%) fall between the age 31-40 years, 8 (16.0%) also fall between the age of 41-50 and 4 (8.0%) also fall between the age of above 50.

4.2.2: Respondents Analysis by Sex.

Gender Frequency

Percent(%)

Validpercent(%)

Cumulativepercent(%)

MALE 24 48.0 49.0 49.0FEMALE 25 50.0 51.0 100.0Total 49 98.0 100.0Source: Field survey (2013)

111

The table above denotes that 24 representing (49%) ofthe total respondents are male while 25 representing (51%)are female. This has shown that more female responded to thequestionnaire than male. It implies that female has moreinformation about Ecobank than male.

4.2.3: “Respondents analysis by Marital Status”

Status Frequency Percent(%)

Validpercent(%)

Cumulative percent(%)

SINGLE 23 46.0 46.0 46.0MARRIED 22 44.0 44.0 90.0DIVORCED/SEPARATED 5 10.0 10.0 100.0Total 50 100.0 100.0Source: Field survey (2013)

The above table indicates that 23 (46%) representssingle, 22 (44%) represents married and 5 (10%) representsdivorce/ separated. Youth has more responses to thequestionnaire than the married and others.

112

4.2.4 “Respondents analysis by Education”Qualification Frequen

cyPercent(%)

Validpercent (%)

Cumulativepercent(%)

PROFESSIONAL QUALIFICATION (ICAN / CIBN / ANAN)

12 24.0 24.0 24.0

POST GRADUATE (MBA/ MSC/ PHD) 23 46.0 46.0 70.0TERTIARY EDUCATION (FIRST DEGREE/ HND)

14 28.0 28.0 98.0

POST SECONDARY EDUCATION (NATIONAL DIPLOMA/ NCE)

1 2.0 2.0 100.0

Total 50 100.0 100.0Source: Field survey (2013)

The above table indicates that 12 (24%) representsprofessional qualification, 23 (46%) represents postgraduate qualification, 14 (28%) represents tertiaryeducation while 1(2%) represents post-secondaryeducation.post graduate has more access to the informationrequired in the questionnaire than others.

113

4.2.5 “Respondents analysis by Length of Service at EcobankNigeria Plc”Years Frequency Percent

(%)Validpercent(%)

Cumulativepercent(%)

LESS THAN ONE YEAR 11 22.0 22.0 22.01-3 YEARS 20 40.0 40.0 62.03-6 YEARS 12 24.0 24.0 86.0ABOVE 6 YEARS 7 14.0 14.0 100.0Total 50 100.0 100.0Source: Field survey (2013)

The above table indicate that 11 (22%) representsrespondents with less than one year length of service, 20(40%) represents respondents with 1-3 years length ofservice, 12 (24%) respondents with 3-6 years length ofservice, while 7 (14%) represents respondents with above 6years length of service. The majority of the respondents are

114

within 1-3years length of service at Ecobank Nigeria plc hasmore access to the questionnaire than the others.

4.2.6 “Respondents analysis by Position Held”Position Frequency Percent

(%)Validpercent(%)

Cumulativepercent(%)

TOP MANAGEMENT LEVEL 8 16.0 16.3 16.3MIDDLE MANAGEMENT LEVEL

21 42.0 42.9 59.2

SUPERVISORY LEVEL 14 28.0 28.6 87.8TACTICAL LEVEL 6 12.0 12.2 100.0Total 49 98.0 100.0Source: Field survey (2013)

The above table indicates that 8 (16.3%) represents TopLevel, 21 (42.9%) represents Middle level, 14 (28%)represents Supervisory level while 6 (12.2%) representsTactical level. Middle level staff has more access to thequestionnaire than the others.

115

4.2.7 THERE ARE ADEQUATE ASSETS LISTING DONE BY MANAGEMENT

Frequency PercentValid

PercentCumulativePercent

Valid DISAGREE 1 2.0 2.0 2.0

UNDECIDED 3 6.0 6.0 8.0

AGREE 35 70.0 70.0 78.0

STRONGLY AGREE 11 22.0 22.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

The above table indicates that 1 (2%) representsrespondents who disagreed that there are adequate assetslisting done by management, 3 (6%) represents respondentsthat can’t decide whether or not there are adequate assetslisting done by management, 35 (70%) represents respondentsthat agreed that there are adequate assets listing done bymanagement and 11 (22%) represents respondents that stronglyagreed that there are adequate assets listing done bymanagement.

116

4.2.8 POSITIONS IN PLACE ENSURE ASSETS ADDITIONS, DISPOSAL, REPLACEMENT ANDTRANSFERS FOR PROPER ACCOUNTABILITY

Frequency PercentValid

PercentCumulativePercent

Valid STRONGLY DISAGREE 1 2.0 2.0 2.0

DISAGREE 1 2.0 2.0 4.1

UNDECIDED 6 12.0 12.2 16.3

AGREE 34 68.0 69.4 85.7

STRONGLY AGREE 7 14.0 14.3 100.0

Total 49 98.0 100.0

Missing System 1 2.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 1 (2%) representsrespondent that strongly disagreed that position in placeensure assets addition, 1 (2%) represents respondent thatdisagreed that position in place ensure assets addition, 6(12.2%) represents respondents that can’t decide whether ornot position in place ensures assets addition, 34 (69.4%)represents respondents that agreed that position in placeensures assets addition and 7 (14.3%) represents respondentsthat strongly agreed that position in place ensures assetsaddition.

117

4.2.9 CAPITAL ASSETS PURCHASED ARE APPROVED BY APPROPRIATE LEVEL OFMANAGEMENT

Frequency PercentValid

PercentCumulativePercent

Valid DISAGREE 2 4.0 4.0 4.0

UNDECIDED 5 10.0 10.0 14.0

AGREE 25 50.0 50.0 64.0

STRONGLY AGREE 18 36.0 36.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

The above table indicate that 2 (4.0%) representsrespondents that disagreed that capital assets purchased areapproved by appropriate level of management, 5 (10.0%)represents respondents that can’t decide whether or not thatcapital assets purchased are approved by appropriate levelof management, 25 (50%) represents respondents that agreedthat capital assets purchased are approved by appropriatelevel of management and 18 (36%) represents respondents thatstrongly agreed that capital assets purchased are approvedby appropriate level of management.

4.2.10 ASSETS NUMBERING IS DONE TO SHOW LOCATION AND PROTECTION OF THEASSETS

Frequency PercentValidPercent

CumulativePercent

Valid STRONGLY DISAGREE 2 4.0 4.0 4.0

UNDECIDED 7 14.0 14.0 18.0

AGREE 33 66.0 66.0 84.0

STRONGLY AGREE 8 16.0 16.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

118

The above table indicate that 2 (4.0%) representsrespondents that strongly disagreed that assets numbering isdone to show location and protection of the assets, 7(14.0%) represents respondents that can’t decide whether ornot assets numbering is done to show location and protectionof the assets, 33 (66.0%) represents respondents that agreedthat assets numbering is done to show location andprotection of the assets and 8 (16.0%) representsrespondents that strongly agreed that assets numbering isdone to show location and protection of the assets.

4.2.11 THERE IS FREE ACCESS TO CHEQUE BOOKS AND ORGANIZATION ASSETS

Frequency PercentValid

PercentCumulativePercent

Valid STRONGLY DISAGREE 4 8.0 8.2 8.2

DISAGREE 23 46.0 46.9 55.1

UNDECIDED 7 14.0 14.3 69.4

AGREE 7 14.0 14.3 83.7

STRONGLY AGREE 8 16.0 16.3 100.0

Total 49 98.0 100.0

Missing System 1 2.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 4 (8.2%) representsrespondents that strongly disagreed that there is freeaccess to cheque books and organization assets, 23 (46.9%)represents respondents that disagreed that there is freeaccess to cheque books and organization assets, 7 (14.3%)represents respondents that can’t decide whether or notthere is free access to cheque books and organizationassets, 7 (14.3%) represents respondents that agreed thatthere is free access to cheque books and organization assetsand 8 (16.0%) represents respondents that strongly agreed

119

there is free access to cheque books and organizationassets.

Source: Field survey (2013)

The above table indicates that 6 (4.0%) representsrespondent that strongly disagreed that a person responsiblefor inventory management is different from the bookkeeper, 3(6.0%) represents respondents that disagreed that a personresponsible for inventory management is different from thebookkeeper, 4 (8.0%) represents respondents that can’tdecide whether or not that a person responsible forinventory management is different from the bookkeeper, 18(36.0%) represents respondents that agreed that a personresponsible for inventory management is different from thebookkeeper and 23 (46.0%) represents respondents thatstrongly agreed that a person responsible for inventorymanagement is different from the bookkeeper.

120

4.2.12 A PERSON RESPONSIBLE FOR INVENTORY MANAGEMENT IS DIFFERENT FROMTHE BOOKKEEPER

Frequency PercentValidPercent

CumulativePercent

Valid STRONGLY DISAGREE 2 4.0 4.0 4.0

DISAGREE 3 6.0 6.0 10.0

UNDECIDED 4 8.0 8.0 18.0

AGREE 18 36.0 36.0 54.0

STRONGLY AGREE 23 46.0 46.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

The above table indicates that 1 (2%) representsrespondent that strongly disagreed that stock taking is donefollowing the procedures, 9 (18%) represents respondentsthat can’t decide whether or not stock taking is donefollowing the procedures, 29 (58%) represents respondentsthat agreed that stock taking is done following theprocedures and 11 (22%) represents respondents that stronglyagreed that stock taking is done following the procedures.

4.2.14 THE PETTY CASHIER IS DIFFERENT FROM THE MAIN CASHIER

Frequency PercentValidPercent

CumulativePercent

Valid DISAGREE 7 14.0 14.0 14.0

UNDECIDED 4 8.0 8.0 22.0

AGREE 19 38.0 38.0 60.0

STRONGLY AGREE 20 40.0 40.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

The above table indicates that, 7 (14%) representsrespondents that disagreed that the petty cashier is

121

4.2.13 STOCK TAKING IS DONE FOLLOWING THE PROCEDURES AND IN THE PRESENCEOF THE INTERNAL AUDITOR

Frequency PercentValidPercent

CumulativePercent

Valid STRONGLY DISAGREE 1 2.0 2.0 2.0

UNDECIDED 9 18.0 18.0 20.0

AGREE 29 58.0 58.0 78.0

STRONGLY AGREE 11 22.0 22.0 100.0

Total 50 100.0 100.0

different from the main cashier, 4 (8%) representsrespondents that can’t decide that the petty cashier isdifferent from the main cashier or not, 19 (38%) representsrespondents that agreed that the petty cashier is differentfrom the main cashier, and 20 (40%) represents respondentsthat strongly agreed that the petty cashier is differentfrom the main cashier.

4.2.15 THERE ARE ADEQUATE POLICIES TO ENSURE EFFECTIVE COLLECTION AND FOLLOW-UPS OF DUE ACCOUNTS

Frequency PercentValidPercent

CumulativePercent

Valid STRONGLY DISAGREE 1 2.0 2.0 2.0

DISAGREE 1 2.0 2.0 4.0

UNDECIDED 4 8.0 8.0 12.0

AGREE 22 44.0 44.0 56.0

STRONGLY AGREE 22 44.0 44.0 100.0

Total 50 100.0 100.0

Source: Field survey (2013)

The above table indicate that 1 (2 %) represents respondent thatstrongly disagreed that there are adequate policies, 1 (2%)represents respondent that disagreed that there are adequatepolicies, 4 (8%) represents respondents that can’t decide thatthere are adequate policies or not, 22 (44%) representsrespondents that agreed that there are adequate policies and 22(44%) represents respondents that strongly agreed that there areadequate policies.

122

4.2.16 COST OF PRODUCTION HAS BEEN REDUCING DRAMATICALLY FOR THE PAST TWO YEARS

Frequency Percent Valid PercentCumulativePercent

Valid STRONGLY DISAGREE 3 6.0 6.1 6.1DISAGREE 21 42.0 42.9 49.0UNDECIDED 13 26.0 26.5 75.5AGREE 6 12.0 12.2 87.8STRONGLY AGREE 6 12.0 12.2 100.0Total 49 98.0 100.0

Missing System 1 2.0Total 50 100.0

Source: Field survey (2013)

The above table indicates that 3 (6.1 %) represents respondents thatstrongly disagreed that cost of production has been reducingdramatically for the past two years, 21 (42.9%) representsrespondents that disagreed that cost of production has been reducingdramatically for the past two years, 13 (26.5%) representsrespondents that can’t decide that cost of production has beenreducing dramatically for the past two years or not, 6 (12.2%)represents respondents that agreed that cost of production has beenreducing dramatically for the past two years and 6 (12.2%) representsrespondents that strongly agreed cost of production has been reducingdramatically for the past two years.

4.2.17 THE COMPANY IS NOW IN A BETTER POSITION TO SERVE CLIENTS MORE EFFICIENTLY AND EFFECTIVELY

Frequency Percent Valid PercentCumulativePercent

Valid STRONGLY DISAGREE 2 4.0 4.1 4.1

UNDECIDED 2 4.0 4.1 8.2

AGREE 31 62.0 63.3 71.4

STRONGLY AGREE 14 28.0 28.6 100.0

Total 49 98.0 100.0

123

4.2.16 COST OF PRODUCTION HAS BEEN REDUCING DRAMATICALLY FOR THE PAST TWO YEARS

Frequency Percent Valid PercentCumulativePercent

Valid STRONGLY DISAGREE 3 6.0 6.1 6.1DISAGREE 21 42.0 42.9 49.0UNDECIDED 13 26.0 26.5 75.5AGREE 6 12.0 12.2 87.8STRONGLY AGREE 6 12.0 12.2 100.0Total 49 98.0 100.0

Missing System 1 2.0Missing System 1 2.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 2 (4.1 %) representsrespondents that strongly disagreed that the company is nowin a better position to serve clients, 2 (4.1%) representsrespondents that can’t decide that the company is now in abetter position to serve clients or not, 31 (63.3%)represents respondents that agreed that the company is nowin a better position to serve clients and 14 (28.6%)represents respondents that strongly agreed that thecompany is now in a better position to serve clients.

124

4.2.18 EFFECTIVENESS IS MEASURED THROUGH QUALITY SERVICES AND PRODUCTS

Frequency Percent Valid PercentCumulativePercent

Valid STRONGLY DISAGREE 2 4.0 4.1 4.1

DISAGREE 1 2.0 2.0 6.1

UNDECIDED 2 4.0 4.1 10.2

AGREE 8 16.0 16.3 26.5

STRONGLY AGREE 36 72.0 73.5 100.0

Total 49 98.0 100.0

Source: Field survey (2013)

The above table indicates that 2 (4.1 %) representsrespondents that strongly disagreed that effectiveness ismeasured through quality service and products, 1 (2.0%)represents respondent that disagreed that effectiveness ismeasured through quality service and products, 2 (4.1%)represents respondents that can’t decide that effectivenessis measured through quality service and products or not, 8(16.3%) represents respondents that agreed thateffectiveness is measured through quality service andproducts and 36 (72.5%) represents respondents that stronglyagreed that effectiveness is measured through qualityservice and products.

125

4.2.19 THE COMPANY IS ABLE TO BUILD CUSTOMER SATISFACTION THROUGHQUALITY PRODUCTS AND SERVICES

Frequency PercentValidPercent

CumulativePercent

Valid DISAGREE 1 2.0 2.1 2.1

UNDECIDED 2 4.0 4.2 6.3

AGREE 30 60.0 62.5 68.8

STRONGLY AGREE 15 30.0 31.3 100.0

Total 48 96.0 100.0

Missing System 2 4.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 1 (2.1%) representsrespondent that disagreed that the company is able to buildcustomer satisfaction, 2 (4.2%) represents respondents thatcan’t decide that the company is able to build customersatisfaction or not, 30 (62.5%) represents respondents thatagreed that the company is able to build customersatisfaction and 15 (31.3%) represents respondents thatstrongly agreed that the company is able to build customersatisfaction.

126

4.2.20 PERFORMANCE OF THE COMPANY RESULTS FROM ASSETS FINANCING, EMPLOYEESKILLS AND PROCESSES INVOLVED IN PRODUCTION

Frequency PercentValid

PercentCumulativePercent

Valid STRONGLY DISAGREE 2 4.0 4.1 4.1

DISAGREE 2 4.0 4.1 8.2

UNDECIDED 7 14.0 14.3 22.4

AGREE 30 60.0 61.2 83.7

STRONGLY AGREE 8 16.0 16.3 100.0

Total 49 98.0 100.0

Missing System 1 2.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 2 (4.1 %) representsrespondent that strongly disagreed that performance of thecompany results from assets financing,2 (4.1%) representsrespondent that disagreed that performance of the companyresults from assets financing, 7 (14.3%) representsrespondents that can’t decide that performance of thecompany results from assets financing or not, 30 (61.2%)represents respondents that agreed that performance of thecompany results from assets financing and 8 (16.3%)represents respondents that strongly agreed that performanceof the company results from assets financing.

127

4.2.21 THERE IS EVALUATION AND DISCUSSION OF THE ORGANIZATIONAL PERFORMANCE PERIODICALLY BY MANAGEMENT

Frequency PercentValidPercent

CumulativePercent

Valid DISAGREE 2 4.0 4.1 4.1

UNDECIDED 4 8.0 8.2 12.2

AGREE 29 58.0 59.2 71.4

STRONGLY AGREE 14 28.0 28.6 100.0

Total 49 98.0 100.0

Missing System 1 2.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 2 (4.1%) representsrespondents that disagreed that there is evaluation anddiscussion of organizational performance periodically, 4(8.2%) represents respondents that can’t decide that thereis evaluation and discussion of organizational performanceperiodically or not, 29 (59.2%) represents respondents thatagreed that there is evaluation and discussion oforganizational performance periodically and 14 (28.6%)represents respondents that strongly agreed that there isevaluation and discussion of organizational performanceperiodically.

128

4.2.22 STOCK OUT INCREASES THE COST OF PRODUCTION

Frequency PercentValid

PercentCumulativePercent

Valid STRONGLY DISAGREE 4 8.0 8.3 8.3

DISAGREE 1 2.0 2.1 10.4

UNDECIDED 5 10.0 10.4 20.8

AGREE 27 54.0 56.3 77.1

STRONGLY AGREE 11 22.0 22.9 100.0

Total 48 96.0 100.0

Missing System 2 4.0

Total 50 100.0

Source: Field survey (2013)

The above table indicates that 4 (8.3 %) representsrespondents that strongly disagreed that stock out increasesthe cost of production, 1 (2.1%) represents respondent thatdisagreed that stock out increases the cost of production, 5(10.4%) represents respondents that can’t decide whether ornot stock out increases the cost of production, 27 (56.3%)represents respondents that agreed that stock out increasesthe cost of production and 11 (22.9%) represents respondentsthat strongly agreed that stock out increases the cost ofproduction.

4.3 Test of Hypotheses and Discussion.

4.3.1 Hypothesis 1

TABLE 4.3.1 Weakness in the internal control system in Nigeria

banks does not lead to fraud.

129

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

b. Dependent Variable: FRAUD

TABLE 4.3.2 Analysis showing the Weakness in the internal control system and fraud

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 3.816 .753 5.067 .000 1.796 5.836

WEAKNESS IN INTERNAL CONTROL SYSTEM

.083 .189 .063 .439 .662 -.424 .590

a. Dependent Variable: FRAUD

The result revealed that the calculated t-statistics for theparameter estimates is (t = 0.439), P < 0.01 is less thantabulated t statistics (1.9960) at 0.01 level of significance.Therefore, the Null hypothesis is accepted and Alternativehypothesis is rejected, that is Weakness in the internal controlsystem in Nigerian banks does not lead to frauds.

The coefficient of determination ( R2 ) is 0.004, it

implies that weakness in the internal control system explains 4 %

130

of the variation in fraud. The remaining 96% unexplained

variation is largely due to the other variables outside the

regression model which are otherwise included in the stochastic

error term. Also with the value of R in the model it shows that

there is no significant relationship between the dependent

variable and independent variable at 0.01 level of significant (r

= .063,P < 0.01).

The coefficient of weakness in internal control system in

the estimated regression line shows .063 which implies that 6% of

the fraud under the study was accounted for by Weakness in

internal control system. The overall regression model is

statistically insignificant in term of its goodness of fit (F

= 0.193, P < 0.01).

4.4 Test of Hypotheses and Discussion.

4.4.1 Hypothesis 2

TABLE 4.4.1 there is no significant relationship between internal

control system and organizational performance.

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .470a .221 .205 .647 .221 13.346 1 47 .001 1.369

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

131

TABLE 4.4.2 Analysis showing the relationship between internalcontrol system and organizational performance

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 2.791 .376 7.426 .000 1.782 3.801

INTERNAL CONTROL SYSTEM

.331 .091 .470 3.653 .001 .088 .574

a. Dependent Variable: ORGANIZATIONAL PERFORMANCE

The result revealed that the calculated t-statistics for the

parameter estimates is ( t = 3.653), P < 0.01 is greater than

tabulated t statistics ( 1.9960) at 0.01 level of significance.

Therefore, the Null hypothesis is rejected and Alternative

hypothesis is accepted, that is there is significant relationship

between internal control system and organizational performance of

Eco bank Nigeria.

The coefficient of determination ( R2 ) is .221, it

implies that the internal control system explain 22% of the

132

variation in the organizational performance. The remaining 78%

unexplained variation is largely due to the other variables

outside the regression model which are otherwise included in the

Stochastic error term. Also with the value of R in the model it

shows that there is significant relationship between the

dependent variable and independent variable at 0.01 level of

significant (r = .470,P < 0.01).

The coefficient of the management in the estimated

regression line shows .470 which implies that 47% of

organizational performance under the study was accounted for by

the internal control system. The overall regression model is

statistically significant in term of its goodness of fit (F =

13.346, P < 0.01).

Regression

[DataSet1] D:\ADE TOPE ANALYSIS.sav

Descriptive Statistics

Mean Std. Deviation N

FRAUD 4.14 1.069 50

WEAKNESS IN INTERNAL CONTROL SYSTEM

3.90 .814 50

133

Correlations

FRAUD

WEAKNESS ININTERNAL

CONTROL SYSTEM

Pearson Correlation FRAUD 1.000 .063

WEAKNESS IN INTERNAL CONTROL SYSTEM

.063 1.000

Sig. (1-tailed) FRAUD . .331

WEAKNESS IN INTERNAL CONTROL SYSTEM

.331 .

N FRAUD 50 50

WEAKNESS IN INTERNAL CONTROL SYSTEM

50 50

Variables Entered/Removedb

ModelVariablesEntered

VariablesRemoved Method

1 WEAKNESS IN INTERNAL CONTROL SYSTEMa

. Enter

a. All requested variables entered.

b. Dependent Variable: FRAUD

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

b. Dependent Variable: FRAUD

134

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

ANOVAb

ModelSum ofSquares Df

MeanSquare F Sig.

1 Regression

.224 1 .224 .193 .662a

Residual 55.796 48 1.162

Total 56.020 49

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

b. Dependent Variable: FRAUD

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 3.816 .753 5.067 .000 1.796 5.836

WEAKNESS IN INTERNAL CONTROL SYSTEM

.083 .189 .063 .439 .662 -.424 .590

a. Dependent Variable: FRAUD

135

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value 3.90 4.23 4.14 .068 50

Residual -3.231 1.101 .000 1.067 50

Std. Predicted Value

-3.561 1.351 .000 1.000 50

Std. Residual -2.997 1.021 .000 .990 50

a. Dependent Variable: FRAUD

Regression

[DataSet1] D:\ADE TOPE ANALYSIS.sav

Descriptive Statistics

Mean Std. Deviation N

ORGANIZATIONAL PERFORMANCE

4.12 .726 49

INTERNAL CONTROL SYSTEM 4.02 1.031 49

136

Correlations

ORGANIZATIONALPERFORMANCE

INTERNALCONTROL SYSTEM

Pearson Correlation ORGANIZATIONAL PERFORMANCE

1.000 .470

INTERNAL CONTROL SYSTEM .470 1.000

Sig. (1-tailed) ORGANIZATIONAL PERFORMANCE

. .000

INTERNAL CONTROL SYSTEM .000 .

N ORGANIZATIONAL PERFORMANCE

49 49

INTERNAL CONTROL SYSTEM 49 49

Variables Entered/Removedb

ModelVariablesEntered

VariablesRemoved Method

1 INTERNAL CONTROL SYSTEMa

. Enter

a. All requested variables entered.

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .470a .221 .205 .647 .221 13.346 1 47 .001 1.369

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

137

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .470a .221 .205 .647 .221 13.346 1 47 .001 1.369

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 5.588 1 5.588 13.346 .001a

Residual 19.678 47 .419

Total 25.265 48

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 2.791 .376 7.426 .000 1.782 3.801

INTERNAL CONTROL SYSTEM

.331 .091 .470 3.653 .001 .088 .574

a. Dependent Variable: ORGANIZATIONAL PERFORMANCE

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

138

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 2.791 .376 7.426 .000 1.782 3.801

INTERNAL CONTROL SYSTEM

.331 .091 .470 3.653 .001 .088 .574

Predicted Value 3.45 4.45 4.12 .341 49

Residual -1.454 .884 .000 .640 49

Std. Predicted Value

-1.960 .951 .000 1.000 49

Std. Residual -2.246 1.367 .000 .990 49

a. Dependent Variable: ORGANIZATIONAL PERFORMANCE

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter presents a summary, conclusion and recommendations

of the findings and end with areas of further research.

5.2 summary of major findings

The study investigates the effect of internal control on

organizational performance. The hypotheses indicate that there is

significant relationship between internal control and

organizational performance. The findings result shows that

internal control contribute to organizational performance; the139

result revealed that the calculated t-statistics for the

parameter estimates is (t = 3.653), P < 0.01 which is greater

than tabulated t statistics (1.9960) at 0.01 level of

significance. Therefore, the Null hypothesis is rejected and

Alternative hypothesis is accepted, that is there is significant

relationship between internal control system and organizational

performance of Ecobank Nigeria Plc.

Also in analyzing the weakness in the internal control

system and fraud in ECOBANK PLC Findings indicated that the

internal controls used in ECOBANK plc were ineffective and

unsatisfactory; The result revealed that the calculated t-

statistics for the parameter estimates is ( t = 0.439), P < 0.01

is less than tabulated t statistics ( 1.9960) at 0.01 level of

significance. Therefore, the Null hypothesis is accepted and

Alternative hypothesis is rejected, that is Weakness in the

internal control system in Ecobank Nigerian Plc does not lead to

frauds.

This studies received support by Coopers and Lybrand (1993) who

argued that there was need to consider whether the following

control objectives are met; management conveys the message that

integrity and ethical cannot be compromised, the organization

structure provides a moral framework for planning, directing, and

controlling operations, management ensures that appropriate

responsibility and delegation of authority is assigned to deal

with goals and objectives and the Board of Directors and audit

140

committee are sufficiently independent from management to

construct a challenge to management decision and take an active

role in ensuring that an appropriate “tone at the top exists”.

The findings revealed a low level of organizational performance

in ECOBANK Plc. Findings are in agreement with studies by Brown

(1996) who argues that performance measures in organizations must

focus attention on what makes, identifies and communicates the

drivers of success, support organizations learning and provide a

basis for assessment and reward. Furthermore, Dixion (1990) adds

that appropriate performance measures are those which enable

organizations to direct their actions towards achieving their

strategic objectives. This is because according to him a firm’s

performance is central to the future well being and prosperity of

any enterprise.

The results in the table above indicate a significant positive

relationship between internal controls and organizational

performance of ECOBANK PLC Also with the value of R in the model

it shows that there is significant relationship between the

dependent variable and independent variable at 0.01 level of

significant (r = .063,P < 0.01). The overall regression model is

statistically significant in term of its goodness of fit (F =

13.346, P < 0.01). These findings, relate well with previous

studies by Coso (1992) who provided a criteria against which

effectiveness of internal controls can be assessed. He contends

that internal control can be judged effective if the entity’s

operations objectives are being achieved; published financial

141

statements are being prepared, reliable and applicable laws and

regulations are being complied with. While internal control is a

process, its effectiveness is a state or condition of the process

at a point in time. Accordingly, the effective functioning of

components of internal control provides a reasonable assurance

regarding achievement of one or more of the stated categories of

objectives to ensure high levels of organizational performance.

5.3 Conclusion

From the findings, it is concluded that; the findings shows the

overall regression model which is statistically significant in

term of its goodness of fit that is there is a significant

relationship between internal control system and organizational

performance of Ecobank Plc.

The following conclusions were made from the investigation

carried out to evaluate the effect of internal control on

organizational performance in Ecobank Nigerian Plc:

There are internal control departments in all banks in Nigeria,

but In Ecobank Nigeria Plc the department is headed by very

senior officers not below the rank of Assistant General Manager.

The responsibility of Internal Control is strictly that of the

management and the internal control officer reports to the

highest level of management. The presence of Internal Control

system in the banks has provided reasonable assurance regarding

the effectiveness and efficiency of operations of banks in

Nigeria, the reliability of financial and management reporting

142

and guarantees compliance with applicable laws and regulations.

The banks rely heavily on the internal control system on the

implementation of policies and procedures. The study revealed

that reliance can be placed on the internal control system of

banks in Nigeria.

We can conclude further from the study that there exists a high

positive correlation between internal controls an organizational

performance. Though controls were observed to be generally

effective, there were some lapses noted in the area of asset

numbering.

On the issue of segregation of duties, the research shows that

the duties of all staff are dully segregated so that no one staff

carries one transaction from the commencement to conclusion.

Practice of good corporate governance by this bank is not yet at

its best, they can still do better.

5.4 Recommendations

A system of effective controls is a critical component of bank

management and a foundation for the safe and sound operation of

banking organizations. A system of strong internal controls can

help to ensure that the goals and objectives of a banking

organization are met, that the bank will achieve long-term

Profitability targets, and maintain reliable financial and

managerial reporting. Such a system can also help to ensure that

the bank will comply with laws and regulations as well as

policies, plans, internal rules and procedures, and decrease the

143

risk of unexpected losses or damage to the bank’s reputation.

The following recommendations are proffered for tackling the

deficiencies noted in the findings from the study. These are

aimed at improving the internal control system of banks in

Nigeria.

To examine the effectiveness of internal controls used in

ECOBANK Plc, the management of ECOBANK Plc should design more

effective internal control systems by ensuring that adequate

asset listings is done by management, capital assets purchased

are approved by appropriate level of management and asset

numbering is done to show location and protection of the assets.

To establish the level of performance in ECOBANK Plc, the

management of ECOBANK Plc should ensure that it strengthens

strategies aimed at improving organizational performance in all

categories of staff and this should continuously be used to

ensure that performance levels are satisfactory.

To establish a relationship between internal control and

performance in ECOBANK Plc, the management of ECOBANK Plc should

appreciate these findings on the relationship between internal

controls and organizational performance to ensure its continued

production in a competitive industry in Nigeria banking industry.

Application of latest Audit software’s that will be able to

break all transactions. Without mincing words, the banking

144

industry in Nigeria is technologically driven and the

technology is changing at a very fast rate. While the banks

are upgrading their operational systems technologically,

they should also upgrade the technological aspect of the

Internal Control. This will help to fight all forms of

electronic frauds including hacking, skimmers, Phishing,

Trojan horse.

As the system is being improved the staff should also be

trained to cope with the latest technologies and the

challenges of the job. Both in-house and external training

should be arranged for the staff of the department.

Staff of the Internal Control department should be

adequately remunerated. They bear high level of risk. Most

people look at them as the police of the organization and

therefore they are always at threat. It is unfortunate that

most banks pay greater attention to marketing at the

detriment of Internal Control consequently marketing

officers are most rewarded. And Internal Control staffs are

often regarded as non-contributive staff. This notion is

wrong because a single fraud that goes undetected can write-

off the fortune of the bank. Therefore Internal Control

staff should be duly motivated to put in their best. In view

of the undeniable importance of internal control system in

an establishment such as bank, the management should not

allow itself to be mis-directed by the criticisms that are

leveled against the internal control system, for instance,

145

control not being cost effective among others. They should

note that there is a great need for the presence of an

effective internal control system in the banks. According to

J. Santocki, poor internal control system or total absence

of it, will lead to a chaotic situation in the company and

this will lead to errors and fraud, unreliable and

inaccurate record keeping and an eventual liquidation of the

company.

The board of directors should have responsibility for

approving and periodically reviewing the overall business

strategies and significant policies of the bank;

understanding the major risks run by the bank, setting

acceptable levels for these risks and ensuring that senior

management takes the steps necessary to identify, measure,

monitor and control these risks; approving the

organizational structure; and ensuring that senior

management is monitoring the effectiveness of the internal

control system.

Lastly, Practice of Corporate governance. The collapsed of most

banks in Nigeria and the World over is traceable to poor

corporate governance. It also account for the high volume of bad

and doubtful debt in our banks. In 2006, the Central Bank of

Nigeria issued the code of Corporate Governance for Banks in

Nigeria post consolidation. This is being operated alongside the

code of Best practices for public companies in Nigeria issued by

Securities and Exchange Commission in 1999. If these codes are

146

duly complied with the Internal Controller will have fewer

problems. We therefore recommend that these codes should be

strictly complied with.

The bank should not make any member of staff indispensable;

hence there should be deputation of responsibilities so that the

absence of a staff will have no effect on the operation of the

bank. Management should encourage staff to participate in

decision making. Employees feel encouraged and motivated in

accomplishing the goals of the company in which they have taken

part in formulating.

There should be discipline on the part of the management not to

override the controls, noting that poor management often results

in excessive risk taking through high operating expenses,

inadequate administration of loan portfolio, an overly aggressive

growth policy to attract deposits, interest rates speculations

coupled with other instances of poor judgment may result in

stress for the Bank.

5.5 Areas for further research

The study did not exhaust all the dependent variables that

influence organizational performance thus the need for other

researchers to conduct an exhaustive study on variables under

listed.

Corporate governance and organizational performance147

Employee incentive and organizational performance

Motivation, training, morale and organizational performance

Employee motivation and organizational performance

Organizational learning and organizational performance

Consumer behavior and organizational performance

148

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APPENDIX I

Regression

[DataSet1] D:\ADE TOPE ANALYSIS.sav

Descriptive Statistics

Mean Std. Deviation N

FRAUD 4.14 1.069 50

WEAKNESS IN INTERNAL CONTROL SYSTEM

3.90 .814 50

155

Correlations

FRAUD

WEAKNESS ININTERNAL

CONTROL SYSTEM

Pearson Correlation FRAUD 1.000 .063

WEAKNESS IN INTERNAL CONTROL SYSTEM

.063 1.000

Sig. (1-tailed) FRAUD . .331

WEAKNESS IN INTERNAL CONTROL SYSTEM

.331 .

N FRAUD 50 50

WEAKNESS IN INTERNAL CONTROL SYSTEM

50 50

Variables Entered/Removedb

ModelVariablesEntered

VariablesRemoved Method

1 WEAKNESS IN INTERNAL CONTROL SYSTEMa

. Enter

a. All requested variables entered.

b. Dependent Variable: FRAUD

156

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

b. Dependent Variable: FRAUD

ANOVAb

ModelSum ofSquares Df

MeanSquare F Sig.

1 Regression

.224 1 .224 .193 .662a

Residual 55.796 48 1.162

Total 56.020 49

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

b. Dependent Variable: FRAUD

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 3.816 .753 5.067 .000 1.796 5.836

WEAKNESS IN INTERNAL CONTROL SYSTEM

.083 .189 .063 .439 .662 -.424 .590

157

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .063a .004 -.017 1.078 .004 .193 1 48 .662 2.055

a. Predictors: (Constant), WEAKNESS IN INTERNAL CONTROL SYSTEM

a. Dependent Variable: FRAUD

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value 3.90 4.23 4.14 .068 50

Residual -3.231 1.101 .000 1.067 50

Std. Predicted Value

-3.561 1.351 .000 1.000 50

Std. Residual -2.997 1.021 .000 .990 50

a. Dependent Variable: FRAUD

Regression

[DataSet1] D:\ADE TOPE ANALYSIS.sav

Descriptive Statistics

Mean Std. Deviation N

ORGANIZATIONAL PERFORMANCE

4.12 .726 49

INTERNAL CONTROL SYSTEM 4.02 1.031 49

158

Correlations

ORGANIZATIONALPERFORMANCE

INTERNALCONTROL SYSTEM

Pearson Correlation ORGANIZATIONAL PERFORMANCE

1.000 .470

INTERNAL CONTROL SYSTEM .470 1.000

Sig. (1-tailed) ORGANIZATIONAL PERFORMANCE

. .000

INTERNAL CONTROL SYSTEM .000 .

N ORGANIZATIONAL PERFORMANCE

49 49

INTERNAL CONTROL SYSTEM 49 49

Variables Entered/Removedb

ModelVariablesEntered

VariablesRemoved Method

1 INTERNAL CONTROL SYSTEMa

. Enter

a. All requested variables entered.

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

159

Model Summaryb

Model R

RSquare

AdjustedR Square

Std.Error of

theEstimate

Change Statistics

Durbin-Watson

R SquareChange

FChange df1 df2

Sig. FChange

1 .470a .221 .205 .647 .221 13.346 1 47 .001 1.369

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 5.588 1 5.588 13.346 .001a

Residual 19.678 47 .419

Total 25.265 48

a. Predictors: (Constant), INTERNAL CONTROL SYSTEM

b. Dependent Variable: ORGANIZATIONAL PERFORMANCE

160

Coefficientsa

Model

UnstandardizedCoefficients

Standardized

Coefficients

T Sig.

99.0% ConfidenceInterval for B

BStd.Error Beta

LowerBound

UpperBound

1 (Constant) 2.791 .376 7.426 .000 1.782 3.801

INTERNAL CONTROL SYSTEM

.331 .091 .470 3.653 .001 .088 .574

a. Dependent Variable: ORGANIZATIONAL PERFORMANCE

Residuals Statisticsa

Minimum Maximum Mean Std. Deviation N

Predicted Value 3.45 4.45 4.12 .341 49

Residual -1.454 .884 .000 .640 49

Std. Predicted Value

-1.960 .951 .000 1.000 49

Std. Residual -2.246 1.367 .000 .990 49

a. Dependent Variable: ORGANIZATIONAL PERFORMANCE

161

APPENDIX II

RESEARCH QUESTIONNAIRE FOR ACADEMIC STUDY

Department of Accounting,

Faculty of Management Sciences,

Osun State University,

Okuku Campus.

Dear Respondent,

I am a final year student of department of accounting,

faculty of management sciences Osun State University Okuku

campus. I am carrying out a research on the subject “ the effect of

internal control on organizational performance. (A case study of Ecobank Nigeria

162

plc)” in partial fulfillment of the requirement for the award of

B.Sc. Degree in Accounting. Your branches at Oshogbo Osun State

and Offa Kwara State have been chosen as one of the branches to

use.

Attached to this Letter is a questionnaire aimed at

gathering some vital information to assist me complete the

research work. Kindly respond to the statements/questions as

freely as possible in the space provided. All information given

will be treated with utmost confidentiality and will be used

solely for the purpose of the research.

Thanks in anticipation of your co-operation

Yours Faithfully,

……………………..

AMOO TEMITOPE .G

QUESTIONNAIRE ON “THE EFFECT OF INTERNAL CONTROL ON

ORGANIZATIONAL PERFORMANCE” ( A CASE STUDY OF ECOBANK NIGERIA

PLC).

163

SECTION “A”: SOCIO – DEMOGRAPHIC INFORMATION

Please Tick your appropriate Choice like this (√)

1. Age (Years): 21-30 31 – 40 41 – 50 Above

50

2. Gender: Male Female

3. Marital Status

Single Married Divorced/Separated

4. Level of Education

Professional Qualification Post Graduate

( ICAN/CIBN /ANAN) (MBA/MSC/Ph.D)

Tertiary Education Post Secondary Education

(First Degree/HND) (National Diploma/NCE)

Others ( Please Specify ……………………………………………

5. Length of service at Ecobank Nigeria

Less than one year 1 – 3 years 3 – 6

years Above 6 years

6. Position Held:

164

Top management level Middle management level

Supervisory level

Tactical level

165

SECTION “B1”: EFFECTIVENESS OF INTERNAL CONTROLS

Instruction: please tick (√) as appropriate.

In this section, the researcher seeks to establish the effectiveness

of internal control on the organizational performance in Ecobank

Nigeria plc. Please tick(√) the appropriate alternative

Key; Where SA-strongly agree, A- agree, UD- undecided, SD-strongly

disagree D-disagree

S/

N

STATEMENT SA A UD SD D

7 There are adequate assets

listing done by management

8 Procedures in place ensure

asset additions, disposal,

replacement and transfers for

proper accountability

9 Capital assets purchased are

approved by appropriate level

of management

10 Assets numbering is done to

show location and protection

of the assets.

11 There is free access to

cheque books and organization

166

assets

12 A person responsible for

inventory management is

different from the bookkeeper

13 Stock taking is done

following the procedures and

in the presence of the

internal auditor

14 The petty cashier is

different from the main

cashier

15 There are adequate policies

to ensure effective

collection and follow- ups of

due accounts

SECTION “B2”: ORGANIZATION PERFORMANCE

Instruction: please tick (√) as appropriate.

In this section the researcher seeks to establish the level of

organizational performance in Ecobank Nigeria plc. Please Tick the

appropriate alternative

Key: Where, SA=strongly agree, A= Agree, UD- undecided, D=Disagree,

SD=strongly disagree

167

S/

N

STATEMENT SA A UD SD D

16 Cost of production has been reducing

dramatically for the past two years

17 The company is now in a better

position to serve clients more

efficiently and effectively

18 Effectiveness is measured through

quality services and products

19 The company is able to build customer

satisfaction through quality products

and services

20 Performance of the company results

from assets financing, employee

skills and processes involved in

production

21 There is evaluation and discussion of

the organizational performance

periodically by management

168

22 Stock out increases the cost of

production

Thank you

169