IMPACT OF INTERNAL CONTROL SYSTEM ON PROFIT PERFORMANCE OF COMMERCIAL BANKS

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IMPACT OF INTERNAL CONTROL SYSTEM ON PROFIT PERFORMANCE OF COMMERCIAL BANKS

ABSTRACT

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

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

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

This project is divided into five (5) chapters –

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

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

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

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

TABLE OF CONTENT

PAGES

Title Page i

Approval sheet ii

Dedication iii

Acknowledgement iv

Preface v

Table of Content vi

CHAPTER ONE: INTRODUCTORY ANALYSIS

1.1 General Introduction 1

1.2 Problem Identification 2

1.3 Statement of Objectives 3

1.4 Significant of Study 3

1.5 Hypothesis (formulation and method of testing) 4

1.6 Scope and Limitations 7

1.7 Definition of terms 8

CHAPTER TWO: LITERATURE REVIEW

2 .1 Introduction 11

2.2 Definition of internal control 14

2.3 Types of Internal control 18

2.4 Structure of Internal control 21

2.5 Importance of Internal control 27

2.6 Qualities of good internal control system 28

2.7 Elements of financial / accounting internal control 38

2.8 Specific areas of internal control 43

2.9 Users of internal control system 52

2.10 Electronic Data processing and internal control 55

2.11 Banking Approach to Internal Control 64

2.12 Expected qualities of banking staff for affective internal control 68

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design 72

3.2 Scope 72

3.3 Methodology 73

3.3a Primary source of data 73

3.3b Secondary source of data 81

3.4 Determination of sample size 82

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

CHAPTER FOUR: DATA PRESENTATION AND ANALSYSIS

4.1 Questionnaire distribution, collection and analysis 84

4.2 Departmental collection and usage of questionnaire 84

4.3 Testing of Hypothesis and Analysis of Data 85

CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION

5.1 Summary 110

5.2 Limitation of Results 111

5.3 Recommendation 112

5.4 Conclusion 114

CHAPTER ONE

INTRODUCTION ANALYSIS

1.1 GENERAL INTRODUCTION

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

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

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

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

1.2 PROBLEM IDENTIFICATION

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

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

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

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

STATEMENT OF OBJECTIVE

The objective of this research include among others the following:

To identify and appraise the internal control designed, installed and operated by the management of OBN and UBA with a view to assessing its impact on profit performance.

To examine the extent of adherence or compliance to the policies, standards and procedures by the members of the staff in order to recommend operating improvement.

To identify possible deficiencies and weaknesses of the existing internal control to find means of ameliorating them.

To review the profit performance of the banks OBN and UBA and relate it to their internal control.

To critically analyze the effectiveness, adequacy and applicability of the various internal control.

To offer useful recommendation to proper design, installation and operation of an adequate and good internal control system.

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