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BUSINESS ADMINISTRATION

INTERNAL CONTROL’S IMPACT ON ORGANIZATIONAL EFFICIENCY (USING ECO BANK AS ORGANIZATION UNDER STUDY)

INTERNAL CONTROL’S IMPACT ON EFFICIENCY (USING BANK AS NIZATION UNDER )

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Chapter one

Introduction

1.1 Background of the study

Banking institutions play a pivotal role in the nation’s financial system and are indispensable to the economic growth process. By serving as an intermediary between surplus and deficit spending units, banks raise the amount of national savings and investments, and hence, national output. By extending credit, banks produce money, so influencing the money supply, a crucial factor in the rise of national revenue because it affects the degree of economic activity in the country.

Banks play a major role in the payments system by facilitating economic transactions between diverse national and international economic entities, so encouraging and promoting business, industry, and trade.

For banks to function efficiently and contribute significantly to the growth of a nation, the industry must be stable, secure, and healthy. And for these prerequisites to be met, a reliable accounting system must exist, which is the result of an effective internal control system.

Due to the increase in the size and complexity of firms as a result of economic expansion, proper management of modern business enterprises is impossible without an effective system of internal control.

A system of efficient internal controls is an essential element of bank management and the basis for the safe and sound operation of financial institutions. A system of robust internal controls can aid in ensuring that the aims and objectives of a banking institution will be realized, that the institution will reach its long-term profitability goals, and that it will maintain accurate financial and managerial reporting. In addition to ensuring the bank’s compliance with laws and regulations, policies, strategies, and internal rules and processes, such a system can reduce the risk of unanticipated losses or reputational harm.

Today, internal control, the strength of every organization, is of the utmost importance in Nigerian banks. The reason for this is because control systems are fundamental to an effective accounting system.

The importance of internal control systems in organizations, particularly banks, cannot be overstated due to the fact that the banking sector, which plays a crucial role in the economic development of a country, is currently characterized by macroeconomic instability, slow growth in real economic activities, corruption, and the risk of fraud.

Fraud, which is the primary purpose for establishing an internal control system, has become a serious headache for many Nigerian bank executives. In addition, it has become a blight on Nigeria’s international reputation. The Nigerian banking system is being devoured by fraud, and any bank with a weak internal control system is extremely vulnerable to bank fraud.

The announced that incidences of attempted fraud and forgery in banks for the first six months of 2007 have topped those for the entire year of 2006. The ’s 2007 half-year report identified 741 instances of attempted fraud and forgery involving $5,4 billion and $35,406. As of June 2007, a total of 1,150 Euros was reported. In 2006, 1,193 cases involving $4.6 billion, $1.8 million, and 14,389.7 pounds sterling were reported. The further reported that the negative trend was attributed to the banks’ inadequate internal control mechanisms. This has vividly illustrated how fraud has permeated the financial strength of Nigerian banks.

In a nutshell, this threat known as fraud has caused innumerable harm to banks and requires immediate response. Ecobank Nigeria PLC serves as a case study to examine the effect of internal control on organizational performance in the banking sector. This research was inspired by an effort to end this economic decline. However, the purpose of this study is to verify the notion that an effective and efficient internal control system is the most effective control mechanism for preventing and detecting fraud, particularly in the banking industry.

Internal control refers to the procedures utilized to aid in the achievement of a goal. Internal controls are policies, procedures, practices, and organizational structures designed to provide reasonable assurance that an organization’s business objectives will be met and that undesirable risk events will be prevented, detected, and corrected, based on compliance or management-initiated concerns (Awe, 2005). The Institute of Chartered Accountants in England and Wales (ICAEW) defines internal control as the entire system of controls, financial or otherwise, established by management in order to carry out the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets, and ensure, to the greatest extent possible, the completeness and accuracy of the records. Every day, management uses these tools to ensure the smooth operation of their organization or firm. In addition, internal controls relate to the procedures implemented by an organization to assure the achievement of its objectives, goals, and missions. They are a collection of policies and processes enacted by an organization to ensure that its transactions are completed in a manner that prevents waste, theft, and misuse of organization resources. Internal Controls are processes designed and implemented by those responsible for governance, management, and other personnel to provide reasonable assurance regarding the achievement of an entity’s objectives with respect to the accuracy of financial reporting, the effectiveness and efficiency of operations, and compliance with applicable laws and regulations (Mwindi, 2008). The implementation of internal controls should enhance operational efficiency and effectiveness, provide accurate financial information, protect assets and records, encourage adherence to prescribed policies, and comply with regulatory agencies. A strong internal control will guarantee that transactions are genuine, properly approved, documented, properly valued, properly categorised, reconciled with subsidiary records, and not executed by a single employee (i.e., separation of duties) ( Adeyemo Kingsley A,2012).

Organizations build internal control systems to assist them in achieving performance and organizational objectives, preventing the loss of resources, enabling the production of credible reports, and ensuring legal compliance. According to ETUK IFIOK CHARLES (1999) et al., “Internal Control is the entire system of financial and non-financial controls established by the management to carry out the business of the enterprise in an orderly and efficient manner, to ensure adherence to management policies, to safeguard the assets, and to ensure as much as possible the completeness and accuracy of the records.” All managers within an organizational department adhere to the established plans, objectives, and procedures. The rules, processes, organizational design, and physical barriers that make up an institution’s internal controls framework. A robust internal control system is crucial to the success of an organization in terms of its mission, operations, and resources, and managers should be aware of this.

The management of an organization is responsible for implementing a sufficient and effective internal control structure. Control is essential because it directly affects the efficacy of other administrative responsibilities, such as planning. In terms of planning, it determines if activities are progressing toward the completion of goals and objectives. Control methods ensure the continuity and accuracy of the plans. Control is also essential to employee empowerment so that employee performance can be effectively managed. Performance is managed in terms of evaluation, reducing the likelihood of arbitrary decisions on the assignment of positions/job titles. Controlling includes minimizing immoral decisions by employees and the business as a whole, therefore control methods are also essential for maintaining a healthy workplace balance.

The questions are: what can be stated to be the cause(s) of the rising incidence of bank fraud? What effect does internal control have on the prevention and detection of fraud in banks, and what effect does internal control have on the performance of Ecobank Nigeria plc?

1.0.1 BANK IA PLC’S HISTORICAL BACKGROUND

Eco bank Nigeria is a member of Eco bank, the premier independent pan-African bank with headquarters in Lome, Togo, and East Africa. Eco bank, founded in 1985, has expanded to a network of over a thousand branches, employing over ten thousand people, with offices in 32 countries.

The bank commenced operations in 1986 as a universal bank offering wholesale, retail, corporate, investment, and transaction banking services to Nigerian clients. The bank’s operations are divided into three distinct divisions: retail banking, wholesale banking, and treasury and financial institution.

Additionally, the bank offers services in capital markets and investment banking. In the fourth quarter of 2011, Eco bank Nigeria buys one hundred percent of oceanic bank’s shareholdings, so expanding Eco bank plc. Eco bank Nigeria was one of the five largest banks in Nigeria as of December 2011, with total assets at around US$8.1 billion (NGN 1.3 trillion). At that time, the bank had 610 freestanding branches, making it the second largest bank in terms of branch network in the country. Eco bank Nigeria plc has evaluated the performance of its management using internal control.

1.1 DESCRIPTION OF THE PROBLEM

KPMG has determined that the string of business failures and corporate scandals are the result of a deficient internal control system. In 2001, the bankruptcy of Enron precipitated a steep drop in investor confidence in the capital markets. In response, the federal , through the regulatory authorities, has enacted SAS2-based disclosure rules for financial statement information. The standards formalized the obligations of corporate leaders, corporate directors, attorneys, and accountants and established a board monitoring system for public company auditors. The rules emphasize the importance of internal control over financial reporting in an effort to increase responsibility and restore investor confidence. This necessitated corporate governance, particularly in public institutions.

International Auditing Standards (IAS) address the auditor’s duty to discover serious misstatements stemming from error when conducting an audit of financial statements. The guidelines, in conjunction with the relevant SEC laws and auditing standard No. 2 issued by the public company ng Oversight Board (PCAOB), require the management of a public accounting firm and its independent auditor to release two new reports at the conclusion of each fiscal year. The annual report submitted with the Securities and Exchange Commission must include these reports (SEC). In the past, a company’s internal controls were examined in the context of audit preparation, but they were not needed to be published publicly, except in response to SEC form requirements when a change in auditor occurred. The new audit and reporting requirements have brought the concept of internal control over financial reporting to the forefront of the minds of audit committees, management, auditors, and users of financial statements. The new requirements also emphasize 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 control over financial reporting that exists as a result of the physical year, at the conclusion of assessment dates. Both PCAOB auditing standard No. 2 and SEC rules applying the guidelines require management and independent auditors to conclude that internal control over financial reporting is not effective if a single major weakness exists.

In light of this, the goal of this study was to determine the effect of internal control system on organizational effectiveness. Eco bank in Port harcourt is used as an example.

Conceptual Framework

Internal Control

Internal control can be defined as a set of mechanisms designed to incentivize an individual or a group toward the accomplishment of desired goals (Kirsch, 2002). Ouchi (1979) was of the opinion that internal control must be able to achieve the goal of fostering collaboration among individuals with diverse aims. Moreover, Cahill (2006) defines internal control as a system of internal administrative efficiency that frequently leads to the design of a system that will enhance financial check and balance, support corrective actions intended by the organization’s management, and ensure the organization’s primary objective is achieved. Similarly, according to Transparency International (2006), an organization’s internal control is a control designed to promote transparency and prevent corruption. According to Transparency International (2006), corruption typically results from the abuse of public office for private benefit. Examples of bribery include kickbacks and misappropriation of public monies. International Standard on Auditing (ISA) 400 defines internal control as “all policies and procedures adopted by the management of an entity to assist in achieving the management’s primary objectives by ensuring that the business is conducted as efficiently as possible and ensuring strict adherence to management policies, safeguarding of assets, prevention and detection of fraud, and timely preparation of reliable account records.”

Influence of Internal Control over a Financial Institution

Looking at a financial institution such as a bank, these bodies such as the , SEC, etc. constantly monitor and influence the actions of all banks, either directly or indirectly. It has been proved that fraud is a very lethal disease for commercial banks, since if it is allowed to spread and eat deeply into the banking system, it would inevitably bring about financial catastrophe. Despite the regulatory procedures implemented by individual banks, evidence from recent commercial and merchant banks indicates that fraud and forgeries are on the rise. The problem of fraud has increasingly garnered the attention of monetary and supervisory authorities due to the fact that fraud results in enormous financial losses to banks and a loss of client confidence in banks, which can lead to bank failure. Therefore, it is essential to emphasize the necessity for all banks to comply with the statutory requirements for reporting in order to evaluate the efficacy of any policy measures that the monetary and regulatory authorities may devise to combat this scourge. Financial institutions are required by law to retain external auditors to review their books and affairs. The regulatory authorities take action against members of the institution and management who have grossly breached the regulatory and statutory code of conduct, engaged in financial malpractice, or condoned such offenses by other employees.

Organizational performance

Organizational effectiveness refers to the degree to which an organization achieves the intended results. Organizational Effectiveness groups are directly concerned with a number of crucial issues.

 

1.2 PURPOSE OF THE

The primary purpose of this research is to investigate the impact of internal control system on organizational effectiveness using Eco Bank of Nigeria PLC, Port harcourt as a case study. In addition to the primary objective, the research aims to fulfill the following specific objectives:

1) Determine the implications of internal control on the efficacy of the Eco bank’s organization.

2) To understand the influence of internal control on Eco bank compliance monitoring.

3) Evaluate critically the effectiveness of the internal control in reducing the degree of risks at Eco bank.

QUESTION

This study tries to address, among other issues, the following:

What effects does internal control have on Eco bank’s organizational effectiveness?
What effect does Eco bank’s internal control have on monitoring compliance?
Has Eco bank implemented internal control to lower the degree of risks?

1.4 HYPOTHESES OF THE

For the study, the following research hypotheses were developed:

There are no substantial effects of internal control on the effectiveness of Eco bank’s organization.

Internal control has substantial effects on the organizational effectiveness of Eco bank.

There is no major impact of Eco bank’s internal control on monitoring compliance.

H2: Internal controls have a substantial impact on monitoring compliance in co-banks.

HO: Eco bank has not utilized internal control to limit the amount of hazards.

Eco bank has utilized internal control to lower the level of hazards.

1.5 Importance of the Research

This study will be of significant use to the organization’s management in addressing the effect of internal control on organizational effectiveness in a comprehensive manner, which will ultimately lead to high organizational productivity and risk mitigation. This study will assist organizations in gaining a better understanding of how to implement an effective internal control system for the efficient operation of their business.

This study will assist managers of companies and individuals in identifying the effect of internal control on organizational performance and its repercussions. As for managers in every firm in the country, the findings of this study will assist them in reducing the amount of risk and fraud within their organization in order to boost the confidence of their shareholders. Managers guarantee that machines and other equipment are operated appropriately during the production of goods and services in order to prevent any faults. Inappropriate utilization of firm assets might result in downtime if defective products require remanufacturing.

In addition, 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 it will also serve as an eye-opener to the fact that, as managers, there are numerous internal control issues within the organization that, if left unaddressed, will jeopardize the company’s organizational goals.

In addition, the study will seek to contribute to the existing literature or researches that will serve as a guide for organizational employees in preventing fraud and dangers within the organization.

This study would also aid policymakers in creating policies concerning the impact of internal control on organizational performance.

The investigation of the impact of internal control on organizational performance is another expansive area of research. Consequently, this study would aid researchers in looking beyond the scope of the present study and influencing previously acquired knowledge.

The impact of internal control on organizational performance will also enhance the credibility of practitioners such as auditors, tax specialists, etc.

1.6 SCOPE OF

The purpose of this study is to investigate the impact of internal control on organizational effectiveness, with a particular emphasis on Eco bank Nigeria plc in Port Harcourt. This research will involve the entire personnel of this bank, whose opinions will be gathered through a detailed questionnaire. The analysis concluded by emphasizing the banking sector as a significant factor in the country’s economic growth and development.

 

1.7 LIMITATIONS OF THE

In the course of this investigation, the researcher will confront a number of obstacles, the most significant of which is likely to be financial. Insufficient finances to cover expenses such as travel, the purchase of research instruments, the collection of both primary and secondary data, etc. In addition, the secondary source of data provided to the researcher contained either old or insufficient information, and access to the one available on the Internet needed a subscription.

This research was also constrained by time, such as study time and class attendance time.

The attitude of respondents is also a factor that limits the scope of this study. Even when assured of confidentiality, the majority of respondents are typically reticent to divulge information; they prefer to maintain anonymity.

Despite the limitations of this study, I plan to conduct additional research in this area.

OPERATIONAL DEFINITION OF TERMS

Internal Controls: The Institute of Chartered Accountants in England and Wales (ICAEW) defines internal control as the entire system of controls, financial or otherwise, established by management in order to conduct the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, to safeguard the assets, and to ensure, to the greatest extent possible, the completeness and accuracy of the records.

Internal Audit is a service-oriented, impartial evaluation activity established within a business. It is a control that examines and evaluates the adequacy and efficacy of other controls; a management tool that analyzes the effectiveness of all aspects of an entity’s operations and management. (CIMA’s Official Management ng Terminology)

CIMA defines monitoring as a procedure that evaluates the quality of the system’s performance over time.

As per Sunny, New Palta, and Root. It can be described as the final internal control criteria that evaluate performance quality.

Control Environment: According to the first internal control standard, this refers to departments that have a favorable and supportive attitude toward internal control and conscientious management.

The concept of reasonable assurance relates to the fact that internal controls, even when designed and running successfully, cannot guarantee absolute certainty that control objectives will be met.

1.8 NISATION OF THE

This research paper contains five chapters.

The first chapter provides an introduction to the research work, which summarizes the study’s context and the key characteristics of the effect of internal control on the organizational effectiveness of Ecobank plc. This chapter elaborates on the statement of the problem, the purpose of the study, the research question, the research hypotheses, the significance of the study, its scope, its limitations, and its design.

The second chapter of this research paper is titled “Review of Relevant Literature,” also known as “” and “Theoretical Framework,” and it consists of a review of prior research in the field of study and an analysis of numerous concepts related to the .

The third chapter addresses the research methods. This section describes research design, the population size to be examined, sample size determination, sampling strategies employed, method of data analysis and interpretation, and the statistical tools used to analyze the proposed hypothesis.

The fourth chapter of this study paper is devoted to the presentation, analysis, and interpretation of data.

The fifth chapter concludes the research study by summarizing its findings, conclusions, and recommendations. It is the final section of the research paper.

 

1.9 OPERATIONAL DEFINITION OF TERMS

Internal Controls: The Institute of Chartered Accountants in England and Wales (ICAEW) defines internal control as the entire system of controls, financial or otherwise, established by management in order to conduct the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, to safeguard the assets, and to ensure, to the greatest extent possible, the completeness and accuracy of the records.

Internal Audit is a service-oriented, impartial evaluation activity established within a business. It is a control that examines and evaluates the adequacy and efficacy of other controls; a management tool that analyzes the effectiveness of all aspects of an entity’s operations and management. (CIMA’s Official Management ng Terminology)

CIMA defines monitoring as a procedure that evaluates the quality of the system’s performance over time.

As per Sunny, New Palta, and Root. It can be described as the final internal control criteria that evaluate performance quality.

Control Environment: According to the first internal control standard, this refers to departments that have a favorable and supportive attitude toward internal control and conscientious management.

The concept of reasonable assurance relates to the fact that internal controls, even when designed and running successfully, cannot guarantee absolute certainty that control objectives will be met.

 

INTERNAL CONTROL’S IMPACT ON EFFICIENCY (USING BANK AS NIZATION UNDER )

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