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FINANCIAL IMPLICATION OF INTERNAL CONTROL SYSTEM IN AN ORGANISATION (A Case Study of Mercury Microfinance Bank)

ABSTRACT

Internal control systems is a topical issue following global fraudulent financial reporting and accounting scandals in both developed and developing countries.

This research work examine the implications of internal control system in an organization with reference to Mercury Micro Finance Bank. In today’s volatile business environment, banking sub-sector in Nigeria faces a wide array of complex business challenges. These challenges come in the form of regulatory compliance, litigation, competitive market pressure, changing technology, investors demand, corporate governance, business ethics and accountability.

The research examine the various types of internal control and the components of internal control. A questionnaire was designed and administered to the staff of Mercury Micro Finance Bank. The data gathered from the questionnaire were presented on table with the respective percentages. The formulated hypotheses were analysed with the used of Chi square statistical tool. From the analysis it was concluded that;

·        Effective internal control system make fraudulent practices and other incidences of irregularities very difficult to perpetrate.

·        Constant review of accounting and internal control system will reduce incidence of fraud and irregularities in Microfinance banks.

·        The internal control system currently in operation at Mercury Microfinance Bank is inline with the International Accounting Standard (IAS).

Conclusion was deduced from the result of the analysis and recommendations were made.

TABLE OF CONTENTS

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study       

1.2     Statement of Problem

1.3     Aim and Objectives of Study

1.4     Research Question        

1.5     Statement of Hypothesis

1.6     Research Methodology

1.7     Significance of Study

1.8     Scope and Limitation of Study        

1.9     Definition of Terms

CHAPTER TWO

LITERATURE REVIEW

2.0     Introduction        

2.1     Definition of Internal Control 

2.2     Purposes of Internal Control System

2.3     Types of Internal Control

2.3.1  Directive or Entity Level Controls   

2.3.2  Preventive Internal Control

2.3.3  Detective / Corrective   

2.3.4  Compensating Control

2.4     Components of the Internal Control System

2.4.1  Definition of Responsibilities 

2.4.2  The In-House Dissemination of Relevant and

          Reliable Information     

2.4.3  A System for identifying and Analysing Risk

2.4.4  Control Activities

2.4.5  On-Going Monitoring of the Internal Control System  

2.5     internal Control Players

2.5.1  The Board of Directors or the Supervisory Board

          (“The Board”)     

2.5.2  Executive Management / The management Board

2.5.3  Internal Audit      

2.5.4  Company Staff    

2.6     Conceptual Framework

2.6.1  Control Environment    

2.6.2  Risk Assessment 

2.6.3  Control Activities

2.6.4  Application Controls    

2.6.5  Information and Communication     

2.6.6  Monitoring

2.7     Effective Internal Control

          References

CHAPTER THREE

RESEARCH METHODOLOGY

3.1     Introduction        

3.2     Sources of Data

3.3     Population and Sample Size   

3.4     Research Instrument Design   

3.5     Administration of Research Instrument

3.6     Analysis of Data

3.7     Methodology

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1     Introduction        

4.2     Personal Characteristics of the Respondent

4.3     Response of Respondents of the Problem Areas

4.4     Testing and Interpretation of the Hypothesis

4.4.1  Test of Hypothesis One

4.4.2  Test of Hypothesis Two         

4.4.3  test of Hypothesis Three        

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1     Introduction

5.2     Summary   

5.3     Conclusion

5.4     Recommendation

          References

          Appendix

CHAPTER ONE

INTRODUCTION

1.1     BACKGOUND OF THE STUDY

When companies suddenly collapse, the often resounding question is, “what went wrong?” Abreakdown in the internal control system is the usual cause. Internal control is a process that guides an organization towards achieving its objectives. These objectives include operational efficiency and effectiveness, reliability of financial reporting, and compliance with relevant laws and regulations (COSO 1992). Absence of these variables often results in organizational failure. The findings of the Treadway Commission Report of 1987 in the United States (USA) confirmed absence of, or weak, internal controls as the primary cause of many cases of fraudulent company financial reporting.

The widespread global corporate accounting scandals that assumes near epidemic proportionsin recent years inform this study. Cases of accounting scandals have been recordedInternational Research Journal of Finance and Economics - Issue 27 (2009) 125in JCI and Randgold and Exploration companies. In Nigeria, the Managing Director and ChiefFinancial Officer of Cadbury Nigeria plc were dismissed in 2006 for inflating the profits of thecompany for some years before the company’s foreign partner acquired controlling interest.

These scandals emphasize the need to evaluate, scrutinize, and formulate systems of checks andbalances to guide corporate executives in decision-making. These executives are legally and morallyobliged to produce honest, reliable, accurate and informative corporate financial reports periodically.

The banking industry is a very important subsector of the financial services of any economy. For effective operation and to beable to render a good stewardship to the operations of a bank, it isimperative that there should be reliable accounting and internalcontrol system. The effectiveness of accounting system of any organization depends on the manner and methods used in therecording of financial transactions, which must be in agreement withthe International Accounting Standard,(IAS) regulations.

Installation of an effective accounting and internal control system is compulsory for every banks especially the Microfinance Banks. If proper records of accounts are not be given to the shareholders and other users of accounting information. This may therefore leads to shareholders, customer, and general public not having confidence in the operation of Microfinance Banks.

There must be a periodic review of the accounting andinternational control system of Microfinance Banks from time to time toensure proper reporting and accounting.Proper keeping of accounting records will enable themanagement to determine whether or. not the firm is operating at a profit. If there is constant review of accounting and internal controlsystem, it will prevent fraud/mismanagement of funds.

1.2     STATEMENT OF PROBLEM

Most Microfinance Banks do not have proper books of accounts and the accounting records of some Microfinance banks in Nigeria are inefficient and unreliable. Also, some of these Microfinance banks have collapsed and closed for business due to improper keeping of records and maintain adequate internal control system.

This research study will provide suggested solution to the above problem and if followed, will ensure proper accountability.

1.3     AIM AND OBJECTIVES OF STUDY

The aim of this research work is to evaluates the financial implication of internal control systems with spcial reference to Mercury Microfinance Bank. The obecjectives includes:

·        Ascertains whether the internal control system provide adequate internal framework of checks and balances of the fund of Microfinance banks.

·        To investigate whether the internal control system currently in operation at Mercury Microfinance Bank is inline with the International Accounting Standard (IAS).

·        Investigate if the internal control system has ever been compromised and led to a negative financial implication.

·        Find out how they could overcome the negative financial implication caused by the poor internal control system.

·        To find out whether books of account are kept by Microfinanace banks as required by statute.

The research work will also look into the methods and systems of accounting to be adopted for day - to – daytransaction and means of installing and effective internalcontrol system, and  also provide recommendation to solving various Internal control systems in Microfinance banks.