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THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN THE BANKING INDUSTRY
CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
It is interesting to note that “Audit” originated from the Latin word “Audire” which means “To Hear” because in ancient time, the owner of a business used to hear a report made by the Auditor about the book keeping and financial records of hours business. This was because the primitive ways of keeping financial records which inducted making marks on ward, keeping figures off hand without any documentation and back of mechanical aids for calculation, had a lot of problems associated with it.
The rudimentary form of checking records of financial transaction could be traced back to the 17th century when civilization came to stage where people began to come on formal business transactions. But such checking was configured mainly to the public account because private audit in the early stages of civilization are rare.
Auditing, as it exists today, developed quite late because the development of accounting was slow as compared to economic theory. The eventual development of auditing was based on a strong determination to conquer problems associated with early beginning of business transactions and to provide an independent and competent report on the state of affairs of the business to their owners.
In modern times, audits have been affected the needed to encourage public investment by providing an environment for ensuring that investor found are put into proper use.
Philosophy of auditing put more input on it that the thinking behind auditing principally arose from the management and the consequential need to safeguard the interests of the owners who in all but the smallest of business were not involved in the day-today decisions made by the management.
Owing to the enlargement of size and complexity of business enterprise today, the concept and scope of auditing have changed. A comprehensive definition of auditing system given by Robert .E. Schlessor as quoted by Jadish Dakash in his book “Auditing principles, practice and problems” (1990:8) say Auditing is a system examination of financial statements, records and related operations to determine and herences to generally accepted accounting principles management policies stated requirement.
Another definition which is widely accepted given by chartered Accountants of England says.
Auditing is an independent examination and investigation of books, records and vouchers so as to enable the Auditor to report whether they have been properly drawn up, so as to show a true and fair view of the profit and loss and balance sheet and of the state of affairs of the business accordance with the best information and explanation given to the Auditor. In these definitions, emphases were laid Auditing being related to operations and how far they adhere to management policies on stated requirements. In other words, we find out that there is need to introduce an effective control system a lack of which can head to business failure also resulting to other multiple problems.
What then is this internal control? Internal control system is defined by explain institute as:- Those control, not only internal check and internal audit but the whole system of controls, financial and otherwise established by management in order to carry on the business of an organization in an orderly manner, safeguard it’s assets and secure as far as possible the accuracy and reliability of it’s records. It may therefore be said that internal or control is an umbrella beneath which are included financial controls, internal check, internal audit and non-financial controls.
The individual components are known as “Control” or “Internal Control” Millichamp .A. U. (1990:97) in his instructional manual for accounting students also defined internal control as related to the definition given by English institute.
Also, it was stated in paragraph five of the Auditor’s operational standard requires that for an auditor to place reliance on any internal control, he should ascertain and evaluate those controls and perform compliance test on the control. We therefore see that to have a sound control system, it would be worthwhile for the organization and the possibility of business failure will be minute.
1.2 STATEMENT OF PROBLEM
With reference to what was mentioned in the introduction that business failure could result from ineffectiveness of internal control system are, the research work therefore will look into ineffective of internal control system in the banking industry today, this posses as a problem because it brings so many associated problems which could be detrimental to a business for instance, deterioration of working capital, high debt equity ratio. Sales decline profit decline, high labour turnover, low capacity utilization, low quality services and finally fraud of which could be either sales fraud purchases, wages of petty cash fraud.
1.3 PURPOSE OF THE STUDY
The purpose of the study is to critically look at the problems at hand (business failure) the associated problem it brings and interrelationship between these variables and how one leads to the other or it’s effect etc. And to provide recommendation for solving the problem.
DETERIORATION OF WORKING CAPITAL
The amount for running of the day –to day business if there is uncontrolled wastages, writing off too many debts etc.
High dept equity-the ratio of outside investor to shareholders. It is importation that a business is geared, but when the gearing ratio becomes too high. There would be a problem of insufficient profit to pay dividend after the deduction of increasing debenture, interest interference of debenture holders in the affairs of a company in respect of non-payment.
FRAUD:-
Irregularities involving the use of deposits to obtain an illegal or unjust advantage:- This could either be cash or sales fraud, these types of fraud relate closely because before a cash fraud could occur a sales must have occurred.
Purchase fraud could be by misuse of order forms, creation of non-existing supplies, presenting two cheques for signature with the same supporting documents.
WAGES FRAUD
This could occur by including during names on payrolls, including ex-employee on the payroll or overcashing gross and net columns in the wages sheet. We therefore, see that control is very important for the solving of these various interlocking problems.
1.4 RESEARCH QUESTIONS
In order to achieve the aims and objective of a typical project, questions have to be asked and answers to be provided for them.
Hence, the questions of this research are:-
(a) What are the effects of internal control in the banking industry?
(b) Is the internal control system in place in the banking industry adequate? If not, can it be improved?
(c) Can effective control system help to reduce business failure and other related problems?
(d) What type of internal control system is being practised by the banking industry?
1.5STATEMENT OF RESEARCH HYPOTHESIS
Research hypothesis means an idea or assumption in mind, which is yet to be verified. It is noteworthy to state that the hypothesis is derived from the combination of the problem detected and the subsequent research questions highlighted above. Thus, the following hypothesis has been formulated and to be tested in this research work in order to draw a logical conclusion.
NULL HYPOTHEIS (Ho)
There is no effect on internal control system in the banking industry.
ALTERNATIVE HYPOTHESIS (HI)
There is an effect on internal control system in the banking industry.
NULL HYPOTHESIS (Ho)
There is no adequacy in the internal control system in the banking industry.
ALTERNATIVE HYPOTHESIS (HI)
There is an adequacy is internal control system in the banking industry.
NULL HYPOTHESIS (HO)
Effects of internal controls cannot help reduce business failure and other related problems.
ALTERNATIVE HYPITHESIS (HI)
Effect of internal control can help to reduce business failure and other related problems.
NULL HYPOTHESIS (HO)
Effective internal control is not practiced by the banking industry.
ALTERNATIVE HYPOTHESIS (HI)
Efficient internal control is practiced by the banking industry.
1.6 SCOPE AND LIMITATION OF THE STUDY
The nature of this study entails the ascertainment of the effectiveness of internal control system in the banking industry. The internal control system being a very large topic. It could therefore, be said that it would be difficult to look all department of internal control in an organisation. As a result we will limits the research to accuracy and authorization of operations with respect to cheques, cash receipts, wages salaries, petty cash and measuring the effectiveness in the banking industry.
Personal interviews and well structure questionnaires will be employed appropriately, also text books, journals annual report shall be consulted.
It is not worthy to state that to a large extent this research work will be limited to situations happening at WEMA BANK PLC. A good research requires a lot of work but there are constraints that may likely hinder the researcher from carrying out a successful research work e.g.
A - Time constraints
B - Financial statements
C - Data constraints etc.
1.7 SIGNIFICANCE OF STUDY
In the financial services sectors such as banking, insurance, building societies, consumer credit, purchase business leasing, factoring business venture etc. bank represents probably the most important financial sector. This is not just in terms of turnovers profit and employment of labour, but also it’s paramount impact on the other sphere of the economy. Any problem in the banking system would invariably have strong effect on the economy and that is why this research work tries to study the internal control in the banking sector with respect to WEMA BANK PLC and see how it’s effectiveness would be used to prevent business failure.
These work will serve as a basis of broadening the researcher’s knowledge on internal control and it’s users. To customers and investors, they would be confidence that controls in place an be relied upon fore safe guarding of their deposit. Management in the other hand will be able to reduce losses and improve on internal control system.
Finally, the academic world will use this work as a basics for further study.
BACKGROUND OF THE COMPANY (WEMA BANK PLC)
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