THE DETERMINANTS OF BANK PERSISTENCE ON INTERNAL CONTROL WEAKNESS
Abstract
This research examines determinants of banks persistence of internal control weakness in Nigeria. The main objective is to examine if there exist a significance relationship between bank internal control environment and control weakness. The secondary source i.e. companies annual reports and accounts were adopted. The study discovered that there is a positive relationship between bank internal control activities and internal control quality. It was concluded that bank control environment is a determinant of the level of internal control quality and that an increase in banks control environment will increase the quality of internal control. The study however recommends amongst others that enough resources should be provided for personnel to carryout effective risk management and internal controls.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
There is currently considerable interest in the topic of internal control systems and its contribution to exact management of any business economic resources (Kantzos & Chondraki, 2006; Rittenberg, 2006). This developing role of the internal controls is also reflected in its current definition as posited by Cahill (2006) which states that “internal control is the system of internal administrative and financial checks and balances designed by management, and supported by corrective actions, to ensure that the goals and responsibilities of the organization are achieved”. The growth in international financial markets, the emergence of the universal banking policy amongst others has given banks the opportunity to design new products and to provide a wide range of services which has come with increases in associated risks (Palfi & Muresan, 2009).
Consequently, there is growing management recognition of the importance of implementing a good internal control system as the activities of internal controls are now seen as critical elements in the assurance process.
With particular emphasis on banks, strong internal contract systems have long been seen as particularly relevant to banks because of their vulnerability to fraud and the links between information systems and money (Cahill, 2006). A system of effective internal controls is a critical component of bank management and a foundation for the sate 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 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. According to the Basle Committee on Banking Supervision (1998), this heightened interest in internal controls is, in part, a result of significant losses incurred by several banking organizations. An analysis of the problems related to these losses indicates that they could probably have been avoided had the banks maintained effective internal control systems. Such systems would have prevented or enabled earlier detection of the problems that led to the losses, thereby limiting damage to the banking organization. The committee report highlighted further that the internal control systems must be designed to provide reasonable assurance of realizing the underlying objectives, as there should be necessary assurance that all bank’s revenues accrue to its benefit, all expenditure is duly authorized and properly disbursed, all assets are adequately safeguarded, all liabilities are recorded, all statutory requirements relating to the provision of accounts are complied with and all prudential reporting conditions are strictly adhered to in such a manner for providing management information.
In the Nigerian banking industry, there is the perception by stakeholders that the quality of internal control appears to be inadequate. The persistence of financial fraud and fragility in the system resulting to several bails out attempts by the apex bank (i.e. Central Bank of Nigeria) strengthens the suspicion of a deep-rooted internal control challenge.
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