ACCOUNTING

EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN NIGERIAN BANKS [A CASE STUDY OF SKYE BANK PLC]

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The banking industry is the live-wire or the equivalent to the central nervous system of the human in all capitalist economics. The institution provide the vital link between the surplus unit and the deficit unit of the economy. Banks promote investment by providing facilities for mobilizing savings and appropriate instruments without which either economic growth or development can take place smoothly and efficiently. In the process of performing these functions, banks come to hold the single largest proportion of the economy’s financial resources and correspondingly account for a similar lion share of the credit that propels the engine of growth and development. In the light of this, the subject of internal control in the industry is of interest to all western type economies of the world.
The process of financial account and data production should be based on a recognized, well-defined and wellorganized system of procedures. If the business transactions are to be properly and correctly observed, documented, Recorded and collated, then there must be a system which is designed to cope with these activities. For this reason, management of the organization has in general, over a period of many years, placed a great deal of emphasis on having strong system of internal control, where possible. This system is intended to maintain adequate process of accounting data production and safeguarding the organization against possible financial loss due to fraud or error. Internal control, in its broadest sense, includes all controls, checks and procedures, formally instituted by the management, to maintain the maximum administrative and operational efficiency possible within the accounting and non-accounting function of the business organization. However, in terms of financial accounting, the system is mainly concerned with those controls which exist to aid the processing of reliable accounting data and to safeguard companies’ asset. The International Auditing Standard and Guidelines [2002] defined Internal Control as ”the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the company in an orderly and efficient manner; ensure reliance to management policies, safeguard its assets and secure as far as possible the accuracy and reliability of its records. The special Report on Internal Control of the Association of Certified Chartered Accountants, London, defines internal control as follows: “Internal Control includes not only internal check or internal audit but all systems of controls, financial or otherwise established by management to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records. An important feature of the impact of Internal control is the director review of company financial operations and position at regular and frequent internals by means of interior account and report, operating summaries and other appropriate financial and statistical. In addition to regular view, management may from time to time call for special reviews of particular items e.g. wages, stock, salary access etc. Managerial review and supervision are essential element in an efficient and effective internal control system. Banks like other business organization achieve their objective through the use of human and economic resources. In most cases, the economic resources are provided by various interest group that do not participate in the day today normal running of the operation of the business. The onus is therefore, on the management to make sure these resources are effectively and efficiently managed to achieve the set goal and to build up public confidence, the desired control achieved through the setting up of a good and valid internal control system. Internal audit which is an integral aspect of internal control. As a part of management team of the control function, it is clearly described in the statement of responsibilities of the internal auditor as an independent appraisal of activity within an organization for the review of accounting, financial and other operation are basis for service to management. For instance, Cadbury Nigeria sacked its Managing Director, Mr. Bunmi Oni and Mr. Ayo Akadiri, the company’s Finance Director recently, which is a fallout of the financial book padding scandal and corruption that recently rocked the company, and that is the way it should be commended. The Board recently commissioned the firm of price water Coopers to review and investigate the company’s financials. The outcome of the investigation “has confirmed a deliberate overstatement of the company’s financial position over a number of years to the tune of between N13 and N15 billion”! This is Nigeria’s version of the Enron Corporation scandal in the United State. In case of ENRON which brings to mind the collapse of the seventh largest company in the United States of America and the largest bankruptcy seen by the country till date. There are many issues that were raised with the collapse of Enron as described in the CRS Report for the Congress in 2002:
Auditing – There may have been a possibility that the auditors were misled into preparing the wrong financials for the company. Often companies pay more to auditors for non-audit fees than for audit fees, which may bring the auditors to compromise their standards.
Accounting – There are several questionable accounting techniques like subsidiary accounting, derivatives and third party investors used by Enron. The loopholes in the accounting system need to be rectified.
Pension – More than 60% of the assets held in the 401(k) plan consisted of Enron stock, which when plummeted put stockholders and employees in huge losses and setbacks. Such grave scenarios need to be avoided in the future. Corporate Governance – The board of directors is meant to protect the interest of the shareholders. In Enron’s case the CFO was allowed to create private partnerships to deal with the company which is against the best interest of the company. Securities Analyst – The creditability of analysts came under question following the collapse of Enron stock in November 2001 as even the Wall Street analysts failed to predict the Enron disaster. This study is therefore established to evaluate internal control as a management tool in banking industry using Skye Bank PIc as a case study.
1.2 STATEMENT OF THE PROBLEM
A notable feature of the industry is low ethical standard and transparency. These are manifesting in the rising cases of unwholesome practices being recorded. A number of banks engage in some sharp and unorthodox practices to achieve compliance with some regulatory requirements “on paper” Many banks’ returns provide inaccurate/misleading financial report thereby preventing timely detection of emerging problems by the supervisor. The managerial incompetence of the top management of some banks as evident in weak internal control system of the banks. Substantial losses incurred by many banks on their credit portfolio, frauds and forgeries and outright negligence have brought to the fore, the importance of sound internal control system. Appraisals of fraud-related losses by Bank Examiners revealed that such losses could have been prevented had the affected banks maintained effective internal control systems. The trend in deficiencies in banks’ earning assets especially loans and advances, arising from either poor loan administration or unethical lending (such as insiders’ abuse). This is an indication of managerial problems in this regard. The importance of internal control system cannot be overemphasized where a variety of requirements, processes that are both manual and information communication technology-based (ICT) are used. Organizations have recognized internal audit function as a tool for ensuring effective workings of the internal control system. Okolo (2001) describes the internal control function as an aspect of control mechanism, within a business, manned by specially assigned staff. However, in Nigeria, the internal control function in the banking sub-sector has not been fully tapped; consequently, cases of errors and intent to defraud and other fraud cases exist in the banking industry. The distress in the banking sub-sector in the nineties reflected lack of effective control mechanism of the audit function in the banking industry. The experiences of failed bank in Nigeria have therefore called for the reinforcement and the strengthening of the controls system in the Nigerian banks.
1.3 OBJECTIVES OF THE STUDY
The main objective of the study is to evaluate the effectiveness of internal control as management tool in banking industry in Nigeria. The specific objectives of the study are:
i. To verify the existences of internal control and auditing system in banks.
ii. To ascertain whether the existing level controls and internal audit procedure in banking industry are adequate to ensure staff efficiency, services delivery, prevention of fraud and embezzlement forestalling occasion of mismanagement
iii. To identify the various type of fraud that can be penetrated in banks and strategies of fraudsters. iv. To determine the suitability or otherwise of the bank official in charge of internal control system.
v. To examine the possible effect of fraud on the earnings and profitability of banks.
vi. To suggest meaningfully ways of improving quality of internal control in banking industry.
vii. To what extent does inefficient staffing impede effective Internal Control System in the Banking Industry?
1.4 RESEARCH QUESTIONS
The following are a few of the questions, which were asked in the questionnaire in the carrying out of this research work.
i. Does the internal audit system ensure that operations comply with set policies and promote accuracy and reliability of transactions?
ii. Are internal/external auditors independent of those whose functions they appraise?
iii. Based on the evaluation of the internal control system, is it effective and efficient?
iv. Is the accounting and operational routine sit out in an accounting Manual?
1. What recommendation can effective and efficient internal control system application to Nigerian banking industry?
1.5 RESEARCH HYPOTHESES
The two hypotheses are formulated and tested in this study.
Ho: The lack of a good internal control is not a major cause of fraud in banks.
Hi: The lack of a good internal control is a major cause of fraud in banks.
Ho: Banks with internal control systems cannot prevent the menace of fraud.
Hi: Banks with internal control systems can prevent the menace of fraud.
1.6 SIGNIFICANCE OF THE STUDY
1. It enables managers of services, organizations and government owned public utility establishments to bring the accounting and the internal control procedures inherent in them in conformity with internal accounting standards and practices.
2. It helps government owned establishments to assess their internal control measures and make amends where necessary
3. The study could arouse further research into some other further research into some other functional areas in the company by students and accountants. It will also help to broaden (my) researchers’ knowledge.
4. The research work helps in widening the researchers knowledge of practical application of internal control system in banking organization.
5. The study also enhances the appreciation of internal control as a necessary tool in the smooth and efficient running of an organization.
6. The study also enable the readers to appreciate the operation of internal control system in a business organization vis-a-vis its theoretical frame work.
1.7 METHODOLOGY OF STUDY
The data needed for this research work were collected from both primary and secondary sources of data.
1. Primary Sources: Personal interview of some managers and staffs of the research section of Skye Bank PLC Lagos were conducted. Structured questionnaires were administered to the manager and the staff as well especially one staff in the research section in Skye Bank PIc.
2. Secondary Source: The research consulted books, journals, magazines and other relevant literature to the topic. The data collected from the administered questionnaire were analyzed using descriptive statistics, and the hypotheses were tested by using chi-square statistical tool for testing hypotheses.
1.8 SCOPE AND LIMITATION OF STUDY
The research study is limited to the evaluation of internal control system as a management tool in banking industry in Nigeria, with particular reference to Skye Bank PIc. In carrying a research work, certain problems were encountered which limits the precision of the research and the extent of generalization of the research work. The problems include, a time constraint which renders one from delving into areas other than accounting and administrative control in the organization, geographical location of the case study in relation to researcher’s institution, and limitations to the amount of information’s obtainable from the respondents to the oaths of secrecy of the organization.
1.9 HISTORICAL BACKGROUND OF SKYE BANK PLC
Skye Bank PLC is a public limited liability company incorporated as ‘Prudent Merchant Bank limited’ on the 8 th of December 1989 in accordance with the provisions of the Companies and Allied Matters Act, 1968. It was issued a banking license on February 7, 1990 to carry on all classes of merchant banking business in accordance with provisions of the Banking Act, 1969 and it commenced operations on the 2 nd of May 1990. The bank’s name was changed to Prudent Bank Limited in 2000 following an Approval in Principle by Central Bank of Nigeria (CBN) for the conversion of the Bank to a commercial bank. The Bank commenced operations as a commercial bank in 2001. Skye bank PLC came about by the merger of five Institutions-Prudent Bank PLC, Eko International Bank PLC, Reliance Bank Limited, Cooperative Banks PLC and Bond Bank PLC which was seamlessly completed in January 2006. The Head office of the Bank is situate at No.3, Akin Adesola Street, Victoria Island, Lagos. The Bank is currently engaged in the business of universal banking by virtue of its banking license. It provides services to individual and corporate customers through its network of branches and local and international subsidiaries. Skye bank listed on the Nigeria Stock Exchange and has over 450,000 diverse shareholders. The Bank’s shareholders’ fund is in excess ofNl00b.The local subsidiaries of the Bank are Law union and Rock Insurance PLC, Skye Stockbrokers Limited, Skye Mortgage Bankers Limited, Skye Trustees Limited, Apex Integrated Technologies Limited, Skye Exchange (BDC) Limited, Skye Resources Limited and Skye Financial Services Limited. The international subsidiaries are Skye Bank Gambia Limited, Skye Bank Sierra Leone Limited and Skye Bank Guinea Limited. The financial statements of the Bank’ subsidiaries have been consolidated. The Central Bank of Nigeria repealed the universal banking license and directed all banks to either divest from all their non-core banking subsidiaries or create a non- operative holding company to hold all such subsidiaries, including the core banking business. Pursuant to this repeal, the Board of Directors of the Bank resolved to focus on the core commercial banking subsidiaries of the Bank. Resolutions will be proposed at the Annual General Meeting to authorize the Directors to divest of the Bank’s non- core banking subsidiaries in such manner as they consider necessary and to take all necessary actions in order to give full effect to the divestment.
1.10 DEFINITION OF TERMS
INTERNAL AUDIT: This can be define as the independent appraisal of activities within the organization for the review of accounting, financial and other operations as basis for service to management.
INTERNAL CHECK: These are day to day administrative control within the internal control system which aims at detecting and minimizing the risk of fraud and error.
ACCOUNTING CONTROL: This comprises of the plan of the organization and all methods and procedures that are concerned mainly with and directly to reliability of the financial records.
TEST CHECKING: This is a method of verifying the operations of a computer program by tracking likely transactions through a print-out of the program
1.11 REFERENCES
Abosede, A. et al (2000): Research Methodology for Management Science. First Edition Lagos:Mixon Publishers.
Adeniyi, A.A. (1997): Accounting System and Internal control System, Macmillan publisher, Lagos.
Adeleke, J.O (2009): Audit Investigation and assurance Services. Mixon Publishers. Lagos
Babs Ajayi (2006): Nigeria world Feature Article: Thursday, December 14,2006 Skye Bank Annual Reports & Financial Statements 2010
Uchendu, O. A. (1998) “Concentration in the Commercial Banking Industry m Nigeria” Economic and Financial Review, Vol. 40 No.3, Central Bank of Nigeria.