EFFECT OF INTERNAL CONTROL ON ORGANIZATIONAL EFFECTIVENESS
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EFFECT OF INTERNAL CONTROL ON ORGANIZATIONAL EFFECTIVENESS
Chapter one
Introduction
1.1 Background of the Study
Banking institutions play an important role in the development of the economy and are vital to the country’s financial system. Banks promote national savings and investments, as well as national GDP, by acting as intermediaries between surplus and deficit spending units.
By giving credits, banks produce money, influencing the level of money supply, which is an important factor in the growth of national revenue since it influences the amount of economic activity in the country.
Banks play an important role in the payments system because they facilitate economic transactions between various national and international economic units, hence encouraging and promoting trade, business, and industry.
To function successfully and contribute meaningfully to a country’s growth, the banking industry must be stable, safe, and sound. And, in order to achieve these criteria, a strong accounting system is required, which is facilitated by an internal control system.
Given the rapid rise in company size and complexity, proper administration of modern commercial activities is impossible without an effective internal control system.
A system of efficient internal controls is an essential component of bank management and the foundation for the safe and sound operation of financial institutions.
A good internal control system can assist ensure that a banking organization’s goals and objectives are met, that the bank meets long-term profitability targets, and that financial and managerial reporting is credible.
Such a system can also help to guarantee that the bank follows laws and regulations, as well as policies, strategies, internal rules, and processes, reducing the risk of unanticipated losses or reputational harm.
Internal control, which is the strength of any organisation, has grown increasingly important in Nigerian banks. The reason for this is that an organization’s control systems serve as the foundation for an efficient accounting system.
The importance of internal control systems in organisations, particularly banks, cannot be overstated, given that the banking sector, which plays a critical role in a nation’s economic development, is currently characterised by macroeconomic instability, slow growth in real economic activities, corruption, and the risk of fraud.
Fraud, which is the primary reason for establishing an internal control system, has become a source of significant frustration for many Nigerian bank management.
It has also become an unwelcome fixture in Nigeria’s international image. Fraud is pervasive in Nigeria’s banking industry, and any bank with a weak internal control system is at risk of bank fraud.
The CBN reported that incidents of attempted fraud and forgery in banks had topped those registered for the entire year 2006. According to the CBN’s half-year report for 2007, there were 741 occurrences of attempted fraud and forgery totaling 5.4 billion ($35,406).1,150 Euros were recorded in June 2007.
In 2006, 1,193 cases were reported, totaling 4.6 billion, $1.8 million, and 14,389.7 pounds sterling. The CBN also stated that the bank’s internal control mechanisms were poor, which contributed to the backward progress. This has clearly demonstrated how fraud has permeated the financial strength of Nigerian banks.
In a nutshell, the harm caused by this danger known as fraud to banks is enormous and requires immediate attention. As a result of the attempt to put an end to this economic degradation, this research study examines the effect of internal control on organisational performance in the banking sector, using Ecobank Nigeria PLC as a case study.
However, the purpose of this study is to validate the belief that an effective and efficient internal control system is the best control measure for preventing and detecting fraud, particularly in the banking sector.
Internal control refers to the measures used to help ensure the achievement of a goal. Internal controls are policies, procedures, practices, and organisational structures that are implemented to provide reasonable assurance that an organization’s business objectives will be met and that undesirable risk events will be prevented, detected, and corrected in response to either compliance or management-initiated concerns (Awe, 2005).
Internal control is defined by the Institute of Chartered Accountants of England and Wales (ICAEW) as the entire system of controls, financial or otherwise, established by management in order to carry on the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard assets, and secure, to the greatest extent possible, the completeness and accuracy of records.
They are instruments that management uses on a daily basis to ensure that their organisation or business runs well. Internal controls are also defined as the mechanisms put in place by an organisation to guarantee that its objectives, aims, and missions are met.
They are a set of policies and processes implemented by an entity to ensure that an organization’s transactions are conducted properly in order to avoid waste, theft, and misuse of organisational resources.
Internal controls are processes designed and implemented by those in charge of governance, management, and other personnel to provide reasonable assurance that an entity’s objectives are met in terms of financial reporting reliability, operational effectiveness and efficiency, and compliance with applicable laws and regulations (Mwindi, 2008).
Internal control enforcement should be structured to increase operational efficiency and effectiveness, provide reliable financial information, protect assets and records, encourage policy adherence, and ensure regulatory compliance.
A strong internal control system will guarantee that transactions are genuine, properly authorised, documented, properly valued, properly classed, reconciled to subsidiary records, and not carried out by a single employee (i.e., ensuring separation of duties) (Adeyemo Kingsley A,2012).
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