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PROJECT TOPIC: AN EVALUATION OF THE EFFECTIVENESS OF INTERNAL CONTROL IN THE BANKING SECTOR (A STUDY OF SELECTED BANKS IN BAUCHI, STATE)

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CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

          A system of effective internal control is a critical component of bank management and a foundation for the safe and sound operation of banking industry. An investigation into the internal control in banks aim at identifying the weaknesses in the internal control system and to offer guidance on how to present inefficiency, wasteful assets and eradication of fraud and prevention of unreliable information in banking industry (Ehiedu and Ogbeta, 2014).

          Banking institutions occupy a central position in the nations’ financial system and are essential agents in the development process of the economy. By intermediating between the surplus and deficit spending units, banks increase the quantum of National savings and investments and hence national output. By granting credits, banks create money thus influencing the level of money supply which is an essential item in the growth of national income as it determines the level of economic activities in the country (Etuk, 2013).

          Banks are central to the payments system by facilitating economic transactions between various national and international economic units and by so doing encourage and promote trade, commerce and industry. Etuk, (2013), posits that for banks to be able to function effectively and contribute meaningfully to the development of a country, the industry must be stable, safe and sound. And for these conditions to be obtained there must be a sound accounting system, which is occasioned by an internal control system.

          Finance sector has become the most important actor with the impact of globalization and technological improvements in last two decades (Ayşe et al; 2013). As a consequence, financial products have increased, operational borders have expanded, and new financial markets have emerged. These developments have increased and diversified the risks that the banking sector has to manage. Poor management and insufficient control of risks originated financial crises in the world. The initial domestic crises spread the world through globalization, in a short period of time (Ayşe et al; 2013).

          The global financial crisis highlighted the importance of well-functioning and healthy banking sector for macro stability (Hayali et al. 2012). One of the main reasons of banking failures which results in major financial loss and even bankruptcy is due to high risks taken by the bank management on an excessive scale and inability of controlling them. The lack of an internal control system which duty is to keep the risks under control or major breakdowns within an existing internal control system pose a threat against the success of the banking sector.

          Internal control is a system structured within the corporation whose goal is to raise efficiency and effectiveness of activities. The system assures the conformity of activities within the laws and regulations and improves the reliability of financial reporting. Internal control system possesses vital importance for the institution to attain its ultimate objectives. Internal control system allows banks to foresee potential problems which may cause financial losses and thereby prevent or minimize any future losses. Researches on the causes of bank failures mainly concluded that an efficient and effective internal control system might prevent financial cost (Olatunji, 2009).

1.2    STATEMENT OF THE PROBLEM

          Internal control system is considered to be essential in accounting system as this will enhance the effectiveness and efficiency of the management of an enterprise. An effective and efficient internal control system ensures that all recorded transactions are; real, properly valued, recorded timely, correctly classified, correctly summarized and correctly posted.

          However, whether or not the internal control system has helped the management in having a sound accounting system, particularly in the areas of prevents controls’ and detects controls’ for which most organizations are facing remained debatable and controversial.

          Therefore, the question being asked is whether the controls in internal control system are sure that errors and fraud can be discovered with reasonable promptness, and whether the control procedures as prescribed and applied in practice are successful in preventing and detecting material errors and fraud in the accounting system.


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