The Effect Of Accounting And Internal Control System In Deposit Money Banks Operation

Project and Seminar Topics with material for Banking and Finance

The Effect Of Accounting And Internal Control System In Deposit Money Banks Operation


The objective of the research was to establish the Effect of accounting and internal control system in deposit money banks. Internal Controls were measured using the five elements of internal control as stipulated by the Committee of Sponsoring organizations. A descriptive research design was adopted due to its ability to describe the relationship between elements of accounting, Internal Controls and Financial Performance.

Chapter One


1.1 Background of the Study

Internal control is the set of accounting and administrative control and practices that helps managers in operating their organization more effectively and efficiently. It ensures that both the accounting and administrative activities are in order with the laid down procedures, standards, and statutory requirements. It also detects deviation if any and calls for immediate corrective measure. In any profit oriented organization, the objective of management is to maximize profit, and internal control is a technique that can be of assistance in attaining such maximizations. Banking is a venture undertaken primarily for profit and whose operation should at least include taking money on account and releasing of such money wholly or partly on demand or authority of the depositor. An important object of banking particularly in the developing countries is the promotion of economic development. In pursuance of this economic development as well as banks’ profitability, banks tends to improve on their services by devising methods of sound and effective system of internal control. This study therefore, intends to evaluate how the internal control policies have affected the profit performance of commercial banks with particular reference to Orient Bank of Nigeria Plc and United Bank for Africa Plc.Fraud, according to Nwankwo (1991) arises when a person/organisation in position of trust and responsibility deliberately breaks the rules for personal or corporate gains at the expense of public interest. It is a global malaise that spares no institution and economy. Bank fraud on the other hand is the use of illegal means to obtain money and/or assets held or owned by financial institutions (Nwaeze, 2008). The increasing wave of fraud in financial institutions in recent years pose serious threats to the stability and survival of financial sector and banks in particular (Usman& Shah, 2013). Akinyomi (2012) opined that fraud if not properly checked, might result in huge financial losses to banks and their customers, depletion of shareholders’ funds and banks’ capital base as well as loss of public confidence in banks. Also, the incidence of frauds and forgeries could, in extreme cases, lead to the closure of banks (Fatoki, 2015). Many of the distressed banks in Nigeria today had suffered a great deal from frauds and insider credit abuses (Nwaeze, 2008).The Nigeria Deposit Insurance Corporation in its 2015 annual report and statement of accounts for the banking sector, stated that a total of 12,279 reported fraud cases for 2015 represented an increase of 15.71 per cent over the 10,612 recorded in 2014 (Ebhodaghe, 2015). Adebisi (2009) reported that the increase in the incidence of frauds and the relatively large amounts involved poses great challenges to the survival and viability of the financial institutions. The foregoing therefore makes it incumbent on stakeholders to declare an emergency on the malaise of fraud in the banking industry in Nigeria. This study aims to examine the impact of fraud on bank performance in Nigeria. The history of the Nigeria banking system connects with growth and burst cycles in the number of operating banks and their branches.

Signs of growth are usually experienced when the policy environment presents questionable business opportunities within the banking sector. In other words, there seems a sudden policy shift that makes it easy for ordinary business people to initiate processes that creates access to public funds in the name of bank deposits. The banking industry as regulated by the Central Bank of Nigeria is made up of Deposit Money Banks usually referred to as Commercial Banks and other Financial Institutions which includes deposit money Banks, Finance Companies, Bureau De Change, Discount Houses and Primary Mortgage Institutions. The statement of research problem in this study stems from the fact that banks appear very profitable in Nigeria, whether returns on assets are assessed on country by country, income group or by individual banks. The Nigerian economy observed in the present dispensation has been characterized by worsening economic fortunes in terms of reduced growth, increased unemployment, galloping inflation, high incidence of poverty, worsening balance of payment conditions, high debt burden and increasing unsustainable fiscal deficit. There are management challenges confronting Nigeria banks since the advent of indigenous banks. Aside losses experienced by depositors, shareholders, employees and other stakeholders, the level of confidence in the financial system has been negatively affected. There are many definitions of internal control, as it affects the various constituencies (stakeholders) of an organization in various ways and at different levels of aggregation Internal controls are systematic measures such as reviews, checks and balances, methods and procedures instituted by an organization to conduct its business in an orderly and efficient manner, safeguard its assets and resources, (Business Internal control is ―the whole system of controls, financial and otherwise, established in order to provide reasonable assurance of effective and efficient operation, internal financial control and compliance with laws and regulations‖ (CIMA, 2006) The internal control process is integrated with all other processes within an organization and is a technique used by managers to help an organization achieve its objectives. (Internal Audit files. Internal control overview August 2007) Adequate internal controls allow managers to delegate responsibilities with reasonable assurance that what they expect to happen, actually does. The three fundamental elements of management planning, sorting out, guiding and controlling is critical to any effective organization.

Banks as a financial institution has the major role of lubricating the gears facilitating the economic operations of a nation. The banking system plays a major role in moving funds from the saving units to the spending units. To mention a few, if a financial system is efficient, it should show improvements in profitability, increasing the volume of funds flowing from saver to borrowers, and provide better quality services for consumers. As financial intermediaries, banks play an important role in the operation of an economy. This is particularly true in the case of Nigeria where all other sectors have to relate with banks to carry out their operations effectively either as a debtor or creditor. Moreover, banks are the sole dealer of funds, and their stability is of great importance to the financial system. As such, an in depth understanding of determinants of their profitability is necessary and vital to the ability of an economy to resist crisis. In banking literature, the determinants of profitability are empirically well explored although the proxy of profitability varies among studies. Some employed, Return on Asset, Return on Equity, Net Interest Margin, Return on Average Asset and so on. The objective of this paper is to examine the contribution of bank-specific as well as macroeconomic factors to the variation in profitability across banks and over time in Nigeria. This paper will be structured into five sections; the nextsection will deal with the review of literature, followed by the methodology section.

1.2 Statement of Problem

In spite of the Commercial Banks importance in building economic growth and development, commercial banks are faced with problems ranging from lack of adequate and sound accounting system, procedures and for rendering returns and required information to Head Office, lack of experienced, qualified and well exposed staff to render bank accounting operations. Besides, some of the Bank appointees studies courses that are not related to banking and accounting. These staff that lack accounting skills are allowed to manage and handle accounting records without realizing that banking business is a professional and specialized business. No proper book keeping and records, inconsistency and divergence of accounting operations and reporting practices which create survival problems of troubled banks and resulted in bank failures, bank distress and or lost of public confidence in the banking sector.

Disregard for existing banking policies and guidelines, thereby making customers to lose confidence occasioned by being, distressed among other things. These in view made Central Bank of Nigeria (CBN) introduced stringent control in 1994.

The fact that Banking is in the service industry, therefore the quality of services rendered by banks has direct relationship with its survival via its accounting system, procedures and internal control system.

1.3 Objective of the Study

The main purpose of this study is to examined the effect of accounting and internal control system in Commercial banks. In other words to assess control measures that management of the Commercial banks can adopt within their organizations to ensure the effectiveness and efficiency of operations; reliability of financial and management reporting; compliance with applicable accounting laws and regulations; prevent fraud; intentional errors in accounting records and misappropriation embezzlement of the organization’s assets in order to achieve its goals effectively and efficiently.

Therefore the study intends to;

  1. Examine the adequacy or otherwise of the relevance of internal control system in Commercial banks.
  2. Examine the contribution of internal control components (prevent controls’ and defect controls’) to the effectiveness and efficiency of Commercial Banks’ management.
  3. To determine the level of correlation between accounting internal control and the effectiveness and efficiency of operation in Commercial Banks.
  4. To determine whether accounting and internal control ensures compliance with applicable laws and regulations.
  5. To determine the degree of reliance to be placed on the accounting system and internal control in commercial banks.
  6. To identify and analyze the prevailing problems associated with the accounting and internal control system and to examine the extent to which these problems affect the banks.
  7. To offer useful suggestions and recommendations on how to improve the accounting system, procedures and internal control system of commercial banks in order to be more effective in meeting future challenges.

1.4 Research Questions

The research work would seek answer and clarification to some of the research questions as stated below:

  1. Does accounting and Internal Control System are sure that errors and frauds can be discovered with reasonable promptness, and whether the control procedures as prescribed and applied in practice are successful in preventing and defecting material errors and fraud in the accounting system.
  2. Can reliance be placed on accounting and internal control system of commercial banks in Nigeria?
  3. Is there any significance relationship between accounting, internal control, profitability and liquidity of the banks in Nigeria?
  4. Is there a positive correlation between the commercial banks degree of compliance with accounting system, procedure, applicable laws, regulations and internal control.
  5. Does accounting and internal control system aids management in decision making?

1.5 Statement Of Hypothesis

The following hypothesis was formulated and empirically tested and make appropriate recommendation based on the findings:

  1. H0Reliance cannot be placed on accounting and internal control system of commercial banks in Nigeria.
    H1: Reliance can be placed on Accounting of Commercial Bank in Nigeria.
  2. H0: There is no significance relationship between accounting, internal control, profitability and liquidity of the banks in Nigeria.
    H1: There is a significance relationship between accounting internal control, profitability and liquidity of the banks in Nigeria.
  3. H0Accounting and internal control system of banks does not ensure compliance with applicable laws and regulations.
    H1: Accounting and Internal control system in Bank ensures compliances with applicable laws and regulations
  4. H0: The accounting and Internal Control System does not aids management in decision making.
    H1: The accounting and Internal Control System aid management in decision making.

1.6 Scope and Limitation of the Study

The scope of the study covers the effect of accounting and internal control system in deposit money banks operation. But in the cause of the study, there were some factors which limited the scope of the study;

a) Time Constraints

Due to the short time given for the study, the researcher could not get all the required information needed for the study.

b) Finance

As a result of money constraint the researcher had not enough money to carry out the study beyond the level. The researcher could not visit places where necessary information relevant to the study could be obtained.

c) Attitude of Respondents

Some of the respondents were unwilling to cooperate with the researcher because they felt, they have nothing to benefit from the study both financially and otherwise.

1.7 Operational Definition of Terms


An accountant is a practitioner of accounting or accountancy, which is the measurement, disclosure or provision of assurance about financial information that helps managers, investors, tax authorities

Deposit Money Bank

Deposit money banks are resident depository corporations and quasi-corporations which have any liabilities in the form of deposits payable on demand, transferable by cheque or otherwise usable for making payments

Internal control

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  1. Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  2. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  3. Chapter three deals on the research design and methodology adopted in the study.
  4. Chapter four concentrate on the data collection and analysis and presentation of finding.
  5. Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that the objective of this study is to ascertain the effect of accounting and internal control system in deposit money banks operation.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of internal control in deposit money banks.

5.2 Summary

The overriding purpose of this study was to establish the effect of accounting and internal control system in deposit money banks. To accomplish this purpose the researcher developedsome research questions based on the scope and area of study which is First Bank And UBA Plc. Enugu main. Internal control system, as a tool for management control an assurance service, represents more than a legal requirement. Timely detection of irregularities is important for all economic and financial market players, for all users of financial information. A well-implemented internal control structure and internal control activities conducted carefully and conscientiously could signal potential dangerous situations due to poor management of assets (this should include all categories of resources, including human resources) with negative, if not so disastrous consequences for the company’s own business and also with implications over the economic environment. Development, implementation and continuous monitoring of internal controls system and procedures are the responsibility of the entire management and not just the auditor alone. Premchand (1999) sees public financial management as the link between the community’s aspirations with resources, and the present with future, Management of every organization has the line responsibility for designing, implementing and monitoring their internal controls system. The study revealed that there is no regular review of financial transaction by management and adequate segregation of duties

5.3 Conclusion

The study findings revealed that deposit money Banks that effectively implemented elements of internal controls had relatively better financial performance. The large peer banks had relatively better financial performance than the medium and smaller peer banks. From the regression analysis there was a significant positive relationship between Internal Controls and Financial Performance of Commercial Banks in Kenya, and absence of internal controls results in negative financial performance. In a nutshell the banking sector in Kenya enjoys a strong financial performance partly as a result of implementing and maintaining effective internal controls. The existence of effective internal controls may be attributed to the highly regulated and structured environment in the banking sector.

5.4 Recommendations

The study recommended that the banks should effectively implement and maintain internal controls due to the nature of the riskiness of the banking sector and its impact on the economic growth of the Country. The banks must have an independent Board of Directors and its committee as a Corporate Governance regulatory requirement. Besides this, an independent audit department that is well trained and staffed should be set in all the branches of the banks to facilitate effective implementation of internal controls. Banks should have in place an information system that facilitates relaying of timely, relevant and reliable information to stakeholders and free upward and downward flow of information between management and employees. Ethical values should be upheld in decision-making, integrity and competence enhanced. Above all the management should ensure an atmosphere of mutual trust exist within their banks. Banks should design and organize for constant seminars and workshops to train its management and employees in finance, accounting, and internal audit departments pertaining Internal Controls, policies and procedures in order to enhance their professional skills and practices.

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