Internal Control System And Firm Performance Of Selected Deposit Money Banks

Background to the Study

The survival of any organization depends on the effective and efficient utilization of resources (financial and non-financial) at the disposal of the organization. Hence, to optimize the utilization of resources entrusted to all employees in an organization, various form of control are put in place by management of the organization, among these major controls are internal control. Internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and corrected based on either compliance or management initiated concerns (Awe, 2015). Internal controls enable management to deal with rapidly changing economic and competitive environment, shifting customer demands and priorities and restructuring for future growth. Internal controls promote efficiency, reduce risks of assets loss and help to ensure the reliability of financial statements and compliance with laws and regulations (COCO, 2015).

The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control as the whole 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 the assets and secure as far as possible, the completeness and accuracy of the records. They are tools used by management every day for the smooth running of their organization or businesses. Internal controls also refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. Successful organizations ensure that they attain and consolidate continued survival in a competitive environment, (Drucker, 2003). Thus successful organizations set performance measures that focus attention that identifies and communicates the success, support organization learning and provide a basis for assessment and reward (Brown, 2021).

Generally, Internal Control System are described as comprising the coordinated plan of organization and all the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, to prorate operational efficiency and adherence to prescribed managerial policies. Internal controls also consist and describes all the measures taken by the organization for the purpose of; protecting the internal and external resources against wastage, fraud and inefficiency. Internal controls also consist of measures to ensuring accuracy and reliability of accounting and operating data; ensuring compliance with the policies of the organization; evaluating the level of performance in all organizational units of the organization (Mbilla, Nyeadi, Gbegble & Ayimpoya, 2020).

Because internal controls serve many component purposes, there are increasing calls for better internal control systems; internal control is looked upon more and more as a solution to a variety of potential problems (Coco, 2015). According to Chambers (2017); Cosserate (2019); Ridley and Chambers (2017), internal controls are systems comprising of the control environment and control procedures. They further stated that internal control systems include all the policies and procedures adopted by the management and directors of an entity to assist in achieving their objective of efficient conduct of its business, including their adherence to internal policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completion of the accounting records and timely preparation of reliable financial information.

Deposit money banks occupy a central position within the nation’s financial system and are essential agents in the development process of the economy. Just like every other organizations, they are setup with the primary aim of making profits, therefore, profitability and/or customer satisfaction are generally used to evaluate their performance. Lots of interest are being generated as a result of the several changes taking place in the banking sector, with regards to how effective is the internal control system in the sector due to the key role it plays in ensuring achievement of organization’s goals. To perform excellently, organizations must critically examine how they treat customers and all other stakeholders in their business and choose the best way to continue meeting the needs of these crucial stakeholders (Livingstone & Isaac, 2017). Due to this, organizations must continuously improve their service systems through enhanced service quality, asset accumulation, value generation, and the maintenance of a flexible internal control system that is integrated with the organization’s operational activities. This is most effective when the internal control plans integrated into the organization’s system become an integral part of the organization’s success in terms of continual performance improvement as a component of the organization’s competitive advantage (Kinyua, Gakure, Gekara & Orwa 2015).

Tekalign (2019) stated that the performance of banks is a good indicator of how effectively management is allocating resources. Good financial and non-financial performance is desired in any organization, and every effort is made to improve it over time. Andrew (2018) pointed out that as expensive as it may be to put in place and maintain, internal control systems have evolved with time. Therefore it is critical for any organization to have effective internal control mechanisms in place in order to perform efficiently. According to Eke (2018), internal controls are the processes designed and implemented by those in charge of governance in the organization, management and other employees to provide reasonable assurance about the achievement of the entity’s objectives in terms of financial reporting reliability, financial and non-financial performance, efficiency and effectiveness of operations and compliance with applicable regulations and laws