EVALUATION OF INTERNAL CONTROL SYSTEM OF BANKS IN NIGERIA BY ETUK IFIOK CHARLES B.Sc. (Acct) P.H., M.Sc. (Acct) Lag. FCA, FCTI MATRICULATION NO.2535 BEING A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DOCTOR OF PHILOSOPHY (PhD) ACCOUNTING OF ST. CLEMENTS UNIVERSITY. MARCH 2011 i APPROVAL PAGE This is to certify that this research project was carried out under our strict supervision and has been approved for submission to the Department in partial fulfillment of the requirements for the award of Doctor of Philosophy (PhD) Accounting of St. Clements University. …………………………… …………………………… Professor Olu E. Ogunjimi Professor David Iornem Project Supervisor Academic Adviser … ……………………………………… Professor David Le Cornu Administrator St. Clements University ii DECLARATION I, Ifiok Charles Etuk do hereby declare that this work is entirely my own effort and where works of other persons have been used or referred to, the sources have been duly acknowledged. Ifiok Charles Etuk iii DEDICATION This work is dedicated with love to my dear wife, Asari and my wonderful children, Emmanuella, Inyang, Ifiok, Inemesit and Idara for their love, support, patience, encouragement and understanding. iv ACKNOWLEDGEMENT I thank the Almighty God for His profound mercies and grace for the time, energy, resources He provided to me throughout the period of my studies and for making me what I am today. I also wish to place on record my appreciation and gratitude to the following individuals and bodies for their contributions in making this work a success. First and foremost, my profound gratitude goes to my Academic Adviser, Professor David Iornem of the Nigerian Institute of Management Consultants, Nigeria, whose instruction, guidance and encouragement facilitated this project. I am deeply indebted to my project Supervisor, Professor Olu Ogunjimi of Bowen University for his detailed work on the study. His helpful criticism and comments necessitate my re-writing some chapters and restructuring of the work. Moreover, I am very grateful to him for his fatherly advice since my contact with him as my course coordinator in the Masters programme in Accounting at the University of Lagos, Akoka, Nigeria and throughout the duration of this study. v It is with deep sense of appreciation I note the contribution of my Consultant, friend, colleague and the Head of the Department of Accounting of Akwa Ibom State Polytechnic, Uwem Andrew Essien who painstakingly developed, engineered and reviewed the work from inception to conclusion. I am deeply indebted to my dear wife, Asari, for her love, support, patience, encouragement and understanding throughout the duration of the study. I want to specially acknowledge the contribution of my daughter and Angel Emmanuella for her assistance in the computation of the ratios used in the study. Deep and profound appreciation also goes to my beloved sister Mrs. Grace Ita John who saw me through my undergraduate programme. I am also indebted to my in-law and his wife Mr. and Mrs. I D Usoroh who introduced and led me to the part of this noble profession. I wish to also acknowledge my late father, Chief Charles Etukudo and my brother Dr Charles N Etuk for laying the foundation of my Education. I am also indebted to my good friend and classmate Dr Alfred Ekpenyong for his support and encouragement. vi I also wish to thank the Management and most especially the Internal Control staff of Diamond Bank Plc, Ecobank Nigeria Plc, First Bank of Nigeria Plc, United Bank for Africa Plc and Zenith International Bank Plc for the assistance and support in providing needed information during the interview and the administration of the questionnaires. Etuk, Ifiok Charles St Clements University Grand Turk Grand Turks & Caicos Islands British West Indies March, 2011 vii ABSTRACT All organizations whether profit oriented or not, operates within conditions of resource constraints. As a result, various steps are taken and procedures established to ensure that the use of these resources is maximized in achieving organizational goals. One of such measures involves control. The purpose of this study therefore is to evaluate the effectiveness of internal control system in Nigerian banks. The emphasis was to establish the effect of internal control on the effectiveness and efficiency of operations, the reliability of accounting and management reporting and compliance with applicable laws and regulations in Nigerian banks. In evaluating the effectiveness of internal control system in Nigerian banks, five (5) banks – Diamond Bank Plc, Ecobank Nigeria Plc, First Bank of Nigeria Plc, United Bank for Africa Plc and Zenith International Bank were chosen from the twenty four (24) existing banks in Nigeria. Data were obtained from the various departments/sub business units (SBUs) of the selected banks through the use of questionnaires, observation and personal interviews. The data obtained were subjected to extensive analysis. viii The entire literature of internal control system was enumerated in chapter two (2), through search of relevant textbooks, journals and other publications in order to ascertain the accounting measures of internal control. The study confirmed that the presence of Internal Control system in the banks has provided reasonable assurance regarding the effectiveness and efficiency of operations of banks in Nigeria, the reliability of financial and management reporting and guarantees compliance with applicable laws and regulations. Though controls were observed to be generally effective, there were some lapses noted as there was a high level of bad loans and laxity on the collateralization of margin loans granted by the banks. The study indicates a rise in the level of successful frauds as reported by the regulatory authority. These instances are indications of clear failure in the control process. We could not also have access to the exception reports generated by the internal control departments of these banks so as to rate the level of policy infractions recorded by the banks neither could we access their ix periodic and ad-hoc reports to the respective management of these banks. In chapter three (3), the various methods employed in collecting data for the study were highlighted. In analyzing the data as shown in chapter four (4), the researcher made use of statistical tools such as Spearman’s Rank Correlation model, Pearson Product Moment Correlation and Chi-Square model in testing the hypotheses. Also there was the use of descriptive statistics and simple percentages. In chapter five (5) the result of the presentation and data analysis as presented in chapter four (4) was discussed and the findings enumerated while chapter six (6) presented the summary of the findings and went further to draw conclusion and recommendations, making suggestions for improvements on gray areas identified in the study. x TABLE OF CONTENTS PAGE COVER PAGE - - - - - - - - - i APPROVAL - - - - - - - - - ii DECLARATION - - - - - - - - - iii DEDICATION - - - - - - - - - iv ACKNOWLEDGEMENT - - - - - - - - v ABSTRACT - - - - - - - - - viii TABLE OF CONTENTS - - - - - - - - xi LIST OF TABLES - - - - - - - - - xv LIST OF DIAGRAMS - - - - - - - - xvii LIST OF APPENDICES - - - - - - - - xviii CHAPTER ONE: INTRODUCTION 1.1.0 Introduction - - - - - - - - 1 1.2.0 Problem Definition - - - - - - - - 4 1.3.0 Objectives of the Study - - - - - - - 7 1.4.0 Statements of Hypothesis - - - - - - - 8 1.5.0 Research Methodology - - - - - - - 9 1.6.0 Significance of the Study - - - - - - - 10 1.7.0 Research Limitations and Constraints - - - - - - - - 14 1.8.0 Brief History and Background of the Selected Banks - - - - - - - 16 1.9.0 Research Format - - - - - - - - 62 1.10.0 Definitions of Terms - - - - - - - 63 xi CHAPTER TWO: LITERATURE REVIEW 2.0.0 Introduction - - - - - - - - 95 2.1.0 Overview of the Nigerian Banking Industry - - - - 104 2.2.0 Types of Banking Products / Services Offered - - - - 114 2.2.1 Corporate Finance Services - - - - - - - 115 2.2.2 Banking Services - - - - - - - - 117 2.3.0 The Concept of Internal Control - - - - - - 123 2.4.0 Internal Control Objectives - - - - - - 127 2.5.0 Classes of Internal Control - - - - - - 130 2.6.0 Essential Features of Internal Control - - - - - 134 2.7.0 Responsibility for Internal Control - - - - - 136 2.8.0 Management Responsibility of Internal Control - - - 138 2.9.0 Importance of Internal Control - - - - - - 140 2.10.0 Elements of Internal Control - - - - - - 144 2.11.0 Risk Recognition and Assessment - - - - - 169 2.12.0 Information and Communication - - - - - 170 2.13.0 Internal Control Evaluation Software- - - - - - 171 2.14.0 Control Activities and Segregation of Duties - - - - 174 2.15.0 Forms of Control - - - - - - - - 174 2.16.0 Internal Control and Compliance Requirement - - - 182 2.17.0 Internal Control and Corporate Governance - - - - 192 2.18.0 Internal Control and Information and Communication Technology in the Banking Industry - - - - - 196 2.19.0 Evaluation of Internal Control System - - - - - 198 xii 2.20.0 Special Areas of Internal Control System - - - - 202 2.21.0 Installation of Internal Control System - - - - 206 2.22.0 Limitations of Internal Control - - - - - - 209 2.23.0 Challenges of the Internal Controller in the Nigerian Banking Industry - - - - - - 211 2.24.0 Statement of Guidance on Internal Controls in Banks - - - 216 Reference - - - - - - - - - 245 CHAPTER THREE: RESEARCH METHODOLOGY 3.0.0 Introduction - - - - - - - - - 249 3.1.0 Research Design - - - - - - - - 250