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EFFECTS OF INTERNAL CONTROL SYSTEMS ON THE FINANCIAL PERFORMANCE OF FINANCIAL INSTITUTIONS

ABSTRACT

The topic of study was effects of internal control systems on the financial performance of financial institutions, the objectives of the study included; to establish existing internal control systems applicable to financial institutions., to examine the relationship between internal controls and financial performance of financial institutions and to establish other factors affecting financial performance in financial institutions.

The study adopted a descriptive research design this is because they provide an in depth study of a particular situation. The study also used qualitative and quantitative methodologies for data analysis. Quantitative and qualitative methodologies were used in effects of internal control systems on the performance of financial institutions. Data were collected from both primary and secondary sources; this included both qualitative and quantitative data. The study was carried out at StanbicBank , Mukono Branch plot no. Plot No 59-67. Cooper & Schindler (2011) observes that population is the total collection of elements about which one wants to make inferences. The study was conducted among administration, employees, Human resource management, casual workers, procurement officers, finance and accounting, and other stake holders of Stanbic bank Mukono district.

The results indicates that Stanbic Bankneeds to hire external auditors to help in the management of finance so that its able to maintain the necessary liquidity at all time for the customers improve profitability and get credibility from customers. Stanbic bank needs to redesighn better financial management policies to help it both in the short run and long run manage iots liquidity so that customers can alwaus get cash when needed.

The findings in the study further indicates that Stanbic Bank needs to have better accountability systems in place to eliminate costs and increase profitability in the organization. Accountability at Stanbic Bank is necessary as it helps to reduce costs and increase credibility.

The findings in the study indicates that the management of Stanbic Bank should emphasize and make better decisions to eliminate costs and increase profitability of the organization , more to that decision makers should avoid collusion of organizational decision makers .

The study recommended the following areas of further research; Influence of credit on the small and medium enterprises, relationship between record keeping and performance of financial institutions and Influence of computerized accounting on the performance of financial institutions.

CHAPTER ONE:

INTRODUCTION

1.1Background of the study

Firms are always keen on their financial performance and they usually engage in activities to appraise their financial performance and thus, make changes in their operations (Visser, Matten& Pohl., 2010). However, it is evident that there are some firms that are considered more successful than others. Similarly, there are firms that have traditionally adopted different methods to improve their financial performance, and these have made them more successful than other firms. Recent research on internal controls in Belgium illustrated the importance of the control environment when studying internal control systems. Research has found that certain control environment characteristics like tone-at-the-top, level of risk and control awareness, clearly defined and communicated are significantly related to the role of the internal control system and fraud detection within an organization ( Sarens & De Beelde, 2006)

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 Dictionary.com) .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).

Internal control systems not only contribute to managerial effectiveness but are also important duties of corporate boards of directors. Accounting literature likewise emphasizes the importance of an organization’s integrity and ethical values in maintaining an effective control system (Verschoor, 1999).

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).

If an organization pursues integrity and clear ethical values reflected in a formal code of conduct, the internal control will take a greater importance (Saren & Beelde, 2008). A study was done to establish the impact of internal control design on banks’ ability to staff fraud and staff life style and fraud detection in Nigeria. Data were collected from 13 Nigerian banks using a four point like Scale questionnaire and analyzed using percentages and ratios. The study found that Internal control design influences staff attitude towards fraud such that a strong internal control mechanism is deterrence to staff fraud while a weak one exposes the system to fraud and creates opportunity for staff to commit fraud (Ewa & Udoayang, 2012).

A research was conducted by Mawanda (2008) on influence of internal control systems on financial performance of an institution of higher learning in Uganda. Internal controls were looked at from the perspective of control environment, risk assessment, Control Activities, information and communication and monitoring process whereas financial performance focused on liquidity, accountability and reporting as the measures of financial performance. Basing on the above this study intends to investigate into effects of internal control systems on the performance of financial institutions.

1.2 Statement of the problem

Financial institutions are faced with various challenges in their core operations. This hinders the effectiveness of their performance and impedes their profit levels. These issues can be related to poor portfolio management, lack of attention to changes in the economy that can lead to deterioration in the credit ratings of the institution. However, the major causes of serious banking challenges continue to be ineffective internal control system for core processes. Internal controls are established to ensure management has accurate, timely and complete information for effective decision making. Despite of the massive investment in Internal control systems, Stanbic Bank is facing challenges in its performance including failure to achieve its targets and an increment in non-performing loans (New vision, 10th March 2015). This study therefore intends to investigate into the effects of internal control systems on the financial performance of financial institutions.

1.3 Purpose of the study

To examine the effects of internal control systems on the financial performance of financial institutions.

1.4 Objectives of the study

1. To establish existing internal control systems applicable to financial institutions.
2. To examine the relationship between internal controls and financial performance of financial institutions.

• To establish other factors affecting financial performance in financial institutions.

1.5 Research questions

1. What are existing internal control systems applicable to financial institutions?
2. What is the relationship between internal controls and financial performance of financial institutions?

• What are the other factors affecting financial performance in financial institutions?

1.6 Scope of the study

The scope of this study was divided into subject, geographical and time scope.

1.6.1 Subject scope

The study variables were internal control systems which was the independent variable and financial performance of financial institutions which was the dependent variable. The study was geared towards investigating the effect of internal control systems on performance of financial institutions. Specifically, the study; Established existing internal control systems applicable to financial institutions, analyzed the relationship between internal controls and financial performance of financial institutions and the study established other factors affecting financial performance.

1.6.2 Geographical scope

The study was carried out in Stanbic Bank Mukono Branch located in Mukono district found in the central region of Uganda, 21 kilometers by the road east of Kampala the capital and the largest city in Uganda. The geographical coordinates of Mukono district are 00 degrees 28’50’’ N, 32 degrees 46’14.0 E (latitude; 0.480567; longitude 32, 770567). Specifically, at Stanbic Bank located at Plot No 59-67. Mukono district Uganda.

1.6.3 Time scope

The study covered data from 2012 to 2017and was carried out for a period of three months.

1.7 Significance of the study

Management

The study findings will help the management of Stanbic Bank have information regarding the different ways of enhancing the growth and development of Stanbic Bank.

The study findings will also help the management of Stanbic Bank make necessary decisions regarding the development of internal control system.

Customers

Study findings will enable the financial institutions to provide the best services to its customers

The customers will benefit from the various innovations that will come as a result of using the internal control techniques that the financial institution will initiate to improve on its performance.

Policy makers /government

The study will also enable the government have information on the challenges that the financial institutions face and design policies to enhance their better performance.

The study will help the government have information on the different ways of enhancing the growth and development of banking sector.

The researcher

The study will help the researcher to complete her studies for Bachelors degree at Kyambogo University, since it is a requirement for the completion of his study.

1.8 Definition of Terms

Internal controls

COSO (2010) defines internal control system as a process affected by an entity’s board of directors, management, other personnel, designed to provide reasonable assurance regarding the achievement of objective in the following categories; effectiveness and efficiency of operations, reliability of financial reporting, compliance with laws and regulations.

Performance

Stoner (2011) says that performance as the ability to operate efficiently, profitability, survive, grow and react to the environmental opportunities and threats.

Quality Statements

According to Clarke (2010), quality statements are statements that are prepared to communicate financial information to influence decisions of users of accounts.

Corporate Financial Statements

These are statements as reports that present fairly the state of affairs of the business and its activity for the year end and provide useful information to users of accounts. Wood (2010)

Quality of financial statements

Brookson (2011) defines quality of financial statements as statements prepared to the required accounting financial reporting standards to show the financial position of the business at the end of time period and also the operating results by which the business arrives at this financial position.