INTERNAL AUDIT FUNCTIONS AND PRODUCTIVITY (A CASE STUDY OF ECOBANK NIGERIA PLC)
ABSTRACT:
This project work takes a look at the effect of internal audit functions on productivity using a case study of Ecobank Nigeria Plc. The main purpose of this study is to examine the effect of internal audit functions on productivity i.e how as internal audit functions aid productivity in Ecobank Nigeria Plc.The research design used during the course of this study was the descriptive survey research design in which a population of 50 staff of Ecobank Nigeria Plc was look into. The researcher made use of stratified sampling technique and the research instrument used during the course of this research was questionnaire. Statistical package for social sciences (SPSS) was being employed to analyze data in form of frequency tables in knowing the effect of internal audit functions on productivity. Findings reveals that the calculated t-statistics for the parameter estimates was (t = 3.653), P < 0.01 which is greater than tabulated t statistics (1.9960) at 0.01 level of significance. Therefore, the Null hypothesis is rejected and Alternative hypothesis is accepted, that is there is significant relationship between internal audit functions and productivity of Ecobank Nigeria Plc.Furthermore, findings also revealed that the calculated t-statistics for the parameter estimates was (t = 0.439), P < 0.01 is less than tabulated t statistics (1.9960) at 0.01 level of significance. Therefore, the Null hypothesis is accepted and Alternative hypothesis is rejected, that is, Weakness in the internal audit functions in Ecobank Nigerian Plc does not lead to frauds.Based on the findings of the study, it is recommended that the management of Ecobank Nigeria Plc should design more effective internal audit functions by ensuring that adequate asset listings is done by management, capital assets purchased are approved by appropriate level of management and asset numbering is done to show location and protection of the assets. Also, Management should encourage staff to participate in decision making. Employees feel encouraged and motivated in accomplishing the goals of the company in which they have taken part in formulating.
TABLE OF CONTENT Pages
Title Page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract xi
CHAPTER ONE 1-10
INTRODUCTION 1
1.0 Background to the study 1
1.0.1 Historical Background 4
1.1 Statement of the problem 5
1.2 Research questions 6
1.3 Objective of the study 6
1.4 Hypothesis of the study 7
1.5 Significance of the study 7
1.6 Scope of the study 8
1.7 Limitations of the study 8
1.8 Organization of the study 9
1.9 Operational definition of terms 10
CHAPTER TWO 11-49
Literature Review 11
2.0 Introduction 11
2.1 Theoretical framework 11
2.1.2 Theoretical concept 13
2.2 Empirical Review 18
2.3 The Concept of Internal audit functions 19
2.3.1The Objectives and roles of internal audit functions framework 22
2.3.2 The major elements of an internal audit functions process 23
2.3.3 Evaluation of internal audit functions by supervisory authorities 35
2.4 Roles and responsibilities of external auditors 38
2.5 The concept of fraud 39
2.5.1 Classification of fraud 40
2.5.2 Type of bank’s common fraudulent practices 41
2.5.3 Causes of bank frauds 42
2.5.4 Factors influencing the existence of fraud in banks 42
2.5.5 Internal audit functions and fraud prevention 43
CHAPTER THREE 50-57
3.0 Introduction 50
3.1 Research Design 50
3.2 Population of study 51
3.3 Sample and sampling techniques 51
3.4 Sources of data collection 51
3.5 Research instrument 52
3.5.1 Procedure for administration of research instrument 52
3.5.2 Validity of the instrument 53
3.5.3 Reliability of the instrument 53
3.6 Method of data analysis 54
3.7 Limitation of methodology 55
3.8 Model specification 55
CHAPTER FOUR 58-80
4.1 Introduction 58
4.2 Data Analysis, presentation and interpretation 58
4.3 Test of Hypotheses and discussion 74
4.4 Test of Hypotheses and discussion 75
CHAPTER FIVE 81-86
5.1 Introduction 81
5.2 Summary of major findings 81
5.3 Conclusion 82
5.4 Recommendations 83
5.5 Areas for further research 86
Bibliography
Appendix I
Appendix II
LIST OF TABLES
4.1.1Introducton
4.2.1 Respondents analysis by age
4.2.2 Respondents analysis by sex
4.2.3 Respondents analysis by marital status
4.2.4 Respondents analysis by education
4.2.5 Respondents analysis by length of service
4.2.6 Respondents analysis by position held
4.2.7 There are adequate assets listing done by the management
4.2.8 Positions in place ensure assets additions, disposal, replacement and transfers for proper accountability
4.2.9 Capital assets purchased are approved by appropriate level of management
4.2.10 Assets numbering is done to show location and protection of the assets
4.2.11 There is free access to cheque books and organization assets
4.2.12 A person responsible from inventory management is different from the book-keeper.
4.2.13 Stock taken is done following the procedures and in the presence of the internal auditor.
4.2.14 The petty cashier is different from the main cashier.
4.2.15 There are adequate policies to ensure effective collection and follow up of due accounts.
4.2.16 Cost of production as been reducing dramatically for the past two years
4.2.17 The Company is now in a better position to serve clients more effectively and efficiently.
4.2.18 Effectiveness is measured through quality service and product.
4.2.19 The Company is able to build customers satisfaction through quality product and services.
4.2.20 Performance of the company result from asset financing, employee skils and processes involved in production.
4.2.21 There is evaluation and discussion of organization performance periodically by management.
4.2.22 Stock out increases the cost of production.
4.3.1 Weaknesses in internal audit functions in Nigeria banks do not lead to fraud.
4.3.2 Analysis showing the weaknesses in the internal audit functions and fraud.
4.4.1 There is no significant relationship between internal audit functions and productivity.
4.4.2 Analysis showing the internal audit functions and productivity
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND TO THE STUDY
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. 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. 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 audit function. In view of the economic growth in companies’ size and complexities, proper management of modern business undertakings are not possible unless they have an effective system of internal audit functions.
A system of effective internal audit functions is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal audit functions can help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the bank will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the Bank’s reputation. Internal audit functions, the strength of every organization, has become of paramount importance today in Nigerian banks. The reason being that the control systems in any organization is a pillar for an efficient accounting system.The need for theinternal audit functions in organizations, especially banks, cannot be undermined, due to the fact that the banking sector, which has a crucial role to play in the economic development of a nation, is now being characterized by macroeconomic instability, slow growth in real economic activities, corruption and the risk of fraud.
Fraud, which is the major reason for setting up an internal audit functions, has become a great pain in the neck of many Nigerian bank managers. It has also become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigerian banking system and that any bank with a weak internal audit functions, is dangerously exposed to bank fraud.The CBN reported that cases of attempted fraud and forgery in banks, as at half-year 2007 have surpassed what was recorded for the whole year 2006. The CBN half-year report for 2007, revealed a total of 741 cases of attempted fraud and forgery, involving 5.4 billion, $35,406.1, 150 Euros were reported as at June, 2007. In 2006, 1,193 cases were reported involving4.6 billion, $1.8 million and 14,389.7 pound sterling. The CBN also reported that the backward development was attributable to weaknesses in the internal audit functions of the banks. This has clearly painted the picture of how fraud has penetrated in the financial strength of Nigerian Banks.
In a nut-shell, the damage which this menace, called fraud has done to the banks is innumerable and needs urgent attention. Therefore, the attempt to put an end to this economic degradation, gave rise to the topic of this research study the effect ofinternal audit functions on productivity in the banking sector with Ecobank Nigeria PLC as a case study. However, this study is aimed at verifying the conception that an effective and efficient internal audit functions is the best control measure for preventing and detecting fraud, especially in the banking sector.
Internal audit functions is the methods employed to help to ensure the achievement of an objective.Internal audit functions 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 managementinitiated concerns (Awe, 2005). The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal audit functions 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 everyday for the smooth running of their organization or businesses.Internal audit functions also refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft and misuse of organization resources. Internal audit functions are processes designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations (Mwindi, 2008). Enforcement of internal audit functions should be designed to promote operational efficiency and effectiveness, provide reliable financial information, safeguard assets and records, encourage adherence to prescribed policies, and comply with regulatory agencies. A sound internal audit functions will ensure that transactions are: valid, properly authorized, recorded, properly valued, properly classified, reconciled to subsidiary records and not carried through by a single employee (i.e. ensure separation of duties) ( Adeyemo Kingsley A,2012).
Organizations establish systems of internal audit functions to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. In the words of ETUK IFIOK CHARLES (1999) et al “Internal audit functions is the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far possible the completeness and accuracy of the records”. All managers in an organizational department operate according to stated plans, objectives and the methods they use. The policies, procedures, organizational design and physical barriers constitute the internal audit functions structure of an institution. Managers should realize that a strong internal audit functions structure is fundamental to the success of an organization in term of its purpose, operations and resources.
Responsibility for providing an adequate and effective internal audit functions structure rests with an organization’s management. Control is important because it single-handedly links with the effectiveness of other managerial functions such as planning. When it comes to planning, it determines whether activities are on going toward the achievement of goals and accomplishment of objectives. Control mechanisms keep the plans running smoothly and up to date. Control is also important in employee empowerment wherein performance of the employees could be properly managed. Performance is controlled in terms of appraisal, lessening haphazard decisions on allocation of positions/job titles. Nonetheless, control mechanisms are also important in keeping a balance within the workplace especially since controlling means to minimize unethical decisions of the employees and the organization as a whole.The questions are: what can be said to be the cause or causes of the increasing rate of fraud in banks? What is the impact of internal audit functions in the prevention and detection of fraud in banks, what is the impact of internal audit functions on theproductivity of the Ecobank Nigeria plc?
1.0.1 HISTORICAL BACKGROUND OF ECO BANK NIGERIA PLC
Eco bank Nigeria is a member of Eco bank, the leading independent pan-African bank, with headquarters in Lome and East Africa. Eco bank, which was established in 1985, has grown to network of over 1000 branches, employing over 10,000 people, with offices in 32 countries.
The bank began operation in 1986, it operates as a universal bank, providing wholesale, retail, corporate, investment and transaction banking services to its customers in the Nigeria market. The bank divides its operations into three major divisions; retail banking, wholesale banking and treasury and financial institution.
The bank also offers capital market and investment banking services. During the fourth quarter of 2011, Eco bank Nigeria acquires 100Image of the shareholding in oceanic bank, creating the expanded Eco bank plc. At December 2011, the expanded Eco bank Nigeria controlled total assets value at approximately US$8.1 billion (NGN 1.3trillion) making it one of the five largest bank in Nigeria. At that time the bank had 610 free-standing branches making it the second largest bank in the country by branch network. Internal audit functions has been a way of evaluating the performance of the management in Eco bank Nigeria plc.
1.1 STATEMENT OF THE PROBLEM
The series of business failures and corporate scandals have been identified by KPMG to be as a result of weak internal audit functions. The failure of Enron in 2001 caused a precipitous decline in investor confidence in the capital markets. The federal government through the regulatory authorities has responded to this, by passing guidelines using SAS2 under information which is to be disclosed in financial statements. The guidelines codified the responsibilities of corporate executives, corporate directors, lawyers, accountants and created a board oversight regime for auditors of public companies. In seeking to enhance accountability and restore investor’sconfidence, the guidelines emphasizes the critical role of internal audit functions over financial reporting. This gave rise to the need for corporate governance especially in public institutions.
InternationalAuditing Guidelines (IAG) deals with the auditor’s responsibility for detection of material misstatement resulting from error when carrying out an audit of financial statements. The guidelines in conjunction with the related SEC rules and auditing standard No 2, established by the public company Accounting Oversight Board (PCAOB), requires management of a public accounting and the company’s independent auditor to issue two new reports at the end of every fiscal year. These reports must be included in the company’s annual report filed with the Securities and Exchange Commission (SEC). In the past, a company’s internal audit functions were considered in the context of planning the audit, but were not required to be reported publicly except in response to the SEC’s form requirements when related to a change in auditor. The new audit and reporting requirements have drastically changed the situation and have brought the concept of internal audit functions over financial reporting to the forefront for audit committees, management, auditors, and users of financial statements. The new requirements also highlight the concept of a material weakness in internal audit functions over financial reporting, and mandate that both management and the independent auditor must publicly report any material weakness in internal audit functions over financial reporting that exists as a result of physical year, at the end of assessment dates. Under both PCAOB auditing standard NO 2 and the SEC rules implementing the guidelines, the existence of a single material weakness requires management and the independent auditors to conclude that internal audit functions over financial reporting is not effective.
Against this background this study investigatedthe purpose of ascertaining the effect of internal audit functions on productivity.
1.2 RESEARCH QUESTIONS
This study seeks to tackle among others questions such as:
1) What is the relationship betweeninternal audit functions and productivity?
2) What are the implication, consequence and benefit of internal audit functions on productivity?
3) What are those challenges which a weak internal audit functions can pose on productivity?
4) What are those things that must be done and put in shape by the company to ensure an effective internal audit functions?
5) What are the limitations of internal audit functions?
6) What are the various component of internal audit functions?
1.3 OBJECTIVE OF THE STUDY
The main objective of this research study is to examine the effect of internal audit functions on productivity in the Nigerian banking industry using EcoBank of Nigeria PLC as a case study. Apart from the main objective, the research also sets out to achieve some specific objectives which are;
1) To examine the various component of internal audit functions.
2) To determine the effects of internal audit functions on the productivity of the financial institution.
3) To know the effect of the internal audit functions in monitoring compliance.
4) To critically examine how effective the internal audit functions has been used to reduce the level of risks.
5) To ascertain how useful is internal audit functions toproductivity.
6) To recommend ways by which internal audit functions can be used effectively so as to achieve the organizational goal.
1.4 HYPOTHESIS OF THE STUDY
The following researchhypotheses were generated for the study:
HO: Weakness in the internal audit functions in Nigerian banks does not lead to frauds.
H1: Weakness in internal audit functions in Nigerian banks leads to frauds.
HO: There is no significant relationship between internal audit functions and productivity.
H1: There is significant relationship between internal audit functions andproductivity.
1.5 SIGNIFICANCE OF THE STUDY
This study shall be of great benefits to the management of the organization in order to deal extensively with effect of internal audit functions on productivity and this will eventually lead to high productivity in the organization and also prevent risks within the organization. This study will help organization to have better understanding on how to install a good internal audit functions for the effective running of their organization.
To managers of organizations and individuals, this study would assist them in the area of identifying the effect of internal audit functions on productivity and its consequences. As for managers in all organization within the country the result of this research will help them to reduce the level of risk and fraud within their organization so as to increase the confident level of their shareholders. Managers ensure that as goods and services are produced, machines or other equipment are properly used so any malfunctions can be avoided. Improper usage of company assets can create downtime if goods have to be re-produced because of product defects.
Moreover, the study will be more relevant to management and social science students because they will be exposed to the effect of internal audit functions on productivity and not only that it would also serve as an eye opener to the fact that as managers, there are lots of issue relating to internal audit functions within the organization which if left unattended to will jeopardized organizational goal of the company.
The study will also attempt to contribute to the available literature or researches that will serve as a guide for organizational staff in order to prevent fraud and risks within the organization.
Policy makers would also benefit from this study in formulating policies relating to the effect of internal audit functions on productivity.
The study of the effect of internal audit functions on productivity is another area of study that is wide for researchers to tap into. So, this study would benefit researchers in looking beyond the scope of the present study and impacting to the knowledge already acquired.
The effect of internal audit functions on productivity will also help practitioners such as Auditor, tax practitioners, etc in increasing their credibility.
1.6 SCOPE OF THE STUDY
This research by the grace of God is expected to go in-depth. Meanwhile the scope of the study is to determine the effect of internal audit functions onproductivity(Using acase study of Eco Bank),The research focuses on Eco bank Nigeria plc. This research work will cover the period between 2000 - 2012. The entire organization’s staff of this bank will be concern in this research, as their view will be collected through detailed questionnaire.
As Eco Bank Plc are located virtually throughout the geographical area in Nigeria, this research work cover two major part of geographical location in Nigeria southern part Osun State (Osogbo) and West Central part Kwara State (Offa).
Lastly, the research laid emphasis on banking sector as one of the main determinantof economic growth and development in the country.
1.7 LIMITATIONS OF THE STUDY
In the course of this study, the researcher would encounter a lot of hindrances among these, the most salient one include finance which the researcher is faced with. Insufficient funds required for expenses like transportation, acquisition of research instruments, sourcing for both primary and secondary data etc. Also information on the secondary source of data available to the researcher was either outdated or incomplete and the one available on the internet requires some form of subscription before access is allowed.
Time also posed a constraint on this research work such as time to study and time to attend lecture etc.
Attitude of respondent is also another limiting factor to this research work. Most respondent are often reluctant to part with information even after being assured confidentiality they still prefer to be secretive.
Despite the limitations of this study I still hope to do better work on this field.
1.8 ORGANIZATION OF THE STUDY
This research work is divided into five chapters.
Chapter one contains introduction to the research work which summarizes background to the study as well as the main feature of the effect of internal audit functions on the productivity of the Ecobank plc. In this chapter, statement of the problem, objective of the study, significance of the study, research hypothesis, research questions,scope of the study, limitation of the study, and organization of the study are discussedextensively.
Chapter two of this research work is known as the review of related literature otherwise known as the literature review and the theoretical frame work, which reviews previous research work in the field of study and analysis of various principles relating to the research topic.
Chapterthree is concerned with the research methodology. This discusses research design, the population size to be studied, sample size determination, sampling techniques applied , method of data analysis and interpretation, the statistical tools used in the analyzing the formulated hypothesis .
Chapter four of this research work is the data presentation, analysis and interpretation.
Chapter five summarizes the whole research project stating the findings useful conclusion and the recommendation and this constitute the concluding part of the research work.
1.9 OPERATIONAL DEFINITION OF TERMS
Internal audit functions: The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal audit functions 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, ensure adherence to management policies, safeguard the assets and secure as far as possible, the completeness and accuracy of the records.
Internal Audit:It is an independent appraisal activity established within an organization as a service to it. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls; a management tool which analyses the effectiveness of all parts of an entity’s operations and management.’ (CIMA’s Management Accounting Official Terminology)
Monitoring:According to CIMA, it is a process that assesses the quality of the system’s performance over time.
According to Sunny, New Palta and Root. It can be defined as the final internal audit functions standards, which assess the quality of performance.
Control Environment:According to the first internal audit functions standard, it relates to the departments that set a positive and supportive attitude towards internal audit functions and conscientious management.
Reasonable Assurance Concept: It refers to the fact that internal audit functions even when they are appropriately designed and operating effectively cannot provide absolute assurance of achieving control objectives.
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