Internal Control

2/17/2011
 INTRODUCTION
 AIMS AND OBJECTIVES
 THE NIGERIAN FINANCIAL SECTOR.
 INTERNAL CONTROL DEFINED
 COMPONENTS OF INTERNAL CONTROL
 INTERNAL CONTROL AND CORPORATE
GOVERNANCE
 INHERENT IMPEDIMENT TO INTERNAL CONTROL
ENVIRONMENT
 VARIOUS FORMS OF INTERNAL CONTROL
 CONCLUSION
 RECOMMENDATION
IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/17/2011
A system of effective control is a critical component of organization
management and a foundation for the safe and sound operations of financial
organizations. A system of strong internal controls can help to ensure that
the goals and objectives of a financial organization will be met, that the
organization 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.

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 The main aim of the presentation is to appreciate how Internal Control can be
improved in the financial sectors of Nigeria. In order to achieve this aim, there are
four objectives that need to be satisfied. First is to determine the importance of
corporate governance in the current situation of the country. Second is to
determine any policies implemented in the sectors to fight the problem in
corruption. Third is to identify the benefits or pitfalls in the application of Internal
Control in the financial organizations in by comparing the Nigerian economy to
the other “third world countries”. And fourth is to establish recommendation in
which the Internal Control can be strengthened.

The rise of the financial sector as a considerable source of economic
clout occurred gradually, and it has allowed a few notable people
and companies to achieve impressive net worths. Because financial
services are such a huge part of the global economy, many nations
have also attempted to regulate the financial sector to protect
investors and the economy as a whole. Unregulated activities can
lead to serious financial problems in periods of economic crisis, as
these activities can directly contribute to crisis situations.

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The Central Bank of Nigeria Governor, (Lamido Sanusi) publicly lamented the
imminent collapse of the entire Financial Sector, immediately 420 Billion Naira was
coughed out within seconds to bail-out five of the threatened banks, not long
after, another 220 Billion Naira dolled out for another three banks. Recently,
another $2 Billion (Over 300 Billion Naira) was injected to re-inflate the economy.
Close to a trillion Naira already dropped, but instead of the situation improving, it
is rather deteriorating. All the Bank directors and executives of the affected banks
have been severally harassed and legally challenged, all the debtors prosecuted,
but is this crisis caused by the misdeed of some individuals as its been advertised
or it is a crisis of Corporate Governance

◦ The Nigerian financial services are governed by regulatory and supervisory

institutions :
◦ Central Bank of Nigeria (CBN) -apex regulatory institution
◦ the Ministry of Finance, (cooperates with the CBN on monetary matters);
◦ the Nigeria Deposit Insurance Corporation (NDIC), (provides deposit insurance);
◦ the Securities Exchange Commission (SEC);
◦ the National Insurance Commission (NAICOM),
◦ and the National Board for Community Banks (NBCB) (scrapped by virtue of abolition
of community banks)
 Financial Services Regulation Coordination Committee All regulatory

institutions to coordinates the supervision of all financial institutions.

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 Financial Sector
 Banking and Related Financial Institutions
The Nigerian financial services are governed by regulatory
and supervisory institutions Central Bank of Nigeria (CBN) -
apex regulatory institution
 the Ministry of Finance, (cooperates with the CBN on
monetary matters);
 the Nigeria Deposit Insurance Corporation (NDIC), (provides
deposit insurance);
 the Securities Exchange Commission (SEC);
 the National Insurance Commission (NAICOM),
 and the National Board for Community Banks (NBCB)
(scrapped by virtue of abolition of community banks)
 Financial Services Regulation Coordination
Committee All regulatory institutions to coordinates the
supervision of all financial institutions.

 Foreign investors (individuals and corporate entities) are

permitted to own up to 100% equity in any enterprise in Nigeria
including banking. Hence commercial operating licenses granted
to foreign banks
 Universal banking system adopted in 2000 allows all banks to
undertake activities related to traditional banking, capital market
and insurance business.
◦ minimum capital requirement for banks increased to N25 billion. mergers
and acquisition in the banking industry, 25 banks
◦ Performance requirements
◦ minimum of 40% liquidity ratio
◦ 10% capital adequacy ratio;
◦ less than 20% of non-performing loans;
◦ a 9.5% minimum cash reserve ratio;
◦ All banks must be incorporated in Nigeria and comply with the Nigerian
banking rules and regulations.
◦ Foreign banks are disallowed from establishing their branches in Nigeria.

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2/17/2011
 Internal control is a process designed to

provide reasonable assurance regarding the
achievement of objectives in the following
categories:
 · Effectiveness and efficiency of operations
 · Reliability of financial reporting
 · Compliance with applicable laws and
regulations

 Internal Control is a key process within an

organization concerned with the management
of risk and achieving the corporate
objectives.
 By Internal Control, it is meant not only

internal checks and internal audit but the
whole system of controls, financial and
otherwise, established by the management in
order to:

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2/17/2011
 Carry on the business of the entity in an

orderly and efficient manner
 Ensure adherence to management policies
 safeguard the assets of the entity.
 Prevent and detect fraud and errors.
 Secure as far as possible the completeness
and accuracy of records.
 Enabling the timely preparation of reliable
financial information.

A. The Control Environment

B. Risk Assessment
C. Control Activities
D. Information and Communication
E. Monitoring

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2/17/2011
The control environment is concerned with the actions, policies, and procedures that reflect the overall
attitude of the client’s top management, directors, and owners of an entity about internal control and its
importance.
1. Integrity and ethical values

2. Commitment to competence
3. Board of directors and audit committee
4. Management’s philosophy and operating style
5. Organizational structure
6. Assignment of authority and responsibility
7. Human resource policies and practices

 The risk assessment process looks at how the entity itself assesses material risks which
might arise. It has to estimate the significance of the risks and the likelihood that they
are occurring. Having identified a risk and assessed the likelihood of its occurrence, the
entity then has to decide what to do about it.
 Risk can be dealt with by:
- Tolerating them
- Terminating them
- Treating them
- Transferring them.

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2/17/2011
Control activities are actions, supported by

policies and procedures that, when carried out
properly and in a timely manner, manage or
reduce risks.

 Information and communication are essential to effecting control;
information about an organization's plans, control environment, risks,
control activities, and performance must be communicated up, down, and
across an organization. Reliable and relevant information from both internal
and external sources must be identified, captured, processed, and
communicated to the people who need it--in a form and timeframe that is
useful. Information systems produce reports, containing operational,
financial, and compliance-related information that makes it possible to run
and control an organization.

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2/17/2011
Monitoring is the assessment of internal control performance over time; it is
accomplished by ongoing monitoring activities and by separate evaluations of internal
control such as self-assessments, peer reviews, and internal audits. The purpose of
monitoring is to determine whether internal control is adequately designed, properly
executed, and effective. Internal control is adequately designed and properly executed
if all five internal control components (Control Environment, Risk Assessment, Control
Activities, Information and Communication, and Monitoring) are present and
functioning as designed. Internal control is effective if management and interested
stakeholders have reasonable assurance that:
· They understand the extent to which operations

IMPROVINGobjectives are being achieved.
INTERNAL CONTROL
· Published financial statements are being prepared reliably.
 Cost V Benefit
 Human Error
 Collusion
 Bypass of Control
 Non-routine transactions

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2/17/2011

 Sound secure operational processes

supported by proactive reviews.
 Bank’s assets protected
 One step ahead of our competitors
 Business as usual in the event of a disaster
 Customer’s information confidential
 Customer’s funds secure
 Customer has confidence in our business
since we have differentiated ourselves in
controls/security
 Customer happy/satisfied.
 Prevent failed audits
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2/17/2011
 Preventative: These are controls that prevent risks from

occurring, for example, authorisation controls, segregation of
duties, recruiting and training the right staff, and having an
effective culture.
 Detective: These are controls that detect if any frauds have

occurred. They are designed to pick up errors that have not
been prevented for example, reconciliations, supervision and
internal checks.
 Corrective or Response: These are controls that address any

problems that have occurred. Where problems are identified,
the controls ensure that they are properly rectified. Examples
are follow-up procedures and management action.

 Segregation of Duties
 Authorization
 Comparison
 Computer Controls
 Maintaining Trial Balance and Control
Account
 Account Reconciliations
 Physical

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2/17/2011
If controls appear to exist to prevent a

particular error, a test of controls (compliance
test) will be performed to ensure the control
is operating effectively. Compliance tests can
take the following forms:
- Examination of evidence.
- Re-performance.
- Inspection
- Recalculation and Re-performance.
- Enquiry and observation.
 Reduces careless mistakes and avoid risky

transactions
 Increases staff’s efficiency
 Teaches responsibility and accountability for
money under a person’s control
 Number One deterrent to internal fraud and
embezzlement
 Reduces careless mistakes and avoid risky
transactions

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 Good prevention is better than excellent

recovery.
 A key objective of the internal auditor is to
review the organization's system of internal
control and to provide assurance that the
corporate governance requirements are being
met.
IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL

ORGANIZATIONS
2/17/2011
To improve internal control environment in the financial organizations the following

recommendations are made:
1. A more integrated approach to internal control, by placing a greater emphasis on its
ability to proactively prevent loss and encourage efficiency.
2. Financial organizations should be made to provide a certain minimum amount of
information requirement on corporate governance. This would allow uniformity and
would allow easy appraisal of the internal control system.
3. The internal audit department should be independent and given the privilege to
determine the scope of their audit, under the supervision of the Audit Committee and
also the board should be actively involved in internal control rather than the upper
management.
4. Disclosures on directors’ remuneration should be extensive as to provide information
on who gets what and for what purpose.
5. Disclosures about employees’ benefits should be extensive as to show an analysis of
their emoluments by category not just by number.
6. All financial organizations should always provide a detailed analysis of insider-related
credits according to performance.
7. The financial statements should as well contain an independent report as regards the
internal control of the organization.
8. The annual report and accounts should include such meaningful, high-level
information as the board considers necessary to assist shareholders' understanding
of the main features of the company's risk management processes and system of
internal control, and should not give a misleading impression.
9. Finally, regulators should be well familiar with the operations of financial
organizations in Nigeria and constantly provide guide on how to improve their
internal control systems.
13

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2/17/2011

IMPROVING INTERNAL CONTROL

A system of effective control is a critical component of organization

organizations. A system of strong internal controls can help to ensure that

organization will achieve long-term profitability targets, and maintain

of unexpected losses or damage to the bank’s reputation.

IMPROVING INTERNAL CONTROL

four objectives that need to be satisfied. First is to determine the importance of

corporate governance in the current situation of the country. Second is to

determine any policies implemented in the sectors to fight the problem in

corruption. Third is to identify the benefits or pitfalls in the application of Internal

Control in the financial organizations in by comparing the Nigerian economy to

the other “third world countries”. And fourth is to establish recommendation in

which the Internal Control can be strengthened.

IMPROVING INTERNAL CONTROL

The rise of the financial sector as a considerable source of economic

clout occurred gradually, and it has allowed a few notable people

and companies to achieve impressive net worths. Because financial

have also attempted to regulate the financial sector to protect

investors and the economy as a whole. Unregulated activities can

lead to serious financial problems in periods of economic crisis, as

these activities can directly contribute to crisis situations.

IMPROVING INTERNAL CONTROL

or it is a crisis of Corporate Governance

IMPROVING INTERNAL CONTROL

◦ The Nigerian financial services are governed by regulatory and supervisory

◦ Central Bank of Nigeria (CBN) -apex regulatory institution

◦ the Ministry of Finance, (cooperates with the CBN on monetary matters);

◦ the Nigeria Deposit Insurance Corporation (NDIC), (provides deposit insurance);

◦ the Securities Exchange Commission (SEC);

◦ the National Insurance Commission (NAICOM),

 Financial Services Regulation Coordination Committee All regulatory

IMPROVING INTERNAL CONTROL

IMPROVING INTERNAL CONTROL

 Foreign investors (individuals and corporate entities) are

IMPROVING INTERNAL CONTROL