THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE FINANCIAL PERFORMANCE OF FINANCIAL INSTITUTIONS IN BUEA

CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

Internal controls have a vital significance in today banking sectors. The reason being that the control frameworks in any association are a mainstay of a proficient bookkeeping framework (Wanemba, 2010). For purpose of the study I adopted (G. Rennox 2015) definition of internal control systems. Internal control is a process, affected by an entity’s board of directors, managements and other personnel, designed to provide reasonable assurance regarding the achievement of a firm’s objective in the effectiveness and efficiency of operations. Whereas financial performance is the ability to operate efficiently, profitability, survive, grow and react to the environment opportunities and threats Sebbowa (2009). The expanding unpredictability in worldwide markets and requirement for improved investor returns has spurred the administration of firms to cultivate the internal control instruments as a component of upgrading the aggressive edge of firms (Rittenberg & Schwieger, 2005).Organization have invested heavily in improving in the quality of their internal control systems over the decade arguing that a good internal control yields good business. From an administration perspective there have to be a guarantee that internal control frameworks are set up so as to decrease the event of extortion. Internal control is a dynamic indispensable procedure that is adjusting constantly to the progressions confronting present day banking industry (Wielstra, 2014).

Inside each money related organization there is a need to give items and administrations at a fair value that guarantees cost productivity in the creation administration. Business banks disappointments and across the board plunge in incomes in the course of recent decades have been because of incapable inner control inside the formal business segments (Nyambura, 2013). Interior control, which guarantees the dependability of each association, in this way, has picked up significance today (Rezaee, 2002). This is on the grounds that the control frameworks set up are a mainstay of a proficient bookkeeping framework just as the accomplishment of authoritative objectives.

Most associations are persistently realigning their internal approaches so as to improve their internal control frameworks. The internal control instrument of associations is vital to cultivating the proficiency and returns of an association (Kantzos and Chondraki, 2006). The internal control of an association is made out of the control condition, the hazard evaluation, the control exercises, the data correspondence and observing (Carmichael, 1996). As indicated by Fadzil et al, (2005) a compelling interior control framework guarantees the achievement of association execution. This is guaranteed through standard audit of the budgetary data, guaranteeing shielding of the firm resources, consistence with administrative rules and guaranteeing viability in the administration exercises.

In his investigation, Mawanda (2008) states that “there is a general recognition that foundation and implementation of legitimate internal control frameworks will dependably prompt improved financial performance”. It is additionally a general conviction that legitimately organized frameworks of internal control improve the announcing procedure and furthermore offer ascent to solid reports which upgrades the responsibility capacity of the board of an element. Getting ready solid budgetary data is a key duty of the administration of each open organization. The capacity to successfully deal with the company’s business expects access to opportune and precise data.

As indicated by Wanjohi (2013) the estimation and assessment of performance is a key to control, and addresses three inquiries specifically; what occurred, why it occurred and what to do about it. Budgetary execution gives momentary input to the control frameworks as they screen the usage of vital goals by checking the association’s position, imparting the position, affirming needs and convincing advancement. It can accordingly be understood that inside controls are the methods while budgetary execution is the end. 

1.2. Statement of the Problem and Justification of the Study

Despite of the rules set out by Central Bank as per the Banking Act Cap, there has been various instances of bank disappointments in performance because of misrepresentation and absence of expound interior controls just as consistence with inside and outside guidelines inside the business (FLSTAP, 2011). For example, inside a time of nine months, the Central Bank put three financial foundations under receivership. For another situation the Dubai Bank was put under receivership for mocking financial rules for a spate of years. Pursue bank was later on put under receivership in what the controller named as dangerous monetary conditions hence; leaving the inquiries of the holes that exist inside the financial area attributable to such different breaks with no move being made (Ngigi, 2015).

Muio (2012) examined the effect of interior control frameworks on the financial performance of private emergency clinics in Nairobi. This examination be that as it may, did not join the business banks.

Olumbe (2012) contemplated the connection between internal control frameworks and corporate administration in business banks in Kenya. This investigation, be that as it may, did not quantify the directing impact of the CBK prudential rules.

 Njenga and Osiemo (2013) contemplated the impact of extortion discovery through an inward control on the execution of store taking microfinance establishments in Kenya. In any case, this exploration did not audit in detail all the interior control framework angles.

Ochoge (2011) was underscoring on the internal control and authoritative performance, the above research neglected to demonstrate the immediate commitment of interior control to the financial performance.

From the referenced writing it was clear that internal control frameworks impact the execution of both financial related and non-budgetary foundations. In the present market condition where money related organizations have been in a bad way because of untrustworthy issues and increment in banking extortion it’s basic to evaluate the job of inside control frameworks in alleviating misfortunes and misrepresentation in the financial business. The sparse proof on the connection between internal control frameworks and execution of business banks has inspired the flow inquire about. This will upgrade both the practices and scholastic information hole. Further, this examination was attempted to fill this learning hole by contemplating the impacts of internal controls on the money related execution of business banks.

From this is derived the following specific research questions/problems:

• What is the nature of relationship between internal control and financial performance?

• Can internal control affect the financial performance micro institutions?

• How does internal control affect the overall financial performance of micro institution?

1.3. Objectives of the Study

The expansive target of this examination was to survey the impact of internal control on the monetary execution of business banks.

The specific objectives

The particular goals include;

• To ascertain if internal control has relationship with fraud perpetration in the organization.

• To examine the relationship that exists between internal control and attainment of the organization objectives.

 1.4. Hypothesis of the Study

The research objectives will be addressed using the following two hypotheses;

Null hypothesis

There is no significant relationship between internal control and the financial performance of micro finance institution.

Alternative hypothesis

There is a significant relationship between internal control and the financial performance of micro finance institution.

FURTHER READING: ECONOMICS PROJECT TOPICS WITH MATERIALS