THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE PERFORMANCE OF MICRO FINANCE INSTITUTION

ABSTRACT

The study was conducted to assess the Impact of Internal Control System on the Performance of Micro Finance Institution in Buea. The main objective of the study was to examine the impact of internal control system on the performance of MFIs in the Cameroon finance industry using NTACCUL as a case study with specific objectives being to determine the effect of Control Environment on the performance of microfinance institutions, evaluate the effect of Risk Assessment on the performance of microfinance institutions, to obtain the effect of Control Activities on the performance of microfinance institutions, to analyze the effect of Information and Communication on the performance of microfinance institutions and to determine the effect of Monitoring on the performance of micro finance institutions. The study employed both correlation and descriptive research design with Ntarinkong Cooperative Credit Union (NTACCUL) Buea as its case study with a sample size of 30 respondents made up of workers of NTACCUL Buea. The results showed that there the Null hypothesis for the study was accepted with the value of adjusted R-squared being 0.461 and Fisher (F) ratio of 2.338 with a probability value of significant of 0.097, which is greater than 0.05 hence insignificant.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Microfinance is an organization that carries out financial activities which occupy a central position in the nation’s financial system and are essential agents in the development process of the economy. By intermediating between the surplus and deficit spending units, institutions increase the quantum of National savings and investments and hence national output.

For financial institutions to be able to function effectively and contribute meaningfully to the development of a country, the institution 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 effective internal control system.

Internal control system refers to all the policies and procedures established and maintained by an institution to help ensure that its operations are practically done in an orderly manner. A system of strong internal controls can help to ensure that the goals and objectives of a financial institution will be met, that the credit union will achieve long-term profitability targets and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the credit union 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 union’s reputation.

The need for the internal control systems in microfinance institutions cannot be undermined, due to the fact that the financial sector which has a crucial role to play in the economic development of a nation is now being characterized by macro-economic instability, slow growth in real economic activities, corruption and the risk of fraud.

Fraud, which is the major reason for setting up an internal control system, has become a great pain in the neck of many Cameroon credit unions managers. It has also become an unfortunate staple in Cameroon’s international reputation. Fraud is really eating deep into the Cameroon financial system and that any credit union with a weak internal control system, is dangerously exposed to fraud.

In a nut-shell, the damage which this menace, called fraud has done to the financial institutions 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 which is the impact of internal control system on the performance of microfinance institution with NTACCUL as a case study. However, this study is aimed at verifying the conception that an effective and efficient internal control system is the best control measure for preventing and detecting performance, especially in this sector.

Internal control is the method employed to help ensure the achievement of an objective. Internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that a microfinance objective will be achieved and undesired risk events will be prevented or detected and corrected, based on either compliance or management initiated concerns (Awe, 2005). According to Milichamp A.H {1991}, internal control is a whole system of control and finance established by management of the organization in order to carry on business of the institution in an orderly and efficient manner to ensure that management policies are well implemented.

The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control 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 every day for the smooth running of their organization or businesses.  Internal controls 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 Control is a process designed and affected 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 controls 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 control 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, 2012).

Microfinance institutions establish systems of internal control 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 Control 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, microfinance institutes designs and physical barriers constitute the internal control structure of an institution. Managers should realize that a strong internal control 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 control structure rests with the management of the institution.  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 ongoing 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 financial institutions?  What is the impact of internal control in the prevention and detection of fraud in financial institutions, what is the impact of internal control on the performance of microfinance institution at NTACCUL?

1.2 Problem Statement

The series of business failures and corporate scandals have been identified by KPMG to be as a result of weak internal control system. 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’s confidence, the guidelines emphasize the critical role of internal control over financial reporting. This gave rise to the need for corporate governance especially in public institutions.

International Auditing 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 controls 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 control 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 control over financial reporting, and mandate that both management and the independent auditor must publicly report any material weakness in internal controls 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 control over financial reporting is not effective.

Against this background this study investigated the purpose of ascertaining the impact of internal control system on the performance of MFIs.

1.3 Research Questions

This study seeks to tackle among others questions such as:

What is the relationship between internal control and the performance of MFIs?

What are the implications, consequences, and benefits of internal control on the performance of MFIs?

What are those challenges which a weak internal control can pose on the performance of MFIs?

What are those things that must be done and put in shape by MFIs to ensure an effective internal control a system?

1.4 Objective of the Study

The main objective of this research study is to examine the impact of internal control system on the performance of MFIs in the Cameroon finance industry using NTACCUL as a case study. Apart from the main objective, the research also sets out to achieve some specific objectives which are;

1.4.1 Specific Objectives

• To determine the effect of Control Environment on the performance of microfinance institutions.
• To evaluate the effect of Risk Assessment on the performance of microfinance institutions.
• To obtain the effect of Control Activities on the performance of microfinance institutions.
• To analyze the effect of Information and Communication on the performance of microfinance institutions.
• To determine the effect of Monitoring on the performance of micro finance institutions.

FURTHER READING: ACCOUNTING PROJECT TOPICS WITH MATERIALS