internal control ppt

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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

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IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL

ORGANIZATIONS

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.

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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

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◦ 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.

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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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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

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Internal Control is a key process within anorganization concerned with the managementof risk and achieving the corporateobjectives.

By Internal Control, it is meant not onlyinternal checks and internal audit but thewhole system of controls, financial andotherwise, established by the management inorder to:

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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.

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A. The Control Environment

B. Risk Assessment

C. Control Activities

D. Information and Communication

E. Monitoring

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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.

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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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Control activities are actions, supported by policies and procedures that, when carried out properly and in a timely manner, manage or reduce risks.

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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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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 objectives are being achieved.

· Published financial statements are being prepared reliably. 2/17/2011


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Cost V Benefit

Human Error

Collusion

Bypass of Control

Non-routine transactions

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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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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.

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Segregation of Duties

Authorization

Comparison

Computer Controls

Maintaining Trial Balance and Control Account

Account Reconciliations

Physical

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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.

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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.

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IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

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.

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internal control ppt

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