The Impact of Internal Control System On PDF

 

THE IMPACT OF INTERNAL CONTROL SYSTEM ON FINANCIAL PERFORMANCE IN MOGADISHU PRIVATE BANKS (CASE STUDY SOME SELECTED PRIVATE BANKS IN MOGADISHU)

BY ANAS DAHIR ABDI Reg. No HIU001823

THIS THESIS IS SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT FOR THE AWARD OF THE DEGREE BACHELOR OF BUSINESS ADMINISTRATION AT HORSEED INTERNATIONAL UNIVERSITY

MAY, 2015

MOGADISHU- SOMALIA

 

TABLE OF CONTENTS DECLARATION ............................................................................................................................................. I  APPROVAL ...................................................................................................................................................II  DEDICATION ...............................................................................................................................................III  ACKNOWLEDGEMENT ............................................................................................................................ ............................................................................................................................ IV  LIST OF TABLES ......................................................................................................................................... V  LIST OF FIGURES ....................................................................................................................................... ..................................................................................................................................... VI  LIST OF ABBREVIATIONS ....................................................................................................................... ..................................................................................................................... VII  ABSTRACT ................................................................................................................................................. ............................................................................................................................................... VIII  CHAPTER ONE.............................................................................................................................................  ............................................................................................................................................. 1  INTRODUCTION .......................................................................................................................................... 1 

1.0 

I NTRODUCTION ...................................................................................................................................... 1 

1.1 

.............................................................. .................................................. 1  BACKGROUND OF THE STUDY ................................................................................................................

1.2 

.............................................................. ............................................................. 3  PROBLEM STATEMENT ...........................................................................................................................

1.3 

R ESEARCH ESEARCH PURPOSE .............................................................................................................................. 4 

1.4 

R ESEARCH ESEARCH OBJECTIVES  ......................................................................................................................... 4 

1.5  1.6 

ESEARCH QUESTIONS  .......................................................................................................................... 4  R ESEARCH SIGNIFICANCE OF THE STUDY ................................................................................................................ 5 

1.7 

SCOPE OF THE STUDY............................................................................................................................. 5 

1.8 

................................................................. .................................................. 5   OPERATIONAL DEFINITIONS ...................................................................................................................

1.8.1 

........................................................ ............................................................. 5  Conceptual Framework  .....................................................................................................................

CHAPTER TWO............................................................................................................................................ 6  LETERATURE REVIEW ............................................................................................................................. 6 

2.0 

I NTRODUCTION ...................................................................................................................................... 6 

2.1 

OVERVIEW OF I NTERNAL CONTROL ....................................................................................................... 6 

2.1.1 

Role and Purposes of Internal Control  .............................................................................................. 6 

2.1.2 

................................................................ .................................................. 6  Types of Internal Control .................................................................................................................. 2.1.2.1  Organizational Control  ............................................................................................................................. 6  2.1.2.2  Segregation Segregatio n of Duties  ............................................................................................................................... 6  2.1.2.3  Physical Control  ....................................................................................................................................... 7  2.1.2.4  Arithmetical and Accounting Control  ...................................................................................................... 7  2.1.2.5  Personnel Control..................................................................................................................................... 7  2.1.2.6  Supervision Control  ................................................................................................................................. 7  2.1.2.7  Management............................................................................................................................................. 7  2.1.2.8  Authorization and Approval ..................................................................................................................... 7  2.2  I NTERNAL CONTROLS SYSTEMS AND FINANCIAL PERFORMANCE .......................................................... 8 

2.3 

FUNCTIONALITY OF I NTERNAL CONTROL SYSTEMS ............................................................................. 10 

2.3.1 

................................................................. ........................................................... 10   Control Activities ............................................................................................................................

2.3.2 

............................................................ ...................................................................... ... 11  Internal Audit ...............................................................................................................................

2.3.3 

Control Environment ...................................................................................................................... 16 

2.4 

FINANCIAL PERFORMANCE .................................................................................................................. 18 

2.4.1 

........................................................... ..................................... 19  Measures of Financial Performance ................................................................................................ 2.4.1.1  Liquidity  ................................................................................................................................................ 19  2.4.1.2  Accountability   ........................................................................................................................................ 20  2.4.1.3  Reporting  ............................................................................................................................................... 20 

 

2.5 

........................................................... ................................................................................. .............. 21  SUMMARY ..............................................................................................................................

2.6 

CONCLUSION ....................................................................................................................................... 21 

CHAPTER THREE...................................................................................................................................... 22  METHODOLOGY ....................................................................................................................................... 22 

3.0 

I NTRODUCTION .................................................................................................................................... 22 

3.1 

R ESEARCH ESEARCH DESIGN .............................................................................................................................. 22 

3.2 

POPULATION AND SAMPLING: .............................................................................................................. ............................................................... ............................................... 22 

3.2.1 

................................................................. ........................................................... 22   Target Population ............................................................................................................................

3.2.2 

Sample Size .................................................................................................................................... 22 

3.2.3 

Sampling Technique ....................................................................................................................... 23 

3.3 

........................................................ ...................................................................... ... 23  DATA COLLECTION  ...........................................................................................................................

3.4 

VALIDITY AND R ELIABILITY ELIABILITY ................................................................................................................ 23 

3.5 

............................................................................................................................... ...................................................................... ... 24  DATA A NALYSIS ............................................................

3.6 

................................................................ ................................................ 24  LIMITATIONS OF THE STUDY ................................................................................................................

3.7 

.................................................................. ................................................ 24   ETHICAL CONSIDERATIONS ..................................................................................................................

CHAPTER FOUR ........................................................................................................................................ 25  DATA ANALYSIS INTERPRETATION AND DISCUSSION ................................................................... 25 

4.0 

I NTRODUCTION .................................................................................................................................... 25 

4.1 

DEMOGRAPHIC DATA .......................................................................................................................... 25 

4.1.1  4.1.2 

Gender characteristics of respondents............................................................................................. 25  Description of age groups of respondents  ....................................................................................... ............................................................. .......................... 26 

4.1.3 

................................................................... .............. 27  Explanation marital status of the respondents  .................................................................................

4.1.4 

 ........................................................................................ .... 28  Education characteristics of respondents ....................................................................................

4.1.5 

 .............................................................................................................. .... 29  Experience of respondents ..........................................................................................................

4.2 

ASSESSING THE FUNCTIONALITY OF I NTERNAL CONTROL SYSTEMS IN MOGADISHU PRIVATE BANKS .. 30 

4.2.1 

Descriptive Statistics on Control Activities  .................................................................................... 30 

4.2.2 

 ..................................................................................... .... 31  Descriptive Statistics on Internal Auditing  .................................................................................

4.2.3 

................................................................. .............. 32  Descriptive Statistics on Control Environment  ...............................................................................

4.3 EXAMINING THE FINANCIAL PERFORMANCE OF PRIVATE BANK IN MOGADISHU ........................................ 32  CHAPTER FIVE .......................................................................................................................................... 34  CONCLUSION AND RECOMMENDATION ............................................................................................ 34 

5.0 

I NTRODUCTION .................................................................................................................................... 34 

5.1 

................................................................. ........................................................... 34   SUMMARY FINDINGS ............................................................................................................................

5.1.1 

Functionality of the Internal Control Systems in Mogadishu Mo gadishu Private Banks .................................. 34 

5.1.2 

........................................................... 34  The Financial Performance of Private Banks in Mogadishu  ...........................................................

5.2 

................................................................ ...................................................................... ... 35  CONCLUSIONS ...................................................................................................................................

5.3 

................................................................. ........................................................... 35   R ECOMMENDATIONS ECOMMENDATIONS  ............................................................................................................................

5.4 

R ECOMMENDATION ECOMMENDATION FOR FURTHER R ESEARCH ESEARCH ..................................................................................... 35 

REFERENCES ............................................................................................................................................. 36  APPENDIX A: REQUEST FOR THE COMPLETION OF QUESTIONNAIRE ....................................... 39  APPENDIX B: QUESTIONNAIRE ............................................................................................................. 40 

 

DECLARATION   DECLARATION

I Anas Dahir Abdi hereby declare that this is my original work and has never been presented for any academic award in any University. Universit y.

Signed ______________________ ___________________________ _____

Date: ____/____/ 2015

Anas Dahir Abdi 

I

 

APPROVAL   APPROVAL

This is to certify that this thesis by Anas Dahir Abdi entitled “The Impact of Internal Control System on Financial Performance in Mogadishu Private Banks” has been written under my supervision and is hereby approved for submission for a Bachelor of Business Administration Degree of Horseed International University.

Signed ______________________ ___________________________ _____

Date: ____/____/ 2015

Abdifitah Omar

Horseed International University

II

 

DEDICATION   DEDICATION

This work is dedicated to my parents; Dahir Abdi Mohamed & Hawo Dahir Hashi and my lovely brothers and sisters.

III

 

ACKNOWLEDGEMENT   ACKNOWLEDGEMENT

All praise and gratitude be given to Allah for giving us such a great strength, patience, courage and ability to complete this thesis. I would like to express my gratitude sincere appreciation to my supervisor, Mr. A/fitah Omar Ga’al for guiding the research presented in this project. I appreciate and thank them for their continuous support, advice, and comment. The knowledge I have learned from them is the most valuable things I had learn in this world of research. Special thanks to Rector, Dean of the faculty of Economics and Management Science, Mr. Ali Abdi Aden and all my lecturers at Horseed International University. My deepest appreciation goes to my beloved family, and in particular to my father and my mother who have been very supportive, patient, and understanding all the time. This research benefited from the following organizations and they deserved special thanks for  providing the information needed for this study; stud y; Premier Bank, Dahabshiil Bank and Salaam Somali Bank. I am grateful to the staff of private bank in Mogadishu who participated in the study. Finally, I wish to express my deepest appreciation to Mohammed Dahir for his immense support and interest in my studies and others who involve direct or indirect with this project.

Thank you everybody.

IV

 

LIST OF TABLES  TABLES  TABLE 1: 3.1: RESPONDENTS OF THE STUDY...................... ............................................ ............................................ .............................. ........ 23  TABLE 2: 3.2: THE INTERPRETATIONS OF THE MEAN VALUES ...................... ............................................ ........................24   TABLE 3: 4.1: GENDER OF THE RESPONDENTS................... ......................................... ............................................ .............................. ........ 25  TABLE 4: 4.2: AGES OF THE RESPONDENTS.................... .......................................... ............................................ .................................. ............ 26  TABLE 5: 4.3: MARITAL STATUS OF THE RESPONDENTS ........................................... ....................................................... ............27  TABLE 6: 4:4 EDUCATION LEVEL OF RESPONDENTS .................... .......................................... ......................................... ...................28  TABLE 7: 4.5: EXPERIENCE OF THE RESPONDENTS ............................................ ............................................................... ................... 29  TABLE 8: 4.6: DESCRIPTIVE STATISTICS ON CONTROL ACTIVITIES ...................................... ...................................... 30  TABLE 9: 4.7: DESCRIPTIVE STATISTICS ON INTERNAL AUDITING..................... ........................................ ...................31  TABLE 10: 4.8: DESCRIPTIVE STATISTICS ON CONTROL ENVIRONMENT ..............................32  TABLE 11: 4.9: DESCRIPTIVE STATISTICS ON FINANCIAL PERFORMANCE ........................... ........................... 33 

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LIST OF FIGURES  FIGURES  FIGURE 1: 1.1: CONCEPTUAL FRAMEWORK ...................... ............................................ ............................................ ................................ .......... 5 FIGURE 2: 4.1: GENDER OF THE RESPONDENTS ..................... ........................................... ............................................ .......................... .... 26 FIGURE 3: 4.2: A BAR GRAPH SHOWING AGE OF THE RESPONDENTS ...................... .................................. ............ 27 FIGURE 4: 4.3: A PIE GRAPH REVEALS MARITAL STATUS OF THE RESPONDENTS .............. 28 FIGURE 5: 4.4: THE LEVEL OF THE RESPONDENT’S EDUCATION ................... ......................................... ........................ 29 FIGURE 6: 4.5: EXPERIENCE OF THE RESPONDENTS ..................... ........................................... ......................................... ...................30

VI

 

LIST OF ABBREVIATIONS  ABBREVIATIONS  ABA-

American Bar Association

ACCA-

Association of Chartered Certified Accountants

AIA-

American Institute of Accountants

AICPA-

American Institute of Certified Public Accountants

HIU-

Horseed International University

ICPAU-

Institute of Certified Public Accountants of Uganda

IIA-UK- Institute of Internal Auditors- United Kingdom IFRS-

International Financial Reporting Standards

ISO-

International Organization for Standardization 

MVA-

Market Value Added

NYSE-

 New York stock exchange 

ROA-

Return on Assets

ROE-

Return on Equity

ROI-

Return on Investment

ROS-

Return on Sales

SAP-

Standard Auditing Practices

SAS-

Statement of Auditing Standards

SPSS-

Statistical Package for Social Scientist

US-

United States

VII

 

ABSTRACT   ABSTRACT

This study investigated the impact of internal control system on financial performance in Mogadishu private banks. The demographic profile of the respondents was age, gender, qualification and experience. The main objectives are to assess the functionality of internal control systems in Mogadishu private banks and to examine financial performance of private  banks in Mogadishu. The study is based on 33 target population especially Accountants, finance directors, chief cashiers, internal auditors and managers of private banks in Mogadishu Descriptive analysis was used. It administers questionnaire as a research instrument. The findings of this study reveal that majority of the private banks in Mogadishu has enough cash to meet its intended goals. Also there is a clear separation of duties. This study suggests that the internal auditors perform their duties fast, efficient and reliable.

VIII

 

CHAPTER ONE  ONE  INTRODUCTION   INTRODUCTION 1.0 Introduction Introduction   This is the first chapter of the study and the researcher is focus on the following sections:

Background of the study, problem statement, research purpose, research objectives, research Questions, significant of the study, scope of the study, the study operational definitions and conceptual frame work. 1.1 Background of the Study  Study  In the World, According to Brown (1962, p. 696), the difference between no recognition and

slight recognition of internal control was found in a 1905 publication entitled Auditing by Lawrence Dicksee, an English audit specialist. In his study, originally published in 1892, Dicksee does not mention the term internal control itself, but addresses internal control by explaining that the object and scope of an audit has three parts to it: “the detection of fraud, technical errors, and errors in principle”. Therefore, internal control was often discussed in the context of the external auditor’s work. While the detection of fraud as an audit objective has a long history, internal control (as a subject) was not recognized until the twentieth century. the Securities Act of 1933 addressed internal control and the audit process in the following words: “In determining the scope of the audit necessary, appropriate consideration shall be given to the adequacy of the system of internal check and internal control” (Early Regulation SX Rule 2-02 (b) of the 1933 Act, quoted after Ferald Fernald (1943, p. 228). A later and broader approach by the American Institute of Accountants (AIA) defined that “Internal control comprises the plan of organization and all of the co-ordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies” (AIA 1948, quoted after Heier et al. 2005, p. 48). During the last 15-20 years, a shift in focus from the accounting and finance orientation of internal control to a much broader governance and business perspective has taken place. The term internal control developed in the accounting and auditing discipline, and was traditionally interpreted as “accounting controls”, limited to the system that auditors test as  part of their assurance on the reliability of financial reporting (Pfister, 2009). In Africa, Organizations establish systems of internal control to help them achieve  performance and organizational goals, prevent loss of resources, enable production of reliable

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reports and ensure compliance with laws and regulations. An internal control system comprises the whole network of systems established in an organization to provide reasonable assurance that organizational objectives will be achieved. Benefits of an internal control system include effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations (Nyakundi, (N yakundi, Nyamita, & Tinega, 2014). In Somalia, Somali remittance companies handles a lot of money and contributes the livelihood of hundreds of thousands of families and develop the private sectors in a country where there is no properly functioning government, therefore how an internal auditor is expected to be high while the staff security has no guarantee. Somali remittance companies suffer loss of millions of dollar due to lack of good quality control system in remittance companies and professional internal auditors therefore most of Somali organizations do not have effective and independence i ndependence auditors (Mohamud, 2013). Internal control is a system structured within the corporation whose goal is to raise efficiency and effectiveness of activities, the system assures the conformity of activities within the laws and regulations and improve the reliability of financial reporting. Internal control system possesses vital importance for the institution to attain its ultimate objectives. Internal control system allows banks to foresee potential problems which may cause financial losses and thereby prevent or minimize any future losses. Researches on the causes of bank failures mainly concluded that an efficient and effective internal control system might prevent financial cost (Hayali, Dinç, Sarılı, Dizman, & Gündoğdu, 2012) 2012).. Internal control system can be generally defined as a system which has the features of maintaining the assets of a company, ensuring accuracy and reliability of information and reports related to accounting and other operations, and increasing the effectiveness of the operations. Additionally, the system also covers all assessment and methods that are adopted in order to detect the suitability of operations in accordance with policies determined by management, implementing a chart of accounts and reporting system, specifying the duties, authority and responsibilities, and organization plan of the cooperation (Cook et al. 1980,  p.198). Internal control system asserts that the system should be always kept under control and supervision since people tend to think about their interests more rather than the interests of the corporation. If there is a failure in the financial accounting system of a corporation, a decrease in assets and an increase in abuses will inevitably takes place in the absence of an effective internal control system (Yayla, (Ya yla, 2006).

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The United Kingdom Auditing practices committee (1979) defined internal control as “the whole system of control, financial and otherwise established by management in order to carry on the business of the enterprise in an orderly band effective manner to ensure adherence to managerial policies and directives, safeguard the assets and ensure as far as possible the completeness and accuracy of the records the prevention and detection of errors the fraud, and the timely preparation of financial information”. According to statement of accounting standards, (SAS) “internal control is the combined  plan, method and procedures which can safeguard the firm’s assets promote operational efficiency and encourage adherence to prescribed policies”. Also according to Robertson and Davis (1988:169) “internal control system is a set of client procedures both computerized and manual imposed on the accounting system for the purpose of preventing, detecting and correcting errors and irregularities that might enter the system and thereby affect the firm’s financial statement. In the study, Internal control systems were construed to mean “a process effected by the entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the categories; reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations” (Whittington & Pany, 2001). While financial performance was considered in terms of measures like profitability (using absolute and relative measures), liquidity (using liquidity ratios like current ratio, acid test ratios, the ease with which the entity settles its financial obligations) and Accountability (in terms of financial accountability) (ACCAManagerial Finance Paper 8; 1998; and Panday, 1996).  Nevertheless, in our best awareness, the role of internal control system in Mogadishu  private banks looks to be unclear. So, this study stud y will investigate the impact of internal control system on financial performance in Mogadishu private banks. 1.2 Problem Statement  Statement  Internal controls 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 Controls are processes 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

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efficiency of operations and compliance with applicable laws and regulations (Ejoh & Ejom, 2014). We might not really understand the impact of internal control system in an organization until probably we run an organization void of internal control system. The absence of adequate internal control measures exposes the financial management of an organization to certain threats such as:  Incorrect financial statement and /loss of the company’s assets.  Stealing

and mismanagement of organizational vital documents which may be done by an

employee to take undue advantage.  Incorrect   Non  Non

and unreliable financial records which may lead to loss of organizational integrity.

implementation of accounting policies in consistent with the applicable legislation

appropriate in presentation of financial statement, (Amaka, 2012).  Nevertheless, in our best awareness, the role of internal control system in Mogadishu  private banks looks to be unclear. So, this study stud y will investigate the impact of internal control system on financial performance in Mogadishu private banks. 1.3 Research Purpose  Purpose  The purpose of this study is to investigate the impact of internal control system on financial  performance in Mogadishu private banks. 1.4 Research Objectives  Objectives  Internal controls in an organization are normally introduced to provide reasonable assurance

about the achievement of the entity’s objectives with regard to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. These will finally translate into improved financial performance. The study will therefore attempt to investigate the impact of internal control system on financial  performance in Mogadishu private banks. In particular the researcher will focus on the following specific objectives: a)  To assess the functionality of internal control system s ystem in Mogadishu private banks.  b)  To examine financial performance of private banks in Mogadishu. 1.5 Research Questions  Questions  To achieve the above desired objectives the following research questions will be used:

1.  What is the functionality of internal control system s ystem in Mogadishu private banks? 2.  What is the financial performance of private banks in Mogadishu?

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1.6 Significance of the Study  Study  This study ware concerned the impact of internal control system on financial performance in

Mogadishu private banks. The study will contribute to the body of knowledge about the role of internal control system in Mogadishu private banks. The findings also may contribute literature that maybe used by the academics that are interesting to carry out for further study in this field. 1.7 Scope of the Study  Study  The study ware concerned with investigating the impact of internal control system on financial performance in Mogadishu private banks and this study was limited in Mogadishu city, the capital of Somalia , because Mogadishu is the headquarter of private banks. In terms of time this study limited from February 2015 to April 2015 1.8 Operational Definitions  Definitions  Internal control  is a business practice, policy or procedure that is established within an

organization to create value or minimize risk. Control is an exercise performed in the present pr esent to achieve a plan drawn up for the future. System is a set of   detailed  methods,    methods,  procedures procedures and  routines   routines created to carry out a specific

activity, perform activity,  perform a duty, a duty, or  or solve a problem. a problem.   Financial performance is  measuring the results of a firm's  policies and operations in

monetary terms.  terms.  These results are reflected in the firm's return on investment, investment,   return on assets, value assets,  value added, etc. added, etc. 1.8.1 Conceptual Framework  Framework  Figure 1: 1.1: Conceptual Framework  Framework 

Independent Variable

Dependent Variable

Internal controls:

Financial Perf Performance: ormance:

Control Activities

Liquidity

Internal Audit

Accountability

Control Environment

Reporting

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CHAPTER TWO  TWO  LETERATURE REVIEW  REVIEW  2.0 Introduction Introduction   This chapter two reviews the previous studies related to this study which was written by other

researchers. This was in respect to the specific objectives of the study of the related area.   2.1 Overview of Internal Control  Control  According to the definition by COSO in 1992, an internal control system is i s defined as a set of

methods, designed and controlled by senior management and board of directors to provide a limited assurance regarding reliability of financial reporting, effectiveness and efficiency of operations and their compliance with laws and regulations (Aksoy, 2007). 2.1.1 Role and Purposes of Internal Control  Control  According to Walter and William (1982:5), the role and purpose of internal control system is

merit able because internal control consists of the measures, record procedures and plan of an organization that deals mainly with safeguarding asset and ensuring financial records are accurate and reliable. 2.1.2  Types of Internal Control  Control 

The guideline of internal control put forward eight (8) types of internal control system that should be obtainable in an organization and they are follows:  2.1.2.1 Organizational Control   An organization should have a plan of its activities which should define and allocate responsibilities that is every function should be monitored by a specific person who may be called “responsible officer.” Adequate lines reporting for all aspect the organization operations, including controls should be clearly stated and the delegation of authority and responsibility should be clearly specified (Amaka, 2012).  2.1.2.2 Segregation of Duties  Duties  One of the prime means of control is the separation of duties. This reduces the risk of internal manipulation, accidental error and increases the element of checking. Functions which should  be separated in an organization financial management include: initiation (officer or person who decides to give out the loan), Execution (the person who keeps the money to be loan out) and recording (the person who records the whole process in the book).system development and daily operations have to be considered in mounding the internal control system to be full  proof against fraud (Amaka, 2012).

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 2.1.2.3 Physical   Physical Control   This concerns the physical custody of assets and involves procedures and security measures designed to limit access to authorized personnel only. These include both direct and indirect access via documentations. These controls assume importance in the case of valuable,  portable, exchangeable or desirable assets.” Physical control can also be achieved by electronic means in a computerized environment for example through the use of electronic I.D cards, password etc. to restrict access to particular file (Amaka, 2012).

  Arithmetical and Accounting Control    2.1.2.4 Arithmetical These are the controls within the recording function which h checks that the transactions to  be recorded and processed have been authorized and that they are correctly and accurately  processed. Such controls include checking the arithmetical accuracy of the records, maintenance and checking of totals, reconciliation, control accounts and trial balances and accounting for document (Amaka, 2012).  2.1.2.5 Personnel   Personnel Control   There should be procedure to ensure that personnel have capabilities capabilit ies commensurate with their responsibility. Inevitably, the proper functioning of any stem depends on the competence and integrity of those operating it. The qualifications, selection and training as well as the  personal characteristics of the personnel involved i nvolved are important features to be considered in setting up any control system especially in financial management (Amaka, 2012).  2.1.2.6  Supervision Control   Any system of internal control should include the supervision by responsible officials of day to-day transactions and the recording thereof. Al activities performed in the financial management by all the level of staff should be clearly laid down and communicated to the  person supervising (Amaka, 2012). 2012).  2.1.2.7  Management  Management      These are the controls exercised by management outside the day-to-day routing of the system they include the overall supervisory controls exercised by management, the review of management accounts and comparison thereof with budget internal audit function and other special review procedures. It is also the duty of the management to review the internal control from time to time in order to accommodate changes in the financial management operations (Amaka, 2012).  2.1.2.8 Authorization   Authorization and Approval  Approval   All transactions should require authorization by an appropriate responsible person. This is very important in the financial system of an organization where large amount of money is

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handled so therefore it is appropriate for these money which are used for are used for various transactions to be authorized by a trusted and responsible person (Amaka, 2012). 2.2 Internal Controls Systems and Financial Performance  Performance  Internal control is broadly defined as the process put in place by management to provide

reasonable assurance regarding the achievement of effective and efficient operations, reliable financial reporting, and compliance with laws and regulations (Petrovits, Shakespeare, & Shih, 2009). Gupta (2001) drawing from Statements of Standard Auditing Practices No. 6 (SAP 6) defines Internal control as “the plan of organization and all the methods and  procedures adopted by the management of an entity to assist in achieving management objectives of ensuring as far as practicable, the orderly and efficient conduct of its business, including adherence to management  policies, the safeguarding of assets, prevention and detection of fraud and error, the accuracy and   completeness of accounting records and the timely preparation of reliable financial information”. It is therefore worth noting from the above that; properly instituted systems of internal control will ensure; completeness of all transactions undertaken by an entity, that the entity’s assets are safeguarded from theft and misuse, that transactions in the financial statements are stated at the appropriate amounts, that all assets in the company’s financial statements do exist, that all the assets presented in the company’s financial statements are recoverable and that the entity’s transactions are presented in the appropriate manner according to the applicable reporting framework (ACCA- Audit and Assurance Services) Internal control is the term generally used to describe how management assures that an organization does meet its financial and other objectives. Internal control systems not only contribute to managerial effectiveness but are also important duties of corporate boards of directors (Verschoor, 1999). Hitt, Hoskisson, Johnson, and Moesel (1996) argued that there are two types of major internal controls associated with the management of large firms, particularly diversified firms, which have an important effect on firm innovation, these are; strategic controls and financial controls. Strategic controls entail the use of long-term and strategically relevant criteria for the evaluation of business-level managers' actions and performance. Strategic controls emphasize largely subjective and sometimes intuitive criteria for evaluation (Gupta, 1987). The use of strategic controls requires that corporate managers have a deep understanding of business-level operations and markets. Such controls also require a rich information exchange between corporate and divisional managers (Hoskisson, Hitt, & Ireland, 1994).

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On the other hand, financial controls entail objective criteria such as return on investment (ROI) in the evaluation of business-level managers' performance. They are similar to what Ouchi (1980) and Eisenhardt (1985) referred to as outcome controls. Thus, top-level managers establish financial targets for each business and measure the business-level managers' performance against those targets. Such an approach can be problematic when the degree of interdependence among business units is high. Thus, emphasis on financial controls requires each division's performance to be largely independent. As a firm grows especially through acquisition, it also grows in complexity and the number of units that corporate executives must oversee and manage (thereby increasing their spans of control). Clearly, each acquisition increases corporate managers' need for information processing, sometimes dramatically so. These changes make it difficult for corporate managers to use strategic controls. To reduce information-processing demands, they may change their emphasis from strategic to financial controls (Hitt, Hoskisson, Johnson, & Moesel, 1996). The three major categories of management objectives comprise; effective operations, financial reporting and compliance (Hayes, R. et al, 2005). Effective operations are about safeguarding the assets of the organization. The physical assets like cash, nonphysical assets like receivables, important documents and records of the company can be stolen, misused or accidentally destroyed unless they are protected by adequate controls. The goal of financial control requires accurate information for internal decision because management has a legal and professional responsibility to ensure that information is prepared fairly in accordance with applicable accounting standards. Organizations are equally required to comply with many laws and regulations including company laws, tax laws and environment protection laws. The authoritative 1994 Principles of Corporate Governance of the American Law Institute recommends that “every large publicly held corporation should have an audit committee that would review on a periodic basis . . . the corporation’s internal controls . . .” According to Verschoor, (1999), approximately three-quarters of the 500 largest publicly held U.S. corporations voluntarily make a public assertion of management’s responsibilities for properly reporting financial results and also maintaining an effective system of internal control. These management statements on internal control are contained in the company’s annual report to shareholders. He asserts that; virtually all of these companies report using the same strategies to execute management’s internal control responsibilities. These include references to segregation of functions, programs of selection and training of personnel, the results of an internal auditing function, oversight from the audit committee of the board of directors, and the work of the company’s external auditors. Verschoor believes that 9

 

management declarations about internal controls represent am management commitment and are not just a promotional statement. Mawanda (2008), performance refers to the ability to operate efficiently, profitability, survive grow and react to the environmental opportunities and threats. They assert that,  performance is measured by how efficient the enterprise is in i n use of resources in achieving its objectives. It is the measure of attainment achieved by an individual, team, organization or  process. Hitt, et al (1996) believes beli eves that many firms' low performance is the result of poorly  performing assets (businesses). Low performance from poorly performing assets is often related to strategic errors made in the acquisition process in earlier years. For example, some firms acquire businesses with unrealistic expectations of achieving synergy between the acquired assets and their current sets of assets. A common reason for such errors is managerial hubris or overvaluation of managerial capability in the acquisition process. 2.3 Functionality of Internal Control Systems  Systems  According to Hayes et al., 2005 internal control comprises five components; the control  

environment, the entity’s risk assessment process, the information and communication systems,  control activities and the monitoring of controls. Therefore, each of the five components of an internal control system is important. Here, we will focus on three components, the control activities, internal audit and control environment. The other components of the internal control systems will be held constant. 2.3.1 Control Activities  Activities  Control activities are the policies and procedures that help ensure management directives are

carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties (University of Califonia, Berkeley, Berkele y, 2012). Control activities are the backbone of the company’s efforts to address the risks it faces, such as fraud. The specific control activities used by a company will vary, depending on management’s assessment of the risks faced. This assessment is heavily influenced by the size and nature of the company (Weygandt, Kimmel, & Kieso, 2012). The six principles of control activities are as follows. • Establishment of responsibility • Segregation of duties • Documentation procedures 10

 

• Physical controls • Independent internal verification • Human resource controls Whittington & Panny, (2001) also mention Control activities as another component of Internal controls. They note that control activities are policies and procedures that help ensure that management directives are carried out. Controls activities in an organization basically comprise; performance reviews (comparing actual performance with budgets, forecasts and  prior period performance),

information

processing (necessary

to

check

accuracy,

completeness and authorization of transactions), physical controls (necessary to provide security over both records and other assets), and segregation of duties (where no one person should handle all aspects of a transaction from the beginning to the end). The last component of internal control according to Whittington & Panny is monitoring. This is aimed at ensuring that the internal controls continue to operate as intended. This can be achieved through ongoing monitoring or separate evaluations. Separate evaluations are non-routine monitoring activities such as period audits by the internal auditors. Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels, and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. Control activities usually involve two elements: a policy establishing what should be done and procedures to affect the policy. All policies must be implemented thoughtfully, conscientiously and consistently (Anduuru, 2005). 2.3.2 Internal Audit  Audit  The term audit comes from a Latin word “AUDIRE” meaning to hear in other words it means

official examination of account and records. Whittington & Pany (2001) suggest that internal auditing is performed as part of the monitoring activity of an organization. It involves investigating and appraising internal controls and the efficiency with which the various units of the organization are performing their assigned functions. An Internal Auditor is normally interested in determining whether a department has a clear understanding of its assignment, is adequately staffed, maintains good records, properly safeguarding cash, inventory & other assets and cooperates harmoniously with other departments. The internal auditor normally reports to the t he top management.

11

 

Gupta (2001) on the other hand asserts that “Internal audit is an independent appraisal function established within an Organization to examine and evaluate its activities as a service to the organization”. The objective of internal audit is to assist members of the organization in the effective discharge of their responsibilities. According to Gupta “the scope of internal audit is determined by management”. This may however, impair the internal auditor’s objectivity and hampers his independence, it is quite hard to report negatively on someone who determines the scope your work. Although at a Seminar organized by the Institute of Certified Public Accountants of Uganda (ICPAU), Bamweyana, 2009 in his presentation “The role of Internal Audit function in Organizations”, states that “Independence is established by organizational and reporting structure” and that “Objectivity is achieved by an appropriate mindset”. Bamweyana, 2009 also defines “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management control and governance processes”. He further mentions the principles of internal audit to include; Integrity, Objectivity, Confidentiality and Competency. However, given that Internal Auditors are appointed by management, report to management, and are employees of an organizations, their objectivity is usually highly compromised. In accordance to Institute of Internal Auditors (IIA-UK; 1997), independence is applicable to all categories of auditors. This means the opportunity granted to the auditors to report directly to the top authority. Woolf (1986), says, although an internal auditor is an employee of the enterprise and cannot therefore be independent of it, he should be able to plan and carryout his work as he wishes and have access to the highest level of management. However the most detailed definition of internal control was that given by Millichamp (2002), who said and I quote that internal audit is “the world 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 as possible the completeness and accuracy of the records”.   Therefore, Millichamp (1993) says, effective internal audit should be carried out by independent personnel though they are employees appointed by management, for them to work efficiently, they should have scope to arrange priorities and activities have unrestricted access to records, assets and personnel.

12

 

According to Bhatia (2003), Internal Auditing is the review of operations and records sometimes undertaken within the business by especially assigned staff. It’s also an independent appraisal function established within an organization to examine and evaluate the effectiveness, efficiency and economy of managements control system (Subramanian, 2006). Its objective is to provide management with re-assurance that their internal control systems are adequate for the need of the organization and are operating satisfactorily (Reid & Ashelby, 2002). It is a component of the internal control system set-up by management of an enterprise to examine, evaluate and report operations of accounting and other controls. The quality and effectiveness of internal audit procedures in practice are necessary since internal auditors cover a wide variety of assignments, not all of which will relate to accounting areas in which the external auditor is interested. For example, it’s common these days for internal audit to undertake the extensive and continuous task of setting management goals and monitoring its performance (Woolf, 1992). Emasu (2010) notes that “The effectiveness of internal audit function partly depends on; legal and regulatory framework, placement of the function and its independence, existence of audit committees, resources allocated to the function and professionalism of internal audit staff”. It is however a bitter reality that internal audit departments are rarely adequately facilitated. Regarding the size and facilitation of the Internal Audit Function, Gerrit and Mohammad (2010), found evidence in support of the monitoring role of the Internal Audit Function. They specifically, found evidence that management ownership is positively related to the relative size of the Internal Audit Function, which is inconsistent with traditional agency theory arguments that predict a negative relationship, but more in line with recent studies on earnings management. This finding suggests that increased management ownership may influence the board of directors to support larger Internal Audit Functions to allow them to closely monitor managers’ performance. It is also plausible that management with higher share ownership is motivated to invest in larger Internal Audit Function for better monitoring of earnings and for signalling to the board of directors that, despite their high stake in earnings, they are convinced that appropriate use of resources has to be assessed on a regular  basis. Gerrit and Mohammad also believe that the proportion of independent board members to have a negative effect on Internal Audit Function size. This finding may indicate a substitution effect, which means that independent board members may be considered as an alternative monitoring mechanism to the Internal Audit Function. They further assert that the 13

 

control environment has a significant effect on the relative size of the Internal Audit Function. Specifically, a supportive control environment characterized by formalized integrity and clear ethical values, a high level of risk and control awareness, the perception that risk management is important and the fact that responsibilities with respect to risk management and internal control are clearly defined is associated with a relatively larger Internal Audit Function (ibid). Using a US sample, Wallace & Kreutzfeldt (1991) found that companies with iinternal nternal audit departments are observed to be significantly larger, more highly regulated, more competitive, more profitable, more liquid, more conservative in their accounting policies, more competent in their management and accounting personnel, and subject to better management controls. Carey et   al. (2000) found that agency variables do not explain the voluntary use of internal audit by Australian family firms. More recently, a study by Goodwin-Stewart & Kent (2006), using a sample of Australian listed companies, shows that the existence of an Internal Audit Function is positively associated with firm size and commitment to risk management. Sarens & De Beelde (2006) also show that the risk and control awareness have an influence on the scope of the Internal Audit Function. These results suggest that when management is aware of risks and control activities, they are more likely to understand the role of the Internal Audit Function in monitoring risk and control activities, thus it is more likely that they will support a relatively larger Internal Audit Function (Sirens & De Beelde, 2006a; Selim & McNamee, 1999). Meigs et al (1988) holds that there must be a strong internal control system and the internal auditor must verify the operations of the system in much the same way, as the external auditor. It involves the investigation, recording, identification and review of compliance tests of control, they also argued that effective internal audit procedures provide sufficient relevant and reliable evidence in order to detect and prevent fraud. Kochan (1993), considers auditing  procedures in one company and describes steps taken in implementing a quality assurance system, she discusses the use of internal audits as an essential part of ISO 9000 certification  process. Boakye-Bonsu (1999) asserts that internal audit procedures are seen as ends in themselves rather than a means towards a specific objective, with such an approach our rambler would undoubtedly get lost. Internal audit procedure is a form and content manual that includes audits notes and responsibilities, documentation standards, local reporting standards and targets, training requirements and expectations and performance measures and indicators (Watts, 1999).

14

 

Effectiveness is the achievement achie vement of goals and objectives using factor measures provided for in determining such achievement. However, it has been traditional in internal auditing that determination of internal auditing effectiveness can be accomplished by evaluating the quality and effectiveness of internal auditing procedures that result in determination by the internal auditors of the character and the quality of effectiveness of the auditee’s control operations and if the auditing procedures are effectively carried out, then the evaluative results are positive (Dittenhofer, (Dittenhofer, 2001). Maitin, (1994) says efficiency and effectiveness of of internal audit procedures is not a simple task, successful operation is governed by the extent to which the element of internal audit procedures receive attention which include; expertise, independence, objectivity and totality. Effectiveness of internal audit procedures is a measure of the ability of the programme to produce a desired effect or a result that can be qualitatively measured (Harvey, 2004). Zabihollah (2001) argues that, there should be effective internal audit procedures to ensure reliability of financial statements, operational reports, safeguarding corporate assets and effective organizational controls. Benston (2003) further supplements that perception and ownership, organization and governance framework, legislation, improved professionalism and resources were identified as functions in the public sector derived from the effectiveness of the internal audit procedures. How far internal audit procedures succeed in their effort of effectiveness is mainly judged by three factors that include; frequency of irregularities committed by the staff in the organization in form of errors or fraud, the promptness with which such irregularities are detected by the authorities and the planning which makes  possible repetition of such irregularities in future more difficult (Reid & Ashelby, 2002). Earnest and Young (1995), the work of the internal auditor should appear to be properly  planned, controlled, recorded and reviewed. Examples of the due professional care by the internal auditor are the existence of an adequate audit manual, general internal audit plans,  procedures for controlling individual assignments ass ignments and satisfactor satisfactory y arrangements for reporting and following up. Internal audit makes a large contribution to the achievement of company goals, and the implementation of strategies for their achievement (Ljubisavljević & Jovanovi, 2011). In addition, the internal audit function is responsible for reinforcing management and audit committee (Hutchinson & Zain, 2009). Likewise, internal audit determines the reliability, reality, and integrity of financial and operational information that comes from different organizational units, on which appropriate  business decisions at all levels of management are based. Successful implementation of 15

 

internal audit tasks means that it must be independent, i.e., company management should in no way influenced by its work, information, conclusions, and evaluations. In this way the internal audit report becomes a means of communication between internal audit and management, and an important guideline for the successful management of the company (Ljubisavljević & Jovanovi, 2011). 2011). Furthermore, the internal audit function facilitates the operation and effective working of the audit committee as the audit function goals are consistent with the former’s financial reporting oversight responsibilities (Goodwin & Yeo, 2001; Goodwin, 2003; Scarbrough, Rama, & Raghunandan, 1998). The creation of an internal audit function is supported by the governance reports (NYSE, 2002) and previous studies (Collier & Gregory, 1996; Goodwin & Kent, 2003) as a mechanism to enhance internal governance processes. 2.3.3 Control Environment  Environment  Control Environment is the philosophy, style and supportive attitude, as well as the

competence, ethical values, integrity and morale of the people of the organization (DiNapoli, 2007). The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control,  providing discipline and structure. Control environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its  people; and the attention and direction provided by the board of directors (University of Califonia, Berkeley, 2012). Control environment refers to all factors which are effective in determining, increasing or decreasing the effectiveness of policies, procedures, and methods specific to a process. Control environment stands out with the basic understanding adopted by senior management of the corporation to control the organization, its attitude toward problems and approach to solving problems and their perspective of the importance of moral values. Strictly speaking, control environment can be perceived as a consciousness of the senior management of a corporation to control the organization and employees (Kaval, 2005). Whittington and Pany (2001) note that the control environment sets the tone of the organization by influencing the control consciousness of people. They further assert that control environment is viewed as the foundation for all the other components of internal control. Control environment factors include; integrity and ethical values of personnel responsible for creating, administering, and monitoring the controls, commitment and competence of persons performing assigned duties, board of directors or audit committees 16

 

(especially the extent of their independence from management, experience & stature), management philosophy and operating style (in terms of their aggressiveness or conservativeness which may determine the level of risk they may take on), and Organizational structure (which may be a well-organized structure that provides for proper  planning, directing and controlling operations or a dis disorganized organized structure that may only serve to confuse the key players by creating unclear roles). role s). Control environment has several factors, however, for purposes of this research, the review will focus on Management philosophy and operating style, the integrity and ethical values of  personnel that create and administer controls, and audit committees and board of directors. For purposes of the study, board of directors will be represented by the Governing council and the various committees of Council. , Whittington and Pany also believe that these factors set a basis upon which the other internal control components can be built. They also provide a framework within which the other components operate. However, these assertions have not always held true, since management in organizations has always overridden these controls, the lack of mentoring has always led to collapse of controls. The independence of audit committee has largely been theoretical in most organizations (ibid). Boards of directors have on several occasions had very little time for company affairs, implying that their supervisory role has always been wanting. It is equally worth noting that most of the board members’ selection is largely political and a reflection of the political allegiance. They most of the cases lack the experience and exposure to determine the strategic direction of the organization. Board of directors, ought to supervise the management of an entity, but it has always turned out that Board members merely implement recommendations of the management committee of an institution. The audit committee, as a subcommittee of the board of directors, plays a role in protecting the owners’ interests by monitoring management’s actions, in terms of financial reporting, risk management and internal control (Mawanda, 2008). On the other hand, an active audit committee could consider the internal audit function as a necessary source of information to execute its monitoring responsibilities (Raghunandan et al., 2001; Sarens et al., 2009; Scarborough et al., 1998), thus the audit committee may push

for better staffed internal audit functions. The study by Wallace & Kreutzfeldt (1991) was among the first to demonstrate the importance of the control environment in explaining the existence of an internal audit function. More recently, Goodwin-Stewart & Kent (2006) provided evidence that the existence of an internal audit function is related to the level of commitment to risk 17

 

management. Recent case studies on internal auditing in Belgium illustrate the importance of the control environment when studying internal auditing practices. Sarens & De Beelde (2006a, 2006b) found that certain control environment characteristics (e.g., tone-at-the-top, level of risk and control awareness, extent to which responsibilities related to risk management and internal controls are clearly defined and communicated) are significantly related to the role of the internal audit function within an organization. The tone-at-the-top refers to a company’s ethical values, management’s philosophy and operating style (Cohen et al., 2002) which are reflected by the company’s code of conduct or code of ethics.

We assume that when the company pursues integrity and clear ethical values reflected in a formal code of conduct/ethics, the internal audit function will take on greater importance. This is because the internal audit function is often seen as a way of translating and communicating the tone-at-the-top throughout the company (Sarens et al., 2009). Therefore, management is more likely to invest in a relatively larger internal audit function. The American Bar Association (ABA) directors’ guidebook states that “an important aspect of the  board’s responsibility, often oft en referred to the audit committee, is oversight of the corporation’s  policies and procedures regarding compliance with law and significant corporate policies.” (Sarens & De Beelde, 2006). Internal control systems not only contribute to managerial effectiveness but are also important duties of corporate boards of directors. Accounting literature likewise emphasizes the importance of an organization’s integrity and ethical values in maintaining an effective control system (Verschoor, 1999). A focus on integrity and ethical values was the principal contribution of  Internal Control— Integrated Integrated Framework  published by the Committee of Sponsoring Organizations of the Treadway Commission (on fraudulent financial reporting.) To trigger independence of auditors, the American Institute of Certified Public Accountants (AICPA) Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 78. This statement requires auditors to perform procedures on every audit to enable them to understand their client’s control environment including integrity and ethical values. In other words, auditors are specifically required to determine whether their clients’ ethical controls are operating. SAS No. 78 points out those ethical values and other elements of the control environment permeate the culture of an organization and affect the strength of all other controls. 2.4 Financial Performance  Performance 

According to Stoner (2003), performance refers to the ability to operate efficiently,  profitability, survive grow and react to the environmental opportunities and threats. In 18

 

agreement with this, Sollenberg & Anderson (1995) asserts that, performance is measured by how efficient the enterprise is in use of resources in achieving its objectives. It is the measure of attainment achieved by an individual, team, organization or process (EFQM, 1999). Hitt, et al (1996) believes that many firms' low performance is the result of poorly performing assets

(businesses). Low performance from poorly performing assets is often related to strategic errors made in the acquisition process in earlier years. For example, some firms acquire  businesses with unrealistic expectations of achieving synergy between the acquired assets and their current sets of assets. A common reason for such errors is managerial hubris (Roll, 1986) or overvaluation of managerial capability in the acquisition process. 2.4.1 Measures of Financial Performance  Performance  According to Dixon et al (1990), appropriate performance measures are those which enable

organizations to direct their actions towards achieving their strategic objectives. Kotey & Meredith (1997) contends that, performance is measured by either subjective or objective criteria, arguments for subjective measures include difficulties with collecting qualitative  performance data dat a from small firms and with reliability of such s uch data dat a arising from differences in accounting methods used by firms. Kent (1994) found out that, objective performance measures include indicators such as  profit growth, revenue growth, return on capital employed. Financial consultants Stern Stewart & Co. created Market Value Added (MVA), a measure of the excess value a company has provided to its shareholders over the total amount of their investments. This ranking is based on eight more traditional aspects of financial performance including: total return for one and three years, sales growth for one and three years, profit growth for one and three years, net margin, and return on equity. Verschoor however, mentions other financial measures to include value of long-term investment, financial soundness, and use of corporate assets. He also talks of non-financial performances measures to include; innovation, ability to attract, develop, and keep talented people, quality of management, quality of products or services, and community and environmental responsibility. Hitt, et al., (1996) mention accounting- based performance using three indicators: return on assets (ROA), return on equity (ROE), and return on sales (ROS). Each measure was calculated by dividing net income by total assets, total common equity, and total net sales, respectively. 2.4.1.1 Liquidity Liquidity   Hitt et al (1996) mention current ratio (current assets/current liabilities) as a standard measure

of liquidity in organizations. Baysinger, (1989) also emphasized the importance of current 19

 

ratio as a measure of an organisation’s liquidity. Other measures of Liquidity according to ACCA and Panday (1996) are; Acid test ratio (i.e. Current Assets less Inventory/Current Liabilities). 2.4.1.2 Accountability Accountability   According to Hayes, et al., 2005, Managers need regular financial reports so as to make

informed decisions. Reporting (particularly financial reports) is one way through which managers make accountability for the resources entrusted to them. Emasu (2010) asserts that Accountability can be political, social or financial accountability. 2.4.1.3 Reporting Reporting   Whittington & Pany (2001), talk about the comprehensiveness of internal controls in

addressing the achievement of objectives in the areas of financial reporting, operations and compliance with laws and regulations. They further note that “Internal control also includes the program for preparing, verifying and distributing to the various levels of management those current reports and analyses that enable executives to maintain control over the variety of activities and functions that are performed in a large organization” They mention internal control devices to include; use of budgetary techniques, production standards, inspection laboratories, employee training and time & motion studies among others. According Bakibinga 2001, corporate law requires a divorce between ownership and management of an entity. Owners normally entrust their resources in the hands of managers. Managers are required to use the resources entrusted to them in the furtherance of the entity’s objectives. Managers normally report to the owners on the results of their stewardship for the resources entrusted to them through a medium called financial statements. It is these financial statements that reveal the financial performance of an entity. John J. Morris (2011) believes that Enterprise Resource Planning systems provide a mechanism to deliver fast, accurate financial reporting with built-in controls that are designed to ensure the accuracy and reliability of the financial information being reported to shareholders. However, no single measure of financial performance is adequate for evaluating a firm’s  business. Evaluation of several financial measures may be more useful in directing the manager to ask the right questions than in providing solutions to the financial problems of the  business. Therefore, a good financial performance measure should ask how well the firm has generated operating profits, given the amount of capital invested to produce those profits. E.g. how Much Capital Is Invested in the Firm? 20

 

2.5 Summary Summary   The theoretical basis for establishing a relationship between financial performance and

internal control systems has been documented in various literatures. Internal control systems that have been confirmed to have a relationship with business organization financial  performance include: organization, segregation of duties, physical authorization and approval, arithmetical and accounting, personnel, supervision, acknowledgement of performance and budgeting (Weber, 1988).

management,

2.6 Conclusion Conclusion   In this chapter, it consists of seven sections: in the first part, it discussed, Internal Controls

Systems and Financial Performance, whereas in the second part Functionality of Internal Control Systems, Systems, in the third part Financial Performance discussed, and the fourth part, Measures of Financial Performance discussed, the fifth part, summary discussed, and conclusion. However, in Mogadishu, the role of internal control system and the functionality of Internal Control systems on financial performance still have not received adequate research. Therefore, this study will attempt to fill this gap by investigating the impact of internal control system on financial performance in Mogadishu private banks.

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CHAPTER THREE  THREE  METHODOLOGY   METHODOLOGY 3.0 Introduction Introduction   This chapter focuses on research methodology including research design, population and

sampling:  target population, sample size, sampling technique, data collection, validity and reliability, data analysis, limitations of the study and ethical considerations. 3.1 Research Design  Design  A research design is the arrangement of conditions for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy in procedure (Kothari, 2004). Also Research design refers to the many ways in which research can be conducted to answer the question being asked (Marczyk, DeMatteo, & Festinger, 2005). The study utilized a survey research design. Surveys are information-collecting method use to describe, compare, or explain individual and societal knowledge, feelings, values,  preferences, and behavior (Fink, 2009). However, this study conducted through a descriptive study; the purpose of descriptive research is to describe an accurate profile of persons, events or situations. In addition, this study used quantitative approach; Quantitative  is any data collection technique (such as a questionnaire) or data analysis procedure (such as graphs or statistics) that generates or uses numerical data (Saunders, Lewis, & Thornhill, 2009). 3.2 Population and Sampling:  Sampling:  3.2.1 Target Population  Population  This study was only limited to the employees of private banks in Mogadishu-Somalia. The

 population of this study which consist of over 70 workers but the target population of this work consists of 33 staff which include of Accountants, finance directors, Internal Auditors, chief cashiers and Managers from 3 main private privat e banks in Mogadishu and others. 3.2.2 Sample Size  Size  In view of the nature of the target population where the number for finance directors, internal

auditors, chief cashiers, accountants and managers. A sample was taken from each category. The sample of this study is 30 respondents. To determine the ideal sample size for a population, the study was used Slovene’s formula which is n=N/ (1+ (N*e^2)), where n= sample size, N= population size, 33 and e = margin of error of 5 %.

n=33/ n=3 3/ 1+ 33× 33×0.0 0.0025 025)) )) = 30 Res onde ondents nts

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Table 1: 3.1: Respondents of the Study  Study  Population

Sample Size

Premier Bank

12

11

Dahabshiil Bank

10

10

Salaam Somali Bank

5

4

Other Private Banks

6

5

Total

33

30

Private Bank in Mogadishu

3.2.3 Sampling Technique  Technique 

The purposive sampling was utilized to select the respondents based on their experience in internal control system. From the list of qualified respondents was chosen based on the inclusion criteria, the simple random sampling was used to finally select the respondents with consideration to the computed minimum sample size.   3.3 Data Collection  Collection  Data collection is the process of gathering and measuring information on variables of interest,

in an established systematic fashion that enables one to answer stated research questions, test hypotheses, and evaluate outcomes. The Researcher used a combination of structured questionnaires. According to Oso & Onen, (2008) questionnaires are a data collection technique in which the respondents respond to the number of items in writing. Questionnaires were chosen simply because of the time limitation. li mitation. 3.4 Validity and Reliability  Reliability  Validity and reliability are interconnected concepts (Sullivan & Feldman, 1979).

Validity is the most critical criterion and indicates the degree to which an instrument measures what it is supposed to measure. Validity can also be thought of as utility. In other words, validity is the extent to which differences found with a measuring instrument reflect true differences among those being tested (Kothari, 2004). Validity refers to the extent to which a test measures what we actually wish to measure. Reliability has to do with the accuracy and precision of a measurement procedure ... Practicality is concerned with a wide range of factors of economy, convenience, and interpretability (Thorndike & Hagen, n.d). The most important issue in the research is to consider the validity and reliability of the instrument used to collect the date, validity refers to the degree to which the data collection method accurately measures what it was intended to measure or to extent to which research

23

 

findings are about what they are claimed to be about. Reliability refers to which your data collection techniques or analysis procedures were yield consistent. In other words, if a study has validity, it collects the appropriate data for the study. And a study has reliability if the same questions, asked of a similar sample, produce the same findings. 3.5 Data Analysis  Analysis 

In most types of research studies, the process of data analysis involves the following three steps: (1) preparing the data for analysis, (2) analyzing the data, and (3) interpreting the data. The researcher was analyzed using both statistical package for social scientist (SPSS) and Microsoft Excel as the main tool for data analysis. After that, the analyzed data were interpreted into a meaningful and systematic manner. This study, the researcher used descriptive technique as data analysis. In the questionnaire each selected one to five scale for where, 1=strongly disagree, 2=disagree; 3= neutral; 4= Agree 5= strongly agree. Table 2: 3.2: The Interpretations of the Mean Values  Values   Mean Range

Respondents Mode

Interpretation

4.21 up to 5.00

Strongly Agree

Excellence

3.41 up to 4.20

Agree

Very good

2.61 up to 3.40

Neutral

Good

1.81 up to 2.60

Disagree

Poor

1.00 up to 1.80

Strongly disagree

Very poor

3.6 Limitations of the Study  Study  During the study the researcher faced few challenges which included the following:  

The respondents may not give you the questionnaire on time.

 

Respondents may not confidentially provide the proper information because of fear.

 

Lack of access to the internet libraries due to the payment method- the online sale that is mostly asked master cards, visa cards, and other sort of electronic cards. This method of  payment is not available in Mogadishu, Somalia.

 

Lastly, the biggest problem of this study was insufficient participants; because some of the private banks in Mogadishu do not want to pay information.

3.7 Ethical Considerations  Considerations  In this study the researcher should keep on the ethical issues through the research project by

keeping the privacy, confidentiality and secrecy of respondents. To maintain ethical issue the researcher will request the organization’s administration to authorize to distribute questionnaire to their employees and also tell them that the information use only for academic  purpose. And will keep the privacy, privacy, confidentiality and secrecy of respondents. 24

 

CHAPTER FOUR  FOUR  DATA ANALYSIS INTERPRETATION AND DISCUSSION  DISCUSSION  4.0 Introduction Introduction   This chapter presents the result of data analysis. The presentations are in form of tables,

graphs and statements to ease understand. The presentation is according to the two objectives of the study. Thus, the first objective of this study was to assess functionality of internal control system in Mogadishu private banks, and the second objective was to examine financial performance of private banks in Mogadishu. 4.1 Demographic Data  Data 

The background information of respondents was thought necessary because the ability of the respondents to give satisfactory information on the study variables greatly depends on their  background. The background information of respondents res pondents asked data on the samples and this has been presented below categorized into; gender, age, marital status,  level of education and length of service in the bank or experience of the work. 4.1.1 Gender characteristics of respondents  respondents 

The study examines and describes the gender details of respondents in this study and a detail of their respective gender is presented in table 4.1 below: Table 3: 4.1: Gender of the Respondents  Respondents  Gender 

Valid

Frequency

Percent

Valid Percent

Cumulative Percent

Male

27

90.0

90.0

90.0

Female

3

10.0

10.0

100.0

Total

30

100.0

100.0

Source: Primary data, 2015

Table: 4.1 above reveals 90% of the staffs of Mogadishu private banks are male while 10% of staffs of private banks are female. Based on data gathered, the majority of the respondents are male, while a small number of the respondents are female. Therefore, male have significantly dominated the staffs of private banks in Mogadishu.

25

 

Figure 2: 4.1: Gender of the Respondents  Respondents 

Gender

90% 80% 70% 60%

Male

50%

Female

40% 30% 20% 10% 0% Male

Female

Source: Primary data, 2015

4.1.2 Description of age groups of respondents  respondents   The study obtained details about the age groups of the respondents for purposes of

understanding their age and probably the knowledge they possess in their respective  positions. Details of the findings are shown in table 4.2 below: Table 4: 4.2: Ages of the Respondents  Respondents  Age 

Frequency

Percent

Valid Percent

Cumulative Percent

Valid 20-30 Years

15

50.0

50.0

50.0

40-50 Years

7

23.3

23.3

73.3

30-40 Years

6

20.0

20.0

93.3

Above 50 Years

2

6.7

6.7

100.0

Total

30

100.0

100.0

Source: Primary data, 2015

Table 4.2 shows that most of respondents aged 20-30 years old (50%) which had relatively greater than the percentage of respondents aged in 40-50 years (23.3%), 30-40 years (20%), and above 50 years (6.7%), this suggests, that majority of staffs of private banks in Mogadishu are junior. 26

 

Figure 3: 4.2: A Bar Graph Showing Age of the Respondents Respondents  

 Age 50% 45% 40% 35% 20-30 Years 30% 40-50 Years 25%

30-40 Years

20%

Above 50 Years

15% 10% 5% 0% 20-30 Years

40-50 Years

30-40 Years

Above 50 Years

Source: Primary Data, 2015 4.1.3 Explanation marital status of the respondents  respondents  

The study examines and describes the marital status of respondents in this study and a detail of their respective marital status is presented in table 4.3 below: Table 5: 4.3: Marital Status of the Respondents   Marital Status 

Frequency

Percent

Valid Percent

Cumulative Percent

Valid

Married

20

66.7

66.7

66.7

Single

10

33.3

33.3

100.0

Total

30

100.0

100.0

Source: Primary Data, 2015

Table 4.3 displays 66.7% of the employees of private banks in Mogadishu are married while 33.3% of the employees of private banks in Mogadishu are single. Based on data gathered, the majority of the employees of private banks in Mogadishu are married.

27

 

Figure 4: 4.3: A Pie Graph Reveals Marital Status of the Respondents  Respondents  

Marital status

33%

Married 67%

Single

Source: Primary Data, 2015 4.1.4 Education characteristics of respondents  respondents  Details about the education levels of respondents were obtained and the results are revealed

in table 4.4 below: Table 6: 4:4 Education Level of Respondents  Respondents  Level of Education 

Valid

Frequency

Percent

Valid Percent

Cumulative Percent

Bachelor

18

60.0

60.0

60.0

Master

7

23.3

23.3

83.3

Diploma

3

10.0

10.0

93.3

PhD

2

6.7

6.7

100.0

30

100.0

100.0

Total Source: Primary Data, 2015

The sample was including 30 respondents who are working at private banks in Mogadishu. Especially Premier Bank, Dahabshiil Bank, Salaam Somali Bank and other private banks in Mogadishu, Somalia. The sample of this study consists of 60% are bachelor, 23.3% are master, 10% are diploma, and 6.7% are PhD. This means that the staffs of most  private banks in Mogadishu are bachelor degree.

28

 

Figure 5: 4.4: The Level of the Respondent’s Education Education  

Level of Education 60%

50% Bachelor

40%

Master 30%

Diploma PhD

20%

10%

0% Bachelor

Master

Diploma

PhD

Source: Primary Data, 2015 4.1.5 Experience of respondents  respondents  The study investigated the length of period served by the respondents in the bank and the

findings are presented in table 4.5 below: Table 7: 4.5: Experience of the Respondents  Respondents   Experience 

Valid

Frequency

Percent

Valid Percent

Cumulative Percent

Above Three years

17

56.7

56.7

56.7

Two Years

6

20.0

20.0

76.7

One Year Three Years

3 3

10.0 10.0

10.0 10.0

86.7 96.7

Less than 6 month

1

3.3

3.3

100.0

Total

30

100.0

100.0

Source: Primary Data, 2015

In table 4.5 above, it can be revealed that majority of respondents have worked in the bank for the period above three years (56.7%), followed by two years (20.0%), this   followed by one year (10.0%) similarly to this three years (10.0%), and finally, less than 6 months (3.3%). Therefore, this means that the experience of staffs in private banks in Mogadishu is more than three years.  Based on data gathered, consequently the most employees have more experience about private banks operations. 29

 

Figure 6: 4.5: Experience of the Respondents  Respondents  

Experience 3% 10%

 Above Three years years

10%

Two Years One Year 57%

Three Years Less than 6 month

20%

Source: Primary Data, 2015 4.2 Assessing the Functionality of Internal Control Systems in Mogadishu Private Banks  Banks  

The study sets one of its objectives to critically analyze and reveal how the internal control systems of the banks actually performs, and details are presented in the descriptive statistics shown by the values of the respective means. Details of these analyses are shown in table 4.6  below: 4.2.1 Descriptive Statistics on Control Activities  Activities  Table 8: 4.6: Descriptive statistics on Control activities  activities  Descriptive Statistics

Mean

Interpretation

Rank

All changes to employee status or pay rate are duly

4.0714

Very good

1

Your bank has clear separation of duties.

4.0690

Very good

2

There are adequate controls over information systems.

4.0345

Very good

3

Staffs are trained to discharge their responsibilities

4.0345

Very good

4

3.8571

Very good

5

4.013

Very good

approved by an Appropriate official.

diligently. There are adequate controls over access to resources  belonging to the bank. bank. Grand Total Source: Primary data, 2015  30

 

From table 4.6 above demonstrates that the degree of control activities is commonly very good

and this is reflected by the whole average of 4.013, the maximum calculated facet of all variations to employee status or pay rate are duly approved by an appropriate official. 4.0714 and this came behind that your bank has clear separation of duties 4.069, there are adequate controls over information systems 4.0345, staffs are trained to discharg dischargee their responsibilities diligently 4.0345, and the poorest calculated facet on the degree there are adequate controls over access to resources belonging to the bank 3.8571. 4.2.2 Descriptive Statistics on Internal Auditing  Auditing  Table 9: 4.7: Descriptive statistics on Internal Auditing  Auditing  Descriptive Statistics

Mean

Interpretation

Rank

Independence of internal auditor assured, based

3.8519

Very good

1

3.8148

Very good

2

3.5667

Very good

3

3.5556

Very good

4

3.5185

Very good

5

3.4074

Very good

6

3.619

Very good

upon review of Documentation. Internal audit is able to detect illegal activities from within the Bank. Internal auditors examine the accuracy and reliability of accounting Records. Organizational internal auditing complies with  professional standards. The bank’s financial statements are audited regularly by external. The internal auditors check compliance with establish police and Accounting procedures. Grand Total

Source: Primary data, 2015 Results in table 4.7 show that the equal of internal control system  is normally extremely good and this is indicated by the overall mean of 3.619, the uppermost graded aspect of independence of internal auditor assured, based upon review of documentation 3.8519 and this came after the internal audit is able to detect illegal activities from within the bank 3.8148, internal auditors examine the accuracy and reliability of accounting records 3.5667, organizational internal auditing complies with professional standards 3.5556, the bank’s financial statements are audited regularly by external 3.5185, and the lowest graded aspect on

31

 

the level the internal auditors check compliance with establish police and accounting  procedures. 3.4074. 4.2.3 Descriptive Statistics on Control Environment  Environment   Table 10: 4.8: Descriptive statistics on Control Environment  Environment  Descriptive Statistics

Mean

Interpretation

Rank

The bank has a clear organizational structure.

4.1786

Very good

1

All employees are aware of the guidelines.

4.1111

Very good

2

are

4.0667

Very good

3

All staffs perform their responsibilities as per the

4.0000

Very good

4

3.9286

Very good

5

The internal control guidelines are able to detect irregularities.

3.8571

Very good

6

Management review financial transactions regularly.

3.7500

Very good

7

The control environment in the bank is enough to

3.7143

Very good

8

3.95

Very good

The

policies,

procedures

and

guidelines

documented.

regulation and guidelines. Compliance to bank guidelines can lead to reliable financial reporting.

reach its objectives. Grand Total

Source: Primary data, 2015 Table 4.8 above displays that the level of internal control system is generally so good and this is

signified by the total par of 3.95, the highest rated part of the bank has a clear organizational structure 4.1786 and this followed the all employees are aware of the guidelines 4.1111 , the  policies, procedures and guidelines are documented 4.0667, all staffs perform their responsibilities as per the regulation and guidelines 4.0000, compliance to bank guidelines can lead to reliable financial reporting 3.9286, the internal control guidelines are able to detect irregularities 3.8571, management review financial transactions regularly 3.750 3.7500, 0, and the lowest rated aspect on the level the control environment in the bank is enough to reach its objectives 3.7143. 4.3 Examining the Financial Performance of Private Bank in Mogadishu  Mogadishu   This section responses objective two of the study, financial performance of private bank in

Mogadishu was examined by analyzing data collected under dimensions of financial

32

 

 performance and computing for the mean of the responses to t o the statements. Details Detai ls of these analyses are shown in table 4.9 below: Table 11: 4.9: Descriptive statistics on Financial Performance  Performance  Descriptive Statistics

Mean

Interpretation

Rank

Your bank has enough cash to meet its obligations

4.1852

Very good

1

your

3.9286

Very good

2

Problems of outstanding cheques are solved in time to

3.6552

Very good

3

3.5000

Very good

4

3.4828

Very good

5

3.4286

Very good

6

3.696

Very good

effectively (as and when they fall due). Accountability

process

is

adequate

in

organization.

reconcile the Bank balance of an account and book  balance of the customer. A good financial performance measure should ask how well the firm has generated operating profits, given the amount of capital invested to produce those profits. Financial performance is the measurement of the results of a firm’s Policies and operations in monetary terms.  No single measure of financial fi nancial performance is adequate for evaluating a firm. Grand Total

Source: Primary data, 2015 From the information revealed by table 4.9, that the level of financial performance is ordinarily very good and this is expressed by the total mean of 3.696, the highest rated aspect of your bank has enough cash to meet its obligations effectively (as and when they fall due) 4.1852, and this went behind the accountability process is adequate in your organization 3.9286, problems of outstanding cheques are solved in time to reconcile the bank balance of an account and book balance of the customer 3.6552, A good financial performance measure should ask how well the firm has generated operating profits, given the amount of capital invested to produce those profits 3.5000,   financial performance is the measurement of the results of a firm’s policies and operations in monetary terms   3.4828  and the lowest rated aspect on the level no single measure of financial performance is adequate for evaluating a firm 3.4286.

33

 

CHAPTER FIVE  FIVE  CONCLUSION AND RECOMMENDATION  RECOMMENDATION  5.0 Introduction Introduction  

This chapter presents summaries of the study findings as per the study objectives, conclusions  based on those findings and recommendations which are based on both the study findings and the researcher’s point of view considered necessary and vital to be used in future to improve the study situation and finally, recommendation for further research. 5.1 Summary Findings  Findings 

This part presents the summarized results and interpretation (findings) based on the study objectives as established at the beginning of the study. 5.1.1 Functionality of the Internal Control Systems in Mogadishu Private Banks  Banks  

The study found out that there is a clear separation of duties, and also there are adequate controls over access to resources belonging to the bank. However, the study also found out that all changes to employee status or pay rate are duly approved by an appropriate official. The study also reveals that employees of the banks are trained to discharge their responsibilities diligently. And the study shows internal auditors examine the accuracy and reliability of accounting records of banks also complies with professional standards. The study found out that the bank’s financial statements are audited by external but doesn’t conduct regular audit activities such as every year and doesn’t produce regular audit reports. Regarding control environment, the study found that all employees are aware of the guidelines. And this study also reveals that the management of the banks reviews financial transactions regularly. The study found out that all staffs perform their responsibilities as per the regulation and guidelines. However, it was found out that the all banks have a clear organizational structure and also the study reveals that the policies, procedures and guidelines of banks are documented. Lastly, this study shows the control environment in the banks is enough to reach their objectives. 5.1.2 The Financial Performance of Private Banks in Mogadishu  Mogadishu   The study found out that the private banks in Mogadishu has enough cash to meet its intended

goals, and that the accountability process is adequate in the banks. The study further reveals that no single measure of financial performance is adequate for evaluating operations of  banks. However, it was also found that financial performance is the measurement of the results of a firm’s policies and operations in monetary terms, and that a good financial  performance measure should ask as k how well the firm fir m has generated operating operati ng profits, given the amount of capital invested to produce those profits. 34

 

5.2 Conclusions Conclusions   Based on the results of the study, it is concluded that the banks has an effective internal

control system as supported by the study findings of clear separation of duties, there are adequate controls over access to resources belonging to the bank. However, there are adequate controls over information systems. There is also compliance to bank guidelines that can lead to reliable financial reporting. There is a good operation of controls especially considering that the audit function is well extended to the which clearly has affected their efficiency as discovered by this study On financial performance of the Mogadishu private banks, the study concludes that the liquidity position of the private banks in Mogadishu is appropriate, details of which are directly in the study, although the study reveals accountability process is adequate private  banks in Mogadishu. The final conclusion of this study is that the internal control system (control activities, internal audit, and control environment) have great significant to private Banks’s financial  performance (liquidity, accountability, and reporting). 5.3 Recommendations Recommendations   This study recommends that the internal auditors perform their duties fast, efficient and reliable.

The

study

also

recommends

that

the

banks

create

and

manage

knowledge/information management system within the banks so as to enable all parties within the banks to freely access and use the official information. Therefore, the researcher recommends that the banks establish a strategy for involving the generation development. This includes supporting for the poor people and unemployment  people; this could be done through development projects, other activities such as microfinance which are directly aimed at supporting people who live low level lives in the country. Also the researcher recommends maintaining using information systems to make managers proper decision that has well consequence. Lastly, the researcher calls call s for the federal government to support private banks. 5.4 Recommendation for Further Research  Research   1. The causes and consequences of internal control absences in private banks.

2. The role of internal control activity on safeguards the bank’s assets. 3.  Examining the factors that determine the contributions of detection illegal activities from within the Bank.

35

 

REFERENCES   REFERENCES University of Califonia, Berkeley. (2012, July). Retrieved from University of Califonia, Berkeley web site: http//www.Berkeley.edu

Aksoy, T. (2007). Basel II ve İç Kontrol. Ankara: Basak Publishing. Amaka, C. P. (2012). The Impact Of Internal Control System On The Financial Management Of An Organization. Nigeria. Anduuru, N. (2005). The accounting system and its related internal control system. Nairobi, Kenya. Bakibinga, D. J. (2001). Company Law in Uganda. Kampala, Uganda: Fountain Publishers. Bamweyana, B. S. (2009). the role of internal audit function in organizations. Collier, P., & Gregory, A. (1996). Audit committee effectiveness and the audit fee. The  European Accounting Accounting Review, 5, 177-198. DiNapoli, T. P. (2007). Standards for Internal Control; In New York State Government.   Retrieved from http://www.osc.state.ny.us/agencies/ictf/docs/intcontrol_stds.pdf Dittenhofer, M. (2001). Internal Auditing Effectiveness. Ejoh, N., & Ejom, P. (2014). The Impact of Internal Control Activities on Financial Performance of Tertiary Institutions in Nigeria.  Journal of Economics Economics and and Sustainable Development, 5(16). Emasu, S. (2010). public financial financial management management – Concepts Concepts & Practices. Practices.  Fink, A. (2009). How to Conduct surveys A step-by-step step-by-step guide (4th ed.). California, United States of America: Sage publications Inc. Gerrit Sarens and Mohammad J. Abdolmohammadi. (2010). Monitoring Effects of the Internal Audit Function: Agency Theory versus other Explanatory Variables.  International  Internat ional Journal Journal of Auditing Auditing. Goodwin, J. (2003). The relationship between the audit committee and the internal audit function. Internati (3), 263-278.  International onal Journal Journal of Auditing, Auditing, 7 (3), Goodwin, J., & Kent, P. (2003). Factors affecting the voluntary use of internal audit. Hawaii. Goodwin, J., & Yeo, T. (2001). Two Factors Affecting A ffecting Internal Audit Independence and Objectivity. Internati  International onal Journal of Auditing, 5(2), 107-125. Hayali, A., Dinç, Y., Sarılı, Sarıl ı, S., Dizman, A. S., & Gündoğdu, A. (2012). Importance Of  Internal Control System System In Banking Banking Sector Sector : Evidence From Turkey.  Hayes, R. et al. (2005). Principles of Auditing. Pearson Education Ltd. 36

 

Hitt, M. A., Hoskisson, R. E., Johnson, R. A., & Moesel, D. D. (1996). The Market for Corporate Control and Firm Innovation. Academy of Management Management Journal. Hutchinson, M., & Zain, M. (2009). Internal audit quality, audit committee independence, growth opportunities and firm performance.  Journal of Corporate Corporate Ownership Ownership and and (2), 50-63. Control, 7 (2), John J. Morris. (2011). The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting. Kaval, H. (2005). Muhasebe Denetimi. Ankara, Turkey: Gazi Publishing Publis hing House. Kothari, C. R. (2004). Research Methodology Methodology (2 Revised ed.). India: New Age International Publisher. Ljubisavljević, S., & Jovanovi, D. (2011). Empirical research on the internal audit position of companies in Serbia. Economic Annals, Annals, 191, 123-141. Maitin, T. (1994). Audit Management Management (1st ed.). South Asia Publication. Marczyk, G., DeMatteo, D., & Festinger, D. (2005). Essential  Essentialss of Research Research Design and and  Methodology.  Methodo logy. Canada: John Wiley & Sons, Inc., Hoboken, New Jersey. Mawanda, S. P. (2008). Effects of of Internal Control Systems Systems on Financial Financial Performance Performance in an  Institution  Instituti on of Higher Higher Learning in Uganda.  Millichamp, A. H. (1993). Auditing. Millichamp, A. H. (2002). Auditing (8th ed.). London: The Bath Press. Mohamud, H. A. (2013, April). Internal Auditing Practices and Internal Control System in Somali Remittance Firms. Internati  International onal Journal Journal of Business Business and Social Social Science, Science, 4(4).  Nyakundi, D. O., Nyamita, M. O., & Tinega, T. M. (20 (2014). 14). Effect of Internal Control Systems on Financial Performance of Small and Medium Scale Business Enterprises in Kisumu City, Kenya. Internatio  International nal Journal of Social Sciences Sciences and  Entrepreneurship,  Entrepre neurship, 1(11). Oso, W. Y., & Onen, d. (2008). ( 2008). A general guide to writing  (2nd writing research research proposal and report  (2nd ed.). Kampala, Uganda: Makerere University printer. Petrovits, C., Shakespeare, C., & Shih, A. (2009). The Causes and Consequences of Internal Control Problems in Nonprofit Organizations. New York, United States of America. Pfister, J. (2009). Managing Organizational Culture for Effective Internal Control. Sarens, G., & De Beelde, I. (2006). The relationship between internal audit and senior management: an analysis of expectations and perceptions.  Internat  International ional Journal Journal of  Auditing.

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Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business business students students (5th ed.). Essen, Germany: Pearson Education Limited. Scarbrough, P., Rama, D., & Raghunandan, K. (1998). Audit committee composition and interaction with internal auditing. Accounting Horizons, 12(1), 51-62. Sebbowa, B. B. (2009). The Role of Internal Audit Function in Organizations. Sullivan, J. L., & Feldman, S. (1979). Multiple indicators: indicators: An introduction. introduction. Beverly Beverly Hills, Hills, CA: Sage.  Thorndike, R. L., & Hagen, E. (n.d). Measurement and Evaluation Evaluation in Psychology Psychology and and  Education (3rd ed.). Verschoor, C. C. (1999). Corporate Performance is Closely Linked to a Strong Ethical Commitment. Business and and Society Society Review, 104 104(4). Watts, H. (1999). A Conceptual Framework to Financial Reports and Internal Audits.  Journal of Accounting Auditing and Finance, 20, 753-778. Weber, R. (1988). EDP auditing – Conceptual Conceptual foundations foundations and practice. practice. Singapore, Malaysia: McGraw Hill Book Co. Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Accountin  Accounting g Principles (10 ed.). United States of America: John J ohn Wiley & Sons, Inc. Whittington, R., & Pany, K. (2001). Principles of Auditing and other Assurance Services.    New York: Irwin / McGraw. Woolf, E. (1992). Auditing Today Today . Prentice Hall International (UK) Ltd. Yayla, H. (2006). Impact of Power Power and Authority Authority Relations Relations on the the Accounting Accounting Information Information  Decisions:  Decision s: A Suggestion Suggestion of Structural Structural Model Model on Turkish Turkish Private Sector Hospitals. Hospitals. PhD Thesis, Ankara University,. Ankara.

38

 

APPENDIX A: REQUEST FOR THE COMPLETION OF QUESTIONNAIRE QUESTIONN AIRE

  FACULTY OF ECONOMICS AND MANAGENET MANAGENET SCIENC SCIENCE E DEPARTMENT OF BUSINESS ADMINISTRATION HORSEED INTERNATIONAL UNIVERSITY, BULA HUBEY – WADAJIR, MUGADISHU – SOMALIA STUDENT ID CARD: 1823  Dear Sir/Madam, I am a final year student of the department of Business Administration, conducting a research on the  topic “The Impact of Internal Control System on Financial Performance in Mogadishu Private Banks”.

I will be very grateful if you would assist complete the attached questionnaires to the best of your knowledge to enable me complete a successful research on the topic. Be assured that the information received will be used solely for academic purpose and will be treated confidentially. Thanks for your understanding and cooperation.

Yours faithfully, ANAS DAHIR A. (Researcher)  

39

 

APPENDIX B: QUESTIONNAIRE  Questionnaire to Key Staff

I am an under-graduate student of HIU (Horseed International University) pursuing Bachelor in Business Administration program. As part of my academic work I am conducting a study on The Impact of Internal Control System on Financial Performance in Mogadishu Private Banks. Please spare me few minutes of your time and respond to the questionnaires

 below as honestly as you can. Information provided provided by you is for academic purposes only and will be treated as private and confidential. Please respond by ticking the one you think appropriate and express your opinion as and when required. Please feel free and answer all the questions truthfully: Section A: Profile of the respondents (PR) Gender:

a) Male

b) Female

Age:

a) 20-30

b) 30-40

c) 40-50

d) Above 50

Marital Status:

a) Single

b) Married 

Level of Education: 

 

a) High school

b) Diploma

d) Master

e) PhD

c) Bachelor  

Experience:

a) Less than 6 month

b) One year

d) Three years

e) above Three years

Type of private banks:

a) Salaam Somali Bank

b) Dahabshiil Bank  

c) Premier Bank

d) Other  

40

c) Two years

 

Section B: Please Read the following statements and check the box that best reflects your opinion of the statement.

To Assess the Functionality of Internal Control Systems in Mogadishu Private Banks  No. 

Where, 1= Strongly Disagree, 2= Disagree, 3= Neutral, 4= Agree, 5= Strongl Strongly y Agree 1  2  3  4 

5 

Control Activities: 

1 Your bank has clear separation of duties. 3 There are adequate controls over information systems. 3 Staffs are trained to discharge their responsibilities diligently. 4 There are adequate controls over access to resources belonging to the bank. 5 All changes to employee status or pay rate are duly approved by an Appropriate official. Internal Auditing: Auditing:  6 Internal auditors examine the accuracy and reliability of accounting Records.

7 The bank’s financial statements are audited regularly by external. 8 Organizational internal auditing complies with professional standards. 9 Internal audit is able to detect illegal activities from within the Bank. of internal auditor assured, based upon review of 10 Independence Documentation.

11 The internal auditors check compliance with establish police and Accou Ac countin ntin

roced rocedure ures. s.

Control Environment: Environment: 

12 Management review financial transactions regularly. 13 The policies, procedures and guidelines are documented. 14 The bank has a clear organizational structure. 15 All employees are aware of the guidelines. 16 All staffs perform their responsibilities as per the regulation and guidelines. 17 Compliance to bank guidelines can lead to reliable financial reporting. 18 The internal control guidelines are able to detect irregularities. 19 The control environment in the bank is enough to reach its objectives. Section C:  No. 

To Examine Financial Performance of Private Banks in Mogadishu  1  2 

1 Problems of outstanding cheques are solved in time to reconcile the Bank  balance of of an account account and book balance balance of the customer. customer. 2 Financial performance is the measurement of the results of a firm’s Policies an and d o er erat atio ions ns in in mone moneta tarr term terms. s. 3 Your bank has enough cash to meet its obligations effectively (as and when the fall du due . 4 A good financial performance measure should ask how well the firm has generated generate d operating profits, given the t he amount of capital capital iinvested nvested to produce those profits.

5  No single measure measure of of financial performance performance is adequate for evaluating evaluating a firm. 6 Accountability process is adequate in your organization. Thank you for your participation 41

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