m INTRODUCTION

m THE NIGERIAN FINANCIAL SECTOR.

m INTERNAL CONTROL DEFINED
m WHY INTERNAL CONTROL
m COMPONENTS OF INTERNAL CONTROL
m INTERNAL CONTROL AND CORPORATE
GOVERNANCE
m INHERENT IMPEDIMENT TO INTERNAL CONTROL
ENVIRONMENT
m VARIOUS FORMS OF INTERNAL CONTROL
m CONCLUSION
m RECOMMENDATION

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
A system of effective control is a critical component of organization management and a

foundation for the safe and sound operations of financial organizations. A system of

strong internal controls can help to ensure that the goals and objectives of a financial

organization will be met, that the organization will achieve long-term profitability

targets, and maintain reliable financial and managerial reporting. Such a system can

also help to ensure that the bank will comply with laws and regulations as well as

policies, plans, internal rules and procedures, and decrease the risk

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

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
The rise of the financial sector as a considerable source of economic clout

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

to achieve impressive net worths. Because financial services are such a

huge part of the global economy, many nations have also attempted to

regulate the financial sector to protect investors and the economy as a

whole. Unregulated activities can lead to serious financial problems in

periods of economic crisis, as these activities can directly contribute to

crisis situations.

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
The Central Bank of Nigeria Governor, (Lamido Sanusi) publicly lamented the imminent

collapse of the entire Financial Sector, immediately 420 Billion Naira was coughed out

within seconds to bail-out five of the threatened banks, not long after, another 220 Billion

Naira dolled out for another three banks. Recently, another $2 Billion (Over 300 Billion

Naira) was injected to re-inflate the economy. Close to a trillion Naira already dropped, but

instead of the situation improving, it is rather deteriorating. All the Bank directors and

executives of the affected banks have been severally harassed and legally challenged, all

the debtors prosecuted, but is this crisis caused by the misdeed of some individuals as its

been advertised or it is a crisis of Corporate Governance

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
± The Nigerian financial services are governed by regulatory and supervisory institutions :

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

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

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

± the Securities Exchange Commission (SEC);

± the National Insurance Commission (NAICOM),

± and the National Board for Community Banks (NBCB) (scrapped by virtue of abolition of
community banks)

K Financial Services Regulation Coordination Committee All regulatory

institutions to coordinates the supervision of all financial institutions.

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
IMPROVING INTERNAL CONTROL
ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Financial Sector
K Banking and Related Financial Institutions The
Nigerian financial services are governed by regulatory and
supervisory institutions Central Bank of Nigeria (CBN) -apex
regulatory institution
K the Ministry of Finance, (cooperates with the CBN on monetary
matters);
K the Nigeria Deposit Insurance Corporation (NDIC), (provides
deposit insurance);
K the Securities Exchange Commission (SEC);
K the National Insurance Commission (NAICOM),
K and the National Board for Community Banks (NBCB) (scrapped
by virtue of abolition of community banks)
K Financial Services Regulation Coordination Committee
All regulatory institutions to coordinates the supervision of all
financial institutions.

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Foreign investors (individuals and corporate entities) are permitted to
own up to 100% equity in any enterprise in Nigeria including banking.
Hence commercial operating licenses granted to foreign banks
m Universal banking system adopted in 2000 allows all banks to
undertake activities related to traditional banking, capital market and
insurance business.
± minimum capital requirement for banks increased to N25 billion. mergers and
acquisition in the banking industry, 25 banks
± Performance requirements
± minimum of 40% liquidity ratio
± 10% capital adequacy ratio;
± less than 20% of non-performing loans;
± a 9.5% minimum cash reserve ratio;
± All banks must be incorporated in Nigeria and comply with the Nigerian banking
rules and regulations.
± Foreign banks are disallowed from establishing their branches in Nigeria.

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Internal control is a process designed to provide
reasonable assurance regarding the achievement
of objectives in the following categories:
m · Effectiveness and efficiency of operations
m · Reliability of financial reporting
m · Compliance with applicable laws and regulations

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Internal Control is a key process within an
organization concerned with the management of
risk and achieving the corporate objectives.

m By Internal Control, it is meant not only internal

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

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m w
 is a systematic approach to
identifying, measuring, monitoring and
managing business risks in an institution.
m 6 
 
 comprises the institution¶s
mechanisms to monitor risks before ã
  or
after ã
  operations.
m 6 
 is a systematic ³ex-post´
appraisal of an institution¶s operations and
financial reports.
w

  
w
  

 



w
  

6
 


 w6


Identify, assess and prioritize risks

Revise policies Develop strategies to

and procedures measure risks
as necessary

Develop operational
policies and
procedures to
mitigate risks

Test effectiveness
of internal controls
and evaluate
results

Implement controls
into operations and
assign responsibility
for oversight
   w

‡ Promotes integrity of data
used in making business
decisions

‡ Assists in fraud prevention

and detection through the
creation of an auditable trail of
evidence
Operations
* Promotes efficiency and effectiveness
of operations through standardized
processes 
w 

* Ensures the safeguarding of assets
through control activities ‡ Helps maintain compliance
with laws and regulations
through periodic monitoring

15
m Credit risk - risk to earnings due to a client¶s failure to
meet the terms of the loan agreement.
m Liquidity risk - risk to earnings or capital from an
organization¶s inability to meet obligations when they
come due.
m Interest rate risk - risk of financial loss from changes
in market interest rates.
m Transaction risk - risk of loss resulting from
mismanagement, employee or systems error.
m Fraud risk - risk of loss resulting from intentional
deception by a customer or employee.
1) Risk management within the methodology:
± peer lending
± character assessment
± forced savings or co-signature requirements
± small loan sizes and limits on increases
± varied loan terms
± loan approval process
± center collections
2) Conducive Environment - create a culture of
low risk tolerance
3) Transparency - use clear accounting and MIS
systems
4) Simplicity - develop simple products and
procedures, clearly written operations manual
5) Accountability - use cost and profit centers,
clear job descriptions, employee incentive
systems
6) Security - install safes/guards/locks, back-up
files, purchase insurance
1. Identify key risks to the institution.
2. For each key risk, evaluate the potential loss to
the MFI by considering the likelihood and
frequency of that loss.
3. Identify potential controls to reduce or eliminate
the risk.
4. Assess the direct and indirect costs of the
control.
5. Compare costs with benefits of control.
6. Select and implement those controls that add
the most value relative to the composite costs.
m Limits - eg. BRI limits cash to 4% of savings
m Signature requirements - manager signs loans
m Physical controls - eg. count cash in vault
m Crosschecks - client visits to reconcile
balances
m Dual controls - eg. use credit committee
m Computer related controls:
± integrity risk controls - access levels and codes
± MIS risk controls - storing back-up files
m Solicit feedback from employees and
customers
± improves quality of the internal control system
± helps build employee commitment to internal control
system
m Assign responsibility
± branch managers should be responsible for
implementing controls and monitoring adherence
± determine and communicate chain of command for
responses to control issues
Ten Grey audit areas:
1) Cash 6) Transfers
2) Loans 7) Computer Systems
3) Provisions 8) Fixed Assets
4) Write-offs 9) Interest Rate Setting
5) Savings 10) Financial Statements
m 
   These are controls that prevent risks from occurring,
for example, authorisation controls, segregation of duties, recruiting
and training the right staff, and having an effective culture.

m    These are controls that detect if any frauds have

occurred. They are designed to pick up errors that have not been
prevented for example, reconciliations, supervision and internal
checks.

m 

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

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Segregation of Duties
m Authorization
m Comparison
m Computer Controls
m Maintaining Trial Balance and Control Account
m Account Reconciliations
m Physical

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
If controls appear to exist to prevent a particular
error, a test of controls (compliance test) will be
performed to ensure the control is operating
effectively. Compliance tests can take the
following forms:
- Examination of evidence.
- Re-performance.
- Inspection
- Recalculation and Re-performance.
- Enquiry and observation.
IMPROVING INTERNAL CONTROL
ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
* Errors may arise from misunderstandings of
instructions, mistakes of judgment, fatigue, etc.
* Controls that depend on the segregation of
duties may be circumvented by collusion
* Management may override the structure
* Compliance may deteriorate over time
IMPROVING INTERNAL CONTROL
ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
m Good prevention is better than excellent recovery.
m A key objective of the internal auditor is to review
the organization's system of internal control and to
provide assurance that the corporate governance
requirements are being met.

IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL

ORGANIZATIONS
2/20/2011
To improve internal control environment in the financial organizations the
following recommendations are made:
1. A more integrated approach to internal control, by placing a greater
emphasis on its ability to proactively prevent loss and encourage
efficiency.
2. Financial organizations should be made to provide a certain minimum
amount of information requirement on corporate governance. This would
allow uniformity and would allow easy appraisal of the internal control
system.
3. The internal audit department should be independent and given the
privilege to determine the scope of their audit, under the supervision of
the Audit Committee and also the board should be actively involved in
internal control rather than the upper management.
4. Disclosures on directors¶ remuneration should be extensive as to provide
information on who gets what and for what purpose.

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011
5. Disclosures about employees¶ benefits should be extensive as to show an analysis of their
emoluments by category not just by number.

6. All financial organizations should always provide a detailed analysis of insider-related credits
according to performance.

7. The financial statements should as well contain an independent report as regards the internal control
of the organization.

8. The annual report and accounts should include such meaningful, high-level information as the board
considers necessary to assist shareholders' understanding of the main features of the company's risk
management processes and system of internal control, and should not give a misleading
impression.

9. In addition, regulators should be well familiar with the operations of financial organizations in
Nigeria and constantly provide guide on how to improve their internal control systems.

10. Finally, financial institutions should link internal control to risk management, and involve their
board in the process
m MFIs need toaccept fraud asareality, identify and implement controls, including client visits!

m Industry needs tolearn more about internal controls for savings operations

IMPROVING INTERNAL CONTROL

ENVIRONMENT IN FINANCIAL
ORGANIZATIONS 2/20/2011