EFFECTS OF INTERNAL CONTROL SYSTEMS ON THE FINANCIAL PERFORMANCE OF CREDIT UNIONS IN THE SEKONDI-TAKORADI METROPOLIS

ABSTRACT
Internal control systems are primarily established to enhance the reliability of financial performance directly or indirectly by increasing accountability among information providers in an organisation. As the credit unions in Ghana has existed over the past twenty years but their activities have not witnessed significant growth as compared to banks and financial services within the country. It therefore calls for a systematic approach to analyse the internal control system within credit unions and how it has affected their financial performance over the years.This study sought to determine the effect of internal control system on the financial performance of Credit Unions in the Sekondi-Takoradi Metropolis. There were sixteen credit unions in the Metropolis. All sixteen were used for this study. Quantitative analysis was employed for this study. Some of the findings from the study revealed that Credit unions in Sekondi-Takoradi Metropolis have structured control environment which included the presence of policies that guided work process and roles and responsibilities that highlights each employee’s role and responsibility. It was therefore recommended that the management of credit unions should exert collective efforts in identifying the ideal mix of effective and efficient internal control systems that match their business needs and invest in them, and future researchers should consider replicating this study in the all financial institutions in Sekondi-Takoradi order to establish the role of internal audit in financial institutions.


CHAPTER ONE
INTRODUCTION
Any organisation of whichever form or size must put in place its own system of controls to achieve desired objectives. This is because critical components of management involve systems of effective internal controls of company and thus a foundation for the safe and sound operation of every organisation. This research evaluates effect of internal control on financial performance of credit unions in Sekondi-Takoradi Metropolis. The chapter is divided into five main sectionsnamely the background of the study, the statement of the problem, objectives, research questions and significance of the study.

Background to the Study
Internal controls are put in place so that organisation can achieve profitable goals and mission and to minimize undesirable risks along the way. They help organisational management to effectively deal with economic and competitive environment which is rapidly changing, shifting customer priorities and demands and restructuring for future growth. Internal controls reduce risks of asset loss, promote efficiency, and help to ensure the reliability of financial statements and compliance with laws and regulations (Mwindi, 2008).

The concept of internal control has existed as early as there have been substantive work relationships. Gupta (1991) sited that its origin can be documented and traced back to civilized communities that existed around 5000 B.C. The governments of these empires imposed a number of taxes on individuals and business for proper accounting and collection of taxes and an elaborate system of checks and counterchecks. Such systems of internal control in early times were designed basically to protect state properties and minimize errors done by dishonest tax collectors (Gupta, 1991). According to Gupta (1991), the Mesopotamian civilizations which existed about 3000 B.C. used comprehensive systems of internal controls and their transaction summaries were prepared by scribes but these scribes did not provide valid records of receipts and payments.

In 1985, organizations sponsored the National Commission on Fraudulent Financial Reporting, (Treadway Commission). In 1987, Treadway Commission suggested committee to be formed to study internal controls. In 1992, Committee of Sponsoring Organizations (COSO) issued “internal Control Integrated Framework” Then the Real Finance Journal, (2005), and concluded with the history of internal controls in the United Kingdom (UK) as follows: 1992: The Cadbury Code, the UK’s first corporate governance code, which included principles on reporting the effectiveness of a company’s system of internal controls. In 1994, the Rutteman Report on Internal Control on Financial Reporting expanded the principles specifying minimum disclosures but it admitted a system of control can provide only “reasonable and not absolute” assurance against misstatement.

This led to the first Combined Code which broadens the debate from internal financial control to internal control in 1998. In 1999 The Turnbull Report suggested boards of organisations should adopt a risk-based approach to establishing a sound system of internal control and conduct an ongoing review of its effectiveness. The Sarbanes-Oxley Act was therefore passed in the United States (US) in year 2002. All directors of organisations were required under Section 404 of the act make statements on the effectiveness of internal controls. In 2003, ‘The Smith Report’ advised on the roles and responsibilities of audit committees.

The Combined Code was further revised to reflect both this and the Higgs Report. In 2005, a group led by Douglas Flint, Financial Director of HSBC reviewed the Turnbull Guidance. Flint stated that “the overwhelming view was that the Turnbull Guidance continued to provide an appropriate framework for risk management and internal control. Its relative lack of prescription is considered to have been a major factor contributing to the successful way it has been implemented,”(Flint, 2005).

To ensure the effective and efficient managements of credit delivery and recovery of all facilities granted at expiry, internal controls are normally put in place. In the financial sector, to enhance the efficiency and effectiveness of internal control in organisations, various legislations have been designed by Central Bank of the nation which includes but not limited to 1992 Fourth Republican constitution, the financial Administration Act (act 654), the Criminal Code of 1960 (Act 29), Internal audit Agency Act (Act 658) and the Public Procurement Act (Act 663). Nonetheless, internal control only provides reasonable assurance, not absolute assurance for organisations. This is because it is humanly operated therefore human error, management override, breakdowns, deliberate circumvention, improper collusion among people who are supposed to act independently can cause failures of the internal control to achieve objectives.

As part of improving their internal control systems, internal auditing function, and financial performance, most credit unions in the country have put in place mechanisms to ensure internal control and compliance in credit delivery. These include setting up an internal audit unit, a monitoring unit and issuing the Accounting, Treasury and Financial Reporting Rules (ATE Rules). It is therefore in this light that this dissertation is undertakento assess the effect of internal control system and how it affects the financial performances of credit unions.

The growth and development of the financial institutions are dependent on the effective and efficient management of its credits. Under the COSO Framework, objective setting is seen as a precondition for internal control. By setting objectives, management is able to identify potential risks to the achievement of set objectives. To address these risks, management of organizations may implement specific internal controls. The effectiveness of internal control can then be measured by how effectively the risks are addressed and how well the objectives are achieved.

More generally, budgets, plans, setting objectives, and other expectations establish criteria for control. Control itself exists to keep a state of affairs within what is allowed and expected. Control built within a process is internal in nature. It evolves having combination components that are interrelated and these includesnecessary information, social environment effecting behaviour of employees, as well as policies and procedures. Internal control as a structure is a plan which predicts how internal control is made up of these interrelated components.

Corporate governance as a concept heavily relies on the necessity of internal controls because internal controls ensure operation of processes as designed and risk management carried out. Further, it is necessary to establish strategies that ensure that aforementioned procedures will be performed as intended: integrity and competence, right attitudes, and monitoring by managers.

Internal control is an organisation’s plan and all it coordinated methods and measures adopted to protect the assets of the organisation, check the accuracy and reliability of accounting data, promote operational efficiency of the machinery and human resource and adherence to prescribed managerial policies. This definition of internal control can be divided into two; financial and non-financial (administrative) internal control respectively. Financial internal control involves financial activities including controls over company’s cash receipts and payments financing operations and company’s management of receipts and payments. Non-financial internal control on the other hand deals with activities that are indirectly financial in nature that is, controls over organisation’s personnel and operations, control of fixed assets controls and controls of laid down procedures (Reid &Ashelby, 2002).

The French Institute of Chartered Accountants defines internal control as a set of security measures which contribute to the control of a company. It ensures the security and safety of assets and information. Internal control further plays an important function of preventing and detecting fraud as well as protecting resources of an organisation both physical (which includes machinery and property) and intangible (that is, reputation or intellectual property). Internal controls are policies, practices, procedures, and organisational structures undertaken to provide assurance that an organisation’s business objectives will be achieved and undesired risk events prevented or detected and corrected, based on either compliance or management initiated concerns (Awe, 2005).

Despite been expensive, internal control system installs and maintain, it gradually evolved over the years with the greatest development occurring at the beginning of 1940’s. Not only have the complexities of the business techniques contributed to this development but also the increased size of business units which have encouraged the adoption of methods which while increasing efficiency of business, acts as a safeguard against errors and frauds. Mawanda (2008) posits that there is a generally, people perceive that instituting and enforcement of proper internal control systems will always lead to improved financial performance. Another general belief is that effectively established system of internal control improves reporting process and gives rise to reliable reports enhancing accountability function of management of organisations. Preparing reliable financial information is thus a key responsibility of the management. The ability to effectively manage the firm’s business requires access to timely and accurate information.

Credit Unions are important contributors to the economy of Ghana. Apart from creating employment opportunities, they have also led the establishment and growth of many micro enterprises, training of entrepreneurs, generation of income as well as sources of livelihood for the majority of low and middle income earners/households by financing their businesses or ventures. Credit Unions traditionally have become the main source of funding for micro enterprises in Africa and in other developing regions of which Ghana is not exception (Anthony, 2004). CUs were initially established as institution-based organizations or aimed towards people on regular incomes. However, in recent times CUs have opened up to a wider variety of clients in the community where they are based (Darko, 2007).

The Ghanaian credit union industry has evolved from a highly regulated sector into a largely market driven one. The regulatory and institutional framework has improved considerably yet still credit unions in Ghana are facing some challenges as the world deals with one of the deepest financial crisis in the history of the planet (Beacon, 2010). The recent demise of Ghana Co-operative Credit union Ltd is test case of how gaps in internal controls can easily cause collapse of financial institutions. Internal controls and risk managements has a purpose to ensure the efficiency and effectiveness of operational activities, reliability of financial information, compliance with applicable rules and regulations and sustainable business growth have been incorporated into the mundane activities of credit unions in Ghana.

Most credit unions go through difficulties in recovering facilities given to customers after expiry. Issues of default of credit facilities by credit unions are gradually destroying most gains and weakening business opportunities. Internal controls and risk managements and sustainable business growth have been incorporated into the mundane activities of credit unions in Ghana.The Ghana Cooperative Credit Union Association (CUA), which is the governing body of all credit unions in Ghana regulates the interest rates that Credit Unions have to pay on members’ savings and charge on loans, perhaps reflecting the initial welfare nature of credit unions.

Credit Unions operate a Central Finance Facility into which member CUs contribute and source funds to lend to their members (Darko, 2007).The Bank of Ghana, which plays the regulatory role of financial institutions in the nation has instituted some measures to make sure financial institutions function to improve on the effectiveness of their internal control systems and financial performance. These various legislations have been passed to reduce fraud, the risk of misstatements, and mismanagement of both government and corporate resources.

The Office of accountability at the Presidency was created among the Commission on Human Rights and Administrative Justice (CHRAJ) and the Serious Fraud Office. With support from the UNDP in 2005, the Securities and Exchange Commission (SEC) was also created carried out a country assessment of corporate governance standards in Ghana, which led to issuing of new corporate governance standards in the same year (ACCA, 2005).

For more Accounting Projects Click here
===================================================================
Item Type: Ghanaian Project Material  |  Attribute: 68 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH110 ($20)  |  Delivery: Within 30Mins.
===================================================================

Share:

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Search for your topic here

See full list of Project Topics under your Department Here!

Featured Post

HOW TO WRITE A RESEARCH HYPOTHESIS

A hypothesis is a description of a pattern in nature or an explanation about some real-world phenomenon that can be tested through observ...

Popular Posts