CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Financial institutions especially the banking industry is unarguably an integral part and a life wire to every economy. This is because of the pivotal role they play in fostering the economy of every nation. Whether it is a central, investment or commercial bank, it plays a key role in the life of a nation. According to Gwatney, Stroup, Sobel and MacPherson (2006), some of the roles commercial banks play in an economy include: They provide a means for people to save money and other valuables, they increase the availability of capital by allowing businesses to use debt to expand, they create money through the fractional reserve system and granting of loans, commercial banks also reduce costs of carrying out transactions like money transfer/receipt services with the use of modern technology.

Globalisation and advancement in technology has become the epicentre for businesses today with the banking industry not left out in the drive. In recent times, banks have expanded their operations beyond national borders to become big multinational financial institutions. Thanks to electronic banking (e-banking), operating and efficiency cost has considerably reduced. The geometric advancement in technology and globalisation has come with their own challenges. Globalisation for instance has increased the complexity in which businesses operate. This has exposed not only banks but also other organisations to malpractices and irregularities. Advancements in technology on its part have had its own share of challenges as the risk of fraud, money laundry, cyber criminality and other irregularities are on the rise.

In a bit to ensure some degree of integrity, transparency and proper conduct of business for the growth and attainment of the objectives of organisations, the management of organisations put in place a system of internal controls to regulate the way operations are carried out and to avoid excesses.

In view of the geometric expansion in the size and complexity of companies, proper management of modern businesses is not possible unless they have an effective and efficient system of internal control. A good internal control system is one that is efficient and effective and can be relied on by management, auditors, investors, shareholders, public authorities and other stake holders.

The effectiveness and efficiency of an internal control system is determined by the extent to which it can provide reasonable assurance that recorded transactions are valid, transactions are properly authorised, existing transactions are recorded, transactions are properly classified, transactions are recorded at the proper time and transactions are properly recorded in the master files and correctly summarised.

The credit crunch that the world has suffered in the past decades and still running though there have been some magnificent improvements is clear indication of the failure of the internal control structures of many big financial institutions to check excesses in the organisations. In their rush to satisfy their profit-making ambitions and outsmart competitors, they turn to pay little attention to their internal control procedures. This leaves the institutions vulnerable to misconduct by the staff.

A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organisations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organisation will be met, that the bank 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.

1.2 Problem Statement

The internal control structure of any organisation may affect its performance in terms of financial management, risk management, fraud detection and prevention, growth and profitability and customer satisfaction. The system of controls of every organisation must be one that limits avenues for errors, fraud and other misconduct.

The ineffectiveness of numerous organisational control frameworks has been highlighted because of the huge financial scandals in recent years. Hence, the increased attention on risk management, internal controls, internal audit and their roles in cutting edge institutions. The aim of control policies formulated in financial institutions is to make certain that it gives credit only to customers who satisfy the laid down conditions including payment on time. This is a fundamental element of control that keeps banks from becoming illiquid because of improper and un-facilitated lending. Despite these financial control policies, some financial institutions fail within the first five years of operations.

Financial institutions are faced with various challenges in their core operations. This hinders the effectiveness of their performance and impedes their profit levels. These issues can be related to poor portfolio management, lack of attention to changes in the economy that can lead to deterioration in the credit ratings of the institution.  However, the major causes of serious banking challenges continue to be ineffective internal control system. These policies determine the reliability and integrity of data for operational efficiency to achieve strategic goals and objectives. They are established to ensure management has accurate, timely and complete information for effective decision making.

Nevertheless, the internal control system of any organisation provides reasonable but not absolute assurance as to the correctness and completeness of records. This is because those responsible for implementing internal control procedures are vulnerable to human error, management oversight and deliberate acts of misconduct. Therefore, the records provided by the internal control system cannot completely be relied upon by auditors, management, investors, shareholders and other stake holders.

Over the past decades, there have been many corporate scandals. Some of these scandals include: the Satym Computers scandal, KOSS Company scandal, Enron scandal, WorldCom Scandal, PARMALAT Scandal. In the local scene, a series of companies have gone bankrupt because of fraud and embezzlement which can be linked to the failure of the internal control procedures of the companies concerned. Some of these institutions include:  The National Corporate Fund (NCF), Global Business Financial (GBF), Compagnie Financière de L’estuaire du Cameroun (CO-FINEST) and host of others.

In recent times, all organisations, be they profit oriented or not for profit entities, work under some laid down principles as to better manage their resources. The existence of scarcity has push corporate bodies to operate within conditions of resource constraints. As a result, various steps are taken and procedures established to ensure that the use of these resources is maximised in achieving organisational goals. One of such measures involves an adequate control system. The financial sector considered a very sensitive sector and the life wire for every economy deserves proper attention. The purpose of this study therefore is to assess the impact of internal control system on the performance of financial institutions.

1.3 Research Questions

The following research questions were relevant to this study:

1. Does the Internal Control System of Banque Atlantique Cameroun S.A significantly affect its performance?
2. Is the Internal Control System of Banque Atlantique Cameroun S.A. the same with international standard?
3. Are there any weaknesses in the Internal Control System of Banque Atlantique Cameroun S.A.?
4. What policy measures can the bank adopt for to improve on the effectiveness and efficiency of its ICS?

1.4 Objectives of the Study

This study will specifically attempt to achieve the following objectives

1. To ascertain if the internal control system of Banque Atlantique Cameroun S.A significantly affects its performance.
2. To identify weaknesses in the ICS of the institution and recommend appropriate policy measures that can be executed to improve on the effectiveness and efficiency of its internal control system.

1.5 Hypothesis of the Study

The following research hypotheses were generated for the study:

H0: The Internal Control System of Banque Atlantique Cameroun S.A. does not have a significant impact on its performance.

HA:  The Internal Control System of Banque Atlantique S.A. has a significant impact on its performance.