Abstract

Efficient internal checks enables the prevention and detection of fraudulent activities in Organizations. This project examined The Influence Of Internal Checks And Risk Management On The Financial Performance Of Commercial Banks In Cameroon having UBA Cameroon and Commercial Bank of Cameroon (CBC) as case studies.

This study made use of three theories; Theory of firm, Agency Theory and Contingency Theory as inspiration. It used the Descriptive research design, Quantitative data (Primary source of data) and Pearson’s chi square test of independence on a Simple random technique and sample size of 20respondents(15 from UBA and 5 from CBC) with the help of Questionnaires(Likert Scale Questionnaire format).

This study got to discover that Internal checks had a significant influence on the Financial Performance of Commercial banks in Cameroon therefore affirming the two alternative hypothesis; firstly, Internal checks and Risk Management has an influence on UBA Cameroon and CBC  Financial Performance. Secondly, Surprise checks, document verification checks, Security sweep, KYC checks and Account reactivation are ways to prevent Risk occurrence which may influence or affect the Financial Performance of UBA Cameroon and Commercial Bank of Cameroon. On the other hand, it was discovered that Risk Management had no significant influence on the Financial Performance of Commercial banks in Cameroon therefore approving the Null hypotheses that Risk monitoring, Risk assessment and Risk transfer as ways of mitigating risk do not have an influence on the Financial Performance of UBA Cameroon and CBC Financial Performance.

CHAPTER ONE

INTRODUCTION

Warren Buffett once said “Risk comes from not knowing what you are doing”. There is some level of risk with almost everything we do especially when it comes monetary items that is why Vicki Robin stated that “Money is something we choose to trade our life energy for”. In other to minimize or eradicate these risks, measures such as Internal Checks are put in place to assess risk possibilities or potential risk which may affect the Financial Performance of any Organization especially that of Commercial banks for Proper Planning and Preparations Prevent Poor Performance (Stephen Keague).

In this note, Chapter One is going to bring out the Background of the study (taking into consideration Internal checks, Risk management and Financial Performance), The Statement of the Problem (What prompted the researcher to choose this as a research), The Research question, Objectives and Hypothesis to be used and considered. Lastly, the Significance of the Study (To whom it is directed and important to).

1.1. Background to the study

Every business wants to minimize risk so as to maximize profit by avoiding pained fines which come it. To this, businesses or organizations put in place Managers (including Risk Managers), Internal Controllers (to conduct internal checks), Financial Analyst and Auditors to control and manage the business accurately and ensure the mitigation of risk which will turn out to give a positive influence on their Financial Performance.

It is worth noting that many big structures in the world have collapsed such as Enron Energy. Enron formed in 1985 became a merger between Houston Natural Gas Co and Omaha, Neb-based Inter North Inc having Kenneth Lay as the Chief Executive Officer and Chair of Enron after being the CEO of Houston Natural Gas Co. Lay quickly turned Enron to an energy trader whereby they had the ability to place bets on future prices. In 1990, Lay created Enron Finance Corp. And appointed Jeffery Skilling (being the youngest partner) as the head of the new corporation who impressed Lay when he worked at McKinsey & Co. Enron became top in terms of finances only for them to drop/fall drastically, collapsing affecting thousands of employees. Enron that was at its peak with a net-worth of $ 90.75 was declared bankrupt by December 02 2001 at $0.26. It was revealed that their reported financial conditions was due to accounting fraud known as the Enron Scandal filled with Corporate fraud and Corruption.

In 2004, a new board of directors was changed after bringing the bankruptcy to an end following a court-approved plan of reorganization having its name changed from Enron to Enron Creditors Recovery Corp which emphasized on reorganizing and liquidating certain operations and assets of the pre-bankrupt Enron .On September 7 2006. Enron’s remaining subsidiaries were sold out (Prisma Energy International to Ashmore Energy International Ltd).  Had it been that Enron had put in place an internal check system, these fraudulent activities would have been discovered and probably prevented/ Mitigated/Reduced so as to maintain or improve their Financial Performance.

Some firms such as Worldcom even failed due to unethical accounting strategies whereby they omit, overstate or understate information regarding the firm’s financial data (Hussaini Umar, 2018). Worldcom happened to be the second largest long distance telephone company at that time (1999-2002).

Bernard Ebbers being the Founder and CEO orchestrated a scheme to inflate earnings in order to maintain its stock prices. The fraud was discovered in June 2002 when the company’s internal audit led by the Vice President Cynthia Cooper discovered over $3.8billion of fraudulent balance sheet entries. Worldcom finally admitted overstating its assets by over $11billion. This happened to be the largest Accounting fraud in American History.

The Banking sector is not exempted from this for many have collapsed due to poor internal control systems which they implemented. The Banking sector is of great importance to the economy for it handles great shares of fund transactions alongside providing services to its customers. The success of an economy according to Gamage, Lock & Fernado (2014) is determined by the strength and stability of its banking sector.

Internal Control systems puts in place control policies such as internal checks.  Internal checks is the arrangement of accounting duties under which the work off one or more persons comes another person (control department) for scrutiny (analysis) so that there is no occurrence or possibility of fraud or errors. Internal checks in D.R. Davar’s  view is a system or method introduced with defined instructions given to the staff as to their sphere of work with a view to control and verification of work alongside the maintenance of accurate records as the ultimate aim.

Internal checks is practically continuous Internal audit carried out by a staff of the organization itself whereby other members of the staff works are been checked by the person (F.R.M De Paula, .Lawrence Sawyer known as the father of  internal audit published his first book version known as Sawyer’s in 1973 where he defined Internal auditing as “an independent, objective assurance and consulting activity designed to add value to and improve an organization’s operations” after spending 45years in the internal audit Profession (1911-2002).

Audits are done periodically depending on the policies of each organization. After every audit control, businesses do not just sit and let their businesses go unsupervised. They put someone in charge to do the continuous checks while waiting for the next audit control. The process used by the internal control department to monitor activities is known as Internal Checks. These internal checks are put in place so that the policies and procedures are thoroughly checked and followed so to ensure that the performance of the Organization is up to their target.

According to L.R. Dicksee (1905), Internal checks is the arrangement of the accounted routine errors and frauds which are automatically prevented or discovered by the very operation of the bookkeeping itself. Internal checks has as aims; Preventing error and fraud occurrence by employees through doing daily checks , Preventing the misappropriation of cash or goods by doing surprise cash counts and checking if goods supplied serve for the purpose which it was requested for, Allocating blames to the right department when fraud, errors or mistakes are identified or detected. Internal checks makes it difficult for an employee to steal cash or other assets and concurrently cover up by entering the amounts stolen in their respective accounts. In a lay man language, internal checks is out to mitigate/prevent risk in the organization.

Risk is an important concept in various fields of study therefore it does not have a precised or standard definition and interpretation (Aven, 2011). Some base their definitions on probabilities while others on expected values, some on uncertainties and others on objectives (Aleksandar Sotic, 2015).

Risk is the measure of probability and the weight of undesired consequences (Lawrence, 1976).  There are many types of risks namely; Credit risk, Market risk, liquidity risk, Reputational risk, financial risk and so on which are faced by both Commercial banks and other organizations other to by-pass these risks, a measure has been put in place called Risk Management. Risk management is the identification, evaluation and prioritization of risk by either minimizing resources, monitoring and controlling the probability or impact of event or maximizing the use of opportunities.

The whole concept of Risk Management is to prevent risk occurrence or reduce the gravity to which risk may affect the company. Risk prevention commonly known as Risk avoidance is the act of adjusting project plans so that conditions triggering risk occurrence are no longer in existence thereby eliminating the risk. For an example, a manufacturing company changing its foreign suppliers with local ones so as to prevent exchange rate risk which come with foreign transactions.

On the other hand, Risk reduction does not eliminate risk completely all it does s reducing the probability of its occurrence or reduces the impact the risk can have cause especially materially. Some common ways to mitigate risks are; Acceptance, Avoidance, Reduction, Control and Transfer. Risk which are prevented tend to increase the chances of every organization having a well to do Financial Performance.

Investopedia has it that Financial Performance is a subjective measure as to how well a firm uses its assets from the genesis of the business to generate revenue. Financial Performance s conclusively the achievement of a business over a certain period of time covering the allocation and collection of finance measure by capital adequacy, liquidity, solvency, efficiency, leverage and profitability (Mochamad Mochlas,2018). The aforementioned happened to be the measures put in place as the determinants of an Organization’s Financial performance.

Details of Financial Performance are gotten from conducting a Financial statement Analysis. Financial statement analyze is all about analyzing the different financial statements of the organization (Cash flow, balance sheet, profit and loss statements alongside their annual reports) so as to the elements which be used to calculate in the various Financial performance measurement.

Analyst and investors use this to compare with their competitors in or out of the dame industry. Stakeholders in the organization including trade creditors, bondholders, investors, employees and management all have personal reasons in tracking the Financial Performance of a company.

In Bangladesh, those in charge for checks and compliance for risk mitigation are the internal control and auditors in their banking sector therefore they always strive to have an effective internal control and compliance system. Their controllers (internal) have roles such as secrecy, reliability and integrity of data and information; compliance with policies, plans, procedures, laws and regulations; the safeguarding of its investments and assets; the economical and efficient use of resources; the accomplishment of established objectives and goals of operations or programs.

Commercial Bank of Cameroon (CBC) Bank Internal checks done by the Internal controller “Control niveau un” which means First level control. National Financial Credit (NFC) Bank internal checks process is called “Manuel de procédure du contrôle interne”. This has to do with guidelines as to there’s compliance in accordance to the bank’s manual. United bank for Africa terms its internal check procedure “Call Over”.

In a nutshell, businesses vary according to their structures and size thereby making the internal checks to be different and conducted in a different way in other to manage and reduce risk. With risk being minimized, it will turn out to boost up their Financial performance.  Thus, ensuring that an accurate control mechanism be implemented in the day-to-day activities of the company.

1.2. Statement Of The Problem

Internal checks and Risk management are the most important and vital aspect of every Organization or business place so as to boost up their Financial Performance. Major companies such as Enron Energy and Worldcom have collapsed as a result of accounting malpractices, corruption and fraud discovery therefore leading their Financial Performance to a downfall. If proper measures were put in place for proper internal checks and Risk Management, these companies would not have been out of the market on Bankruptcy basis.

Financial lapses do not only affect Product companies but service rendering companies such as Financial houses (Banks especially Commercial). United Bank for Africa (UBA) Cameroon encounter the following challenges;

Firstly, Resident Control Officers (RCO) breaching policies of doing daily document verification checks as well as employees’ late submission work for checks leads to bulk checking there exposes them to potential risk (due to rush checking, tiredness/boredom while checking) and fraudulent activities or transactions which may affect their financial performance.

In addition, the aspect of misinformation may exposes UBA Cameroon to great risk which may jeopardize their Financial Performance. For example, BEAC has it that once a National Identification Card or temporal Identification Card (Recipisee) has expired, another identification document such as Passport, Drivers’ License or Birth Certificate should be presented when creating a Bank account.

Where the worry comes from when doing the KYC (Know Your Customers) checks is at the level of the temporal Identification Card (Recipisee) as to the number of times it has been prolonged (be it twice or thrice) so that another Identification document should be presented. This exposes the bank to fraudulent transactions by scammers and other criminals who use bank transactions as their means of operation.

Furthermore, Account Reactivation (reactivating closed banks accounts upon request of customers) is a vital aspect which may cause the downfall of Commercial banks. Accounts which have been made been active/opened/functional without the concern of bank or request of the customer is made a tool for fraudulent transactions such as transfers/ Debit of customers’ money or receiving money for fraudulent activities.

1.3. Research Questions

1.3.1. Main Question:

What is the influence of Internal Checks and Risk management on the Financial Performance of United Bank for Africa (UBA) Cameroon and Commercial Bank of Cameroon?

1.3.2. Specific Questions

1. How does inadequate Surprise checks, Document Verification Check, Security sweep, KYC and Account reactivation checks influence UBA Cameroon and CBC Financial Performance?
2. In what way does Risk monitoring, Risk avoidance and Risk transfer as ways of mitigating risk influence the Financial Performance of UBA Cameroon and CBC Financial Performance?
3. What are the challenges and possible solutions UBA Cameroon and CBC face when implementing accurate Internal checks method and Risk Management strategies which may affect their Financial Performance?

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