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internal control ppt 2

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INTRODUCTION THE NIGERIAN FINANCIAL SECTOR. INTERNAL CONTROL DEFINED WHY INTERNAL CONTROL COMPONENTS OF INTERNAL CONTROL INTERNAL CONTROL AND CORPORATE GOVERNANCE INHERENT IMPEDIMENT TO INTERNAL CONTROL ENVIRONMENT VARIOUS FORMS OF INTERNAL CONTROL CONCLUSION RECOMMENDATIONIMPROVING 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 banks 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 institutionthe 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)

x Financial Services Regulation Coordination Committee All regulatoryinstitutions 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

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Financial Sector x Banking and Related Financial Institutionsx x x x x

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)

x Financial Services Regulation Coordination CommitteeAll regulatory institutions to coordinates the supervision of all financial institutions.IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

2/20/2011

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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 Universal banking system adopted in 2000 allows all banks to undertake activities related to traditional banking, capital market and insurance business.acquisition in the banking industry,minimum capital requirement for banks increased to N25 billion. mergers and

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

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Internal control is a process designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations

IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

2/20/2011

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Internal Control is a key process within an organization concerned with the management of risk and achieving the corporate objectives. 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:

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IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

2/20/2011

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Risk management is a systematic approach to identifying, measuring, monitoring and managing business risks in an institution. Internal control comprises the institutions mechanisms to monitor risks before (ex-ante) or after (ex-post) operations. Internal audit is a systematic ex-post appraisal of an institutions operations and financial reports.

Relationship between Risk Management and Internal Control

Risk Management

Internal Control

RISK MANAGEMENT FEEDBACK LOOPIdentify, assess and prioritize risks

Revise policies and procedures as necessary

Develop strategies to measure risks

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

Financial Reporting 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 Laws and Regulations Ensures the safeguarding of assets Helps maintain compliance through control activities with laws and regulations through periodic monitoring

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Credit risk - risk to earnings due to a clients failure to meet the terms of the loan agreement. Liquidity risk - risk to earnings or capital from an organizations inability to meet obligations when they come due. Interest rate risk - risk of financial loss from changes in market interest rates. Transaction risk - risk of loss resulting from mismanagement, employee or systems error. Fraud risk - risk of loss resulting from intentional deception by a customer or employee.

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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.

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Limits - eg. BRI limits cash to 4% of savings Signature requirements - manager signs loans Physical controls - eg. count cash in vault Crosschecks - client visits to reconcile balances Dual controls - eg. use credit committee Computer related controls:integrity risk controls - access levels and codes MIS risk controls - storing back-up files

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Solicit feedback from employees and customersimproves quality of the internal control system helps build employee commitment to internal control system

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Assign responsibilitybranch 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 2) Loans 3) Provisions 4) Write-offs

6) Transfers 7) Computer Systems 8) Fixed Assets 9) Interest Rate Setting

5) Savings 10) Financial Statements

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Preventative: 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. Detective: 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. Corrective or Response: These are controls that address any problems that have occurred. Where problems are identified, the controls ensure that they are properly rectified. Examples are followup procedures and management action.

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IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

2/20/2011

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Segregation of Duties Authorization Comparison Computer Controls Maintaining Trial Balance and Control Account Account Reconciliations 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

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Good prevention is better than excellent recovery. 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

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Disclosures about employees benefits should be extensive as to show an analysis of their emoluments by category not just by number. All financial organizations should always provide a detailed analysis of insider-related credits according to performance. The financial statements should as well contain an independent report as regards the internal control of the organization. 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

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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. Finally, financial institutions should link internal control to risk management, and involve their board in the processM Is need toaccept fraud asareality, identify and im ent controls, including client visits! F plem Industry needs tolearn m about internal controls for savings operations ore

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IMPROVING INTERNAL CONTROL ENVIRONMENT IN FINANCIAL ORGANIZATIONS

2/20/2011