Internal Control and Audit Efficiency as Determinants of Financial Performance in Nigerian Money Deposit Banks

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The need for money deposit banks to be financially stable is very important to shareholders and stakeholders because financial stability does not affect the going concern of the bank and because shareholders want to profit from their investments. Furthermore, money deposit banks massively contribute to the stability of an economy at large by being intermediaries and moving money from the supply side to the demand side in an economy. Internal audit is said to help Organization by providing independent assurance that its risk management, governance and internal control systems are effectively working. (B Valkenburg, I Bongiovanni 2024). The financial performance of banks according to Agapova & McNulty (2016) is determined by factors to the banking industry, inadequate internal audits can lead to a bank failure, it took action and published regulations under the Banking and Commercial Banks Act (2006) to require money deposit banks to implement an operational internal audit mechanism to improve banks financial performance. An effective system of bank internal audit was one of the controls internal audit can have a significant impact on a company’s financial success. It is critical for all employees to grasp the audit concept and how it can aid in the development and growth of an organization, according to (Lalkhen, 2019). To ensure that their governance, risk management, and internal control systems are adequate, all managers should consider conducting audits. The effectively banks can generate profits using the money on the market is reflected in its financial performance. Financial performance, as shown by consistent earnings growth, reveals a company’s ability to profit from each of its business segments. In a competitive market, a company must decide how to achieve an ideal level of financial position, which includes defining the financial results of the company’s policies and activities (Sitinjak et al… 2023). According to Siddikin (2017), financial performance is a gauge of an organization’s profitability position and is calculated as the difference between the proceeds from the sale of an output and the total opportunity cost of the input that was used to create that output. Financial performance in money deposit banks is influenced by various factors, including economic conditions, government policies, and global market trends. examples are Revenue Growth, annual increase, Profit Margin, Return on Equity (ROE) etc.  

According to Ali (2018), the part of duty for independent inspections and providing confirmation on various foundation operations has continually gone toward better hierarchical execution, as may be expected by firms’ internal auditors. This enables banks to achieve its operational goals by assessing and improving how best to manage risk, establish effective controls, and improve management. The Nigerian government regulates the banking sector through the Central Bank of Nigeria, making it one of the most regulated industries in the country. Deposit money banks offer a variety of services in addition to safekeeping money and other valuables and making them readily available to the owners who need them, among other things. Despite these enormous responsibilities, the sector has been plagued by issues such as financial irregularities, a lack of objective internal audit control, internal auditor independence in relation to reporting channels, insider dealings, and excessive loan losses as they relate to the financial performance of Nigeria’s commercial banks.( AA salami, AB uthman 2024) et Al

Globally, financial performance in money deposit banks are influenced by various factors, which can be political environment and economic condition, to resource availability. One of the challenges faced by money deposit banks is to ensure efficiency and sustainability to serve public interest. Low financial performance can lead to the inability to achieve set objectives, thereby eroding public trust. Efficient financial performance therefore, is a global concern for internal audit to improve accountability. Data from World Bank (2014) revealed that there was decline in service in all sectors of the economy including tourism. Poor financial performance of quoted companies adversely affects the economic growth of economy. There is however, continued poor financial performance, where budgets are not followed, rules and regulations on the use of finances are not adhered to and there are massive unaccounted funds. This has led to the risk of financial inadequacy, employee dissatisfaction and poor financial performance.

Internal auditing is considered the main pillar in the structure of control over financial data and assets, in addition to tracking the policies carried out by the establishments to spend their financial and administrative matters, as the existence of a good control system is considered a legal obligation on the establishment, and the source of this commitment is the establishment’s legal duty to keep regular accounts, As it is  irregular to have counts without it, in addition to the practical necessity of this system for the establishment to carry out its work in the correct manner and with a high degree of efficiency (Bshayreh et al, 2019).

     The multifaceted procedure connected with auditing activities in recent times; have generated a good reason for the accounting profession to worry. This is because auditing now carries heavy responsibility and calls for commensurate knowledge, skills and expertise to perform the activity in this modern society. Added to the complexity of the art of auditing, is the current increasing need for strategy implemtation which ensures that the separate working leaders in various divisional and functional units have got the right information ( background, attributes and skills) which are relevant in making the strategy work, design a better organization plan and employ the right functional policies to the functional units in accordance to the strategy allowed for the units. Also, internal audit performs a valuable function in strategy implemented in order to carry out the services of the organization by ensuring compliance with legal requirements and organization rules. The preparation of annual reports of organizations ventures and the presentation of information contain therein is the responsibility of management. Auditing mainly means examining the financial statements by persons who are impartial and independent of any institution, whatever its objective, size, and legal form. Given its importance, it is the essence of the work of auditors and the starting point for all operations carried out by the institution (Al-Dahabi and Bin Bayyah, 2017).  The ultimate purpose of internal Auditing is to achieve better returns for the organization in shape of improved firm performance.  as cited in (Bouteina, 2021).

The interaction between the internal audit efficiency and financial performance is of critical important to understand how money deposit banks navigate financial constrain and manage internal audit effectively. Internal audit efficiency influences the financial performance of money deposit bank, which in turn affect the available option to companies when preparing the financial statement. As a result of this, this study will explore how internal audit efficiency affect financial  performance within the banks, with a particular  focus in Nigerian through this analysis this study will enhance broader understanding of how internal audit process can enhance the financial performance of banks. Nigerian banks have several internal control systems, but there is evidence that the financial management in Nigerian banks is not up to the expected standards locally and internationally, and this may create loop hole for financial impropriety or unfair view of the financial reporting as well resulted to rapid increase in merger and acquisition of banks in recent time in Nigerian

1.2       Statement of the Problem

In the course of providing these financial services, banks are exposed to many different types of risks that can threaten the bank operations and sustainability of the bank hence the need to have internal audit because it plays a cardinal role in eradicating  some of these risks that can affect a bank Internal audit according to Mullinger (2020) is an important component of a bank’s internal control system. Among some of the risks that banks face are fraud and theft. With that being said, this research will seek to determine the effect that the internal audit has on the financial performance of commercial banks in Nigeria. There have been two reasonable but discordant results as a result of the recent corporate accounting scandals.