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THE IMPACT OF RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM OF THE NIGERIAN FINANCIAL SECTOR
This study examined the impact of risk management and internal control system of the Nigerian Financial Sector. Five banks were randomly selected using their financial statement as published by NSE fact book from 2006 – 2010. The hypotheses formulated were tested with the use of person’s moment of correlation coefficient. It was found that risk management does not have any significant relationship of the Nigerian financial sector but must be in place in case of any uncertainty. It was also found out that internal control system has a significant relationship on the performance of the Nigerian financial sector, through is costly but it enhance managerial performance and good work ethics in the financial sector. Suggestion was made to improve risk management and internal control system in the Nigerian financial sector.
1.1 BACKGROUND OF THE STUDY
All forms of economic activities are confronted with risk, both internal and external risks involves huge losses that could deprive a firm from its continuity if the proper management is not put in place.
These days, managing risks faced by firms in the Nigeria financial sector is an important factor, how these risks can be managed and the systems of control used to mitigate them.
Risk has been defined as the uncertainty of future events that could influence the achievement of the organizations strategic, operations and financial obligation and object (IFA 1999).
According to Johnrickee (2007), risk was defined as the combination of the probability of an event and its consequences. While internal control system is all of the financial operation and other control system are carried out by internal controllers and which involves monitoring, independent evaluation and timely reporting to management in accordance with current policies, methods, instructions and limits.
The aim of profit making organization is to earn profit, stay in business for long time, meet customer’s demands and expectation, pay their debts when they fall due and satisfy the aim of stakeholders. These objectives are easily achieved if the owner and manager of the company is the same person, however as the business grows and expands the need for additional employees arises and the owner employees more and more people to help manage the fir5m.
The gradually results in what is called in business terms separation of ownership and control. At this point, the owner realizes that precautions must be taken to protect the company as well as the interest of the owner. The issue of ownership and control becomes more complicated, if a company is big and listed on a recognized stock exchange, which is a company with much more capital investment both in cash assets and personnel.
Thus the owner need and an assurance that the intended objectives of the company would be achieved, assets of the company would be protected from theft and mismanagement, the accounting information would be received on time and that they would be accurate and reliable.
The weakness of many companies control systems have been highlighted due to the big financial scandals of recent years and as a result increased attention on risk management, internal control, internal audit and their role in financial institutions.
The implementation of the Sarbanes – Oxley act 2002 (SOX), which has enacted by the US Congress in response to a number of major corporate and accounting scandals including those affecting Enron corporation, Tyco internal, world com and others, is an evidence of major steps taken by government to revise company regulations (2002).
It was discovered that five banks by the shaking financially after auditing by the CBN to the time of #747 billion Naira. The problem with these five banks which are Oceanic Bank, Intercontinental bank, , first bank, afribank and union bank is that they have huge debtors and the loans given to these debtors most times are non performing and that lead to the sack of the banks MDs because they failed to apply to proper internal control system and risk management structures mostly in respect to margin loans. Sanusi also made it known that there is a general failure in recognizing the limitation of the banking system when it comes to delivery of economic development. The recent reform by the current CBN governor is to put the Nigerian bank to shape.
Chris (2011) in his report he suggested that there is need for the establishment of a strong institutional investors based that will spur the banks for behavioral change which can only happen if there is proper risk management and internal control system put in place.
Risk management is a process of understanding and managing risk that the entity is inevitable subject to in attempting to achieve its corporate objectives, for management purpose, risks are usually divided into categories such as operational, financial, legal compliance, information and personnel. One example of an integrated solution to risk management is enterprise risk management (CIMA) 2005.
Effective risk management is the identification and treatment of this risk in accordance with the organization risk appetite. These risk needs to be managed and controlled in order to prevent vibrant organization from catastrophic loses and help than to achieve their goals and objectives.
Internal control on the other hand is the whole system of control, financial and otherwise, established in order to provide reasonable assurance of effective and efficient operations, internal financial control and compliance with laws and regulations (CIMA 2006).
The formality, structure and nature of a company’s system of internal control will generally vary the type of sector or industry, size of the company and the level of public interest in it. Since profits are in essence, the reward for successful risk taking the purpose of internal control system is to help and manage the control risk appropriately rather than to eliminate it as indicated in the turn bull report (ICAEW 1999)
Thus control mechanisms should be incorporated into the business plan and embedded in the day to day activities of a financial institution.
1.2 STATEMENT OF THE PROBLEM
Risk is inherent in every economic activity and every organization has to manage it according to its size and nature of operating because without these management, no organization an survive in a long run, this is because the business is today are faced with far greater challenges rather than before due to the fact that economical technological and legal interdependence are becoming more prevalent and pronounce.
It will be assume that risk management and internal control system will vary from organization based on their size or industry sector.
It is therefore logical to assume that every business organization has to put in place a strong risk management structure and internal control system to help achieve the goals. These are fundamental to the successful operation and dad to day running of a business and assist a company in achieving its objectives. Risk may affect many activity areas such as strategy, operations, finance, technology and environment.
In terms of specific substantial reduction in finance and other resources, severe disruption to the flow of information and communication fires or other physical disasters leading to interruption of business and loss of records. More generally, this also comprises of issues such as frauds, wast, abuse and mismanagement.
In light of this, it is expedient to find out more about the risk that threatens the operations of the financial sector of the Nigerian economy.
1.3 PURPOSE OF STUDY
This project work aims to achieve the following purpose:
1 To find out how risk management affects the performance of the Nigerian financial sector.
2 To find out the risk management and internal control system put in place in the Nigerian financial sector.
3 To find out how control system have impacted the performance of the Nigerian financial sector.
1.4 RESEARCH QUESTIONS
As mentioned earlier, about the purpose of this study raises questions like:
1 How does risk management affects the Nigerian financial sector.
2 How internal control system in the financial se4ctor does affect the Nigerian Financial sector.
1.5 RESEARCH HYPOTHESIS
The hypothesis are drawn from the research questions and they are stated below
Ho: Risk management have a significant relationship on the Nigerian financial sector.
Hi: Internal control system does not have any significant relationship on the Nigerian financial sector.
Ho: Internal control systems have a significant relationship on the Nigerian financial sector.
1.6 SIGNIFICANCE OF THE STUDY
This project is concerned about the study of the financial sector of Nigerian economy. The study is concentrated on how risk management and internal control system, can be effectively managed in the financial sector so as to reduce both financial and non – financial loss when there is a proper management of risk and the internal control system. It will stimulate growth in the financial sector of the economy and also gives sector of the economy and also gives customers and potential investors the confidence of depositing their case and other items with the financial houses in the Nigerian financial sector.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
In this study, the scope is limited to the banking sector in Nigeria.
Every research work should accomplish its aims but there exists constraints to every solution to the problems.
Firstly, scarcity of information needed in terms of secondary data required, some of the recommend textbooks, magazines and journal were not within the reach of the research.
Secondly, limited time required of completion of the study in addition to writing other term paper, attending lectures and preparing for examination.
1.8 DEFINITION OF TERMS
i AUDIT: An independent examination of and the subsequent organization.
ii INTERNAL AUDIT: This is a setup to carry out the audit work of an organization.
iii RISK REDUCTION: It is the practice of some activities that tends to lower the level of risk in an attempt to achieve something.
iv VOUCHING: This is the physical examination of a transaction to confirm the validity
v VERIFICATION: This is an examination of the ownership and existence of assets.