ABSTRACT

The need for the protection of their interests has always been an essential component in ensuring the survival of most organizations. It is for this reason commercial banks employ the use of internal audit services since internal audit units are known as protectors. The purpose of this study was to analyze the relationship betweenthe quality of internal audit and the financial performance of commercial banks in Cameroon. The study employed primary source data. The sample for this study was twelve (12) out of the eighteen (18) currently operational commercial banks in Cameroon. Data was collected with the use of the questionnaire instrument of data collection and analysis involved both descriptive and inferential statistics methods. From the results of the tests conducted in the study, it was found that internal audit quality had a positive influence on the financial performance of commercial banks in Cameroon through internal audit quality proxies (qualifications of internal auditors, size of internal auditors and professional expertise of internal auditors) and profit (financial performance). The independent variables:qualifications ofinternal auditors, size of internal audit teamwere found to have a weakly positive influence on the performance of commercial banks and the independent variable; experience of internal auditors was found to have a significant positive influence on the performance of commercial banks in Cameroon.Based on these findings, it is recommended that commercial banks should give utmost attention to internal audit quality especially on the expertise of internal auditors since it has a strong effect on their financial performance.

Keywords: Internal Audit Quality, Performance, Commercial Banks

CHAPTER ONE

INTRODUCTION

1.1 Introduction

This work titled “Internal audit quality and the performance of commercial banks in Cameroon” is comprised of five chapters. The first chapter states the general introduction of the study, the second chapter reviews the related literatures, the third talks about the methods used in the study, the fourth chapter presents the results and the fifth and last chapter advances the conclusions.

1.2 Background to the study

Over the years, a component that has proven indispensable for the sustainability of the majority of organizations is performance. Performance is one of the major indicators that explain the level of development of any society (Umar &Dikko, 2018).The financial dimension of performance has long been seen as the benchmark for corporate performance and evaluation (Bouteina&Abdeslam, 2021)and thus financial performance is a general measure and indicator of an organization’s overall health.It is believed that the banking sector is one of the most critical areas on the economic level (Saddam et al., 2021) andfinancial performance is vital to the health of the banking sector and is closely associated with the well-being of the whole economy (Matoke and Omwenga, 2016). Commercial banks play a vital role in every economy as they hold the savings of the public, provide a means of payment for goods and services and finance the development of businesses (Chevers et al., 2016).Theychannel funds from depositors to investors continuously. They can do so, if they generate necessary income to cover the operational cost they incur in the due course. In other words for sustainable intermediation function, banks need to be profitable (Vincent &Gemechu, 2013).Making profit is one of the most important goals of commercial banks. A good financial performance is the most important factor investors take into consideration while seeking out investments meanwhile poor financial performance can lead to bank crisis and failure.

The history of formal banking in Cameroon is relatively recent dating back to the post World War II mandate rule (Halle, 1997) and the Cameroonian banking sector has undergone a series of transformations over the years in order to have a strong and reliable banking sector (Akon, 2018). There are several factors that influence the performance of commercial banks in Cameroon both externally and internally. The external factors that influence bank performance include inflation, economic growth and the internal factors include capital size, size of deposit liabilities, interest rate policy, labor productivity, level of information technology, risk level, management quality, and bank size. These factors are bank specific and are at the disposal for the banks to manipulate as deemed fit. They also differ from bank to bank. The banking industry in Cameroon is highly competitive and thus in order to attain good performance, these banks has to be able to manipulate their available variables at an optimal level.Supervisors of commercial banks need periodic data on the workflow within the bank to check on the proper use of material resources and take decisions aimed at correcting deviations or errors that occur during the implementation of the bank’s activities, as well as making sure that the financial statements of the bank fairly represent the financial position of the bank and the results of its activity ( Hassan et al., 2023).Numerous studies have investigated the factors affecting the performance of commercial banks; one of them is audit quality (Matoke&Omwenga, 2016). The complexity of banking transactions and the increase in fraudulent activities have recently prompted scholars and experts, and authorities to divert their attention to internal control systems in the banking sector (Umar &Dikko, 2018). Risk is inherent to every banking operation. Even the most carefully planned project can run into risk (Bpayne& Watt, 2019). It is certain that without appropriate practicing of the internal control system, organizations will face numerous risks and problems and if the situation persists, it will lead to loss of investors fund, employees’ welfare loss, customers’ dissatisfaction, disputes for company’s growth, image damage, and insolvency and finally, it leads the problems to the government(Gamage et al., 2014).

Internal audit has become an indispensable management tool for achieving effective control in both public and private organizations (Ezejiofor&Okolocha, 2020).The concept of internal auditing was conceived by Lawrence Sawyer (1911-2002) often referred to as “the father of modern auditing”. He served as a source of inspiration for the Institute of Internal Auditors (IIA), an international organization for internal auditors generally associated with the genesis of modern auditing. The establishment, growth, and evolution of the contemporary internal auditing profession is closely intertwined with the history of The Institute of Internal Auditors (Sridhar, 2003). The purpose of establishing an organization gathering auditors in its circles was to professionalize internal auditing as a separate discipline (Winiarska, 2017). The Institute of Internal Auditors was first established in the United States in 1941 and was made up of only 24 members.

In the recent ages, internal auditing has experienced improvements that have increased its value-adding capabilities and broadened its coverage (Nthenge, 2022). Its main goals are to add value to a company’s operations and make them more efficient. It does this by putting in place a methodical, disciplined way to look at risk management, control, and governance systems and improve how well they work (A. Arens, et al.,2017). As in any other organization, internal audit is necessary for the efficiency and effectiveness of banks’ operations (Meseret, 2016). An effective internal audit function provides independent assurance to the board of directors and senior management on the quality and effectiveness of a bank’s internal control, risk management and governance systems and processes, thereby helping the board and senior management protect their organization and its reputation (BCBS, the internal audit function in banks, 2012). Organizations whether private or public should make sure that their internal audit is effective so as to achieve their objective in an efficient manner (Muazu, 2013). Weak internal controls often cause fraudulent activities to go unchecked and inevitably result in the downfall of the organization.

The role of internal auditing continuously evolves as the organization’s structure, risks and environmental conditions change over time. By changing or improving their role, internal audit functions can provide different types of services (or activities) to their key stakeholders (such as the board, audit committee, senior management, operating line managers, regulators, external auditors and other auditees) according to their needs (Azharudin, 2016). Every business organization needs effective teams to be successful in today’s highly competitive and dynamic business environment (Zaim et al., 2013). The Basel Committee for Bank Supervision (BCBS) is aimed at enhancing the stability of banking system by providing quality supervision and regulatory frameworks for global banking operations (Isoh et al., 2020).

Internal operations and reporting have a strong correlation which contributes to competence (Alzoubi, 2019). Audit quality acts as an essential element in maintaining thefinancial performance of companies; an objective quality audit forms the basis for confidence on the integrity and credibility of reports which is extremely important for efficient-functioning markets and also improve the performance (Abdullahi et al., 2020).The internal control process is a dynamic component of modern banking that is constantly adapting to the changes brought about by the industry (Oday et al., 2023) and due to the fact that banks seek to protect themselves and their interests this has led to significant growth in demand and interest in the concept of internal auditing and consequently interest in its quality.

1.3 Problem statement

Cameroon’s financial system is the largest in the CEMAC region accounting for about half of this region’s financial assets and the banking system accounts for about seventy percent of the total financial sector assets (International monetary fund, 2014). In spite of this, the banking industry has experienced significant bank failures over the years in which internal control weakness is among the reasons for this failure (Umar &Dikko, 2018). Several procedures have been set up to deliver paths through which banks can grow and progress their performance (Jimoh and Iyoha, 2013)and commercial banks in Cameroon put in place several internal control procedures but despite these efforts the banks continuously incur these incidences. Five bank directors were sanctioned by COBAC in connection with unethical practices with respect to rules governing foreign exchange (Business in Cameroon, 2019).In 2019, ANTIC in their report on cybercrime in the country revealed that Cameroon lost six billion francs CFA to bank frauds. These frauds consisted of scammers sending urgent, unplanned and confidential request for funds transfer with the scammers posing as a member or even a manager of the organization (Business in Cameroon, 2020).  These instances cause the credibility of the banking sector to be open to doubt leading actual and potential customers to divert to the competitions which leads to fall in the financial performance of the banks.In 2017, 1.7 million people held a bank account in Cameroon, a number that was only about 31 percent of the total registered mobile money accounts held in the country that same year of 5.4 million people (Samme-nlar, 2022). Mobile money is a service which permits customers to access financial services using mobile devices by dialing USSD codes (Igbinoba, 2020) and is a service which is a lot less secure than commercial banks but despite this weakness the service stays a very strong competitor. Increasing competition is one of the first problems faced by commercial banks in Cameroon followed by cultural shifts, regulatory compliance, changing business models, rising expectations, customer retention ability, outdated mobile experiences, security breaches, antiquated applications, continuous innovations, operational efficiency, corporate sustainability and then technical expertise. The internal auditors in the commercial banks of Cameroon take several actions to regulate these problems but the occurrences of the above instances are pointers that the procedures are not sufficiently effective. Could this be because the internal audit teams are not sufficiently qualified or is the proportion of internal auditors in the bank not enough to cover every aspect from which risks may occur or do the internal auditors not have enough expertise or skills to detect these problems.The quality of internal auditing and its impact on financial performance is much debated but little understood and thus this study intends to investigate the competence of the internal audit teams in commercial banks of Cameroon, their ability to detect frauds and errors and how these factors reflect on the financial performance of the commercial banks in Cameroon.

1.4 Research questions

From the context of the problem statement the following research questions were advanced;

1.4.1 Main research question

1. Does the quality of internal audit have influence on the financial performance of commercial banks in Cameroon?

1.4.2 Specific research questions

The following specific research questions were further developed;

1. Do the qualifications of the internal audit team play a role on thefinancial performance of commercial banks in Cameroon?

• Does the size of the internal audit team have influence on thefinancial performance of commercial banks in Cameroon?

1. How does the professional expertise of internal auditors affect the financialperformance of commercial banks in Cameroon?

1.5Research objectives

1.5.1 Main objective

The main objective of this study is to analyze how the quality of internal audit influences the performance of commercial banks in Cameroon.

1.5.2 Specific objectives

From the main objective, the following were the specific objectives of this study;

1. To evaluatethe effect of the qualifications of the internal audit team on the financial performance of commercial banks in Cameroon.
2. To investigate if the number of internal auditors has an effect on the financial performance of commercial banks in Cameroon.

• To examine how the expertise of internal auditors affect the financial performance of commercial banks in Cameroon.