CHAPTER ONE

INTRODUCTION

1.1: Background of Study.

A system of internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organizations. A system of strong internal controls can help to ensure that the goals and objectives of a banking organization will be met, that the bank will achieve long-term profitability targets, and maintain reliable financial and managerial reporting (Markowski & Mannan, 2008). For Financial institutions to be able to function effectively, and contribute meaningfully to the development of the country, the economy must be stable, safe and sound and for these conditions to be obtained, there most be a sound accounting system which is occasioned by an effective internal control system. A system of accounting and records keeping will not succeed in completely and accurately processing all transaction unless controls known as internal controls are built into the system (Opromolla & Maccarini, 2010).

Globally, internal control system consist of specific policies and procedures designed to provide the management with reasonable assurance that the goals and objectives of the organization will be met. According to COSO ( 2007), internal control has been adapted to a higher extent in more developed countries as compared to countries of the south Uganda inclusive. According to COSO (2004), the reason to have internal control is to promote operational effectiveness and efficiency, provide reliable financial information, safeguard assets and records, encourage adherence to prescribed policies and compliance with regulatory agencies. Internal control are mechanism, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Internal control system refers to all the policies and procedure established and maintened by an institution to help ensure that it’s oparation are practically done in an orderly manner.   

According to Mawanda (2008) a system of strong internal control can help the organization to prevent fraud, errors and minimize wastage and also ensure that the  credit union will achieve longterm profitability targets and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the credit union will comply with laws and regulations as well as polices, plans, internal rules and procedures and reduce the risk of unexpected losses or damage to the unions reputation.Therefore internal control system in MFIs cannot be undermined due to the fact that the financial sector which has the role to play in the economic development of the nation is now being characterized by macro-economic instability, slow growth in economic activities, corruption and fraud.

Fraud which is the major reason for setting up an internal control system has become a great pain in many credit unions in Cameroon. it has also become an unfortunate staple in Cameroon’s international reputation. Fraud is really eating deep into the Cameroon financial system and that any credit union with a weak internal control system is generally exposed to fraud (Uwaoma & Urdu 2015). From every indication, the damage which fraud has done to the financial institutions is innumerable and needs urgent attention. Therefore, the attempt to put an end to this economic degradation, gave rise to the topic of this study. This study is however aimed at verifying if effective and efficient internal control system is the best control measure of preventing and determining fraud especially in this sector. Internal control as the name mentioned, is the method employed by the management of an organization to help ensure the achievements of objectives. Internal control are policies, procedures, practices implemented by an organizational structure to provide reasonable assurance that a MFIs objective will be achieved and undesired risk events will be prevented, detected and corrected base on the compliance or management Initiated according to milichamp  (2002), internal control is a whole system of control and finance established by management of the Organization in order to carry out business of the institution in an orderly and efficient manner to ensure that management policies are well implemented.

According to the words of Etuk et al.,1999),  internal control is defined as a whole system of control or otherwise established by management in order to carry out the business of the Organization in an orderly and efficient manner to ensure adherence to management policies, safeguard the assets and secure as far as possible. Internal control are tools used by management every day for the smooth running of the Organization. They are a set of policies and procedures adopted by an organization to ensure that an organization’s transactions are processed in the appropriate manner to avoid waste, theft, and misuse of organization resources. Internal control is a process designed and affected by those charged with governance, management and other personnels to provide reasonable assurance about the achievements of an entities objectives with regards to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations (Mwindi, 2008)

The enforcement of internal control system by MFIs, should be orderly, practical and efficient enough to help them conduct businesses and to provide reliable financial information, safeguard assets and records (Ledgewood & White 2016). A sound internal control will ensure that transactions are valid, properly classified, recorded ,properly valued ,properly authorized, reconciled to subsidiary records and not carried through by a single employee (Adeyemo 2012). Microfinance institutions establish a system of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable report and ensure compliance with laws and regulations. Internal control is a whole system of control, financial and otherwise established by management in order to carry out the business of the Organization in an orderly and efficiently manner to ensure adherence to management policies, safeguard the assets and secure the completeness and accuracy of the records of an organization. All managers in an organizational department, operates According to the stated plans objectives and the methods they used.

The policies, procedures instituted by MFIs constitute the internal control structure of an organization. Managers should realize that setting up a strong internal control structure, is fundamental to the success of an organization interms of it’s purpose, operations and resources. According to Uwaoma & Urdu (2015) ,there is a general consensus that any Organization with absence of adequate internal control measures in place generally exposes the management of an organization to certain threats such as stealing and mismanagement of organizational vital documents and loss of company assets. This gives management of the Organisation, the responsibility to provide an adequate and effective internal control structure.

Control is important because it links with the effectiveness of other managerial functions such as planning. When it comes to planning, control helps to determine if all the activities are moving towards the realization of goals and accomplishment of objectives. According to Coso (2004), the reason to have internal control is to promote operational effectiveness and efficiency, provide reliable financial and administrative information, safeguard assets and records, encourage adherence to prescribe policies and compliance with regulatory agencies. Control mechanism keeps the plans running smoothly and up to date. Control is also important in employee empowerment where by the performance of the employee could be properly managed. nonetheless ,control mechanism are also important in keeping a balance with the work place especially as control means minimizing unethical decisions of  the employees and for the organization as a whole.Hence this study seeks to find the effect of internal control on the detection and prevention of fraud in MFIs in Bamenda.

1.2. The Problem Statement.

The efficacy of internal control system on financial performance is paramount in every organization. This is because internal controls ensure prevention and detection of errors and frauds. The firm’s economic assets generate income which needs growth and sustainability. It is important for MFI’s to establish a strong control system if at all it is to achieve improved financial performance. In the study of Moraa Ondieki (2003) found out that internal controls has served as a simple  administrative procedure comprised by checking documents, counting assets and reporting to  the board of directors, management or external auditors. Setting an internal control system will involve costs and delays in the accounting cycle. On the other hand, inadequate internal control have led to corruption and collusion leading to organizations failing to achieve set objectives. Procasur Africa report (2012) stated that poor control systems has led to huge investment loss through fraud and misuse of assets that are used to generate revenue while members and institutions have suffered big losses. Effective internal controls should enable MFI to tap new businesses while safeguarding the already existing portfolio. Therefore, MFI should strike a balance between internal controls and efficiency in operation. The management of the organization should meet regularly to review the affairs of the firm and direct strategic path of the firm and also ensure continued goal oriented (Reid & Smith, 2000).

Internal controls check the governance of MFI’s to achieve profitability (Cha, 2009; Cheng 2007) growth and development. MFIs are prone to risks that are life threatening to the existence and sustainability of the Organization. Operational and strategic risks are of non financial character and result mainly from human error, fraud, system failure through regulatory environment. A number of MFI’s face collapse or may collapse if they are unable to set up a good internal control system (COSO 2004). The absence of inadequate internal control measures, exposes the management of MFIs to certain threats such as loss of assets, and properties, mismanagement of MFI’s through stealing of vital documents which may be done by an employee or a host of them for undue advantage. Therefore, the study explores the effects of internal control on the detection and prevention of fraud in  MFIs

1.3. Research Questions.

1.3.1. Main Question.

What is the effect of internal control on the mitigation of fraud in credit unions in limbe?

1.3.2. Specific Questions.

• Does an effective control activities have any effect on the mitigation of fraud in credit unions in limbe?
• what is the effect of risk assessment on the mitigation of fraud in credit unions in limbe?
• What is the role of monitoring on the mitigation of fraud in credit unions in limbe?

1.4. Objectives of the Study.

1.4.1. Main Objective.

The main objective of the study is to access the effect of internal control on the the mitigation of fraud in credit unions in limbe

1.4.2. Specific Objectives.

• To determine the effect of control activities on the mitigation of fraud in credit unions in limbe.
• To critically examine role of risk assessment on the mitigation of fraud in credit unions in limbe.
• To know the effect of monitoring on the mitigation of fraud in credit unions in limbe.