THE IMPACT OF INTERNAL CONTROL SYSTEM ON FINANCIAL PERFORMANCE

IN MOGADISHU PRIVATE BANKS

(CASE STUDY SOME SELECTED PRIVATE BANKS IN MOGADISHU)

BY

ANAS DAHIR ABDI

Reg. No

HIU001823

THIS THESIS IS SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT

FOR THE AWARD OF THE DEGREE BACHELOR OF

BUSINESS ADMINISTRATION AT HORSEED

INTERNATIONAL UNIVERSITY

MAY, 2015

MOGADISHU- SOMALIA
 TABLE OF CONTENTS

DECLARATION .............................................................................................................................................I

APPROVAL ...................................................................................................................................................II

DEDICATION ...............................................................................................................................................III

ACKNOWLEDGEMENT ............................................................................................................................ IV

LIST OF TABLES......................................................................................................................................... V

LIST OF FIGURES ...................................................................................................................................... VI

LIST OF ABBREVIATIONS ...................................................................................................................... VII

ABSTRACT ................................................................................................................................................ VIII

CHAPTER ONE............................................................................................................................................. 1

INTRODUCTION .......................................................................................................................................... 1
1.0 INTRODUCTION ...................................................................................................................................... 1
1.1 BACKGROUND OF THE STUDY ................................................................................................................ 1
1.2 PROBLEM STATEMENT ........................................................................................................................... 3
1.3 RESEARCH PURPOSE .............................................................................................................................. 4
1.4 RESEARCH OBJECTIVES ......................................................................................................................... 4
1.5 RESEARCH QUESTIONS .......................................................................................................................... 4
1.6 SIGNIFICANCE OF THE STUDY ................................................................................................................ 5
1.7 SCOPE OF THE STUDY............................................................................................................................. 5
1.8 OPERATIONAL DEFINITIONS................................................................................................................... 5
1.8.1 Conceptual Framework ..................................................................................................................... 5

CHAPTER TWO............................................................................................................................................ 6

LETERATURE REVIEW ............................................................................................................................. 6

2.0 INTRODUCTION ...................................................................................................................................... 6
2.1 OVERVIEW OF INTERNAL CONTROL ....................................................................................................... 6
2.1.1 Role and Purposes of Internal Control .............................................................................................. 6
2.1.2 Types of Internal Control .................................................................................................................. 6
2.1.2.1 Organizational Control............................................................................................................................. 6
2.1.2.2 Segregation of Duties ............................................................................................................................... 6
2.1.2.3 Physical Control ....................................................................................................................................... 7
2.1.2.4 Arithmetical and Accounting Control ...................................................................................................... 7
2.1.2.5 Personnel Control..................................................................................................................................... 7
2.1.2.6 Supervision Control ................................................................................................................................. 7
2.1.2.7 Management............................................................................................................................................. 7
2.1.2.8 Authorization and Approval..................................................................................................................... 7
2.2 INTERNAL CONTROLS SYSTEMS AND FINANCIAL PERFORMANCE .......................................................... 8
2.3 FUNCTIONALITY OF INTERNAL CONTROL SYSTEMS ............................................................................. 10
2.3.1 Control Activities............................................................................................................................ 10
2.3.2 Internal Audit .................................................................................................................................. 11
2.3.3 Control Environment ...................................................................................................................... 16
2.4 FINANCIAL PERFORMANCE .................................................................................................................. 18
2.4.1 Measures of Financial Performance ................................................................................................ 19
2.4.1.1 Liquidity ................................................................................................................................................ 19
2.4.1.2 Accountability ........................................................................................................................................ 20
2.4.1.3 Reporting ............................................................................................................................................... 20
 2.5 SUMMARY............................................................................................................................................ 21
2.6 CONCLUSION ....................................................................................................................................... 21

CHAPTER THREE...................................................................................................................................... 22

METHODOLOGY ....................................................................................................................................... 22
3.0 INTRODUCTION .................................................................................................................................... 22
3.1 RESEARCH DESIGN .............................................................................................................................. 22
3.2 POPULATION AND SAMPLING: .............................................................................................................. 22
3.2.1 Target Population............................................................................................................................ 22
3.2.2 Sample Size .................................................................................................................................... 22
3.2.3 Sampling Technique ....................................................................................................................... 23
3.3 DATA COLLECTION .............................................................................................................................. 23
3.4 VALIDITY AND RELIABILITY ................................................................................................................ 23
3.5 DATA ANALYSIS .................................................................................................................................. 24
3.6 LIMITATIONS OF THE STUDY ................................................................................................................ 24
3.7 ETHICAL CONSIDERATIONS.................................................................................................................. 24

CHAPTER FOUR ........................................................................................................................................ 25

DATA ANALYSIS INTERPRETATION AND DISCUSSION ................................................................... 25

4.0 INTRODUCTION .................................................................................................................................... 25
4.1 DEMOGRAPHIC DATA .......................................................................................................................... 25
4.1.1 Gender characteristics of respondents............................................................................................. 25
4.1.2 Description of age groups of respondents ....................................................................................... 26
4.1.3 Explanation marital status of the respondents ................................................................................. 27
4.1.4 Education characteristics of respondents ........................................................................................ 28
4.1.5 Experience of respondents .............................................................................................................. 29
4.2 ASSESSING THE FUNCTIONALITY OF INTERNAL CONTROL SYSTEMS IN MOGADISHU PRIVATE BANKS.. 30
4.2.1 Descriptive Statistics on Control Activities .................................................................................... 30
4.2.2 Descriptive Statistics on Internal Auditing ..................................................................................... 31
4.2.3 Descriptive Statistics on Control Environment ............................................................................... 32
4.3 EXAMINING THE FINANCIAL PERFORMANCE OF PRIVATE BANK IN MOGADISHU ........................................ 32

CHAPTER FIVE .......................................................................................................................................... 34

CONCLUSION AND RECOMMENDATION ............................................................................................ 34

5.0 INTRODUCTION .................................................................................................................................... 34
5.1 SUMMARY FINDINGS............................................................................................................................ 34
5.1.1 Functionality of the Internal Control Systems in Mogadishu Private Banks .................................. 34
5.1.2 The Financial Performance of Private Banks in Mogadishu........................................................... 34
5.2 CONCLUSIONS ...................................................................................................................................... 35
5.3 RECOMMENDATIONS ............................................................................................................................ 35
5.4 RECOMMENDATION FOR FURTHER RESEARCH ..................................................................................... 35

REFERENCES ............................................................................................................................................. 36

APPENDIX A: REQUEST FOR THE COMPLETION OF QUESTIONNAIRE....................................... 39

APPENDIX B: QUESTIONNAIRE ............................................................................................................. 40

 DECLARATION

I Anas Dahir Abdi hereby declare that this is my original work and has never been presented
for any academic award in any University.

Signed ___________________________ Date: ____/____/ 2015

Anas Dahir Abdi

I
 APPROVAL

This is to certify that this thesis by Anas Dahir Abdi entitled “The Impact of Internal Control
System on Financial Performance in Mogadishu Private Banks” has been written under my
supervision and is hereby approved for submission for a Bachelor of Business Administration
Degree of Horseed International University.

Signed ___________________________ Date: ____/____/ 2015

Abdifitah Omar
Horseed International University

II
 DEDICATION

This work is dedicated to my parents; Dahir Abdi Mohamed & Hawo Dahir Hashi and my
lovely brothers and sisters.

III
 ACKNOWLEDGEMENT

All praise and gratitude be given to Allah for giving us such a great strength, patience,
courage and ability to complete this thesis. I would like to express my gratitude sincere
appreciation to my supervisor, Mr. A/fitah Omar Ga’al for guiding the research presented in
this project. I appreciate and thank them for their continuous support, advice, and comment.

The knowledge I have learned from them is the most valuable things I had learn in this
world of research. Special thanks to Rector, Dean of the faculty of Economics and
Management Science, Mr. Ali Abdi Aden and all my lecturers at Horseed International
University. My deepest appreciation goes to my beloved family, and in particular to my
father and my mother who have been very supportive, patient, and understanding all the time.

This research benefited from the following organizations and they deserved special thanks for
providing the information needed for this study; Premier Bank, Dahabshiil Bank and Salaam
Somali Bank. I am grateful to the staff of private bank in Mogadishu who participated in the
study.

Finally, I wish to express my deepest appreciation to Mohammed Dahir for his immense
support and interest in my studies and others who involve direct or indirect with this project.

Thank you everybody.

IV
 LIST OF TABLES

TABLE 1: 3.1: RESPONDENTS OF THE STUDY.......................................................................... 23

TABLE 2: 3.2: THE INTERPRETATIONS OF THE MEAN VALUES ............................................. 24
TABLE 3: 4.1: GENDER OF THE RESPONDENTS....................................................................... 25
TABLE 4: 4.2: AGES OF THE RESPONDENTS............................................................................ 26
TABLE 5: 4.3: MARITAL STATUS OF THE RESPONDENTS ....................................................... 27
TABLE 6: 4:4 EDUCATION LEVEL OF RESPONDENTS ............................................................. 28
TABLE 7: 4.5: EXPERIENCE OF THE RESPONDENTS ............................................................... 29
TABLE 8: 4.6: DESCRIPTIVE STATISTICS ON CONTROL ACTIVITIES ...................................... 30
TABLE 9: 4.7: DESCRIPTIVE STATISTICS ON INTERNAL AUDITING........................................ 31
TABLE 10: 4.8: DESCRIPTIVE STATISTICS ON CONTROL ENVIRONMENT .............................. 32
TABLE 11: 4.9: DESCRIPTIVE STATISTICS ON FINANCIAL PERFORMANCE ........................... 33

V
 LIST OF FIGURES

FIGURE 1: 1.1: CONCEPTUAL FRAMEWORK ............................................................................ 5

FIGURE 2: 4.1: GENDER OF THE RESPONDENTS ..................................................................... 26
FIGURE 3: 4.2: A BAR GRAPH SHOWING AGE OF THE RESPONDENTS .................................. 27
FIGURE 4: 4.3: A PIE GRAPH REVEALS MARITAL STATUS OF THE RESPONDENTS .............. 28
FIGURE 5: 4.4: THE LEVEL OF THE RESPONDENT’S EDUCATION .......................................... 29
FIGURE 6: 4.5: EXPERIENCE OF THE RESPONDENTS .............................................................. 30

VI
 LIST OF ABBREVIATIONS

ABA- American Bar Association

ACCA- Association of Chartered Certified Accountants
AIA- American Institute of Accountants
AICPA- American Institute of Certified Public Accountants
HIU- Horseed International University
ICPAU- Institute of Certified Public Accountants of Uganda
IIA-UK- Institute of Internal Auditors- United Kingdom
IFRS- International Financial Reporting Standards
ISO- International Organization for Standardization
MVA- Market Value Added
NYSE- New York stock exchange
ROA- Return on Assets
ROE- Return on Equity
ROI- Return on Investment
ROS- Return on Sales
SAP- Standard Auditing Practices
SAS- Statement of Auditing Standards
SPSS- Statistical Package for Social Scientist
US- United States

VII
 ABSTRACT

This study investigated the impact of internal control system on financial performance in
Mogadishu private banks. The demographic profile of the respondents was age, gender,
qualification and experience. The main objectives are to assess the functionality of internal
control systems in Mogadishu private banks and to examine financial performance of private
banks in Mogadishu. The study is based on 33 target population especially Accountants,
finance directors, chief cashiers, internal auditors and managers of private banks in
Mogadishu Descriptive analysis was used. It administers questionnaire as a research
instrument. The findings of this study reveal that majority of the private banks in Mogadishu
has enough cash to meet its intended goals. Also there is a clear separation of duties. This
study suggests that the internal auditors perform their duties fast, efficient and reliable.

VIII
 CHAPTER ONE
INTRODUCTION

1.0 Introduction
This is the first chapter of the study and the researcher is focus on the following sections:
Background of the study, problem statement, research purpose, research objectives, research
Questions, significant of the study, scope of the study, the study operational definitions and
conceptual frame work.
1.1 Background of the Study
In the World, According to Brown (1962, p. 696), the difference between no recognition and
slight recognition of internal control was found in a 1905 publication entitled Auditing by
Lawrence Dicksee, an English audit specialist. In his study, originally published in 1892,
Dicksee does not mention the term internal control itself, but addresses internal control by
explaining that the object and scope of an audit has three parts to it: “the detection of fraud,
technical errors, and errors in principle”.
Therefore, internal control was often discussed in the context of the external auditor’s
work. While the detection of fraud as an audit objective has a long history, internal control
(as a subject) was not recognized until the twentieth century. the Securities Act of 1933
addressed internal control and the audit process in the following words: “In determining the
scope of the audit necessary, appropriate consideration shall be given to the adequacy of the
system of internal check and internal control” (Early Regulation SX Rule 2-02 (b) of the
1933 Act, quoted after Ferald Fernald (1943, p. 228). A later and broader approach by the
American Institute of Accountants (AIA) defined that “Internal control comprises the plan of
organization and all of the co-ordinate methods and measures adopted within a business to
safeguard its assets, check the accuracy and reliability of its accounting data, promote
operational efficiency, and encourage adherence to prescribed managerial policies” (AIA
1948, quoted after Heier et al. 2005, p. 48).
During the last 15-20 years, a shift in focus from the accounting and finance orientation of
internal control to a much broader governance and business perspective has taken place. The
term internal control developed in the accounting and auditing discipline, and was
traditionally interpreted as “accounting controls”, limited to the system that auditors test as
part of their assurance on the reliability of financial reporting (Pfister, 2009).
In Africa, Organizations establish systems of internal control to help them achieve
performance and organizational goals, prevent loss of resources, enable production of reliable

1
reports and ensure compliance with laws and regulations. An internal control system
comprises the whole network of systems established in an organization to provide reasonable
assurance that organizational objectives will be achieved. Benefits of an internal control
system include effectiveness and efficiency of operations, reliability of financial reporting
and compliance with applicable laws and regulations (Nyakundi, Nyamita, & Tinega, 2014).
In Somalia, Somali remittance companies handles a lot of money and contributes the
livelihood of hundreds of thousands of families and develop the private sectors in a country
where there is no properly functioning government, therefore how an internal auditor is
expected to be high while the staff security has no guarantee. Somali remittance companies
suffer loss of millions of dollar due to lack of good quality control system in remittance
companies and professional internal auditors therefore most of Somali organizations do not
have effective and independence auditors (Mohamud, 2013).
Internal control is a system structured within the corporation whose goal is to raise
efficiency and effectiveness of activities, the system assures the conformity of activities
within the laws and regulations and improve the reliability of financial reporting. Internal
control system possesses vital importance for the institution to attain its ultimate objectives.
Internal control system allows banks to foresee potential problems which may cause financial
losses and thereby prevent or minimize any future losses. Researches on the causes of bank
failures mainly concluded that an efficient and effective internal control system might prevent
financial cost (Hayali, Dinç, Sarılı, Dizman, & Gündoğdu, 2012).
Internal control system can be generally defined as a system which has the features of
maintaining the assets of a company, ensuring accuracy and reliability of information and
reports related to accounting and other operations, and increasing the effectiveness of the
operations. Additionally, the system also covers all assessment and methods that are adopted
in order to detect the suitability of operations in accordance with policies determined by
management, implementing a chart of accounts and reporting system, specifying the duties,
authority and responsibilities, and organization plan of the cooperation (Cook et al. 1980,
p.198).
Internal control system asserts that the system should be always kept under control and
supervision since people tend to think about their interests more rather than the interests of
the corporation. If there is a failure in the financial accounting system of a corporation, a
decrease in assets and an increase in abuses will inevitably takes place in the absence of an
effective internal control system (Yayla, 2006).

2
 The United Kingdom Auditing practices committee (1979) defined internal control as “the
whole system of control, financial and otherwise established by management in order to carry
on the business of the enterprise in an orderly band effective manner to ensure adherence to
managerial policies and directives, safeguard the assets and ensure as far as possible the
completeness and accuracy of the records the prevention and detection of errors the fraud,
and the timely preparation of financial information”.
According to statement of accounting standards, (SAS) “internal control is the combined
plan, method and procedures which can safeguard the firm’s assets promote operational
efficiency and encourage adherence to prescribed policies”. Also according to Robertson and
Davis (1988:169) “internal control system is a set of client procedures both computerized and
manual imposed on the accounting system for the purpose of preventing, detecting and
correcting errors and irregularities that might enter the system and thereby affect the firm’s
financial statement.
In the study, Internal control systems were construed to mean “a process effected by the
entity’s board of directors, management and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the categories; reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with applicable laws
and regulations” (Whittington & Pany, 2001). While financial performance was considered in
terms of measures like profitability (using absolute and relative measures), liquidity (using
liquidity ratios like current ratio, acid test ratios, the ease with which the entity settles its
financial obligations) and Accountability (in terms of financial accountability) (ACCA-
Managerial Finance Paper 8; 1998; and Panday, 1996).
Nevertheless, in our best awareness, the role of internal control system in Mogadishu
private banks looks to be unclear. So, this study will investigate the impact of internal control
system on financial performance in Mogadishu private banks.
1.2 Problem Statement
Internal controls refer to the measures instituted by an organization so as to ensure attainment
of the entity’s objectives, goals and missions. They are a set of policies and procedures
adopted by an entity in ensuring that an organization’s transactions are processed in the
appropriate manner to avoid waste, theft and misuse of organization resources. Internal
Controls are processes designed and affected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of
an entity’s objectives with regard to reliability of the financial reporting, effectiveness and

3
efficiency of operations and compliance with applicable laws and regulations (Ejoh & Ejom,
2014).
We might not really understand the impact of internal control system in an organization
until probably we run an organization void of internal control system. The absence of
adequate internal control measures exposes the financial management of an organization to
certain threats such as:
 Incorrect financial statement and /loss of the company’s assets.
 Stealing and mismanagement of organizational vital documents which may be done by an
employee to take undue advantage.
 Incorrect and unreliable financial records which may lead to loss of organizational integrity.
 Non implementation of accounting policies in consistent with the applicable legislation
appropriate in presentation of financial statement, (Amaka, 2012).
Nevertheless, in our best awareness, the role of internal control system in Mogadishu
private banks looks to be unclear. So, this study will investigate the impact of internal control
system on financial performance in Mogadishu private banks.
1.3 Research Purpose
The purpose of this study is to investigate the impact of internal control system on financial
performance in Mogadishu private banks.
1.4 Research Objectives
Internal controls in an organization are normally introduced to provide reasonable assurance
about the achievement of the entity’s objectives with regard to reliability of the financial
reporting, effectiveness and efficiency of operations and compliance with applicable laws and
regulations. These will finally translate into improved financial performance. The study will
therefore attempt to investigate the impact of internal control system on financial
performance in Mogadishu private banks. In particular the researcher will focus on the
following specific objectives:
a) To assess the functionality of internal control system in Mogadishu private banks.
b) To examine financial performance of private banks in Mogadishu.
1.5 Research Questions
To achieve the above desired objectives the following research questions will be used:
1. What is the functionality of internal control system in Mogadishu private banks?
2. What is the financial performance of private banks in Mogadishu?

4
1.6 Significance of the Study
This study ware concerned the impact of internal control system on financial performance in
Mogadishu private banks. The study will contribute to the body of knowledge about the role
of internal control system in Mogadishu private banks. The findings also may contribute
literature that maybe used by the academics that are interesting to carry out for further study
in this field.
1.7 Scope of the Study
The study ware concerned with investigating the impact of internal control system on
financial performance in Mogadishu private banks and this study was limited in Mogadishu
city, the capital of Somalia , because Mogadishu is the headquarter of private banks. In terms
of time this study limited from February 2015 to April 2015
1.8 Operational Definitions
Internal control is a business practice, policy or procedure that is established within an
organization to create value or minimize risk.
Control is an exercise performed in the present to achieve a plan drawn up for the future.
System is a set of detailed methods, procedures and routines created to carry out a specific
activity, perform a duty, or solve a problem.
Financial performance is measuring the results of a firm's policies and operations in
monetary terms. These results are reflected in the firm's return on investment, return on
assets, value added, etc.
1.8.1 Conceptual Framework
Figure 1: 1.1: Conceptual Framework

Independent Variable Dependent Variable

Internal controls: Financial Performance:

Control Activities Liquidity

Internal Audit Accountability

Control Environment Reporting

5
 CHAPTER TWO
LETERATURE REVIEW

2.0 Introduction
This chapter two reviews the previous studies related to this study which was written by other
researchers. This was in respect to the specific objectives of the study of the related area.
2.1 Overview of Internal Control
According to the definition by COSO in 1992, an internal control system is defined as a set of
methods, designed and controlled by senior management and board of directors to provide a
limited assurance regarding reliability of financial reporting, effectiveness and efficiency of
operations and their compliance with laws and regulations (Aksoy, 2007).
2.1.1 Role and Purposes of Internal Control
According to Walter and William (1982:5), the role and purpose of internal control system is
merit able because internal control consists of the measures, record procedures and plan of an
organization that deals mainly with safeguarding asset and ensuring financial records are
accurate and reliable.
2.1.2 Types of Internal Control
The guideline of internal control put forward eight (8) types of internal control system that
should be obtainable in an organization and they are follows:
2.1.2.1 Organizational Control
An organization should have a plan of its activities which should define and allocate
responsibilities that is every function should be monitored by a specific person who may be
called “responsible officer.” Adequate lines reporting for all aspect the organization
operations, including controls should be clearly stated and the delegation of authority and
responsibility should be clearly specified (Amaka, 2012).
2.1.2.2 Segregation of Duties
One of the prime means of control is the separation of duties. This reduces the risk of internal
manipulation, accidental error and increases the element of checking. Functions which should
be separated in an organization financial management include: initiation (officer or person
who decides to give out the loan), Execution (the person who keeps the money to be loan out)
and recording (the person who records the whole process in the book).system development
and daily operations have to be considered in mounding the internal control system to be full
proof against fraud (Amaka, 2012).

6
2.1.2.3 Physical Control
This concerns the physical custody of assets and involves procedures and security measures
designed to limit access to authorized personnel only. These include both direct and indirect
access via documentations. These controls assume importance in the case of valuable,
portable, exchangeable or desirable assets.” Physical control can also be achieved by
electronic means in a computerized environment for example through the use of electronic
I.D cards, password etc. to restrict access to particular file (Amaka, 2012).
2.1.2.4 Arithmetical and Accounting Control
These are the controls within the recording function which h checks that the transactions to
be recorded and processed have been authorized and that they are correctly and accurately
processed. Such controls include checking the arithmetical accuracy of the records,
maintenance and checking of totals, reconciliation, control accounts and trial balances and
accounting for document (Amaka, 2012).
2.1.2.5 Personnel Control
There should be procedure to ensure that personnel have capabilities commensurate with their
responsibility. Inevitably, the proper functioning of any stem depends on the competence and
integrity of those operating it. The qualifications, selection and training as well as the
personal characteristics of the personnel involved are important features to be considered in
setting up any control system especially in financial management (Amaka, 2012).
2.1.2.6 Supervision Control
Any system of internal control should include the supervision by responsible officials of day -
to-day transactions and the recording thereof. Al activities performed in the financial
management by all the level of staff should be clearly laid down and communicated to the
person supervising (Amaka, 2012).
2.1.2.7 Management
These are the controls exercised by management outside the day-to-day routing of the system
they include the overall supervisory controls exercised by management, the review of
management accounts and comparison thereof with budget internal audit function and other
special review procedures. It is also the duty of the management to review the internal control
from time to time in order to accommodate changes in the financial management operations
(Amaka, 2012).
2.1.2.8 Authorization and Approval
All transactions should require authorization by an appropriate responsible person. This is
very important in the financial system of an organization where large amount of money is

7
handled so therefore it is appropriate for these money which are used for are used for various
transactions to be authorized by a trusted and responsible person (Amaka, 2012).
2.2 Internal Controls Systems and Financial Performance
Internal control is broadly defined as the process put in place by management to provide
reasonable assurance regarding the achievement of effective and efficient operations, reliable
financial reporting, and compliance with laws and regulations (Petrovits, Shakespeare, &
Shih, 2009). Gupta (2001) drawing from Statements of Standard Auditing Practices No. 6
(SAP 6) defines Internal control as “the plan of organization and all the methods and
procedures adopted by the management of an entity to assist in achieving management
objectives of ensuring as far as practicable, the orderly and efficient conduct of its business,
including adherence to management policies, the safeguarding of assets, prevention and
detection of fraud and error, the accuracy and completeness of accounting records and the
timely preparation of reliable financial information”.
It is therefore worth noting from the above that; properly instituted systems of internal
control will ensure; completeness of all transactions undertaken by an entity, that the entity’s
assets are safeguarded from theft and misuse, that transactions in the financial statements are
stated at the appropriate amounts, that all assets in the company’s financial statements do
exist, that all the assets presented in the company’s financial statements are recoverable and
that the entity’s transactions are presented in the appropriate manner according to the
applicable reporting framework (ACCA- Audit and Assurance Services) Internal control is
the term generally used to describe how management assures that an organization does meet
its financial and other objectives. Internal control systems not only contribute to managerial
effectiveness but are also important duties of corporate boards of directors (Verschoor, 1999).
Hitt, Hoskisson, Johnson, and Moesel (1996) argued that there are two types of major
internal controls associated with the management of large firms, particularly diversified
firms, which have an important effect on firm innovation, these are; strategic controls and
financial controls. Strategic controls entail the use of long-term and strategically relevant
criteria for the evaluation of business-level managers' actions and performance. Strategic
controls emphasize largely subjective and sometimes intuitive criteria for evaluation (Gupta,
1987). The use of strategic controls requires that corporate managers have a deep
understanding of business-level operations and markets. Such controls also require a rich
information exchange between corporate and divisional managers (Hoskisson, Hitt, &
Ireland, 1994).

8
 On the other hand, financial controls entail objective criteria such as return on investment
(ROI) in the evaluation of business-level managers' performance. They are similar to what
Ouchi (1980) and Eisenhardt (1985) referred to as outcome controls. Thus, top-level
managers establish financial targets for each business and measure the business-level
managers' performance against those targets. Such an approach can be problematic when the
degree of interdependence among business units is high. Thus, emphasis on financial controls
requires each division's performance to be largely independent. As a firm grows especially
through acquisition, it also grows in complexity and the number of units that corporate
executives must oversee and manage (thereby increasing their spans of control). Clearly, each
acquisition increases corporate managers' need for information processing, sometimes
dramatically so. These changes make it difficult for corporate managers to use strategic
controls. To reduce information-processing demands, they may change their emphasis from
strategic to financial controls (Hitt, Hoskisson, Johnson, & Moesel, 1996).
The three major categories of management objectives comprise; effective operations,
financial reporting and compliance (Hayes, R. et al, 2005). Effective operations are about
safeguarding the assets of the organization. The physical assets like cash, nonphysical assets
like receivables, important documents and records of the company can be stolen, misused or
accidentally destroyed unless they are protected by adequate controls. The goal of financial
control requires accurate information for internal decision because management has a legal
and professional responsibility to ensure that information is prepared fairly in accordance
with applicable accounting standards. Organizations are equally required to comply with
many laws and regulations including company laws, tax laws and environment protection
laws. The authoritative 1994 Principles of Corporate Governance of the American Law
Institute recommends that “every large publicly held corporation should have an audit
committee that would review on a periodic basis . . . the corporation’s internal controls . . .”
According to Verschoor, (1999), approximately three-quarters of the 500 largest publicly
held U.S. corporations voluntarily make a public assertion of management’s responsibilities
for properly reporting financial results and also maintaining an effective system of internal
control. These management statements on internal control are contained in the company’s
annual report to shareholders. He asserts that; virtually all of these companies report using the
same strategies to execute management’s internal control responsibilities. These include
references to segregation of functions, programs of selection and training of personnel, the
results of an internal auditing function, oversight from the audit committee of the board of
directors, and the work of the company’s external auditors. Verschoor believes that
9
management declarations about internal controls represent am management commitment and
are not just a promotional statement.
Mawanda (2008), performance refers to the ability to operate efficiently, profitability,
survive grow and react to the environmental opportunities and threats. They assert that,
performance is measured by how efficient the enterprise is in use of resources in achieving its
objectives. It is the measure of attainment achieved by an individual, team, organization or
process. Hitt, et al (1996) believes that many firms' low performance is the result of poorly
performing assets (businesses). Low performance from poorly performing assets is often
related to strategic errors made in the acquisition process in earlier years. For example, some
firms acquire businesses with unrealistic expectations of achieving synergy between the
acquired assets and their current sets of assets. A common reason for such errors is
managerial hubris or overvaluation of managerial capability in the acquisition process.
2.3 Functionality of Internal Control Systems
According to Hayes et al., 2005 internal control comprises five components; the control
environment, the entity’s risk assessment process, the information and communication
systems, control activities and the monitoring of controls. Therefore, each of the five
components of an internal control system is important. Here, we will focus on three
components, the control activities, internal audit and control environment. The other
components of the internal control systems will be held constant.
2.3.1 Control Activities
Control activities are the policies and procedures that help ensure management directives are
carried out. They help ensure that necessary actions are taken to address risks to achievement
of the entity's objectives. Control activities occur throughout the organization, at all levels
and in all functions. They include a range of activities as diverse as approvals, authorizations,
verifications, reconciliations, reviews of operating performance, security of assets and
segregation of duties (University of Califonia, Berkeley, 2012).
Control activities are the backbone of the company’s efforts to address the risks it faces,
such as fraud. The specific control activities used by a company will vary, depending on
management’s assessment of the risks faced. This assessment is heavily influenced by the
size and nature of the company (Weygandt, Kimmel, & Kieso, 2012).
The six principles of control activities are as follows.
• Establishment of responsibility
• Segregation of duties
• Documentation procedures

10
• Physical controls
• Independent internal verification
• Human resource controls
Whittington & Panny, (2001) also mention Control activities as another component of
Internal controls. They note that control activities are policies and procedures that help ensure
that management directives are carried out. Controls activities in an organization basically
comprise; performance reviews (comparing actual performance with budgets, forecasts and
prior period performance), information processing (necessary to check accuracy,
completeness and authorization of transactions), physical controls (necessary to provide
security over both records and other assets), and segregation of duties (where no one person
should handle all aspects of a transaction from the beginning to the end). The last component
of internal control according to Whittington & Panny is monitoring. This is aimed at ensuring
that the internal controls continue to operate as intended. This can be achieved through
ongoing monitoring or separate evaluations. Separate evaluations are non-routine monitoring
activities such as period audits by the internal auditors.
Control activities are the policies and procedures that help ensure management directives
are carried out. They help ensure that necessary actions are taken to address risks to
achievement of the entity's objectives. Control activities occur throughout the organization, at
all levels, and in all functions. They include a range of activities as diverse as approvals,
authorizations, verifications, reconciliations, reviews of operating performance, security of
assets and segregation of duties. Control activities usually involve two elements: a policy
establishing what should be done and procedures to affect the policy. All policies must be
implemented thoughtfully, conscientiously and consistently (Anduuru, 2005).
2.3.2 Internal Audit
The term audit comes from a Latin word “AUDIRE” meaning to hear in other words it means
official examination of account and records.
Whittington & Pany (2001) suggest that internal auditing is performed as part of the
monitoring activity of an organization. It involves investigating and appraising internal
controls and the efficiency with which the various units of the organization are performing
their assigned functions. An Internal Auditor is normally interested in determining whether a
department has a clear understanding of its assignment, is adequately staffed, maintains good
records, properly safeguarding cash, inventory & other assets and cooperates harmoniously
with other departments. The internal auditor normally reports to the top management.

11
 Gupta (2001) on the other hand asserts that “Internal audit is an independent appraisal
function established within an Organization to examine and evaluate its activities as a service
to the organization”. The objective of internal audit is to assist members of the organization
in the effective discharge of their responsibilities. According to Gupta “the scope of internal
audit is determined by management”. This may however, impair the internal auditor’s
objectivity and hampers his independence, it is quite hard to report negatively on someone
who determines the scope your work. Although at a Seminar organized by the Institute of
Certified Public Accountants of Uganda (ICPAU), Bamweyana, 2009 in his presentation
“The role of Internal Audit function in Organizations”, states that “Independence is
established by organizational and reporting structure” and that “Objectivity is achieved by an
appropriate mindset”.
Bamweyana, 2009 also defines “Internal auditing is an independent, objective assurance
and consulting activity designed to add value and improve an organization’s operations. It
helps an organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management control and
governance processes”. He further mentions the principles of internal audit to include;
Integrity, Objectivity, Confidentiality and Competency. However, given that Internal
Auditors are appointed by management, report to management, and are employees of an
organizations, their objectivity is usually highly compromised. In accordance to Institute of
Internal Auditors (IIA-UK; 1997), independence is applicable to all categories of auditors.
This means the opportunity granted to the auditors to report directly to the top authority.
Woolf (1986), says, although an internal auditor is an employee of the enterprise and cannot
therefore be independent of it, he should be able to plan and carryout his work as he wishes
and have access to the highest level of management.
However the most detailed definition of internal control was that given by Millichamp
(2002), who said and I quote that internal audit is “the world system of controls, financial and
otherwise, established by the management in order to carry on the business of the enterprise
in an orderly and efficient manner, ensure adherence to management policies, safeguard the
assets and secure as far as possible the completeness and accuracy of the records”.
Therefore, Millichamp (1993) says, effective internal audit should be carried out by
independent personnel though they are employees appointed by management, for them to
work efficiently, they should have scope to arrange priorities and activities have unrestricted
access to records, assets and personnel.

12
 According to Bhatia (2003), Internal Auditing is the review of operations and records
sometimes undertaken within the business by especially assigned staff. It’s also an
independent appraisal function established within an organization to examine and evaluate
the effectiveness, efficiency and economy of managements control system (Subramanian,
2006). Its objective is to provide management with re-assurance that their internal control
systems are adequate for the need of the organization and are operating satisfactorily (Reid &
Ashelby, 2002). It is a component of the internal control system set-up by management of an
enterprise to examine, evaluate and report operations of accounting and other controls. The
quality and effectiveness of internal audit procedures in practice are necessary since internal
auditors cover a wide variety of assignments, not all of which will relate to accounting areas
in which the external auditor is interested. For example, it’s common these days for internal
audit to undertake the extensive and continuous task of setting management goals and
monitoring its performance (Woolf, 1992).
Emasu (2010) notes that “The effectiveness of internal audit function partly depends on;
legal and regulatory framework, placement of the function and its independence, existence of
audit committees, resources allocated to the function and professionalism of internal audit
staff”. It is however a bitter reality that internal audit departments are rarely adequately
facilitated.
Regarding the size and facilitation of the Internal Audit Function, Gerrit and Mohammad
(2010), found evidence in support of the monitoring role of the Internal Audit Function. They
specifically, found evidence that management ownership is positively related to the relative
size of the Internal Audit Function, which is inconsistent with traditional agency theory
arguments that predict a negative relationship, but more in line with recent studies on
earnings management. This finding suggests that increased management ownership may
influence the board of directors to support larger Internal Audit Functions to allow them to
closely monitor managers’ performance. It is also plausible that management with higher
share ownership is motivated to invest in larger Internal Audit Function for better monitoring
of earnings and for signalling to the board of directors that, despite their high stake in
earnings, they are convinced that appropriate use of resources has to be assessed on a regular
basis.
Gerrit and Mohammad also believe that the proportion of independent board members to
have a negative effect on Internal Audit Function size. This finding may indicate a
substitution effect, which means that independent board members may be considered as an
alternative monitoring mechanism to the Internal Audit Function. They further assert that the
13
control environment has a significant effect on the relative size of the Internal Audit
Function. Specifically, a supportive control environment characterized by formalized
integrity and clear ethical values, a high level of risk and control awareness, the perception
that risk management is important and the fact that responsibilities with respect to risk
management and internal control are clearly defined is associated with a relatively larger
Internal Audit Function (ibid).
Using a US sample, Wallace & Kreutzfeldt (1991) found that companies with internal audit
departments are observed to be significantly larger, more highly regulated, more competitive,
more profitable, more liquid, more conservative in their accounting policies, more competent
in their management and accounting personnel, and subject to better management controls.
Carey et al. (2000) found that agency variables do not explain the voluntary use of internal
audit by Australian family firms. More recently, a study by Goodwin-Stewart & Kent (2006),
using a sample of Australian listed companies, shows that the existence of an Internal Audit
Function is positively associated with firm size and commitment to risk management.
Sarens & De Beelde (2006) also show that the risk and control awareness have an influence
on the scope of the Internal Audit Function. These results suggest that when management is
aware of risks and control activities, they are more likely to understand the role of the
Internal Audit Function in monitoring risk and control activities, thus it is more likely that
they will support a relatively larger Internal Audit Function (Sirens & De Beelde, 2006a;
Selim & McNamee, 1999).
Meigs et al (1988) holds that there must be a strong internal control system and the internal
auditor must verify the operations of the system in much the same way, as the external
auditor. It involves the investigation, recording, identification and review of compliance tests
of control, they also argued that effective internal audit procedures provide sufficient relevant
and reliable evidence in order to detect and prevent fraud. Kochan (1993), considers auditing
procedures in one company and describes steps taken in implementing a quality assurance
system, she discusses the use of internal audits as an essential part of ISO 9000 certification
process. Boakye-Bonsu (1999) asserts that internal audit procedures are seen as ends in
themselves rather than a means towards a specific objective, with such an approach our
rambler would undoubtedly get lost. Internal audit procedure is a form and content manual
that includes audits notes and responsibilities, documentation standards, local reporting
standards and targets, training requirements and expectations and performance measures and
indicators (Watts, 1999).

14
 Effectiveness is the achievement of goals and objectives using factor measures provided for
in determining such achievement. However, it has been traditional in internal auditing that
determination of internal auditing effectiveness can be accomplished by evaluating the
quality and effectiveness of internal auditing procedures that result in determination by the
internal auditors of the character and the quality of effectiveness of the auditee’s control
operations and if the auditing procedures are effectively carried out, then the evaluative
results are positive (Dittenhofer, 2001). Maitin, (1994) says efficiency and effectiveness of
internal audit procedures is not a simple task, successful operation is governed by the extent
to which the element of internal audit procedures receive attention which include; expertise,
independence, objectivity and totality. Effectiveness of internal audit procedures is a measure
of the ability of the programme to produce a desired effect or a result that can be qualitatively
measured (Harvey, 2004).
Zabihollah (2001) argues that, there should be effective internal audit procedures to ensure
reliability of financial statements, operational reports, safeguarding corporate assets and
effective organizational controls. Benston (2003) further supplements that perception and
ownership, organization and governance framework, legislation, improved professionalism
and resources were identified as functions in the public sector derived from the effectiveness
of the internal audit procedures. How far internal audit procedures succeed in their effort of
effectiveness is mainly judged by three factors that include; frequency of irregularities
committed by the staff in the organization in form of errors or fraud, the promptness with
which such irregularities are detected by the authorities and the planning which makes
possible repetition of such irregularities in future more difficult (Reid & Ashelby, 2002).
Earnest and Young (1995), the work of the internal auditor should appear to be properly
planned, controlled, recorded and reviewed. Examples of the due professional care by the
internal auditor are the existence of an adequate audit manual, general internal audit plans,
procedures for controlling individual assignments and satisfactory arrangements for reporting
and following up.
Internal audit makes a large contribution to the achievement of company goals, and the
implementation of strategies for their achievement (Ljubisavljević & Jovanovi, 2011). In
addition, the internal audit function is responsible for reinforcing management and audit
committee (Hutchinson & Zain, 2009).
Likewise, internal audit determines the reliability, reality, and integrity of financial and
operational information that comes from different organizational units, on which appropriate
business decisions at all levels of management are based. Successful implementation of
15
internal audit tasks means that it must be independent, i.e., company management should in
no way influenced by its work, information, conclusions, and evaluations. In this way the
internal audit report becomes a means of communication between internal audit and
management, and an important guideline for the successful management of the company
(Ljubisavljević & Jovanovi, 2011).
Furthermore, the internal audit function facilitates the operation and effective working of
the audit committee as the audit function goals are consistent with the former’s financial
reporting oversight responsibilities (Goodwin & Yeo, 2001; Goodwin, 2003; Scarbrough,
Rama, & Raghunandan, 1998). The creation of an internal audit function is supported by the
governance reports (NYSE, 2002) and previous studies (Collier & Gregory, 1996; Goodwin
& Kent, 2003) as a mechanism to enhance internal governance processes.
2.3.3 Control Environment
Control Environment is the philosophy, style and supportive attitude, as well as the
competence, ethical values, integrity and morale of the people of the organization (DiNapoli,
2007). The control environment sets the tone of an organization, influencing the control
consciousness of its people. It is the foundation for all other components of internal control,
providing discipline and structure. Control environment factors include the integrity, ethical
values and competence of the entity's people; management's philosophy and operating style;
the way management assigns authority and responsibility, and organizes and develops its
people; and the attention and direction provided by the board of directors (University of
Califonia, Berkeley, 2012).
Control environment refers to all factors which are effective in determining, increasing or
decreasing the effectiveness of policies, procedures, and methods specific to a process.
Control environment stands out with the basic understanding adopted by senior management
of the corporation to control the organization, its attitude toward problems and approach to
solving problems and their perspective of the importance of moral values. Strictly speaking,
control environment can be perceived as a consciousness of the senior management of a
corporation to control the organization and employees (Kaval, 2005).
Whittington and Pany (2001) note that the control environment sets the tone of the
organization by influencing the control consciousness of people. They further assert that
control environment is viewed as the foundation for all the other components of internal
control. Control environment factors include; integrity and ethical values of personnel
responsible for creating, administering, and monitoring the controls, commitment and
competence of persons performing assigned duties, board of directors or audit committees

16
(especially the extent of their independence from management, experience & stature),
management philosophy and operating style (in terms of their aggressiveness or
conservativeness which may determine the level of risk they may take on), and
Organizational structure (which may be a well-organized structure that provides for proper
planning, directing and controlling operations or a disorganized structure that may only serve
to confuse the key players by creating unclear roles).
Control environment has several factors, however, for purposes of this research, the review
will focus on Management philosophy and operating style, the integrity and ethical values of
personnel that create and administer controls, and audit committees and board of directors.
For purposes of the study, board of directors will be represented by the Governing council
and the various committees of Council. , Whittington and Pany also believe that these factors
set a basis upon which the other internal control components can be built. They also provide a
framework within which the other components operate. However, these assertions have not
always held true, since management in organizations has always overridden these controls,
the lack of mentoring has always led to collapse of controls. The independence of audit
committee has largely been theoretical in most organizations (ibid).
Boards of directors have on several occasions had very little time for company affairs,
implying that their supervisory role has always been wanting. It is equally worth noting that
most of the board members’ selection is largely political and a reflection of the political
allegiance. They most of the cases lack the experience and exposure to determine the
strategic direction of the organization. Board of directors, ought to supervise the management
of an entity, but it has always turned out that Board members merely implement
recommendations of the management committee of an institution. The audit committee, as a
subcommittee of the board of directors, plays a role in protecting the owners’ interests by
monitoring management’s actions, in terms of financial reporting, risk management and
internal control (Mawanda, 2008).
On the other hand, an active audit committee could consider the internal audit function as a
necessary source of information to execute its monitoring responsibilities (Raghunandan et
al., 2001; Sarens et al., 2009; Scarborough et al., 1998), thus the audit committee may push
for better staffed internal audit functions.
The study by Wallace & Kreutzfeldt (1991) was among the first to demonstrate the
importance of the control environment in explaining the existence of an internal audit
function. More recently, Goodwin-Stewart & Kent (2006) provided evidence that the
existence of an internal audit function is related to the level of commitment to risk
17
management. Recent case studies on internal auditing in Belgium illustrate the importance of
the control environment when studying internal auditing practices. Sarens & De Beelde
(2006a, 2006b) found that certain control environment characteristics (e.g., tone-at-the-top,
level of risk and control awareness, extent to which responsibilities related to risk
management and internal controls are clearly defined and communicated) are significantly
related to the role of the internal audit function within an organization. The tone-at-the-top
refers to a company’s ethical values, management’s philosophy and operating style (Cohen et
al., 2002) which are reflected by the company’s code of conduct or code of ethics.
We assume that when the company pursues integrity and clear ethical values reflected in a
formal code of conduct/ethics, the internal audit function will take on greater importance.
This is because the internal audit function is often seen as a way of translating and
communicating the tone-at-the-top throughout the company (Sarens et al., 2009). Therefore,
management is more likely to invest in a relatively larger internal audit function. The
American Bar Association (ABA) directors’ guidebook states that “an important aspect of the
board’s responsibility, often referred to the audit committee, is oversight of the corporation’s
policies and procedures regarding compliance with law and significant corporate policies.”
(Sarens & De Beelde, 2006).
Internal control systems not only contribute to managerial effectiveness but are also
important duties of corporate boards of directors. Accounting literature likewise emphasizes
the importance of an organization’s integrity and ethical values in maintaining an effective
control system (Verschoor, 1999). A focus on integrity and ethical values was the principal
contribution of Internal Control— Integrated Framework published by the Committee of
Sponsoring Organizations of the Treadway Commission (on fraudulent financial reporting.)
To trigger independence of auditors, the American Institute of Certified Public Accountants
(AICPA) Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 78.
This statement requires auditors to perform procedures on every audit to enable them to
understand their client’s control environment including integrity and ethical values. In other
words, auditors are specifically required to determine whether their clients’ ethical controls
are operating. SAS No. 78 points out those ethical values and other elements of the control
environment permeate the culture of an organization and affect the strength of all other
controls.
2.4 Financial Performance
According to Stoner (2003), performance refers to the ability to operate efficiently,
profitability, survive grow and react to the environmental opportunities and threats. In

18
agreement with this, Sollenberg & Anderson (1995) asserts that, performance is measured by
how efficient the enterprise is in use of resources in achieving its objectives. It is the measure
of attainment achieved by an individual, team, organization or process (EFQM, 1999). Hitt, et
al (1996) believes that many firms' low performance is the result of poorly performing assets
(businesses). Low performance from poorly performing assets is often related to strategic
errors made in the acquisition process in earlier years. For example, some firms acquire
businesses with unrealistic expectations of achieving synergy between the acquired assets and
their current sets of assets. A common reason for such errors is managerial hubris (Roll,
1986) or overvaluation of managerial capability in the acquisition process.
2.4.1 Measures of Financial Performance
According to Dixon et al (1990), appropriate performance measures are those which enable
organizations to direct their actions towards achieving their strategic objectives. Kotey &
Meredith (1997) contends that, performance is measured by either subjective or objective
criteria, arguments for subjective measures include difficulties with collecting qualitative
performance data from small firms and with reliability of such data arising from differences
in accounting methods used by firms.
Kent (1994) found out that, objective performance measures include indicators such as
profit growth, revenue growth, return on capital employed. Financial consultants Stern
Stewart & Co. created Market Value Added (MVA), a measure of the excess value a
company has provided to its shareholders over the total amount of their investments. This
ranking is based on eight more traditional aspects of financial performance including: total
return for one and three years, sales growth for one and three years, profit growth for one and
three years, net margin, and return on equity. Verschoor however, mentions other financial
measures to include value of long-term investment, financial soundness, and use of corporate
assets. He also talks of non-financial performances measures to include; innovation, ability to
attract, develop, and keep talented people, quality of management, quality of products or
services, and community and environmental responsibility.
Hitt, et al., (1996) mention accounting- based performance using three indicators: return on
assets (ROA), return on equity (ROE), and return on sales (ROS). Each measure was
calculated by dividing net income by total assets, total common equity, and total net sales,
respectively.
2.4.1.1 Liquidity
Hitt et al (1996) mention current ratio (current assets/current liabilities) as a standard measure
of liquidity in organizations. Baysinger, (1989) also emphasized the importance of current

19
ratio as a measure of an organisation’s liquidity. Other measures of Liquidity according to
ACCA and Panday (1996) are; Acid test ratio (i.e. Current Assets less Inventory/Current
Liabilities).
2.4.1.2 Accountability
According to Hayes, et al., 2005, Managers need regular financial reports so as to make
informed decisions. Reporting (particularly financial reports) is one way through which
managers make accountability for the resources entrusted to them. Emasu (2010) asserts that
Accountability can be political, social or financial accountability.
2.4.1.3 Reporting
Whittington & Pany (2001), talk about the comprehensiveness of internal controls in
addressing the achievement of objectives in the areas of financial reporting, operations and
compliance with laws and regulations. They further note that “Internal control also includes
the program for preparing, verifying and distributing to the various levels of management
those current reports and analyses that enable executives to maintain control over the variety
of activities and functions that are performed in a large organization” They mention internal
control devices to include; use of budgetary techniques, production standards, inspection
laboratories, employee training and time & motion studies among others.
According Bakibinga 2001, corporate law requires a divorce between ownership and
management of an entity. Owners normally entrust their resources in the hands of managers.
Managers are required to use the resources entrusted to them in the furtherance of the entity’s
objectives. Managers normally report to the owners on the results of their stewardship for the
resources entrusted to them through a medium called financial statements. It is these financial
statements that reveal the financial performance of an entity.
John J. Morris (2011) believes that Enterprise Resource Planning systems provide a
mechanism to deliver fast, accurate financial reporting with built-in controls that are designed
to ensure the accuracy and reliability of the financial information being reported to
shareholders.
However, no single measure of financial performance is adequate for evaluating a firm’s
business. Evaluation of several financial measures may be more useful in directing the
manager to ask the right questions than in providing solutions to the financial problems of the
business.
Therefore, a good financial performance measure should ask how well the firm has
generated operating profits, given the amount of capital invested to produce those profits.
E.g. how Much Capital Is Invested in the Firm?

20
2.5 Summary
The theoretical basis for establishing a relationship between financial performance and
internal control systems has been documented in various literatures. Internal control systems
that have been confirmed to have a relationship with business organization financial
performance include: organization, segregation of duties, physical authorization and
approval, arithmetical and accounting, personnel, supervision, management,
acknowledgement of performance and budgeting (Weber, 1988).
2.6 Conclusion
In this chapter, it consists of seven sections: in the first part, it discussed, Internal Controls
Systems and Financial Performance, whereas in the second part Functionality of Internal
Control Systems, in the third part Financial Performance discussed, and the fourth part,
Measures of Financial Performance discussed, the fifth part, summary discussed, and
conclusion. However, in Mogadishu, the role of internal control system and the functionality
of Internal Control systems on financial performance still have not received adequate
research. Therefore, this study will attempt to fill this gap by investigating the impact of
internal control system on financial performance in Mogadishu private banks.

21
 CHAPTER THREE
METHODOLOGY

3.0 Introduction
This chapter focuses on research methodology including research design, population and
sampling: target population, sample size, sampling technique, data collection, validity and
reliability, data analysis, limitations of the study and ethical considerations.
3.1 Research Design
A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure
(Kothari, 2004). Also Research design refers to the many ways in which research can be
conducted to answer the question being asked (Marczyk, DeMatteo, & Festinger, 2005).
The study utilized a survey research design. Surveys are information-collecting method use
to describe, compare, or explain individual and societal knowledge, feelings, values,
preferences, and behavior (Fink, 2009).
However, this study conducted through a descriptive study; the purpose of descriptive
research is to describe an accurate profile of persons, events or situations. In addition, this
study used quantitative approach; Quantitative is any data collection technique (such as a
questionnaire) or data analysis procedure (such as graphs or statistics) that generates or uses
numerical data (Saunders, Lewis, & Thornhill, 2009).
3.2 Population and Sampling:
3.2.1 Target Population
This study was only limited to the employees of private banks in Mogadishu-Somalia. The
population of this study which consist of over 70 workers but the target population of this
work consists of 33 staff which include of Accountants, finance directors, Internal Auditors,
chief cashiers and Managers from 3 main private banks in Mogadishu and others.
3.2.2 Sample Size
In view of the nature of the target population where the number for finance directors, internal
auditors, chief cashiers, accountants and managers. A sample was taken from each category.
The sample of this study is 30 respondents.
To determine the ideal sample size for a population, the study was used Slovene’s formula
which is n=N/ (1+ (N*e^2)), where n= sample size, N= population size, 33 and e = margin of
error of 5 %.
n=33/ (1+ (33×0.0025)) = 30 Respondents

22
Table 1: 3.1: Respondents of the Study
Private Bank in Mogadishu Population Sample Size

Premier Bank 12 11

Dahabshiil Bank 10 10

Salaam Somali Bank 5 4

Other Private Banks 6 5

Total 33 30

3.2.3 Sampling Technique

The purposive sampling was utilized to select the respondents based on their experience in
internal control system. From the list of qualified respondents was chosen based on the
inclusion criteria, the simple random sampling was used to finally select the respondents with
consideration to the computed minimum sample size.
3.3 Data Collection
Data collection is the process of gathering and measuring information on variables of interest,
in an established systematic fashion that enables one to answer stated research questions, test
hypotheses, and evaluate outcomes. The Researcher used a combination of structured
questionnaires. According to Oso & Onen, (2008) questionnaires are a data collection
technique in which the respondents respond to the number of items in writing. Questionnaires
were chosen simply because of the time limitation.
3.4 Validity and Reliability
Validity and reliability are interconnected concepts (Sullivan & Feldman, 1979).
Validity is the most critical criterion and indicates the degree to which an instrument
measures what it is supposed to measure. Validity can also be thought of as utility. In other
words, validity is the extent to which differences found with a measuring instrument reflect
true differences among those being tested (Kothari, 2004).
Validity refers to the extent to which a test measures what we actually wish to measure.
Reliability has to do with the accuracy and precision of a measurement procedure ...
Practicality is concerned with a wide range of factors of economy, convenience, and
interpretability (Thorndike & Hagen, n.d).
The most important issue in the research is to consider the validity and reliability of the
instrument used to collect the date, validity refers to the degree to which the data collection
method accurately measures what it was intended to measure or to extent to which research

23
findings are about what they are claimed to be about. Reliability refers to which your data
collection techniques or analysis procedures were yield consistent. In other words, if a study
has validity, it collects the appropriate data for the study. And a study has reliability if the
same questions, asked of a similar sample, produce the same findings.
3.5 Data Analysis
In most types of research studies, the process of data analysis involves the following three
steps: (1) preparing the data for analysis, (2) analyzing the data, and (3) interpreting the data.
The researcher was analyzed using both statistical package for social scientist (SPSS) and
Microsoft Excel as the main tool for data analysis. After that, the analyzed data were
interpreted into a meaningful and systematic manner. This study, the researcher used
descriptive technique as data analysis. In the questionnaire each selected one to five scale for
where, 1=strongly disagree, 2=disagree; 3= neutral; 4= Agree 5= strongly agree.
Table 2: 3.2: The Interpretations of the Mean Values
Mean Range Respondents Mode Interpretation

4.21 up to 5.00 Strongly Agree Excellence

3.41 up to 4.20 Agree Very good

2.61 up to 3.40 Neutral Good

1.81 up to 2.60 Disagree Poor

1.00 up to 1.80 Strongly disagree Very poor

3.6 Limitations of the Study

During the study the researcher faced few challenges which included the following:
 The respondents may not give you the questionnaire on time.
 Respondents may not confidentially provide the proper information because of fear.
 Lack of access to the internet libraries due to the payment method- the online sale that is
mostly asked master cards, visa cards, and other sort of electronic cards. This method of
payment is not available in Mogadishu, Somalia.
 Lastly, the biggest problem of this study was insufficient participants; because some of
the private banks in Mogadishu do not want to pay information.
3.7 Ethical Considerations
In this study the researcher should keep on the ethical issues through the research project by
keeping the privacy, confidentiality and secrecy of respondents. To maintain ethical issue the
researcher will request the organization’s administration to authorize to distribute
questionnaire to their employees and also tell them that the information use only for academic
purpose. And will keep the privacy, confidentiality and secrecy of respondents.
24
 CHAPTER FOUR
DATA ANALYSIS INTERPRETATION AND DISCUSSION

4.0 Introduction
This chapter presents the result of data analysis. The presentations are in form of tables,
graphs and statements to ease understand. The presentation is according to the two objectives
of the study. Thus, the first objective of this study was to assess functionality of internal
control system in Mogadishu private banks, and the second objective was to examine
financial performance of private banks in Mogadishu.
4.1 Demographic Data
The background information of respondents was thought necessary because the ability of the
respondents to give satisfactory information on the study variables greatly depends on their
background. The background information of respondents asked data on the samples and this
has been presented below categorized into; gender, age, marital status, level of education and
length of service in the bank or experience of the work.
4.1.1 Gender characteristics of respondents
The study examines and describes the gender details of respondents in this study and a detail
of their respective gender is presented in table 4.1 below:
Table 3: 4.1: Gender of the Respondents
Gender

Frequency Percent Valid Percent Cumulative Percent

Valid Male 27 90.0 90.0 90.0

Female 3 10.0 10.0 100.0

Total 30 100.0 100.0

Source: Primary data, 2015

Table: 4.1 above reveals 90% of the staffs of Mogadishu private banks are male while
10% of staffs of private banks are female. Based on data gathered, the majority of the
respondents are male, while a small number of the respondents are female. Therefore,
male have significantly dominated the staffs of private banks in Mogadishu.

25
Figure 2: 4.1: Gender of the Respondents

Gender

90%
80%
70%
60% Male
50%
Female
40%
30%
20%
10%
0%
Male Female

Source: Primary data, 2015

4.1.2 Description of age groups of respondents
The study obtained details about the age groups of the respondents for purposes of
understanding their age and probably the knowledge they possess in their respective
positions. Details of the findings are shown in table 4.2 below:
Table 4: 4.2: Ages of the Respondents

Age

Frequency Percent Valid Percent Cumulative

Percent

Valid 20-30 Years 15 50.0 50.0 50.0

40-50 Years 7 23.3 23.3 73.3

30-40 Years 6 20.0 20.0 93.3

Above 50 Years 2 6.7 6.7 100.0

Total 30 100.0 100.0

Source: Primary data, 2015
Table 4.2 shows that most of respondents aged 20-30 years old (50%) which had relatively
greater than the percentage of respondents aged in 40-50 years (23.3%), 30-40 years
(20%), and above 50 years (6.7%), this suggests, that majority of staffs of private banks in
Mogadishu are junior.

26
Figure 3: 4.2: A Bar Graph Showing Age of the Respondents

Age

50%

45%

40%

35%
20-30 Years
30%
40-50 Years
25%
30-40 Years
20% Above 50 Years

15%

10%

5%

0%
20-30 Years 40-50 Years 30-40 Years Above 50 Years

Source: Primary Data, 2015

4.1.3 Explanation marital status of the respondents
The study examines and describes the marital status of respondents in this study and a detail
of their respective marital status is presented in table 4.3 below:
Table 5: 4.3: Marital Status of the Respondents
Marital Status

Frequency Percent Valid Percent Cumulative

Percent

Valid Married 20 66.7 66.7 66.7

Single 10 33.3 33.3 100.0

Total 30 100.0 100.0

Source: Primary Data, 2015

Table 4.3 displays 66.7% of the employees of private banks in Mogadishu are married
while 33.3% of the employees of private banks in Mogadishu are single. Based on data
gathered, the majority of the employees of private banks in Mogadishu are married.

27
Figure 4: 4.3: A Pie Graph Reveals Marital Status of the Respondents

Marital status

33%

Married
67% Single

Source: Primary Data, 2015

4.1.4 Education characteristics of respondents

Details about the education levels of respondents were obtained and the results are revealed
in table 4.4 below:
Table 6: 4:4 Education Level of Respondents

Level of Education
Frequency Percent Valid Percent Cumulative Percent
Valid Bachelor 18 60.0 60.0 60.0
Master 7 23.3 23.3 83.3
Diploma 3 10.0 10.0 93.3
PhD 2 6.7 6.7 100.0
Total 30 100.0 100.0
Source: Primary Data, 2015
The sample was including 30 respondents who are working at private banks in Mogadishu.
Especially Premier Bank, Dahabshiil Bank, Salaam Somali Bank and other private banks
in Mogadishu, Somalia. The sample of this study consists of 60% are bachelor, 23.3%
are master, 10% are diploma, and 6.7% are PhD. This means that the staffs of most
private banks in Mogadishu are bachelor degree.

28
Figure 5: 4.4: The Level of the Respondent’s Education

Level of Education

60%

50%

40% Bachelor
Master
30% Diploma
PhD
20%

10%

0%
Bachelor Master Diploma PhD

Source: Primary Data, 2015

4.1.5 Experience of respondents
The study investigated the length of period served by the respondents in the bank and the
findings are presented in table 4.5 below:
Table 7: 4.5: Experience of the Respondents
Experience
Frequency Percent Valid Percent Cumulative Percent
Valid Above Three years 17 56.7 56.7 56.7
Two Years 6 20.0 20.0 76.7
One Year 3 10.0 10.0 86.7
Three Years 3 10.0 10.0 96.7
Less than 6 month 1 3.3 3.3 100.0
Total 30 100.0 100.0
Source: Primary Data, 2015
In table 4.5 above, it can be revealed that majority of respondents have worked in the bank
for the period above three years (56.7%), followed by two years (20.0%), this followed by
one year (10.0%) similarly to this three years (10.0%), and finally, less than 6 months (3.3%).
Therefore, this means that the experience of staffs in private banks in Mogadishu is more
than three years. Based on data gathered, consequently the most employees have more
experience about private banks operations.

29
Figure 6: 4.5: Experience of the Respondents

Experience

3%
10%

10% Above Three years

Two Years
One Year
Three Years
57%
Less than 6 month
20%

Source: Primary Data, 2015

4.2 Assessing the Functionality of Internal Control Systems in Mogadishu Private Banks
The study sets one of its objectives to critically analyze and reveal how the internal control
systems of the banks actually performs, and details are presented in the descriptive statistics
shown by the values of the respective means. Details of these analyses are shown in table 4.6
below:
4.2.1 Descriptive Statistics on Control Activities
Table 8: 4.6: Descriptive statistics on Control activities
Descriptive Statistics Mean Interpretation Rank
All changes to employee status or pay rate are duly 4.0714 Very good 1
approved by an Appropriate official.
Your bank has clear separation of duties. 4.0690 Very good 2
There are adequate controls over information systems. 4.0345 Very good 3
Staffs are trained to discharge their responsibilities 4.0345 Very good 4
diligently.
There are adequate controls over access to resources 3.8571 Very good 5
belonging to the bank.

Grand Total 4.013 Very good

Source: Primary data, 2015

30
From table 4.6 above demonstrates that the degree of control activities is commonly very good
and this is reflected by the whole average of 4.013, the maximum calculated facet of all
variations to employee status or pay rate are duly approved by an appropriate official. 4.0714
and this came behind that your bank has clear separation of duties 4.069, there are adequate
controls over information systems 4.0345, staffs are trained to discharge their responsibilities
diligently 4.0345, and the poorest calculated facet on the degree there are adequate controls
over access to resources belonging to the bank 3.8571.
4.2.2 Descriptive Statistics on Internal Auditing
Table 9: 4.7: Descriptive statistics on Internal Auditing
Descriptive Statistics Mean Interpretation Rank

Independence of internal auditor assured, based 3.8519 Very good 1

upon review of Documentation.

Internal audit is able to detect illegal activities 3.8148 Very good 2

from within the Bank.

Internal auditors examine the accuracy and 3.5667 Very good 3

reliability of accounting Records.

Organizational internal auditing complies with 3.5556 Very good 4

professional standards.

The bank’s financial statements are audited 3.5185 Very good 5

regularly by external.

The internal auditors check compliance with 3.4074 Very good 6

establish police and Accounting procedures.

Grand Total 3.619 Very good

Source: Primary data, 2015
Results in table 4.7 show that the equal of internal control system is normally extremely good
and this is indicated by the overall mean of 3.619, the uppermost graded aspect of
independence of internal auditor assured, based upon review of documentation 3.8519 and
this came after the internal audit is able to detect illegal activities from within the bank
3.8148, internal auditors examine the accuracy and reliability of accounting records 3.5667,
organizational internal auditing complies with professional standards 3.5556, the bank’s
financial statements are audited regularly by external 3.5185, and the lowest graded aspect on

31
the level the internal auditors check compliance with establish police and accounting
procedures. 3.4074.

4.2.3 Descriptive Statistics on Control Environment

Table 10: 4.8: Descriptive statistics on Control Environment
Descriptive Statistics Mean Interpretation Rank
The bank has a clear organizational structure. 4.1786 Very good 1
All employees are aware of the guidelines. 4.1111 Very good 2
The policies, procedures and guidelines are 4.0667 Very good 3
documented.
All staffs perform their responsibilities as per the 4.0000 Very good 4
regulation and guidelines.
Compliance to bank guidelines can lead to reliable 3.9286 Very good 5
financial reporting.
The internal control guidelines are able to detect 3.8571 Very good 6
irregularities.
Management review financial transactions regularly. 3.7500 Very good 7
The control environment in the bank is enough to 3.7143 Very good 8
reach its objectives.

Grand Total 3.95 Very good

Source: Primary data, 2015
Table 4.8 above displays that the level of internal control system is generally so good and this is
signified by the total par of 3.95, the highest rated part of the bank has a clear organizational
structure 4.1786 and this followed the all employees are aware of the guidelines 4.1111, the
policies, procedures and guidelines are documented 4.0667, all staffs perform their
responsibilities as per the regulation and guidelines 4.0000, compliance to bank guidelines
can lead to reliable financial reporting 3.9286, the internal control guidelines are able to
detect irregularities 3.8571, management review financial transactions regularly 3.7500, and
the lowest rated aspect on the level the control environment in the bank is enough to reach its
objectives 3.7143.
4.3 Examining the Financial Performance of Private Bank in Mogadishu
This section responses objective two of the study, financial performance of private bank in
Mogadishu was examined by analyzing data collected under dimensions of financial

32
performance and computing for the mean of the responses to the statements. Details of these
analyses are shown in table 4.9 below:
Table 11: 4.9: Descriptive statistics on Financial Performance
Descriptive Statistics Mean Interpretation Rank
Your bank has enough cash to meet its obligations 4.1852 Very good 1
effectively (as and when they fall due).
Accountability process is adequate in your 3.9286 Very good 2
organization.
Problems of outstanding cheques are solved in time to 3.6552 Very good 3
reconcile the Bank balance of an account and book
balance of the customer.
A good financial performance measure should ask how 3.5000 Very good 4
well the firm has generated operating profits, given the
amount of capital invested to produce those profits.
Financial performance is the measurement of the results 3.4828 Very good 5
of a firm’s Policies and operations in monetary terms.
No single measure of financial performance is adequate 3.4286 Very good 6
for evaluating a firm.

Grand Total 3.696 Very good

Source: Primary data, 2015
From the information revealed by table 4.9, that the level of financial performance is
ordinarily very good and this is expressed by the total mean of 3.696, the highest rated aspect
of your bank has enough cash to meet its obligations effectively (as and when they fall due)
4.1852, and this went behind the accountability process is adequate in your organization
3.9286, problems of outstanding cheques are solved in time to reconcile the bank balance of
an account and book balance of the customer 3.6552, A good financial performance measure
should ask how well the firm has generated operating profits, given the amount of capital
invested to produce those profits 3.5000, financial performance is the measurement of the
results of a firm’s policies and operations in monetary terms 3.4828 and the lowest rated
aspect on the level no single measure of financial performance is adequate for evaluating a
firm 3.4286.

33
 CHAPTER FIVE
CONCLUSION AND RECOMMENDATION

5.0 Introduction
This chapter presents summaries of the study findings as per the study objectives, conclusions
based on those findings and recommendations which are based on both the study findings and
the researcher’s point of view considered necessary and vital to be used in future to improve
the study situation and finally, recommendation for further research.
5.1 Summary Findings
This part presents the summarized results and interpretation (findings) based on the study
objectives as established at the beginning of the study.
5.1.1 Functionality of the Internal Control Systems in Mogadishu Private Banks
The study found out that there is a clear separation of duties, and also there are adequate
controls over access to resources belonging to the bank. However, the study also found out
that all changes to employee status or pay rate are duly approved by an appropriate official.
The study also reveals that employees of the banks are trained to discharge their
responsibilities diligently. And the study shows internal auditors examine the accuracy and
reliability of accounting records of banks also complies with professional standards. The
study found out that the bank’s financial statements are audited by external but doesn’t
conduct regular audit activities such as every year and doesn’t produce regular audit reports.
Regarding control environment, the study found that all employees are aware of the
guidelines. And this study also reveals that the management of the banks reviews financial
transactions regularly. The study found out that all staffs perform their responsibilities as per
the regulation and guidelines. However, it was found out that the all banks have a clear
organizational structure and also the study reveals that the policies, procedures and guidelines
of banks are documented. Lastly, this study shows the control environment in the banks is
enough to reach their objectives.
5.1.2 The Financial Performance of Private Banks in Mogadishu
The study found out that the private banks in Mogadishu has enough cash to meet its intended
goals, and that the accountability process is adequate in the banks. The study further reveals
that no single measure of financial performance is adequate for evaluating operations of
banks. However, it was also found that financial performance is the measurement of the
results of a firm’s policies and operations in monetary terms, and that a good financial
performance measure should ask how well the firm has generated operating profits, given the
amount of capital invested to produce those profits.
34
5.2 Conclusions
Based on the results of the study, it is concluded that the banks has an effective internal
control system as supported by the study findings of clear separation of duties, there are
adequate controls over access to resources belonging to the bank. However, there are
adequate controls over information systems. There is also compliance to bank guidelines that
can lead to reliable financial reporting. There is a good operation of controls especially
considering that the audit function is well extended to the which clearly has affected their
efficiency as discovered by this study
On financial performance of the Mogadishu private banks, the study concludes that the
liquidity position of the private banks in Mogadishu is appropriate, details of which are
directly in the study, although the study reveals accountability process is adequate private
banks in Mogadishu.
The final conclusion of this study is that the internal control system (control activities,
internal audit, and control environment) have great significant to private Banks’s financial
performance (liquidity, accountability, and reporting).
5.3 Recommendations
This study recommends that the internal auditors perform their duties fast, efficient and
reliable. The study also recommends that the banks create and manage
knowledge/information management system within the banks so as to enable all parties
within the banks to freely access and use the official information.
Therefore, the researcher recommends that the banks establish a strategy for involving the
generation development. This includes supporting for the poor people and unemployment
people; this could be done through development projects, other activities such as
microfinance which are directly aimed at supporting people who live low level lives in the
country. Also the researcher recommends maintaining using information systems to make
managers proper decision that has well consequence.
Lastly, the researcher calls for the federal government to support private banks.
5.4 Recommendation for Further Research
1. The causes and consequences of internal control absences in private banks.
2. The role of internal control activity on safeguards the bank’s assets.
3. Examining the factors that determine the contributions of detection illegal activities
from within the Bank.

35
 REFERENCES

University of Califonia, Berkeley. (2012, July). Retrieved from University of Califonia,

Berkeley web site: http//www.Berkeley.edu

Aksoy, T. (2007). Basel II ve İç Kontrol. Ankara: Basak Publishing.

Amaka, C. P. (2012). The Impact Of Internal Control System On The Financial Management
Of An Organization. Nigeria.

Anduuru, N. (2005). The accounting system and its related internal control system. Nairobi,
Kenya.

Bakibinga, D. J. (2001). Company Law in Uganda. Kampala, Uganda: Fountain Publishers.

Bamweyana, B. S. (2009). the role of internal audit function in organizations.

Collier, P., & Gregory, A. (1996). Audit committee effectiveness and the audit fee. The
European Accounting Review, 5, 177-198.

DiNapoli, T. P. (2007). Standards for Internal Control; In New York State Government.
Retrieved from http://www.osc.state.ny.us/agencies/ictf/docs/intcontrol_stds.pdf

Dittenhofer, M. (2001). Internal Auditing Effectiveness.

Ejoh, N., & Ejom, P. (2014). The Impact of Internal Control Activities on Financial
Performance of Tertiary Institutions in Nigeria. Journal of Economics and
Sustainable Development, 5(16).

Emasu, S. (2010). public financial management – Concepts & Practices.

Fink, A. (2009). How to Conduct surveys A step-by-step guide (4th ed.). California, United
States of America: Sage publications Inc.

Gerrit Sarens and Mohammad J. Abdolmohammadi. (2010). Monitoring Effects of the

Internal Audit Function: Agency Theory versus other Explanatory Variables.
International Journal of Auditing.

Goodwin, J. (2003). The relationship between the audit committee and the internal audit
function. International Journal of Auditing, 7(3), 263-278.

Goodwin, J., & Kent, P. (2003). Factors affecting the voluntary use of internal audit. Hawaii.

Goodwin, J., & Yeo, T. (2001). Two Factors Affecting Internal Audit Independence and
Objectivity. International Journal of Auditing, 5(2), 107-125.

Hayali, A., Dinç, Y., Sarılı, S., Dizman, A. S., & Gündoğdu, A. (2012). Importance Of
Internal Control System In Banking Sector : Evidence From Turkey.

Hayes, R. et al. (2005). Principles of Auditing. Pearson Education Ltd.

36
Hitt, M. A., Hoskisson, R. E., Johnson, R. A., & Moesel, D. D. (1996). The Market for
Corporate Control and Firm Innovation. Academy of Management Journal.

Hutchinson, M., & Zain, M. (2009). Internal audit quality, audit committee independence,
growth opportunities and firm performance. Journal of Corporate Ownership and
Control, 7(2), 50-63.

John J. Morris. (2011). The Impact of Enterprise Resource Planning (ERP) Systems on the
Effectiveness of Internal Controls over Financial Reporting.

Kaval, H. (2005). Muhasebe Denetimi. Ankara, Turkey: Gazi Publishing House.

Kothari, C. R. (2004). Research Methodology (2 Revised ed.). India: New Age International
Publisher.

Ljubisavljević, S., & Jovanovi, D. (2011). Empirical research on the internal audit position of
companies in Serbia. Economic Annals, 191, 123-141.

Maitin, T. (1994). Audit Management (1st ed.). South Asia Publication.

Marczyk, G., DeMatteo, D., & Festinger, D. (2005). Essentials of Research Design and
Methodology. Canada: John Wiley & Sons, Inc., Hoboken, New Jersey.

Mawanda, S. P. (2008). Effects of Internal Control Systems on Financial Performance in an

Institution of Higher Learning in Uganda.

Millichamp, A. H. (1993). Auditing.

Millichamp, A. H. (2002). Auditing (8th ed.). London: The Bath Press.

Mohamud, H. A. (2013, April). Internal Auditing Practices and Internal Control System in
Somali Remittance Firms. International Journal of Business and Social Science, 4(4).

Nyakundi, D. O., Nyamita, M. O., & Tinega, T. M. (2014). Effect of Internal Control
Systems on Financial Performance of Small and Medium Scale Business Enterprises
in Kisumu City, Kenya. International Journal of Social Sciences and
Entrepreneurship, 1(11).

Oso, W. Y., & Onen, d. (2008). A general guide to writing research proposal and report (2nd
ed.). Kampala, Uganda: Makerere University printer.

Petrovits, C., Shakespeare, C., & Shih, A. (2009). The Causes and Consequences of Internal
Control Problems in Nonprofit Organizations. New York, United States of America.

Pfister, J. (2009). Managing Organizational Culture for Effective Internal Control.

Sarens, G., & De Beelde, I. (2006). The relationship between internal audit and senior
management: an analysis of expectations and perceptions. International Journal of
Auditing.

37
Saunders, M., Lewis, P., & Thornhill, A. (2009). Research methods for business students (5th
ed.). Essen, Germany: Pearson Education Limited.

Scarbrough, P., Rama, D., & Raghunandan, K. (1998). Audit committee composition and
interaction with internal auditing. Accounting Horizons, 12(1), 51-62.

Sebbowa, B. B. (2009). The Role of Internal Audit Function in Organizations.

Sullivan, J. L., & Feldman, S. (1979). Multiple indicators: An introduction. Beverly Hills,
CA: Sage.

Thorndike, R. L., & Hagen, E. (n.d). Measurement and Evaluation in Psychology and
Education (3rd ed.).

Verschoor, C. C. (1999). Corporate Performance is Closely Linked to a Strong Ethical

Commitment. Business and Society Review, 104(4).

Watts, H. (1999). A Conceptual Framework to Financial Reports and Internal Audits. Journal
of Accounting Auditing and Finance, 20, 753-778.

Weber, R. (1988). EDP auditing – Conceptual foundations and practice. Singapore,

Malaysia: McGraw Hill Book Co.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Accounting Principles (10 ed.).
United States of America: John Wiley & Sons, Inc.

Whittington, R., & Pany, K. (2001). Principles of Auditing and other Assurance Services.
New York: Irwin / McGraw.

Woolf, E. (1992). Auditing Today . Prentice Hall International (UK) Ltd.

Yayla, H. (2006). Impact of Power and Authority Relations on the Accounting Information
Decisions: A Suggestion of Structural Model on Turkish Private Sector Hospitals.
PhD Thesis, Ankara University,. Ankara.

38
 APPENDIX A: REQUEST FOR THE COMPLETION OF QUESTIONNAIRE

FACULTY OF ECONOMICS AND MANAGENET SCIENCE

DEPARTMENT OF BUSINESS ADMINISTRATION

HORSEED INTERNATIONAL UNIVERSITY,

BULA HUBEY – WADAJIR,

MUGADISHU – SOMALIA

STUDENT ID CARD: 1823

Dear Sir/Madam,

I am a final year student of the department of Business Administration, conducting a research

on the topic “The Impact of Internal Control System on Financial Performance in

Mogadishu Private Banks”.

I will be very grateful if you would assist complete the attached questionnaires to the best of

your knowledge to enable me complete a successful research on the topic. Be assured that the

information received will be used solely for academic purpose and will be treated

confidentially.

Thanks for your understanding and cooperation.

Yours faithfully,

ANAS DAHIR A.

(Researcher)

39
 APPENDIX B: QUESTIONNAIRE

Questionnaire to Key Staff

I am an under-graduate student of HIU (Horseed International University) pursuing Bachelor
in Business Administration program. As part of my academic work I am conducting a study
on The Impact of Internal Control System on Financial Performance in Mogadishu
Private Banks. Please spare me few minutes of your time and respond to the questionnaires
below as honestly as you can. Information provided by you is for academic purposes only and
will be treated as private and confidential. Please respond by ticking the one you think
appropriate and express your opinion as and when required.
Please feel free and answer all the questions truthfully:
Section A: Profile of the respondents (PR)
Gender:

a) Male b) Female
Age:

a) 20-30 b) 30-40 c) 40-50 d) Above 50

Marital Status:

a) Single b) Married
Level of Education:

a) High school b) Diploma c) Bachelor

d) Master e) PhD

Experience:

a) Less than 6 month b) One year c) Two years

d) Three years e) above Three years

Type of private banks:

a) Salaam Somali Bank b) Dahabshiil Bank
c) Premier Bank d) Other

40
Section B:
Please Read the following statements and check the box that best reflects your opinion of the statement.
To Assess the Functionality of Internal Control Systems in Mogadishu Private Banks
Where, 1= Strongly Disagree, 2= Disagree, 3= Neutral, 4= Agree, 5= Strongly Agree
No. 1 2 3 4 5
Control Activities:
1 Your bank has clear separation of duties.
3 There are adequate controls over information systems.
3 Staffs are trained to discharge their responsibilities diligently.
4 There are adequate controls over access to resources belonging to the bank.
5 All changes to employee status or pay rate are duly approved by an
Appropriate official.
Internal Auditing:
6 Internal auditors examine the accuracy and reliability of accounting
Records.
7 The bank’s financial statements are audited regularly by external.
8 Organizational internal auditing complies with professional standards.
9 Internal audit is able to detect illegal activities from within the Bank.
10 Independence of internal auditor assured, based upon review of
Documentation.
11 The internal auditors check compliance with establish police and
Accounting procedures.
Control Environment:
12 Management review financial transactions regularly.
13 The policies, procedures and guidelines are documented.
14 The bank has a clear organizational structure.
15 All employees are aware of the guidelines.
16 All staffs perform their responsibilities as per the regulation and guidelines.
17 Compliance to bank guidelines can lead to reliable financial reporting.
18 The internal control guidelines are able to detect irregularities.
19 The control environment in the bank is enough to reach its objectives.
Section C:
To Examine Financial Performance of Private Banks in Mogadishu
No. 1 2 3 4 5
1 Problems of outstanding cheques are solved in time to reconcile the Bank
balance of an account and book balance of the customer.
2 Financial performance is the measurement of the results of a firm’s Policies
and operations in monetary terms.
3 Your bank has enough cash to meet its obligations effectively (as and when
they fall due).
4 A good financial performance measure should ask how well the firm has
generated operating profits, given the amount of capital invested to produce
those profits.
5 No single measure of financial performance is adequate for evaluating a firm.
6 Accountability process is adequate in your organization.
Thank you for your participation
41