MARYLAND INTERNATIONAL COLLEGE

DEPARTMENT OF BUSINESS ADMINISTRATION

(MBA) PROGRAM

MARYLAND INTERNATIONAL COLLEGE

SCHOOL OF POSTGRADUATE STUDIES
MASTER OF BUSINESS ADMINISTRATION

THE EFFECT OF INTERNAL CONTROL SYSTEM ON

FINANCIAL PERFORMANCE;THE CASE OF BANK OF
ABYSSINIA.

SET BY: ALMAZ DEREJE TAREKE

ID NO:MBA\GKA006\15

SUBMITTED TO;D.R ABEBAW KASSIE

OCTOBER 15,2023

ADDIS ABABA,ETHIOPIA
Table of Contents page
CHAPTER ONE........................................................................................................................................1
1. INTRODUCTION.................................................................................................................................1
1.1. Background of the Study..................................................................................................................1
1.2. Background of the Organization.......................................................................................................2
1.3. Statement of problems......................................................................................................................4
1.4. Objectives of the study.....................................................................................................................6
1.4.1. General objective.......................................................................................................................6
1.4.2. Specific objectives......................................................................................................................6
1.7. Significance of Study........................................................................................................................6
1.8. Scope of the Study............................................................................................................................7
1.9. Organization of the Paper.................................................................................................................7
CHAPTER TWO.......................................................................................................................................8
2. LITERATURE REVIEW.....................................................................................................................8
2.1. Theoretical Review...........................................................................................................................8
2.1.1. Internal Control Theory.............................................................................................................8
2.1.2. Agency Theory...........................................................................................................................8
2.1.3. Theory of the Firm.....................................................................................................................9
2.2 Internal Control Component............................................................................................................10
2.3.1. Performance Measures in Banks.............................................................................................14
2.4. Empirical Review...........................................................................................................................14
CHAPTER THREE.................................................................................................................................18
RESEARCH METHODOLOGY...........................................................................................................18
3.1. Introduction....................................................................................................................................18
3.2. Research Design.............................................................................................................................18
3.3. Types of data collect instrument................................................................................................18
3.4. Population of the study...................................................................................................................19
3.5. Sample size.....................................................................................................................................19
3.6. Instrument of Data Collection.........................................................................................................19
3.7. Methods of Data Analysis and Tools..............................................................................................20
3.8. Ethical Considerations....................................................................................................................20
Chapter four...............................................................................................................................................21
...................................................................................................................................................................21
5. Budget schedule...................................................................................................................................21
REFERENCE..............................................................................................................................................22

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 CHAPTER ONE

1. INTRODUCTION
This chapter will introduce the nature of the propose research and the overall justify approach to
deal with the stated research problem. It consists of background of the study, background of the
organization, research problem, research hypotheses, associated research questions to be answer,
objectives to be achieved, scope, significance of the study & organization of the study.

1.1. Background of the Study

The Finance sector has become the most important actor with the impact of globalization and
technological improvements in last two decades. As a consequence, financial products have
increased, operational borders have expanded, and new financial markets have emerged. These
developments have increased and diversified the risks that the banking sector has to manage
(Daniel, 1999). Poor management and insufficient control of risks originated financial crises in
the world.

COSO in (2013) defined internal control as a process, effect by an entity ‘s board of directors,
management, and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives relating to operations, reporting, and compliance. COSO provides
further characterization of the objectives, which allow organizations to focus on different aspects
of internal control: Operational objectives pertain to effectiveness and efficiency of the entity ‘s
operations, including operational and financial performance goals, and safeguarding assets
against loss. Reporting objectives pertain to internal and external financial and non-financial
reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by
regulators, recognized standard setters, or the entity ‘s policies.

Again the Basel committee on banking supervision defined internal controls as a process affected
by board of directors, senior management and all levels of personnel. It is not solely a procedure
or policy that is performed at a certain point in time, but rather it is continually operating at all
levels within the bank (Basel, 1998). Statement of accounting

Standard (SAS, no 55) defines internal control as a combined plan, method and procedures used
to safeguard asset, promote efficiency of operation and adherence to prescribed policies and

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directives. The wider definition of internal control by United Kingdom Auditing Practice
Committee (UKAPC,1979) defined internal control as the whole system of control, financial and
operational in order to carry on business of any enterprise to safe guard asset, ensure the
completeness, accuracy of records, detect errors and fraud and ensure timely report of financial
information. (UKAPC,1979)

Many people interpret internal control as the steps a business takes to prevent employee fraud.
Actually, such measures are a part of Internal Control (IC). In the broadest sense, an organization
‘s IC structure (also referred to as an internal control system) consists of the policies and
procedures established to provide reasonable assurance that the organization ‘s objectives will be
achieved. Internal control consists of all measures taken to assure management that everything is
functioning as it should (Meigs, 1989:145-149). Business decisions of almost every kind are
based at least in part on accounting data. These decisions range from minor matters such as
authorizing overtime work and purchasing office supplies to major issues such as shifting from
one product to another or choosing between leasing or buying a new plant. The internal control
structure assures management of the dependability of the accounting data used in making
decisions. Business decisions made by management become company policy. To be effective,
this policy must be communicated throughout the company and consistently followed. Internal
control aids in securing compliance with company policy. Management also has the direct
responsibility of maintaining accounting records and producing financial statements that are
adequate and reliable. Internal control provides assurance that this responsibility is being met
(Ibid).

1.2. Background of the Organization

The present-day Bank of Abyssinia was established on February 15, 1996 (90 years to the day
after the first but defunct private bank was established in 1906 during Emperor Menelik II) in
accordance with 1960 Ethiopian commercial code and the Licensing and Supervision of Banking
Business Proclamation No. 84/1994.

BOA started its operation with an authorized and paid up capital of Birr 50 million, and Birr 17.8
million respectively, and with only 131 shareholders and 32 staff.

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In two decades since its establishment Bank of Abyssinia has registered a significant growth in
paid up capital and total asset. It also attracted many professional staff members, valuable
shareholders and large customers from all walks of life. This performance indicates public
confidence in the Bank and reliability and satisfaction in its services.

Currently, employing the state-of-art banking technology, the Bank provides excellence
domestic, international and special banking services to its esteemed and valuable customers. It
also strives to serve all economic and services sectors via its ever increasing branch networks
throughout the country.

Asset

Authorized and paid up capital of BOA as at December 31,2020 is Birr 4 billion and Birr 3.41
billion, respectively, a total deposit balance of Birr 67.17 Billion and a total loans and advances
of Birr 55.84 billion, which in effect enhance the risk absorbing and the lending capacity of the
Bank.

Customers

BOA has more than 10,294 staffs and 3,838,325 account holders at December 31, 2020 and
works with known money transfer agents such as Western Union, Xpress Money, Ria
International, Transfast , Dahabshiil, MoneyGram, Kaah ,Word Remit Terrapay and Thunes.

ICT

Following a strong demand for better service and products from all directions on the one hand,
and a ground-breaking development in ICT, on the other, BOA has replaced its in –house IT
system with the state-of- the art technology called T24 and started ATM and POS services
with Habesha card and mobile banking services. BOA also provides Internet banking services
while Agent banking service will be readily available within the near future.

Shareholders

BOA has 2,424 shareholders who are successful businessmen, intellectuals, celebrities, etc.

Branch Networks

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Bank of Abyssinia, which started banking services with only one branch in 1996, has 768
domestic branch networks, of which 262 branches are in Addis Ababa and the remaining 506 are
established in bankable towns all over the country. Most branches work 10 hours a day 6 days a
week (starting from 08:00 up to 06:00 PM), while some other work up to 07:00 PM in the
evening. All City and Outlying branches are interconnected with state-of-the art ICT. All
branches offer both domestic and international banking services.

Bank of Abyssinia still strives to identify bankable area every year and serve valuable customers
by expanding its branch networks throughout the country.

In this respect there are more branches on the pipe line to be opened in Addis Ababa and in the
regional states this fiscal year.

Through its 818 branches in the country, BOA serves over 9.3 million customers. BOA’s well-
structured financial service system is connected through the T-24 core banking system. This
coupled with the 1271 ATM machines, 16 virtual banking centers, and more than 1256 POS
placed in different locations to afford customers to access their accounts from anywhere at any
time. This also allowed BOA to increase its capital a hundred-fold from ETB50 million to ETB
5.5 billion.

A system is a set of interrelated and interdependent components that interact in a way to achieve
a set goal. These components or sub-systems are inter-dependent and the failure of one
component leads to the failure of the whole system. An organization is a complex system which
is divided in various sub-systems (Units, divisions, departments, etc.) and hence requires a
system of controls over units, divisions, departments, etc. For its effectiveness and survival. An
effective internal control system is an integrated system with interrelated components, supporting
principles and attributes. Harvey and Brown (1998) identified control environment, accounting
system and control procedures as the major components of internal controls (Harvey & Brown,
1998).

1.3. Statement of problems

Internal control systems in the banking sector are the mechanisms and the basis upon which
banks streamline their operations towards the direction of achieving their objectives. Most of the
banks stakeholders believe that control systems working properly. However, some challenges

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will have happened to the company concerning internal control of financial performance such as
low liquidity ratio, frauds and mismanagement, untimely financial report and low accountability.
Several Studies where study on internal controls globally, regionally and locally on the effect on
internal control & financial performance system on various firms.

According to Kirsty (2008) efficient internal controls creates an organization ‘s confidence in its
ability to perform or undertake a particular task and prevents errors and losses through
monitoring and enhancing organizational and financial reporting processes as well as ensuring
compliance with pertinent laws and regulations.

According to Sable (2018 Despite of the fact that internal control system will be in reality for
many years in the banking sector, there have been current cases and stories told about highly
frequent fraud Ethiopian banking industry was not left out in this increase in crime – wave
problems and banking.

According to Hawaz (2016) in 2012, 7 million Ethiopian Birr (ETB) was transferred from the
bank into the account of another company and also in 2016, 19 million birr (ETB) to the account
of a fake company. Bank frauds following same pattern and design have been committed in the
past years.

Each company needs to have in place an appropriate and effective internal control environment
to ensure that the company is managed and controlled in a sound and prudent manner. (Sultana
and Haque, 2011)

Mohammed, (2003) researched effect of the internal controls of Ethiopian Airlines Branch office
in Nairobi and a case study of internal controls of Nyayo Bus Service

Corporations in Nairobi (Esmailjee, 1993). Chira (2009) researched on the analysis of internal
controls systems in financial institution. In the context of Ethiopia, the related study conducted
by Rahel (2017) tries to see the role of internal control system on performance of Ethiopian
shipping and logistics service enterprise by considering internal control from the perspective of
Control Environment, Control Activities, Risk Assessment, Information and Communication
system, Monitoring and fail to disclose the impact of corporate governance on financial
performance.

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Even though the control systems put in place by the banks, banks still experience liquidity
problems, inefficient allocation of resources, and delay in preparation of financial reports,
malfunctioning and fraud in use of assets of the banks. The findings of the studies carried out and
did not focus specifically on Internal Control on financial performance of Bank of Abyssinia and
it is clear that, there are many areas about internal control in relation to financial performance
that have not yet been fully addressed. The researcher therefore, required to find out the effect of
ICS on financial performance of the case of bank of Abyssinia.
1.4. Objectives of the study
1.4.1. General objective
The main objective of the study will be to determine the effect of internal control systems on
financial performance the case of bank of Abyssinia.
1.4.2. Specific objectives
The specific objectives of the study are:
1 To understand the effect of Control environment on financial Performance of BOA.
2 To determine the effect of Risk assessment on financial Performance of BOA.
3 To determine the effect of control activity of financial performance of BOA.
4 To establish the effect of Information and communication on financial Performance of BOA.
1.7. Significance of Study
This study will investigate the effect of internal control systems on financial performance in the
case of Bank of Abyssinia. The result of this study will provide insight and information to
practitioners about the role of internal control system on financial performance.
The study will help other researcher come up with better proposal on the effect internal control
of financial performance in case of Bank of Abyssinia.
The finding of this study will enable the internal auditors, financial management and staffs
across all branch of Bank of Abyssinia to understand the roles and benefits of systems of internal
control in their area of work.
This is study important for those researchers who will be in interesting to conduct further study
in this area.
The finding of the study will be used to give recommendations on area of weakness that might be
in existence but not yet discovered and that will require proper attention and consideration in
matters pertaining internal control system of Bank of Abyssinia.
The finding of this research will provide a knowledge base method that will aid in decision
making for manager and help identify internal control faults to prevent any negative
consequence; the study will also help other researchers as a source of reference and as a stepping

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stone for those who want to make further study on the area afterward. Finally, the study will give
stake holders in the area the opportunity to gain deep knowledge about the relationship of
internal control and financial performance.
1.8. Scope of the Study
The scope of the study will be delimited conceptually, geographically and methodologically
which is described as follows. The geographical scope of the study will be delimited to only
bank of Abyssinia. Regarding the conceptual scope of the study is effectiveness of internal
control system on financial system, but the researcher forced to considered only five factors
namely; Control Environment, Risk Assessment practices, Information and Communication,
existence of Control Activities and monitoring. The methodological scope of the study that the
researcher will be use includes descriptive statistical tools like, frequency distribution &
measures of variability will be used to summarize & describe the response of participants from
inferential statistical tools, T-test, linear regression analysis, chi-square etc.
1.9. Organization of the Paper
The result of the proposal will be organized into the following chapter. Chapter one is concern
with introduction that included background of the study, background of the company, statement
of the problem, general and specific objectives, research questions, significance of the study,
scope of the study & organization of the study. Chapter two covers literature's which are relevant
on the subject matter under study. Chapter three is about research methodology that consists of
research design, research approach, sources of data collection, method of data collection and data
analysis will be discussed. Chapter four and Chapter five presents findings from the survey
result, general conclusions and possible recommendations to the problems that will be drawn
from the results of the data analysis and final results.

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 CHAPTER TWO

2. LITERATURE REVIEW
This chapter presents both theoretical and empirical reviews of related literature on the internal
control and financial performance. The current and relevant literature will be sought for and
thoroughly reviewed.

2.1. Theoretical Review

This section will be briefly sketch the meaning of internal controls, theories, internal control
component, internal control limitation, and internal control and performance. Finally, the
concern is to show financial Performance Measures in the Banks and conceptual frame work.

2.1.1. Internal Control Theory

A theory is a set of interrelated concepts, definitions, and propositions that present a systematic
view of events or situations by specifying relations among variables, in order to explain and
predict the events or situations‖ (Van Ryn& Heaney, 1992).

Theoretical literature is concerned primarily with theories or hypotheses rather than Practical
application. Theoretical literature begins with a formal model that seeks to explain participation
patterns in terms of underlying theory (Heilbrun& Gray, 1993) based on these the following
theories are discussed below.

2.1.2. Agency Theory

Agency theory is a management and economic theory that attempts to explain relationships and
self-interested business organizations. It describes the relationship between delegation of
principals/agents and control. It explains how best to organize relationships in which one party
(principal) determines the work and which another party (agent) performs or makes decisions on
behalf of the principal (Jensen and Meckling, 1976).

Agency Theory explains how to best organize relationships in which one party determines the
work while another party does the work. In this relationship, the principal hires an agent to do
the work, or perform a task the principal is unable or unwilling to do. For example, in
corporations, the principals are the shareholders of a company, delegating to the agent i.e. the
management of the company, to perform tasks on their behalf. Agency theory assumes both the
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principal and the agent are motivated by self-interest. This assumption of self-interest dooms
agency theory to inevitable inherent conflicts. Thus, if both parties are motivated by self-interest,
agents are likely to pursue self-interested objectives that deviate and even conflict with the goals
of the principal. Yet, agents are supposed to act in the sole interest of their principals. This
position will be supported by Coarse (1937) who maintained that the controls provide for conflict
resolution between the agent and principal and that moral hazard and adverse selection affects
the output of the agent. Studies have shown that Agency theory has been used to explain
demands for monitoring controls (Watts & Zimmerman1983)

Internal control systems have been incorporated into policies, rules and regulations of
organizations to achieve their established objectives. This theory is important in the current study
as it will shed light on how the principal and agency interact for the benefit of the organization. It
will also help in the evaluation of the organization on internal controls. The fact that the principal
delegates his power to the agent also creates an oversight role by the principal to the agent.

2.1.3. Theory of the Firm

The theory of the firm is the microeconomics concept founded in neoclassical economics that
states that firms (including businesses and corporations) exist and make decisions to maximize
profits. Firms interact with the market to determine pricing and demand and then allocate
resources according to models that look to maximize net profits.

In the theory of the firm, the behavior of a particular business entity is said to be driven by
maximization of profit. This theory governs decision making in a variety of areas including
resource allocation, production technique, pricing adjustments and quantity produced. Modern
takes on the theory of the firm take such facts as low equity ownership by many decisions
makers into account; some feel that chief executive officers (CEOs) of publicly held companies
are interested in profit maximization as well as in goals based on sales maximization, public
relations and market share. Solely focusing on profit maximization comes with a level of risk in
regards to public perception and a loss of a sense of goodwill between the business and other
individuals or entities.

According to Spulber (2009) the theory of the firm consists of a number of economic theories
that explain and predict the nature of the firm, company, or corporation, including its existence,

9
behavior, structure, and relationship to the market. According to Magu & Kibati (2016) cited as
DePaula (1990) in support stated that risk assessment is important for the existence of the firm.
Millichamp (1999) in support stated that monitoring of firm ‘s activities reduces risk of
intentional manipulation of accounts and increases element of checking. This makes fraud more
difficult to be committed and maximizes profits of the firm. This theory is important in the
current research project as it helped in shedding light on how wealth maximization can be
achieved through the interaction with internal controls. It also helped in the understanding of the
controls activities that are supposed to be put in place to enhance wealth creation.

2.2 Internal Control Component

A. Control Environment

The control environment is the set of standards, processes, and structures that provide the basis
for carrying out internal control across the organization. The board of directors and senior
management establish the tone at the top regarding the importance of internal control including
expected standards of conduct. Management reinforces expectations at the various levels of the
organization. The control environment comprises the integrity and ethical values of the
organization; the parameters enabling the board of directors to carry out its governance oversight
responsibilities; the organizational structure and assignment of authority and responsibility; the
process for attracting, developing, and retaining competent individuals; and the rigor around
performance measures, incentives, and rewards to drive accountability for performance. The
resulting control environment has a pervasive impact on the overall system of internal control.
(COSO, 2013)

It is the foundation for an internal control system. It provides the discipline and structure to help
an entity achieve its objectives. The control environment is the foundation for an internal control
system. It provides the discipline and structure, which affect the overall quality of internal
control. It influences how objectives are defined and how control activities are structured. The
oversight body and management establish and maintain an environment throughout the entity
that sets a positive attitude toward internal control. (SOX Guidance, 2007)

It establishes integrity and ethical values, establish oversight structure, develop expectations of
competence, and maintain accountability to all members of the oversight body and key
stakeholders.

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B. Control Activity

Control activities are the actions established through policies and procedures that help ensure
that management ‘s directives to mitigate risks to the achievement of objectives are carried out.
Control activities are performed at all levels of the entity, at various stages within business
processes, and over the technology environment. They may be preventive or detective in nature
and may encompass arrange of manual and automated activities such as authorizations and
approvals, verification's, reconciliations, and business performance reviews. Segregation of
duties is typically built into the selection and development of control activities.

An effective internal control system requires that an appropriate control structure is set up, with
control activities defined at every business level. These should include: top level reviews;
appropriate activity controls for different departments or divisions, physical controls, checking
for compliance with exposure limits and follow-up on non-compliance; a system of approvals
and authorizations; and, a system of verification and reconciliation. An effective internal control
system requires that there is appropriate segregation of duties and those personnel are not
assigned conflicting responsibilities. Areas of potential conflicts of interest should be identified,
minimized, and subject to careful, independent monitoring.

C. Risk Assessment

Every entity faces a variety of risks from external and internal sources. Risk is defined as the
possibility that an event will occur and adversely affect the achievement of objectives. Risk
assessment involves a dynamic and iterative process for identifying and assessing risks to the
achievement of objectives. Risks to the achievement of these objectives from across the entity
are considered relative to established risk tolerances. Thus, risk assessment forms the basis for
determining how risks will be managed.

A precondition to risk assessment is the establishment of objectives, linked at different levels of

the entity. Management specifies objectives within categories relating to operations, reporting,
and compliance with sufficient clarity to be able to identify and analyze risks to those objectives.
Management also considers the suitability of the objectives for the entity. Risk assessment also
requires management to consider the impact of possible changes in the external environment and
within its own business model that may render internal control ineffective. According to the

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frame work for internal control system in banking organization (1998)stated that effective risk
assessment identifies and considers internal factors (such as the complexity of the organization‘s
structure, the nature of the bank‘s activities, the quality of personnel, organizational changes and
employee turnover) as well as external factors (such as fluctuating economic conditions, changes
in the industry and technological advances) that could adversely affect the achievement of the
bank‘s goals. This risk assessment should be conducted at the level of individual businesses and
across the wide spectrum of activities and subsidiaries of the consolidated banking organization.
This can be accomplished through various methods. Effective risk assessment addresses both
measurable and non-measurable aspects of risks and weighs costs of controls against the benefits
they provide. The risk assessment process also includes evaluating the risks to determine which
are controllable by the bank and which are not. For those risks that are controllable, the bank
must assess whether to accept those risks or the extent to which it wishes to mitigate the risks
through control procedures. For those risks that cannot be controlled, the bank must decide
whether to accept these risks or to withdraw from or reduce the level of business activity
concerned.

According to J. Dubihlela and Lisa (2017) stated that risk management activities protect of the
organization, its people, assets, and profits, against the physical and adverse consequences, by
planning, coordinating and directing the internal risk control and the risk mitigation activities.

D. Information and Communication

Information is necessary for the entity to carry out internal control responsibilities to support the
achievement of its objectives. Management obtains or generates and uses relevant and quality
information from both internal and external sources to support the functioning of other
components of internal control. Communication is the continual, iterative process of providing,
sharing, and obtaining necessary information. Internal communication is the means by which
information is disseminated throughout the organization, flowing up, down, and across the entity.
It enables personnel to receive a clear message from senior management that control
responsibilities must be taken seriously. External communication is twofold: it enables inbound
communication of relevant external information, and it provides information to external parties
in response to requirements and expectations. (COSO, 2013)

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The quality information management and personnel communicate and use to support the internal
control system. Analyze and discuss information relating to the entity’s achievement of
objectives.

E. Monitoring

Ongoing evaluations, separate evaluations, or some combination of the two are used to ascertain
whether each of the five components of internal control, including controls to affect the principle
within each component, is present and functioning. Ongoing evaluations, built into business
processes at different levels of the entity, provide timely information. Separate evaluations,
conducted periodically, will vary in scope and frequency depending on assessment of risks,
effectiveness of ongoing evaluations, and other management considerations. Findings are
evaluated against criteria established by regulators, recognized standard-setting bodies or
management and the board of directors, and deficiencies are communicated to management and
the board of directors as appropriate. (COSO2013)

According to the frame work for internal control system in banking organization (1998) stated
that the overall effectiveness of the bank ‘s internal controls should be monitored on an ongoing
basis. Monitoring of key risks should be part of the daily activities of the bank as well as periodic
evaluations by the business lines and internal audit. Since banking is a dynamic, rapidly evolving
industry, banks must continually monitor and evaluate their internal control systems in the light
of changing internal and external conditions, and must enhance these systems as necessary to
maintain their effectiveness. Monitoring the effectiveness of internal controls can be done by
personnel from several different areas, including the business function itself, financial control
and internal audit. For that reason, it is important that senior management makes clear which
personnel are responsible for which monitoring functions. Monitoring should be part of the daily
activities of the bank but also include separate periodic evaluations of the overall internal control
process. The frequency of monitoring different activities of a bank should be determined by
considering the risks involved and the frequency and nature of changes occurring in the
operating environment. Ongoing monitoring activities can offer the advantage of quickly
detecting and correcting deficiencies in the system of internal control. Such monitoring is most
effective when the system of internal control is integrated into the operating environment and
produces regular reports for review.

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2.3.1. Performance Measures in Banks

Performance is a measure of company ‘s policies and operations in monetary terms. It is a

general Measure of a firms overall financial health over a given period of time, and can be used
to compare similar firms across the same industry or to compare industries or sectors in
aggregation. The financial performance analysis identifies the financial strengths and weaknesses
of the firm by properly establishing relationship between the items of the statement of financial
position and statement of comprehensive income.

According to Dixon (1990) appropriate performance measures are those which enable
organizations to direct their actions towards achieving their strategic objectives. Banks ultimate
goal is Profit. All activities performed are to realize this grand objective. They also have
additional social and economic goals.

Profitability

To measure the financial performance of organization, return on Equity, return on Asset, Net
interest margin ratio may be used.

2.4. Empirical Review

Mawanda (2008) conducted a research on effects of internal control systems on financial
performance in institution of higher learning Uganda. In his study he investigated and sought to
establish the relationship between internal control systems and financial performance in an
Institution of higher learning in Uganda. Control Environment, Internal Audit and Control
Activities are taken as independent variable while financial performance Liquidity,
Accountability and Reporting is taken as dependent variable representing the firm ‘s
performance. The Researcher set out to establish the causes of persistent poor financial
performance from the perspective of internal controls. The study established a significant
relationship between internal control system and financial performance.

A case study was conducted by Mary and Byaruhanga (2014) in their study they investigated and
sought to establish the relationship between internal control component and financial
performance of Kenya ‘s sugar cane out grower companies. Internal controls will be looked at
from the perspective of control environment, risk assessment process, information system and
control activities whereas financial performance focused on cost per unit, goal attainment and

14
profitability as the measures of financial performance as a result of poor performance of the
management which is illustrated in poor returns they post for their clients. The study result
indicates internal control system has positive significant impact on financial performance Kamau
(2014) conducted a research on the effect of internal control system on financial performance of
manufacturing firms in Kenya. The study examined the effect of control activities on the
financial performance of manufacturing firms in Kenya. The results revealed that the staffs are
train to implement the accounting and financial management systems, the security system
identified safeguarded organizational assets and also the management had put in place
mechanisms for mitigation of critical risks that may result from fraud. The statistical results from
the regression analysis show that there is a positive relationship between internal control and
financial performance of manufacturing firms in Kenya. Internal control proxy by Control
Environment, Risk Assessment, Control Activities, Information and Communication, and
monitoring contributed to a good model prediction.

Ndifon and Patrick (2014) studied the Impact of Internal Control Activities on Financial
Performance of Tertiary Institutions in Nigeria. The objective of this study is to establish the
relationship between internal control activities and financial performance in Tertiary Institutions
in Nigeria. The data for the study will be collected using questioner and interview. The study
revealed that all activities of the College are initiated by the top management, there is clear
separation of role in the institutions finance and account department and that superior officer in
the College supervised regularly work done by their subordinate, the institution financial
statements are audited annually by external.

However, there is a possibility for a single staff to have access to all valuable financial
information without the consent of other staff. On the budgetary control, the study revealed that
the institution adheres strictly to the provisions of annual departmental budget and that control
are in place to exclude incurring expenditure in excess of allocated fund. Also, there is poor
security network in the College. Chnnar (2015) studied comparative assessment on internal
control effectiveness and its impact on financial performance. The study examined the
relationship between internal control effectiveness with the proxy control environment, risk
assessment, control activity, information and communication and monitoring and financial
performance with the proxy of ROE, ROA and profit to expense ratios among private, public and

15
Islamic banks. The studied results show that the effectiveness of the elements of the internal
control system vary between banks in the same sector the general result reveals there is no
significant variation about effectiveness of the elements of internal control system among
different sector of banks. And also financial performance between groups and within groups
concluded even though still there is variation of performances within groups, the total result
shows banks engaged in different sectors do not have significant variation in their ROA, ROE
and profit to expense measures.

Hassen (2016) in their study they investigated and sought to establish the relationship between
the internal control system and organizational performance of remittance companies in
Mogadishu Somalia. In this study internal control system proxy by control environment, control
activities and risk evaluation whereas organizational performance on Employee Satisfaction and
Customer Satisfaction. Tools of this research are questionnaires which are administered through
drop and pick method. Findings showed that control environment; risk assessment and control
activity significantly affects the organizational performance of remittance companies in
Mogadishu.

Robert (2016) conducted a research on Internal Control System and Financial Performance in
Non-Governmental Organizations in Uganda: A Case Study of International Union for
Conservation of Nature. The study set out to investigate the role of internal control system in the
financial performance of non-governmental organizations in Uganda. Specifically, the study
sought to establish the effect of control environment on the financial performance of
International Union for Conservation of Nature, to investigate the effect of control activities on
the financial performance of International Union for Conservation of Nature, and to examine the
significance of monitoring on the financial performance of International Union for Conservation
of Nature. The findings of the study revealed a significant relationship between control
environment, control activities, monitoring, and financial performance.

Johnkan (2016) conducted a research on effect of internal control system on financial

performance of companies quoted in the Nairobi securities exchange (NSE). The main objective
of the study was to the effect of internal control systems and financial performance of companies
quoted in NSE. Internal controls are looked at from the perspective of internal control
environment, internal audit function, risk management, internal control activity and corporate

16
governance whereas financial performance focused on Net profit, return on equity and Earning
per share as the measures of financial performance. The study adopted descriptive research
design using both quantitative and qualitative approach and multiple regression model used. The
data is analyzed using both qualitative and quantitative analysis. The finding of the study
revealed that internal control systems had a significant relationship with financial performance.

Tsedal (2015) conduct a research on the Assessment of Internal Control Effectiveness in

Selected Ethiopian Public Universities. Internal controls are looked at from the perspective of
Control Environment, Control Activities, Risk Assessment, Information and Communication
system, and Monitoring. Thus this study focused on assessment of the effectiveness of the
internal control system in the universities to identify the possible areas of deficiencies in the
system. Data are analyzing using descriptive statistics and inferential statistics using SPSS
results. The result indicates that internal control in the universities is not effective. Particularly
the risk assessment component of internal control is not practiced in the universities. Though
monitoring is better in the universities, there is in adequate control environment, control
activities and inadequate flow of information and communication in those universities. Hence, it
needs commitment from both universities management and responsible government authority ‘s
to improve those specific areas of deficiencies in internal control indicated.

Rahel (2017) conduct a research on the role of internal control systems on performance of
Ethiopian shipping and logistics service enterprise. The main purpose of this study is to
determine the impact of internal control systems on financial performance on Ethiopian shipping
and Logistics Services Enterprises as a case study. Internal controls are looked at from the
perspective of internal control system, control environment, control activities, risk assessment,
monitoring and information and communication whereas financial performance focused on
profitability and ROA. The descriptive result shows there is weak internal control system in the
organization. The study recommends more commitment by the management in monitoring
internal control system and continue working on improving for the effectiveness of the internal
control system so, the company will achieve better performance.

17
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1. Introduction
This chapter describes the research methodology of the study that will be used to achieve the
objective of the study. Research methodology is the procedural plan that will be adopted by the
researcher to validly, objectively, economically and accurately answer the research questions.

3.2. Research Design

According to Kothari (2007), research design will be defined as a framework that shows how
problems under investigation will be solved. This study adopted a descriptive survey design
because it provides a clear outcome and the characteristics associated with it at specific point in
time. Explanatory research design will be relevant for this study since it focuses at one point in
time and does not require several rounds of monitoring. The study will employee quantitative
methods of data analysis. It can play a great role of achieving organizational goal and they work
effectively and efficiently in bank of Abyssinia by using questionnaire method.

3.3. Types of data collect instrument

This study will be used questionnaire which is a widely used and useful instrument for collecting
information. The questionnaire will be develope in two sections. The first one is on the general
aspect of the respondent and the second one is develope based on standard of internal control.
The first section evaluates whether the status and experience of the respondents has an effect on
internal control system. The second section will be used to evaluate the effect of the standards of
the controls are in those samples of bank of Abyssinia.

3.4. Population of the study

Population is a collection of all conceivable elements, subjects or observations with one or more
attributes in common. It represents a specified segment of the real world with common definite
specified characteristics relating to a particular phenomenon of interest to the researcher. The
definition of population is an identifiable total set of elements of interest being investigated by a
researcher zikmund, 2003.According to Ethiopian commercial code of 1960 and the licensing
and supervision of banking business proclamation no.84/1994.there are about 8 districts, 11,265

18
employees and Currently it has over 825 branches across. Therefore, the target populations for
the study district and head offices in finance, internal control and audit departments of Bank of
Abyssinia in Addis Ababa.

3.5. Sample size

The total numbers of population working in finance, internal control, auditors and the five
districts in Addis Ababa are 380. The sample size is 200 and purposive sampling method used to
select sample respondents. Employees who have more than one year experience and believed to
have required knowledge included in the sample. The sample size for this study is determined by
simplified formula provided by Yamane (1967), 95% confidence level which stated as follow.

N
n= 2
1+ N ( e )

380
n= 2
1+380 ( 0.05 )

n =195

3.6. Instrument of Data Collection

The data collection instrument is a questionnaire will be prepared in the form of a five point
Likert-scale to identify and measure the effect of internal control systems on financial
performance the case of bank of Abyssinia. The instruments which will be used in this study are
close-ended questionnaire which is adopted from previous studies the measuring instrument for
this research is questionnaire which consists of two parts. The first part is the demographic
profile which helps us to identify the participants ‘gender, age, educational background, and field
of study/profession. The second part of questions which helps the researcher to investigate each
determinant components of internal control system and their effect of internal control systems on
financial performance the case of back of Abyssinia. A large amount of researchers uses this
methodology, because it is relatively easy for respondents to use, and responses from such a
scale are likely to be reliable (Balzan and Baldacchino, 2007; Lam and Kolic, 2008).After
collecting the distributed questionnaires, the data gathered will be edited & carefully checked to
eliminate improperly filled questionnaires so that only usable questionnaires will be considered
for analysis. Finally, the data obtained after analysis will be presented using different statistical
tools and models.
19
3.7. Methods of Data Analysis and Tools
In order to analyze and present the findings of the study, (STATA) software program of version
12 will be used. Each response of the respondents will be coded and fed to the software and
analyzed using descriptive and inferential statistical tools. From inferential statistical tools, to
test T-test, Cronbach's coefficient alpha, chi-square etc. will be conducted to examine ICS on
financial performance The Pearson Correlation statistical tool will be used by the researcher to
measure the relative strength of the relationship between the five ICS determinant factors
(variables) and its financial performance through Cronbach’s alpha likert scale.

3.8. Ethical Considerations

There are certain ethical protocols that have been followed by the student researcher. The first is
asking explicit consent from the respondents. This will ensure that their participation to the study
is not out of their own desire. The student researcher has also ensured that the respondents are
aware of the objectives of the research and their contribution to its completion. One other ethical
measure which exercised by the student researcher is treating the respondents with respect and
courtesy. Following the above ethical considerations motivate and initiated respondents to be at
ease and more likely to give honest responses to items of the questionnaires. There are also
ethical measures will be taken in the data analysis. To ensure the integrity of data, the researcher
checked the accuracy of encoding of the responses. This shall be carried out to ensure that the
statistics generated from the study are truthful and verifiable

20
 Chapter four
4. Time and Activity schedule

Activities Aug Sep Oct

No
1 Selecting the title and approval 
2 Proposal preparation and date of   .
proposal submission
3 Collecting data  

4 Editing and formatting 

5 Submission of proposal prepared 

presentation

5. Budget schedule

No Materials Measurement Unit Cost

Per unit Total cost

1 Paper Packet 1 700 700

2 Printing Page 25 3 5

21
3 Pen Number 6 15 90
Total 32 718 795

REFERENCE
COSO, May 2013; Committee of Sponsoring Organizations of the Tread Way
Commission Internal Control — Integrated Framework Executive Summary
BusinessWeek, September 22.

Heremans (2007), financial performance is the employment of financial indicators

to measure.
Hassan Adam Mire (2016), Effect of internal control system on organizational
Performance of remittance companies in Mogadishu Somalia manufacturing
firms in Kenya ,IJRDO - Journal of Business Management,Volume-2 | Issue-
Paper-9

Douglas, 2011; Internal Control and its Contributions to Organizational Efficiency

and Effectiveness: A Case Study of Eco bank Ghana Limited July, 2011.
Dixon, J. R. (1990). The new performance challenge: Measuring operations for
world class Competition, Irwin Professional Pub.

Ndifon and Patrick (2014) studied the Impact of Internal Control Activities on
Financial Performance of Tertiary Institutions in Nigeria
Tsedal Lemi (2015); Assessment of Internal Control Effectiveness in selected
Ethiopian Public Universities, January, 2015 Addis Ababa

22
.AICPA (1988) Standards of Internal Control (pdf). Available from
(http://www.aicpa.org/internal control.pdf)

23