Effect Of Internal Audit On Financial Performance Of Co34mercial Banks In Uganda
[A CASE STUDY OF STANDIC BANK KANSANGA BRANCH]

CHAPTER ONE INTRODUCTION

1.1 Background of Study

The bait (Stanbic Bank) was founded in Uganda as the National bank of India in 1906.After several name changes it became Grindlays bank. In 1991 standard bank bought the grindlays bank network in Africa. The new owners renamed the bank Stanbic (Uganda) limited. Stanbic bank Uganda limited is licensed as a merchant banker, stock broker and financial advisor by the capital markets authority, which was licensed the USE in 1997.In 2017 the bait was awarded a banc assurance license from the license from the insurance regulatory authority authorizing Stanbic bank to sell insurance products to its customers and the public.

In Febi‘uary 2002, standard bank acquired 90% share holdings. The Uganda commercial bank , a government owned retail banking operations with 65 branches. The new owners merged their new acquisition with their existing Stanbic bank Uganda limited to form the Uganda’s largest commercial bait by assets and branches network. In November 2005, the government of Uganda divested its ownership in Stanbic bank by listing its shares on the USE. Standard bank also floated 10% of its shares at the same time reducing their ownership to 80%.

For iiiost o1 its history internal audit has served as a simple administrative procedure comprised mainly of checking documents, counting assets, and reporting to Board of Directors, Management or External Auditors. In recent times, however, a combination of different forces has led to a quiet revolution of the profession. Organizations have to demonstrate accountability in the use of shareholders money and efficiency in the delivery of services. Organizations now demand great competency and professionalism  from internal audit, and scarce resources must be deployed more efficiently to minimize and manage risks.

Technological advancement makes it possible to track and analyze data with continually increasing speed thus making it essential for organizations to be well advised by  the internal audit department. Internal audit varies from one orp•anization to another, and making change to modern internal audit can be a substantial undertaking. The

transition from merely ensuring compliance with rules and regulations to truly delivering added value requires more than just organizational changes. In many bank institutions staff is poorly paid and unmotivated, ethical standards are weak, and governance practices are ineffective leading to asset mismanagement (Ramamoorti, 2003).

According to Robertson (1976) Internal Auditing may be defined in several ways depending upon what purpose is to be served. Pickett (1976) stated that internal audit 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, discipllned approach to evaluate and improve the effectiveness of risk management, control, and governance processes. This definition actually seeks to demonstrate the depth and breadth of the internal audit activity within an institution as against the previous orientation of reviewlng payment transactions over the years.

There are many aspects of the performance of commercial banks that can be analyzed. Muga (2012) stated that the importance of bank profitability can be appraised at the micro and macro levels of the economy.  At the micro level, profit is the essential prerequisite of  a competitive banking institution and the cheapest source of funds. It is not merely a result, but also a necessity for successful banking in a period of growing eompetltion on fi1âdi1G181 markets. Hence the laasic airs of every bank management is to maximize profit, as an essential requirement for conducting business.

Schiuina (2003) mentioned accounting- based performance using three indicators:  return on assets (ROA), the return on total equity (ROE) and Return on Investment (ROI).These are widely used to assess the performance of finns, including commercial banks. Bank regulators and analysts have used ROA and ROE to assess industry performance and forecast  trends in market  structure as inputs  in statistical models  to predict  bank failures

and  mergers  and  for  a  variety  of  other  purposes  where  a  measure  of   profitability is • desired. The main purpose of this study was to examine if internal audit can actually

enhance banks financial performance.

Finally Herman son and Rotenberg (2005) argued that the existence of an effective internal audit function is associated with superior organizational performance. At the empirical level, a survey conducted by KPMG (1999) found that the internal audit function in organizations where it exists, contributes substantially to performance improvement and  assist in identifying profit evidence in corporate disasters, particularly financial fraud consistently documents an association between weak governance. Thus internal audit by acting as a watchdog could save the organization from malpractices and irregularities thus enabling the organization to achieve its objectives of ensuring high level of productivity and profit.

1.2 Problem Statement.

Recent corporate accounting scandals and the resultant outcry for transparency and  honesty in reporting have given rise to two disparate yet logical outcomes. First, Internal Auditing skills have become crucial in untangling the complicated accounting man oeuvres that  have  obfuscated   financial  statements.   Secondly,   public  demand  for  change  and subsequent    regulatory    action   lfas   transformed    corporate  governance. Increasingly, ” company officers and directors are under ethical and legal scrutiny. Both trends have the

common goal of responsibly addressing investors concerns about the financial reporting system. However there has been laxity in implementation of internal audit findings and recommendations due to lack of understanding of assessing skills and methods, identifying corrective actions and losing them out and poor management decisions making. And Stanbic bank Ishaka branch has not been without crisis, the shortcomings of Uganda's banking sGctor prior to the banking crisis of the late 1980s, and then the effect of the measures subsequently introduced by Uganda's Central Bank. This laxity forced the researcher to carry out the research on tlie internal audit functions in this branch, the role it plays in the organization,  internal  audit  and asset management  and  how  they affect   the financial performance. -