Internal Control System in Banking Transaction

Meaning and Need

An organization is established with definite aims and objectives. These objectives are achieved by performing different managerial, financial, operational and decisional activities. Different employees are involved in different levels of these activities. The work done by these employees has to be checked by another independent employee at work. Such checking is an aspect of an internal check. Even after the completion of work, the whole phenomenon and procedure are checked by another independent employee who has no direct concern with the work completed. This is the aspect of internal audit. Therefore, internal control is a framework comprising of internal checks and internal audits.

An internal control system is a complete framework set by an organization to control its monetary and non-monetary affairs. It is guided by prevailing laws and acts, rules and regulations, objectives and strategies of the organization, organizational need and design etc. It is a set of rules, regulations, structure, procedures etc. adopted by an organization to maintain check and balance of its various functions. It is set in such a way that it can prevent, detect and rectify errors or mistakes during and after the work. It is essential in banking transactions as well to make them transparent, reliable, trustworthy, efficient and effective.

Key Definitions

Defined By	Definition
Prof. Arnold W. Johnson	“Internal control system is one wherein the accounting work of the employee is complemented and verified by the work of another employee, both employees working independently and without duplication of each other’s work”
Jagdish Prakash	“Internal control involves various methods and procedures, adopted in an organization with a view of safeguard its assets to ensure that the accounting and statistical data produced are reliable and accurate to promote greater efficiency in operation and to carry out effectively general policies laid down by the management”

From the above discussion and definitions, an internal control system can be understood as a comprehensive control system in an organization. It aims at performing different organizational activities in the way as guided by concerned legal, strategic and policy guidelines. It is about preventing errors during work and detecting errors after work and rectifying the detected error. In short, the internal control system is a system of controlling monetary and other affairs under legal and organizational provisions of the organization including the banking sector. Moreover, it is needed in banking transactions due to the following reasons:

• For preparing and publishing reliable financial reports on a monthly, quarterly and annual basis
• For an effective and efficient operation to obtain higher profitability and enhance customer satisfaction
• For legal compliance through abiding by-laws, acts, guidelines, directives and policies
• For prevention of minor or major frauds associated with banking transactions
• For security and safeguard of assets
• For maintaining a scientific expenditure system for cost mitigation and control
• For meeting deadline of either working or reporting of the work done
• For facilitating heck and balance mechanism in the organization

Scope of Internal Control System

An internal control system in banking transactions is essential to ensure the effective completion of such transactions. In banking, the internal control system is confined to areas of the organization. More specifically, the following are the scope of the internal control system in banking transactions:

• Financial Control:

It is concerned with the proper recording of financial transactions with necessary supporting documents in a prescribed standard manner. It is also related to the use and application of accounting and reporting standards for banking transactions. Further, it is about reporting adequately within deadline with compliance to different financial norms, principles and provisions.

• Expenditure Control:

It is an attempt to spend on those heads from where the cost-effectiveness can be ensured. It is mitigating and minimizing both capital and revenue expenditure. All expenditures should be made logically and rationally. All expenditures are to be made only after considering the level of outcome or results from such expenditure.

• Inventory Control:

Inventories are a key part of the regular operation of banks and financial institutions. It includes logistic support such as vouchers, forms, cards, stationeries, brochures etc. needed for the regular operation of BFIs. Unnecessary usage, printing, modification etc. such materials are not desirable for wastage minimization and inventory control. It is also concerned with proper procurement and handling during storage and at work.

• Assets Control:

A bank has different assets of both fixed and current nature. Bank operation is dependent on assets like land and building, computer and computing devices, vehicles, security devices, ATM, furniture and fixtures etc. These assets are to be properly purchased, stored, distributed and handled while performing different banking transactions. Assets control is also about servicing as per the schedule and cost-effective repair of these assets incase of any breakdown of such assets.

• Administrative Control:

It is concerned with the general administration of banks. It is simplifying inter-departmental and inter-branch communication and coordination. It is about making deposits, credit and digital services of banks simplified for customers with reduced administrative works. It is ensuring procedural promptness with shortened command chain for any kind of administrative works in banks.

• Digital Control:

It is concerned with digital banking services offered by banks. It is all about initiating, improving and enhancing customer digital delight from the use of digital banking services. It is making digital services user-friendly and secure in terms of cyber attacks or crimes.

• Human Resource Control:

It is concerned with human resource planning, recruitment, maintenance and development. It is about forming policies and strategies so as to reduce employee turnover and absenteeism. It is ensuring right man at the right place for right work in the right level of cost. Making employees productive, punctual, loyal and committed to adopting control measures is also a crucial aspect of human resource control.

Limitation of Internal Control System

The significance of internal control system for any organization is remarkable. Its role in banks and banking transactions is significantly crucial. Despite such importance, it is also not free from limitations. Some major limitations of the internal control system can be outlined as below:

• Too much emphasis on cost reduction by management and making the decisions accordingly can reduce the effectiveness of internal control
• Chance of misuse of authority by the persons who are involved directly in the internal control system
• Frequent changes in decisions, policies and strategies harm the effectiveness of the internal control system
• Manipulation and undue influence of management divert the internal control system from its actual objective.
• An internal control system is highly focused on routine transactions which means irregular or non-routine transactions are overlooked