INTERNAL CONTROL EFFECTIVENESS & ITS RELATIONSHIP WITH FINANCIAL PERFORMANCE

Abstract

Purpose: This research attempts to investigate the functionality of each of the five Internal control components, effectiveness of the control system and its relationship with financial performance. Methodology: Sample size for this research is 210 respondents comprising of employees from 6 Banks in Hyderabad: NBP and Sindh bank from the public sector, MCB and HBL from the private sector, Meezan bank and Bank Alfalah as Islamic banks. In this study, internal control is measured by the five components whereas financial performance is measured through three profitability ratios. Data is collected through primary as well as secondary sources. The primary source used is questionnaire taken from a combination of instruments developed by Baker, Castro, Labrena & Meyer (2005). Secondary source used are the financial statements of the sample banks for a period of four years. Return on Asset (ROA), Return on Equity (ROE), Profit expense ratio (PER) are the profitability ratios used to measure the financial performance. Data was analyzed using the Statistical Package for Social Scientists (SPSS). The statistical methods of correlation and one-way ANOVA were used for the testing of the research hypotheses. Findings: Results showed that Internal control effectiveness is strongest in private banks, followed by public banks and weakest in islamic banks, although the difference is not statistically large, but slight variation exists. Moreover, private banks had a high level of financial performance, public banks had moderate level of financial performance whereas islamic banks were found to have low financial performance. Hence it was concluded that Internal control effectiveness has a positive relationship with the Financial performance of the banks. Practical Implications: The detailed evaluation and understanding of the Internal control system effectiveness and its components provides valuable insights to managers and employees of how they can manage or improve their control systems in order to achieve greater operational as well as financial performance.