Consolidated Internal Control Systems, Regulatory Compliance and Financial Reporting Quality of Selected Deposit Money Banks in Nigeria

Abstract

In Nigeria's banking sector, poor financial reporting is often linked with fraud, regulatory punishments, and poor internal control. This study assessed consolidated internal control systems: the five components of COSO (control environment, risk assessment, control activities, information and communication, and monitoring), and financial reporting quality and the regulatory compliance moderating variable, in selected DMBs in Lagos State, Nigeria. A survey design and a census of 22 DMBs of both international and national authorizations were employed. The study aimed at 264 internal auditors, compliance officers, finance managers and risk officers. A total of 226 questionnaires (response rate: 85.6%) were returned and filled. The questionnaires had a 5-point Likert scale. The collected data were analyzed using descriptive statistics, Pearson correlation, and regression analysis which included regression diagnostics, simple, multiple and hierarchical regression analysis. The study found that all five components of COSO had significant positive effects on the quality of financial reporting. Control environment (β = 0.491), risk assessment (β = 0.521), control activities (β = 0.571), information and communication (β = 0.456), and monitoring activities (β = 0.502), all had p-values less than 0.001. Control activities had the strongest positive effect. The five components of COSO combined were significantly good predictors of financial reporting quality at 44.6% adjusted R2. R² = 0.446, F = 37.84, p < 0.001). Regulatory compliance positively and significantly moderated the internal control–financial reporting quality relationship (interaction β = 0.324, ΔR² = 0.044, p < 0.001), and the variation increased to 55.8%. The study concluded that internal control components positively contributed to reporting quality and that strong regulatory compliance significantly improved this contribution. The study recommends that banking organizations should increase focus on control activities, and strengthens the whistleblowing mechanism in their organizations to serve as measure of internal control mechanism within their organizations