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Contribution of Internal Audit to the Financial Performance of Companies: The Case of Lebanese Banks

استشاري وظيفة

An essential condition for the survival of a company or more generally of an organization lies in the ability of its members to act consistently and efficiently to achieve the objectives of the organization. These necessary coordination behaviors can be achieved by different means.

In a very small company, the leader can directly verify that tasks are conducted in the manner it considers appropriate. But the supervision of the manager and mutual adjustment between the various actors (H. Mintzberg, 1982) are rapidly becoming inadequate when the size of the company increases. Certainly one may wish to maintain these practices, but we can hardly apply to the company’s parts.

This requires that the management implement devices to compensate for the inability to apply throughout supervision. The choice of these devices is to ensure the quality of the organization through performance.

Performance can be expressed in accounting and financial terms, and depends on the ability to:

-- raise funds at lower cost

> Preserve and heritage,

> Use of the most productive way possible.

The performance may also have a more general nature: it is the ability to identify and implement good strategies as part of the objectives it pursues. These objectives are varied: it can be to become the largest company in the world, or to remain a successful business in a specialty, or even being best able to achieve the goals it has set. Once you set goals, success depends on the ability to identify appropriate strategies and implement them.

Organizational arrangements must guarantee the level of performance in both economic and strategic fields. Internal control called all such devices.

It is desirable to periodically test the effectiveness and relevance of this or that aspect of internal control. Audit called the process of study and evaluate internal control or some of its aspects and performance expected by. The result consequent will in turn determine the effectiveness of the company, because the challenge of every business nowadays is to be competitive in order not to be forced out of the market.

The audit covers an area more extensive, in which independent firms and the company’s employees act in a complementary manner. In the story, the audit activity has primarily concerned the review of accounts and the hearing of the leaders who were in charge. The emergence and rapid development of capital have only reinforced the need for shareholders and lenders, and for third parties to have accounts audited, reviewed, certified by independent professionals.

This is why those interested will increasingly to business performance for which they have an interest; they will focus therefore on the financial performance of the company in which they have decided to invest in the return on capital and therefore the leaders of the management system. The case of Enron, the giant in the world of energy internationally, where many risky operations leaders speculation have led the company to bankruptcy is a palpable example. The fall of Enron resulted debauchery 4 500 employees who lost both their jobs and their retirement. Capital holders have also lost their money and this because of the fact that Arthur Andersen, responsible for the certification of accounts did lax and subjective manner.

The Board of Directors of the  Institute of Audit and Internal Control (IFACI) defines internal auditing as an independent and objective activity that gives an organization an assurance on the degree of control of its operations, it provides advice for improving and helps create added value. It helps an organization accomplish its objectives by evaluating, through a systematic and methodical approach, its risk management processes, controls, and corporate governance, and making proposals to enhance their efficiency. Internal auditing is an assurance and consulting activity that improves the functioning and performance of an organization.

Our study will be focused around the internal audit and performance. The question we might ask premium on board is that of how the internal audit function does it fit in a performance improvement dynamic, and in order to sustain the business?

In a large majority of cases, internal audit devotes most of its activities and risk analysis of existing shortcomings in order to give advice, make recommendations, to put in place procedures or to propose new strategies, in short the internal audit includes all missions that aim to improve company performance (A. Dayan, 2009).

Internal audit evaluates organizational provisions for:

> The economy: providing resources at the lowest cost,

> Efficiency: using resources in the most productive manner,

> Efficiency: behave in a manner consistent with the objectives, the choices made in the company at all levels and / or evaluation of the results of these devices.

That is why the questions that we have emerged from this item is that of how the internal audit he contributes to the achievement of financial targets that the company has secured the prior which depends its success?

A thorough analysis of our problem has led us to ask the following questions:

How do we evaluate a company’s performance?

How the internal audit he contributes to the company’s performance?

How can the recommendations provided by internal auditors increase the efficiency of operational and efficiency of the organization?

To this end, we issued the following research proposals:

The performance of a company can be accessed through its ability to achieve the objectives it has set.

> Internal audit can help to make the company more efficient by evaluating management systems, internal control and financial management thereof, giving recommendations and advice.

> The performance of a company can be increased through the scrupulous respect of audit recommendations by line, and also by a permanent monitoring of the implementation thereof.

To carry out this study, our methodological approach was part of a qualitative approach. We made a single case study because of the delicacy of the subject of the study. Unlike a multi-site case study that would have given us only superficial information in the field, the single-site case study has allowed us to better understand all the contours of the subject, to conduct our study and profound way accurate, allowing us to collect evidence and meaningful data.

First, we have addressed the subject by studying a case in which we have followed from one end to the other the internal audit process. The chosen unit belongs to the banking sector. We turned our attention to the bank because it is a particularly risky, sensitive in character of public interest, all this and submitting it to a special regulation. Henri book (2008) has also described as complex organization. If our research propositions are true in a complex organization, they will be featured in a traditional organization.

Then, an antipode study of three companies in the microfinance sector has allowed us not to compare the results with the case, but rather to bring new elements to our study.

The interest of this work is to provide banks and specifically the banks operational elements that enable them to understand the validity of the internal audit; get them to not see listeners only as gendarmes of the company, but also as individuals, who act in the interest of all, and by their advice and recommendations, allow the company to create more value, leading to the improved performance.

Moreover, this work could enable bank executives to no longer consider the internal audit as a regulatory constraint established by COBAC, but as an essential and necessary function that could with the contribution of other business functions, the erect increasingly high; the current economic situation indeed requires that every company has written before it a device allowing it to evolve into a constant and continuous improvement of its performance.

Our study is based on two pillars organized into four PARTs:

First we present the theoretical basis for internal audit and performance. Then we establish a theoretical link between the internal audit and financial performance, this by identifying elements highlighting the improved financial performance through internal audit.

Second, we show its application through a case and investigations, this after presenting the methodology that allowed us to collect data in the study site.


This section presents the theoretical basis for internal audit and performance, in order to establish later a theoretical link between the internal audit and financial performance, the census elements highlighting improving financial performance through internal audit.


Internal audit and performance are two notions as complex one than the other. It is therefore necessary to avoid any ambiguity, clearly identify the theoretical outlines. To this end, the first section was devoted to general information on the internal audit, and the second to the concept of performance in the company.

Section 1: Overview of Internal Audit

1- Internal Audit, related concepts and types of audit

We present in this section the internal audit concept as a whole, then close notions of auditing in order to avoid confusion between them.

1-1- Internal audit and internal control

Internal audit is sometimes likened to internal control, which in fact is only a field on which the audit relies to deploy. We will see in what way the various definitions and characteristics of both.

1-1-1- a- Definition Internal Audit

According to the  Institute of Audit and Internal Control (IFACI 1), internal audit is an independent and objective activity that gives an organization an assurance on the degree of control of its operations, brings his advice for improve and helps create added value. It helps an organization accomplish its objectives by evaluating a systemic and methodical approach of risk management processes, control and corporate governance and by making proposals to enhance their effectiveness. It is an assurance and consulting activity that improves the functioning and performance of an organization. Strategic activity, internal audit is exercised within the organization, even if the use of external service providers is sometimes necessary.

The internal audit focuses on the major issues of the organization and its insurance term tasks include assessment of all processes, functions and operations thereof and more particularly on the management processes risk control and corporate government 2.

1  PART of the IIA (Institute of Infernal Auditors).

2 Corporate governance is to establish guiding principles for effective development and operation of the business sector

These advisory roles with General Management and operational and functional departments, acting under particularly demanding standards, contribute greatly to creating added value. This is also why IFACI in his article, Position Paper (2010) states: If the first role of internal audit is to give a business insurance on the degree of control of its operations, its advisory role should not be overlooked so far.

b- Objectives of Internal Audit

The internal audit end goal of assisting officers in their daily duties by providing relevant information in real time.

Thus, the internal audit aims to:

  • Assess internal control,
  • Ensure the quality of internal information,
  • Encourage the staff,
  • Improve and verify the proper application of procedures,
  • Ensure the implementation of the Directorate instructions,
  • Ensure the reasonable use of resources

c- Place of internal audit in the organizational structure

Independent activity, internal audit is attached to the Directorate and has a strong relationship with the Audit Committee 3. The audit function is a key component of the continuous monitoring of internal controls because it provides an independent assessment of the adequacy of policies and procedures and respect for compliance with these. It is therefore essential and even indispensable that the audit function is independent of the company’s functioning3 Independent body responsible for assisting the Board in the exercise of its functions. Its task is to ensure the reliability and accuracy of information and reports to the Board. It is generally responsible for monitoring the financial reporting process and internal control system. In the banking sector, it is particularly attentive to the activities of the audit service for which it serves as direct contact.

Daily and it has access to all the activities conducted by the company, including branches and subsidiaries.

This is why it must, for better functioning of the business, dependent on the board, while reporting to senior management and the Audit Committee. In this way, internal auditors provide reliable and objective information on activities (Basel, 2008).

1-1-2- Internal Control

a- The internal control concept

Internal control definitions are many and were most often as authors of professional organizations of accountants. This is the definition of control given in 1977 by the controls of Chartered Accountants: Internal control is the set of safety contributing to the control of the company. It aims to one side of the protection, heritage preservation and quality of information, the other application instructions of management and encourage improved performance. It is manifested by the organization, methods and procedures of each of the company’s operations, to maintain the continuity of it.

Most companies have set up their own system of internal control without relying on a specific repository. But after numerous financial scandals businesses worldwide, including the US in the late 90s and early 2000s 4, the United States adopted the Sarbanes Oxley Act (SOX). Section 404 of the Act requires that the Directorate General accepts responsibility for the establishment of internal accounting and financial structure and it evaluates annually its effectiveness in terms of a recognized internal control model;auditors are responsible for validating that assessment.

On 1 August 2012, the Financial Security Act (AOA) was enacted in France according to  authorities an answer, both political and technical, to the

4 scandals Enron Pramalat...

crisis of confidence in market mechanisms and regulatory shortcomings which the economic world has recognized for some time.

b- Principles and organization of a bank’s internal control system

The Institute of Chartered Accountants (OEC) identified in 1977 a number of rules and principles defined underlying internal control. These include:

  • Organization,established by management;
  • Integration,establishment of a system of self;
  • Permanence:permanence of regulatory systems;
  • Universality:internal control concerns all those of the entity;
  • Independence:control is independent of the methods, processes and resources of the entity;
  • Harmony:adequacy of external control to the characteristics of the entity and its environment;
  • Information:criterion of relevance, usefulness, objectivity and communicability.

The regulation indicates the best practices of control but these practices are not operating as if they form respecting several principles:

> Incompatible functions and tasks

It is important that a strict separation of functions are established; not only the supervisory bodies should be identified with clearly defined missions, but again, the authorization / execution / control distinction shall be secured where:

  • The absolute separation between the operational services that initiate operations (agencies...) and administrative services for the accounting treatment and preservation of evidence (back office);
  • The precise delineation of individual skills through clear delegations of authority;
  • The mandatory and immediate recording of all transactions.

The competence of controllers

The bodies responsible for control must receive extensive training, particularly where the transactions should check are complex and require precise monitoring in risk.

The completeness checks

All activities, all the operations, all the components of the credit institution should be subject to regular checks, there can be no sanctuaries to which the controllers do not apply.

The review of the control systems

Rapid changes in technology, financing techniques, legislation ordering regular review of inspection procedures so that they remain in line with their purpose.

c- organization of internal control in banks

Usually it is based on the distinction between two levels. A compliance function must also be implemented.

The first-degree control

At the business unit level, the first level of control is based on a manual of procedures, a procedure for performing an operation in accordance with standards set by the bank. For all operations manual states:

- The successive steps and logic of the treatment;

- The responsibility of each stakeholder in the processing chain; - The registration of information and restitution

- Control procedures

Control of second degree

This is an unannounced check and post-trip operations, often conducted cross and periodically (commitments, treasury, asset-liability management...) whose role is:

- Assess the appropriateness of operations;

- To monitor the risks attached to it, given the power accorded to the delegations;

- To inform the governing bodies on the implementation of the internal control objectives.

The activity reports, dashboards, performance indicators, thematic reports are the usual instruments of this type of control.

This check requires a specialized body, from one institution to another, is called General Inspection and Internal Audit.

1-2- Different types of audit

We have listed among the three different types of audit main types namely financial audit, operational audit and legal audit.

1-2-1- Financial Audit

The financial audit is a review of financial statements of the company, to verify their sincerity, their regularity, compliance and their ability to reflect the true image of the company. The financial audit is the modern form of control, audit, inspection, monitoring accounts, providing a critical dimension.

All accounting and financial information may have serious consequences for the company, so it is necessary for leaders to ensure the accuracy of the information. Concerns a revision for executives are usually:

  • The need for reliable financial information before presenting it to third parties or partners,
  • Assessing the current accounting system in order to detect deficiencies and improve,
  • The need to avoid fraud and embezzlement.

1-2-2- Operational Audit

Internal audit tends to enrich and now extends beyond the financial audit to ensure the operational audit missions. The operational audit with the objective risk analysis and existing shortcomings in order to give advice, make recommendations, to put in place procedures or to propose new strategies, in short operational audit includes all missions that are designed to improve company performance (A. Dayan, 2009).

The operational audit includes verification of the adequacy and effectiveness of internal systems and procedures and the analysis of organizational structures and the allocation of responsibilities to ensure that the objectives set by top management with its cheaper. This audit is used primarily for evaluation of an organization’s point of view the performance of its operations and the use of resources

The implementation of the operational audit requires a good understanding of the company as a project, organization (organization of work, and administrative organization, accounting organization), its internal control system.

According RAFFEGEAU et al (1989), operational audit will aim to:

  • Judging the quality of information;
  • Judging the performance and efficiency.

In the field of operational audit, it will include: - the audit of operational controls

- The management audit

- Audit strategy

a- audit of operational controls

It allows to judge the company on the efficiency and performance of information and organizational systems in place for its business and management methods. This will lead to the assessment of internal control.

b- Management Audit

It allows to judge the company on its results (the resources have they been used optimally to achieve the rational objectives?). Given the performance issues, management control (as a structure set up by management to measure performance) will be particularly examined.

c- Strategy Audit

It allows to judge whether the project within the company is still under control, auditing will apply in particular to investment projects and the quality of the applied strategy.

1-2-3- The legal and tax audit

Book H. (2008) defines the legal audit as the audit of legalism of the company and legalism means the following proposals:

- The organization must have a policy and organizational patterns that define its relationship to the law, the regulatory and tax;

- The organization must be aware of the fact of having only weak influence on part of the law, regulations and tax, due to their dilution in operations and between agents who treat them, sometimes without even aware that these operations are carriers of law;

- The organization must be aware that it creates its own rules of internal law and that these can be called into play during merger operations, or split;

- The presence of a form of law for any operation, any act, any service rendered or to make;

- The need to find, in this context, any legal grounds imbalance minimizing risks and optimizing opportunities.

2 Standards and Regulations for the control system

Our study specifically relating to credit institutions, it seemed sensible to first present the particularity of these, since their operation differs somewhat from that of classic- companies before presenting the standards themselves.

2-1 Special credit institutions

Credit institutions differ primarily from other companies by the nature of the activity, the organization and the type of risks to which they are subject.

2-1-1- Banking

5 The Banking Law of 24 January 1984 defines a credit institution as any institution authorized to perform banking operations and related operations in their activities. By operation of bank means:

- The perception of public funds;

- The distribution of credit

- Issuing guarantees for other banks - the provision and management of means of payment.

The bank’s main activity is the collection of savings and granting loans. A spatial distribution of activities it makes us distinguish domestic activity in deposit and credit and international business understood here as the fact for a bank to have branches overseas offices and / or a bank with vis-a-vis nonresidents operations exceed one third of total assets (Coussergues, 2007).

2-1-2- risks of banking activity

The bankruptcy of the bank’s main cause failure of customers who received loans. Some losses due to customer defaults are

5  Banking Law on the activity and supervision of credit institutions. It has been amended many times and built the Monetary and Financial Code in 2000.

unfortunately unavoidable and inherent in the banking business, defined as risk business.

There are two types of losses:

> Losses following weaknesses in the internal control system and organization;

> Losses inherent in the credit business.

If these are explained, the first cannot be explained at all. They are due mostly to:

  • Insufficient risk control:

- Lack of clear and consistent policy;

- Concentration risk;

- Insufficient study credit files;

- Lax in the credit authorization system;

- Weaknesses and shortcomings of litigation function.

- A lack of administrative control:

=> poor organization;

=> neglect taking guaranteed and monitoring;

=> lack of segregation of duties;

=> computer failure;

=> late recovery;

=> lack of monitoring of unpaid.

To better understand this concept of risk, it is necessary to master all the contours to know its origins and the main types of risks.

a- definition

Daniel Bernoulli in 1738 in Specimen novae theoriae of mensura brings out the first scientific definition of risk, the risk is the expected value of a probability function of events.In simpler terms, it is the average value of the consequences of events affected their likelihood.

According to Marie-Claude DELAVEAUD (2012), the risk is a possible danger, more or less measurable, for goods and specific activities having harmful consequences for the company

For CONSO and HEMICI (2012), the risk is manifested by a damaging event for l`entreprise to exceptional, unanticipated, an unknown degree of probability for a single character, but statistically measurable for many; this is accidental risk. The risk also arises from the uncertainty of the future and in particular the uncertainty about the evolution of the business environment in its different aspects: this risk is inherent in the activity and leadership management choices. The company has an enterprise risk considered the global exposure of the various economic and financial components of the company. There is also a group risk specifically related to the decentralization of operational activities, the existence of legally independent subsidiaries and the use of different currencies.

The IIA defines him when at risk as the possibility to occur an event that could have an impact on the objectives. Risk is measured in terms of consequences and probabilities.

b- The risks in the banking business

The banking business is subject to several types of risk because of the volume of its transactions with various partners. Include as key risks counterparty risk, market risk, operational risk, default risk and liquidity risk.

> Counterparty risk

This is a risk inherent in the traditional intermediation activity and corresponding to the failure of the counterparty to which a debt or liability is held (Coussergues, 2007). Thus the bank suffers a capital loss (debt not repaid) and income (non-interest income) loss which is considerably more important than the profit made on the same exchange

non-defaulting in this risk also known under the name of credit risk, or the risk of signing.

Counterparty risk has two components: an external aspect related to the insolvency of the borrower and an internal aspect is the way in which the bank holds credit distribution function.

  • The insolvency of the borrower

The insolvency of the borrower may have various origins; the origin can be general (earthquake in its area of activity), professional (innovations in the sector...) staff that is to say, specific to the borrower (more frequent and more elusive), and finally linked to its geographical location (country risk 6).

  • The organization of the bank

Credit risk can also arise from the manner in which the bank organizes the granting of credit. It may therefore be inherent to:

- Credit policy: objectives, interest rates, delegations of authority in decision making during a credit committee.

- Credit records of treatment procedures: the study of credit, monitoring the credit report, the internal control of counterparty risk.

> Market risk

Market risks are from an unfavorable evolution of asset prices generally traded on a market which is not original as the deterioration of the creditworthiness of the issuer of the asset, otherwise it is returned to if counterparty risk. There are three categories of market risk:

  • The risk of interest ratewhich is derived from the detention of claims and liabilities whose date of change of interest rates attached to them do not coincide, given that during this period the rates may go up or falling.

He first covers all components of counterparty risk: natural disaster, political or economic crisis, own insolvency of the borrower. However, it has an additional component, related to the monetary situation of the country in which the borrower is installed.

  • The currency riskresulting from unfavorable changes in the course 
    of a currency in which the bank holds assets and liabilities.
  • The position of riskstock that is related to unfavorable changes in share contained in the bank’s securities portfolio.

> Operational risk

The Basel Committee on Banking Supervision 7 defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk 8 and excludes strategic risk 9 and reputation 10.

Some risks are related to the organization of the bank to the borrower; these are the risks of insolvency and bank liquidity.

> The risk of insolvency

It concerns the bank’s survival and is usually the result of manifestation of one or more risks that the bank could not prevent. It is noted as the insolvency of a bank typically begins with a liquidity crisis as soon as the markets begin to challenge an institution on the basis of verified information or not high losses, it does can no longer refinance. The insolvency risk analysis is based on several factors:

The Basel Committee on Banking Supervision was created in 1975 by the central bank governors of Group of Ten, bringing together the banking supervisory authorities. It is composed of senior representatives of banking supervisory authorities and central banks of Germany, Belgium, Canada, the US, France, Italy, Japan, Luxembourg, the Netherlands, the United Kingdom, Sweden and Switzerland. It usually meets at the Bank for International Settlements in Basel, where its permanent secretariat.

Risk of any dispute with a counterparty resulting in particular from any inaccuracy, omission or any kind of failure may be attributed to the institution in respect of its operations.Exposure to fines, penalties and damages for faults resulting from the exercise of prudential supervision as well as private transactions.

10 Reputational risk, or reputational risk, is the impact that can have an error management on the image of this organization. The reputation of a company is measured by the excess value on the organization of the value of its physical assets. Thus, in developed countries, and given the importance of financial markets, it is estimated that the image represents about 60% to 70% of the value of companies. It is necessary to incorporate the impact on reputation in the analysis of vulnerabilities.

  • The bank’s financial strength

It depends on the amount of capital that the bank act as a mattress when risk adverse and evolving unexpectedly.

  • The quality of the shareholding

The main shareholders are critical for the survival of the troubled bank. In this regard, the bank dispersed ownership (publicly traded bank, for example) is more fragile than a group of banks.

  • The role of the credit institution in the banking system

The credit risk from large banks is much lower than that of small-scale establishments. supervisory authorities would not allow the bankruptcy of a major bank because of contagion effects are to be feared: they operate mostly as a lender of last resort.

> Liquidity risk

Still called liquidity risk, the result of the maturity transformation by the bank. There is also a risk inherent in the traditional intermediation activity since the term of employment and always longer than that of resources, especially when it comes to customer deposits. The bank unable to cope with a massive and unexpected demand of customer withdrawals or other credit institutions is called illiquid. Banking regulation frames this risk through the liquidity ratio.

This brief presentation of the banking sector leads us to ask us questions about the regulations on auditing in the banking sector.

2-2 Standards and Regulations

On standards and regulations in the company’s control systems, many organizations have set out rules for the proper operation thereof. This is mainly the IIA in its Occupational Standards for the Practice of Internal Auditing, the Basel Committee on Banking Supervision in the Framework for internal control systems in organizations

bank and the Banking Commission of Central Arab in its regulations COBAC R-2010/07 relating to internal control in credit institutions.

2-2-1- IIA Standards

The internal audit activity is conducted in different legal and cultural environments in organizations whose purpose, size, and structure are different, and by auditing professionals, internal or external to the organization. These differences may affect the practice of internal auditing in each environment. It is for this reason that the IIA has set a number of standards called Standards for the Professional Practice of Internal Auditing, that internal auditors can fulfill their responsibilities. These standards are designed to:

- Define the basic principles that the practice of internal auditing should follow;

- Provide a reference for the realization and promotion of a wide range of internal audit activities bringing added value; - Establish the assessment of the functioning of the internal audit criteria; - Promote improved organizational processes and operations.

We distinguish thereby qualification standards, operational standards and implementation prefectures.

The qualification standards set out the characteristics to be submitted by organizations and individuals performing internal audit activities.

Operating Standards describe the nature of internal audit activities and define quality criteria for assessing the services provided.

The standards implementation for their declining standards of qualification and performance standards for specific tasks (eg a compliance audit, an investigation in the context of fraud or self-assessment work of the internal control). The implementation of standards are set for insurance and for counseling.

2-2-2- Basel Committee Recommendations

a- General

The Basel Committee on Banking Supervision published in 2008 the Framework for internal control systems in banking organizations. This article regulates the establishment and the conditions of success of an internal control system in banking, the internal control system is mainly composed of internal controls upstream and downstream internal auditing. It also states in its preamble that a bank, by establishing rigorous internal control systems, will better achieve its goals and long-term profitability targets, also ensuring the reliability of its financial reporting as external that its management. The Basel Committee, together with the banking supervisory authorities worldwide, insists increasingly on the importance of sound internal controls. This increased interest is partly explained by the substantial losses incurred by several banking organizations. The analysis of problems related to these losses indicates that they could probably have been avoided if the banks had been equipped with effective control systems. Such systems have in fact prevented the emergence of these problems, or detected, limiting the damage to banks.

b- Objective and role of the internal control system. > Role of Internal Control

The Basel Committee (2008) defines internal control as a process implemented by the Board of Directors, senior management and all levels of staff. This is not just a procedure or policy applied at some point, but rather a system that operates at all levels continuously in the bank. It therefore defines the objectives of the internal control process as follows:

- Efficiency and effectiveness of activities (performance goal)

- Reliability, completeness and timeliness of financial data and information for management (information objectives);

- Compliance with applicable laws and regulations (compliance target). > Role of Internal Audit

The Basel Committee assigns an internal audit assessor mission. Indeed, its role is to assess the internal control system carried out upstream, with the aim to control risks through risk assessment process.

In its 12th principle, the Basel Committee on Banking Supervision states that the internal audit, notify the level of the department concerned and promptly deficiencies in internal controls detected by an industry. They thereby providing reports identifying problems identified controls.

Internal auditors should follow up of any other appropriate monitoring and to report to the Executive Management or the Board of Directors of any uncorrected deficiency.

2-3-3- Regulation COBAC R-2010/07

The COBAC regulation R-2010/07 relating to internal control in credit institutions, in Article 1st, states that credit institutions must establish an internal control system. It defines an internal control system as a whole provisions decided by the deliberative body 11 and implemented by the executive body 12 and the entire staff of a credit institution to ensure that its activities are properly controlled at all levels to enable it to achieve its objectives.

COBAC in that regulation subdivides the internal control system at two levels:

A first level of permanent control which may include himself several levels: internal control;

A second level control: internal audit.

In Article 3 of the Regulation defines the components of internal control system. It includes in fact:

11 board of directors, supervisory board or similar body responsible for monitoring, on behalf of the providers of capital, situation and management of the institution.

12 Set of people who ensure the general management of the institution.

- A system of operational control and risk - written procedures

- An accounting organization,

- An information processor,

- Systems for measuring risks and results, - a reporting system.

Article 12 states that meanwhile the organization of the internal audit function shall verify, according to an appropriate frequency, regularity and compliance of operations, and effectiveness of first-level devices, including their suitability the nature of all the risks associated with operations. He continued that the internal audit is to operate independently with respect to all the structures for which it carries out its missions.

The resources allocated to internal auditing should be sufficient to complete a full course of investigations of all activities over a period as short as possible.

One can read in section 14 of the Regulations as legislative and executive bodies should ensure that internal audit assignments apply to all activities of the entities of the institution, including its subsidiaries and its branches.

Section 2: The concept of performance in business

The term performance is commonly used in the assessments of companies, especially in management control and everyone wondered what a business or a successful organization:

- Is it one that makes good profits?

- Or one that is resistant to changes in its environment?

- Or the one that preserves jobs, which saves the environment?

This set of questions shows that the concept of performance is multidimensional, which raises the question of the definition and those of a few related concepts and different performances that can be identified in a company.

1- Neighboring notions 1-1- Performance and Performance

In management, performance is the achievement of organizational goals (Bourguignon A). It results in a realization (or result).

The performance is the result of coordinated actions, consistent, which mobilized resources (staff, investments), which implies that the organization has a potential realization (staff skills, technology, organization, suppliers...).

Performance can be expressed mainly in accounting and financial terms: speaking to this effect financial performance and it depends on the ability to:

-- raise funds at lower cost

> Preserve and heritage,

> Use of the most productive way possible.

It can also be expressed in term strategic and we will talk about strategic performance.

Strategic performance was more general: it is the ability to identify and implement good strategies as part of the objectives it pursues. These objectives are varied: it can be to become the largest company in the world, or to remain a successful business in a specialty, or even being best able to achieve the goals it has set

The achievement is compared to objectives through a set of indicators, encrypted or not. The comparison assumes a form of competition: do better than in the previous period, to reach or exceed competitors. It gives rise to an interpretation; value judgments can differ depending on the stakeholders (shareholders, directors).

To be competitive, every company must be effective, that is to say, better than its competitors in both its strategy in its organization (ALAZARD C., S. SEPARI). The performance thus refers to the ability of a company to be able to achieve good results, at least those expected of it. She filled several aspects in this case the efficiency, effectiveness and economy (H. Touchstone).

1-1-1- The effectiveness

The efficiency describes the ability of a person, group or system to reach its goals or the goals we have set for it. be effective would therefore produce the expected results and achieve objectives. In other words, it would be doing the right things when it is necessary and where you need it or just get good results.

1-1-2- Efficiency

Efficiency refers to the fact for a company to achieve its objectives with the minimum possible resources committed. It thus reflects the productivity of an entity because it relates the results obtained and the resources consumed. Efficiency can also be expressed by several other concepts such as:

The productivity:

It represents the ratio between production and volume consumed factors;


It is the ratio of profit to the cost associated with it.

1-1-3- Economy

The economy is to secure the necessary resources at lower cost (Touchstone, H).

1-2- Profitability

Profitability is a very similar concept of performance and means the ability for a company to secrete a result expressed in monetary units. (Colasse B., 2003)

It represents the ratio of profit to invested capital. Profitability comprehensively packed two distinct concepts: economic profitability and financial profitability. Both returns are the retrospective called profitability, assesses the capital asset pricing model (CAPM) can be used to calculate the discount rate by the weighted average cost of capital; as opposed to the expected profitability, which in turn allows the use of cash flow to make an assessment taking into account the time lags of the company.

1-2-1- The economics

The economic profitability is a measure of the company’s economic performance in the use of all his employee capital, that is to say of all its assets financed by permanent capital.

1-2-2- Financial profitability

Also known as return on equity or return on shareholders, it is the expression of net income reported in the equity capital invested by shareholders. It is for this reason that unlike the economic profitability

insignificant for capital providers, financial profitability is followed more closely by them.

Financial profitability is what the Anglo-Saxon accounting called Return on Equity or ROE and expresses the ability of capital invested by shareholders and partners to reach a certain level of profit.

2- Performance external, internal performance

The performance of the organization is assessed differently depending on the players, customers, employees, shareholders, managers, fund lenders because they have different objectives. Thus we will distinguish the internal performance of the external performance.

2-1 External Performance

The external performance is generally aimed at those involved in contractual relationship with the organization. It is mainly directed towards shareholders and financial institutions, and focuses on the present and future results.

2-2- Internal Performance

Internal performance is that which mainly concerns the internal stakeholders of the organization.

Financial information that favors a communication on profitability and the company’s major balances remains inside information in particular in terms of performance for shareholders. However, managers of the organization, who are responsible for the performance, are more interested in the process of achieving results. It is for them to take, organize and implement all recovery decisions of internal and external resources to achieve the company goals.

The following table shows the characteristics of each performance.

Table 1: Comparison of internal and external performance.

external performance

internal performance


East turn mainly to shareholders and financial institutions

East turn to managers


Door on the r UTCOME, present or future

Covers the process of building r UTCOME from the resources of the organization


produce and

communicate the information 

provide the necessary information for decision making


G enère financial analysis of major balances

Leads to the definition of the action variables


Gives rise to debate between the different stakeholders

Requires a unique vision of the

Performance in order to coordinate the actions of everyone towards the same goal.


Sources: Doriath B., C. Goujet

2-3- Measurement and assessment of financial performance

The performance measure for a business is a question still relevant for any management team in a company. In fact any company concerned about its development must constantly ask questions like how to evaluate the performance, be it economic, strategic or financial? She has the tools or methods to conduct this assessment? Can it actually measure everything? What parameters come into play in this assessment?

Measurement tools of performance that we used are mostly those of management control. The presentation of these tools requires first a brief presentation of proper management control.

2-3-1- definitions and management control missions

a- definitions

One of the first definitions of management control is given by RN Anthony in 1965 in his article  Planning and control system: a framework for analysis. It defines the management control as the process by which managers ensure that resources are obtained and used effectively (against objectives) and efficiency (by reporting to the means employed) to achieve the objectives of the organization.

Henri Touchstone offers thereafter the following definition: management control consists of processes and systems and systems that allow leaders to have the assurance that the strategic choices and the current actions will be, are and have been consistent, including through the implementation of control.  Similarly, for Philippe Lorino, (2008), ... Is performance in the company all that, and only that contributes to achieving the strategic objectives....

Hence his field of analysis is enriched by the day and more and more. So managers look, with management control, beyond the knowledge of the costs, to guide players to organize and manage a performance (Alazard C., Separi S. 2014).

Thus, this new conception of management control assigns the tasks to be fulfilled to enable the organization to achieve its goals.

b- Missions of management control

The management control is responsible for ensuring the implementation of the adopted business strategy and the means implemented in the long term.

If in the future a company wants to improve its financial performance, it will indeed make regularly it approaches slowly its objective by checking its financial statements;However, it will still be able to connect financial performance with its operational activities.

Thus, the management control goes to:

> Check that the objectives underpinning the strategy are followed. This is done from tables of indicators that can blend financial data (cost accounting) and statistical data from the operation;

> Advising operational from analyzing its indicator tables;

> Rate management on the choice of objectives that underpin the strategy.

Monitoring is important because it ensures that the actions implemented well lead the company where desired.

2-3-2- The measurement tools and performance management

Driving performance is an attempt by a set of processes to achieve the performance targets that have been clearly defined terms. (F. Giraud, Saulpic O., G. Naulleau, Delmond MT., Beslos PL.). It is also organizing a series of actions that achieve the business objectives (Doriath B., C. Goujet).

To properly assess the success of the organization, determine the measures that really count and rank them in order of importance. The use of inappropriate measures may provide an incomplete or inadequate representation of the company. More importantly, choose wrong key performance indicators may give a sense of unjustified confidence in the correctness of the path chosen by society.

Generally, these indicators are varied, financial or non-financial, short and long term, and content in dashboards 13, allowing the manager to make strategic decisions, in this case, we talk about strategic dashboard. Indeed, the strategic direction dashboards are systems of indicators that seek to measure the overall performance (and changes) in its various constituent dimensions. They will clarify

13 The dashboard is a set of indicators chosen and designed to allow the manager to be informed of past performance and present activities within its area of responsibility, and events that can influence the performance in the future.

strategic objectives and translate them into concrete targets. They also provide a deployment policy

Dashboards, designed by controllers in collaboration with unit leaders, provide managers with a synthetic control tool. For easy reading, the indicators should be simple, limited, quantified; their contents differ according to their users (Coussergues, 2007). Thus, the dashboard of the Directorate General for example will be different from the operating units.

The evaluation of financial performance is mainly through the financial performance indicators that are mostly output indicators. It is necessary to do this to briefly present the components of profit, specifically in credit institutions.

2-2-3- Indicators

A performance indicator is a measure represent progress and weaknesses of the company.

The choice of indicators is of utmost importance; It is therefore important to choose the indicators that will correct this situation and plan for the future. The good financial performance indicators requires that all factors likely to affect the result are taken into account.

The financial performance indicators that we can remember are the following:

a- return on equity ratio: ROE (Return on equity)

Net income for the year



It measures the ability to monetize the funds made available to the company by shareholders. It is therefore necessary to link the equity surplus that pays (net income).

b- Profitability of all resources committed: ROI (return on investment)

Net income + interest loans


Total assets

It measures the ability of the company to monetize all resources (own and borrowed) available to the company by all economic agents.

c- The creation of value

Value creation is one of the main criteria on which financial analysts support their diagnosis.

A company creates value for its shareholders if the profitability of its assets exceeds the cost of invested capital, debt and equity. From this definition, two methods of creating value measurement are deduced.

  • An economic measure, EVA 14(Economic Value Added) EVA = (re-k) x C


Re, economic profitability ratio;

K, weighted average cost of capital invested;

C, invested capital, debt and equity.

A positive EVA indicates that shareholders are paid beyond their requirements.

  • A financial measure, the MVA (market value added)

MVA = Market capitalization / Equity Accounting

MVA compares the market value of the bank and the historical value of equity invested in them. Over the MVA, the larger shareholders

14 Proposed by Stern Stewart and consulting firm.

sell their shares recover the wealth accumulated since the creation of the bank.

MVA is a good indicator of performance in that it synthesizes the compatibility of risk and profitability, it establishes a link between the market value and performance and is fully consistent with the methods allocations of capital.

Although value creation is a performance indicator that is not without its critics, such as the focus on immediate profitability at the expense of profitability in the longer term or the importance attached to market assessments As we know, are volatile and are often mistaken, it has become a major element of financial analysis.

d- rate of value added

added value


Sales figures

It measures the ability of the company to create value, or to increase the goods or services obtained from third parties.

Gross profit rate

Gross operating result


Net sales

The gross operating profit margin indicates that emerges from the current activity of a bank after taking into account operating costs (overhead) mainly consist of personnel expenses.

Operating income f-

Operating income = gross operating profit - Cost of risk

It takes into account the counterparty risk. The impact of counterparty risk is highlighted and the operating result is a quite significant balance of the financial performance of a bank with the margin on all its activities.

All these above mentioned indicators measure the profitability of the company, and thus performance.

However, credit institutions, which have a special function obey a regulation. Indeed, specific tools allowing banks to monitor their activities have been established. Pr do this, it is necessary that the internal control system established to be effective.


In this PART, based on a few major literary currents, we show how to do internal auditing practiced effectively can allow to increase financial performance, after defining the characteristics of an effective internal control system.

Section 1: Effectiveness of Internal Control System

The improved financial performance by the internal audit first requires that the internal control system implemented in the organization to be effective.

The Basel Committee has analyzed some recent cases of troubled banks, in order to identify the main sources of internal control deficiencies. Problems updated reinforce the idea that it is important that directors and bank management, internal auditors and the authorities of internal controls devote more attention to strengthening internal control systems and assessment permanent their effectiveness.

The question we will answer in this section is that of the characteristics of an effective internal control system.

1- Effectiveness of internal control systems

The internal control process, which traditionally sought to reduce fraud, embezzlement and errors, took a wider dimension and covers all risks faced by banking organizations. It is accepted now that a sound internal control process is critical to a bank to meet the objectives it set itself and maintain its financial viability.

The effectiveness of internal control systems based on the pooling of five essential elements of the organization:

- The management oversight and control culture,

- The recognition and risk assessment,

- Control activities and segregation of duties,

- Information and communication,

- Monitoring activities and correcting deficiencies.

1-1- monitoring by management and control culture

This task falls mainly on the Board of administration and general management.

1-1-1- The Board of Directors

The effectiveness of internal control systems based primarily on the Administration Council of the organization. This should approve and periodically review the major strategies and policy principles of the bank, enjoy the substantial risks it incurs, set acceptable levels for these risks and ensure that the General Directorate take the necessary steps to identify, measure, monitor and control these risks. The institution of the Audit Committee in the majority of banks is a suitable solution and to support the Board in its different functions.

1-1-2- The Directorate General

The General Directorate as to it is implementing strategies and policies approved by the board, will develop processes to identify, measure, monitor and control the risks, put in place an organizational structure clearly establishing the relations of responsibility, of authority and notification, sets appropriate internal control policies and monitors the adequacy of the internal control system.

1-1-3- A strong control culture

A strong control culture is a major element in the effectiveness of internal control systems. To this end, the Board of Directors and senior management must inculcate ethical values through their performance, both inside and outside the organization. To varying degrees, control is the responsibility of everyone. Almost all employees produce information used in the internal control system or take other actions necessary for the exercise of control. A key element of a strong internal control system is consciousness, for each employee, the need to fulfill its tasks effectively and to notify the appropriate management level any problems encountered in connection with the transactions, any offense code of conduct and any breach of established or recognized illegal action policies.

The ideal for this purpose is that the operational procedures are clearly set out in writing and made available to all staff.

1-2- Recognition and Risk Assessment

Effective internal control system requires recognizing and continuously assessing material risks that could jeopardize the achievement of the bank’s objectives. This assessment should cover all risks faced by the organization (credit risk, country risk, transfer risk, market risk, risk of interest rate risk, liquidity risk, operational risk, legal risk and reputational). A review of internal controls may be necessary to appropriately address any new or previously uncontrolled risks. The risk assessment should identify and evaluate the internal and external factors that may affect the achievement of performance targets, and information compliance of the banking organization. This will take into account all the risks faced by the bank and cover all levels of the institution.

1-3- Control activities and segregation of duties

Effective internal control systems require compliance with a number of rules to achieve performance objectives, information and compliance within the organization. They require thereby the establishment of an appropriate control structure. For this it is necessary that tasks are separated appropriately and that the staff is not responsible for conflicting responsibilities. The areas that may give rise to conflicts of interest should be identified, circumscribed as closely as possible and subject to supervision by an independent third party.

In general, internal control systems aim to ensure that all staff work with efficiency and integrity to achieve the objectives without causing unintended or excessive cost or favoring other interests. Performance objectives are related to the effectiveness and efficiency of the organization in the use of resources and in the protection of the institution vis-a-vis the loss.

The aims of information within the organization as to carry them on the preparation of relevant reports, reliable and as recent as possible, essential for decision making within the organization. Every information received by management, the board of directors, shareholders and supervisors should be of sufficient quality and integrity that recipients can refer to base their decisions.

In terms of compliance objectives, they guarantee that all activity complies with laws, regulations and applicable prudential requirements, policies and procedures of the organization. This objective must be satisfied at all costs to preserve the rights and the company’s reputation.

In the case of major banking losses due to inadequate internal controls, supervisors typically find that one of the main causes is the lack of adequate segregation of duties.Entrusting the same person conflicting tasks gives him the possibility of asset values and manipulate financial data for personal gain 15 and conceal losses. This is why in a bank, some tasks should be distributed as much as possible between several individuals, to reduce the risk of manipulation of financial data or misappropriation.

The framework for internal control systems in banking organizations, in Article 28 that:

Segregation of duties is not only about situations where the same person controls both the front office and the back- 16. In the absence of appropriate controls, serious problems can also arise when one individual is responsible for:

- The approval of the disbursement of funds and actual disbursement; - The customer accounts and own accounts;

- Transactions under banking book and the trading book;

- From the informal provision of information to customers about their positions and the business relationship with such customers;

15 Insider Trading

16 Department for the administrative operations traded on financial markets (Back Office).

- Assessment of the adequacy of loan documentation and monitoring the borrower after the granting of credit;

- In any other area where notable conflicts of interest emerge and are not mitigated by other factors.

In the same context, we read in the 9 principle that an effective internal control system requires efficient communication channels to ensure that all staff fully understands and respects the policies and procedures affecting their duties and responsibilities and that other important information reach recipients.

To this end, the organizational structure of the bank should facilitate an adequate flow of information in the organization. This structure ensures that information back and allows the Board of Directors and Executive Management to know the risks within the business and results of operations. The information that comes down through the organization ensures that objectives, strategies and also the expectations of the bank as well as the policies and procedures are communicated to lower level management and operations staff.This communication is essential for a joint effort of all employees to the bank’s objectives. Finally, horizontal communication 17 in the organization is necessary so that the information reaches a unit or department may become known to other units or departments.

1-4- Information and communication

Effective internal control system requires the existence of internal data 
adequate and comprehensive, as well as external market information about 
events and circumstances relevant to the decision. This data and 
information should be reliable, timely and presented in a consistent format. 
Adequate information and effective communication are two elements 
essential to the functioning of the internal control system. Regarding the 
banks, for the information to be useful it must be relevant, reliable, current,

17 Between the same hierarchical level units

available and presented in a form consistent. There may be internal financial data, operational or related to compliance with compliance as well as external market information about events and circumstances relevant to the decision.

It also requires the existence of reliable information covering all significant activities of the bank. Information systems must be secure, monitored independently and supported by adequate contingency plans. It is therefore important that the bank should establish an effective maintenance of information systems. This also includes constant monitoring of these, in order to avoid malfunctions and potential losses.

In the absence of effective communisation, information is useless. Senior management must establish channels of communications performance, so that the necessary information reach recipients. To do so, it is necessary that the organizational structure facilitates the proper flow 18 of information throughout the organization. This structure ensures that information back and allows the board and senior management to know the risks as part of daily operations. Thus, the organizational structure is a key element in the communication of the organization and in turn within an effective internal control system.

1-5- Monitoring activities and correcting deficiencies

The framework for internal control systems in banking organizations set out in the direction of the monitoring activities and correcting deficiencies, a continuous monitoring process can quickly discover and correct deficiencies in the control system internal and help make it more effective. It is most effective when integrated with the operating environment and results in regular reports that are subject to review.

18 Horizontal and vertical

2- Specific Devices to credit institutions: the prudential arrangements

The tools for measuring performance of credit institutions differ from those of other companies because of the nature of the activity. It is for this reason that the supreme organ, the Bank for International Settlements has established a number of rules to allow banks to minimize risks in their daily management, and thus to increase their financial performance.

2-1 Regulations and Standards

Credit institutions are required to respect standards managements to ensure the liquidity and solvency of the latter vis-a-vis the applicants (...) as well as their financial structure. The Basel II (the New Basel Accord) is a prudential framework for better understanding of the banking risks and primarily credit risk or counterparty and capital requirements. These guidelines have been prepared since 1988 by the Basel Committee, under the auspices of the Bank for International Settlements. The Basel Committee has proposed in 2013 a new set of recommendations, which will be defined after a more relevant measure of credit risk, with particular consideration of the quality of the borrower, including through its own internal credit rating system for each facility (called IRBinternal rating Based).

The Basel II come to replace the standards set by Basel I in 1988 and aim in particular to the implementation of the McDonough ratio to replace the BIS ratio 19.

This new ratio takes into account both the credit risk, market risk and operational risk 20. Thus we move from a Cooke ratio where19 minimum capital ratio compared to all loans granted. The ratio of the two values must not be less than 8% in the proposals of the Basel Accords I. The major limitation of the Cooke ratio, and therefore the regulations from the first Basel agreements is related to the definition of credit commitments. The main variable considered was the amount of credit granted. In light of modern financial theory, it appears that is neglected the essential dimension of the quality of the borrower, and therefore credit risk it actually represents.

Total FP

> = 8%

credit risk

Bank’s own background> 8% of credit risks to a ratio where McDonough

Total FP

> = 8%

credit risk + market risk + operational risk

And which

Bank’s equity> 8% (credit risks (75%) + market (5%) + business (20%)).

The Basel II recommendations are based on three pillars 21Pillar 1: minimum requirements for own funds.

Here we mainly refer to the new Basel II ratio, the ratio of McDonough, which requires that all shareholders divided by weighted risk funds must be greater than or equal to 8%.

Pillar 2: the procedure for monitoring the management of capital

It will test the capital adequacy of individual institutions and procedures of internal assessments. Banks will adopt internal procedures and reliable risk control in order to check

20 The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events It corresponds: to inappropriate procedures or processes, human errors, system abnormalities, events external.

21 Term used explicitly in the text of the agreements

compatibility over a medium term horizon of their own funds with risk levels they have set. Similarly, they must be able to adjust their capital according to their activity and their overall risk profile.

Pillar 3: market discipline.

Transparency rules are established for the information available to the public on the assets, risks and their management.

In practice, it is transferred to the market (investors, rating agencies,...) part of the bank supervisory responsibilities. This approach requires the banks, reliable information on the capital held, their business, their risks borne... the regular publication of information from banks on these areas will allow various market players to assess the bank’s ability to remain solvent in times of crisis and determine the terms on which it can obtain its capital;

2-2- The prudential ratios

Prudential ratios 22 constitute a prudential measure introduced by COBAC to allow the banking sector to minimize the risk of loss, to maintain sound management of their assets.

Prudential ratios concern for most solvency and also the liquidity of assets in the company.

2-2-1- The solvency

Generally, a company is solvent if the value of its assets exceeds that of its debts. That is to say, if the equity is positive. More capital is important, fewer lenders are at risk not to recover their claims; the risk that the asset sale does not cover the value of the debt is in fact lower as equity or net assets are important.

22 The details of some key ratios is reproduced

The solvency of a bank depends exclusively on the value of investments made by it, and this value depends, in turn, discerning qualities banker has shown in their choice; so it is important for the bank to control its activity. Many things can cause insolvency of the bank: the borrower defaults, loss of foreign exchange risk, mismanaged rate... It is therefore essential that the following ratios are closely monitored:

> Risk division ratio

This is the type of security ratio, but also one of those whose technical definition and practical application raises the most problems. It is to limit, based on the own resources of the bank, the maximum commitments that it may contract with one customer.

  • Risk-weighted assets according to the guarantees which they seem bound to a customer or group of customers linked by control or financial relations must not exceed 45% of equity of the bank.
  • The sum of large exposures must not exceed eight times the amount of capital the bank.
  • A big risk is a risk of a customer or group of customers that exceeds 15% of equity of the lending institution.

> The solvency ratio or ratio of risk coverage

This is the new McDonough ratio that takes into account both the credit risk, market risk and operational risk.

Total FP

> = 8%

credit risk + market risk + operational risk

2-2-2- The liquidity

Strictly speaking, liquidity is defined as the ability to a credit institution to meet its short-term commitments, ie to meet an unexpected demand for removal of a portion of the funds deposited by customers.

The most common prudential ratios for liquidity are:

> Liquidity ratio

It was instituted to require credit institutions that receive public term deposits to be able to face any time of any withdrawals due to their availability, or by making all or part of the assets mobilized

The liquidity ratio is defined by the ratio between cash and liabilities within one month of a bank:

achievable jobs in less than a month

Liquidity ratio =

Resources within one month

> The long-term transformation coefficient

The long-term transformation coefficient is a minimum ratio to be met by banks between their resources over five years (equity, quasi-equity, provisions, bonds more than five years...) and for jobs a same term (fixed assets, equity securities, loans...)

Resources over five years

Transformation coefficient => 60%

Jobs over five years

Section 2: Improving the financial performance

Several managerial thoughts can enable us to link the improvement of company performance to internal audit. Indeed many theories in the mangement organizations show that the implementation of certain control mechanisms such as internal audit is necessary, enabling leaders to ensure the smooth running of their business.

To highlight the increased performance of the company through internal audit, we used one hand to the theory of agency Meckling and Jensen, and the other articles enacted at the Basel Committee on the Framework for internal control systems in banking organizations.

1- managerial contribution of internal auditing to performance: the agency theory

The agency theory is now the dominant framework for analysis of the forms of economic organization, especially of the firm, proposed by neoclassical recent developments. Its starting point is the agency relationship.

The origin of the study of the agency relationship and the questions it raises is located generally in Adam Smith’s thoughts on inefficient stock companies whose management is entrusted to a non-proprietary agent would not be encouraged thereby to better manage the business entrusted to him. This relationship is then shown as a special case of an agency relationship. The classic definition of this agency relationship is that the agency relationship is a contract whereby one or more persons (the principal) engages another person (the agent) to perform a task on its behalf one that involves a delegation of some decision-making power.

The authors come to regard that any cooperation between agents pose problems the characteristics of an agency relationship and may be treated in the same way. Indeed, the leader may wish to maximize its own goals

over those of the shareholder. Also this qualified behavior of opportunistic, is difficult and expensive to control for the shareholders to the extent the director offers internal company information that shareholders do not: it is the principle of asymmetry information.

The information asymmetry is most often to the advantage of the agent. That is why the main hope in general, control by developing means to prevent the agent to make decisions against its own interests; This is not without consequences for the functioning of the organization. Indeed, it generates agency costs that Jensen and Meckling (1976) include costs of monitoring, commitment costs and residual loss.

  • Monitoring costsare those incurred by the principal and the agent for monitoring. The principal can limit divergences from its own interest by establishing appropriate incentives for the agent and supporting monitoring costs to limit the aberrant behavior of agent (Jensen and Meckling, 1976). Spending control and correspond to the costs of drafting and compliance monitoring agreements concluded between the principal and the agent to restrict the room for maneuver of the latter by fixing such compensatory measures or limiting some budgets.
  • The costs of engagementare, as to them borne by the agent in order to trust the principal. They can result in writing by the company’s financial reports and audits by internal or external experts to the organization.
  • Residual lossesare related to the persisting divergence between decisions taken by the agent and those that would maximize the welfare of the principal despite the control and commitment.

In this perspective then appears the need to establish, within the organization, a new rule aimed at minimizing the costs associated with these information problems.: Internal Audit. Indeed, whereas the individual tends generally to favor its own interests, Jensen and Meckling (2002)

emphasize the need to provide in the decentralization process, an organizational control system that aligns the interests of individuals with those of the organization.

Measuring devices and the performance evaluation are also one of the authors of the contribution of axes to the agency theory. Jensen and Meckling (2008) examine the performance assessment methods associated with five major types of organizational units (responsibility centers): cost centers, revenue centers, profit centers, investment centers, cost centers. They then propose to study the conditions under which, each responsibility center is a measurement and evaluation of performance.

Analyzing the organizational situation where a divisional unit X provides a product / service to another unit Y, the authors emphasize that the knowledge necessary to assess the performance of this unit X:

- Is difficult to observe from the hierarchy,

- Is a specific and therefore expensive to transmit knowledge,

- Is at the user unit of the product / service.

It is necessary, in this case, to transfer part of the control function to the Y unit, establishing a commercial transaction system between units. In addition, for greater efficiency of the device, the head of the Y unit should be free to choose the organizational units from which it buys. He has to select units, either internally to other organizational units, to the outside, from other organizations. Through their analysis, Jensen and Meckling and show that profit centers are a performance measurement mechanism in this specific organizational context, which allows the hierarchy to make direct control of the Y unit, for the simple measure its profit.

Put into perspective

The agency theory revolves through its foundations and its interests to other existing currents.

First, based on the premises in which the individual focuses his personal interest and that there are conflicting objectives at the organizational level, the agency theory adopts the same position in the political model of the organization.

The agency theory also shows similarities with the theory of structural contingency (Lawrence and Lorsch, 1976), in that they are related to both information theories that focus on the limited rationality of individual and asymmetry of information within the organization.

Finally, considering that the individual has a limited rationality, he favors his personal interest and that it is opportunistic, the theory of this agency, of course similarities with the current of transaction costs (Williamson, 1975) theories also put at the heart of their analysis, the asymmetry of information in the context of a contractual relationship of efficiency, they plan as the engine of any economic transaction (Barney and Ouchi, 1986). The agency theory, however, singularly out of the current transaction costs by focusing on the ability of the principal to address risks.

The internal audit appears therefore, given this agency theory, as a process that allows the organization to minimize costs and reduce losses and risks associated with the activity.Moreover, the definition of conventions clear as emphasized Jensen and Meckling is critical to the effective functioning of an organization.

2- Definition of procedures and analysis of transaction processing process

The improved financial performance of the company through internal audit first requires a clear definition of internal management procedures and a careful analysis of the operations process.

2-1 Definition of procedures

Formalized procedures developed to enable internal control follow the evolution of the company’s activities. It also allows auditing

better assess the internal control, to make recommendations on deviation from the rule or the standards established by the organization. It is in this way that the performance can be improved over time.

Indeed the great theorists such as Taylor with its principles of definitions of tasks, and Fayol to industrial administration proposed through their theories and methods of work organization that could enable the organization to be more efficient.

2-2 Procedures in the theories of organizations

The contribution of Taylor in the definition of standards and procedures in the company was to suggest that if one is able to perfectly master a number of techniques and rules on personnel administration (task decomposition, definition the content of a post, maximum control capacity, etc.), then the difficulties in the management of large groups of workers are largely resolved. This requires a scientific study of labor, leading to scientific management.

3- Control of operations and risk control

Operational control is a mechanism that enables the organization to control its activities and therefore the risks associated with these activities. Taylor, in his time has also stated control principles to monitor the activity of the workers.

3-1- The Frederick Winslow Taylor control principles

Taylor stated in 1911 four control principles to enable industrial enterprises of his time to monitor developments in the labor of the workers;

- Replace traditional empiricism scientific knowledge of various aspects of the work of each individual.

- Select, train, educate and develop scientifically workers. (Previously, they were allowed to choose their profession and they formed themselves, the best they could.)

- Establish a frank cooperation with the workers, so as to ensure that all work is performed in accordance with established scientific principles.

- Starting afresh the work and responsibilities so nearly equal between management and workers. Management will handle all the tasks for which it will be more competent than the workers. (Previously, almost all the work and most of the responsibilities incumbent on them.)

These principles listed by Taylor clear that control of operations, intended partly to ensure that the rules are respected, and secondly to ensure a good flow of information between management and operational, allows identify deficiencies in the performance of tasks and immediate effect adjustments, the major concern is to improve the performance of the organization. It also states that compliance with these principles will ensure the prosperity of all: employees are better paid and leaders will see their profits increase.

Taylor arrives after the enumeration of these principles to obtain a 200% productivity gain and, while reaffirming the leadership roles of managers and the need for workers to strictly obey instructions. This applies to all companies, including those that have certain features, such as banks.

3-2- The audit of operations in banks

Control activities are an integral part of the daily activities of the bank. The control systems require the establishment of an appropriate control structure, with control activities defined at every operational level. The internal audit, together with the internal control seeks to ensure that all staff work with efficiency and integrity to achieve the objectives without causing unintended or excessive costs or focus on other interests (such as an employee, supplier or customer) than those of the company. Performance objectives are related to the effectiveness and efficiency of the company in the use of its assets and other resources, as well as in protection vis-a-vis its losses establishment.

Control activities are designed and implemented to address the risks identified by the bank through the risk assessment process. These activities involve two steps:

The establishment of control policies and procedures

Verification of compliance with compliance with these policies and procedures.

Control activities are at all levels of staff of the bank, including senior management and staff in direct contact with the market, and are of the forms:

- The examinations at the highest level;

- Checks of activities;

- Physical checks;

- Compliance with commitments ceilings

- Approvals and authorizations;

- Checks and controls by reconciliation.

3-2-1- at the highest level examinations

The Board of Directors and senior management often request presentations and performance reports to help them assess the progress made by the bank for achieving the objectives. This requires consultation reports showing actual financial performance during the year compared to the budget. The questions which they have to ask and the responses of lower hierarchical levels are a control activity that can reveal problems such as control weaknesses, errors in financial reporting or fraud.

3-2-2- Controls activities

The management of a department or unit receives and examines conventional or special reports on a daily, weekly or monthly. Functional reviews are more frequent than those performed at the highest level and are usually more detailed. Thus, the head of the commercial lending sector for example can view reports on delinquencies, payments received... while credit manager within senior management is aware of similar documents once a month and under a more condensed form covering all categories of loans.

3-2-3- Physical Controls

Physical controls generally focus on the limitations of access to tangible assets, including cash and securities. Control activities include physical limitations, dual conservation and periodic inventories.

3-2-4- compliance with exposure limits

The establishment of prudent limits on commitments is a major component of risk management. Therefore, an important aspect of internal controls is in a compliance audit process these limits and monitoring in case of non compliance.

3-2-5- Approvals and authorizations

The need to seek approvals and authorizations for transactions exceeding certain limits ensures that the appropriate level of management is aware of the transaction or situation, which helps restore responsibilities.

3-2-6- checks and controls by reconciliation

Audits detailed characteristics of the transactions and the various activities and results provided by the risk management models used by the bank are important control activities. Periodic reconciliations, such as between cash flow and financial reports and statements may highlight activities and accounting records demanding to be amended. Therefore, the findings of these controls should be reported to the appropriate levels of management whenever problems or potential problems are detected.

To varying degrees, internal control is the responsibility of everyone. Almost all employees produce information used in the internal control system or take other actions necessary for the exercise of control. Control activities have their optimum efficiency when management and the entire staff see them as inherently part, not as a supplement of the daily activities of the bank. Moreover, truly integrated in the daily activities controls allow fast response to changing conditions and avoid unnecessary costs. As part aimed at establishing control culture within the bank, senior management should ensure that adequate control activities are truly part of the daily functions of all relevant personnel.

3-3- Control of the risks by the internal audit

All audit firms audit the organization aimed at reducing the risk of loss and therefore their control. The purpose of these checks a posteriori of transactions frequently made cross and periodically is:

- To assess the appropriateness of operations

- Monitor the risks attached to them, accounts held for granted delegations of power;

- Inform the governing bodies on the implementation of the internal control objectives.

The conclusions reached and recommendations made by the auditors after the audit missions carried out generally aimed at correcting the shortcomings facing the company. The consideration of these recommendations by operational will also reduce the potential risks that may influence the profitability and hence the move towards achieving its goals.

The audit must recognize and evaluate major risks that threaten the achievement of the bank’s objectives. This assessment should cover all risks faced by the institution and the consolidated banking organization (that is to say, credit risk, market risk, risk of interest rate risk, liquidity risk, legal risk, reputation risk, country risk and transfer risk). A review of internal controls may be necessary to appropriately address any new or previously uncontrolled risks.

This is why it is necessary for any company, whatever the field of activity in which it unfolds, to have internal control systems 23 effective. The effectiveness of internal control systems therefore becomes an important factor in improving company performance.

3-3-1- The control of counterparty risk

Banking activity includes taking risks. It is therefore imperative that these risks are recognized and continually assessed. We shall dwell more on the control of counterparty risk.Mastery of counterparty risk requires not only a diagnosis but also an able and careful control as well as management and evaluation thereof.

23 First level control (internal control) and second level (internal audit).

a- The diagnosis of counterparty risk

The financial analyst has difficulty in assessing risk for bank balance sheets indicate net values and the definition of impaired loans and provisioning of the game make awkward comparisons. In addition, the realization of counterparty risk can be spread over several years which introduces inertia effect on the balance sheets. Credit institutions have significantly improved the quality of their information on counterparty risk, several items deserve detailed study.

Beyond compliance with risk diversification ratios, the analyst will assess the distribution of counterparty risks by adequate criteria: customer category, industry, geographical area, including the assessment of country risk. Improved accounting information of banks on the subject makes it easier for the analyst because many banks communicate over the distribution of their performing loans and their outstanding compromise 24.

b- The measurement and control of counterparty risk

At the invitation of the regulatory authorities and in line with the Basel Committee’s recommendations, banks report more qualitative way on the tools they implement to measure counterparty risk (credit scoring 25, internal models) to control and to manage by allocating adequate capital, by techniques such as securitization or credit derivatives.The development of credit derivatives also encourages banks to provide more detailed indicators on the amounts of the contracts and their use. Finally, it is certain that the entry into force of the new solvency ratio homogenized measurement systems counterparty risk.

24 Through Central risks.

25 This is a technique that seeks to synthesize counterparty risk through a rating (score) by assigning to each information representative of the borrower’s creditworthiness weighting. The total weighting, compared with a previously established limit score, lets take an immediate decision of agreement or refusal of credit.

c- Assessment of counterparty risk

The evaluation of counterparty risk is done in two ways depending which is the part of individuals or companies.

> The risk assessment specific

This is about assessing consumer credit 26 and mortgages 27. First it is necessary to collect all the necessary information about the borrower and its track record of debt and solvency; second, to ensure that the borrower’s income can cover the repayment of the credit. (Coussergues, 2007)

Specific risk can also be assessed by the method of credit scoring.

> The assessment of corporate risk

The assessment of corporate risk through a collection prior information about the borrower, then a careful analysis of financial condition.

Moreover, new counterparty risk assessment methods have been developed. These external and internal ratings. The first pillar of credit institutions invites them to acquire counterparty risk assessment systems based on one of three methods proposed by the Basel Committee: the standard method, the basic IRB approach and advanced IRB approach. These methods evaluate different approaches according to the probability of failure of a separately taken counterparty or credit portfolio, and losses, with the objective that capital is sufficient to cover unexpected losses, the expected loss is covered by adequate pricing of credit and by provisions. (Coussergues, 2007).

26 Usually short term, they are requested to finance the purchase of a capital good, or to finance a requirement that the borrower does not specify.

27 In the longer term as consumer loans, they also have a higher amount.

The diagram below is a summary model for improving the financial performance of the company through the practice of internal auditing.

Diagram: Model for Improvement of financial performance in the practice of internal auditing.


Analysis of transaction processing process


control: Audit



- Indicators CDG - prudential ratios COBAC





of the

Operations control and risk mastery

Sources: Author


This second part shows the application of highlighting the increase in the financial performance of the bank through internal audit. It is divided into two PARTs:

The first entitled context of the study and methodology sets the context of the study and the methodology we used to.

The second in turn allows us through the case FNB First Bank to verify the research proposals that we issued.



The aim of this PART is to first define the context in which this study was conducted, and then define and justify the methodological choices adopted. Thus, in the first section, we presented the Lebanese banking sector, as well as our research site namely FNB First Bank. The second section was devoted to the presentation of the methodology we followed for the collection and processing of data.

Section 1: Environment Study

We presented alternately Lebanese banking sector and the bank in which case study took place.

1- The Lebanese banking sector

The structure of the Lebanese banking system is based on the Convention of 17 January 2002 on the harmonization of banking regulation in the States of Central Arab. The Lebanese banking system, despite its similarities with other banking systems of other countries has its own characteristics. Operating in a particular economic environment and policy that has laws and regulations.

1-1- Structure of the Lebanese banking system

Historically, banks BEAC emitting area in general and in Lebanon in particular are organized systems to the extent that they constitute a hierarchy, centralized with a central bank and second-tier banks. The regulatory framework is defined by the monetary authorities, and evolves with financing needs and the requirements of financial liberalization imposed by an international competitive environment. Beside the central bank and commercial banks, there are oversight bodies or control and supervision. We discussed in turn in this section, the components of the banking system.

1-1-1- The National Bank

The National Bank of currency in Lebanon is the Bank of Central Arab States BEAC. It also works in the other CEMAC countries namely the Congo, Equatorial Guinea, Central Arab Republic and Chad. It is governed by the Convention establishing the Monetary Union of Central Arab, monetary cooperation agreement between France and the other States of the Union as defined in Article I of the Articles of April 2008 BEAC.

Its mission:

- Defining and conducting monetary policy applicable in the union of member countries;

- To conduct foreign exchange operations;

- To hold and manage foreign exchange reserves in member countries;

- To promote the smooth functioning of the union payment systems.

Moreover, the BEAC’s role:

- Issuing base money;

- To act on credit;

- Manage international foreign reserves;

- To perform transactions with the International Monetary Fund (IMF) as fiscal agent of the Member States;

- Ensure the oversight of the payment system.

1-1-2- The control and supervision bodies

The supervisory bodies are COBAC and the National Credit Council (NCC); the single supervisory body is the Professional Association of Credit Institutions of Lebanon (APECCAM).


Born in 2000, emanates from the BEAC and is responsible for ensuring compliance by credit institutions of the laws and regulations enacted by national authorities or by the BEAC itself. In case of non compliance, significant deficiencies or deviations, it takes corrective action vis-a-vis the credit institution concerned. It ensures its functions on the operating conditions for credit organizations and the quality of their financial situation and on compliance with ethical rules of the profession.

The authorization of credit institutions, appointment of the auditors of credit institutions, changes in the structure and

capital allocation is subject to prior agreement with COBAC. It sets thereby the rules to ensure control of the liquidity and solvency of credit institutions. COBAC may impose the following sanctions against banks in the event of non-compliance with the rules enacted by this:

- Warning

- Blame;

- Prohibition of certain operations effector or any limitation in the exercise of its functions;

- Revocation / Statutory Auditors;

- Revocation and resignation of office / leaders of institutions; - Withdrawal of approval.

b- The National Credit Council

It was created by Decree No. 96/09/2006 and functions in both advisory and regulatory.

> The regulatory powers

Its decisions are general. The National Credit Council sets regulating banking and organizes the profession. It sets the banking conditions and ensures the standardization of statistics states that credit institutions must develop periodically; it also defines the banks’ balance sheet accounts.

Finally, it takes decisions by individual character when it authorize the opening of a new bank, the inscription on the list of banks and opening or closing windows.

> The advisory functions

The CNC makes recommendations to increase the volume of deposits in banks. It directs resources to productive employment in well-defined areas. His opinion is also required because it is regularly consulted on the policy of Lebanon’s financial responsibilities for participation, grants and tax benefits. It also gives its opinion on the conditions of bond issues on the Global Credit Policy and specifically in the context of

financing of development plans. The relationship between the CNC and banks is through the APECCAM.


Ordinance No. 85/002 of 08/31/1985 relating to the activity of credit institutions establishes the APECCAM but its effective creation only took place during the meeting of the Consultative plenary meeting held in Douala the 23/11/2000. Its statutes and regulations have been approved by the Minister of Finance on 12/03/2000.

The APECCAM is composed of three different groups that form the financial community ie banks, public bodies in nature banking and financial institutions.

Membership in the APECCAM remains mandatory for bank-based organizations. This association has the following roles:

- Representing the collective interests of its members to the government;

- Information of members and the public;

- Addressing issues of common interest and developing recommendations relating thereto;

- Organization and management of services of collective interest.

Like most economic activities, the activities of Lebanon to credit institutions takes place in a framework to protect both customers, the state and developers.

1-2- Typology of Lebanon institutions

The Lebanese banking today is essentially composed of thirteen commercial banks. The banking system of banks are changing for most network and can be classified according to Article 5 of Decree No. 90/69 of 9 November 2000 in deposit bank, specialized.

1-2-1- The deposit banks

They are designed to receive deposits of funds and term, and conduct credit operations. Traditionally, commercial banks provide short term loans to facilitate ongoing business operations (ahead of title and market operations on documents and merchandise, discount, credit facilities, overdrafts).

1-2-2- The specialized banks

They can enjoy a special status and are main business scope:

- Whether a particular type of transactions, including the medium and long term loans and equity investments,

- Either a sector or a specific clientele.

For equity investments, specialized banks should use their own resources and call on deposits over two years for the refund, to the extent that deposits at least two years are reserved for commercial banks.

1-2-3- Intermediaries in banking

The 2002 Convention as an intermediary qualifies banking operation any person who, as usual occupation, brings without wearing delcredere, interested parties to a banking operation which at least is a credit institution. To this we can mention the financial institutions 28, financial services and postal financial firms investment and participation.

28 They cannot use public deposits for the purposes of its business; they therefore cannot have recourse to their capital or debt capital. On 31 December 2015, there were 10 financial institutions in Lebanon (list attached).

1-3- The Lebanese banking system

The following table shows the geography of the capital of banks in Lebanon 31/12/2015.

After this brief overview of the Lebanese banking sector, it appears that this sector is mainly dominated by foreign capital. We particularly study the case FNB First Bank, in which there

  1. Presentation of the host unit

We chose this Lebanese banking fabric consists of twelve banks FNB the bank called First Bank as our study site. Our choice was to this bank because it offered us the opportunity to work in the Audit Service (Inspectorate).

2-1- Presentation and organization of the First Bank

We will present to turn the historic tower and the evolution of the First Bank, and its objectives and organization.

29 Established recently in 2008.

Master Of Business Administration (AFU) 71

2-1-1- History and evolution

FNB First Bank, First Bank abbreviated, made an application for approval in order to create a bank in 1982; four years later, it is a limited company with capital of 300 million FCFA. However, it was not until 1987 that she obtained the approval of the bank under the trade name of Caisse Commune Savings and Investment (CCEI), thanks to the pooling of two groups:

- Lebanese group headed by Dr. Paul FOKAM KAMMOGNE - A Dutch group, FMO.

This is the first r July 1988 she opened the first wicket in Yaounde (college retirement); person first customer transaction 18 days later. She is now a full international bank through its operations in Arab, China, France, and its network which allow it to be present on the financial markets worldwide. Its capital is past few months of 6300 million to 8000 million FCFA.

2-1-2- Objectives and organization of the First Bank

First Bank is an ambitious bank whose objectives are:

  • Create bridges between the informal and formal sector;
  • Promote the emergence of a true entrepreneurial class;
  • Integrate the rural world in the development process;
  • Secure client funds;
  • Provide support for business development.

To achieve these goals First Bank has established management bodies able to manage a network that extends beyond the borders of Lebanon with subsidiaries in Equatorial Guinea, Sao Tome and Principe, with offices in Paris and Beijing. These great management bodies are the Board of Directors, the Audit Committee and the General Directorate:

  • The Board of Directors

It defines the general policy of the bank policy implemented by the Directorate General;

  • The Audit Committeeoversees the management of the entire network operations. In this function, the Audit Committee is supplemented by the General Inspection.
  • The General Directorate

The organization of the bank reflects the dual national and international dimension.

On the General Management National Plan consists of two regions: the Coast / North and Central / West Region region. The Directorate General also has central technical directions:

The Department of Human Resources and General Administration, which manages the staff, training and service documentation. In addition, it is responsible for materials management and general affairs.

Financial and Accounting department that deals with the projected administrative and accounting management of the bank. Clearly, it is responsible for accounting control, accounting, budget and statistical analysis.

The Department of Legal Affairs and Litigation which fulfills a function of both operational and consulting. As such, it provides the Bank, by its advisory role, the best legal conditions advice of banking; it coordinates the activities of lawyers of the bank, research and ensures the best protection of heritage resources, this by preventing conflicts and the bank’s interests. It also conducts debt collection activities.

The Department of Research and Corporate Banking which is responsible for the corporate banking operations and the financial market. It provides the link between banking and venture capital funds, value chain analysis, the study projects, actively seeking funding, the implementation of field projects in collaboration with the (s) promoter (s), project monitoring and impact analysis, promotion and monitoring of micro banks.

Internationally, the Directorate General has two directorates Group:

The Processing Directorate and IT group: it has over the management of IT resources to First Bank. As such, it mobilizes a set of resources (software, hardware, financial and human) to collect, complete, secure, process, and output information processed in the bank.

The management of credit and the Group Commitments Control: it ensures the analysis and cons analysis of the bank’s credit records and subsidiaries, commercial action and especially the control of First Bank Group commitments. It also provides the secretariat of credit committees and participates in group credit committee.

For our purposes, upon arrival in the bank, we were assigned to the General Inspectorate.

2-2 Operation of the General Inspection

The inspectorate, reporting to the Board of Directors acts as a scout of the Directorate General and the Chairman of the Board of Directors regarding the operation of the bank.It should set itself up as control checks technical manager to the last degree of regularity, safety and efficiency of operation of the bank.

2-2-1- Missions of the General Inspection

The General Inspectorate is responsible for monitoring all the bank’s operations. It has therefore total independence vis-a-vis all officials and employees. It provides to the Directorate General control of the regularity of all the bank’s operations. It ensures the strict application instructions, monitors and modifies the agreement of the Director General the provisions of general instructions become inoperative.

Its mission is therefore analyzed as follows:

- Give the bank insurance on the degree of control of its operations;

- Provide advice and improvements contributing to the creation of added value;

- To assess systematically the risk management of process 
control and corporate governance in order to improve them.

The General Inspectorate has to accomplish in a year and in each unit, at least three missions: a general monitoring mission, implementation or monitoring mission control and a specialized or thematic monitoring mission. The surveys are conducted occasionally and are triggered as a result of the occurrence of a particular problem (fraud, resignations, embezzlement...). The inspector as a professional are of major significance. It should therefore:

  • Mastering the methodology and techniques appropriate to the wide variety of audited information;
  • Express a responsible and independent opinion.

2-2-2- The trades of the General Inspection

Implementation in a systematic approach, the General Inspectorate consists of several trades including:

- The audit of commitments;

- The audit of operations;

- The financial audit;

- The audit and organization;

- Legal audit, and administrative investigations;

The audit of commitments

It aims to ensure that all commitments made meet the standards set by the bank. The major concern is to limit credit risk and a continuous monitoring of all acts by which the bank undertakes with third parties. These include:

- The audit of account openings

- The audit of credit records

- The audit of the decision process (minutes of credit committees, establishment of credit files, guarantees)

- The audit of credit-related management activities (rational allocation of records proper record keeping monitoring of commitments... good reporting????)

The audit of operations

It aims to monitor the conformity of production operations within the bank through operational agents in the areas of revenue generation, also known as profit centers.

The financial audit

The accounting and financial audit is a first step to seek the location of risks by class and accounts in a second time to undertake a systematic verification of each class accounts for minimizing the usual risks and risks anticipated.

The audit organization and

The audit is to verify compliance with IT procedures by computer, ensuring either application security or control of access, to ensure network security.

> The legal audit, administrative inquiries and

This profession of internal auditing has the overall objective to ensure the compliance of the bank’s activities to the standards and regulations set by the authorities.

2-2-3- the course of an audit

a- Preparation of the mission

This step varies depending on the nature of the mission. It is necessary to have background information on the unit to be audited are: the reports of previous missions, investigations concerning the organization... The exploitation of these data allows listeners to plan the work and to proceed with the distribution of tasks for methodical work.

b- The execution of the mission

At the beginning of the mission itself, the team of the inspection meeting the head of the entity to be audited and informed him of the mission objectives. This makes available all the documents it needs for the success of the mission. It therefore conducts its investigations at the end of which it issues recommendations 30 based on anomalies in the auditee.

c- The end of the mission

Here, the general inspection meets the audited to present their written outline of the future mission report that will be sent to the Chairman of the Board and Executive Management. This allows them to react possibly by clarifying and controversy.

30 List of recommendations attached.

Section 2: Methodology of Study

Any study in the field of management or management requires the application of a methodology to carry out and methodically studied. The methodology sets out how we will analyze, discover, decipher a phenomenon (Rispal, 2011). There is therefore the quantitative method and a qualitative method. The distinction between the two methods is through the kind of data (qualitative, quantitative data), the direction of research (construction or testing a theoretical object), the objective or subjective outcomes (objectivism / subjectivism), and flexibility results. (Thietart, 2012).

We chose for our purposes to adopt the qualitative method; we present in this section the method itself and the scientific process that follows.

  1. Presentation of the research method

For Miles and Huberman is a method based on qualitative data, that is to say data which are in the form of words rather than numbers. According Evrard et al. (2003), qualitative data are variable measured on nominal and ordinal scales (that is to say non-metric). The qualitative method, which can come from an orientation, is an exploratory approach, characteristic of the theoretical construction, which largely one ignores the content of what we want to update.

The development of qualitative approach was characterized by taking into account the subjectivity of the researcher. According to Erickson (1986), the most distinctive feature of the qualitative survey lies in the implementation of interpretation. This interpretation should not be that of individuals who are studied. This positioning of the qualitative approach is akin to the tenets of the proponents of symbolic interactionism 31 who consider authentic sociological knowledge is delivered to us in the view of the actors, whatever the subject of the study, since it is through the meaning they assign to objects,

31 The term symbolic interactionism generally indicates a sociological trend of American origin based on the idea that society is the product of interactions between individuals.

situations, symbols around them that actors make their social world (Coulon, 1987).

The qualitative approach is not limited to the interpretation of variables identification, development of a given collection instruments and analysis to determine the results. It is rather for us to position ourselves as an interpreter of the studied field, even if our own interpretation can be supported more than the subjects.

This brief presentation of the qualitative approach allows us to justify the choice of this method in our study; the data we have planned to study are nominal and ordinal data, and therefore qualitative.

2- Access Strategy in real

Choosing an access strategy in real highly dependent on the approach taken. Several strategies can therefore be listed:

- Case studies;

- The comparative methods;

- Experimental research

- The simulation

- Action research (Wacheux 2006).

For our study, we chose as access strategy to the real case study; we attèlerons us to present the specifics of this strategy, then the way in which we collected the data, and finally the nature of the data we collected for the purposes of the study.

2-1- The case study

The case method is defined as a spatial and temporal analysis of a complex phenomenon by conditions, events, actors and implications (Wacheux 2006). The case study is applied to very different realities. She often refers to a short description of a company to a simplified manner illustrate an issue in the context of a teaching situation. It is justified by the complexity of the problem. A case can be

a person or group of persons, a specific project, an organization or a group organization or a business sector. In Management Science, the last three categories are the most used (Rispal, 2011).

The case study is appropriate when the research question begins with  why  or  how . It can track or reconstruct events in time, assess the local causalities and make an explanation. It aims to:

- Understanding a situation, determinants and give a representation (typology of leadership styles)

- Enable process analysis;

- Highlight recursive causalities.

The case study can be performed on one or more sites such as the following table shows.

Table 3: Types of case studies

Multi-site single-site


Study of a theme theoretical 32 

Identify Representation

configurations and empirical


Similarities Case-cluster and

process differences

Sources: Wacheux (2006).

For our study, we chose to study the case of an organization, specifically a number of organizational processes, in order to show how they allow it to increase its financial performance.

32 It is obtained by selecting representative cases of contrasts and different forms of underlying concepts.

2-2- Data collection

In a qualitative analysis, data collection can be done in two ways: either by obvious sources or by a triangulation.

The choice of using obvious sources implies for the researcher is to make a maintenance or a passive or participant observation, or even a documentary and archival analysis.

To collect data that allowed us to complete our analysis, we used the third method ie documentary and archival analysis. This is a structuring scattered information of operation, to achieve a usable result original for the researcher. It does not result in a byproduct, or a concentrate of the original files, but in creating a structure where the information takes place in relation to their nature and in relation to research questions considered. (Wacheux, 2006). The following table shows the function of documentation and archives consulted.

Table 4: various functions of documentation and archives.






> Comprehension


Search the pass e which explains the









Compare the pr ESENT and the past





Telling a bygone period for



> Validation



Understand a speech in relation to







other devices)



Generate precise questioning the






Triangulate data  (speech and actions)


Sources: Wacheux 2006.

In business, the writing has a specific function. They are acting the events, observe the decisions, engage people to action. The accounting system and management control, such as a company’s life metronome. They record the situation, effectiveness and efficiency of the system at regular periods, and serve as a basis for discussion between stakeholders.

Research on companies the facility to identify the sources of their function is an advantage. Must still have access. The longer it will perceived, the more difficult it will be to get it.

2-3- Natures and documentary sources

The literature strives to offer the key relationships of context without being imbued intentions and perceptions of current players. This objectivity is only apparent. A historical approach focuses on representations of the past. The analysis therefore aims to establish the image perpetuated by the writings and understanding their influence on the present and even the future.

From different sources, we structure and records before interpreting a classic analysis process. At a minimum, the information is found in both files (Thuiller and Tulard, 1986):

- One establishes the precise sequence of events,

- The other cumulative information on a particular research question.


Table 5: various possible sources of information for a documentary study





Internal to the organization


Minutes of reeting, contracts, documents, 
training, internal newspaper, notes

Service, report, audit 




Diaries, notes Dr. eeting,

memo, letter work

Preparatory, reflection 


External to the organization


Law and rules, decree, trial, collective agreement




professional journal, interview and speech of the leader, announces








Official report tracking

administrations, control and 
external audit.


Sources: Wacheux 2006.

This table shows what the sources of documentation and archives available for research by the qualitative method.

Using recent documents 33 serves, first, to establish a precise chronology of the studied process. But it is also a powerful way to generate specific questions to the actors about their experiences. As shown and Thietart

33 On the historical moment studied the records and documents that have influence on decisions in the process.

Marmonier (1988), the information is passed to the filters of the publication and memory. This work of investigation thus complements other data collection devices, both to clarify and contacts to triangulate the information.

The materials we used are mostly the audits reports. Thereafter, a triangulation was performed. Indeed, data collected in the documents, in addition to passive observation, were complemented by open interviews with the bank’s auditors. We were looking into these reports information on the observations made by the auditors on the operational management mode, the recommendations made by them for this purpose, the rate of implementation of the recommendations of two audits. All this has allowed us to show the impact on earnings and thus on the financial performance of the bank through the financial performance ratios.

After the data collection stage, we conducted a survey of antipodes case. Antipodes cases are cases that strongly differ pilot case on one or more points 34. The objective is not the replication of results, but the discovery of new concepts. We studied for this purpose three companies in the micro finance sector.

3- Data Analysis

The method used for data collected for the analysis was the content analysis. We therefore analyzed the content of all audit reports we have operated as part of the study, comments gathered during interviews with the auditors of the bank, as well as with other leaders microfinance.

34 size, sector of activity,...

This PART was devoted to highlighting the increase of financial performance in FNB First Bank through internal audit practices. Indeed, internal audit, as specified in the definition of the IIA, has the task to control risks, and to improve the performance of the organization.

To this end, we presented in the first section the results we have obtained as a result of data collection to FNB First Bank; in the second section, we analyzed these data, presented the results collected in the banking and micro finance institutions in which we conducted the investigation, then we formulated conclusions and made some recommendations.

Section 1: Collection and analysis of the study data 

In this section, we first analyzed the data we collected in the audit reports with the documentary study FNB First Bank, then we investigated two fraud detection ca.Afterwards, we did a content analysis of the comments gathered during interviews conducted with listeners of microfinance institutions..

1- Case FNB First Bank

We used the reports of all the trades of internal audit to FNB First Bank namely the audit of commitments, the audit of the operational, legal audit, and administrative investigations, accounting and auditing financial and IT audit and organization

1-1- 1-1-1- Audit commitments Mission Objectives

The mission was carried out by the Inspector responsible for the audit of commitments, supervised by the Inspector General. It was conducted in one of the units of the First Bank in June 2015 and had the following objectives:

- Monitoring the previous mission’s recommendations made in December 2014;

- The audit of commitments by cash 35 ;

- Evaluation of resources

- The audit of credit files;

- The audit of the decision process;

- The audit of the implementation of appropriations;

- The audit of the activity of credit by the Manager;

35 Making available liquidity to the customer

- The detection of anomalies and recommendations. 

1-1-2- Findings

During this mission audit, the audit findings were the following: Finding 1: 17.28% resource increase

Finding 2: overshoot reduction in their authorized level

Finding 3: regularization of certain credit records include:

- The signing of depreciation records (some depreciation records were not signed at the last mission);

- Insurance AIRD 36 and IDA 37 taken on files (not taken into account when the final pass in the audited entity.

Finding 4: on 74 unauthorized accounts receivable 230 102 153 FCFA, a recovery 202,362,003 FCFA was done according to the following table:

Table 6: Table cover claims on unauthorized debit accounts

full recovery

partial recovery
















Source: Author

This table allowed us to construct the following table of frequencies:

Table 7: Crossover claims on unauthorized debit accounts


Total amount

RECOUVR amount e



Proportion in creances


full recovery






partial recovery


















Source: Author

36 Insurance Fires and Other Hazards

37 Insurance Disability Death

This table shows that approximately 88% of claims on unauthorized debit accounts were recovered from the audit engagement in December 2014 and that of June 2015.

Finding 5: down unauthorized charges by 279%. Table 8: Global development commitments

D ecember 2014

June 2015


9.10% of the total commitments

2.69% of the total commitments


Down 238%


Source: Author

Finding 6: the overruns were down 32.9%. Table 9: evolution of overruns

December 2014


June 2015


Down 49.04%

Source: Author

Finding 7: expectations 38 appropriations were down 544, 27% Table 10: Progress anticipated credits

December 2014


June 2015


Decrease 544 27%

Source: Author

All cited above findings allowed the inspection team to make recommendations that they believe would allow the head unit to render even better its unity.

1-1-3- Recommendations

Recommendation 1: refrain from the practice of unauthorized charges to encourage the installation of credit records.

Recommendation 2: reduce overshoot their authorized level; Recommendation 3: recover the remaining funds; Recommendation 4: henceforth avoid anticipating the credits;

Recommendation 5: meet deadlines in the implementation of appropriations.

1-2- Audit of operations

We also used two reports of successive missions. The second mission was carried out in January 2007 and the data we were able to draw are:

1-2-1- Mission Objectives

The mission objectives were:

- Implementation of the recommendations of the previous mission; - The new review of the operation positions;

38 Provision of funds to the customer until it has fulfilled all the credit record of the constitution formalities.

- Detection of risk areas. 1-2-2- Findings

The major finding was the regularization of most anomalies detected in the daily operations of the bank in the previous mission.

Table 11: Table of anomalies detected and corrected





Anomalies detected




Anomalies corrected 




Anomalies remaining to correct




Source: Author

This table shows that of 43 anomalies detected in 2015, 18 had been corrected or approximately 41.9%. Moreover, new anomalies were detected in 2007 for a total of 30 defects to correct.

Corrected major anomalies and risks incurred by the bank for this purpose were as follows:

Table 12: Table of anomalies and risks

anomalies detected



S involvement of security agents  in administrative tasks: some security officers help clients fill out account opening forms.

Its main function is

abandoned and the bank more easily exposed to the risk of robbery, theft...


Record keeping by trainees: the files installed by trainees are not always audited.

A poorly filled folder is a 
handicap in case of litigation;

occurrence of error 


Clients evil : some customers when new accounts are not well informed about the functioning of the account and all selected options (eg owning a debit card that causes annual charges in his account)

M dissatisfaction customers

which could result in closing.


Sources: Author

Moreover, the recent observed anomalies were as follows

Table 13: Table of anomalies and risks

anomalies detected



Keeping the reception desk by a trainee

Customers are likely to be misinformed or misguided due to the inexperience of the trainee.


Locks of defective in two


The bank thus exposed to serious risk of theft or loss.


D unsigned ECLARATIONS customers

In case of dispute, the bank could be exposed if the client does not recognize the declaration


collection of overdue effects.

Collection risk and

provisioning by debt that the more time passes, the harder it is to collect a debt.


Sources: Author

1-2-3- Recommendations

Recommendation 1: strengthening internal control in the unit in order to minimize anomalies occurred in operations;

Recommendation 2: recruitment of a home agent to maintain and secure the clientele of the unit;

Recommendation 3: restoration work in the crates to limit the risk of loss or theft

1-3- Legal audit, administrative inquiries and

The inspector responsible for the legal audit, administrative and investigation carried out a thematic mission entitled Audit of administrative and legal compliance in order to verify the implementation of administrative procedures.

1-3-1- Mission Objectives

The objectives of this mission is declined as follows:

- Test chart

- Review administrative procedures in handling customer relations

- Review of the mail system

- Monitoring records

- Reporting

1-3-2- Findings

Finding 1: poor data management instructions

Finding 2: not effective conduct of meetings meant to bring added value

Finding 3: problems in the central mail issue

Finding 4: lack of technical supervision: commercial property managers are not well coached.

1-3-3- Recommendations

The inspector in charge of the legal audit, administrative inquiries and felt it would be necessary to:

Recommendation 1: Organize exchange seminars on practical operations

Recommendation 2: Training for operational knowledge of texts and procedures.

1-4- Accounting and financial audit

The report of accounting and financial audit mission we have used is that of June 2008. The purpose of the mission was to evaluate the accounting control unit concerned.

1-4-1- Mission Objectives

The main objective of this mission was to make a reconciliation of accounts in order to ensure that all manual entries recorded in the accounts were justified and that any account closure (mainly receivables) were approved by management of credit.

1-4-2- Findings

Observation 1: Almost all abnormalities detected during the previous mission has been regularized.

Table 14: Highlighting the corrected anomalies

June 2007

June 2008

56 anomalies 9

83.92% is corrected

Source: Author

Finding 2: the general accounts were cleaned 1-4-3- Recommendations

The only recommendation that was issued as a result of this mission was to appeal to the vigilance of accounting controllers in order to bring the operatives to be more careful in handling operations front and back office.

The rating given by the inspector to the accounting controller of this unit has increased from 16.5 / 20 in 2007 to 17.5; This to congratulate the work already done and encourage him to move forward.

1-5- IT Audit and Organization

We studied two reports of audit mission. A report of December 2015 and another in May 2008. These missions were carried out in the same unit.

1-5-1- Mission Objectives

In December 2015

- Monitoring the implementation of the recommendations of the last audit engagement - Review of IT operations

In May 2008,

- Monitoring the implementation of recommendations of the mission from December 2015

- Review of computer operations

1-5-2- Findings

In December 2015

Finding 1: certain recommendations made during the previous missions were taken into account while others do were partially.

Table 15: consideration of the recommendations



Frequencies (in%)


Fully taken into account




Partially taken





Not considered








Source: Author

This results in the following diagram:

Following this mission, other anomalies were identified and recommendations were issued.

Finding 2: The anomalies have induced significant losses were mostly corrected or approximately 55.17% of detected anomalies.

Finding 3: Implementation of the recommendations has saved more than thirty million and the inspector intends to maintain this figure as a goal for the coming years.

Finding 4: the control cards, the setting of operations, levity and negligence of computer controllers have been highlighted and corrected.

> In May 2008,

Finding 1: Also in 2008, all anomalies have been corrected:

Table 16: consideration of the recommendations (May 2008)



Frequencies (in%)


Fully taken into account




Partially taken





Not considered




Appreciation additional








Source: Author

This results in the following diagram

1-5-3- Recommendations

The inspector responsible for the audit recommended that computer controllers be more vigilant with regard to the setting of operations and control of records.

1-6- The internal audit, internal control media

One of the missions of internal audit is to assess the internal control in a company. This function consists precisely in a review of internal processes, with the aim of correcting any shortcomings encountered. To show the contribution of internal audit to the financial performance of FNB First Bank, we took two cases of fraud detection that have not been without impact on the result.

Case 1:

The first case that caught our attention is attempted embezzlement of 25 million FCFA. Indeed, an accounting controller of the bank, Mr. X, spent a fictitious adjusting entry in which he credited an account belonging to Mr. Y, his accomplice. This one appeared a few days later to regain possession of the said sum. Or earlier, the General Inspectorate had established procedures to strengthen internal control of cash operations. Indeed, they had established an exemption procedure for transactions exceeding 5 million FCFA allowing the cashier to approve the operation by an agent of a higher level. Checks were therefore carried out, given the importance of the sum that Mr. Y was removed. It is immediately realized, by the wording of the operation that caused the credit of this account, that the operation was doubtful. The head of the agency submitted the problem immediately at the service of the audit, which after some investigation, mounted the operation and found that the sponsor of this was none other than their colleague, Mr. X. Mr. Y was seized he confessed his crime and immediately denounced Mr. X.

This event allows us to see how that internal audit by its support for the internal control could stop a diversion which would have resulted in considerable losses for the bank. The major factor which favored the diversion is an inconsistency function that notes in the accounting control. The agent that controls the scriptures he himself assured past two incompatible functions, leaving the field open to implementation of fraud.

Case 2:

The second case selected is that of a cashier who was grazing by the cash received to conduct hijackings. Indeed said cashier contrived to appear on receipts phrase no operation carried out when customers come withdrawals. But these are not perceived because this phrase appeared at the bottom of the receipt and was thus not easily perceptible. The test successful, it began to do so for payment transactions. Guests poured money into their accounts, but the cashier, who scored no operation carried out on the receipt of payment, credited a fictitious account in which it was turning all amounts paid by customers. Customers obviously do not realize because they do not bother to read the receipt to the end, their mere possession is for them irrefutable proof of the payment.

Unfortunately, a customer from making a withdrawal was surprised to learn that his account was not provisioned when he had made a payment a few days earlier. An investigation by the audit allowed discovering the deception of the cashier. They found that before attacking the payment operations, it had risen by withdrawals to test the system. The amount drawn by the cashier at the time it was unmasked around 5 million FCFA.

This shows indeed brought by supporting the internal audit internal control to control operations performed daily in the bank.

All these cases we stated aim not to characterize as internal audit activity to detect fraud and error, but as activity by its advice and recommendations corrects irregularities and limits of a reducing system the risk of loss of an organization. It is therefore necessary that the internal control and internal audit cooperates very closely, hence the need to have a well-established system of information and consistent.

2- The study antipodean case.

As stated above, we conducted a survey of three microfinance institutions in Lebanon not to confront  results with those of our pilot case namely FNB First Bank, but rather in order to find new elements that complement the results of the case study. To this end, we conducted a survey including data collection was carried out by simplified semi-structured interviews with auditing officials of these companies.

To do this, it seemed necessary before presenting the results of the investigation, to present these companies briefly

2-1- Presentation of companies

Table 17: presentation of microfinance institutions


Credit community

First Trust Savings and 








Legal status





Date creation

December 2007




Share capital

2 billion




If social



Number of employee 





Number of branches






Theme 1: Organization of internal audit

1- What is the role of internal audit in the organization chart of the company?

2- What are the objectives of the internal audit?

3- What is the general approach of internal audit in your business?

Theme 2: Typology of audits

1- What are the different types of audit you practice?

2- What is the peculiarity of each type?

3- Do you think they are people that can happen?

Theme 3: Key business risks

1- What are the different risks you face in your daily life?

2- Have you done a risk map?

Theme 4: Evaluation of financial performance

1- To you, what performance?

2- and financial performance?

3- According did you a successful company?

4- If so, why?

5- How do you rate your performance?

6- What are the performance indicators do you use?

Theme 5: Contribution of internal audit to financial performance

1- Do you think the practice of internal auditing influences performance of your business?

  1. If so, how?

3- The audit recommendations are they always implemented?

Theme 6: presentation of the company and met with leader

Identification of the company name

Legal status

Creation date

Share capital


The head office

Number of employees

Identification of the interviewee

Name Position

2-2- Data analysis

The analysis from the data collected in cases antipodes was content analysis. It follows from the interviewees about that:

The audit function is an important function for the development of a company, regardless of the industry in which it deploys. Of all the types of audit generally practiced in companies, namely the compliance audit, management audit, strategic audit and financial audit, we cannot do without any, but the focus is usually on the management audit and financial audit.

In these three companies, internal audit and internal control functions are exercised by the same officer, Inspector. This is according to them the volume of the business is not as dense as that of the banks. Moreover, each agent has a first-level control at his workstation, already to ensure the completeness and compliance of all operations.

The major risks are credit risk, as with any financial institution, the risk of fraud and operational risks much more related to security. Risk mapping was conducted.

At the CCA, for example, the focus is on the control of various operations because according to the listener, it is an account that gives free scope for fraudulent operations by operational.

In terms of financial performance, FIRST STRUST considers that a company is performing when its accounts are balanced is to say, when all expenses are covered so as to leave a margin.

The RENAPROV evaluates the financial performance of the company from the results obtained during the year. A positive result is a sign of good financial health and therefore of good performance. Furthermore the listener think that the internal audit has an undoubted effect on the performance of the mere fact of its existence as it allows to discipline opportunistic behavior of the company’s agents.

A FIRST TRUST, the practice of internal auditing can reduce the risk that either credit or business, provided that the audit recommendations are taken into account, and that listeners even they follow the implementation of those recommendations.

A CCA and RENAPROV in addition to the consideration of the recommendations, the auditors believe that the support of the internal audit internal control allows proper implementation of management rules and reduces the risk of errors, and losses, which improves profitability and therefore financial performance. Moreover, it appears from about listeners of the three companies that apart from monitoring the auditors’ recommendations, the quality of issued recommendations by itself in the quality of auditors, plays a very important and allows role improved quality of services and the company’s products. It is therefore important for the company that audit recommendations are relevant and appropriate.

Section 2: Internal audit for better performance 

In this section, we analyzed the data we have obtained from the collection while showing their impact on the financial performance ratios that we presented above; then we presented the results of the survey we conducted with other companies.

1- Presentation of results

The analyzes that we made were based on the content of documents used in the literature review, including starting the findings to the recommendations. It will matter to us in this section to show what has been the impact of internal audits carried out on the results of the bank, and therefore performance, especially financial.

1-1- Audit commitments

Consideration of audit recommendations resulted in the recovery of sums supposedly lost, increase the audited unit resources, reduce overspending, reduce expectations on loans, and therefore reduce credit risks. It is necessary here to distinguish the internal control upstream (first level control) enforces the rules issued by management in ensuring the company’s assets. This has had a considerable impact on the prudential ratios laid down by COBAC on ratios of effectiveness and efficiency of the bank, on the overall result.

1-1-1- impact on prudential ratios

> Risk coverage ratio or ratio Macdonough Total FP

> = 8%

credit risk + market risk + operational risk


Reducing overruns, falling unauthorized charges and reduced expectations on loans has limited credit risk and thus reduce them to an acceptable level, the credit risk is made up of all detainees credit by bank customers. Which helps to maintain the hedging ratio in the range provided for if


- Credit Risk, Risk coverage ratio

- Credit Risk, Risk coverage ratio (everything

remaining equal)

> Coefficient of transformation

Resources over five years

Transformation coefficient => 60%

Jobs over five years


One year noted a 17.28% increase in resources of which also impact on the bank’s transformation coefficient for if:

- Resources, transformation coefficient


- Resources, transformation coefficient

1-1-2- Profit Impact

Net income for the year



The practice of internal audit has a faster recovery of debts; indeed, if the debts are not collected on time, the credits would be provided for and would have resulted in a reduction of net income of the bank and at the same time a reduction of capital, which would show the poor financial health the bank because:


- If equity ROE: return on equity

if will operate in a longer period.

Net income + interest loans


Total assets

ROI also takes a hit because the decline in net income entails declining ROI where a relay of return on investment long, which is not a good sign for shareholders who invested in the bank.

1-1-3- impact on value creation

EVA = (re-k) x C

The swift recovery of debts which resulted in an increase of capital of the bank has also led to an improvement of economic profitability, and by extension that of the economic value added measure of economic value creation.

1-1-4- Impact on income

Operating income = gross operating profit - Cost of risk

Receivables that were provisioned and that could have been lost have been recovered. Given that this result takes into account the counterparty risk with provisions for loan impairment, a reduction of credit risk and therefore under provisioning of bad loans decreases the cost of risk and in turn the operating result which is a balance quite significant to the financial performance of the bank, with the margin on all its activities.

1-2- Audit of operations

Nearly half of anomalies in this unit have been corrected: Defective locks (flight risk) held the wicket by a student (not yet proven experience, risk of errors, confidence effects and safety of the Customer...). All this has had an impact on the operational risk; indeed it has helped reduce operational risks and thus increase the risk coverage ratio.

1-3- Legal audit, administrative inquiries and

Consideration of recommendations has helped increase the efficiency of the unit’s staff through the practice of shorter and less strenuous meetings, enabling them to continue their work in good conditions, thus limiting the risk of errors when processing files daily. This audit has helped to resolve administrative problems in the unit, reducing operational risk and increasing the risk coverage ratio.

1-4- Accounting and financial audit

The recommendations of the accounting and financial auditor were considered almost entirely and the general accounts were cleaned. The passage of the audit led the operatives of the forehead and the back office to be more vigilant and this is demonstrated in the reduction rate of abnormalities, which is not without influence on the MacDonough ratio, the coverage ratio risks. Indeed sanitation general accounts show a net reduction of operational risks, also sanitizing the situation of the bank.

1-5- IT Audit and Organization

- Anomalies that induced significant losses were mostly corrected or approximately 55.17% of detected anomalies: the audit thus possible not only to detect, but also to correct them, thus reducing the rate of loss half. The reduction of losses here causes a

increase the income of the bank and therefore financial performance through ROI and ROE, the gross operating margin rate and operating income.

- Levity and negligence of computer controllers have been highlighted and corrected; this led to a reduction of operational risk, an improvement of the risk coverage ratio, and thus the financial performance.

- Taking into account the recommendations has saved more than thirty million, thus making the bank more efficient.

All this already allows us to validate our two research proposals:

  1. i) The performance of a company can be accessed through its ability to achieve the profitability targets it has set.

Indeed the case study that we conducted reveals that performance is measured based on performance indicators established firstly by the bank and the other by COBAC. These indicators represent the objectives that the bank attaches to monitor the evolution of its business and its performance. COBAC evaluates the performance of the bank through prudential ratios it receives periodically from the bank through the CERBER.

  1. ii) The performance of a company can be increased through the scrupulous respect of audit recommendations by line, and also by a permanent monitoring of the implementation thereof.

The study of our pilot case leaves transpire that listeners make regular monitoring visits to monitor the implementation of recommendations made in previous missions. The study mission reports revealed that after monitoring missions, operational application put the recommendations of the authors, and the analysis of the implementation of these recommendations has shown its impact on various performance indicators and therefore the bank’s financial performance.

Results of the analysis of case detection.

The analysis of case detection and correction of fraud by internal controls upstream and internal audit later shows the cooperation that should exist between the two services, hence the need for an information system effective. This allowed us to see how internal audit, in its management of the organization and by his advice did not hesitate a second to support the internal control when the need was felt. Its role is thus not stopped giving advice; he went further and proposed recommendations putting feet on the devices to stop and prevent risks.

In the first example, an exemption procedure has been established in order to strengthen control at all operations with a high amount, particularly withdrawals.

In the second case, the access to the computer system were even more limited. Access levels are increasingly strict and limiting the scope of each agent; this allowed each officer did what the system allows the profile of the position to perform, limiting the risk of fraud.

All this still allows us to validate one of our research proposals:

iii) internal audit can help to make the company more efficient by evaluating the management system, internal control and financial management thereof, giving recommendations and advice.

3- The results of the opposite case study

The objective of the study cases antipodes was to identify not only items that would allow us to corroborate our research proposals, but also to find new items that will allow us to deepen our study.

As a result, the internal audit function is a major and essential function for the success of a business. Indeed, internal audit allows, thanks to the audit recommendations and maintains internal control, reduce credit risks and operational risks, which improves the financial performance of the company, which itself himself

by measuring the ability of the company to achieve positive results. In addition, it was noted that for this to be possible, it is essential that audit recommendations are relevant and reliable. This led us to complete our research proposals by issuing the following.

  1. iv) The quality of recommendations made by the auditors is fundamental in improving the performance of a company.

Given all the above, we can safely say to deceive us that the practice of internal auditing does have a significant effect on improving the performance of a company.

  1. Perspectives and recommendations

The quality of the recommendations of the auditors, as we have seen above, is an essential element in improving the performance of a company. To this end, it is necessary that auditors are able to properly conduct investigations and provide all the information the company needs to limit the risks they face in everyday life.

The internal auditor is a company employee. He must have considered cultural characteristics, within the organization, by members of its management staff, to better understand, understand, acquire, promote the culture of the company. He must also demonstrate his loyalty in comparison to the organization to uphold the interests of the latter on his personal interest. These qualities may take the form, for example, a permanent membership in the social pact, the personnel policy, acceptance of the function to mobility function, and availability (H. Touchstone, 2007). It is therefore essential to choose the team that we want to walk because the company’s survival depends on it.

The following grid can be used to support the selection, recruitment and evaluation of an auditor. Lebanese banks would benefit from using this tool to optimize the choice of their listeners.

Table 18: grid proposal for the recruitment and evaluation of auditors

Personality e and independence






Ind ependance of mind

Courage, tenacity, stress resistance












Common sense

Adaptability to change in inter cultural

Summary analysis Flair







flexibility e






Spirit team






Communication written, oral






Capacity language es












Quality management es




Organization and Method


Individuals Motivation

Sense of time






Sources: Touchstone H. and Becours JC (2007)

Furthermore, we noted that one of the major causes that caused the fraud in our sluggishness case study is based on incompatibility noted in the accounting control service.Indeed allow a person to spend the scriptures and control these writings is a favorable outcome for embezzlement.

It would be wise to reorganize the service by limiting the access of accounting controllers so they control just and make monitoring reports to another division for action.


The objective of this work was to demonstrate the contribution of internal audit to the financial performance of companies, specifically those in the banking sector. We started from the principle that any business, however small, must make constant checks that can range from a simple revision for small businesses, an audit for the largest; and this in order to know the evolution of its business in terms of results.

To this end, we started questioning was that of how the internal audit function does it fit in a dynamic performance, and in order to sustain the business.

To answer this question, the theory of Jensen and Meckling agency allowed us theoretically to demonstrate the need for businesses to make permanent controls. Indeed, this is due to the opportunistic nature of the agent, materializing its permanent tendency to always put his personal interest at the expense of the principal.

In practical terms, we conducted a single case study website by adopting a qualitative approach as a research method. This allowed us to validate our prior research proposals.The result is therefore that:

The performance of a company can be assessed through its ability to achieve the objectives it has set.

Internal audit can help to make the company more efficient by evaluating management systems, internal control and financial management thereof, giving recommendations and advice.

The performance of a company can be increased through the scrupulous respect of audit recommendations by line, and also by a permanent monitoring of the implementation thereof.

In addition, a case study antipodes with three microfinance institutions was made. The content analysis of about auditors from the semi-structured interview allowed us to confirm these results. Although it allowed us more

issuing another proposal: the quality of the recommendations made by the auditors is fundamental in improving company performance. The conclusions we have accomplished can therefore be generalized at all Lebanese banking fabric.

To this end, at the end of this study, we proposed a grid of recruitment and evaluation of auditors that could allow Lebanese banks to strengthen their tools for improving financial performance, via the recommendations made by them. Moreover Lebanese banks should be careful not to perform to the same post office incompatible.





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Becour BOUQUIN JC and H. The operational audit: management control, governance and performance, Economica, 2008;

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COLLINS L. and G. VALIN, audit and internal control principles, objectives and practices, Dalloz, 1986;

COUSSERGUES S., Bank Management, Paris, Dunod, 2007;

DESCAMPS C. and J. SOICHOT, Economics and Management of the bank, Colombelles, Ems, 2011;

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  1. Giraud and All, Controlling and Performance Management,Paris, Gualino editor;
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Mr. Levasseur and QUINTART A., Finance, Paris, Economica, 2008;

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APPENDIX 1: Constitution of equity


Retained earnings credit


Financing and Guarantee Fund

non-allocated provisions

Earnings (undeliverable fraction)

Interim profit (subject)

A Subtotal

unpaid share capital

Treasury shares

Retained debtor

intangible assets

Losses for the year

interim losses

Shopping help

Subtotal B


Revaluation reserves

Shareholder accounts

subordinated loans and subordinated

latent reserve of credits lease operations


Jobs constituting own funds of other credit institutions

Subtotal D

Nets own funds

If C <= AB, F = (AB) + CD

If C> AB, F = 2x (AB) -D

APPENDIX 2: Standards for the Professional Practice of Internal Auditing

a- Qualification Standards

1000 - Mission, power and responsibilities: they must be formally defined in a charter, consistent with the standards and duly approved by the Board. 39 1100 - Independence and Objectivity: Internal auditors must be independent and carry out their work objectively.

1200 - Competence and professionalism: missions must be performed with proficiency and professionalism.

1300 - Insurance Program and quality improvement: a quality assurance program must be designed by the auditors in order to help internal audit to bring added value to the organization’s operations and improve.

b- Performance Standards

2000 - Management of internal audit: the audit manager must manage this activity to ensure it adds value to the organization.

2100 - Nature of work: internal audit evaluates the risk management, control and corporate governance 40 and contributes to their improvement.

2200 - Mission Planning: Internal auditors should develop and formalize a plan for every mission.

2300 - Performing the Engagement: Internal auditors should identify, analyze, evaluate first record sufficient information to achieve the mission objectives.

2400 - Communicating Results: The results of the mission must be communicated as soon as possible.

39 Supervisory Board, Board of Directors, the Audit Committee or any other body to which the internal auditors report.

40 procedures available to stakeholders in an organization to ensure risk monitoring and control processes implemented by management.

2500 - Monitoring progress actions: the head of internal audit must establish and maintain a system to monitor the implementation of the results communicated to management.

2600 - Acceptance of risk by senior management: when the head of internal audit believes that senior management has accepted a level of residual risk that is unacceptable to the organization, it should discuss the matter with her. If they can take a decision regarding residual risk, they should refer the matter to the board for resolution.

APPENDIX 3: a bank result Training

Income from banking activities 
-prices from banking operations


from the

Int Eretz


Gains or losses


Net banking income

It indicates the margin by the bank on all its activities with its three components, interest, commissions and capital gains or losses.

-Fresh general

Gross operating income

It shows the margin that emerges from the current activity of the bank after taking into account operating costs.

-cost of risk

Operating income

It takes into account the counterparty risk with provisions for loan impairment as market risks were taken into account upstream in net banking income. It is a quite significant balance of the performance of a bank with the margin on all of its current activities, given the resources it spends, and its ability to control risks.

+/- Other income and expenses

Net profit

It takes account of exceptional items and depreciation or reversals of fund for general banking risks and the impact on profits. The review of outstanding result can detect the share due to non-recurring activities.

Sources: Coussergues 2007.