Effect Of Internal Control System On Risk Management
Effect Of Internal Control System On Risk Management
Abstract
This study examine the effects of internal control system on risk management. The researcher consider employee of Nigerian television authority, Lagos centre as the population of the study. This research adopted descriptive design and quantitative approach. The data collection instrument used was questionnaire. The population of the study were staff of Nigeria Television Authority in Lagos state. Data was collected from the entire population. The study discovered that NTA has adopted a hybrid control framework (COSO, CoCo, and CobiT frameworks) and that the Board of Directors and Management of NTA only are responsible for formulating internal control policies. It was revealed that the control systems of NTA are highly strong and effective. The study found out that: the inability of the control system to detect people who do not comply with control policies; inadequate physical control measures and procedures over the organization‘s assets to protect those assets against theft and unauthorised access are some of the challenges of NTA‘s internal control systems. It was also discovered that the control system had led to positive financial and non-financial performance at NTA. Some of the major recommendations made include: NTA should involve staff in the formulation of control policies and also, the organization should conduct regular control system reviews.
Chapter One
Introduction
1.1 Background of the Study
Business organizations across the world are confronted with risks. Some of these risks, both internal and external, involve huge losses that could deprive an organization from its continuity if the proper management is not put in place. These days, managing risk has become a matter of necessity. Hence, this research will examine the relationship between internal control system and risk management. Risk has been defined as uncertain future events that could influence the achievement of the organization’s strategic, operational and financial objectives (International Federation of Accountants IFA, 1999). Risk can be defined as the combination of the probability of an even and its consequences (The Institute of Risk Management IRM, 2002).
The intention of every profit-making organization is to earn profit, stay in business for a long time, meet customers’ demand and expectations, pay their debts when they fall due and satisfy the aims of stakeholders. These objectives are easily achieved if the owner and manager of the company is the same person. However, as the business grows and expands, the need for additional employees arises and the owner employs more and more people to help manage the company. This gradually results in what is called separation of ownership and control (Smith, 1776). At this point, the owner realizes that precautions must be taken to protect the company as well as the interest of the owner. The issue of ownership and control becomes more complicated if a company is big and listed on a recognized stock exchange. That is, a company with much more capital investment both in cash, assets and personnel. Thus, the owners need an assurance that the intended objectives of the company would be achieved, assets of the company would be protected from theft and mismanagement, the accounting information would be received on time and that they would be accurate and reliable.
The weaknesses of many companies internal control systems have been highlighted due to the big financial scandals of recent years and as a result increased attention on risk management, internal controls, internal audit and their role in modern organizations. Following these high profile corporate fraud and accounting scandals, greater demands have been created on companies to account for in their corporate governance statements, what risk factors they are exposed to and the internal control systems put in place to alleviate them.
Risk management is a process of understanding and managing the risks that the entity is inevitably subject to in attempting to achieve its corporate objectives. For management purposes, risks are usually divided into categories such as operational, financial, legal compliance, information and personnel. One example of an integrated solution to risk management is enterprise risk management (Chartered Institute of Management Accountants CIMA, 2005). Effective risk management involves risk assessment, risk evaluation, risk treatment and risk reporting. The focus of good risk management is the identification and treatment of these risks in accordance with the organization’s risk appetite. These risks need to be managed and controlled in order to prevent vibrant organizations from catastrophic losses and help them achieve their goals and objectives. An organization needs to understand its mission and articulate it clearly. This makes it easier to recognize the risks associated with the mission. Once an organization identifies its mission, it can begin its risk assessment by listing the possible risks that threaten the business with the aim of identifying high priority risks and focusing on those first.
Internal control system on the other hand, is the whole system of controls, financial and otherwise, established in order to provide reasonable assurance of effective and efficient operation, internal financial control and compliance with laws and regulations (CIMA, 2006). The formality, structure and nature of a company’s system of internal control will generally vary with the type of sector or industry, size of the company and the level of public interest in it. Since profits are in essence the reward for successful risk-taking, the purpose of an internal control system is to help manage and control risk appropriately rather than to eliminate it as indicated in the Turnbull Report (Institute of Chartered Accountants in England &Wales ICAEW, 1999). Thus, control mechanisms should be incorporated into the business plan and embedded in the day-to-day activities of the company.
1.2 Statement of the Problems
Risk is inherent in every economic activity and every organization has to manage it according to its size and nature of operation because without risk management no organization can survive in the long run. This is because businesses today are faced with far greater challenges than before due to the fact that economical, technological and legal interdependence are becoming more prevalent and pronounced. It would be assumed that risk management and internal control systems will vary from organization to organization based on their size or industry sector. It is therefore logical to assume that every business organization has put in place a strong risk management structure and internal control systems to help achieve its goals. These are fundamental to the successful operation and day-to-day running of a business and assist a company in achieving its objectives.
Risk may affect many areas of activity, such as strategy, operation, finance, technology and environment. In terms of specifics, it may include, for example, loss of key staff, substantial reductions in financial and other resources, severe disruptions to the flow of information and communication, fires or other physical disasters, leading to interruptions of business and or loss of records. More generally, risk also encompasses issues such as fraud, waste, abuse and mismanagement. It is based on the foregoing that the current researcher is examining the relationship between internal control system and risk management in a selected organization.
1.3 Objectives of the Study
The following are the objectives of this study:
- To examine the components of internal control system at NTA.
- To assess the effectiveness of control policies of NTA.
- To analyse the challenges of internal control systems at NTA.
- To examine the effects of control policies on the operational activities of NTA.
1.4 Research Questions
- What are the components of an internal control system of NTA?
- What are the effectiveness of control policies formulated by NTA?
- What are the challenges in the internal control systems of NTA?
- How are control policies managed in NTA?
1.5 Significance of the Study
The following are the significance of this study:
The findings from this study will enlightens business managements, shareholders, corporate managers and the general public on different types of risks that organizations are exposed to and the various strategies/internal control system that can be used for risk management/mitigation.
This research will be a contribution to the body of literature in the area of internal control system and risk management, thereby constituting the empirical literature for future research in the subject area.
1.6 Scope of the Study
This study is limited to the Nigeria Television Authority (NTA), Lagos center. It will also cover their internal control systems, risks that they are exposed to and the risk management strategies in place within the organization.
1.7 Limitation of the Study
Financial constraint
Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
Time constraint
The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work
1.8 Operationalization of Variables
Dependent Variable:
Internal control system
Independent Variable:
Risk management
Dependent Variable:
Internal control system which is measured by management attitude, management awareness, management actions
Independent Variable:
Risk management which is captured by policies, regulations, environmental factors
Y* ₌ f(Y1, Y2, Y3)
Y* ₌ Internal control system
Where:
Y1 ₌ management attitude
Y2 ₌ management awareness
Y3 ₌ management actions
X ₌ Risk management
X ₌ f(X1, X2, X3)
Where:
X1 ₌ policies
X2 ₌ regulations
X3 ₌ environmental factors
It can also be stated that the internal control system is a function of risk management.
Y* ₌ f (X1, X2, X3)
Converting this functional relationship into a regression model, it becomes:
Y* ₌ α0 ₊ α1X1 ₊ α2X2 ₊ α3X3 ₊ μ
Α0 ₌ constant term of the regression model
Α1-2 ₌ coefficients of parameter estimates of risk management
μ ₌ Stochastic variable
1.11 Definition Of Terms
Risk:
A situation involving exposure to danger.
Fraud:
Wrongful or criminal deception intended to result in financial or personal gain.
Hazards:
A danger or risk.
Chapter Five
Summary of Findings, Conclusions and Recommendations
5.1. Introduction
Chapter five has been divided into three main sub-sections. These are the summary of the findings, conclusions and recommendations.
5.2. Summary of Key Findings
The summary of the study is in accordance with the research objectives of this study. Key findings have been divided into four main thematic areas. These are the organization‘s internal control components, effectiveness of Nigeria Television Authority‘s internal control systems, Nigeria Television Authority‘s internal control challenges, and effects of internal control on Nigeria Television Authority‘s operations.
5.2.1. NTA Internal Control Policy Formulation.
The components of the internal control system of the organization in descending order are: free flow of information and communication; sound monitoring and evaluation procedures; control procedures and activities which are clearly spelt out; high staff commitment; high staff capability; sound control environment; moderate IT support and infrastructure; and moderate risks assessment. The study also revealed that NTA has adopted a hybrid control framework (COSO, CoCo, and CobiT frameworks). The study also revealed that the Board of Directors and Management of Nigeria Television Authority only are responsible for formulating internal control policies. However, it was found out that there was lack of consensus on the frequency of control policy review at the organization by the respondents
5.2.2. Effectiveness of NTA Internal Control Systems and Policies.
The study discovered that the organization ensures that its activities comply with laws and regulations in the non-bank financial industry. It also revealed that regular control system audits are conducted to ensure that directives are complied with and that errors and risks can easily be detected by the control systems in place. Moreover, the study highlighted that the control system has helped to achieve the organization‘s operational objectives and that the control systems in place reduces errors and risks. Additionally, it was revealed that, the control system enables the preparation of reliable financial statements and the Organization has back-ups for all its activities. Lastly, it was found out that, the control systems moderately correct all detected errors. In general it was revealed that the control systems of the organization are strong and effective.
5.2.3. Challenges to NTA Internal Control Systems and Policies.
The study found out that: inability of the control system to detect people who do not comply with control policies; inadequate physical control measures and procedures over the organization‘s assets to protect these assets against theft and unauthorised access; slow level of correspondence between Head office and centers especially over new product launch; lack of proper explanation and unnecessary blame sharing over control system failures; lack of sufficient and well-equipped internal control supervisors; improper market segmentation and over concentration on corporate market; and poor banking operations software are some of the internal control policies challenges in the organization.
5.2.4. Effects of NTA Internal Controls on its Business Operations.
The control system has led to positive financial and non-financial performance at Nigeria Television Authority. The control system helps to determine the level of confidence that the organization‘s Credit officers should place on the financial records of customers. It has helped to eliminate fraud in the organization. The control system can easily detect creditworthy borrowers. The organization‘s control system has provided the accuracy and reliability of records. The control system has helped identify measures that can secure or improve stakeholder‘s access to vital information as well as making it easier for the organization to comply with existing legislation. The internal control system has enabled Nigeria Television Authority to generate adequate and reliable information on both the staff and the customers at large. The control system has enabled staff easy access to operational information since every staff know where and who to consult when in need of information relating to a staff‘s core duties. The supervisory controls (as part of internal controls) of the organization has helped it to ensure that staff perform their task properly and as required. The organization‘s internal control systems have enhanced the effectiveness and efficiency of its daily operations. The internal control system has ensured law and order, and staff and customers discipline at its operational premises.
5.3. Conclusion.
The general purpose of this study was to examine the effects of NTA internal control systems on its business operations. In order to achieve this purpose, literatures relating to the subject area was reviewed and empirical (field) data from NTA were collected and analysed as a case study. After the analysis and discussion of the empirical data, it was found out that Nigeria Television Authority has adopted multiple control frameworks (COSO, CoCo, and CobiT frameworks) and that the Board of Directors and Management of Nigeria Television Authority only are responsible for formulating internal control policies. It was revealed that the control systems of Nigeria Television Authority are highly strong and effective. The study found out that: Inability of the control system to detect people who do not comply with control policies; inadequate physical control measures and procedures over the organization‘s assets to protect these assets against theft and unauthorised access; and slow level of correspondence between Head office and centers especially over new product launch were some of the challenges of Nigeria Television Authority‘s control systems and policies. Notwithstanding the negative effects of the system, the control system has led to positive financial and non-financial performance at Nigeria Television Authority.
5.4. Recommendations.
Based on the findings of this study, the following recommendations are made:
Staff of NTA should be involved in the formulation of control policies. Employees must be made a natural element of how entities work and so must be involved in some aspect of policy formulation. This will ensure commitment and they will have a clear view of what is expected of them for the achievement of set targets.
The organization should conduct regular control system reviews. This can be done at least semi-annually. Conducting regular control system review will enable the organization to determine if the control systems are working effectively and efficiently. The organization can learn from the outcome and improve on the policies.
The organization should put in place adequate physical control measures and procedures over the organization‘s assets to protect these assets against theft and unauthorised access.
The organization‘s head office should improve the level of correspondence with its centers by releasing information to the centers quickly.
The organization should investigate all control failures to determine the cause(s) of the failure for proper explanation to staff.
The organization should put in place measures to recruit or train more internal control staff and equip them properly to carry out their functions efficiently. Employees must be competent to discharge control policies, access risks and ensure controls make it easier to deal with these risks.
The organization should properly segment its market and target other segments in addition to the corporate market.
Nigeria Television Authority should put in place measures to acquire modern non- bank operation software to aid effective operations.
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