Internal Control System In Public Organization

Project and Seminar Material for Accountancy / Accounting

Abstract

This study examined Internal Control System in public organization, using Power Holding Company of Nigeria (PHCN) Okpara Avenue, Enugu as the case study. The study employed survey research design and sampled two hundred and respondents. Two hundred copies of questionnaires were distributed and only one hundred and thirty-three copies retrieved. Data were presented and analyzed using simple percentage method and tables. Hypotheses formulated were tested using 0.05 percentage. The result of the finding revealed that internal control system significantly relate to fraud prevention in Power Holding Company of Nigeria (PHCN) Okpara Avenue, Enugu. It was also revealed that Internal Control System impact on the overall performance of management of Power Holding Company of Nigeria (PHCN) Okpara Avenue, Enugu. It concluded that internal control and fraud prevention have a high influence on personnel need of the organization. The study recommended amongst others that internal control department must be closely involved at the management level where organization plan is formulated and information obtained about the direction of the organization.

Chapter One

1.0 Introduction

1.1 Background of the Study

According to Oxford Learners Dictionary, Organization can be said to be a group of people who form a business, club etc. together in order to achieve a particular aim. It can also mean two or more people getting together for a purpose. In getting together, they decide to interact with one another to achieve the objectives of the organization (Unamka & Ewurum, 1995:1)

When we discuss organization, we have variclasses among which are service organization and social organization etc. All these organizations have in mind the aim of continuing if not for eternity, a given period of time. (Unamka & Ewurum, 1995 1, 2, 3)

For an organization to carry on its business there must be some factors put in place for the smooth running of the organization management, man-power, materials, money and machines. These need to be well coordinated in order for the success of the organization to be achieved. They are used by a group of persons known as management; neither can management exist without organization- the two are inseparable twin. (Unamka &Ewurum, 1995:65)

Good management weaves together the various parts of organization so that all factors function as a united body. Management refers to the group of executives or officials of a company who directs efforts towards common objectives by using available resources (Unamka & Ewurum, 1995:66) management can also be said to be a process of planning, organization to have an intergrated system that will aid the achievement of organization objectives (Musselman & Hughes, 1981)

Effective management leads to purposeful, well coordinated, goal oriented and goal directed activities. As earlier social organizations have in mind “CONTINUITY” and “SURVIVAL” as they are being run for an organization to survive and continue existing without going bankrupt, or said to be illiquid, i.e. being its inability to meet up with its responsibilities as and when due, it must ensure the safty of its assets, cash and also the accuracy and reliability of its records, it should ensure that it institutes a system of control, strong enough to ensure such. This system is what is known as INTERNAL CONTROL SYSTEM.

According to WIKIPEDIA, the free encyclopedia, in accounting and organization theory, INTERNAL CONTROL is defined as a process effected by an organization’s people and information technology (I.T) system, designed to help the organization accomplish specific goals or objectives. It is a means by which an organization’s resources are directed, monitored and measured. It plays an important role in preventing and detecting fraud and protecting the organization’s resources both physical (e.g. machinery and property) and intangible (e.g. Reputation and intellectual property such as trade marks) the organizational level, internal co9ntrol objectives relate to the reliability of financial reporting; timely feedback on the achievements of operational or strategic goals and compliance with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g. how to ensure the organization payments to third parties are for valid services rendered)

There are also a variety of definitions of internal control as it affects a variety of constituencies (stakeholders) of an organization in various ways.

Under the committee of sponsoring organization (COSO) internal control- integrated framework, a widely-used frame work in the United States, internal control is broadly defined as a process effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and Efficiency of operations; Reliability of financial reporting; and compliance with laws and regulations.

According to Millichamp(2002:85), internal control system is defined as the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence and management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. Internal controls are to be an integral part of an organization’s financial business policies and procedures. Internal control consists of all the measures taken by the organization for the purpose of protecting its resources against waste, fraud and inefficiency, ensuring accuracy and reliability in accounting and operating data, securing compliance with the policies of the organization and evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices.

Internal control according to Osita(2002:106) is the whole system of controls, financial or otherwise, established by management in order to secure as far as possible, the accuracy and reliability of the records, run the business in an orderly manner and safeguard the company’s assets, its objectives being the prevention or early detection of fraud and errors. It may include internal auditing.

Everyone within the organization has some roles in internal controls. The roles vary depending upon the level of responsibility and the nature of involvement by the individual. The Kansas Board of regents, president and senior executives established the presence of integrity, ethics, competence and a positive control environment. The director and department heads have oversight responsibility for internal controls within their units. Managers and supervisory personnel are responsible for executing control policies and procedures at the detail level within their specific unit. Each individual within a unit is to be cognizant of proper internal control procedures associated with their job responsibilities.

The internal audit role is to examine the adequacy and effectiveness of the organization internal controls and make recommendations where control improvements are needed. Since internal auditing is to remain independent and objective, the internal audit office does not have the primary responsibility for establishing or maintaining internal controls. However, the effectiveness of the internal controls are enhanced through the reviews performed and recommendations made by internal auditing.

The institution of internal control system is an organization is not without a purpose; these purposes will be discussed later in this sturdy. One of such is to ensure that the organization survives, continue to exist, grows, become vibrant in whatever environment it might be existing or located. It is against this background that this sturdy seeks to unveil and look at the place, importance and inevitable nature of internal control system on the survival and growth of an organization.

1.2 Statement of Problems

When we refer to internal control system, we talk of a system which will enable an organization achieve its objectives, we talk of a system which is very important to the existence of an organization, we talk of a system which will forestall the perpetration of acts that can act as a clog in the wheel to the success of an organization. This system is an all round system, that is to say, it encompasses both financial and non-financial control in realizing the goals and objectives of running the organization in an orderly manner, safeguarding the assets of the organization and also ensuring the accuracy and reliability of the organization’s records.

We might not really understand the impact of internal control system on an organization’s performance until probably, we run an organization void of internal control system. The non-institution of internal control system in an organization is detrimental to the continual growth and survival of that organization. Non institution of internal control system in an organization result in improper keeping of records which could lead to the late preparation of accounts, doctoring of books of accounts, misappropriation of funds which are meant to be used for planning, decision making etc. illegal transactions being transacted, pilferage, misuse of fixed assets etc. improper keeping of records can also lead to inability to ascertain the organization’s actual assets; goods in stock, which could breed pilfering.

Lack of proper record keeping, controlling of proceedings or actions in an organization could lead to concealing of errors and fraud that might crop-up to bring down an organization.

The non-institution of internal control system could lead to inability of the organization to make proper decisions and plan ahead effectively. When an organization fails to plan, definitely it will forestall the growth of the organization; make the organization to start dwindling and struggling for survival, which will then bring the organization to an end.

1.3 Objectives of Study

As earlier said that this sturdy of internal control is not without objectives and as such we shall see some of the objectives for the institution of internal control system in an organization. The objectives of this sturdy are:

To ascertain the extent to which fraud and errors can be prevented or detected early.
Highlight areas of underperformance, weakness and specific failures connected to internal control system in order that corrections may be effected for performance to improve.
To ascertain the degree of compliance of the company staffs with the internal control measures
To examine the relevance and appropriateness of the presently adopted control measures in preventing fraud.

1.4 Research Questions

Does record keeping aid the proper running of business?
Does segregation of duties aid averting errors and fraud?
Does power holding company in Enugu Statecarry out internal check or vouching?
Are your fixed assets used for other business outside your normal business?
In what ways does internal control affect the survival and growth of an organization?

1.5 Significance of Study

The study is significance for the following reasons:

The result of this study would help to expose the level of fraud in power holding company of Nigeria (PHCN)
The result would also help the financial institution especially power holding company of Nigeria (PHCN)to see the extent of occurrence of fraud in the company.
The result would expose the fraudulent staffs thereby preventing fraud in the organization.
The result would also help the bank to access their overall performance through internal control check.
Student carrying out research in similar area can make use of the work.

1.6 Scope and Limitation of Study.

This sturdy of internal control system in public organization shall cover the use of controls at ensuring that orderly efficient manner of carrying on business, adherence to management policies, safeguarding of assets and receiving as far as possible the completeness and accuracy of the records in public organization, power holding company of Nigeria (PHCN). The scope of this sturdy is centered on PHCN, Okpara Avenue, Enugu.

In the cause of this research, there were some hitches that were encountered. These hitches have in one way or the other, directly or indirectly caused some limitation in the research work. Some of these limitations encountered were;

Staff Reluctance:

In most cases the staffs from the study area often feels reluctance over providing required information required by the researcher. This result in finding information where the structured questionnaires could not point out.

Researcher’s Commitment:

The researcher, being of full time student spent most of her time on other academic activities such as test, class work, assignment, examination etc which takes average focus from this study.

Inadequate Materials:

Scarcity of material is also another hindrance. The researcher finds it difficult to long hands in several required material which could contribute immensely to the success of this research work.

1.7 Definition of Terms

Error:

A mistake, especially one that causes problems or affects the result of something.

Pilferage:

Relates to stealing things of little value or in small quantities especially from the place where one works.

Fraud:

The crime of deceiving somebody in order to get money or goods illegally.

Vouching:

This is comparing the original documents with the entries made in the books.

Manipulate:

To control or influence somebody or somebody or something, often in a dishonest way that they do not realize it.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at assessing the contributions of internal auditing in the detection and prevention of fraud, thus the topic “internal control system in public organization”.
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations were made which in the opinion of the researcher will be of benefits in addressing the challenges associated with fraud prevention in Nigeria.

5.2 Summary

The overriding purpose of this study was to establish the relationship between internal control system and fraud control in public organizations in Nigeria. To accomplish this purpose the researcher developed some research questions based on the scope and area of study which is First Power Holding Company, Enugu. Internal control system, as a tool for management control an assurance service, represents more than a legal requirement. Timely detection of irregularities is important for all economic and financial market players, for all users of financial information. A well-implemented internal control structure and internal control activities conducted carefully and conscientiously could signal potential dangerous situations due to poor management of assets (this should include all categories of resources, including human resources) with negative, if not so disastrous consequences for the company’s own business and also with implications over the economic environment. Development, implementation and continuous monitoring of internal controls system and procedures are the responsibility of the entire management and not just the auditor alone. Premchand (1999) sees public financial management as the link between the community’s aspirations with resources, and the present with future, Management of every organization has the line responsibility for designing, implementing and monitoring their internal controls system. The study revealed that there is no regular review of financial transaction by management and adequate segregation of duties.

5.3 Conclusion

The area of internal control system is probably one of the most dynamic and yet important subjects to come to our attention. Internal control is currently at a crucial stage in its development as there is a growing demand for audit services. What has yet to be formed is a consensus among theory and practice. This research did not have the intention of concluding the discussions over this matter; however, it is expected to be one more element to help the formation of opinions and to diffuse other discussions on the subject. This study has made a first and successful attempt to establish the positive relationship between the broad attributes of corporate governance and internal control. The main limitation of this study is that it is just focused on a specific industry sector. Taking into consideration that the interest in this field of research is rather new, it is necessary that the future orientation of the academics as well as of the practitioners be focused on the evolution of those governance mechanisms which will limit these troubles. From the above it is clear, that internal control system develops ever-new approaches to internal auditing, devises new auditing products and services, and helps fulfill increasingly more complex demands that management nowadays faces. Related to that, it can be expected that internal auditing will be increasingly oriented towards advising the management on efficient corporate governance on management control.

5.4 Recommendation

Haven successfully completed the study; the researcher therefore makes the following recommendations that:
Future research should take a more focused approach by examining the matters reported in this research work in different areas of industry sectors and organizational size, and evaluate the development of individual elements and steps of the approach.

Management should ensure that there are adequate organizational controls and that each staff knows his duties and equally ensures effective segregation of duties so as to reduce interference in terms of funds; and assets management and controls.

There should be a good communication between auditors and management for a maximum of effectiveness of internal control, so that the management would be open to the proposed recommendations. It is very important for the auditor to properly diagnose a situation (it is ideal as the auditor has knowledge and receive complex explanations necessary to understand the work properly).

Internal control function should be strengthened more in order to provide reasonable assurance for all audited domains/activities, which will add value to the company. It’s more than obvious that this economic crisis, characterized by some specialists without precedent, will have a significant impact on the development of several areas, one being the internal control.

Taking into consideration that the interest in this kind of research is rather new, it is necessary that the future orientation of the academics as well as of the practitioners be focused on the evolution of those governance mechanisms which will limit these challenges.

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