EFFECT OF INTERNAL CONTROL SYSTEM AS OBSTACLE TO FRAUD PERPETUATION

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EFFECT OF INTERNAL CONTROL SYSTEM AS OBSTACLE TO FRAUD PERPETUATION

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Every organization both profit or non-profit organization has its objectives and goals in mind to achieve. For the non-profit making organization, their goal is to satisfy the social need of the citizens and in the effort to achieve these purposes supervision more often than not play a vital role. The size and scope of these organizations have sometimes made it hard for the executors to exercise personal and first hand supervision of operation. It is in this light that internal control established by management is initiated. For an organization to carryout its business there must be some factors put in place for the smooth running of the organization like materials, machines, money etc.

These need to be well co-ordinated in order for the success of the organization to be achieved. These factors are used by a group of persons known as management. Neither can management exist without organizations both are inseparable. The system of internal control provides assurance to management of the dependability of the accounting data used in the decision making of the organization

It has been discovered that due to lack of internal control several banks have been discovered to have defrauded its customers mostly foreign investors, Having discovered this, banks now take extra precaution before clearing a cheque because of rampant incidence of fraud and forgeries which have placed bank. Loss on average of N1m each working day of the year in Nigeria. Due to this challenges, CBN issued a directive to banks to increase its capital base to N25 billion.

Management use internal control as a tool to check it staff due to the fact that managers are not able to monitor the activities of the organization. It therefore adopts the internal control in such a way that the system checks itself and any irregularity within the system is been detected and corrected. To ensure that the system checks itself, management could use devices such as segregations, supervision of work and acknowledgement of performance. The effective arrangement and implementation of this control system would ensure proper management.

1.2 Statement of Problem

We might not really understand the impact of internal control system in an organization until probably we run an organization void of internal control system. The absence of adequate internal control measures exposes the financial management of an organization to certain threats such as:

– Incorrect financial statement and /loss of the company’s assets.

– Stealing and mismanagement of organizational vital documents which may be done by an employee to take undue advantage.

– Incorrect and unreliable financial records which may lead to loss of organizational integrity.

– Non implementation of accounting policies in consistent with the applicable legislation appropriate in presentation of financial statement.

1.3 Research Questions

The following research questions will be used to form the research hypothesis and they are:

i To what extent does the internal control measures impacts on appropriation of organizational assets and funds?

i To what extent does internal control enhance a true reflection of organization activities as presented in the financial statement?

i To what extent does perpetration of fraud and losses of Revenue in an organization are as a result of weakness in the internal control system?

i To what extent does a relationship exists between internal control and proper keeping of accounting records?

i To what extent does segregation of duties among the employee of an organization could improve financial management?

i To what extent does verification of document enhances financial management?

i To what extent do internal checks and balances enhance financial management?

i To what extent does internal control measured by an external auditor improve financial performance and management of your organization?

i To what extent does non-financial transaction in organization enhances financial management?

1.4 Objectives of the Study

The overall purpose of this research work is to evaluate and determine the effect of internal measures in an organizational financial management. A well defined organizational structure helps management to run the business in an orderly manner. This enhance operational and efficiency, which is the important features of internal control.

Specifically, this research work stands to achieve the following objective.

h To determine the impact of internal control to proper use of organizations funds and assets.

h To ascertain whether perpetration of fraud and losses of Revenue in an organization are as a result of weakness in internal control system.

h To ensure whether a true reflection of organizational activities are presented in financial statement where there is an active observation of internal control measures.

h To determine the relationship between internal control measures and proper keeping of accounting records.

1.5 Statement of Hypotheses

This research is undertaken on the basis of the following hypothesis.

Ho: Internal control measure does not ensure proper use of organizations funds and assets.

Hi: Internal control measure ensures proper use of organization funds and assets.

Ho: Fraud perpetration and losses of revenue in an organization are not as a result of weakness in the internal control system.

Hi: Fraud perpetration and losses of Revenue in an organization are as a result of weakness in the internal control system.

Ho: Internal control does not ensure a true reflection of organizational activities as presented in financial statement.

Hi: Internal control ensures a true reflection of organizational activities as presented in financial statement.

1.6 Significance of the Study

There is no controversy that this research works have been conducted on internal control system, however much emphasis has been placed on the impact of a good internal control system on financial management of organizations.

This research work will go a long way in helping an organization discover the impact of weakness in internal control and suggest measures in correcting them. It will also reveal the problems caused by bad internal control system and be useful to students, scholars, lecturers and other third parties as it shall open new area of further research work and at same time advance challenges to up-coming researchers.

1.7 Scope of the Study

The impact of a good internal control aids management effectiveness in its organization. This research will specifically focus attention on the activities of organizations in Nigeria and due to the logical point that not every organization can be studied; this research is therefore limited to the Nigeria Bottling Company. The focus of this research is to show the impact of a good internal control system in the performance of organization financial management.

1.8 Limitations of the Study

The major constraints in this study include the conservating nature of organization and their apathy towards providing information, especially with respect to their internal operation policies, human errors and biasness are other limiting factor of this study.

This is because some data’s were obtained through discussions and interviews therefore there is the possibility of human error of omitting some vital information. Respondent may also exaggerate important information in order to give their organization a positive credit for fear of what seems an invasion into the organization’s privacy.

1.9 Definition of Terms

The following terms have been used in the course of this research work and as such need to be explained. They were as stated below:

Internal Control: It has been defined by the Auditing Planning Committee (APC1979) in UK as “the whole system of control financial and otherwise established by management in order to carry out the business of the enterprise in an orderly and efficient manner to safeguard the assets and secure as far as possible, the competence and accuracy of records, the prevention and detection of errors and fraud in accordance with the final preparation of financial statement.”

Control: Is an exercise performed in the present to achieve a plan drawn up for the future.

Management: It is defined as the process of planning, organizing coordinating and controlling the activities of an organization. It is seen as a group of people who monitor and control the organization activities towards the achievement of the organization objectives.

Audit: This comes from a Latin word “AUDIRE” meaning to hear in other words it means official examination of account and records.

Fraud: This is defined as a deception deliberately practiced in order to secure unfair or unlawful gain. Fraud is simply an intentional wrongful act with the purpose of deceiving or causing harm to another party.

Auditing: Auditing is an independent examination and the expression of opinion on accounts of companies as presented by appointment, and in keeping with any reliant legislature and other requirements, whether in his opinion the account show a true and fair view and had been prepared in accordance with law.

Audit Report: This is the means by which the auditors express their opinion on the truth and fairness of the company’s financial statement.

Auditing Standards: These are the basic principle and practices to be followed in all audits. They specify the requirement that an audit must meet if it is to be considered a satisfactory and professional effort.

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