IMPACT OF INTERNAL CONTROL MECHANISM ON THE SUCCESSFUL OPERATION OF AN ORGANISATION

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IMPACT OF INTERNAL CONTROL MECHANISM ON THE SUCCESSFUL OPERATION OF AN ORGANISATION

CHAPTER ONE

INTRODUCTION

1.1 Background of 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 or internal audit system established by management is initiated.

For an organization to carry out its business there must be some factors put in place for the smooth running of the organization like materials, machines, money, people etc. These need to be well coordinated 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 an organization both is 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 (CBN, 2010).

Management use internal control as a tool to check its 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 the Problem

There is a general consensus that any organization without an Internal Control system in place is generally exposed to several threats that are capable of crumbling the organization in less or no time.

1.3 Objectives of the Study

To determine the impact of internal controls in ensuring proper use of organizations funds and assets.
To ascertain whether perpetration of fraud and losses of Revenue in an organization are as a result of weakness in Internal Control system.
To examine the extent that internal control system helps in minimizing misrepresentations of facts and proper preparation and presentation of financial statements by the employees concerned in organisation.
To determine the relationship between internal control measures and proper keeping of accounting records.
To ascertain the extent to which internal controls help organizations in staying on budgets.
To understand the relationship between internal control systems and effective operations of an organization

Research Questions

The following research questions were raised to form the research hypothesis and they are:

To what extent does the internal control measures impacts on appropriation of organizational assets and funds?
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?
To what extent does internal control enhance a true reflection of organization activities as presented in the financial statement?
To what extent does a relationship exists between internal controls and proper keeping of accounting records?
To what extent does internal controls helps employees to keep to financial budgets?
What is the relationship between internal control systems and effective operations of an organization

1.5 Research Hypothesis

This study is undertaken on the basis of the following hypothesis stated in the null form of which were tested and results analyzed:

Ho₁: There is no significant relationship between internal control measure and proper use of organizations funds and assets.

Ho₂: There is no significant relationship between weak internal control system and fraud perpetration and losses of revenue in an organization

Ho₃: There is no significant relationship between internal controls and accurate financial statements preparation and presentation.

Ho_4: There is no significant relationship between internal control activities and proper keeping of records.

Ho_5: There is no significant relationship between internal audit system and keeping to organizational financial budgets

1.6 Significance of the Study

There is no controversy that this research works have been conducted on Internal Controls 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 Justification of the Study

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

1.8 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:

Audit

In this study Audit is seen, as an official inspection of the organization’s accounts, typically by an independent body invited by the organization’s management.

Bearing in mind that, “Audits can’t be expected to detect every fraud”, hence the need for internal audit (www.investopedia.org).

Internal Audit

Seen here as the examination, monitoring and analysis of activities related to the companies’ operations, including business structure, employee behavior and information systems whilst reviewing company activities in order to identify potential threats to the organization’s health and profitability, and to make suggestions for mitigating the risk associated with those threats in order to minimize costs and ensure proper financial management.

Sound Financial Management

According to financial growth solutions UK (2014), Sound financial management is defined as the careful tracking and prudent management of a company’s financial resources and cash-flow, without sound financial management, information can be wrong or absent, decision-making is flawed, and minor issues can become serious problems that put the business itself at risk . In this study however, sound financial Management is seen as the adequate utilization of organizational financial resources to achieve organizational objectives which are measured in terms of Budget adherence and reduction or outright elimination of financial loss in the organization.

Weak Internal Control Measures

In this study, it is seen as the measures the organization puts in place in order to safeguard its assets (both financial and other assets) but has failed to meet up with its intended purpose of safe guarding the assets. In order words, they are measures that have failed to ensure an orderly and efficient operation of the company activities in such a way that assets are safe guarded, ensure the competence and accuracy of financial records, the prevention and detection of errors and fraud whilst preparing the financial statements.

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