INTERNAL CONTROL SYSTEM IN GOVERNMENT PARASTATALS
Chapter one Introduction
Background to study
As a substitute of its presence on the scene of operations, management must rely on internal control techniques to implement its decisions and to regulate the activities for which she would ultimately be responsible for. It is in this light that use of effective ICS’s is deemed crucial in the management of business resources.
In the endeavor to ensure efficient and effective operation of her activities, the management of any organization designs internal control procedures to allocate, control and ensure efficient utilization of resources, in order to achieve the overall corporate goals ISA 400 (2002). Such procedures include among others, the Internal Control Systems (ICS’s). ICS’s have long been advocated as a mechanism for establishing high quality financial reporting, and firms have voluntarily used them for this purpose, as they give attestation on the reliability of the accounting and financial statements besides safeguarding assets of the firm.
In accounting and auditing, internal control is defined as a process affected by an organization’s structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives. 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 or intellectual property such as trademarks). This is achieved through proper authorization controls and documentation. At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations (COSO, 2011). At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g. how to ensure the organization’s payments to third parties are for valid services rendered) (Cook, 1979).
A system of internal control recognizes the basic principle that it should be as difficult as is practical and feasible, for individuals to be dishonest or careless. Such a premise is indeed not based on a cynical view of human nature in general, but rather on the realistic assumption that there could be a few persons who would be dishonest or careless if it is easy for them to be so. Further, apart from the prevention and detection of fraud, internal controls should reflect the strength of the overall accounting environment in an organization as also the accuracy of its financial and operational records.
1.2 statement of problem
In spite of the use of ICS’s, which advocate for modern accounting systems and methods, the size of modern business, its complexity and widespread structural organization combined with human weaknesses, exposes organizations to financial losses (Ashton & Hylas, 1982). A great amount of money and goods can be lost through fraudulent actions of dishonest employees, and unintentional errors in the transformation and transfer of financial information used for appropriate decision making.
The findings of the Treadway Commission Report of 1987 in the United States (USA) confirmed absence of, or weak, internal controls as the primary cause of many cases of fraudulent company financial reporting. In response to several high-profile financial frauds COSO (1992) issued a report providing a foundation for assessing internal control effectiveness. Ever since, several waves of accounting scandals have led to regulatory requirements for managers and auditors to report on internal control effectiveness. Most recently, the Sarbanes Oxley Act (SOX) internal control provisions have fueled the ongoing debate among regulators and practitioners about the effectiveness of this type of regulation in improving financial reporting quality given the subsequent financial crisis.
In a speech delivered at the U.S. Chamber of Commerce Global Capital Markets Summit, James Turley (2008), Chairman and CEO of Ernst & Young, called for “a global debate about what management should be saying about its controls, (and) what auditors should be saying about them, if anything.”
The widespread global corporate accounting scandals that assume near epidemic proportions in recent years inform this study. Notable cases include Enron and WorldCom in the USA, Parmalat in Europe and Chuo/Aoyama in Asia, and Tyco. In
South Africa, cases of accounting scandals have been recorded in JCI and Randgold and Exploration companies. These scandals emphasize the need to evaluate, scrutinize and formulate systems of checks and balances to guide corporate executives in decision making and preparing accurate financial statements. The researcher desires to establish the effectiveness of the existing ICS’s, in this transition period, for the benefit of stakeholders, who include the government, taxpayers, management, and employees. Also Poor performance of parastatals in Nigeria, attributed to poor management, for lack of adequate controls, preempted this study.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to evaluate the impact of internal control system in Nigerian government parastatals and also to aid local government improve on their revenue generation and collection to that point where all collectable revenue are actually collected and safely paid into the council treasury.
Other objectives include the following:
- To ascertain whether the revenue generated within the government institution is put into good use.
- To examine if the internal control system applied by the government institution is appropriate and effective
- to recommend stages by which the government can use in detailing out funds and prevent revenue leakages.
1.4 RESEARCH QUESTIONS
The following research questions are formulated for the purpose of this research work:
- is the revenue generated within the government institution is put into good use?.
- Is the internal control system applied by the government institution appropriate and effective?
- What are the recommended stages by which the government can use in detailing out funds and prevent revenue leakages?
1.5 FORMULATION OF RESEARCH HYPOTHESES
The following hypotheses are formulated for the purpose of this research work:
HO1: The internal control system applied by Government
authority is inappropriate and ineffective
HO2: The sources of revenue available to Ijebu Ode Local Government authority is
not enough for them.
1.6 SIGNIFICANCE OF THE STUDY
This research work will be of immense significance to the staff of public sector. It will go a long way in enlightening them on the concept of internal control system as well as the best strategies to be adopted to monitor its generated funds. This research work will as well be of benefit to students and researchers because it will widen their scope from the information contained in this research work and lastly, it will help the entire nation in modifying the methods and approaches used by different ministries, parastatals and other inter-ministerial departments in their financial control system and also it will help them in improving revenue generations and minimizes expenditures since public sector is differentiate able from private sector or bodies.
1.7 SCOPE OF THE STUDY
This research work on the impact of internal control system in government parastatals
is focused on Ijebu-Ode Local Government of Ogun State.
1.8 LIMITATIONS OF THE STUDY
This research would have been generalized to all government paralstatals in Nigeria but due to some numerous factors, I have decided to limit my study to Ijebu Ode Local Government area, Ogun State.
The following are the constraints encountered in this research:
- Financial Constraint: Finance is the key to the success of every research work and the said finance was readily unavailable on my part as at the time I was carrying out this research and as such, proper research will not be carried out if I go about all local governments in Nigeria.
- Time Constraint: The time stipulated for the submission of this work was obviously too short and as such was unable to go about all local government areas in Nigeria.
- Lack of knowledge able and Sincere Personnel: Some of the officials employed or appointed in most local governments in Nigeria including that of Ijebu Ode Local Government has no knowledge of what internal control system is and they are also not approachable because they placed themselves on a very high esteem and even when one is opportune to interview them, there is sure to be shortcomings arising from the basis such as, misinformation, and deliberate distortion of facts and these is as a result of not letting one know where revenue comes from and how it is been utilized.
- Lack Of Research Facilities: Research facilities such as transportation makes research work easier and interesting but it is noted that Nigeria has a poor transportation system especially in the area were most local government secretariat are situated and this restricted me from going about all local government areas and as such, I was forced to focus my study on Ijebu Ode Local Government area though, the research was still very difficult to carry out.