THE IMPACT OF INTERNAL CONTROL SYSTEMS ON THE PERFORMANCE OF OIL AND GAS INDUSTRY (A CASE STUDY OF EXXONMOBIL UPSTREAM NIGERIA)

CHAPTER ONE

INTRDUCTION

1.1. BACKGROUND OF THE STUDY

Oil and gas institutions occupy a vital position in the nations’ economic system and are essential agents in the development process of the economy. By intermediating between the surplus and deficit spending units, oil companies increase the quantum of National savings and investments and hence national output. By granting credits, oil companies create money thus influencing the level of money supply which is an essential item in the growth of national income as it determines the level of economic activities in the country.

Oil companies are central to the payments system by facilitating economic transactions between various national and international economic units and by so doing encourage and promote trade, commerce and industry.

For oil companies to be able to function effectively and contribute meaningfully to the development of a country, the industry must be stable, safe and sound and for these conditions to be obtained there must be a sound accounting system, which is occasioned by an internal control system.

In view of the economic growth in companies’ size and complexities, proper management of modern business undertakings are not possible unless they have an effective system of internal control.

A system of effective internal controls is a critical component of oil company management and a foundation for the safe and sound operation of oil and gas organizations. A system of strong internal controls can help to ensure that the goals and objectives of a oil and gas organization will be met, that the oil company will achieve long-term profitability targets and maintain reliable financial and managerial reporting. Such a system can also help to ensure that the oil and gas industry will comply with laws and regulations as well as policies, plans, internal rules and procedures, and decrease the risk of unexpected losses or damage to the Oil companies reputation.

Effective internal control, the strength of every organization, has become of critical importance today in the Nigerian oil and gas industry. The reason being that the control systems in any organization is a pillar for an efficient accounting system.

The need for the internal control systems in any sector of the economy especially the oil and gas industry, cannot be undermined, due to the fact that the oil and gas sector, which has a crucial role to play in the economic development of a nation, is now being characterized by macro economic instability, corruption and the risk of fraud.

Fraud, which is the major reason for setting up an internal control system, has become a great pain in the neck of many Nigerian oil company managers. It has also become an unfortunate staple in Nigeria’s international reputation. Fraud is really eating deep into the Nigerian oil and gas system and that any oil company with a weak internal control system, is dangerously exposed to fraud.

Therefore, the attempt to put an end to this economic degradation, gave rise to the topic of this research study the effect of internal control on organizational performance in the oil and gas industry with Exxon mobil PLC as a case study. However, this study is aimed at verifying the conception that an effective and efficient internal control system is the best control measure for preventing and detecting fraud, especially in the oil and gas sector.

Internal control is the methods employed to help to ensure the achievement of an objective. Internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and corrected, based on either compliance or management initiated concerns (Awe, 2005). The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control as the whole system of controls, financial or otherwise, established by management in order to carry on the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets and secure as far as possible, the completeness and accuracy of the records. They are tools used by management everyday for the smooth running of their organization or businesses. Internal controls also refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft and misuse of organization resources. Internal Controls are processes designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of the financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations (Mwindi, 2008). Enforcement of internal controls should be designed to promote operational efficiency and effectiveness, provide reliable financial information, safeguard assets and records, encourage adherence to prescribed policies, and comply with regulatory agencies. A sound internal control will ensure that transactions are: valid, properly authorized, recorded, properly valued, properly classified, reconciled to subsidiary records and not carried through by a single employee (i.e. ensure separation of duties) ( Adeyemo Kingsley A,2012).

Organizations establish systems of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. According to Etuk Ifiok Charles (1999) et al “Internal Control is 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 to management policies, safeguard the assets and secure as far possible the completeness and accuracy of the records”.

1.2. STATEMENT OF THE PROBLEM

The series of business failures and corporate scandals have been identified by KPMG to be as a result of weak internal control system. The failure of Enron in 2001 caused a precipitous decline in investor confidence in the capital markets. The federal government through the regulatory authorities has responded to this, by passing guidelines using SAS2 under information which is to be disclosed in financial statements. The guidelines codified the responsibilities of corporate executives, corporate directors, lawyers, accountants and created a board oversight regime for auditors of public companies. In seeking to enhance accountability and restore investor’s confidence, the guidelines emphasizes the critical role of internal control over financial reporting. This gave rise to the need for corporate governance especially in public institutions.

International Auditing Guidelines (IAG) deals with the auditor’s responsibility for detection of material misstatement resulting from error when carrying out an audit of financial statements.   The guidelines in conjunction with the related SEC rules and auditing standard No 2, established by the public company Accounting Oversight Board (PCAOB), requires management of a public accounting and the company’s independent auditor to issue two new reports at the end of every fiscal year. These reports must be included in the company’s annual report filed with the Securities and Exchange Commission (SEC). In the past, a company’s internal controls were considered in the context of planning the audit, but were not required to be reported publicly except in response to the SEC’s form requirements when related to a change in auditor. The new audit and reporting requirements have drastically changed the situation and have brought the concept of internal control over financial reporting to the forefront for audit committees, management, auditors, and users of financial statements. The new requirements also highlight the concept of a material weakness in internal control over financial reporting, and mandate that both management and the independent auditor must publicly report any material weakness in internal controls over financial reporting that exists as a result of physical year, at the end of assessment dates. Against this background this study investigated the purpose of ascertaining the effect of internal control system on organizational performance.

1.3. AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to examine the impact of internal control systems on the performance of the oil and gas industry. other general objectives of the study are;

1. To determine the need for an effective internal control system in the oil and gas industry.
2. To examine the relationship between internal control systems and organizational performance.
3. To assess the level of internal control systems in the oil and gas industry.
4. To examine the level of effectiveness of internal control systems in the oil and gas industry.
5. To recommend ways of improving internal control systems in the oil and gas industry.

 1.4. RESEARCH QUESTIONS

1. What is the need for an effective internal control system in the oil and gas industry?
2. What is the relationship between internal control systems and organizational performance?
3. What is the level of internal control systems in the oil and gas industry?
4. What is the level of effectiveness of internal control systems in the oil and gas industry?
5. What are the ways of improving internal control systems in the oil and gas industry?

1.5. RESEARCH HYPOTHESIS

H01: There is no significant impact of internal control systems on the performance of oil and gas industry.

H02: There is no significant relationship between internal control system and the performance of the oil and gas industry.

1.6. SIGNIFICANCE OF THE STUDY

This study shall be of immense benefits to the management of the oil and gas industry in order to deal extensively with effect of internal control on organizational performance and this will eventually lead to high productivity in the organization and also prevent risks within the organization. This study will help organization to have better understanding on how to install a good internal control system for the effective running of their organization.

Moreover, the study will be more relevant to management and social science students because they will be exposed to the effect of internal control on organizational performance and not only that it would also serve as an eye opener to the fact that as managers, there are lots of issue relating to internal control within the organization which if left unattended to will jeopardized organizational goal of the company.

The study will also attempt to contribute to the available literature or researches that will serve as a guide for organizational staff in order to prevent fraud and risks within the organization.

Policy makers would also benefit from this study in formulating policies relating to the effect of internal control on organizational performance.

The study of the effect of internal control on organizational performance is another area of study that is wide for researchers to tap into. So, this study would benefit researchers in looking beyond the scope of the present study and impacting to the knowledge already acquired.

The effect of internal control on organizational performance will also help practitioners such as Auditor, tax practitioners, etc in increasing their credibility.

1.7. SCOPE AND LIMITATION OF THE STUDY

This study is restricted to the impact of internal control systems on the performance of oil and gas industry using Exxon mobil Plc as a case study.

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. DEFINITION OF TERMS

Internal Controls: The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control as the whole system of controls, financial or otherwise, established by management in order to carry on the business of an enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible, the completeness and accuracy of the records.

Internal Audit:It is an independent appraisal activity established within an organization as a service to it. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls; a management tool which analyses the effectiveness of all parts of an entity’s operations and management.’ (CIMA’s Management Accounting Official Terminology)

Monitoring:According to CIMA, it is a process that assesses the quality of the system’s performance over time.

According to Sunny, New Palta and Root. It can be defined as the final internal control standards, which assess the quality of performance.

Control Environment:According to the first internal control standard, it relates to the departments that set a positive and supportive attitude towards internal control and conscientious management.

Reasonable Assurance Concept: It refers to the fact that internal controls even when they are appropriately designed and operating effectively cannot provide absolute assurance of achieving control objectives.