INTERNAL CONTROL SYSTEM: A necessity to the survival and growth of public organization (A case study of power holding company of Nigeria, Enugu)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF 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)

God 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.

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.

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 under performance, weakness and specific failures connected to internal control system in order that corrections may be effected for performance to improve.

HYPOTHESIS AND RESEARCH QUESTION

  RESEARCH QUESTIONS

Does record keeping aid the proper running of business

Does segregation of duties aid averting errors and fraud?

Does your organization carry 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?      

 RESEARCH HYPOTHESIS

There are no significant relationships between internal controls and the orderly and efficient running of an organization.

There exist significant relationship between internal controls and the orderly and efficient of an organization.

1.6   SCOPE AND LIMITATION OF STUDY.

SCOPE 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.

LIMITATION OF THE STUDY.

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;

Funds needed to conduct in-depth study.

Insufficient time.              

Non-availability of required documents.

The respondent being reluctant in answering some questions.

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.