ABSTRACT
This research is designed to examine the prospect of internal control system on public sector organization a case study of selected ministries (Ministry of Education, Ministry of Finance, Ministry of Justice and Ministry of Health). The use of 100 structured questionnaires was administered to the selected ministries which were based on a five point likert scale to measure respondent’s knowledge and perception of internal control system in the organization. Where “agree” is represented by (A), “strongly agree” represented as (SA), “not sure” represented as (NS), “disagree” is represented as (DA) and “strongly disagree” as (SD). In which 80 was taken for the purpose of this research. Chi-square as a statistical tool was used to analyze the data obtained using a statistical package called SPSS (Statistical Package for Social Sciences). From the findings, it can be established that the internal control system of a ministry affects its operations, the achievement of its goals, and the prevention and detection of frauds, errors and material misstatements. This research recommends that there should be a system of internal control in place in government ministries and agencies, the task of internal controls should be ingrained in the core duties of the management at government ministries and when government policies are being created, there should be appropriate inclusion of internal control systems so that they do not contradict.
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TABLE OF CONTENTS
PAGE NO
Title page……………………………………………………………………………………………….. i
Certification …………………………………………………………………………..ii
Declaration ……………………………………………………………………………iii
Dedication …………………………………………………………………………….iv
Acknowledgements …………………………………………………………………..v
Abstracts………. ……………………………………………………………………..vi
Table of contents ……………………………………………………………………..vii
List of Tables …………………………………………………………………………viii
CHAPTER ONE: INTRODUCTION
1.1 Background Information………………………………………………………… 1
1.2 Statement of the problem ………………………………………………………….5
1.3 Objectives of the Study ……………………………………………………………6
1.4 Research Questions ……………………………………………………………….6
1.5 Research Hypothesis ………………………………………………………………7
1.6 Significance of the Study ………………………………………………………….8
1.7 Scope and Limitations of the Study ……………………………..………………..9
1.8 Organization of the Study ………………………………………………..……….9
1.9 Definition of Terms ………………………………………………………………11
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction ………………………………………………………………………12
2.1 Conceptual Clarification ………………………………………………………….12
2.1.1 History and Background of selected Ministries …………………………………16
2.1.2 Internal Control ………………………………………………………………….19
2.1.3 Internal Auditing …………………………………………………………………20
2.1.4 Features of Internal Control ……………………………………………………..21
2.1.5 Types of Internal Control ………………………………………………………..22
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2.1.6 Components of Internal Control System ………………………………………..23
2.1.7 Ascertaining the systems of Internal Control …………………………………..24
2.1.8 Recording the systems of Internal Control ……………………………………..24
2.1.9 Evaluating the Internal Control System …………………………………………26
2.1.10 Practical implication of Internal Control ………………………………………30
2.1.11 Roles and responsibilities in Internal Control …………………………………33
2.1.12 Internal Control activities in Public Sector Organization ………………………33
2.1.13 Internal Control Policies in Public Sector Organization ……………………….35
2.1.14 Internal Control and the IT infrastructure of Public Sector Organization ……..35
2.1.15 Resources provided to help departments in Public Sector Organization ………36
2.1.16 Self Assessments of Internal Control …………………………………………..37
2.1.17 What departments can do to improve its Internal Control ……………………..38
2.1.18 Internal Auditors responsibilities as they relate to Internal Control ……………38
2.1.19 Effectiveness of Internal Control System ………………………………………41
2.1.20 Limitations of Internal Control System …………………………………………42
2.2 Theoretical Framework……………………………………………………………..43
2.2.1 Control Theory …………………………………………………………………..43
2.2.2 Systems Theory …………………………………………………………………..44
2.2.3 Agency Theory and Institutional Theory ………………………………………..45
2.2.4 Sarbanes-Oxley Act 2002 ………………………………………………………..46
2.3 Empirical Review ………………………………………………………………….47
2.4 Summary of Empirical Review ……………………………………………………52
CHAPTER THREE: METHODOLOGY
3.0 Introduction ……………………………………………………………………….56
3.1 Research Design …………………………………………………………………..56
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3.2 Research Population ………………………………………………………………57
3.3 Sample and Sampling Technique …………………………………………………57
3.4 Research Instrument ………………………………………………………………58
3.5 Validity and Reliability of Instruments ……………………………………………58
3.5.1 Validity of the Instrument ………………………………………………………58
3.5.2 Reliability of the Instrument ……………………………………………………59
3.6 Method of Data Collection ……………………………………………………….59
3.7 Data Analysis Technique …………………………………………………………60
CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION
4.0 Introduction ………………………………………………………………………61
4.1 Return of Questionnaire …………………………………………………………..61
4.2 Data Analysis and Interpretation of Demographic Factors ………………………62
4.3 Analysis and Interpretation: Hypotheses One …………………………………….76
4.3.1a Interpretation of Hypotheses One ………………………………………………79
4.3.1b Discussion of Findings …………………………………………………………80
4.3.2 Hypotheses Two …………………………………………………………………80
4.3.2a Interpretation of Hypotheses Two ……………………………………………..82
4.3.2b Discussion of Findings …………………………………………………………82
4.3.3 Hypotheses Three ……………………………………………………………….83
4.3.3a Interpretation of Hypotheses Three ……………………………………………85
4.3.3b Discussion of Findings ………………………………………………………..85
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.0 Introduction ………………………………………………………………………87
5.1 Summary of Findings …………………………………………………………….87
5.2 Implication of the Findings ………………………………………………………88
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5.3 Recommendations ………………………………………………………………..89
5.4 Conclusion ……………………………………………………………………….89
5.5 Contribution to Knowledge ………………………………………………………90
5.6 Suggestion for Further Studies ……………………………………………………90
REFERENCES ………………………………………………………………………91
APPENDIX …………………………………………………………………………..94
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LIST OF TABLES
TABLE NO PAGE NO
1 Return of Questionnaires 61
2 Age Analysis of Respondents 62
3 Sex Analysis of Respondents 63
4 Marital Status Analysis of Respondents 65
5 Ministry Analysis of the Respondents 66
6 Distribution of Respondents Educational Qualification 67
7 Professional Qualification of the Respondents 68
8 Analysis of Nature of Employees‘ Employment 71
9 Distribution of years spent in Ministry 73
10 Analysis of Respondents‘ Work Experience 74
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CHAPTER ONE
INRODUCTION
1.1 BACKGROUND INFORMATION
An effective and efficient internal control system should be established in every be it banking industry, manufacturing company, small scale business, large scale business or government establishment irrespective of their size or mode of operation so as to protect it from possible losses, organizationalresources, frauds, errors or material misstatement. Misappriopriation of funds, misuse and vandalization of company property and errors made by inefficient personnels could result to losses. To avoid all these losses, misuse, vandalization of company property, errors e.t.c. in an organization it is perceived that an effective internal control system will lead to the achievement of the organizational goals. The collapse of internal control will certainly lead to the extinction of business of organization. Therefore, adequate internal control should encompass proper accountability for assets, reporting and proper documentation of all tasks and procedures must be maintained.
Internal control system according to the operational standard (guideline) is defined as‖ The whole system of controls, financial and otherwise, established by the management in order to carry on the business enterprise, in an orderly and efficient manner, ensure adherence to management policies, safeguard assets and secure as far as possible the completeness and accuracy of records. This definition points to the fact that internal controls create a basis of amount of work to be done by the professionals charged with the function, as they are expected to ensure the safeguard of the organization‘s funds, ensure that there is efficient and effective management of assets and that financial statements are accurate all the time.
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According to COSO (1992) ―Theinternal control is an executive process of an entity‘s board of directors, authorities and other employees to achieve purposes in these categories: efficiency and effectiveness of operations, reliability of financial accountability and obeying laws and legal act.
Internal control system according to International Organization of Supreme Audit Institutions (INTOSAI, 2004) is defined ―as an integral process that is effected by an entity‘s management and personnel and is designed to address risks and to provide reasonable assurance that in pursuit of the entity‘s mission, the following general objectives are being achieved: executing orderly, ethical, economical, efficient and effective operations, fulfilling accountability obligations,complying with applicable laws and regulations and safeguarding resources against loss, misuse and damage‖.
Internal control is broadly set process needed to establish wise guarantees that (effectiveness and economic performance, reliability of financial accounting and obeying laws and rules) these goals will be accomplished ―M.R. Simmons 1995‖.
According to Thomas, P.D. (2007) the term internal control is the integration of the activities, plans, attitudes, policies and efforts of the people of an organization working together to provide reasonable assurance that the organization will achieve its objectives and mission. It ensure that all recorded transactions are real, properly valued, related to the correct period, properly classified, correctly authorized and posted. It is the responsibility of the board of directors and its audit committee to ensure that the internal control system within the organization is adequate which includes determining the extent to which internal controls are evaluated and the parties involved in the evaluations (internal and external auditors).
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Internal control is the integration of the activities, plans, attitudes, policies and efforts of the employees of a department working together to provide reasonable assurance that the department will achieve its mission.
For systems based auditing to work effectively, the auditor will like to rely on internal controls to reduce the volume of substantive testing. Auditing is therefore defined as the processcarried out by an appointed qualified person or body, whereby the records and financial statements of an entity are subjected to independent examination in such detail as will enable the auditor form an opinion as to their truth and fairness of the financial statements. It is therefore important for the auditor to examine the internal control practice and procedures that are in place in the organization. Where weaknesses are revealed, the auditor recommends ways of improving the systems. Internal control system should therefore be viewed as a dynamic process that is continuously shaped by the interactions among the factors such as internal audit quality, management support and organization setting. Therefore it‘s now recognized that a sound internal control process is critical to an entity‘s ability to meet its established goals and maintain its financial viability.
Therefore, internal control system provides assurance to the management of the dependability of accounting data used in making decision. Decisions made by management becomes company policies and to be effective, these policies must be communicated throughout the organisation and consistently followed. However policies are not adequately followed in the public sector and to the extent that good governance is only imagined in Nigeria.
Corporation, state-owned company, state-owned enterprise, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, commercial government agency, public sector undertaking or parastatal is a legal entity that undertakes commercial activities on
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behalf of an owner ‗government‘. Their legal status varies from being a part of government to stock companies with a state as a regular stockholder. There is no standard definition of a government-owned corporation (GOC) or state-owned enterprise (SOE), although the two terms can be used interchangeably. The defining characteristics are that they have a distinct legal form and they are established to operate in commercial affairs while they may also have public policy objectives.
Public sector management needs to be clearly paid attention to, reason being that government constitutes the largest single business entity and her pattern of expenditure through its various parastatals, agencies and commissions stimulate lot of economic activities. (Angus and Mohammed 2011) says that as a result of the government huge involvement in economic activities, initiatives are being taken into all over the world towards the improvement of the standards of accounting, auditing and internal control departments in government. In the eye of Woolf (1986) the public sector is primarily composed of not-profit making organizations.
In a general term Public sector is the part of the economy concerned with providing various government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the military, police, public transit and care of public roads, public education, along with healthcare and those working for the government itself, such as elected officials. The public sector might provide services that a non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service.
Public sector consists of governments and all publicly controlled or publicly funded agencies, enterprises and other entities that deliver public programs, goods or services. The concept of public sector is broader than simply that of core governments and may overlap with the not-for-
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profit or private sectors. For the purpose of this guidance, the public sector consists of an expanding ring of organizations, with core government at the center, followed by agencies and public enterprises.
In conclusion, public sector is the part of the economy that is owned and controlled by government and provides basic services to the citizens. It is the means by which the government relates and delivers amenities to the public. Such amenities include, but are not limited to welfare, infrastructure, security, social justice, education and health care and a means of regulating or deregulating the economy (Okotuwa, 2007).
Though internal controls cannot eliminate all errors and irregularities faced in public sector organization, it is expected that they can alert management to potential problems, which can be controlled before they escalate to big problems. Nevertheless, the established internal control system must be evaluated from time to time so as to provide management with some assurance regarding its effectiveness.
1.2 STATEMENT OF THE PROBLEM
Internal control was primary to the achievement of objectives in public organizations and the indications of effective internal control system that enhance performance.Currently, there has been a reported case of general fall in the operational performance of organizations forcing the government to achieve less than its target objectives. Due to lapses in the control system of organization, organizations have been experiencing inefficiency, fraud, absenteeism and inability to adhere to government policy.
The problem here is to find out if whether there are effective control mechanisms with regards to the detection and prevention of frauds, errors and material misstatement, budgeting, safeguard of the asset of the organization, strict adherence to government policies, absenteeism, vandalization
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of property, inefficiency, transparency and accountability in public sector organization. The management of public sector does not see the necessity to improve the internal controls though it helps in the detection and prevention of frauds and errors. Hence they neglect it and do not have risk awareness. From the research conducted on public sector organizations have come to conclude that an effective internal control system should be put in place in other to solve the problems faced by public sector and it should be anticipated at all levels of management.
1.3 OBJECTIVES OF THE STUDY
i. This study will examine the existence and effectiveness of internal control system on public sector organization. ii. To determine whether internal control system will help in the detection and prevention of errors, frauds and material misstatement. iii. To determine the extent to which internal controls ensure the adherence to government policy. iv. To investigate whether internal control system can reduce or minimize inefficiency v. To determine the level of transparency and accountability in public sector
1.4 RESEARCH QUESTIONS
Under these, the research questions will take a close look at how public sector organizations abide to the policy of internal control system in their daily operations. The following are the research questions this study intends to address: * Does internal control system help in the detection and prevention of errors, frauds and material misstatement? * To what extent will internal control system ensure adherence to government policies? * To what level will internal control minimize inefficiency?
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* What is the level of transparency and accountability in public sector?
1.5 RESEARCH HYPOTHESIS
The following hypothesis was formulated; Hypothesis 1: Ho: Internal control system does not help in the detection of errors, frauds and material misstatement. Hi: Internal control system helps in the detection of errors, frauds and material statement. Hypothesis 2: Ho: Internal control system does not ensure adherence to government policies. Hi: Internal control system ensure adherence to government policies. Hypothesis 3: Ho:Most internal control system does not have significant impact in the minimization of inefficiency. Hi: Most internal control systems have significant impact in the minimization of inefficiency.
1.6 SIGNIFICANCE OF THE STUDY
Internal control system promotes efficiency, reduce risk of assets loss and help ensure the reliability of financial statements and compliance with rules and regulations. This study will bring the awareness to the need for effective internal control system in public. Beside, designing the study show the importance of a proper and effective internal control system in public sector. It will be of immense benefit to the following: Management: Since internal control is established by the management especially the top level management. This research will be relevant to the top level management of publicsector
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organization as it will help them in preventing and detecting of errors, frauds and material misstatement and achieve organizational objectives. Employees: It provides employees reasonable assurance that goals and objectives laid by the management will be achieved. This research will provide new perspectives by which to view and ameliorate internal control in the organization. The Economy: An effective internal control leads to the achievement of organizational goals and objectives which will in-turn be of benefit to the economy.
Government: When the internal control is efficient and effective it will lead to high returns or gains or profit to the organization which will lead to payment of high tax which is a good source of revenue to the government.
Researchers: The study will help researchers in furthering their research work.
Students: It serves as existing theories for research student to further their research work on internal control system.
In conclusion, this research will help provide additional and enhance the solutions to the problems of internal control to public sector organization formally proffered by various authors and researchers.
1.7 SCOPE AND LIMITATIONS OF STUDY
The research work focuses on internal control system and its prospect on public sector organization in public sector using four ministries. The selected ministries are ministry of education, ministry of health, ministry of finance and ministry of justice in Oyo state will be considered. Employees of each ministry are to be administered the questionnaire. Period of study is 2014/2015. The following are the limitations encountered during the course of conducting the research:
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Restrictions or Lack of Access to Information Online: Researchers are often at times restricted to information to be downloaded online through the use of passwords or registration..
Others: Nature of self-reporting, the sample and instruments utilized.
1.8 ORGANIZATION OF THE STUDY
The research on the internal control system and its prospect on public sector are organized into five chapters. Which are: Chapter one: Introduction, chapter two: Literature review, chapter three: Research Methodology, chapter four: Data analysis, chapter five: Conclusion.
1.9 DEFINITION OF TERMS
Control: Control according to C. Dury, 2012 is defined as a connection net through which the performance of an enterprise is controlled to ensure its right action in the future. It can also be defined as a function which ensures an effective working of the system or creates it desirable profit.
Internal Control: It is a process including norms, procedures, performance and organizational structure established to ensure reasonable guarantees so as to achieve settled business goals and avoid undesirable event, or they could be indicated and fixed (Cobit 2007)
Public Sector: This is the part of the economy concerned with providing various government services such as public transit, public roads, public education and health care.
Organization: This is an entity such an institution or an association that has a collective goal and is linked to an external environment.
Frauds: Fraud is deliberate deception to secure unfair or unlawful gain. The purpose of fraud may be monetary gain or other benefits.
Material Misstatement: This is accidental or intentional untrue financial statement information that influences a company‘s value or price of stock.
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Auditing: This refers to a systematic examination of books, accounts, documents and vouchers of an organization to ascertain how far the financial statements present a true and fair view of the concern.
Internal Auditor: This is an employee of a company charged with providing independent and objective evaluations of the company‘s financial and operational business activities, including its corporate governance.
Objectives: These are basic tools that underline all planning and strategic activities, they serve as the basis for creating policy and evaluating performance. It is also specific result that a person or system aims to achieve within a time frame and with available resources.
Effectiveness: This is the capability of producing a desired result. When something is deemed effective it means it has an intended or expected outcome.
Government Policy: This is a general principle by which a government is guided in its management of public affairs or the legislation in its measures.
Transparency and Accountability: It is defined as the perceived quality of intentionally shared information from a sender i.e. operating in such a way that is easy for others to see what actions are performed while accountability is the acknowledgement and assumption of responsibility for actions, products, decisions and policies including the administration, governance and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.
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