THE EFFECT OF INTERNAL CONTROLS ON REVENUE GENERATION: A CASE STUDY OF THE UNIVERSITY OF NAIROBI ENTERPRISE AND SERVICES LIMITED

THE EFFECT OF INTERNAL CONTROLS ON REVENUE GENERATION: A CASE STUDY OF THE UNIVERSITY OF NAIROBI ENTERPRISE AND SERVICES LIMITED

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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The rapidly changing economic and competitive environments, shifting customer demands and priorities, and restructuring for future growth and social trend indicates how extensive an organization internal controls should be structured to ensure continuous growth in revenue generation. Internal control is a dynamic integral process that is adapting continuously to the changes facing modern organizations. At all levels of the organization, the management and personnel have to be involved to address risks and to provide reasonable assurance of the achievement of the organization‟s mission and general objectives. Every organization strives to provide products and render some service at a price using the most effective and efficient operations of its business. It is by the effective and efficient operations in products or services delivery that revenue flow into the organization. In the Kenya, organizations failures and widespread dip in revenues over the past two decades have been due to operations that have resulted into mismanagement thus elevated the importance of effective internal control within the formal business sectors. Internal control, which assures the stability of every organisation, therefore has gained importance today. This is because the control systems in place are a pillar for an efficient accounting system as well as the achievement of organizational goals.
1.1.1 The Concept of Internal Controls
Internal controls are measures that organizations institute with the aim of ensuring that the objectives, goals, and mission of the organization are met (Rezaee, 2002). They refer to set of organizational policies and procedures that ensure any transaction is processed in the appropriate
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way to avoid waste, theft and misuse of organization resources. Through internal control systems, organizations achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. Thus internal control is established by the organizational management to ensure that the business of enterprise is carried out in an orderly and efficient manner. This further ensures adherence to management policies safeguard the assets and secure the completeness and accuracy of the records. Organizations are constantly and extensively working to improve their internal control systems so as to increase revenue inflow, survive in the rapidly changing economic and competitive environments, and adapt to the shifting customer demands and priorities (Kantzos and Chondraki, 2006). Internal control consists of five interrelated components which are derived from the way management runs a business, and are integrated with the management process: control environment; risk assessment; control activities; information and communication; and monitoring (Carmichael, 1996). According to Liu (2005) and Rittenberg et al. (2005), under the current operations of organizations in general, the importance of internal control can be divided into six major categories; detecting error and fraudulence, decreasing illegal conduct, improving the competence of the business entity, improving the quality of data, helping to create the business infrastructure, and decreasing auditors‟ fee.
1.1.2 The Concept of Revenue
Revenue refers is that monetary event of asset valves increasing in the organization because of the physical event of production or sales of products or services of the organization (Pandey, 1996). Rittenberg and Schwieger (2005) define revenue as the inflows or enhancements of assets of a firm or settlements of its liabilities during a period from delivery or producing goods,
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rendering service or other activities that constitutes the entity‟s ongoing major or central operations. In addition, described revenue as inflows of asset (almost always cash or accounts receivables) received for products or services provided to customers. Organizational performance is in terms of revenue generation portrayed by the levels of assets accumulation, wealth created, and the quality services by customer level of satisfaction and customer complaints (Kloot, 1999). For better revenue generation, organizations should critically look at customers and other stakeholders in business and establish how best they are satisfying their needs. Organizations should continuously improve their revenue and have an internal control system that is intervened with organizations operating activities and it is most effective when controls are built into the organizations infrastructure in terms of continued improvement on performance standards as part of the competitive advantage of the organization.
1.1.3 Relationship between Internal Controls and Revenue
Internal control systems including internal audits are intended primarily to enhance the reliability of financial performance, either directly or indirectly by increasing accountability among information providers in an organization (Jensen, 2003). Internal control therefore has a much broader purpose such that the organization level of control problems associated with lower revenues, which explore links between disclosure of material weakness and fraud, earnings management or restatements (Doyle et al., 2005).
Internal controls provide an independent appraisal of the quality of managerial performance in carrying out assigned responsibilities for better revenue generation (Beeler et al., 1999). According to Fadzil et al. (2005), an effective internal control system unequivocally correlates with organizational success in meeting its revenue target level. Effective internal control for
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revenue generation involves; regular a review of the reliability and integrity of financial and operating information, a review of the controls employed to safeguard assets, an assessment of employees' compliance with management policies, procedures and applicable laws and regulations, an evaluation of the efficiency and effectiveness with which management achieves its organizational objectives (Ittner et al., 2003). Most organizations no longer set up internal control system as a regulatory requirement but also because it helps in ensuring that all management activities are appropriately carried out (Kenyon and Tilton, 2006). Further, organizations are making it a point of duty to train, educate, and sensitize their employees on how to use these internal control systems since its effectiveness depends on the competency and dependability of the people using it. All these control actions ensure that any risks that may affect the company‟s ability to achieve its goals are appropriately avoided and should occur at all levels and in all functions of the organization. Further, there are three major classifications of internal controls; preventive, detective, and corrective (Singleton, 2006). Preventive controls predict potential problems before they occur, make adjustments, and prevent an error, omission or malicious act from occurring. The detective controls are used to detect and report the occurrence of an omission, an error or a malicious act. Finally, the corrective controls help in ensuring that the impact of a threat is minimized, identify the cause of a problem as well as the correct errors arising from the problem. Corrective controls correct problems discovered by detective controls and modify the processing system to minimize future occurrence of the problem.
Risk management encompasses a set of resources, behaviors, procedures and actions that is adapted to the characteristics of each organization and that enables managers to keep risks at an
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acceptable level for the company. Risk management and internal control systems complement each other in controlling the company‟s activities. Its aim is to identify and analyze the company‟s main risks. Risks that exceed the acceptable levels set by the organization are dealt with subject to plans of action. For some time now, risk management in general and internal control more specifically; have been considered as fundamental elements of organizational governance. As a consequence, risk management is beginning to be perceived as a new means of strategic business management, linking business strategy to daily risks and then optimizing those risks in order to realize value (Saarens and de Beelde 2006.) In the United States for instance in 1992, a group of companies sponsored the formation of the tread way commission to study and report on how to improve on the effectiveness of internal control systems, and more recently in 2002 the US congress passed the Sarbanes Oxley act giving new directives on how companies are to report on the effectiveness or otherwise of their internal control systems.
1.1.4 The Concept of Internal Control and Revenue Generation in Kenya
Internal control has gained importance today in many organizations in Kenya including the University of Nairobi Enterprises and Services (UNES) Limited. In particular, internal controls are required to assure that if properly designed and implemented, UNES achieved its goals mitigating its losses. Established over 20 years ago, UNES Ltd is a knowledge-based premier body corporate wholly owned by the University of Nairobi. It mandated to harness the resources of the university with a view to enhancing its teaching and research capabilities; promoting and providing financial managerial services for income-generating activities within the university. Its vision is to be premier knowledge-based business enterprise while its mission is to promote and engage in knowledge-based business activities for the benefit of the university and other stakeholders through the provision of financial management, consultancy, bookstore and
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hospitality services. In addition, UNES provides financial managerial services for all the academic revenue and the following University based Income Generating Units (IGUs) like; the Chiromo Funeral Parlour (CFP), Diagnostic Imaging, Immunology, Haematology, and Clinical Chemistry Laboratory services, dental services at the Dental Plaza, and Veterinary Farm and Small And Large Animal Clinics in Faculty of Veterinary Medicine. Currently, the business units comprise of UNES include; the bookstore, Arziki Restaurants and Chiromo Conference Centre. In order to sustain efficiency and effectiveness, UNES is organized in six key sections; Finance, Human Resource and Administration (HRA), Business Advisory Services (BAS), Information and Communication Technology (ICT), consultancy and procurement. The internal control is ensured through communication in the sections‟ processes through which all relevant and reliable information is identified, captured and communicated in a timely manner to all relevant players within UNES thereby enabling them to carry out their responsibilities.
1.2 Research Problem
Organizations continue to experience low levels of revenue generation most of which are man-made and therefore avoidable. Despite the numerous rules and regulations, the varying levels in revenue generation occur across all entities in the government and private sectors. No matter how well it is designed and operated, an internal control system can only provide a reasonable, not absolute assurance that the objectives of the company‟s internal control system are met in terms of revenue generation.
This heightened interest in internal controls is, in part, a result of the increased revenue in the the academic programs in Module II. An analysis of the problems related to this whether there are
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effective internal control system since such systems help in preventing or enable earlier detection of the problems that led to the losses (Rezaee, 2002). According to (Kirsty, 2008) an internal control system creates an organization‟s confidence in its ability to perform or undertake a particular task and prevents errors and losses through monitoring and enhancing organizational and financial reporting processes as well as ensuring compliance with pertinent laws and regulations. Muio (2012) studied the impact of internal control systems on the financial performance of private hospitals in Nairobi and established a significant relationship between internal control system and financial performance. Kakucha (2009) evaluated the level of effectiveness of internal controls operating in Nairobi and established that there are deficiencies in the systems of internal controls, with the degree of deficiencies varying from one enterprise to another. Njui (2012) investigated the effectiveness of internal control and audit in promoting good governance in the public sector in Kenya and found that internal control has the greatest effect on corporate governance within Kenya government ministries followed by risk management while compliance and consulting had the least effect. Ngugi (2011) survey of internal control systems among the listed private companies and the public sector companies in Kenya in which the results indicated that the private sector compared to the public sector has a strong internal control system. Limited research has been carried out to examine the effect of the internal control system on revenue generation in Kenya. All the above research on internal controls has a gap as they did not take into consideration on the components of internal control and risk analysis. It is due to this background that the study sought to fill the knowledge gap by assessing the effect of internal control on revenue generation in Kenya while focusing on UNES Limited..
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1.3 Objectives of the Study
The objective of this study is to evaluate the effect of internal controls on revenue generation in UNES. 1.4 Significance of the Study UNES Management First, the study would benefit the UNES Audit Committee by assuring itself that appropriate processes are functioning effectively to monitor the risks to which the company is exposed and that the system of internal control is effective in reducing those risks to an acceptable level. Secondly, the findings would be of great use to UNES management in accounting to the Board for developing, operating and monitoring the system of internal control and for providing assurance to the Board that it has done so. Third, the results of the findings would be used by the employees to in improving their financial performance through effective implementation of the internal control systems and processes. Researchers and Scholars This study contribute to the existing knowledge, address and provide the background information to research organizations, individual researchers and scholars who would want to carry out further research in this area. The study would help researchers and academicians to expand their research into the effect of internal control on revenue generation (both public and private) in Kenya as literature review.
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The Government The study would finally help the government ensure quality of internal and external reporting and maintenance of proper records and processes that generate a flow of timely relevant and reliable information from within and outside the organization.

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