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.

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