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| Chapters: 1-5
| Pages: 72
INTERNAL CONTROL SYSTEM, HOW EFFECTIVE AS A MEANS OF REDUCING THE INCIDENCE OF FRAUD IN AN ORGANISATION
CHAPTER ONE
1.0 INTRODUCTION
There is barely any organisation in our society today that cannot be associated with one type of fraud or the other. Manufacturing industries, banking industries etc have all experienced a high propensity of fraud in recent time. In fact, activities of fraudsters in our organisations are highly unpredictable and their methods of operations keep changing.
The case and issue of fraud in Nigerian economy has taken a different dimension, which if not attended to would cause a wreck in the total economic potentials. Fraud is not only found in the private sector of the Nigerian economy but also the public sector. As a matter of fact, the motive (for almost all aspirants) behind serving in a public office is to go and fraud to enrich themselves.
Cases of frauds are found to arise due to complete absence of internal auditing services to check transaction and policies laid down, duties are not adequately segregated as a single persons starts and completes a transaction etc. The meaning of this is that the funds which could have been used by an organisation in the generation of employment through expansion and diversification programmes would have been cornered by a selfish individual who uses his position in the organization authority or intelligence to embezzle money.
If this end is not properly monitored, then the future of the Nigerian economy would be in shamble. There is therefore he need to give a serious attention to the design of internal control measures that would help to curb the activities of fraudsters. From a more professional perspective and according to auditing guidelines published by the institute of chartered accountancy (England and Wales).Internal Control System is defined as “the whole system of control, financial and otherwise, established by the management of an enterprise in an orderly and efficient operations to secure it assets, ensure compliance with management polices and secure as far as possible the completeness, and accuracy of the records.
Conclusively, Internal Control System are prescribed practices which the management of an enterprises develop, and adopted in order to facilitate the smooth and efficient running of an enterprises of order and mainly to the present in all the operations of the enterprise and for security of its assets.
The types of controls available as contained in the appendix to the operation auditing guideline on internal control, with reference to the appendix are ten (10) types of control management could use in controlling its organisations. They are as follow:
i. Organisation control
ii. Authorization and approval
iii. Segregation of duties
iv. Arithmetic and accounting control
v. Supervision control
vi. Personal control
vii. Management control
viii. Acknowledgement of performance and
ix. Budgeting control
The beauty of any control is for it to actually work efficiently and effectively in practice. So, it is not enough to design a control but to make sure that it functions as planned.
The meaning of each would be explained and it area of application are explained below:
1. Organisation Controls
This is a control set up by the management which involves having a plan of organisation which should defined and allocate responsibility where a specified person is in charge of a particular function who might be called the responsible who is their responsible and automatically answerable for that function.
This control also ensure that line of reporting are known meaning that an employee should the precious powers delegated to him, the extent of his authority and to whom he should report. Example the correct operation of internal control may be delegated by the board of specific management personnel and to internal audit department.
2. Authorization and Approval
This control emphasized the need for all transaction to be first of all be authorized or approval by an appropriate person. Examples are that credit sales must be approved by the credit control department, all overtime done as required by the management be approved by the department manager or works manager and perhaps all returnable and non returnable gate posses must be approved by two or more management personnel.
3. Segregation of Duties
This control is self explanatory as it preaches the procedure where no single person should be responsible for the recording and processing of a complete transaction of the glaring advantages that the involvement of several people the risk of international manipulation or accidental error and increase the element of checking errors.
4. Physical Control
The is control called physical as it involves on intelligent deliberate actions to safeguard the assets of a company, keep a highly confidential business information in a restricted safe equipment or place and above all to give full protection to all the assets of the company be it financial or otherwise.
5. Arithmetical and Accounting Control
These are control in the recording function which checks that the transaction have been fully authorized and that they are included and correctly recorded with accuracy.
Procedures in the control include checking the arithmetic accuracy of records, the maintenance and checking of total, reconciliation, controls account etc. For example, where this control is in operation all purchases involves are checked by the purchase invoice section of accounting department being prelisted by that section before sending them to the computer department for processing. Notable to be mentioned as an example of this control is where there is clerk in the accounting department comparing the income purchases invoices with copy order forms and goods inward notes.
6.Supervision Control
All actions by all levels of staff should be supervised. There possibility for the supervision should be clearly laid down and communicated to the person being supervised.
7.Personnel Control
At this concern the human resources of the organisation, under this control, procedure should be designed to ensure that personnel operating the system are competent and motivated to carry on the task assigned to them and appropriate, measures put in place for the remuneration promotion and carrier development prospect design for the employees.
8.Management Control
These are control ,exercised by the management which are outside and over and above the day-to-day routine of the system. They include overall supervisory controls, review of management accounts, comparisons with budget, internal audit and other.
9.Acknowledgement of Performance
This makes it compulsory for every function performed by any responsible official to be signed or initiated and stamped to prevent anybody from doing illegal or unauthorized assignment for fraudulent purposes. For instance, during a stock taker exercise at the end of the financial year, the official stock takes is made to signed the stock sheet of all items counted so that in case of any error that the blame could be ascribed to the person responsible.
10.Budgeting Control
This is a techniques used in business to streamline the activities of a particular organisation to achieve a set goal. Budget itself is defined as a quantitative plans of action where all actions are expressed in monetary terms. This is usually employed as it affords or give the opportunity of computing the variances analysis, which helps to control and manage a business very well. This study would therefore bother on the meaning of fraud, types of fraud common to organisation and the various internal control in our organisation with particular reference to Nigerian Bottling Company Plc.
1.1 OBJECTIVE OF THE STUDY
The objective of this study is to emphasize the effectiveness of internal control as a means of reducing the incidence of fraud in an organization with special reference to Nigerian Bottling Company Plc and also to proffer suggestions that will help bring its incidence to the bearest minimum.
1.2 STATEMENT OF PROBLEM
The objective of internal control is to limit the occurrence of errors and fraud to the bearest minimum. However, no matter how effective an internal control system is, error and fraud occur by:
i. Collusion: Two or more dishonest person working in collusion can override the efficiency of the best possible controls.
iii. Management Exemption: Management is in a position to override control set by it.
iv. Human Errors: Due to errors of judgement and interpretation, misunderstanding, carelessness etc, fatigue or distractions can undermine the effective operation of internal control.
1.3 SIGNIFICANCE OF THE STUDY
This study is very important in that:
i. It will unfold various factors contributing to fraud in our organisation.
ii. It will enable us to know about common fraudulent practices in our organisation.
iii. It will also help us to know the various internal control measure that can be put in place in combating the incidence of fraud.
As it is popularly and erroneously believed by the un-initiated into the accounting profession that internal control system is all about protocols which must be followed in a particular organisation which delay business transactions and also useful for prevention of fraud this study will help to correct this belief and hence unveil the tremendous merit of the system especially how it is being operated in Nigerian Bottling Company Plc.
1.4 SCOPE OF THE STUDY
In order to create an avenue for a proper understanding of this study, it is necessary to state clearly the scope and limitations of this work.
Firstly, this study is limited to the internal control system in Nigerian Bottling Company Plc.
Secondly, this study is supposed or meant to represent the internal control techniques as it operate in Nigerian Bottling Company Plc, while many of the findings may have general application, some might not be applicable to other smaller firms in a different location or different industry.
Thirdly, the topic will cover internal control with a computer using electronic data processing technique.
Lastly, the topic will cover all inherent factors both internal and external as it affects the internal control environment of Nigerian Bottling Company Plc with all techniques being in place.
1.5 LIMITATIONS OF THE STUDY
The problem encountered by the researcher in the cause of this study are majorly that of time constraint, finance, willingness or unwillingness, it also worth mentioning in addition to the points mentioned earlier as it is true for security reasons that all the control that are in operation in an organisation cannot be probed into by a researcher and this formed the major limitation to the scope of the study.
1.6 FORMATION OF HYPOTHESIS
Hypothesis are developed and tested to ensure a more effective and result oriented research work. Two types of hypothesis will be employed in this study. The null and the alternative hypothesis. This is the normal principles of reject or accept criterion. The hypothesis shall be used to test whether internal control as a means of controlling fraud is weak and ineffective.
The research hypothesis are:
H0: Effective and efficient operations of internal control does not lead to reduction of fraud in an organisation.
H1: Effective and efficient operation of internal control leads to reduction of fraud in an organisation.
1.7 DEFINITION OF TERMS
The following are the definition of the related terms as used by the researcher in this study.
(1) Fraud
This is an intentional misrepresentation of financial information by one or more individual among management, employee or third party. It is a special case of irregularities and it involved the use of criminal deception to obtain an unjust or illegal advantage.
(2) Internal Control
This is the whole system of control, financial or other wise, established by the management of an enterprise in order to ensure an orderly and efficient operation to secure its assets, ensure adherence to management solicits and as far as possible the completeness and accuracy of the records.
(3) Internal Auditing
CHAPTER ONE
1.0 INTRODUCTION
There is barely any organisation in our society today that cannot be associated with one type of fraud or the other. Manufacturing industries, banking industries etc have all experienced a high propensity of fraud in recent time. In fact, activities of fraudsters in our organisations are highly unpredictable and their methods of operations keep changing.
The case and issue of fraud in Nigerian economy has taken a different dimension, which if not attended to would cause a wreck in the total economic potentials. Fraud is not only found in the private sector of the Nigerian economy but also the public sector. As a matter of fact, the motive (for almost all aspirants) behind serving in a public office is to go and fraud to enrich themselves.
Cases of frauds are found to arise due to complete absence of internal auditing services to check transaction and policies laid down, duties are not adequately segregated as a single persons starts and completes a transaction etc. The meaning of this is that the funds which could have been used by an organisation in the generation of employment through expansion and diversification programmes would have been cornered by a selfish individual who uses his position in the organization authority or intelligence to embezzle money.
If this end is not properly monitored, then the future of the Nigerian economy would be in shamble. There is therefore he need to give a serious attention to the design of internal control measures that would help to curb the activities of fraudsters. From a more professional perspective and according to auditing guidelines published by the institute of chartered accountancy (England and Wales).Internal Control System is defined as “the whole system of control, financial and otherwise, established by the management of an enterprise in an orderly and efficient operations to secure it assets, ensure compliance with management polices and secure as far as possible the completeness, and accuracy of the records.
Conclusively, Internal Control System are prescribed practices which the management of an enterprises develop, and adopted in order to facilitate the smooth and efficient running of an enterprises of order and mainly to the present in all the operations of the enterprise and for security of its assets.
The types of controls available as contained in the appendix to the operation auditing guideline on internal control, with reference to the appendix are ten (10) types of control management could use in controlling its organisations. They are as follow:
i. Organisation control
ii. Authorization and approval
iii. Segregation of duties
iv. Arithmetic and accounting control
v. Supervision control
vi. Personal control
vii. Management control
viii. Acknowledgement of performance and
ix. Budgeting control
The beauty of any control is for it to actually work efficiently and effectively in practice. So, it is not enough to design a control but to make sure that it functions as planned.
The meaning of each would be explained and it area of application are explained below:
1. Organisation Controls
This is a control set up by the management which involves having a plan of organisation which should defined and allocate responsibility where a specified person is in charge of a particular function who might be called the responsible who is their responsible and automatically answerable for that function.
This control also ensure that line of reporting are known meaning that an employee should the precious powers delegated to him, the extent of his authority and to whom he should report. Example the correct operation of internal control may be delegated by the board of specific management personnel and to internal audit department.
2. Authorization and Approval
This control emphasized the need for all transaction to be first of all be authorized or approval by an appropriate person. Examples are that credit sales must be approved by the credit control department, all overtime done as required by the management be approved by the department manager or works manager and perhaps all returnable and non returnable gate posses must be approved by two or more management personnel.
3. Segregation of Duties
This control is self explanatory as it preaches the procedure where no single person should be responsible for the recording and processing of a complete transaction of the glaring advantages that the involvement of several people the risk of international manipulation or accidental error and increase the element of checking errors.
4. Physical Control
The is control called physical as it involves on intelligent deliberate actions to safeguard the assets of a company, keep a highly confidential business information in a restricted safe equipment or place and above all to give full protection to all the assets of the company be it financial or otherwise.
5. Arithmetical and Accounting Control
These are control in the recording function which checks that the transaction have been fully authorized and that they are included and correctly recorded with accuracy.
Procedures in the control include checking the arithmetic accuracy of records, the maintenance and checking of total, reconciliation, controls account etc. For example, where this control is in operation all purchases involves are checked by the purchase invoice section of accounting department being prelisted by that section before sending them to the computer department for processing. Notable to be mentioned as an example of this control is where there is clerk in the accounting department comparing the income purchases invoices with copy order forms and goods inward notes.
6.Supervision Control
All actions by all levels of staff should be supervised. There possibility for the supervision should be clearly laid down and communicated to the person being supervised.
7.Personnel Control
At this concern the human resources of the organisation, under this control, procedure should be designed to ensure that personnel operating the system are competent and motivated to carry on the task assigned to them and appropriate, measures put in place for the remuneration promotion and carrier development prospect design for the employees.
8.Management Control
These are control ,exercised by the management which are outside and over and above the day-to-day routine of the system. They include overall supervisory controls, review of management accounts, comparisons with budget, internal audit and other.
9.Acknowledgement of Performance
This makes it compulsory for every function performed by any responsible official to be signed or initiated and stamped to prevent anybody from doing illegal or unauthorized assignment for fraudulent purposes. For instance, during a stock taker exercise at the end of the financial year, the official stock takes is made to signed the stock sheet of all items counted so that in case of any error that the blame could be ascribed to the person responsible.
10.Budgeting Control
This is a techniques used in business to streamline the activities of a particular organisation to achieve a set goal. Budget itself is defined as a quantitative plans of action where all actions are expressed in monetary terms. This is usually employed as it affords or give the opportunity of computing the variances analysis, which helps to control and manage a business very well. This study would therefore bother on the meaning of fraud, types of fraud common to organisation and the various internal control in our organisation with particular reference to Nigerian Bottling Company Plc.
1.1 OBJECTIVE OF THE STUDY
The objective of this study is to emphasize the effectiveness of internal control as a means of reducing the incidence of fraud in an organization with special reference to Nigerian Bottling Company Plc and also to proffer suggestions that will help bring its incidence to the bearest minimum.
1.2 STATEMENT OF PROBLEM
The objective of internal control is to limit the occurrence of errors and fraud to the bearest minimum. However, no matter how effective an internal control system is, error and fraud occur by:
i. Collusion: Two or more dishonest person working in collusion can override the efficiency of the best possible controls.
iii. Management Exemption: Management is in a position to override control set by it.
iv. Human Errors: Due to errors of judgement and interpretation, misunderstanding, carelessness etc, fatigue or distractions can undermine the effective operation of internal control.
1.3 SIGNIFICANCE OF THE STUDY
This study is very important in that:
i. It will unfold various factors contributing to fraud in our organisation.
ii. It will enable us to know about common fraudulent practices in our organisation.
iii. It will also help us to know the various internal control measure that can be put in place in combating the incidence of fraud.
As it is popularly and erroneously believed by the un-initiated into the accounting profession that internal control system is all about protocols which must be followed in a particular organisation which delay business transactions and also useful for prevention of fraud this study will help to correct this belief and hence unveil the tremendous merit of the system especially how it is being operated in Nigerian Bottling Company Plc.
1.4 SCOPE OF THE STUDY
In order to create an avenue for a proper understanding of this study, it is necessary to state clearly the scope and limitations of this work.
Firstly, this study is limited to the internal control system in Nigerian Bottling Company Plc.
Secondly, this study is supposed or meant to represent the internal control techniques as it operate in Nigerian Bottling Company Plc, while many of the findings may have general application, some might not be applicable to other smaller firms in a different location or different industry.
Thirdly, the topic will cover internal control with a computer using electronic data processing technique.
Lastly, the topic will cover all inherent factors both internal and external as it affects the internal control environment of Nigerian Bottling Company Plc with all techniques being in place.
1.5 LIMITATIONS OF THE STUDY
The problem encountered by the researcher in the cause of this study are majorly that of time constraint, finance, willingness or unwillingness, it also worth mentioning in addition to the points mentioned earlier as it is true for security reasons that all the control that are in operation in an organisation cannot be probed into by a researcher and this formed the major limitation to the scope of the study.
1.6 FORMATION OF HYPOTHESIS
Hypothesis are developed and tested to ensure a more effective and result oriented research work. Two types of hypothesis will be employed in this study. The null and the alternative hypothesis. This is the normal principles of reject or accept criterion. The hypothesis shall be used to test whether internal control as a means of controlling fraud is weak and ineffective.
The research hypothesis are:
H0: Effective and efficient operations of internal control does not lead to reduction of fraud in an organisation.
H1: Effective and efficient operation of internal control leads to reduction of fraud in an organisation.
1.7 DEFINITION OF TERMS
The following are the definition of the related terms as used by the researcher in this study.
(1) Fraud
This is an intentional misrepresentation of financial information by one or more individual among management, employee or third party. It is a special case of irregularities and it involved the use of criminal deception to obtain an unjust or illegal advantage.
(2) Internal Control
This is the whole system of control, financial or other wise, established by the management of an enterprise in order to ensure an orderly and efficient operation to secure its assets, ensure adherence to management solicits and as far as possible the completeness and accuracy of the records.
(3) Internal Auditing
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