Abstract
This
research tends to examine the effect of internal control on organization
performance of local government, with reference to Ojo Local Government
Council. The research adopted survey method
of research design where a simple random sampling technique was used in the
selection of samples. A sample of 100
respondents were drawn from the entire population of staff.
A well-structured questionnaire was the main instrument used in collection of
data. The data collected were presented on tables to determine the frequencies
and the percentages. The two (2) formulated hypotheses were tested with the use
of Chi Square analysis. The study
revealed that Internal Control System of Ojo Local Government Council has been
effective as a result of effective supervision, Segregation of duties and
proper authorizations and approval. The result also proofs relationship exists
between Internal Control System and Employee Satisfaction at Ojo Local
Government Council. This study concluded
that Internal Control System at Ojo Local Government Council had been effective
and efficient. Hence, having positive effect on employee satisfaction. Among
other Recommendations proffered to the council and public organisations in general,
it was recommended that management should put in a system to ensure that
internal control does not only exist but is effective, this can be achieved by
using the internal audit department; their activity should include monitoring
the daily call over of records, reconciliation of account, staff training and
ensure compliance to laid down rules and regulations.
TABLE
OF CONTENTS
Title
Page i
Certification
ii
Dedication iii
Acknowledgement
iv
Abstract v
Table
of Contents vi
CHAPTER ONE
INTRODUCTION
1.1 Background to the study 1
1.2 Brief History of Ojo Local Government. 3
1.3 Statement of the Problem 4
1.4 Objective of the Study 6
1.5 Statement of Research Questions 6
1.6 Statement of Research Hypotheses 7
1.7 Significance of the Study 7
1.8 Definition of Terms 8
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction 9
2.2 Conceptual
Framework 9
2.2.1 Historical
Development of Internal Control 9
2.2.2 Concept of Internal Control 10
2.2.2.1 Components of Internal Control
System 13
2.2.2.2 Elements of Internal Control System 16
2.2.3 Concept of Fraud 17
2.2.3.1 Classification of Fraud 18
2.2.3.2 Causes of Frauds 20
2.2.3.3 Ways
of Preventing Fraud in the Public Sector 22
2.2.4 Internal
Control System in Preventing Fraud in the Public Sector 23
2.2.5 Negative
Effects of Fraud Incidence in the Public Sector 25
2.2.6
Council Controls and financial
performance 26
2.2.7 Internal
audit and financial performance 27
2.3 Theoretical
Review 28
2.3.1 Contingency Theory 30
2.4 Empirical
Studies 35
2.5 Synthesis
of Literature Review and Gap Analysis 37
CHAPTER
THREE
RESEARCH
METHODS
3.1 Preamble 38
3.2 Research
Design 38
3.3 Type
and Sources of Data Collection 38
3.4 Population 39
3.5 Sampling technique
and sample size 39
3.6 Data
Collection Instrument 40
3.7
Validity of the Instrument 40
3.8
Reliability of the Instrument 41
3.9 Method
of Data Analysis 41
CHAPTER
FOUR
DATA
ANALYSIS AND PRESENTATION
4.1 Preamble
43
4.2 Data Collection and Presentation 43
4.3
Testing of Hypotheses 60
4.3.1 Test
of Hypothesis
1 61
4.3.2 Test
of Hypothesis
2 62
CHAPTER
FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATION
5.1 Preamble
64
5.2 Summary
of Findings 64
5.3 Recommendation 65
5.4 Conclusion 66
5.5 The
contribution of the study 67
5.6
Recommendations for further
research 67
References 68
Appendix 75
Research Questionnaire 75
CHAPTER ONE
INTRODUCTION
1.1 Background
to the study
The
establishment of an effective and adequate internal control system is the duty
of the management of any enterprise, this assist in the discharge of their
responsibility for the prevention and detection of irregularities and fraud.
In
present day decision making, the importance of relevant, reliable and timely
accounting information cannot be overemphasized; hence the need for a strong
and reliable internal control system which is able to assure user and decision
makers that the information provided in the financial statements are true and
fair (Flick,
2015).
The
source and strength of accounting information in any accounting system depends
on the strength of the various controls put in place by the management of such
reporting entity, a major reason that a professional auditor must ascertain and
evaluate the accounting and internal control system which an entity utilized in
the process of providing the information used in preparing its financial
statement (Jensen, & Ruback, 2013).
Internal
control system, according to the Auditing Practice Committee is “the whole
system of control for financial or otherwise, established by the management in
order to carry on the business of the enterprise in an orderly and efficient
manner, ensure adherence to management’s policies, safeguard the assets and
secure as far as possible the completeness and accuracy of the records” (AICPA
2016).
The
International Standards on Auditing (ISA 400) defined internal control to mean
all the policies and procedures adopted by the management of an entity to
assist in achieving management’s objective of ensuring as far as practicable,
the orderly and efficient conduct of its business, including adherence to
management policies, the safeguarding of asset, the prevention and detection of
Fraud and errors, the accuracy and completeness of accounting records and the
timely preparation of reliable financial information.
Public sector entities are
increasingly recognizing the benefits of organizational governance. A recent
survey sponsored by the department of accounting at Colorado State University,
"Audit Committees, Internal Auditing, and Outsourcing in Local
Governments: A Survey of Current Practice," queried 522 local governments
on their use of organizational governance. The findings indicate that although
there has been an increase in the use of these practices since the early 1990s,
there is still ample opportunity for organizational governance players to add
value to their local governments.
Fakunle,
(2016), Internal controls are an
integral part of any organization’s financial and business policies and
procedures. Internal controls consist of all the measures taken by the
organization for the purpose of:
·
Protecting
its resources against waste, fraud, and inefficiency.
·
Ensuring
accuracy and reliability of accounting and operating data.
·
Ensuring
compliance with the policies of the organization.
·
Evaluating
the level of performance in all organizational units of the organization
What internal control do…
·
Promote
orderly, economical, efficient and effective operations.
·
Safeguard
resources against, loss due to waste, abuse, mismanagement, errors and fraud.
·
Promote
adherence to laws, regulations, controls and management directives.
·
Develop
and maintain reliable financial and management data and accurately present that
data in timely reports.
1.2 Brief
History of Ojo Local Government.
Ojo Local Government was created in May 1989,
under the Military Administration of General Ibrahim Gbadamosi Babangida, as
the President of the Federal Republic of Nigeria, under the Military Governor
of General Raji Rasaki. Before the creation of Ojo Local Government, out of the
Old Badagry Local Government, the area was adjudged the most populous, in the
Federation going by the National Population Census conducted in Nigeria in
1991, the population as at that time was put at 1.01 million. Ojo Local
Government is divided into two segments; the Reverine and the Upland. It is inhabited
by mainly the Aworis, who are very accommodative and progressive.
In 1996, under the Military Administration of
General Sanni Abacha, two Local Governments were carved out of the Old Ojo
Local Government; Amuwo - Odofin and Ajeromi Ifedodun Local Governments. It is
on record that under the administration of Alhaji Latef Jakande, as the
Executive Governor of Lagos State, Ojo Local Government that did not have the
backing of the Federal Government under President, Shehu Shagari, was created
in 1980; with Alhaji Ajakaiye as the Chirman of the Council between 1980 -
1983. However, the Military Government of Generals Mohammed Buhari and Tunde
Idiagbon scrapped the Local Government when they struck in 1983 and the new
council returned to Badagry Local Government.
Today, two Local governments have been carved
out of the old Ojo Local Government; Iba Local Development Area and Oto-Awori
Local Council Development Area. With this development, there were boundary
adjustment. As of today, Ojo Local Government shares boundaries with Oto-Awori
on its Southwest, it is bounded in the East by Oriade Local Government, in the
North by Iba Local Council Development Area and in the South by the Lagoon. It
also shares boundary with Amuwo Odofin Local Government between Ojo Military
Barracks and the Trade Fair Complex. The Local Government had a TOTAL Land mass
of 180sq km with about 30% of it constituting the Reverine Area, today part of
this Reverine Area is being shared by Oto-Awori Local Council Development Area.
The auditing of Ojo local government under
the government of Babatunde Raji Fashola started officially in 2006
1.3 Statement
of the Problem
Most cases of fraud are as a result of
pressure or abuse of authorization. Senior officer may veto his decision to aid
fraud. This may be the case where the effectiveness of internal control is
restricted to lower cadre of staff (Amudo, and Inanga, 2016). Internal check
(which should be a routine exercise to prove independently the work of each
staff which is complimentary to that of another) with its objective of
preventing or detecting early, any fraud or error has become an occasional
exercise or periodic exercise in most public organisations.
In some Electronic Data Processing
(EDP) environment, there is little or no control over input, output, processing
and master files. Too much independence of computer personnel (operators,
programmers) may be an open gate to fraud and error. Since most of
organization's activities these days are computerized, the internal control
system should beam more light on input, output, processing and master files
control.
A number of organisations engage in
some sharp and unorthodox practices to achieve compliance with some regulatory
requirements. Many organization’s returns provide inaccurate/misleading
financial report thereby preventing timely detection of emerging problems by
the supervisor (Carey, 2016).
Substantial losses incurred by many
organisations on their credit portfolio, frauds and forgeries and outright
negligence have brought to the fore, the importance of sound internal control
system. Appraisals of fraud-related losses by organisations revealed that such
losses could have been prevented had the organisation maintained effective
internal control systems.
The importance of internal control
system cannot be overemphasized where a variety of requirements, processes that
are both manual and information communication technology-based (ICT) are used.
Organizations have recognized internal audit function as a tool for ensuring
effective workings of the internal control system. Bello, (2013) describes the
internal control function as an aspect of control mechanism, within a business,
manned by specially assigned staff. However, in Nigeria, the internal control
function in organisations has not been fully tapped; consequently, cases of
errors and intent to defraud and other fraud cases exists majorly in public
organisations.
In spite of efforts made by the government
to combat fraud in the public sector, millions of state and local government
funds meant for national development go into the wrong pockets through
fraudulent acts by some individuals in the sector. Some public sector stewards
spend funds on themselves and on projects based on their own interest and not
that of the nation Lakis, (2016).
According
to Robbertson, (2016), there are lots of fraudulent activities in the public
sector most especially the local government due to weak internal control
systems and measures. Thus, public sectors do not have strong policies and
systems to check fraudulent activities. Financial laws and regulations are
implemented and courts and tribunals continue to administer justice to
fraudsters, all in a bid to prevent and control fraud but to no avail due to
the weak internal control systems and checks in the public sector (Jokipii,
2014).
Based on
the above, the problems that triggered this study include:
i.
Due to
ineffective internal control system, continuous report of errors, frauds and
material misstatements by auditors which ought to have been detected and
corrected by management in the implementation of its policies.
ii.
Inadequate
enlightenment on the need for and purpose of internal control system in an
organization and Employee Satisfaction.
iii.
Challenge of implementing Internal Control
System in public organisations?
1.4 Objective
of the Study
The
aim of this research is to examine the effect of Internal Control System on
organization performance. The objectives are to:
i.
Examine the effectiveness of Internal
Control System at Ojo Local Government Council
ii.
Identify the relationship between Internal
Control System and Employee Satisfaction at Ojo Local Government Council.
iii.
Determine the challenges of implementing
Internal Control System at Ojo Local Government Council
1.5 Statement
of Research Questions
The
following research questions are posed by the study:
i.
Can one say that the Internal Control
System at Ojo Local Government Council is effective?
ii.
Do any relationship exists between
Internal Control System and Employee Satisfaction at Ojo Local Government
Council?
iii. What
are the major challenges Ojo Local Government Council faces in implementing
Internal Control System?
1.6 Statement
of Research Hypotheses
The
following hypotheses are tentatively formulated for the purpose of this
research and will be tested during the course of this study.
Hypothesis One
Ho: The
Internal control system of Ojo Local Government Council is
ineffective
Hi: The
Internal control system of Ojo Local Government Council is
effective.
Hypothesis Two
Ho: Relationship
does not exist between Internal Control System and Employee Satisfaction at Ojo
Local Government Council
Hi: Relationship
exists between Internal Control System and Employee Satisfaction at Ojo Local
Government Council
1.7 Significance
of the Study
This
research study is aimed at helping the public institutions to implement
effective Internal Control. This is to ensure that the government fulfils its
mission and achieves its goals while providing safeguard to government
resources.
Again,
it will help the management of Ojo Local Government to prepare and implement
effective and efficient plans by providing correct and reliable information in
decision making process. Thus, this study will help them to implement
management policies to attain corporate goals and objectives.
Finally,
to students and researchers, a copy of this study will be put at the
University’s library to serve as a source of information and reference. To
other readers, copies of this study will be published in the electronic media
for easy accessibility.
1.8 Definition
of Terms
Audit Committee: This
body is required to be set up by Companies and Allied Matter Act (CAMA) 1990 to
comprise a maximum of 3 directors and the other 3 shareholders.
Control Risk: This is the risk that the internal control
system of an organization will fail to prevent or discover material
mis-statements present in the financial statement.
Error: This
refers to unintentional mistakes in financial statements.
Fraud: This
refers to an intentional act by one or more individuals among management,
employees or third parties which results in a misrepresentation of financial
statement.
Internal Audit: A
review of the organization of a business which may be in many respects similar
to a statutory audit but which is carried out by employees of the business who
are responsible only to management.
Materiality: An
item will be considered to be material in the context of the financial
statement if its omission, misstatement or non-disclosure is significant enough
to affect the message passed by such financial statement.
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