THE EFFECT OF INTERNAL CONTROL ON ORGANIZATION PERFORMANCE OF LOCAL GOVERNMENT (A STUDY OF OJO LOCAL GOVERNMENT)

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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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