Impact of Internal Control System On The Financial Management Of An Organization
(A Case Study Of The Nigeria Bottling Company Plc, Enugu)
The efficacy of an organization’s internal control system significantly influences its financial management practices, shaping its fiscal stability and risk mitigation strategies. A robust internal control framework ensures the adherence to regulatory requirements, promotes accountability, and safeguards assets against misappropriation or fraud, thus bolstering financial integrity. Through systematic processes such as segregation of duties, regular audits, and stringent monitoring mechanisms, internal controls enhance transparency and accuracy in financial reporting, fostering investor confidence and stakeholder trust. Moreover, by identifying operational inefficiencies or discrepancies promptly, these controls facilitate informed decision-making and enable timely corrective actions, optimizing resource allocation and operational performance. Ultimately, a well-designed internal control system serves as a linchpin in fostering prudent financial management practices, enhancing organizational resilience, and fostering long-term sustainability.
Over the years, there have being a problem of incorrect and unreliable financial record which has lead to loss of organizational integrity. The research work aimed among others at determining the relationship between internal measures to proper accounting records. A survey research design was adopted for this research study and a sample size was selected using yaro yamane sampling technique as data used were obtained from both primary and secondary sources. Four research questions were formulated out of which three hypothesis were formulated using regression co-efficient analysis method at 5% level of significance and the z table was also used for comparison between calculated value of significance b and tab le value. The finding from the analysis indicates that internal control measure management performance and is necessary for the growth and effectiveness of the organization. Financial management of any organization cannot do without internal control as true and fair presentation of financial statement may never be possible if the board and senior management are not committed to providing a well planned internal control system. It also recommends that a periodical review of the organization should be done by the management so as to cope with the model trends in organizational fraud prevention.
Cover page
Title Page i
Dedication ii
Acknowledgement iii
Approval Page iv
Abstract v
Table of contents vi
CHAPTER ONE
INTRODUCTION
1.1 Background of the study 1
1.2 Statement of problem 3
1.3 Objective of the study 4
1.4 Research Questions 5
1.5 Statement of hypothesis 5
1.6 Significance of the study 7
1.7 Scope of the study 7
1.8 Limitation of the study 8
1.9 Definition of terms 8
1.10 References 10
CHAPTER TWO:
LITERATURE REVIEW
2.1 Introduction 11
2.2 Internal control 11
2.3 Role and Purpose of internal control 13
2.4 Types of Internal control 15
2.5Function of internal control 19
2.6 Internal control in financial institution 20
2.7 Element of a good internal control system 24
2.8 Relationships between internal auditing and internal control system. 27
2.9 Management and internal control system 28
2.10 Defect and shortcoming of internal control 29
2.11 Possible solution to defects internal control system 31
2.12 Limitation of internal control 32
CHAPTER THREE 34
3.0 Research methodology
3.1 introduction 34
3.2 Research design 34
3.3 Sources of data 34
3.4 Area of study 35
3.5 population of the study 35
3.6 sample size and sampling technique 35
3.7 Research instrument 36
3.8 Validation and Reliability of instrument 37
3.9 Method of data analysis 37
CHAPTER FOUR
4.0 Data Presentation and analysis 40
4.1 introduction 40
4.2 Data Presentation 40
4.3 Test of hypothesis 45
CHAPTER FIVE
Summary, Conclusion and Recommendation 54
5.1 Summary of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
Bibliography 57
Appendix 59
Questionnaire 60
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Every organization both profit or non-profit organization has its
objectives and goals in mind to achieve. For the non-profit making
organization, their goal is to satisfy the social need of the citizens
and in the effort to achieve these purposes supervision more often
than not play a vital role.
The size and scope of these organizations have sometimes
made it hard for the executors to exercise personal and first hand
supervision of operation. It is in this light that internal control
established by management is initiated. For an organization to
carryout its business there must be some factors put in place for
the smooth running of the organization like materials, machines,
money etc.
These need to be well co-ordinated in order for the success of
the organization to be achieved. These factors are used by a group
of persons known as management. Neither can management exists
without an organization both are inseparable. The system of
internal control provides assurance to management of the
dependability of the accounting data used in the decision making of
the organization
It has been discovered that due to lack of internal control
several banks have been discovered to have defrauded its
customers mostly foreign investors, Having discovered this, banks
now take extra precaution before clearing a cheque because of
rampant incidence of fraud and forgeries which have placed bank.
Loss on average of N1m each working day of the year in Nigeria.
Due to this challenges, CBN issued a directive to banks to increase
its capital base to N25 billion.
Management use internal control as a tool to check it staff due
to the fact that managers are not able to monitor the activities of
the organization. It therefore adopts the internal control in such a
way that the system checks itself and any irregularity within the
system is been detected and corrected.
To ensure that the system checks itself, management could
use devices such as segregations, supervision of work and
acknowledgement of performance. The effective arrangement and
implementation of this control system would ensure proper
management.
1.2 STATEMENT OF PROBLEM
We might not really understand the impact of internal control
system in an organization until probably we run an organization
void of internal control system.
The absence of adequate internal control measures exposes the
financial management of an organization to certain threats such as:
– Incorrect financial statement and /loss of the
companys’assets.
– Stealing and mis-management of organizational vital
documents which may be done by an employee to take undue
advantage.
– Incorrect and unreliable financial records which may lead to
loss of organizational integrity.
– Non implementation of accounting policies in consistent
with the applicable legislation appropriate in presentation of
financial statement.
1.3 OBJECTIVE OF THE STUDY
The overall purpose of this research work is to evaluate and
determine the impart of internal measures in an organizational
financial management.
A well defined organizational structure helps management to
run the business in an orderly manner. This enhance operational
and efficiency, which is the important features of internal control.
Specifically, this research work stands to achieve the following
objective.
1. To determine the impact of internal control to proper use of
organizations funds and assets.
2. To ascertain whether perpetration of fraud and losses of
Revenue in an organization are as a result of weakness in internal
control system.
3. To ensure whether a true reflection of organizational activities
are presented in financial statement where there is an active
observation of internal control measures.
4. To determine the relationship between internal control
measures and proper keeping of accounting records.
1.4 RESEARCH QUESTION
The following research questions will be used to form the research
hypothesis and they are:
1. To what extent does the internal control measures impacts on
appropriation of organizational assets and funds.
2. To what extent does perpetration of fraud and losses of
Revenue in an organization are as a result of weakness in the
internal control system
3. To what extent does internal control enhance a true reflection
of organization activities as presented in the financial statement
4. To what extent does a relationship exists between internal
control and proper keeping of accounting records
1.5 STATEMENT OF HYPOTHESIS
This research is undertaken on the basis of the following
hypothesis.
HYPOTHESIS ONE (1)
Ho: internal control measure does not ensure proper use of
organizations funds and assets.
Hi: Internal control measure ensures proper use of organization
funds and assets.
HYPOTHESIS TWO (2)
Ho: Fraud perpetration and losses of revenue in an organization are
not as a result of weakness in the internal control system.
Hi: Fraud perpetration and losses of Revenue in an organization are
as a result of weakness in the internal control system.
HYPOTHESIS THREE (3)
Ho: internal control does not ensure, a true reflection of an
organizational activities as presented in financial statement
Hi: Internal control ensures a true reflection of an organizational
activities as presented in financial statement.
1.6 SIGNIFICANCE OF THE STUDY
There is no controversy that this research works have been
conducted on internal control system, however much emphasis has
been placed on the impact of a good internal control system on
financial management of organizations.
This research work will go a long way in helping an
organization discover the impact of weakness in internal control
and suggest measures in correcting them. It will also reveal the
problems caused by bad internal control system and be useful to
students, scholars, lecturers and other third parties as it shall open
new area of further research work and at same time advance
challenges to up-coming researchers.
1.7 SCOPE OF STUDY
The impact of a good internal control aids management
effectiveness in its organization. This research will specifically
Focus attention on the activities of organizations in Nigeria and due
to the logical point that not every organization can be studied, this
research is therefore limited to the Nigeria Bottling Company. The
focus of this research is to show the impact of a good internal
control system in the performance of organization Financial
management.
1.8 LIMITATION OF THE STUDY
The major constraints in this study include the conservating nature
of organization and their apathy towards providing information,
especially with respect to their internal operation policies
Human errors and biasness are other limiting factor of this
study. This is because some data’s were obtained through
discussions and interviews therefore there is the possibility of
human error of omitting some vital information. Respondent may
also exaggerate important information in order to give their
organization a positive credit for fear of what seem an invasion into
the organization’s privacy. Time and finance is also a limiting factor.
1.9 DEFINITION OF TERMS
The following terms have been used in the course of this research
work and as such need to be explained. They were as stated below:
INTERNAL CONTROL
It has been defined by the Auditing planning committee (APC) IN Uk
as “the whole system of control financial and otherwise established
by management in order to carry out the business of the enterprise
in an orderly and efficient manner to safeguard the assets and
secure as far as possible, the competence and accuracy of records,
the prevention and detection of errors and fraud in accordance with
the final preparation of financial statement.”
CONTROL
Is an exercise performed in the present to achieve a plan drawn up
for the future.
MANAGEMENT
It is defined as the process of planning, organizing co-ordinating
and controlling the activities of an organization. It is seen as a
group of people who monitor and control the organization activities
towards the achievement of the organization objectives.
AUDIT
This comes from a Latin word “AUDIRE”meaning to hear in other
words it means official examination of account and records.
Impact of Internal Control System On The Financial Management Of An Organization:
An internal control system plays a crucial role in the financial management of an organization. It encompasses the policies, procedures, and practices implemented to safeguard an organization’s assets, ensure the accuracy of financial reporting, and promote compliance with laws and regulations. The impact of an effective internal control system on financial management can be significant:
- Asset Protection: Internal controls help safeguard an organization’s assets, including cash, inventory, equipment, and intellectual property. Proper controls reduce the risk of theft, fraud, and misappropriation, which can directly impact the organization’s financial stability.
- Accuracy of Financial Statements: Internal controls are designed to ensure the accuracy and reliability of financial reporting. This is critical for making informed decisions, attracting investors, and meeting regulatory requirements. A well-implemented system reduces the chances of errors and misstatements in financial statements.
- Fraud Prevention: Internal controls are essential in preventing and detecting fraudulent activities within an organization. They establish checks and balances that make it more difficult for individuals to engage in fraudulent behavior, protecting the organization’s finances and reputation.
- Operational Efficiency: Internal controls can streamline financial processes, reducing inefficiencies and unnecessary costs. This efficiency can positively impact the organization’s profitability and financial health.
- Compliance with Laws and Regulations: Many industries and jurisdictions have specific financial regulations that organizations must adhere to. Internal controls help ensure compliance with these regulations, reducing the risk of fines, penalties, and legal issues.
- Risk Management: Internal controls help identify and mitigate risks related to financial activities. By having a system in place to assess and manage risks, an organization can better protect its financial assets and long-term sustainability.
- Decision-Making: Reliable financial information generated through an effective internal control system provides management with the data needed to make informed decisions. This can include investment decisions, cost-cutting measures, and growth strategies.
- Investor and Stakeholder Confidence: When an organization demonstrates strong internal controls and accurate financial reporting, it builds confidence among investors, creditors, and other stakeholders. This can lead to easier access to capital and improved relationships with stakeholders.
- Prevention of Errors: Internal controls are designed to catch errors before they become significant problems. This helps in preventing costly mistakes that can impact an organization’s financial position.
- Efficient Audits: An effective internal control system can streamline the external audit process. When an organization has well-documented processes and controls in place, it’s easier for auditors to perform their work, potentially reducing audit fees and disruptions to normal business operations.
In summary, an internal control system is essential for maintaining financial integrity, protecting assets, ensuring compliance, and supporting informed decision-making in an organization. Its impact extends beyond just financial management, influencing an organization’s overall performance and reputation in the marketplace.