Internal Control Mechanism And Its Effect On Organisation Performance Among Selected Production Industries

The Internal Control Mechanism And Its Effect On Organisation Performance Among Selected Production Industries Complete Project Material (PDF/DOC)

Abstract

This study was carried out to examine internal control mechanism and its effect on organization performance among selected production industries in FCT, Abuja. The study specifically was set to determine the extent internal control mechanisms are implemented in production industries in FCT Abuja, determine whether there is a significant relationship between internal control mechanisms and organizational performance, find out the impact of internal control mechanisms on organizational performance of production industries in FCT Abuja, and identify the problems affecting the effectiveness of internal control mechanisms in production industries in FCT Abuja. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprise of managerial staff of selected production industries in FCT, Abuja. In determining the sample size, the researcher conveniently selected 57 respondents and 50 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables, and mean scores. While the hypotheses were tested using Pearson correlation statistical tool, SPSS v23. The result of the findings reveals that there is a significant relationship between internal control mechanisms and organizational performance. The study also revealed that internal control mechanisms has a positive impact on organizational performance of production industries in FCT Abuja as it ensures compliance with industry standards, it enhances operational efficiency, it safeguards organizational assets, and it prevents fraud and misappropriation of resources. Therefore, it is recommended that management should always practice proper recording of transactions and each and every other transaction should always be recorded and kept for references. To mention but a few.

Chapter One

Introduction

1.1 Background of the Study

The survival of any organization depends on the effective and efficient utilization of resources (financial and non-financial) at the disposal of the organization. Hence, to optimize the utilization of resources entrusted to all employees in an organization, various form of control are put in place by management of the organization, among these major controls are internal control and internal audit to mention a few. Internal controls are policies, procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and corrected based on either compliance or management initiated concerns (Awe, 2005). Internal controls enable management to deal with rapidly changing economic and competitive environment, shifting customer demands and priorities and restructuring for future growth. Internal controls promote efficiency, reduce risks of assets loss and help to ensure the reliability of financial statements and compliance with laws and regulations (Coco, 2005). The Institute of Chartered Accountants of England and Wales (ICAEW), defined internal control as the whole system of controls, financial or otherwise, established by management in order to carry on the business of an enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets and secure as far as possible, the completeness and accuracy of the records. They are tools used by management every day for the smooth running of their organization or businesses. Internal controls also refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions.

Because internal controls serve many component purposes, there are increasing calls for better internal control systems; internal control is looked upon more and more as a solution to a variety of potential problems (Coco, 2005). According to Chambers (2000), Cosserate (2009), Ridley and Chambers (2000), internal controls are systems comprising of the control environment and control procedures. They further stated that internal control systems include all the policies and procedures adopted by the management and directors of an entity to assist in achieving their objective of efficient conduct of its business, including their adherence to internal policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completion of the accounting records and timely preparation of reliable financial information. Successful organizations ensure that they attain and consolidate continued survival in a competitive environment, (Drucker, 2003). Thus successful organizations set performance measures that focus attention that identifies and communicates the success, support organization learning and provide a basis for assessment and reward (Brown, 2001).

Organizational performance is measured in terms of customer satisfaction, through reduced customer complaints (Kloot, 1999). In order to be able to perform, organizations should critically look at customers and all stake holders in business and know how best they are satisfying their needs. Kloot (1999), adds that organizations should continuously improve their services through assets accumulation, create value, improve quality services and flexibility, internal control system is intervened with organization’s operating activities and it is most effective when controls are built into the organization’s infrastructure becoming part of the very essence of the organization’s success in terms of continued improvement on performance standards as part of the competitive advantage of the organization.

1.2 Statement of the Problem

Organizations are confronted with several challenges in their core operations. This hampers their performance levels. During the last few years, the global economy has undergone some corporate scandals, liquidation and financial failures arose due to unnecessary risk taking and imprudence by some businesses connected with a number of flaws in the internal control system of these companies. The progressions of business failures and corporate scandals have been identified by KPMG to be as a result of weak internal control system in organizations (KPMG 2004 as cited in Shah et al 2015). These problems can be linked to poor portfolio management, lack of attention to changes in the economy that can lead to weakening in the credit ratings of the organization. However, the main causes of serious problems in manufacturing companies continues to be ineffective internal control system for core procedures. The ineffectiveness of several organizations’ control frameworks have been emphasized because of the huge financial scandals in recent years and accordingly increased attention on risk management, internal controls and internal audit (Adu-Frimpong 2015).

Supplementary studies suggest that, the internal control will impact the organizational performance by setting objectives; management can then identify risks to the accomplishment of those objectives. To address these risks, the management of an organization may instigate specific internal control. The implementation of effective internal control system in organizations is critical to identify whether the business can accomplish its objectives and to guarantee the reliability of financial reporting. It is noteworthy that the entire audit process is generally dependent upon the existence of an effective system of internal control. Though internal control systems are implemented in firms, there are still cases of fraudulent acts and poor performance; therefore, the research intends to examine how the lack of an effective internal control system affects the performance of organizations.

1.3 Objective of the study

The main objective of the study is to evaluate internal control mechanism and its effect on organization performance among selected production industries in FCT, Abuja. The specific objectives of the study are to:

Determine the extent internal control mechanisms are implemented in production industries in FCT Abuja

Determine whether there is a significant relationship between internal control mechanisms and organizational performance.

Find out the impact of internal control mechanisms on organizational performance of production industries in FCT Abuja.

Identify the problems affecting the effectiveness of internal control mechanisms in production industries in FCT Abuja.

1.4 Research Question

The following research questions were raised;

What is the extent internal control mechanisms are implemented in production industries in FCT Abuja?

Is there a significant relationship between internal control mechanisms and organizational performance?

What are the impact of internal control mechanisms on organizational performance of production industries in FCT Abuja?

What are the problems affecting the effectiveness of internal control mechanisms in production industries in FCT Abuja?

1.5 Research Hypothesis

Ho: There is no significant relationship between internal control mechanisms and organizational performance.

Ha: There is a significant relationship between internal control mechanisms and organizational performance.

1.6 Significance of the Study

There is no controversy that research works have been conducted on internal controls system, however much emphasis has been placed on the need of an efficient internal control system in organizations. This research work will go a long way in helping an organization discover the impact of an effective internal control system. . It will assist to evaluate the contributions that internal control system can provide growth in performance of organizations. It will also reveal the problems instigated by bad internal control system and will be useful to students, scholars, lecturers and other third parties, as it shall open new area of further research work and challenges to up-coming researchers. The study would create awareness to organizations and shareholders as to the level of internal controls, which have been put in place and to use the recommendations proposed to improve the controls already implemented. It will help the shareholders appreciate the role of the internal control system as one of the most important managerial control systems in an organization required to safeguard their interests.

This study shall be of great benefits to the management of organizations in order to put in place a good internal control system for the effective running of their organization and this will eventually lead to high productivity in the organization and prevent risks within the organization.

This study will help production industries in formulating policies and procedures that will lead to high productivity and prevent risks within organization hence maximize profit. The study would help the government ensure quality of internal and external reporting and maintenance of proper records and processes that generate a flow of timely relevant and reliable information from within and outside the firm. Policy makers can use the result of the study to come up with the policies that will lead to improved control environment in the country.

Finally, the study will also serve as literature to future researchers and benefit researchers in looking beyond the scope of the present study and influencing the knowledge already acquired.

1.7 Scope of the Study

This study is focused on internal control mechanism and its effect on organization performance among selected production industries in FCT, Abuja. Hence, the study will be delimited to some selected production industries in FCT, Abuja which includes: The Bouch Manufacturing Company Ltd, and Comestar Manufacturing Company.

1.8 Limitations of the Study

As with any human endeavor, the researcher experienced small impediments while performing the study. Due to the scarcity of literature on the subject as a result of the discourse’s nature, the researcher incurred additional financial expenses and spent additional time sourcing for relevant materials, literature, or information, as well as during the data collection process, which is why the researcher chose a small sample size. Additionally, the researcher conducted this inquiry in conjunction with other scholarly pursuits. Additionally, because only a small number of respondents were chosen to complete the research instrument, the results cannot be applied to other secondary schools outside the state. Regardless of the limits faced throughout the investigation, all aspects were reduced to ensure the best outcomes and the most productive research.

1.9 Definition of Terms

Internal Control System:

International Accounting Standards (IAS) categorize the internal control system as an organizational plan, segregation of duties, document control, asset safeguard, personnel competency, arithmetic and accounting controls, recording and recordkeeping, oversight, authorization and approvals, appointment and rotation of responsibilities, feasibility of costs, routine and automation

Audit:

An audit is a systematic and independent review of an organization’s books, accounts, statutory records, documents and vouchers to determine the extent to which the financial statements and non-financial disclosures provide a true and fair view of the concern.

Internal Audit:

The Institute of Internal Auditors identified internal auditing as an autonomous assessment activity within an organization for the examination of accounting, economic and other activities as a basis for the protective and constructive service to management.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows.

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.

Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.

Chapter three deals on the research design and methodology adopted in the study.

Chapter four concentrate on the data collection and analysis and presentation of finding.

Chapter five gives summary, conclusion, and recommendations made of the study.

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