THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN AN ORGANIZATION

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THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN AN ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Internal controls are the responsibility of all employees of the department; generally, an employee’s position will determine the extent of their involvement. Internal control is people dependent; it is developed by people, it guides people, it provides people with a means of accountability and people carry it out. While everyone in a department has responsibility for ensuring the system of internal control is effective, the greatest amount of responsibility rests with the managers of the department. That is because internal control systems are the structure, policies, and procedures used to ensure that management accomplishes its objectives and meets its responsibilities.

According to Oxford Learners Dictionary, Organization can be said to be a group of people who form a business, club etc. together in order to achieve a particular aim. It can also mean two or more people getting together for a purpose. In getting together, they decide to interact with one another to achieve the objectives of the organization (Unamka & Ewurum, 1995:1) When we discuss organization, we have various classes among which are service organization and social organization etc. All these organizations have in mind the aim of continuing if not for eternity, a given period of time. (Unamka & Ewurum, 1995 1, 2, 3)

For an organization to carry on its business there must be some factors put in place for the smooth running of the organization management, man-power, materials, money and machines. These need to be well coordinated in order for the success of the organization to be achieved. They are used by a group of persons known as management; neither can management exist without organization- the two are inseparable twin. (Unamka &Ewurum, 1995:65). Good management weaves together the various parts of organization so that all factors function as a united body. Management refers to the group of executives or officials of a company who directs efforts towards common objectives by using available resources (Unamka & Ewurum, 1995:66) management can also be said to be a process of planning, organization to have an intergrated system that will aid the achievement of organization objectives (Musselman & Hughes, 1981)

Effective management leads to purposeful, well coordinated, goal oriented and goal directed activities. As earlier social organizations have in mind “CONTINUITY” and “SURVIVAL” as they are being run for an organization to survive and continue existing without going organizationrupt, or said to be illiquid, i.e. being its inability to meet up with its responsibilities as and when due, it must ensure the safty of its assets, cash and also the accuracy and reliability of its records, it should ensure that it institutes a system of control, strong enough to ensure such. This system is what is known as INTERNAL CONTROL SYSTEM.

According to WIKIPEDIA, the free encyclopedia, in accounting and organization theory, INTERNAL CONTROL is defined as a process effected by an organization’s people and information technology (I.T) system, designed to help the organization accomplish specific goals or objectives. It is a means by which an organization’s resources are directed, monitored and measured. It plays an important role in preventing and detecting fraud and protecting the organization’s resources both physical (e.g. machinery and property) and intangible (e.g. Reputation and intellectual property such as trade marks) the organizational level, internal co9ntrol objectives relate to the reliability of financial reporting; timely feedback on the achievements of operational or strategic goals and compliance with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g. how to ensure the organization payments to third parties are for valid services rendered)

There are also a variety of definitions of internal control as it affects a variety of constituencies (stakeholders) of an organization in various ways. Under the committee of sponsoring organization (COSO) internal control- integrated framework, a widely-used frame work in the United States, internal control is broadly defined as a process effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Effectiveness and Efficiency of operations; Reliability of financial reporting; and compliance with laws and regulations.

According to Millichamp (2002:85), internal control system is defined as the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence and management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. Internal controls are to be an integral part of an organization’s financial business policies and procedures. Internal control consists of all the measures taken by the organization for the purpose of protecting its resources against waste, fraud and inefficiency, ensuring accuracy and reliability in accounting and operating data, securing compliance with the policies of the organization and evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices.

Internal control according to Osita(2002:106) is the whole system of controls, financial or otherwise, established by management in order to secure as far as possible, the accuracy and reliability of the records, run the business in an orderly manner and safeguard the company’s assets, its objectives being the prevention or early detection of fraud and errors. It may include internal auditing. Everyone within the organization has some roles in internal controls. The roles vary depending upon the level of responsibility and the nature of involvement by the individual. The Kansas Board of regents, president and senior executives established the presence of integrity, ethics, competence and a positive control environment. The director and department heads have oversight responsibility for internal controls within their units. Managers and supervisory personnel are responsible for executing control policies and procedures at the detail level within their specific unit. Each individual within a unit is to be cognizant of proper internal control procedures associated with their job responsibilities.

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