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THE ASSESSMENT OF INTERNAL CONTROL SYSTEM AS A TOOL FOR FRAUD PREVENTION IN PRIVATE ORGANIZATION
ABSTRACT
Internal control system is a topical issue following global fraudulent financial reporting and accounting scandals in both developed and developing countries. A proactive approach to the problem requires a critical evaluation of the impact made by the existing internal control structures in organization to determine their capacity to ensure that the organizations activities are carried out in accordance with established goals, policies and procedures. It is to this end that this research is carried out on the assessment of internal control system as a tool for fraud prevention in private organization with special focus on Transcop Hilton Abuja. The assessment process is that some control components of effective internal control systems are lacking which from this research it is gathered that some office of audit is not totally free. This renders the current control structures ineffective. The study recommends that the office of the auditors must be independent as well as other recommendations to improve the existing internal control systems in the research and suggests areas for further recommendation and research. Method of data collection is questionnaire method and the analysis techniques is Chi-square.
TABLE OF CONTENT
I. Title page i
II. Declaration ii
III. Approval page iii
IV. Dedication iv
V. Acknowledgement v
VI. Abstract vi
VII. Table of content vii
CHAPTER ONE
INTRODUCTION
1.1. Background of this study 1
1.2. Statement of the study 3
1.3. Objective of the study 4
1.4. Research questions 4
1.5. Statement of hypothesis 4
1.6. Significance of the study 5
1.7. Scope of the study 5
1.8. Definition of term 5
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction 8
2.2 Meaning/concept of internal control 9
2.3 Essential features of internal control 17
2.4 Element of internal control 19
2.5 Internal control system for fraud preventions 19
2.6 Type of internal control in hotel 22
2.7 Cases of fraud discovered in organization 25
2.8 Summary of the chapter 28
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
3.1 Introduction 29
3.2 Data collection 29
3.3 Population and sampling size 31
3.4 Source and methods of data collection 31
3.5 Techniques of data analysis 32
3.6 Justification of data analysis techniques 32
3.7 Summary of the chapter 33
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction 34
4.2 Data presentation 35
4.3 Test of hypothesis 42
4.4 Discussions of finding 43
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION 44
5.1 Summary 44
5.2 Limitation of study 44
5.3 Conclusion 45
5.4 Recommendation 45
Bibliography 46
Questionnaire 47
Proposal 48
CHAPTER ONE
1.0. INTODUCTION
1.1. BACKGROUD OF THE STUDY
In our society today, internal control system seems to be the only solution remedy to fraud that has been traced to economic, social and political reason for the purpose of this project the research work will center on organization e.g. private organization because a very strong internal control system is the only solution that can be used to prevent fraud on resources invested by owners of the business concern primarily for profit making and economic development.
The auditing practice committee defined internal control system as the whole system of control. Financial or otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, sure adherence to management policies, safe. Guard the assets and secure as far as possible the completeness and accuracy of the record.
International standards and auditing (IAS 400) defines internal control system as all the policies and procedures (internal control) adopted by the management of an entity to assist in achieving managements objective of ensuring as far as practicable the orderly and efficient conduct of its business including adherence to management policies, the safeguarding of assets, the detection and prevention of fraud and error, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.
Fraud as we know today has eaten deep into both the public and private organizations. It is irregularity that may be difficult to completely eradicate but with very strong internal control system. It can be prevented or drastically reduced to the barest minimum.
This project place particular emphasis in determining the level of risks that the internal control might not be property applied. The following factors can be considered
a. The nature of the control itself.
b. The attitude of management of control.
c. Whether there has been change in staff as control procedures may become wean and become slack as soon as there is a change of staff.
d. The doors the control has succeeded in identifying and eliminating in the past.
e. The timing and frequency of the control check.
This project owing to the preventing cases of fraud will look into the internal control aspect of the management as a tools of the private organization taking Transcorp Hilton Hotel as a case study more so it will be based mainly in the accounts department the receiving sections stores. This research will look into the level of internal control system prevalent in the department compliance with companies and Allied Matters Decree 1990 (CAMA).
Basically certain facture depict low virile and strong system of internal control system in operating in an organization. This features attributable to achieving the effectiveness of internal control measures.
One of the characteristics of internal control is the involvement of honest trust worthy, reliable and dedicated personnel or employee. It is imperative thus to consider the impact of personnel and executive on the effectiveness of the internal control system.
1.2. STATEMET OF THE PROBLEM
The prevalence fraudulent practices in the Transcorp Hotel have the public confidence in the system. This has lead to the collapse of some areas of the hotel
1.3. OBJECTIVE OF THE STUDY
The following objective are drawn for the study
i. To identify ways of positive improvement.
ii. To determine effective ways of managing the fraud.
iii. To ascertain the actual causes of fraud.
iv. To make recommendation base on finding.
1.4. RESEARCH QUESTONS
In view of the problems of the study following research questions are drawn a. Are internal control measures put in place not effective?
b. Is fraud in organization as a result of lack of motivation?
c. Are there been cases of fraud in organization?
d. Is there result of fraud in organization?
e. Is there result of fraud corrupt officers in organizations?
1.5. STATEMENT OF HYPOTHESIS
HI:lack of internal control system leads to fraud in an organization.
HO:lack of sound internal control system does not lead to fraud in an organization.
HI:a sound internal control system will help in prevention of fraud in Transcorp Hilton hotel.
HO:a sound internal control system will not help in prevention of fraud in Transcorp Hilton on hotel.
1.6. SIGNIFICANT OF THE STUDY
The study will be of importance to government even the public at large in checkmating the activities of fraudsters. It will equally be of importance in exploring ways of maintaining accurate internal control system in the hotel industries.
A study of this nature will enable students and researcher in different field of academic endeavors to know the actual causes of fraud particularly the society who may wish to study on the same topic.
1.7. SCOPE OF THE STUDY
This work is restricted to the importance of internal control and fraud detection and prevention which will cover the spanning period from (1990-2013).
1.8. DEFINATION OF TERM
Fraud can be defined as the use of criminal deception to obtain unjust or illegal financial advantage. It is an intentional mistake that is associated with the falsification embezzlement, misappropriation and outright theft.
Internal control system: Can be defined as the procedure adopted by business to control its operation
Internal audit:Is described as a review of operation and records, sometimes continue undertaken with a business by special assigned staff where there is internal audit.
Audit report: This is a statement from the auditor accounting his views in respect of the financial statement, if it complies with the company act that these show a true and fair view.
Audit: This simply means, examination, evaluation of the accuracy and reliability of a firm’s accounting documents and records by a qualified accountant (Auditor) in order to form a opinion whether the account and the information presented before him shows a true and fair view of the period under review.
Internal audit report: It is very important that after much times and effort have been consumed ad variety of skills had been used in carrying out internal audit, there should be no audit, there should be no ambiguity about the measuring and implications of the facts and figure involved in the exercise.
After the internal audit has been completed all the findings from the work prepare then accumulated into summary format the nature of the audit and the magnitude of its findings dictate the type of audit report that should be given to the chairman of the organization.
ECONOMIC AND FINANICAL CRIMES COMMISSION (EFCC)
Is a body corporate by the federal government to take measures against lapses of ineffectiveness, management forgery, falsification of documents financial misappropriation, frauds and general criminal activities .
Fairness: A convention of fairness is an extension of objectivity. It means that there are different users of accounting information with different needs. Therefore accounting report should be prepared not to favor any particular group or users.
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 INTRODUCTION
Fraud is a major crime being perpetrated in our private organization today indeed hotel fraud is an international phenomenon which has become pervasive as the fraudsters become more sophisticated and during in their approach. This nefarious activity could lead and had actually led to crisis and collapsed of many private organization worldwide.
The demise of the Bank of Credit and Commerce International (B.C.C.I) is an example. The bank was in England and in other countries B.C.C.I Nigeria was also an affricate of the bank. They deal mostly with some drug baron when this was late discovered, customers to the bank all decided to withdraw their money. As at the time the bank has granted substantial amount as loans to those drug barons without comparable collateral this further puts the bank in a very difficult position and couple with the fact that there was not proper record to attest to the dealing with the drug barons.
2.2 CONCEPT OF INTERNAL CONTROL
Reynolds Isaac N. etal (1984) define internal control as “the plan of organization procedure and equipment used in a business to protect its asset from improper used and to promote efficiency in operation.
Smith Jack L. etal (1986) in their book “Accounting principal” say that “one of the very first thing we need to realize about any internal control system is that no matter how tightly it is designed cannot be made a hundred percent (100%) full proof. But an internal control system can also be so designed that no person is able to perpetrate fraud” internal control completely detect and prevent fraud, it can however make the perpetration of fraud very difficult.
Shicle Charlere P. etal (1987) defined internal control as “a plan of organization with method and measure adopted within a business to do the following.
i. Safeguard the assist of the business
ii. Check the accuracy and reliability of accounting data
iii. Encourage employment to adhere procedure set up by their employers
Helm Kamp John G. etal (1986) define internal control system as the processes adopted by a business to control its operations and the system consist of all measures used by a business to safeguard it resources against waste fraud and in efficiency to promote the reliability of accounting information and to encourage compliance with company policies and government regulations.
Emile Woolf in his book auditing today (1980) define internal control as “the whole system of control financial and otherwise, established by management in order to carry on business of the enterprise in an orderly and efficient manner ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.
Walgenbach Paul H. etal (1980) defined internal control as the plan of an organization and all of the co-ordinate methods and measure. Adopted within business to safeguard it, check the accuracy and reliability of its accounting data promotion operation of efficiency and encourage adherence to prescribed management policies.
Meighs Robert F. and Meighs Walter (1977) in their book financial accounting 5thedition said internal control included all measure taken by an organization for the purpose of :
i. Promoting its resource against waste fraud and efficiency
ii. Ensuring accuracy and reliability in accounting and operation data.
iii. Securing compliance with company policies and
iv. Evaluation of the level of performance
Cook etal (1979) A cardinal principle of internal control is that there should be a plan of organization to establish functions and adequate segregation of generation responsibility. Accounting work should be segregated and the system should allow automatics check on employees work. Here the organizational structure should make possible the segregation of duties.
Johnson and Jaemicke (1980) wrote that neither an internal control system nor a review of that system can achieve ultimate perfection. The carelessness in the part of an employee may affect effectiveness of the systems. Where personnel do not and are not up to demand of their duties or away, important documents are been thrown away, loss or misplace due to the employee negligent.
Sarbanes-Oxley act (2002) define internal control as a process affected by an organization’s structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objective. It is a means by which as organization re directed monitored and measured it play is an important role in detecting and preventing fraud and protecting the organizations resources physical and intangible.
Okolo J.U.T (2001) defines internal control system as the whole system of control, financial or otherwise established by the management in order to carry on the business of the enterprise.
Ikharo C. O (principles and practices of auditing define internal control in line with international standards on auditing (ISA 400) as all the policies and procedures (internal control) adopted by the management of an entity to assist in achieving management objective of ensuring, as far as practicable the orderly and efficient conduct of its business including adherence to the management policies, the safeguarding of assets the detection and the accuracy and completeness of the accounting records and the timely preparation of reliable financial information.
The institute of chartered accountant of England and Wales in its statement on auditing no 4 (internal control) suggested financial functions under which supervision and control by the use of interim account budgetary control and special reports.
International audit guideline No 6 define internal control as the plan on organization and all methods and procedure adopted by the management objectives of ensuring as for as practicable the orderly and efficient conducts of its organization including adherence to managerial policies the safeguarding of assets the detection and prevention of fraud and errors the accuracy and completeness of accounting records and financial information.
Woolf (1978) defines internal control as a process affected by an organization structure, work authority flow people and management information system design to help the organization accomplished its goals and objectives.
Walter W.B (1972) in his book “internal control is a system of record keeping maintained by an organization with methods adequate to ensure that all transactions are correctly reordered, allocated and summarized and that accounting statements prepared from the recorded and correct in accounting principles of internal control which are.
a. Clerical organization
i. The separation of the function of record keeping from physical control of assets and
ii. The breakdown of the clerical function in manner ensures that the work of one clerk is regularly review by another and that no clerk performs the whole of the clerical steps involved in a transaction e.g. the ledger clerk is not permitted to write up day book or petty cash.
b. Comparison of record with evidence originations outside clerical system.
i. Physical clerks, consist of checking of the records against physical quantities
ii. Comparison of records with document originating outside the organization
c. Clerical control entails providing the data entering the system, whenever any transaction gives rise to two or more documents reconciliation may be attempted.
While assessing the system of internal control which includes the internal checks, he said it usually present little difficult in the case of small or even medium size business. Since by making judicious enquires and using the power of observation skill and experience required. The auditors will be able in a relatively short period of time to appreciate the system in operation and to assess its efficiency in practice. However in the case of large business concern ensuring into the system of internal control must of necessary take on a new dimension and a haphazard form of enqury will be both wasteful of time and ineffective. According to matter in order to assist in acquiring an appreciation of the system of accounting and internal control in operation, many auditing firms have in recent years adopted certain aids the most common of which is the “internal control questionnaire (ICQ). The striking thing about all these authors in their definition of internal control is the fact that their views of internal control is alike and it is all embracing, that is effective internal control is concerned with the control operation in every area of co-operation actively as well as with the way in which individual control interrelated the management of an organization know their capability so they are mainly the people that decided on intent of the internal control system for the enterprises. As a matters of fact the operation of records and the installation may be collected is an entirely the management responsibility.
The system employed in a business will carry to the nature and size of the organization. Also of note is the aspect of internal control that is exclusively concern with the detection of frauds and errors and early prevention, this is usually referred to as the ‘’internal check’’. Internal check involves the arrangement of book keeping and other clerical duties in such a way as to ensure:
i. That no single task is executed for in its beginning to its conclusion by only one person.
ii. That the work of each clerk engaged upon a task is subject to an independent clerk in the cause of another duty.
From what has been said so far, it will by now be clear that the strengths and weakness of internal control system will determine the volume of audit work necessary in relation to each area of operation. The interplay between will cause, be evaluated by reference to:
a. The existences of related compensating controls which minimize if not eliminate, the effect if identified weakness.
Above all, it can be deducted from the contribution of all the authors that no internal control system no matter how collaborate can guarantee efficient administration and the completeness and accuracy of the record or can it be proof against fraudulent collusion especially on the part of those holding position of authority or trust.
The emphasis was based on segregation of duties can be avoided by collusion. Authorization control can be abused by the person whom the authority is vested. Management according to the above assertion is frequently in a position to override controls which it has itself established, thus many factors may limit the effectiveness. Lack of integrity, fatigue, human error and attention of system for their consider improvement. it is a fact that staff training and efficient supervision may help reduce the aforementioned odd, complete importance on an system is no practical and it is at this point that the auditors decided on how far to rely on the internal control system in his investigation.
2.3 ESSENTIAL FEATURES OF INTERNAL CONTROL
An effective control, which can be regarded as that routing procedures that is concerned with the reviewing of an organization policies designed to ensure that the activities of the workers conforms with the policies predetermined by the management, it associated with some feature:
a. The nature and size of the business concern.
b. The number of administrative staff available.
c. The materiality of transaction concerned
d. The importance place upon internal control by the organization own management
2.3.1 Administrative control
They are use to maintain an effective operation and ensure adherence to prescribed company policies, an example of administrative controls is a written statement describing the employment standard to be followed by a firms personnel department in hiring new employees. Other examples of administrative controls are manuals specifying the purchasing and sales procedures to be followed and various performance reports that may be required from employees. It also deals with operational efficiency and management policies.
2.3.2 Accounting control
These are method used to protect assets and ensure that accounting information is reliable. They include procedures used to authorize various business transactions and to separate record keeping duties, from the custody of a firm’s assets. Accounting control is designed to provide reasonable assurance that:
i. Transaction are executed in accordance with management general or specific authorization
ii. Transaction is recorded as necessary to:
a. permit preparation of financial statements in conforming with general accepted accounting principle (GAAP) and
b. Maintain accounting for asset.
iii. Access to assists is permitted only in accordance with management.
iv. The recorded accountability for assets at reasonable internal and appropriate within is taken with respect to any discrepancies.
2.4 ELEMENT OF INTERNAL CONTROL
According to Helm Kamp John G etal certain element are involve in any internal control systems; these elements aid the practice or application of control to facilitate the smooth and efficient running of an organization.
2.5 INTERNAL CONTROL SYSTEM FOR FRAUD PREVENTION
The management has the responsibility under the companies and allied matter decree or act (CAMD or CAMA) of 1990 as the case may be to keep adequate account records. Internal control covers all the methods procedures and organizational arrangement adopted within the organization to ensure as far as possible the safeguarding of assess, the completeness accuracy and reliability of accounting records and the promotion of operation efficiency and adherent to management policies.
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