Effective Internal Control System as a Measure of Fraud Prevention in the Public Service. (A Case Study of Board of Internal Revenue Enugu State)
Chapter One
OBJECTIVES
To find out the impact of internal control system, on the overall management of Board of Internal Revenue Nigeria Enugu state.
To find out the employees knowledge base on the concept of fraud in the Public service.
To find out effective internal control systems influence on prevention and detection of fraud.
To find out the problem of fraud and how to curb it.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
A usual adage says prevention is better than cure; so also, people say that one should look before one leaps. These statements are more or less the equivalent of an internal control system. It is very important to state that the success of the operations of organizations worldwide is strictly guided and dependent among other things, on the existing quality of their internal control system. The basic purpose of internal control is providing a reasonable assurance that adequate internal controls and best practices are in place by which the objectives of the company/ organisation are achieved.In September 1998, following wide consultation, the Basel Committee published a document entitled ‘Framework for internal control systems in the Public service organisation’. The paper makes many familiar claims for the benefits of a strong internal control system:
Helping to meet goals and objectives;
Helping to achieve long-term profitability targets;
Maintaining reliable financial and management reporting;
Ensuring compliance with laws and regulations;
Ensuring compliance with policies, plans, internal rules, and procedures;
Decreasing the risk of unexpected losses or damage to reputation.
According to the Basel Committee, it is believed that organizations would be less likely to suffer significant losses if they have internal controls designed to prevent or detect the problems.
DEFINITION OF INTERNAL CONTROL
Millichamp and Taylor (2008) defined “internal control system- 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 to management policies, safeguarding the asset and secure as far as possible the completeness and accuracy of the records. The individual components of an internal control system are known as “control” or “internal control.”
Mary A Lannoye defined internal control as a process, affected by the director, management, and support staff of each State department, designed to provide reasonable assurance towards accomplishment of each principal department’s mission, objectives and goals.
The Committee of Sponsoring Organisation’s (COSO) defines internal control 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
Compliance with applicable laws and regulations.
It goes further to define it as “policies, procedures, practices, and organizational structures designed to provide reasonable assurance that business objectives will be achieved and that undesired events will be prevented or detected and corrected.
Messier Jr (2000), defined internal control as the process effected by an entity’s board of director’s, management and other personnel that is designed to provide reasonable assurance regarding the achievement of objectives in the following categories;
Effectiveness and efficiency of operations.
reliability of financial reporting
Compliance with applicable laws and regulations.
According to him internal control is a way of providing stewardship to meet the responsibilities of management.
Dictionary of Finance and Investment Terms defined internal control as method, procedure, or system designed to promote efficiency, assure the implementation of policy, and safeguard assets.
The Institute of Internal Auditors defines internal control as “all means designed to promote, govern and check upon various activities for the purpose of seeing that enterprise objectives are met”.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
Internal control system, the strength of every organisation, has become an integral part of organizations in Nigeria today. This is because; it promotes efficient accounting system leading to safe and sound organizational operations in achieving organizational goals. A system of effective internal controls is a critical component of organization management and a foundation for the safe and sound operation of Public service.
Financial institutions such as organizations have succeeded in addressing most of the challenges they face; but there is one canker, called fraud, that they are still battling with. Fraud is simply a deceitful and dishonest act, which involves taking a property unlawfully from its owner, without his or her knowledge, permission or consent, or to misstate a situation knowingly or by negligence.
This issue of fraud is a traditional occurrence in the society in which we find ourselves today. In the government as well as private sector, it seems to be the other of the day. In Nigeria organizations, fraud is slowly on the increase whereas in other African countries like Nigeria, its effects have been over whelming. In the Public service especially, fraud is causing more harm than good; hence, efforts must be taken to ensure that it is dealt with.
DESCRIPTION OF THE STUDY AREA
This research was carried out in Board of Internal Revenue. It is the only branch of the organization in the area serving a huge customer base.
RESEARCH DESIGN
POPULATION DEFINITION
Twumasi (2001) defines population as the group of elements that a researcher is interested in studying. A population he says has to be defined in terms of content, extent and time. The population for this study is defined as all employees of Board of Internal Revenue, Enugu state. This population amounts to twenty (20).
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
INTRODUCTION
This chapter presents an analysis of data collected from the field with the aid of the study’s questionnaires and interview. The result of the study had been presented according to the objectives of this research. Data collected were compared with the systems of internal controls prescribed by the management of the organization using related literature as basis of data analysis and discussion of the relevant findings.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
INTRODUCTION
This chapter focuses on the summary of the major conclusion based on the figures and findings derived and the recommendations provided for proper implementation of efficient and effective internal controls in the Public service organisation to help in the detection and prevention of fraud. It also offers recommendations based on the findings of the study.
SUMMARY OF FINDINGS
From the data analysis, discussion of findings and answers to the questionnaire in chapter four of the study, it was observed that the concept of internal control goes beyond financial and accounting matters and the custody of organisations assets but it includes controls designed to improve operational efficiency, prevention and detection of fraud and to ensure adherence to the organisation’s policies. It also includes good governance that is, management style of leadership, reward and motivational systems in the achievement of organisational goals. The researcher as at the beginning of this research, set objectives of which; was to be achieved as at the end of the project work. To achieve these set goals, questions were of which response where given.
The researcher’s first objective was to find out the impact of internal control system, on the overall management of Board of Internal Revenue in Nigeria. According to the analysis, it is evident that Board of Internal Revenue has internal controls because staff are aware of this system in place as well as the effect (negative; when it is not implemented in a organization and positive; when it is implemented in a organization) of an internal control system in the Public service. This was made evident in the responses given by the respondent as to why internal control system is needed in a organization and how effective the implemented internal control system is in the organization. At the end, based on the analysis made, the researcher found out that internal control system has an impact on the performance of management in organizations because an effective and adequately implemented internal control system will help the organization in areas of their operations such as: safeguarding of asset, financial statement preparation due to proper record keeping, performance of its operations, etc.
The researcher’s second objective was to find out the knowledge base of employees concerning the concept of fraud in organization. With respect to this objective, the researcher hoped to find out the employees knowledge on fraud. Questions were asked and responses were given. Hence according to the study, the respondents have knowledge as to what fraud is, of which a greater percentage termed it as an illegal act of acquiring wealth and they do know when fraud is said to occur. The researcher found out that a weak internal control system is a major cause of fraud although there are other causes such as human greed, availability of opportunity, societal expectation etc. It was also made evident that theft of cash is the most commonly committed fraud in organizations, and cashiers’ were seen as the most perpetrators of organization fraud. It was also shown that the most occurring nature of fraud is that which involves single management alone, senior or junior staff.
The researcher’s third objective was to assess effective internal control systems influence on prevention and detection of fraud. With this objective, the researcher hoped to find out if an effective internal control system can help a organization to prevent and detect fraud. The researcher found out that organizations do have policies and procedures that help them in performing their operations and these policies help the management of organizations in prevention and detection of fraud according to table 4.23. Also, based on the study, it was revealed that there is a relationship between internal control system and fraud prevention and detection and that internal control system impacts on fraud prevention and detection. This impact can either be negative or positive as seen in table 4.20 interpretation. In addition, the study shows that an effective internal control system can help a organization to prevent fraud since the function of an effective internal control system is to facilitate effectively and efficiently the operations of the organization by enabling it to respond appropriately to significant business, operational, financial, compliance, and other risks to achieving the company’s objectives. This includes the safeguarding of assets from inappropriate use or from loss or fraud, and ensuring that liabilities are identified and managed.
The researcher’s last objective was on how to curb fraud in organizations. The researcher saw the need to give the respondent the opportunity to make bare their minds in area such as this, believing that fraud if not directly, does affect people indirectly. The researcher went on to find out from the respondent apart from policies and procedures, what can be used to curb fraud it is was shown that intensifying the punishment of the fraudsters and some mentioned steps will help in preventing fraud. The respondent went further to say that efficient and adequate internal control system is the best measure to be adopted in fraud prevention. Hence, the need to implement an effective internal control system arises.
CONCLUSION
Organization fraud is now becoming a global phenomenon. Fraud in general, inflicts untold hardship on organization owners, customers and their family members, as most organization failures are associated with large scale frauds.
The prevention and detection of fraud are basically the responsibility of the management, through the establishment of an effective and efficient internal control system.
Conclusively, the importance of the internal control department/ unit of any organization, especially organizations cannot be undermined since according to Public service, a regulatory and auditing guide, “a organization without a sound internal control system ought not to be authorized”. Lack of internal control system, according to the findings is the major cause of organization frauds; hence, management of every organization should create and establish a standard internal control system, strong enough to stand against the deceits of fraud in order to promote continuity of operations and to ensure the liquidity, solvency and going concern concept of the organization.
RECOMMENDATIONS
The function of fraud prevention, detection and control are interwoven, as the three works together to eliminate fraud and fraudulent tendencies.
ADEQUATE INTERNAL CONTROL
Internal control system as mentioned earlier is of great importance to the Public service since it helps the organization in achieving its objectives.Effective internal controls are the foundation of safe and sound Public service. Organizations should develop a strong internal control system and review of procedures should be properly documented and enforced. Ongoing monitoring activities of the internal control and corporate audit department should be strengthened.
The essential element of a strong internal control system is the recognition by all employees of the need to carry out responsibilities effectively and to communicate to the appropriate level of management any problem in operation, policy violation, or ethics. This is only achievable where there are effective control activities and monitoring systems. A properly designed and consistently enforced system of operational and financial internal control helps a organization’s board of directors and management safeguard the organization’s resources, produce reliable financial reports, and comply with laws and regulations. Effective internal control also reduces the possibility of significant errors and irregularities and assists in their timely detection when they do occur.
PROPER ATTENTION SHOULD BE PAID TO CASH
From the findings, it is observed that cash is the most defenseless asset to theft, in reference to table 4.20 it can be seen that cash accounted for 68.8% of fraud committed in organizations. The research in reference to table 4.19 also revealed the fact that the most perpetrators of organization fraud are the cashiers. Hence, their recruitment must be thorough, based on personal knowledge, guarantee, and reference from people with high integrity rather than sentiment. This will go a long way in reducing the recruitment of kleptomaniac, greedy and ungodly individuals in the Public service.
ATTRACTIVE PAY PACKAGE
The management should look into the rewarding scheme of their employees as well as the environment in which they are to work. This will enable the average organizationer live above the poverty level that is to say, able to provide for his or her basic needs. Thus, he or she will shun the temptation to defraud the employer.
EDUCATING OF EMPLOYEES
The management of organizations should make it a point of duty to send their employees on training in other to get them acquainted with the changes in the Public service as well as the economy of the nation. Don’t forget that the Public service takes care of the nation’s economy. Just like in most of our universities; not all the theory that a student is taught are applied in the practical firm, management must therefore make it a point of duty to educate their employees in the new trend and then spell out to them what is expected of them.
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