THE EFFECTS OF BUDGETING AND CONTROL ACTIVITIES IN CORPORATE GOVERNANCE

CHAPTER ONE

1.1 INTRODUCTION

BACKGROUND OF STUDY

Budgeting can be traced to the 18th century period when it was used to check the powers of the king concerning taxation as a source of revenue and the governments expenditure. It involves management development plans developed in order for the terms of marketing to be served, the production and distribution process to be used and the facilities and personnel required.

Controls can be seen as single procedures or whole systems they are established by management either directly or by means of external consultants e.g auditors, accountants, etc to maintain orderliness in the business enterprise. Internal control activities can be defined as the whole system of controls financial or otherwise established by the management in order to carry out the business of the enterprise in an orderly and efficient manner, ensure adherence to managements policies, safeguard the assets and secure as far as possible the completeness and accuracy of records. Controls in relation to finance are those activities that involve planning and control of all aspects of production or marketing of commodities using the budget as a tool.

Corporate governance as a term covers all the general mechanisms by which management are led to act in the best interest of companies’ owners statutory control of corporate governance has been with us for a long time and has increased overtime. While it is impossible to have a crime free society, the need to spell out the rules of the game cannot be overemphasized. Corporate governance means the system which companies are directed in the best interest of the owners and investors in this case through the use of budgets.

The study will be taken from four angles. The first is centered on the preparation of the budget. The guidelines or rules which the firm follows in preparing budgets and the consideration given in preparing a budget. It now leads to the question of how an organization prepares it budget. The second point of reference is how the budget preparation influences the organizational performance and also the individual performance. The third point of reference is centered on how the control system works and its ability to properly direct the staff of the organization. Finally, we look at the weaknesses or strength of budgeting and control activities in an organization in relatives to the performance of its staff.

It is important to know that budget or forecast is predicting and planning is taking action on the forecast to make it an economic reality. Planning is concerned with setting objectives and the means for their attainment. It is essentially concerned with the future therefore it must be an adequate predictive model which must have objectives and leads to a higher level of performance which may not be possible without it. Planning is therefore closely related to budgeting. Infact a budget is a planning tool.

1.2 LIMITATION OF THE STUDY

A direct statistical issue in this study is in the preparation of budget and control activities and their implementation in corporate governance. It is assumed that every organization prepares budget but the question one will ask is how seriously are these budgets followed and are their controls in place to ensure the strict adherence to the budget. It has however, come to notice that a lot of the businesses do not recognized the important role played by budgets in the success of their business and this has led to the failure of many organizations.

The reasons for this failure can be attributed to:

(1) Negative attitudinal trait of the operating managers against budget.

(2) Lack of realistic data in budget preparation

(3) It represents an ordinary tool which may not be effective without closer supervision.

(4) Establishment of unattainable standard or target for workers.

(5) Budget ignores responsibility centers in performance evaluation.

1.3 AIMS/OBJECTIVES OF THE STUDY

The main aim of this study is to highlight the importance of the preparation of budgets. It is also wants to give an insight into the impact which budgeting and control activities have in corporate governance.

The study aims to:

(1) To describe the methods employed by an organization in preparing its budget.

(2) To find out its effectiveness as a tool of the management.

(3) To set up mechanisms which will assist in achieving the objectives of the establishment.

1.4 RESEARCH QUESTIONS AND HYPOTHESIS

The case study for this research is Unity Bank Plc and sample will be taken from its branches (2-3 branches) to get the data required for the research. The research will be based on the following research questions.

R1 – Does corporate gornannce generate wealth?

R2 – Does the survival of a company depend on the preparation of budget.

R3 – Can the budget committee aid the control system of an organization?

R4 – Are performance evaluated on the standard obtained?

The hypothesis to be tested are;

1. Ho: Enhanced corporate governance does not improve wealth

Hi: Enhance corporate governance generates or improves wealth.

2. Ho: The survival of any company is dependent on how well it manages its revenue and expenditure

Hi: The survival of any company is largely dependent on how well it manages its revenue and expenditure.

3. Ho: The role of the budget committee cannot be used to strengthen the control system.

Hi: The role of the budget committee can be used to further strengthen budgeting control system in the corporate sector.

4. Ho: Effective performance evaluation will not boost the success of the company.

Hi: Effective performance evaluation will boost the success of the company.

1.5 THE SCOPE OF STUDY

This study is carried out to highlight the differences which may exist between the budgeting and control activities. It will look into budgeting, budgets, budgetary controls and how they are carried out and the differences between these various terms.

It will also examine control activities i.e internal control system of an organization and its effectiveness in the implementation of a budget. The study will be carried out in Lagos among 2-3 branches of Unity Bank Plc.

1.6 SIGNIFICANCE OF THE STUDY

This study is very significant in the sense that it can, if properly utilized, act as a catalyst to inspire proper use of budgets and budgeting and also inspire development of control activities in organization whether big or small. It has the following effects.

1) It lead to the gaining of knowledge by providing such information that will broaden the horizon.

2) It creates a high degree of awareness about the need for sound planning and budgeting systems in various organizations.

1.7 DEFINITION OF TERMS

The following are the definitions of some terms that one might come across when going through this topic.

A. BUDGET: A budget is a financial statement which is prepared at the beginning of every period in an organization containing the plans of the management concerning it revenues and expenditures.

B. BUDGETARY CONTROL: According to the institute of cost and Management Accountants (ICMA). It can be defined as the establishment of departmental budgets relating to the responsibilities of the executives of an organization to the requirements of the policies of and the comparison of actual results with the budgeted period.

C. CASH BUDGET: this represents the cash receipts and payment and the estimated cash balances for each month of the budgeted period.

D. ADMINISTRATIVE EXPENSE BUDGET: This involves forecasting the number of working people both direct and indirect who will be needed to meet the production requirements.

E. INTERNAL CONTROL SYSTEM: It is the whole system of control financial or otherwise set up or established by the management in order to carry out the 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 records.