The Role of Internal Control as the Foundation of Quality Management

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The Role of Internal Control as the Foundation of Quality Management (A Case Study of the Broadcast Media in Nigeria)

ABSTRACT

This project titled “The Role of Internal Control as the Foundation of Quality Management: a study of the Broadcast Media in Nigeria” is both a descriptive and an analytical study designed to evaluate the role of internal control in an organization so as to see whether, or otherwise, it is the bedrock of quality management. The entire work is chronicled into five chapters with each addressing an important segment of the research work.The objectives of the study are to identify and evaluate: the importance of Internal Control System in the management of an organization using Broadcast Media in Nigeria for the study; the features of a good Internal Control System; the factors responsible for increase of frauds, embezzlements or misappropriations of funds/assets in the modern day Nigeria; and also to find out why some of them remain undetected for a good number of years whereas the books of accounts of the organization are often being examined by her internal and external auditors.

Furthermore, the population of the study is the Broadcast Media in Nigeria and the determined sample size is 171. Data used for the study were obtained from primary and secondary sources, making use of oral interviews, questionnaires, and literature review. Again, the data collected were analyzed by the use of tables, simple percentages, and absolute numbers, while chi-square (x2) technique was used to test the hypotheses formulated in the study.

Moreover, the major findings made in this dissertation are as follows: that some of the factors responsible for increase of errors, frauds, embezzlements or misappropriations of funds/assets, in this modern day Nigeria are: greed and lack of contentment; non-compliance with the laid down internal control procedures; non-adherence to financial policies and guidelines; collusion; employment of unqualified and incompetent personnel; poor remuneration; glorification of ill gotten wealth in Nigeria; and delay in payment of salaries by some employers – that undetected errors, frauds, embezzlements or misappropriation of funds/assets for quite a good number of years (whereas the accounts of the organization are being reviewed by her internal auditors on regular basis and the external auditors yearly) are due to the following: collusion; employment of inexperienced internal auditor; negligence on the part of some external auditors; and noncompliance of companies/organizations to auditors’ management letters (letters of
weakness).

Finally, based on the major findings above, the following recommendations aimed at improving the situations are made: establishment of adequate accounting system and effective internal control measures; employment of honest, dedicated and competent personnel; proper supervision of staff; compliance with Auditors’ management letters; adequate remuneration and regular payment of salaries, and reorientation of the Nigerian citizens towards the glorification of ill gotten wealth in our society today.

TABLE OF CONTENTS

Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract vi
Table of contents vii
List of tables
CHAPTER ONE: INTRODUCTION
1.1 Background of the study 1
1.2 Statement of the problem 6
1.3 Objectives of the study 7
1.4 Formulation of research hypotheses 8
1 .5 Significance of the study 9
1.6 Scope of the study 10
1.7 Limitations of the study 10
1.8 Classical definition of terms 11
1.9 Overview of the study 14
References 15
CHAPTER TWO: THE REVIEW OF RELATED LITERATURE
2.1 Historical Development of Internal Control System 16
2.2 Internal Control System Defined 18
2.3 Objectives of Internal Control System 24
2.4 Features of Good Internal Control System 26
2.5 The Importance of Internal Control System 39
2.6 Internal control and Management 39
2.6.1 Design and Installation of the System 39
2.6.2 Operation of the System 41
2.6.3 Performance Evaluation and Monitoring of the System 42
2.6.3.1 Internal Audit 43
2.6.3.2 Definition of Internal Audit 43
2.6.3.3 Functions of the Internal Audit 46
2.7 Internal Control and the Auditor 47
2.7.1 Review of System of Internal Control 48
2.7.1.1 Systems Descriptions 50
2.7.1.2 Form of Systems Descriptions 50
2.7.1.3 Obtaining Detailed Systems Information 52
2.8 Internal Control in Computerized Organizations 53
2.9 Limitations of Internal Controls 55
2.10 Foundation 58
2.11 Quality 58
2.12 The Concept of Management 59
2.13 Fraud 61
2.13.1 Factors Responsible for Increase of Fraud 64
2.13.2 Types of Business Fraud 67
2.13.3 Indication of Errors and Frauds 70
2.14 The Historical Development of One of the Broadcast
Media Studied Federal Radio Corporation
Of Nigeria, FRCN 71
2.14.1 The Establishment of the Nigeria Broadcasting
Services, NBS 71
2.14.2 The Nigeria Broadcasting Corporation, NBC 73
2.14.3 The Federal Radio Corporation of Nigeria, FRCN 74
Reference 76
CHAPTER THREE: Research Design And Methodology
3.1 Research Design 81
3.2 Population 81
3.3 Sample Size Determination 82
3.4 Sources of Data 84
3.5 Questionnaire Administration and Collection 84
3.6 Statistical Tool For Data Analysis 85
3.6.1 Acceptance / Rejection of Hypotheses 86
3.7 Validity and Reliability of the Questionnaire 87
Reference 88
CHAPTER FOUR: Data Presentation, Analysis
And Interpretation
4.1 Responses to the Questionnaire and Interview 89
4.2 Test of Hypotheses Using Chi-square 104
4.2.1 Decision Rule 104
4.2.2 Hypothesis One 104
4.2.3 Hypothesis Two 108
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS
AND CONCLUSION 113
5.1 Summary of Findings 113
5.2 Recommendations 116
5.3 Suggestions for Further Research 119
5.4 Conclusion 119
Bibliography 120
Appendices:
Appendix I – Letter of Introduction 123
Appendix II – Questionnaire 124
Appendix – Table of Critical Values of the
Chi-square Distribution 132

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

It is a well-known fact that everything in this world has a foundation. In fact, the foundation of anything be it a building, an idea, a career, belief, etc matters a lot: it determines, to a very large extent, the strength, durability, quality and success, or otherwise, of that very thing.

The Oxford Advanced Learner’s Dictionary of Current English, defines foundation as: strong base of a building, usually below ground level, on which it is built up; that on which an idea, belief, etc rests; underlying principle; basis; starting point.

Management as an essential ingredient of all organized endeavour has an underlying principle and that is the internal control system. How successfully an organization achieves its objectives, satisfies social responsibilities or both, and depends upon how well the organization’s managers do their jobs. In other word, how well the managers adhere to the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise. How well managers do their jobs – Managerial performance – is measured in terms of two concepts: efficiency and effectiveness.

According to Stoner and Freeman (1 989:10), efficiency means “doing things right,” that is, the ability to get things done correctly, and effectiveness means “doing the right thing,” that is, the ability to choose appropriate objectives.

The sum of these two concepts is quality management which is itself the product of Internal Control system. Nwoko (1997:202) defined quality management as a systematic approach for ensuring that all activities within an organization happen according to the plan. This approach was evolved primarily by a group of American quality experts: W.E. Deming, Joseph Juran and Philip Grosby. Before implementing quality management, there must be a quality system in existence. A quality system is an assembly of components, such as organizational structure, responsibilities, procedures, processes, and resources.

In the same direction, Stoner and Freeman (1989:4) defined management as the process of planning, organizing, leading, and controlling the efforts of organization members and of using all other organizational resources to achieve stated organizational goals.

A process is a systematic way of doing things. Management is defined as a process because all managers; regardless of their particular aptitudes or skills, engage in certain interrelated activities in order to achieve their desired goals.

Planning implies that managers think through their goals and actions in advance. Plans give the organization its objectives and set up the best procedure for reaching them.

In addition, plans become the guides by which: the organization obtains and commits the resources required to reach its objectives; members of the organization carry on activities consistent with the chosen objectives and procedures; and progress toward the objectives is monitored and measured so that corrective action can be taken if progress is unsatisfactory.

The first step in planning is the selection of goals for the organization.

Then objectives are established for the subunits of the organization — its divisions, departments, and so on. Once the objectives are determined, programmes are established for achieving them in a systematic manner.

Organizing means that managers coordinate the human and material resources of the organization. Once managers have established objectives and developed plans or programmes, to reach them, they must design and staff the organization in order to be able to carry out those programmes successfully.

Leading describes how managers direct and influence subordinates, getting others to perform essential tasks. After plans have been made, the structure of the organization has been determined, and the staff has been recruited and trained, the next step is to arrange for movement toward the organization’s defined objectives. This function can be called by various names: leading, directing, motivating, actuating, and so on. But whatever the name used to identify it, this function involves getting the members of the organization to perform in ways that will help it achieve its established objectives.

Whereas planning and organizing deal with the more abstract aspects of the management process, the activity of leading is very concrete; it involves working directly with people.

Finally, controlling means that managers attempt to assure that the organization is moving toward goals. Managers must ensure that the actions of the organisation’s members do in fact move the organization toward its stated goals. This is the controlling function of management, and it involves four main elements: establishing standards of performance (budgets); Measuring current performance and comparing it against the established standards; detecting deviations from standard goals in order to make corrections before a sequence of activities is Completed; taking action to correct performance that does not meet those standards.

Through the controlling function, managers can keep the organization on its chosen track, keeping it from straying from its specified goals.

But it is a sad commentary to say that even in those organizations in which quite competent managers and skilled supporting staff are known to be at the helm of affairs for attaining the goals of the organizations, the problems of frauds, irregularities, embezzlement, misappropriation of funds/assets, mismanagement or poor management, or whatever name it may go with, are still being encountered, and even at an alarming rate. Why? It is the opinion of the researcher therefore, that a study on internal control system as a foundation of quality management would provide an insight to the way of solving the problems.

Bethel, et al (1971:27) pointed out that an enterprise may possess the most modern plant and equipment, a highly skilled and experienced labour and sales force, ample Financial resources and an adequate source of raw materials yet fail to perform efficiently. They argued that although several reasons are involved but the major factor is poor management.

The question now is: what is poor management? Poor management, in the context of this study, simply means deviation from any of the 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.

Poor management occurs only where there is no internal control system in existence or where in existence, it is weak. Therefore, the only solution to poor management is establishment of good internal controls and observing them.
Santocki (1972:12) opined, “By internal control, is meant not only internal check and internal audit, but the whole system of controls, financial and otherwise, established by the management, in order to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its
records.”

In fact, internal control is the bedrock of quality management, and to achieve its purposes, it must be adequate in design and effective in operation.

1.2 STATEMENT OF THE PROBLEM

In the early sixties one hardly heard of frauds, irregularities, embezzlements or misappropriation of funds/assets,
mismanagement or poor management, or whatever name it may go with. But nowadays the reverse is the case: there are a lot of cases of the aforesaid social evils in the modern day Nigeria. Why?

Also, there has been a general out cry from the public sectors, private sectors, and the general public why some of the above fraudulent practices are not easily detected, or if at all detected, they may have taken some time, even though these organizations may have engaged internal auditors and the services of external auditors who audit the accounts of the organizations year after year.

These are the main problems which led the researcher into this study/ dissertation.

What are the factors responsible for the increase of frauds, irregularities, embezzlements or misappropriation of funds/assets, mismanagement or poor management in the modern day Nigeria?

Does your organization have good, adequate, and operational Internal Control System in existence presently?

Does your organization have good, adequate, and operational Internal System in existence presently?

Does your organization have internal Audit Department?

Has your organization experienced frauds, embezzlements or misappropriation of funds/assets before, and what were the
causes?

1.3 OBJECTIVES OF THE STUDY

The main objectives of this study are to:

Identify and evaluate the importance of Internal Control System in the management of an organization using Broadcast Media in Nigeria for the study.

Identify and evaluate the features of a good Internal Control System.

Identify and evaluate the factors responsible for increase of frauds, embezzlement or misappropriation of funds/assets in the modern day Nigeria, and also find out why some frauds, embezzlement or misappropriation of funds/assets remain undetected for a good number of years whereas the books of accounts of the organization are often being examined by her internal and external auditors.

1.4 FORMULATION OF RESEARCH HYPOTHESES

In considering the nature and extent of the problems of the study, the researcher shall make some ‘intelligent guesses upon which the research will be based.

1. The persistence of frauds, embezzlements or misappropriation of funds/assets and other fraudulent practices in any organization is not due to noncompliance with established internal control system.

The persistence of frauds, embezzlements or misappropriation of funds/assets and other fraudulent practices in any organization is due to non-compliance with established internal control system.

2) There are no cases where errors, frauds, embezzlements or misappropriation of funds/assets remain undetected for quite a good number of years whereas the accounts of the organization are being audited by her internal auditor on regular basis and the external auditors yearly.

1.5 SIGNIFICANCE OF THE STUDY

Generally, research work helps management of organizations and intending investors to solve problems and have sense of direction for effective and efficient management and profitable operations. This study is significant in that it will help managers of organizations to understand whether Internal Control System plays any significant role toward prevention and detection of errors, frauds, embezzlements or misappropriation of funds/assets, proving the claim right or wrong that Internal Control System is the foundation of quality management.

It will also help to explain the features of a good Internal Control System and the role of Internal Audit in Internal Control System.

Furthermore, it will help to identify and explain certain factors that are responsible for increase of frauds, embezzlement or misappropriation of funds/assets in various organizations in this modern day Nigeria.

Finally, it will be of tremendous help to future researchers who may wish to develop and research more into the study.

1.6 SCOPE OF THE STUDY

This research work focused on “The Role of Internal Control as the foundation of quality management,” a study of the Broadcast Media in Nigeria.

However, the findings and recommendations will certainly be of immense help to managers of other organizations in Nigeria and elsewhere and other research scholars.

1.7 LIMITATIONS OF THE STUDY

Research of this nature especially in developing countries like Nigeria is usually subjected to some constraints.
In the process of obtaining the data for this work, some specific problems worthy of mentioning were encountered.

They were as follows:

In the conduct of this kind of study, reliance is on the data collected and the appropriate officials within the organization who will make the data available, and if necessary, explain those that are rather technical. The researcher, while trying to collect the data, could not, in most cases, get the officials on seat, and where they were met in the office, some of them were always in a hurry to attend one meeting or the other and as a result could not grant enough audience. These problems hindered some of the information that could have been obtained.

Also, some of the officials were too reserved and reluctant to make available certain required information, and this posed a big obstacle during the course of the study.

Furthermore, finance was another constraint since there’s searcher, in most cases, had to repeat his series of visits before he could get some of the officials in the office.

Although the researcher tried to minimize the effects of these constraints, he therefore cannot claim that the report Presented here is with 100 percent precision.

The validity of any research work rests heavily on the availability and reliability of the data required and utilized for the research work.

This research work, although it was starved of much of the required data, especially from primary sources, took much from the secondary source data but this does not in any way diminish the validity of the work and its recommendations. Truly, the impact of the result of this study will be of immense assistance to both lecturers and students who may wish to research in this field of study.

1.8 CLASSICAL DEFINITION OF TERMS

Detective Control

This is an internal control which is designed to discover errors that have occurred and to assure that they are corrected on a timely basis.

Error

This is defined as unintentional occurrence of:

Compliance deviation: This is a failure to perform an internal control procedure as prescribed; or

Monetary error: This is a mis-statement in an account or a required financial statement disclosure.

Fraud

Financial Institutions Training Centre (FITC) defined fraud as an act or course of deception deliberately practiced to gain unlawful or unfair advantage; deception directed to the detriment of another.

Internal Control

Millichamp (1987:96) defined Internal Control as “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, safeguard the assets and secure as far as
possible the completeness and accuracy of the records.”

Internal Audit

Internal Audit is defined as: an independent appraisal activity within an organization for the review of accounting, financial and other operations as a basis of service to management. It is a managerial control, which functions by measuring and evaluating the effectiveness of other controls.

Irregularity

This means the intentional mis-statement of an account or required financial statement disclosure.

Management

Bank (1976:88) defined it as “a collective term that refers to the system, function, process or office of planning, providing coordination, directing, evaluating and controlling all available efforts and resources of an organization for the accomplishment of the objectives and policies which are designated by, and handed down from top executive of the organization.”

Potential Errors

These are errors which could occur and should be the object of internal controls and/or audit procedures.

Preventive Control

This is an internal control which is designed to prevent errors from occurring.

System

This refers to an arrangement of many parts that work together, e.g. the digestive system. Again, system can mean an established order or arrangement of things, e.g. in a business, in a society, etc.

1.9 OVERVIEW OF THE STUDY

According to Odo (1992:31) overview of the study deals with exposing in a bird’s eye view the nature of the entire study.

Chronologically, chapter one contains the introduction which includes among others the background of the study, statement of the problems, objectives of the study, basic research hypotheses, significance of the study, scope of the study, limitations of the study and classical definition of terms.

Chapter two is concerned with the rumination of works previously done by scholars in the field of study.

Chapter three deliberated on the research design and methodology of the study, which include, population and sample
description, instrument for data collection, techniques for data collection and course of this work. Chapter four centered on data presentation and analysis while chapter five centered on the findings, recommendations, conclusion and suggestion for further study.

REFERENCES

Bank, S. (1976) Dictionary of Supervision and Management, (Los Angeles: System Research).

Bethel, L. L. et al (1971) Industrial Organization and Management, 5th ed (Tokyo: MacGraw Hill).

Hornby, A. S. (1985) Oxford Advanced Learner’s Dictionary of Current English. 18th ed. (Great Britain: Oxford University Press)

Millichamp, P, A. H. (1987)Auditing: An Instructional Manual for Accounting Students, 4 ed. (London: ELBS and DP
Publication).

Nwoko, C. 0. (1997) Decision Accounting for Executives, 1st ed. (Enugu: Gethsemane Consulting and Publishing).

Odo, M. 0. (1992) Guide to Proposal Writing in Social and Behavioural Sciences, (Enugu: SNAAP Press Ltd.)

Santocki, J. (1972) Case Studies in Auditing, 1st ed. (London: Macdonald and Evans Ltd.)

Stoner, J. A. F. and Freeman, R. E. (1989) Management, 4th ed. (New Delhi: Prentice Hall International, Inc.)

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