INTERNAL CONTROL SYSTEM AND FRAUD PREVENTION

INTERNAL CONTROL SYSTEM AND FRAUD PREVENTION

The relevance of this study is in its attempt to find out and evaluate those factors responsible for an effective internal control system in the board of internal revenue (BIR) in Rivers State, Nigeria.

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CHAPTER ONE

INTRODUCTION

1.1 Background to the study

The case of fraud in the public sector in Rivers state cannot be overlooked as it contributes to the growth retardation and decay of the various infrastructure in the state. It is a very serious problem not only in the state but as well as the nation and basically a global concern too, especially in developing countries which view fraud as a normal way of life. Duffield & Grabosky [2001] came to the assumption that “fraud is the practice of misleading another involving the deliberate manipulation of the truth by hiding the actual fact to gain undue influence over another in the attempt to obtaining benefits while depriving others”. It is a deliberate aim of deception of securing a personal benefit by taking advantage of others. It could be in different forms such as in a form of misappropriation, theft, embezzlement of the particular public asset in a particular economic environment g the public sectors in Rivers state. Achibong [1993] simply puts it as “stealing by tricks”. Fraud is embedded deeply in the Rivers state public sector to the extent that any attempt to fighting it makes one look stupid.

The internal control system is the system of control on its entirety, including financial and otherwise put in place by the management of an organization to undertake the business of the organization in an orderly efficient manner. It entails the control environment and control procedures, as well as all the guidelines and processes put into use by the directors and management of an organization to help in actualizing their set goals and objectives while aligning with the laid out guidelines in the organization the safeguarding of assets, the prevention and detection of fraud and error as well as secure the integrity of records, with the appropriately timed preparation of financial information which others can depend on in decision making. Criteria of control [COCO] 1992 described 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 and objectives.

The institution of charter accountants defines the concepts of Internal control system as “The whole system of control financially and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets and secure as fast as possible the completeness and accuracy check and internal audit” fraud is a threat common to most organizations. It is a threat to the effective utilization of resources and as such, it will always remain an important concern to management.

Fraud needs to be deleted and potential needs to be prevented. An effective internal control system is vital for the survival of any organization it serves as a check on fraudulent activities of the management and employees, an organization and it brings about solutions to likely fraudulent acts in an organization.

The internal control system is a necessity in large organizations, especially where management is removed from day to day routine operations of the organization. Internal control systems include controls exercised by management which comprises of the rules and regulations as well as procedures set up by organizations bearing also the problems of limited resources. If the internal control system is effective in an organization, it ensures maximum use of resources and also reduces to the lowest minimum fraud. The need for an effective internal control system therefore cannot be overemphasized. It is important because of the existence of risks and also all forms of irregularities in an enterprise term of flatly, the major frauds in public sectors can be traced to lapse in the internal control system and the existence of a poor control environment in the organization.

An effective control system and its fraud preventive measures in an organization will help to prevent fraud and errors in an organization thereby reducing fraud to its minimum than when internal control is not in existence or when there is a weakness in the system.

1.2    Statement of the study

Firms in Rivers state always have to meet their objectives by ensuring the adequacy of systems of control, reliability of data, and efficient use of organizational resources. Being funded by the government and other stakeholders and given the number of transactions they transact, this exerts pressure on institutions both private and public to integrate proactive measures in internal control procedures in order to enhance accountability. Therefore, internal controls remained as the only way the public organizations ensured accuracy and reliability of their financial transactions and in order to prevent fraud in the firm/organization the need for internal control system arises which is done by management, the management is responsible for establishing and maintaining internal control to achieve the objectives of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations.

But in firms in Rivers state, there has been a continuous report on errors, frauds and material misstatements by auditors which ought to have been detected and corrected by the management in the implementation of the firm’s policies and inadequate enlightenment on the need for and purpose of the internal control system in the organization. The series of business failures and corporate scandals have been identified by KPMG to be as a result of the weak internal control system. The failure of Enron (2001) caused a precipitous decline in investor confidence in the capital markets. The federal government through the regulatory authorities has responded to this, bypassing guidelines using SAS2 under information that is to be disclosed in financial statements. The guidelines codified the responsibilities of corporate executives, corporate directors, lawyers, accountants, and created a board oversight regime for auditors of public companies. In seeking to enhance accountability and restore Investors’ confidence, the guidelines emphasize the critical role of internal control over financial reporting. This gave rise to the need for corporate governance, especially in public institutions. International Auditing Guidelines (IAG) deals with the auditor’s responsibility for the detection of material misstatement resulting from error when carrying out an audit of financial statements. The guidelines in conjunction with the related SEC rules and auditing standard No 2, established by the public company Accounting Oversight Board (PCAOB), requires management of a public accounting and the company ‟independent auditor to issue two new reports at the end of every fiscal year. These reports must be included in the company’s annual report filed with the Securities and Exchange Commission (SEC). In the past, a company’s internal controls were considered in the context of planning the audit but were not required to be reported publicly except in response to the SEC‟s form requirements when related to a change in auditor. The new audit and reporting requirements have drastically changed the situation and have brought the concept of internal control over financial reporting to the forefront for audit committees, management, auditors, and users of financial statements. The new requirements also highlight the concept of a material weakness in internal control over financial reporting and mandate that both management and the independent auditor must publicly report any material weakness in internal controls over financial reporting that exists as a result of physical year, at the end of assessment dates. Under both PCAOB auditing standard NO 2 and the SEC rules implementing.

Against this background, this study investigated the purpose of ascertaining the effect of the internal control systems on organizational performance and find solutions to make the internal control systems more applicable in the public firms in Rivers State.

1.3   Aim and Objectives

The objectives of the study include the following:

1. To ascertain if there is a significant relationship between control environment and fraud prevention in ministries in Rivers state
2. To what extent does risk assessment affects fraud prevention in the ministries in Rivers state.
3. To identify if there are a significant relationship control environment and fraud prevention in ministries in Rivers state.

1.4 Research questions

From the debated and research on internal control system in the public sectors, many have suggested the following ways of fraud prevention in the public sector which are adequate reporting of agent stewardship, internal and external checks of the various parastatal by the auditors are reduction in the frequent occurrence of errors in their accounts. In an attempt to examine the proposal and problems of internal audit in the public sector, the following questions have been advance which includes:

1. What is the significant relationship between the control environment and fraud prevention in ministries in Rivers state?
2. Is there any significant relationship between risk assessment in the ministries in Rivers state?
3. What is the significant relationship between the control environment and fraud prevention in ministries in Rivers state?

1.5    Research Hypothesis

Ho₁: There is no significant relationship between control environment and fraud prevention in ministries in Rivers state.

Ho₂: There is no significant relationship between risk assessment in the ministries in Rivers state.

Ho₃: There is no significant relationship between control environment and fraud prevention in ministries in Rivers state.

1.6   Significance of the study

The relevance of this study is in its attempt to find out and evaluate those factors responsible for an effective internal control system in the board of internal revenue (BIR) in Rivers State, Nigeria.

The significance will include the following:

• To ensure, the researcher finds out problems encountered in relation to the internal control system and make an appropriate recommendation for
• To serve as a guide for organizations having weak internal control systems to improve on the quality of theirs and their intern make it more effective.
• To serve as a guide to others who are likely to carry on research on this study in

1.7   Scope of the study

In the light of broad coverage, conceptually the researcher focuses on the internal control system and fraud prevention in the public sector in Rivers State, Nigeria.

1.8    Limitation of the Study

In the course of this research work, the researcher encountered some limitations. Some limitations envisaged in this research work were:

• The uncooperative attitude of the staff in the organization

This is a major limitation that increases the time spent in completing the research work.

• Monetary constraints

These factors serve as a deficiency for the research work and the result of low financial capability, it was not enough to give the desired results. Since no man can claim a monopoly of knowledge, the study is not an exception and we acknowledge that this study is limited by a myriad of variables.

• Time constraint

The major limitation of this study is the time constraint, the researcher was inhibited by time as there was no enough time to cover the entire firm data in Rivers state.

• Accessibility of data

This is a major limitation of this study because getting the required signature to allow you to access the required data was really difficult.

1.9    Definition of basic terminologies

In this study, I will try as much as possible to explain technical terms used during the course of the study. They are as follows

• Internal control

In the AICPA’S codified standards covering auditing practice [320 09], Internal control comprises of the plan which organization and all of the co-ordinate use methods to safeguard its assets check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to managerial policies.

It is 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 and efficient manner.

• Fraud

Fraud is a deliberately deceitful activity in order to gain an advantage or generate a profit. In other words, corporate fraud is equivalent of cheating in business or the financial markets.

• Fraud prevention and detection

Fraud detection is a set of activities undertaken to prevent money or property from being obtained through false pretenses.

• Public sector

It is a portion of the economy that provides a range of governmental services, including infrastructure, public transportation, public education, health care, police, and military services.