ABSTRACT

The study was the effect of internal control on the financial performance of business organization, the general or main objective was to determine the effect of internal control on the financial performance of business organizations, the dependent variable was financial performance and the independent variable was internal control. The specific research objectives were: to examine the effect of control environment on the financial performance of business organizations, to evaluate the effect of  control activities on the financial performance of business organization and also was to examine the effect of risk assessment on the financial performance of business organization .the primary method of data collection was chosen the accessible population was 20  and the questionnaires were administered to respondents and only closed ended questionnaires were administered , the study was conducted using descriptive and inferential statistics with the use of tables ,regression analysis was use to examine the relationship between internal control and financial performance the analytical tool use for this research was the SPSS . From the analysis conducted and based on the results it shows that internal control significantly affect the financial performance of business organization.

CHAPTER ONE

 INTRODUCTION

1.1 Background of the Study

The internal control system  comprised of all policies and actions that were established by management to support management goals, including adhering to management policies, maintaining the integrity of assets, preventing and discovering criminal acts and mistakes, accurateness and completeness of accounting records and timely presentation of reliable financial information. Internal controls consist of policies, procedures, organizational structures, personnel management, physical and information protection and the separation of duties. These types of controls are main tools of an internal control system. They should cover all areas of management of self-governments. Internal controls could be described as accounting, administrative, management controls and internal audit. That approach refers to the functional areas of internal control system John (2006) Internal controls refer to the measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft and misuse of organization resource. Internal Control is defined as all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to internal policies, the safeguarding of assets, the prevention and detection of frauds and errors, the accuracy and completeness of accounting records, and the timely preparation of reliable financial information. (Ofori, 2011).

 Financial performance is the ability to operate efficiently, profitability, survive, grow and react to the environmental opportunities and threats Sebbowa (2009). For purposes of the study I adopted Ray and Kurt’s definition of internal control systems. In as much as Internal control Systems are wide and numerous, for the sake of this study, Internal control systems will be limited to; the Control Environment, Internal audit , and segregation of duties whereas financial performance will be looked at basically from the three perspectives of Liquidity, Accountability and Reporting (Donald and Delno 2009). Organizations have invested heavily in improving the quality of their internal control systems over the past decade arguing that a good internal control yields good business. Many organizations are required to report on the quality of internal control over financial reporting, compelling them to develop specific support for their certifications and assertions. The following five objectives help management in designing effective internal controls: maintaining reliable systems, ensuring timely preparation of reliable information, safeguarding assets, optimizing the use of resources, preventing and detecting error and fraud (Alvin et al, 1993).

During the 1980s, several high-profile audit failures led to creation of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), organized for the purpose of redefining internal control and the criteria for determining the effectiveness of an internal control system They studied the causal factors that can lead to fraudulent financial reporting and developed recommendations for public companies, independent auditors, educational institutions, the Securities Exchange Commission (SEC), and other regulators (COSO 1985). The product of their work is known as the COSO Internal Control—Integrated Framework (Simmons 1997).The framework also points out that controls are most effective when they are “built into” the entity’s infrastructure (COSO 1992,) and further states that “built in controls support quality and empowerment initiatives, avoid unnecessary costs and enable quick response to changing conditions” (COSO 1992) In Cross River State College of Education, Akamkpa, financial performance is one aspect that has not been given the attention it deserves. College staff has in a number of cases been given College resources and have failed to account for the resources entrusted to them or have not made the necessary accountabilities on time.

At the turn of the century, another group of corporate scandals resulted in enactment of the Sarbanes-Oxley Act of 2002 (SOX) which, among other things, requires a formal report on the effectiveness of internal controls. The COSO framework plays a key role in compliance because Section 404 of the Act requires companies to include in their annual report, a separate management report on the company’s internal control over financial reporting and an attestation report issued by a registered public accounting firm.John J. Morris. (2011) separates internal controls into those that are general (entity-wide) controls from those that are specific (account-level) controls. He believes that if management was overriding control features in order to manage earnings, then one would expect to find more Internal Control Weaknesses related to general controls, even if the specific (account-level) controls are effective. This type of behaviour should be uncovered during the audit process since this is an area of concern specifically identified in Auditing Standard No. 5, Paragraph 24, which states that “entity-level controls include controls over management override.”

On the other hand, a stronger argument could be made that if general controls are in place and working, then one would expect to find less Internal Control Weaknesses related to general controls.In their publication Whittington and Pany (2001), attempt to explain the meaning, significance of Internal Controls, and the Components of a Company’s internal controls. They also attempt to explain the relevancy of internal controls in large scale business organizations. In their book while borrowing the definition of the Committee of Sponsoring Organizations (COSO); Internal Control- Integrated Framework, Whittington & Pany.2001 define internal control as “a process effected by the entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories; reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.” They emphasize that internal controls is a process and not an end in or of itself. They note that internal controls provide reasonable but not absolute assurance about the attainment of an entity’s objective

1.2 Statement of the Problem

Internal Control measures in order to enhance their financial reporting systems check on their efficiency and effectiveness of operations as well as enhance adherence to the prescribed rules and regulations. However, the performances of the business organizations vary across countries. In 2014 and 2015, business organizations in almost all member states in the European Union (EU) experienced good growth in value added ranging from 3.8% in 2014 and 5.7% in are everywhere 2015. However, and in South Africa more than one in every five business organizations reported a decrease in turnover in 2014 whereas 20% reported no growth in turnover for the same period. Locally, 71% of the businesses in Kenya close shop in their third anniversaries due to shortage of operating funds among other factors. Moreover, there level of contribution to the country’s GDP is paltry 3%. There is a general consensus that internal Control systems are used as management tools in financial management. In view of the foregoing virtually all organizations have established this has not worked out for all the institutions as several instances of allegations of misappropriations of funds and frauds due to weaknesses

In addition the incidence of internal control weaknesses, unsatisfactory and deteriorating service delivery have the undesired effect of not only weakening the company’s ability to effectively deliver services but also encourages collusion, fraud, embezzlements, loss of cash (revenue), assets conversion genuine and deliberate mistakes, corruption, lack of transparency and accountability for revenue collection and other assets. The management of a company should familiarize themselves with internal control procedures that will ensure effective service delivery and the desired financial performance (Efozie,2010).

According to (Aden & Addow, 2015) The results of the study indicate that employee of financial institutions believe they have internal control system to prevent errors and detection frauds to reduce financial misleading because internal control are important for any organizations the result of this study indicate effective internal control system can help remittance institutions in Somalia to meet their goals and objectives of their service, in achieving long-term profitability targets, and in maintaining reliable financial and managerial reporting, So is the performance of remittance companies is high or law so this study investigated the effect of internal control system on the performance of remittance companies in Mogadishu-Somalia. Ewa and Udoayang (2012) conducted a study on the impact of internal control design on banks’ ability to investigate staff fraud, staff life style and fraud detection in Nigeria. The sample of the study consists of 13 banks and the data collected were analysed using percentages and ratios. The result of the study showed that internal control design had influence on staff attitude towards fraud and that a strong internal control system prevents staff fraud while a weak one provides avenues for staff to commit fraud. It follows that where resources are well controlled, employees would find it difficult to cheat, steal of falsify reports except if there was staff collusion involving highly placed employees.

Tumisang and Swami (2014) assessed the impact of internal controls on managing resources of small businesses in Botswana. The study examined the availability or otherwise of internal controls in small businesses and the cost of their implementation. Data were obtained from 52 randomly selected respondents. Using descriptive statistics for data analysis, the researchers found that most businesses have internal controls that are moderately expensive to establish and that the employees can get the knowledge on internal controls through in-service training, education, meetings and briefings.  Odei (2011) examined the internal control procedures in Papso Ghana Limited, to assess the effectiveness of internal controls in Papso Ghana Limited, Jean (2014) undertook a study to determine if internal audit lead to the business growth, Carl (2013) examined whether the results of external audits may be used as an objective measure of internal audits’ benefits, Mbuti (2014) determined the effect of internal audit reporting on financial performance of SACCOs, Ondieki (2013) determined the effect of internal audit on financial performance in commercial banks in Kenya. From empirical studies, scholars have had contradicting opinion on the effect of internal control systems on financial performance of business organizations. Due to different opinions, little is known on whether the effect of internal control systems such as control environment, risk assessment and control activities on financial performance of of business organization is positive or negative. It was the intent of this study for the researcher therefore to examine the effect of internal controls on financial performance of business organizations.

This investigation will be carried out with the following research questions

1.2.1 The main question

What are the effect of internal control on the financial performances of business organizations?

1.2.2 Specific questions

What are the effects of risk assessment on the financial performances of business organizations?

What are the effects of control environment on the financial performances of business organizations?

What are the effects of control activities on the financial performances of business organizations?

1.3 Research objectives

 Main objective

To examine the effect of internal control on the financial performances of business organizations.

1. To investigate effect of risk assessment on the financial performances of business organizations.
2. To determine effect of control environment on the financial performances of business organizations.

• To evaluate effect of control activities on the financial performances of business organizations

1.4 Research    hypothesis

H0: There is no significant effect of risk assessment on the financial performances of business organizations.

H1: There is a significant effect of risk assessment on the financial performances of business organizations.

H0: Control environment does not have a significant effect on the financial performances of business organization

H1: Control environment have a significant effect on the financial performances of business organizations.

H0: Control activities does not significantly affect the financial performances of business organizations.

H1: Control activities significantly affects the financial performances of business organization.