CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of study

In managing a business, directors need to have strong risk management process in place as one of the requirements of corporate governance. So, one way of managing risk is “internal control” which mainly reduces risk and auditors need to gain a full understanding of how internal control systems of a micro finance institution work in order to successfully perform the audit process.

Internal control system is a topical issue following global fraudulent financial reporting and accounting scandals. This requires a critical evaluation of internal controls systems and their impact on organizational performance, for an internal control system to be considered effective.

The opinion about the meaning of internal control has existed long ago. Many people interpreted internal control as the steps taken by a business to prevent employees’ fraud and fraudulent financial reporting. Others believed that internal control had an equal role in assuring control over management, accounting, manufacturing and other processes.

Internal control systems are engrained within good corporate governance through guidance and acts (laws) corresponding respectively to the UK approach and the US approach to internal control systems.

• UK approach to internal control systems: Turnbull report 1999: This approach is highly influenced by the Turnbull report 1999, issued by the Turnbull Committee put in place by the UK government to establish the requirement for a strong internal control system to business. This report simply provided recommendations advice, and guidance on what a good internal control system should be. These requirements are not enforceable by law.
• US approach to internal control systems: This approach is highly influenced by the Committee of Sponsoring Organizations (COSO), formed in 1985 to sponsor the national commission on fraudulent reporting. The sponsoring organizations included the American Accounting Association and American Institute of Certified Public Accountants.

1.2 Problem statement

Despite the fact that organizations set up internal control departments to ensure efficiency, mitigate frauds and errors or totally eliminate them; it can still be said that internal control faces major setbacks. Even with the presence of internal controllers, there is no 100% assurance in the sense that they cannot eliminate or catch all arenas of frauds and therefore some chances of frauds happening even after control is done is always there; As a matter of fact, with all these setbacks the organization cannot boast of being efficient in its affairs even with the presence of internal controllers.

On account of the aforementioned setbacks of internal control, this piece of work will seek to find solutions to these problems.

1.3 Research questions

1.3.1 Main research questions

What is the effect of Internal control on organizational performance?

1.3.2 Specific research questions

• In what ways does internal control contribute to the financial success of organizations?
• How does internal control improve organizational systems and procedures?

1.4 Research objectives

1.4.1 Main research objective

The main objective of this study is to investigate the effects of internal control on organizational performance.

1.4.2 Specific research objectives

The specific objectives are:

• To examine the effect of internal control on the financial performance of an organization.
• To investigate the innovative role of internal control in organizations.
• To make recommendations

1.5 Research Hypothesis

H₀: Internal Control has no effect on organizational Performance

H₂: Internal Control has a significant effect on organizational Performance