EFFECT OF INTERNAL CONTROL ON THE PROFIT MAKING OF NIGERIAN BREWERIES

ABSTRACT

In this research work titled “effect of internal control on the profit making of Nigeria breweries with particular references to Nigeria Bottling company 9th mile Enugu” the study determine the impact of internal control to proper use of organizations funds and assets. The study equally ascertains whether perpetration of fraud and losses of Revenue in an organization are as a result of weakness in internal control system. In this study the various true of reflection of organizational activities are presented in financial statement where there is an active observation of internal control measures. Data for the study was sourced from two main sources Primary and Secondary. Primary data were sourced from the use of questionnaires and oral interviews. Secondary data were sourced from journals, and other relevant materials. Extensive literature review was carried out on the direct literature and indirect literature on books, journals and past works. The research instrument used in this study includes oral interview and questionnaire. The questionnaire is structural as to contain both close and open ended question. Simple tables and percentages were used in treatment of data. Z-table and regression co-efficient method was used for comparison between calculated values of significance of testing the hypothesis. At the end the researcher found out the adequate organizational controls and that each staff knows his duties and equally ensures effective segregation of duties. Based on this findings, the researcher find out that internal control measures ensure proper use of organizational fund and assets.

CHAPTER ONE

1.0   INTRODUCTION

1.1 Background of the Study

Internal control has been recognized in the most organizations as one of the most essential ingredients, necessary for the survival of the business enterprise and government agencies. Apart from the problem of scarce resources, organizations run a high risk of fraud, errors, misappropriation of funds, inefficient and ineffective operations. Step are required, therefore to minimize, if not eliminate completely, these risks, by establishing internal control system. For every organization, there are risks that the organizational goals and: objectives are not achieved. All efforts aimed at preventing or identifying and correcting such risks are viewed as internal control. Anthony (2008:17) defined internal control as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization objectives. Garrison Noreen 2000:378) suggested a different definition for internal control as follows: “those steps taken by management that attempt to increase the likelihood that the objectives set down at the planning stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies”. He further defined internal control as those sets of organizational activities which include: planning, co-ordination, communication, evaluation .and decision making as well as informal processes, aimed at enhancing the efficient and effective use of the organizational resources towards the achievement of the organizational objectives. We are treating internal control as a tool used by the management to facilitate those activities which corresponds to our area of study. Anthony and Govindavajan (2004) identified several aspects or activities of management/internal control namely: planning, coordinating, ‘communication, evaluation, decision-making and influencing. Planning what the organization should do to achieve proper accountability. Planning could be viewed as budget preparation. With planning the organization decides what to do and the responsibilities of its different members. Koontz and Donnel (2002:34)defined internal control as all the measures of a public or private organization that could be said to be strategies of owners and managers to monitor and control the activities within the organization. Arnold and Turley (2006:3162) classify organization plans as falling under the following headings:

i.        Operating Plans: These are short-term plan which relates directly to the achievement of the organization objectives. Thus the annual accountability and met up government target plans as well as the plans to suppress smuggled goods would be examples of operating plans.

ii.        Administrative Plans: These are tactical plans concerned with the creation of the organizational structured, under which accountability and performance levels can be determined for appropriate functions.

iii.        Coordinating the activities of several parts of the organization to assure alignments goals.

iv.        Communicating information such as strategy and specific performance objective. Communication could be done formally (by means of budgets and other official documents) and informal through conversations.

Evaluating actual performance related to the standard and making inference as to how well the employees have preformed. Deciding what, if any action should be taken. In 1999, in the United States of America, the general accounting office for standard defined “Internal Control as an integral component of an organization, management that provides reasonable assurance that the following objectives are being achieved: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. They further state that internal control is a major part of managing an organization. It comprises the plans, methods, and procedures used to meet missions, goals and objectives and in doing so supports performance based management. Internal Control also serves as the first line of defence in safeguarding assets and preventing and detecting errors and fraud. In short, internal control, which is synonymous with management control, helps government program managers achieve desire results through effective stewardship of public resources. Internal Control provides reasonable assurance that the objectives of the organization are being achieved in the following categories: effectiveness and efficiency of operations including the use of the entity’s resources. Reliability of financial statement and other report for internal and external use, compliance with applicable laws and regulation. Internal control was designed to provide reasonable assurance regarding preventions of or prompt detection of unauthorized acquisition, use or disposition of organizations assets. Internal Control is not one event, but a. series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. Internal control was recognized as integral parts of each system that management uses to regulate and guide its operations rather than as a separate system within an organization. In this sense, internal controls are management tools that are built into the entity as a part of its infrastructure to help manager run the entity and achieve their aims on an ongoing basis. Internal control is affected by people: people are what make internal control work. The responsibility for good internal control rests with all managers. Management sets the objectives, put the control mechanisms and activities in place, and monitor and evaluates the control. However, all personnel in the organization play important roles in making accountability happen. Internal control provides reasonable assurance, not absolute assurance; management design and implement internal control based on the related cost and benefits. No matter how well designed and operated, internal control cannot provide absolute assurance that all organizational objectives will be met. Factors outside the control or influence of management can affect the entity’s ability to achieve all of its goals. For example, human mistakes, judgment errors, and acts of collusion to circumvent control can affect meeting organization’s objectives. Therefore, once in place, internal control provides reasonable but not  absolute assurance of meeting organizational goals Isidore (2006:81) in his definition of internal control stated it is the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the organization 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. The key concepts from the above definition can be summarized as follows:

a)   To ensure that a structural framework exists for the efficient and effective channeling scare resources.

b)  To ensure that policies decided on and adopted by management are consistently followed by those responsible for implementing them;

c)   To ensure that expensive assets on which operations critically depend are properly secured and safeguarded to prevent misuse and misappropriation,

d)  To ensure that important document which provides the information on which significant strategic and decision are based provide a. complete accurate and timely record of relevant events.

1.2 Statement of Problem

We might not really understand the impact of internal control system in an organization until probably we run an organization void of internal control system. The absence of adequate internal control measures exposes the financial management of an organization to certain threats such as:

–      Incorrect financial statement and/loss of the company’s’ assets.

–      Incorrect and unreliable financial records which may lead to loss of organizational integrity.

–      Non implementation of accounting policies in consistent with the applicable legislation appropriate in presentation of financial statement.

1.3 Objective of the Study

The overall purpose of this research work is to evaluate and determine the effect of internal control on the profit making of Nigerian brewing industrial. A well defined organizational structure helps management to run the business in an orderly manner. This enhance operational and efficiency, which is the important features of internal control. Specifically, this research work stands to achieve the following objective.

1)  To determine the effect of internal control to proper use of organizations funds and assets.

2)  To ascertain whether perpetration of fraud and losses of Revenue in an organization are as a result of weakness in internal control system.

3)  To ensure whether a true reflection of organizational activities are presented in financial statement where there is an active observation of internal control measures.

1.4 Research Questions

The following research questions will be used to form the research hypothesis and they are:

1. To what extent does the internal control measures effect on appropriation of organizational assets and funds?

2. To what extent does perpetration of fraud and losses of Revenue in an organization are as a result of weakness in the internal control system?

3. To what extent does internal control enhance a true reflection of organization activities as presented in the financial statement?

1.5 Hypothesis

This research is undertaken on the basis of the following hypothesis.

Hypothesis One (1)

Ho: internal control measure does not ensure proper use of organizations funds and assets.

Hi: Internal control measure ensures proper use of organization funds and assets.

Hypothesis Two (2)

Ho: Fraud perpetration and losses of revenue in an organization are not as a result of weakness in the internal control system.

Hi: Fraud perpetration and losses of Revenue in an organization are as a result of weakness in the internal control system.

Hypothesis Three (3)

Ho: internal control does not ensure, a true reflection of an organizational activities as presented in financial statement

Hi: Internal control ensures a true reflection of organizational activities as presented in financial statement.

1.6 Significance of the Study

There is no controversy that this research works have been conducted on internal control system, however much emphasis has been placed on the effect of a good internal control system on profit making of Nigerian Brewing Industries. This research work will go a long way in helping an organization discover the effect of weakness in internal control and suggest measures in correcting them. It will also reveal the problems caused by bad internal control system and be useful to students, scholars, lecturers and other third parties as it shall open new area of further research work and at same time advance challenges to up-coming researchers.

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