THE ROLE OF INTERNAL CONTROL AS THE FOUNDATION OF QUALITY MANAGEMENT

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.

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 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.

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