Authors
Abstract
The purpose of the study was to confirm whether internal control mechanisms and the level of compliance in Cross River State local government councils are very adequate for the achievement of their objectives and goals. The research adopted a survey methodology through the use of questionnaires and oral interview to solicit for responses from staff selected from the 18 Local Government Councils in Cross River State. A purposive sample size of 36 staff was selected from the internal audit, the finance and administrative departments respectively of the Local Government Councils. The data collected was analyzed using the regression model and descriptive statistics. The regression results statistically revealed that both existing internal control system and the level of compliance with internal control principles in Cross River State local governments are not adequate to enable the achievement of their objectives and goals of the local governments. The researcher recommended the engagement of regular external consultants to review and update the internal control mechanisms used by Local Government Councils in Cross River State, Nigeria.
Key Words: Internal control compliance, Internal control mechanisms, Local government objectives, Misappropriation of fund, Resource constraints.
Full Text
1. Introduction
Local Government is the third-tier of government in Nigeria that is nearest to the people at the grassroots. It is a structure created with intention that it will provide for the goods and services needed by the people and to also bring development and good governance to the local level. However, development has not thrived at the grassroots’ level due to paucity of the culture of accountability and transparency in the administration of local government in Nigerian politics. At all levels of government, controls have to be exercised over all aspects of the government resources. Every organization whether profit oriented or nonprofit making organization operates within resource constraints. As a result, various forms of controls are taken into consideration and procedures established to ensure that the use of the resource is maximized in achieving the government set objectives and goals. Therefore, local government as an organ of government also do incorporate into its accounting system all methods and forms of controls which enable her to operate effectively and efficiently to achieve her targeted objectives.
Apart from the problems of scare resources, local governments run on a high rate of fraud, errors, misapplication and misappropriation of fund, inefficient and ineffective operation. Steps are required therefore to minimize, if not eliminate completely, these risks by establishing rules and regulations. For every local government, there are risks that the local government goals and objectives may not be achieved. All efforts aimed at identifying, preventing and/or controlling such risk, are viewed as internal control. Internal control is a major part of administration of any organization private or government. It comprises the plans, methods and procedures used to meet missions, goals and objectives in doing so, supports performance-based administration. Internal control also serves as the first line of defense in safeguarding assets preventing and detecting errors and fraud. In short, internal control should help local government administrators achieve desires and should provide reasonable assurance that the objectives of local government are being achieved in following categories:
1. Effectiveness and efficiency of administration including the use of local government resources.
2. Reliability of financial reporting, including report on budget execution, financial statement, and other report for internal and external use.
3. Compliance with applicable laws and regulation both for the local government, state government, and federal government.
4. Internal control should not be one event, but a series of action and activities that occur throughout the local government operation and should be on an ongoing basis.
i. Statement of the Research Problem
One of the greatest observed weaknesses of government in third world countries is fraud. This has led to various deficiencies and failure in government and governance. Objectives of government are in most cases properly set, risk well evaluated, accounting structure properly put in place, personnel well trained, assets apparently well safeguarded, yet despite this beautiful arrangement, government objectives are in most cases not achieved, because proper books are not kept, and fraud thrive which result in massive losses and failure within government and the objectives of local government authorities not achieved. There are regular cases of fraud, assets are not properly safeguarded.
In light of the above, this study has been undertaken to evaluate the adequacy of the internal and financial control systems and compliance with set guidelines in the local government councils in the Cross River State.
ii. Research Questions
a. To what extent does the existing internal control system in Cross River State Local Government Councils affect the achievements of objectives and goals of the local governments?
b. To what extent does the existing level of compliance with internal control principles in Cross River State Local Government Councils lead to the achievement of her goals and objectives?
iii. Research Hypotheses
The following hypotheses have been formulated for testing:
Ho1: The existing internal control system in Cross River State Local Government is not significantly adequate to enable the achievements of objectives and goals of the local governments.
Ho2: The existing level of compliance with internal control principles in Cross River State Local Government Councils does not significantly lead to the achievement of her goals and objectives.
2. Literature Review
2.1 Conceptual Review
2.1.1 Internal Control
In running profit or non-profit formal organizations, performed internal control has significant functions. This process further would help board of management and enterprise initiator in determining the company strategy and future policy. According SPAP (2007:319), definition of internal control is a process initiated by Board of Commissioner, management, and other personnel, designed to bring proper confidence about three kinds of objectives:
a. Financial report reliability: Management is responsible in providing financial report for investors. Not only that, it has obligation to guarantee the existing information that has fulfilled standard basis of report.
b. Operating effectively and efficiently: the initiation of internal control within an organization to make for efficiency and effective operation. In other words, saving resources could lead getting to the optimal result and reaching company’s objective in certain stated period.
c. Obedience to applied laws and rules: In running its operation, a company must follow the laws and regulations that are related to accounting.
Another source mentioned internal control as a process initiated by Board of Commissioner, Management and other personnel that are designed to bring proper confidence in approaching company’s objectives. In the Committee of Sponsoring Organization (COSO), defined 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 of objectives in the following categories:
a. Effectiveness and efficiency of operations.
b. Reliability of financial reporting.
c. Compliance with applicable laws and regulations.
According to Romney and Steinbart (2003) ‘Internal Control is the plan of organizations and method of business used to safeguard assets, provide accurate and reliable information, promote and improve operational efficiency, and encourage adherence to prescribe managerial policies’ (Romney). Another source refers to Boynton, William C., Raymond N. Johnson, Walker, G. Kell (2003) in his book of Modern Auditing, translated by Rajoe, P.A., Gania, G., & Budi, I.S., mentions internal control as ‘A process performed by board of directors, management and other personnel in an entity that is designed to provide proper confidence related to approaching the objectives in the following categories; reliability of financial report, applied law and rules of obedience, operations, efficiency and effectiveness (Boyton)’. And according to Mardiasmo (2004) internal control involves certain activities, such as:
1. Planning
2. Inter-structural organization coordination
3. Communication of information
4. Decision making
5. Motivates every person included in organization to act correlated to organization’s objectives and company’s goals.
6. Work assessment.
Thus, in general comprehension, internal control system could be defined as a mechanism designated to keep (preventive), detect (detective), and provide correction mechanism (corrective) against the potential of mistakes, misdeeds, or errors (error) and abusive acts (fraud).
2.1.2 Internal Control Objective
Referring to its intention, the initiation of internal control in certain organisation aims to share future achievements of the organisation itself.
According to J. Hall (2007) implementation of internal control is to achieve four main objectives, these are
1. To maintain company assets
2. To ensure accuracy and the reliability of notes as an accounting information.
3. To promote organizational operational efficiency
4. To measure the accordance of policy and procedures stated by management.
The concept of internal concept itself, following COSO, would be expected to provide proper confidence but not absolute. The latter was intended for management and board of director of certain entity. This is because of the existence of limitation, which could be tagged along in all internal control system and the necessity of considering cost and relative advantages of control.
2.1.3 Components of Internal Control
According to Boyton and Johnson (2006:392) the COSO reports (and AU 319.07) identify five interrelated components of internal control:
1. Control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Factors that form control environment in certain entity are:
a. Integrity and ethical values
b. Commitment to competence
c. Board of directors and audit committee
d. Management’s philosophy and operating style
e. Organizational structure
f. Assignment of authority and responsibility, human resources policies and practices.
2. Risk assessment is the entity’s identification and analysis of relevant risk to achievement of its objectives, forming a basis for determining how the risks should be managed. There are some occurrence needed to be concerned in its initiation, they are:
i. Risk relation and the match over detail reports and accounting activities and managerial reports.
ii. Changes that could happen in scope of internal or external control activities.
iii. Consideration that might be urged based on the mentioned changes.
3. Control activities are the policies and procedures that help ensure that management directives are carried out. Its performance involves:
i. How standard operation and working standard are implemented
ii. How data and information are managed.
iii. How is the flow of resources provided for being distributed
iv. And how the separation of assignment could be said as proportional
4. Information and communication are the identification, capture and exchange of information in a form and time frame that enable people to carry out their responsibilities.
5. Monitoring is a process that assesses the quality of internal control performance over time.
2.1.4 Internal Control Characteristics
Tunggal (2010) explained that characteristics of strong internal control are:
1. Competent and honest employees, have knowledge of accounting standard, taxation and capital market regulations.
2. Transactions are authorized under the allowance of rightful officer (valid transaction).
3. Transaction are recorded accurately (total estimation and accounted for).
4. Assignment segregation that has tendency of stimulating transaction, recorded and be stored.
5. Access on assets and company records are corresponding to function and assignment of duty to employee.
6. Periodic comparison between the recorded balance and its physical numbers.
Characterization above supposed to comply with three criteria of effective control, these are:
i. Prevention control tendency: control for prevention is reducing the urgency of problems before they will appear, employing qualified accounting personnel, appropriate job segregation, and effectively controlling the physical access of assets, facilities and information. These are all good preventive control tendency.
ii. Detective control tendency: not all problems could be prevented. Therefore, examining of problems would be necessary at that time the problem arises. Example for the latter are; examining copy on calculation, bank reconciliation preparation and monthly balance check.
iii. Correction control tendency: Corrective control could solve problems discovered by control through examination. This control includes conducting procedures to identify the cause of problems, reconditioning problems or complications that they have caused, and changing the system with expectation to minimize or eradication of problems.
2.2 Theoretical Framework
This study anchored on the Organization or Management Control Theory.
The Organization or Management Control Theory: This is based on the broader concept of internal control than the agency theory. It focuses on control mechanism that should be imposed at all levels of an organisation. It was propounded by Ouchi and Maguire (1975). It involves various forms of control that an organisation can use in order to get the desired results such as : organizational structure, behavioral controls like norms and policies of an organisation.
3. Research Methodology
3.1 Research Design
The researcher adopted a survey design which was conducted through the use of questionnaires and oral interviews. The questions were designed in a way that the answers were chosen from five (5) possible options and were firmly worded for ease of understanding. The questionnaires were personally drawn-up by the researcher and distributed to finance, internal audit and administrative staff of the eighteen local government councils in Cross River State.
3.2 Sampling Technique
Purposive sampling technique was adopted in selecting the sample for the study.
3.3 Population of the Study
The population of the study is the entire staff of the internal audit, finance and administrative departments in the eighteen (18) Local Government Councils in Cross River State.
3.4 Sample Size
A total of thirty six (36) staff was purposively selected from the internal audit, finance and administrative departments.
3.5 Estimation Model
The regression analysis was guided by the following linear model:
ALGGO = F (ICSM, CINS) translated as
ALGGO = 
Where; ALGGO = Achievement of Local Government Goals and objectives
ICSM = Internal Control System Mechanisms; CINS = Compliance with Internal Control System; a1, a2, > 0; 
= the parameter; ei = the error term
Intuitively, all the two explanatory variables are expected to have significant effects on the level of achievement of local government goals and objectives.
3.6 Data Treatment Technique
Statistical Package for Social Science (SPSS) was employed for data analysis. Descriptive statistics and regression were used.
4. Data Presentation and Analysis
4.1 Descriptive Statistics
Table 1: Model Summary
|
Model |
R |
R Square |
Adjusted R Square |
Std Error of the Estimate |
|
1 |
.956a |
.913 |
.908 |
.338 |
a. Predictors: (constant), compliance with Internal Control System, Internal Control System mechanisms.
Table 2: ANOVAa
|
Model |
|
Sum of Squares |
df |
Mean Square |
F |
Sig. |
|
1 |
Regression Residual Total |
39.858 3.780 43.639 |
2 33 35 |
19.929 .115 |
173.966 |
.000b |
a. Dependent Variable: Achievement of Local Government Goals and Objectives
b. Predictors (independent variables): (Constant), Compliance with Internal Control System, Internal Control System Mechanisms.
Table 3: Coefficients a
|
Model |
Unstandardized Coefficients |
Standardized Coefficients |
t |
Sig. |
||
|
B |
Std. Error |
Beta |
||||
|
|
(constant) |
-.135 |
.118 |
|
-1.137 |
.264 |
|
|
Internal Control System |
|
|
|
|
|
|
1 |
Mechanisms |
.776 |
.095 |
.714 |
8.155 |
.18 |
|
|
Compliance with Internal |
|
|
|
|
|
|
|
Control System |
.287 |
.090 |
.380 |
3.200 |
.13 |
a. Dependent variable: Achievement of Local Government Goals and Objectives.
4.2 Results and Discussion
The regression result reveals the following:
1. The regression result of hypothesis one for un-standardized coefficient shows that a 1 percent improvement in internal control mechanisms will achieve a 0.776 percent potential increase in the achievement of local government goals and objectives. Meaning that there is a positive relationship between internal control system mechanisms and achievement of local government goals and objectives; the higher the mechanism, the higher the chance of goal achievement. With the p-value of 0.18 greater than 0.05 percent alpha level, the null hypothesis is accepted. It is therefore upheld that the existing internal control system in cross river state local government is not adequate to enable the achievement of the objectives and goals of the local governments.
2. The regression result for hypothesis two for un-standardized coefficient show that a 1 percent increase in compliance with internal control system will achieve a 0.287 percent potential increase in the achievement of local government goals and objectives. Meaning that there is a positive relationship between compliance with internal control system and achievement of local government goals and objectives; the higher the compliance, the higher the chance of goals achievements. With the p-value of 0.13 greater than 0.05 percent alpha level of compliance with internal control principles in Cross River State local government council is not adequate and does not lead to the achievement of her goals and objectives.
5. Conclusion and Recommendations
5.1 Conclusion
The study was undertaken to evaluate critically the internal control system operating in the local government council of the Cross River State. All the eighteen local government council were examined. The examination of the relevant literature revealed that there is considerable evidence of the documentation of internal control methods and system. The control examined included: internal audit, control environment, controls techniques, information and communication, and monitoring of controls. The aim of the test was to confirm whether the internal control mechanisms and the level of compliance with internal control mechanisms in Cross River State local government councils are very adequate for the achievement of the objective and goals. The regression results statistically revealed that both existing internal control system and the level of compliance with internal control principles in Cross River State local government are not adequate to enable the achievement of the objectives and goals of the local governments.
5.2 Recommendations
It is thus recommended from the finding of the study that:
i. Internal control should be recognized as an integral part of each system that local government administration use to regulate and guide their operations rather than as a separate system within the local government council. In this sense, internal control should be an administration as a part of its infrastructure to help the administration run the local government and achieve their aims ongoing basis.
ii. Management should design and implement internal control bases on the related cost and benefits. No matter how well designated and operated, internal control cannot provide absolve assurance that all the local government council objectives will be met. Factors outside the control or influence of the council can affect the entity’s ability to achieve all of its goals. For example, human mistakes, judgment errors and acts of collusion, which is very common in council administration, to circumvent control can affect meeting the council’s objectives. However, once in place, internal control will provide reasonable, though not absolute, assurance of meeting the council’s objectives.
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