THE IMPACT OF INTERNAL CONTROL SYSTEMS ON FINANCIAL PERFORMANCE: A STUDY OF QUOTED COMPANIES IN NIGERIA

Reference code: c026

ABSTRACT

This thesis is on the Impact of Internal Control Systems on Financial Performance: a Study of Quoted Companies in Nigeria. In order to achieve the objectives of the study, data was collected through the issue of 73 questionnaires to the accounting/finance staffs of 11 quoted companies. Three hypotheses were formulated and tested using the Ordinary Least Square Method of Multiple Regression Analyses. The results of data analyses among other things showed that: there is a positive and statistically significant relationship between the internal control variables of control environment, internal audit and control activities and financial performance. On the basis of our findings, we conclude that: companies will do well to implement internal control systems so as to nip fraud and fraudulent activities in the bud. The absence of internal control systems will only encourage fraud thus draining the firms’ resources into unprofitable activities. We also conclude that the presence of well instituted internal control systems will also help to improve profitability of the company since resources that would have been lost to fraud or litigation will be better invested. Given our findings and conclusions, we make the following recommendations: companies should invest in the latest and up to date control systems in other to improve financial performance. Where such systems are already in existence, there is need to continually review and update the system this is because fraudsters will continually develop new ways to by-pass whatever checks that are already in place. Finally, there is need for companies to continually train and retrain theirs staff especially those in charge of the internal control systems so that they can better discharge their responsibilities to the firm. 

INTRODUCTION

.............. There is a general perception that institution and enforcement of proper internal control systems will always lead to improved financial performance. It is also a general belief that properly instituted systems of internal control improve the reporting process and also give rise to reliable reports which enhances the accountability function of management of an entity. Nevertheless, available Literature still point out that in spite of elaborate system of controls in organizations, financial performance has been elusive in many of these organizations (OAG, 2010).
This study will be guided by “The Agency Theory” as initially put across by Jensen & Meckling, (1976) and later expounded on by Gerrit Sarens & Mohammad J. Abdolmohammadi, (2010). Gerrit & Mohammad theory also has connotations with the Theory of firm articulated by Nicolai J. Foss et al. According to the agency theory a company consists of a nexus of contracts between the owners of economic resources (the principals) and managers (the agents) who are charged with using and controlling those resources (Jensen & Meckling, 1976). Agency theory posits that agents have more information than principals and that this information asymmetry adversely affects the principals’ ability to monitor whether or not their interests are being properly served by agents.
Furthermore, an assumption of agency theory is that principals and agents act rationally and use contracting to maximize their wealth. A consequence of this assumption may be the ‘moral hazard’ problem (Jensen & Meckling, 1976), indicating that in an effort to maximize their own wealth, agents may face the dilemma of acting against the interests of their principals. This Theory was chosen for this study simply because “Internal control is one of many mechanisms used in business to address the agency problem” (Jensen and Payne 2003) and again “studies have shown that internal control reduces agency costs” (Abdel-khalik 1993; Barefield et al. 1993).
In the study, Internal control systems were construed to mean “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 categories; reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations” (Ray & Kurt; 2001).
It is worth noting that internal controls only provide reasonable but not absolute assurance to an entity’s management and board of directors that the organization’s objectives will be achieved. “The likelihood of achievement is affected by limitations inherent in all systems of internal control” (Hayes et al., 2005). Organizations establish systems of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. ...............

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TABLE OF CONTENT

CHAPTER ONE INTRODUCTION
1.1 BACKGROUND TO THE STUDY
1.2 STATEMENT OF THE PROBLEM
1.3 PURPOSE OF THE STUDY
1.4 RESEARCH QUESTIONS
1.5 RESEARCH HYPOTHESIS
1.6 SIGNIFICANCE OF THE STUDY
1.7 SCOPE OF THE STUDY
1.8 LIMITATIONS
1.9 ORGANIZATION OF STUDY
1.10 DEFINITION OF TERMS
REFERENCES

CHAPTER TWO: LITERATURE REVIEW
2.1 INTRODUCTION
2.2 THEORETICAL FRAMEWORK
2.3   CONCEPT OF INTERNAL CONTROL
2.4   FEATURES OF INTERNAL CONTROL
2.5   COMPONENTS OF INTERNAL CONTROL
2.6   OBJECTIVES OF INTERNAL CONTROL
2.7 REVIEW OF RELATED LITERATURE
2.7.1 Internal Controls systems and financial performance
2.7.2 Control Environment
2.7.3 Internal Audit and Financial performance
2.7.4 Control Activities
2.8 FINANCIAL PERFORMANCE
2.8.1 Measures of financial performance
2.9 RELATIONSHIP BETWEEN INTERNAL CONTROL AND ORGANISATIONAL PERFORMANCE
REFERENCES

CHAPTER THREE: RESEARCH METHODOLOGY
3.0   INTRODUCTION
3.1    RESEARCH DESIGN
3.2 POPULATION/ SAMPLE SIZE
3.3    SOURCES OF DATA
3.4     INSTRUMENTS OF DATA COLLECTION
3.5   DATA ANALYSIS TECHNIQUE
REFERENCES

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.0 INTRODUCTION
4.1 DATA PRESENTATION
4.2 DATA ANALYSES AND INTERPRETATION

CHAPTER FIVE: DISCUSSION OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.0. INTRODUCTION
5.1: DISCUSSION OF FINDINGS
5.2 CONCLUSIONS
5.3 RECOMMENDATIONS
BIBLIOGRAPHY
APPENDICES

Reference code: c026
Reference code: c026
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113 Pages

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