Problems and Prospects of Designing Internal Control Systems for Smaller Entities

Problems and Prospects of Designing Internal Control Systems for Smaller Entities

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Chapter one on Problems and Prospects of Designing Internal Control Systems for Smaller Entities

INTRODUCTION

BACKGROUND OF THE STUDY

Internal controls are designed to provide reasonable assurance regarding the achievement of an organization’s objectives in terms of effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. It is generally believed that small and medium scale enterprises are the pillars on which the economy of a country rests, especially a developing economy like Nigeria. The impact of small and medium scale enterprises (SMEs) cannot be over emphasized as their contribution to gross domestic product (GDP) is significant. (Matlay and Westhead, 2005).

Where internal control systems come to play, every company must create a unique system because some of these controls may be either cumbersome or inefficient (committee of sponsoring organisations of the treadway commission, 2000). However there are some general factors that affect internal control design systems in SMEs. The stumbling blocks in designing effective internal control systems should therefore be brought to limelight. The possibilities of developing an internally designed control system also should be explored. Internal control means different things to different people. It is pertinent that an effective and efficient system of internal control is consciously designed to mitigate risks in firms. Internal control means that enterprises, in order to improve their self-quality of business information, promote operation efficiency, fully obtaining and using the each kind of resources, under the related laws and regulations, so as to reach the fixed management goal, take the various kinds of restrictions and regulative organization, planning, methods and procedure in the enterprise (CCSE, 2008). SMEs form a major part of the economy and internal control serves as a major tool to prevent such firms from falling apart, hence the need for it. In order to carry out internal control effectively, there has to be conscious effort put in place to ensure that there is a gearing towards the achievement of corporate objectives in all the separate but inter-twined and overlapping parts of the firm (Committee of sponsoring organizations of the tread way commission, 2013). The Sarbanes-Oxley Act of 2002 increased the amount of internal control systems that a company needs to use. This is because internal control helps in relieving ethical dilemmas, increasing accountability, deterring fraud and improving the quality of financial information used by creditors and investors: however, an internal control system is only as good as its design. This study is therefore geared towards proper identification of the problems and prospects of internal control systems design for small businesses in Kwara state.

Statement of the problem

SMEs in Kwara state have not performed creditably well and hence have not played the expected vital and vibrant role in the economic growth and development in Kwara State (Onugu, 2005). Considering any ideal model, SMEs should have little or no barriers in designing an effective and efficient internal control system alongside very high prospects and much ease in instituting internal control systems for the smooth running of the business. This is not always so in reality due to some (avoidable and unavoidable) reasons, some of which are: suitability of objectives.

Disciplined management and staff of SMEs is the cornerstone the success of SMEs. Where a good internal control system design exists, they themselves stand up to their roles and responsibilities and advocate for others to abide by already established controls. They themselves therefore serve as social controls, adding up to the administrative controls already existing. However, in reality there are indiscipline members of SMEs hence, the reverse is the case. As a result of lack of controls bringing up a new internal control system or trying to resurrect already established ones meet with so much difficulty. Therefore, the study seeks to investigate whether there is strong internal control systems design for small businesses in Kwara State. 

Research Questions

This study is directed towards answering the following questions:

i. What is the effect of efficient information and communication system on the profitability of small entities?

ii. What are the effects of internal control systems on risk management in Small entities?

iii. What are the problems encountered in designing internal control systems for small entities?

Justification for the Study

The question of the role played by a good internal control design System in SMEs cannot be overemphasized, hence, the need for this research. Many researchers such as Abdulraheem, Yahaya, Oyebola & Abogun (2012) have written on accounting principles of small enterprises. (COSO 2013) also developed a final integrated framework on internal control systems design. Klynveld Peat Marwick Goerdeler (KPMG) also developed a practical guide to internal control (2012). However it is the researcher’s opinion that Problems and Prospects of internal control in Kwara state has been under researched therefore, this study intends to fill this gap.

Objectives of the Study

The general objective of the study shall be to identify and analyze the problems and prospects of designing internal control systems for smaller entities in Kwara State. More specifically, this study will help:

i. Identify the effect of efficient information and communication system on the profitability of small entities.

ii. Identify the effect of efficient internal control systems in risk management in small entities.

iii. Identify the problems encountered in designing internal control systems for small entities.

Hypothesis of the study

Ho1: there is no relationship between efficient information and communication system 

Ho2: there is no relationship between efficient internal control systems and risk management in small entities.

Ho3:there are no problems encountered in designing internal control systems for small entities.

Significance of the Study 

The ultimate goal of every organization is to prevent fraud, embezzlement of money and increase accountability in any organization and this is achieve through internal control system in Selected businesses in Ilorin, Kwara State. This study is necessary because it would enable the owners and employee of Small and Medium Scale Enterprises in Ilorin is to improve the ethical behaviours in the business firms. Also, it would be of immense benefit to other companies who used internal control system in their organization and to enhance more profits of the selected businesses. It will also serve as a reference source to other researchers who might want to further studies in the similar topic.

Scope and limitations of the study

 Scope of the study

This study shall be limited to SMEs duly registered in Kwara state. The focus of this research work will be on SMEs in Ilorin Metropolis of Kwara State which has been selected by the researcher for convenience sake. The researcher has already established from the Kwara State Agency for SMEs that there are three hundred and six registered SMEs in Kwara State. (See appendix I).

 Limitations of the study

Some of the expected limitations in this study are:

i. The limitation of this study was inability of management to divulge certain information which the considered sensitive and fear of publication which might be detrimental to their operation.

ii. Economic and geographic difference between research study and literature review. Mass literature on SMEs in scattered forms abound, but it might be easier for the researcher to access data relating to other countries and even states than those pertaining to SMEs in Nigeria, Kwara State to be precise.

iii. Shortage of information, time and funds. This might limit the intensity of the spread or area of coverage of the study.

iv. Unavailability of sufficient primary data.

v. The researcher also observed the non-cooperative attitude of some workers of the company to make information available.

Definition of Terms

For this research, the following definitions have been adopted:

1. INTERNAL CONTROL: Internal control is a process, effected by an entity’s board of directors, management, and other personal, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance. (COSO 2013).

It is the whole system of controls, financial or 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 records. (ICAN, 2009).

2. INTERNAL CONTROLS: Internal controls are policies procedures, practices and organizational structures implemented to provide reasonable assurance that an organization’s business objectives will be achieved and undesired risk events will be prevented or detected and connected based on wither compliance or management initiated concerns (Awe, 2005).

3. SMALL AND MEDIUM SCALE ENTERPRISES (SMEs): In accordance with the provision of  the “200 billion naira SMEs Credit Guarantee Scheme” Central Bank of Nigeria Guidelines, An SME is an enterprise that has an asset base (excluding land) of between N5 million – N500 million and a labor force of between 11 and 300.

The National Council of Industries also defined SMEs as business enterprises whose total costs excluding land do not exceed more than two hundred million naira. (N200, 000,000)

4. PROBLEMS: A question raised for inquiry, consideration, or solution i.e. an intricate unsettled question which is a source of perplexity, distress, or vexation. (Webster, 2014). It can also be defined as “Any question or matter involving doubt, uncertainty or difficulty, proposed for solution or discussion” (Prospect Dictionary, 2014).

5. PROSPECTS: The probability or likelihood of some future event occurring i.e. a mental picture of a future or anticipated event and/or chances or opportunities for success (Concise Oxford English Dictionary, 2013). An apparent probability of advancement, success, profit, outlook for the future, a mental view of survey as of a mental description (Prospect Dictionary, 2014).

6. SYSTEM: System can be an organized set of ideas or theories or particular way of doing something or a group of things, pieces of equipment that are connected or work together (Horngren, Harrison and Bamber, 1999).

7. EFFICIENCY: This is very important to the achievement of competitive advantage and the maximization of profitability (Roth, 1997).

8. BUSINESS: Is an organization or economic system where goods and services are exchanged for one another.

9. ORGANIZATION: A social unit of people, systematically structured and managed to meet a need or pursue collective goals on a continuing basis. All organizations have a management structure that determines relationship between functions and positions, and subdivides and delegates roles, responsibilities, and authority to carryout defined tasks (Simmon, 1997).

10. Abbreviations, terms and notations which shall be used in this study include but are not limited to the following:

i. SMEs: Small and Medium Enterprises are those firms which satisfy the definitions given above.

ii. SMEDAN: Small and Medium Enterprises Development Agency. 

iii. COSO: Committee of Sponsoring Organizations of the Treadway Commission.

iv. NASME: Nigerian Association of Small and Medium Enterprises, which is an umbrella association of all SMEs

v. MAN: Manufacturers Association of Nigeria is the official association of manufacturing companies in Nigeria

vi. NACCIMA: Nigerian Association of chambers of commerce, industry, Mines, and Agriculture is an association of various chambers of Commerce in Nigeria.

vii. CBN: Central Bank of Nigeria, the apex bank in Nigeria, which supervises other banks

viii. DFIs: Development Finance Institutions are companies involved in project and development finance such as the Bank of Industry (BOI).

ix. ICS: Internal Control System.

x. CCSE: Canadian Centre for Science and Education.

xi. CAQ: Centre for Audit Quality.

xii. KWACCIMMA: Kwara State Chamber of Commerce, Industry, Mines and Agriculture.

Plan of the study

The rest of this research project is divided into four sections. Chapter two, which is on literature review, includes the introduction, conceptual framework, theoretical background, empirical evidence and summary. Chapter three, which is on methodology, includes the introduction, research design, population for the study and sampling techniques. Chapter four contains the analysis of data while Chapter five gives the research findings, conclusion and other useful recommendations.

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