The Role of Internal Control on the Performance of Commercial Enterprises Case Study: CONGELCAM S.A
Department: Accounting
No of Pages: 63
Project Code: ACC10
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
The
globalization of the economy, technological advancements, complexity of
business and allegations of fraudulent financial reporting have recently
sharpened the ever-increasing attention on internal controls and internal
auditing. Simultaneously, the capital markets have seen many new financial
instruments and players been introduced, making transactions and operations
more complex.
In
this context, the objective of this research work is to examine the role of
internal control on the performance of commercial enterprises. To accomplish
this objective, data was collected with the use of questionnaires administered
to the Head office of CONGELCAM SA at Douala a Cameroonian enterprise that
deals with the importation, exportation and commercialization of frozen
products.
A
cluster sample was used to attain this objective. 60 questionnaires were
administered and 50 were answered which gave us room to analyze the data. The
data was analyzed based on the following control components: control
environment, risk assessment, control activities, Accounting Information and
communication System and monitoring.
These
components were drawn from related literature review such as COSO and other
literatures relating to internal control which were highly rated.
Based on the analyzed data, we found out that
there exists a positive relationship between the various components of internal
control and the performance of commercial enterprises and a conclusion was
drawn based on this that internal controls are vital for the efficient,
effective and profitable running of commercial enterprises.
CHAPTER ONE
INTRODUCTION
1.1 Background to Study
Internal
controls refer to the measures instituted by an organization so as to ensure
attainment of the entity’s objectives, goals and missions. They are a set of
policies and procedures adopted by an entity in ensuring that an organization’s
transactions are processed in the appropriate manner to avoid waste, theft and
misuse of organization resources.
Internal
control, according to the Committee of Sponsoring Organizations of the Tread
way Commission (COSO), is 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:
Effectiveness
and efficiency of operations, reliability of financial reporting, compliance
with applicable laws and regulations, and
safeguarding of assets against unauthorized acquisition, use or
disposition. 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). Internal control will ensure that
errors and irregularities are avoided or made apparent.
Internal
control as a system comprise of the control environment and procedures .It
includes all the policies and procedures adopted by the directors and
management of an entity to assist in achieving their objectives of ensuring as
far as practicable the orderly and efficient conduct of its business so as to
safeguard assets, to prevent and detect fraud and error to ensure accuracy and
completeness of accounting records and the timely preparation of reliable
financial information (SAS 300.1).
During
the period from approximately 1905 to 2004, the definitions, meaning, and use
of internal controls in auditing as well as their impact on audit engagements
have developed and transformed. These changes were often a reaction to a major
change in the economic situation of country as a whole or to the actions of
individual firms within the economy.
In
1892, Lawrence Dicksee made it clear that the object and scope of an audit were
threefold. Dicksee also stated that the "whole duty of the auditor is to
ascertain the exact state of the client's affairs upon a certain given
date".
The
author then explained that this duty may be accomplished by "testing"
the accounts, but he never discussed the concept of internal control in any fashion as it relates to those tests.
According
to Montgomery the purpose of an audit had moved from just the detection of both
fraud and errors to the primary purpose to "ascertain the actual condition
and earnings of an enterprise for (a) its proprietors, (b) its executives, (c)
bankers and investors who are considering the purchase of securities.
The
practice within the United States Industrial setting moved Auditing from protecting
the assets of single business proprietors to protecting the numerous
stakeholders in an American economy where ownership and management of companies
had become divorced from each other.
Regardless
of the changing nature of the audit for Montgomery, a large portion of the
audit focus was still on the possible fraudulent actions of clerical employees,
with no mention of potential problems within the ranks of the management of the
company itself.
Thus,
nearly 100 years before the problems at Enron and other early twenty-first
century audit failures, the seeds of discussion existed regarding not only the
necessity of internal control reviews during an audit, which should be
investigated and reported for the protection of stakeholders, but also the
corporate administrator's role in financial reporting.
As
a reaction to the stock market crash in the fall of 1929, the Congress passed
two acts to stabilize the market and ensure proper reporting to investors. The
first was the Securities Act 1933, which required publicly held companies to
register their market securities and make regular financial disclosures.
The
second was the Securities Exchange Act 1934, which created the Securities and
Exchange Commission (SEC), an organization tasked with regulating exchanges and
brokers as well as monitoring the financial disclosures of publicly held
companies
In
1934, Victor H. Stempf proceeded to discuss the fact that it is the
responsibility of the company, not the independent auditor, to detect fraud
within the company. He stressed fraud and defalcation investigations would be a
duplication of the work done by the company's internal audit staff.
Stempf
made these very pointed comments even though the 1931 Ultramares case had ruled
that professional liability could attach to auditors in the case of fraud and
negligence.
The
concept of independent auditor responsibilities was to evolve through
litigation and authoritative pronouncements over the next 70 years culminating
with SAS 99 in 2001, which finally placed an affirmative responsibility on
auditors to detect fraud
With
the coming of the war in 1941, the major focus of internal control measures
from 1941 to 1945 was to identify and reduce fraud and abuse among defense
contractors. This type of contract auditing was the responsibility of the
internal audit staffs of many of the large corporations
In
November 1949, the Committee on Auditing Procedure of the AIA now known as
AICPA issued a report entitled Special Report on Internal Control, which
included a definition of internal control.
The
report indicated that "Internal control comprises the plan of organization
and all of the co-ordinate methods and measures adopted within a business to
safeguard its assets, check the accuracy and reliability of its accounting
data, promote operational efficiency, and encourage adherence to prescribed
managerial policies".
The problems led to Congressional hearings in February 2002, but they did little to calm the fears of investors.
In an effort to assuage the public outrage over
the Enron debacle and other high-profile financial scandals at the turn of
twenty-first century, as well as mute the criticisms over the weak regulatory
oversight by the government, the Congress of the US passed a sweeping market
reform act that became known as Sarbanes-Oxley Act 31st July 2002.
The
Ministry of the Supreme State Audit (MINCSP) was established with an objective
to fight against the practice of corruption, embezzlement and all the
malfunctions in the public sector of Cameroon.
Supreme
State Audit incriminates SODECOTON General Manager, Iya Mohamed which was found
guilty of 20 managerial lapses that cost the state 9 billion.
The
MINCSP in Cameroon has also undertaken to encourage transparency in the
management of public affairs measures for management in corporations to establish
controls and check their effectiveness in order to increase the reliability on
audited financial statements following the collapse of micro financial
institutions like FIFFA, National corporate fund (NCF), Global Business
Financial (GBF),Compagnie financière de l'estuaire du Cameroun (CO-FINEST).
The
Supreme State Audit (SAI) appointed by the Head of State has also got
jurisdiction over businesses in Cameroon. In this effect the SAI has the powers
to take punitive actions. One of the major roles played by the SAI to control
corruption in the Public sector is by carrying out punitive actions against
government officials for poor management, fraud and corrupt practices.
This
task is done by the Budget and Finance Disciplinary Board headed by Henri
Eyebe. ‘‘Operation Sparrow Hawk’’ is also a corrective measure taken by the
Head of State to fight against corruption and the misuse of public funds.
In
this respect the discrepancies of the Higher Education sector and weaknesses in
the secondary education can also be attributed to embezzlement for this, we can
notice the removal of the former vice chancellor of the University of Buea and
of Douala. Minister of Secondary Education Louis BapesBapes sentenced 20 years
of jail due to misuse and embezzlement of funds.
Another
scandal is the case of Marafa HamidouYaya, former minister of territorial
administration and Yves Michel Fotso, former Director of defunct state air
transport company CAMAIR which were held guilty of misappropriation and
sentenced 25 years of jail. This led to the closure of Yves Fotso’s
corporations such as FGH-SA and Clean OIL.
Equally
the National Anti -Corruption Commission (CONAC), is an institutional body
established by the Head of State to fight against corruption in the country.
1.2 Problem Statement and
Justification of Study
The causes of the current economic and
financial crises and the occurrence of ever repeating accounting and business
scandals throughout business history are often associated with “detached”,
“corrupt” and “greedy” corporate cultures.
The
absence of adequate internal controls as set by the SOX ACT and other
regulatory bodies generally lead to the collapse of companies. Enron was ranked
by Chief Executive Magazine as having one of the nation’s five best boards in
2000.
The
Enron Board of Directors failed to safeguard Enron shareholders and contributed
to the collapse of the seventh largest public company in the United States.
Also, we witness the fall of WorldCom due to poor corporate ethics, Parmalat in
Europe, and Chou Aoyama in Asia.
The override of internal controls such as
authorization, segregation of duties, passwords, physical checks and
supervision or lack of these controls in commercial enterprises usually lead to
fraud, pilferage, theft, embezzlement and hence reduces performance.
This
reflects the practices in the public sector of Cameroon and can be seen through
embezzlement in the Health Ministry by former minister Owona Olanguena, fraud
by MarafaHamidouYaya, Louis BapesBapes found guilty of misappropriation of
funds in the Ministry of secondary education and mismanagement in public
universities.
This
goes a long way to reduce performance. Performance is view in terms of
profitability, liquidity, customer satisfaction, employee and managerial
performance, strategic performance and reputation.
Due
to corruption and malpractices in administration and weak internal controls can
be traced the collapse of companies in Cameroon such as FIFFA, COFINEST, NCF,
CECO, FGH-SA, and Clean OIL.
However,
the government instituted regulatory agencies such as National Anti-Corruption
Commission CONAC, MDPRSS, and Supreme State Audit which have taken corrective
measures to discourage corruption, embezzlement and misuse of funds.
Weak
controls will obviously lead to reduced performance, in this perspective; the
following research questions shall guide this study,
- Can a good internal control system improve the performance of commercial enterprises?
- What are the system of controls to safeguard cash and inventory?
- Are the control measures accurate enough to reduce pilferage?
- Can misappropriation of assets affect the performance of a commercial enterprise?
- Can the management of commercial enterprises be guided by internal controls?
1.3 Objectives of Study
- The main objective of this study is to examine how internal control affects the performance of a commercial enterprise, taking CONGELCAM S.A as a case study.
The
specific objectives are as follows,
- To determine if a good internal control system can improve the performance of commercial enterprises.
- To examine the system of controls put in place to safeguard cash, non-current assets and inventory.
- To establish a relationship between good accounting practices and performance in commercial structures.
- To enable management of commercial enterprises to adopt adequate internal controls.
- To examine the impact of misappropriation of assets on the performance of commercial enterprises
- To make necessary recommendations on the internal control structure of the organization
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