ANALYSIS OF FINANCIAL CONTROL SYSTEM IN GOVERNMENT COMMERCIALIZED ENTERPRISES (A CAST STUDY OF NEPA ENUGU)
Chapter one formed the background to the study. In it the researcher was able to set out clearly her objectives for the study having also clearly defined her research problem.
The present chapter (chapter two) is therefore aimed at constructing the theoretical base for the study. The researcher developed keen interest in the study, when she discovered that the secondary sources of data are mainly available in Newspapers such as business times NEPA briefs, seminar/conference proceedings and unpublished works.
The corporate nature of business organisation has made it possible for the separation of the investors from the management of the business organizations.
This separation ensures necessary checks and balances in business organizations for effective internal control and efficient management.
In government parastatals the ownership is not completely divorced from the management while in the private enterprises the reverse is the case. This explains why private enterprises are more efficient and profitable than the government enterprises.
Over the years increasing attention is being paid to the method of internal controls. This is due to the complexity of modern business techniques increased size of business units, huge government spending and the need for proper accountability.
Internal control system is so important that it affect all the assets liabilities, revenues and expenses of a business. The purpose then is to aid the efficient operation of business.
The system includes all the measures taken by management of an organisation for the purpose of:
- Protecting its resources against wastes, fraud and inefficiency.
- Ensuring accuracy and reliability in accounting operating data.
- Securing compliance with organisation polices.
- Evaluating the level of performance in all divisions of the organisation
2.1 CONCEPT OF INTERNAL CONTROL SYSTEM
Though the subject matter of the study is the financial control system, it is pertinent to understand the concept of internal control system which is the whole system of control, financial and otherwise, established by the management to carry out the business in an orderly manner, safeguard it aspectual secure the accuracy and reliability of the control.
The system is called internal control because it is designed and installed by the management to suit its own peculiar circumstance.
Internal control is only an important factor in protecting assets and perverting frauds and this is only a part of its role as all business decisions and based at least partly upon accounting data.
Internal control system can be seen as a two way communication system. The management’s decision becomes organisation for effectiveness. The result of these policies must be reported back to the management for evaluation and continuous update.
The means of communication in internal control system includes the organistional charts, manual of accounting policies and procedures, flow charts, forecasts, purchase order, interim financial reports, job descriptions and performance evaluation reports. Internal control system provides direction to all activities and monitors the working of all units in an organization. Its processes include:
(a) Setting standards.
(b) Measuring performance against the set standard.
(c) Correcting deviations from standards.
Wolf (1985:64) “Auditing Today” defined internal control according to the auditing guidelines, as “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 or records”, consequently he stated that a reliable system of accounting and internal control can be of great help, especially to the external auditor, if the objectives of the system are:
(a) Ensuring that the records are complete, accurate and properly authorized.
(b) Detecting errors and frauds.
This definition of internal control and its objectives differ technically from that of Deaula (1970:10) “Principles of Auditing” who defined internal control in a very systematic manner as “Principally a continuous internal control (audit) carried on by the staff”. He is of the opinion that no internal control system is water tight and as such cannot eliminate fraud completely but rather minimize fraud and increase the possibilities of detection.
These definition and explanations are rather too concise and not explicit enough when contrasted with the definition given by Nwoko (1988:5) “Internal control in business” broke down the two definitions from the two accounting bodies, one form institute of chartered accountant in England and Wales (ICAEW) Statement of Auditing and the other from American Institute of Certificate public Accountants (AKPA) to arrive at the under stated definition “Internal control may be looked at as a system of control administration and otherwise installed and maintained by internal management to achieve the four purposes:
- Safeguard the assets of the enterprises from all forms of misuse and errors.
- Establish and maintain the accuracy and reliability of accounting data, information and records.
- Promote operational efficiency and effectiveness.
- Seek, encourage and obtain adherence to prescribed management policies.
Nwoko (1988:5) “Internal control in business” consequently subdivided internal control into two parts of administration.
- Administrative control – classified as other system of control in the definition.
- Accounting (Financial) control – identified as internal checks, audit and other financial system of controls.
For the purpose of this study emphasis will be placed on the financial control of the internal systems. Financial (Accounting) control therefore explained as “all accounting, financial and monetary control techniques and systems built to promote and encourage the attainment of the objectives of internal controls”.
Internal financial controls measures relates to the protection of assets and to the reliability of accounting and financial reports. These are non-administrative of quantitative objectives of the organisation.
It comprises the method and procedures that are mainly concerned with the authorization of transactions the safeguarding of assets, and the accuracy of accounting records.
2.2 FEATURES OF A GOOD FINANCIAL CONTROL SYSTEM
The financial control system in any organization is designed and installed by the management of suit its own peculiar circumstances and so is not externally imposed except in government parastatals where each has an imposed system of accounting designed for mere routine. Instead of designing, installing and operating a financial control system suited for profit planning, government parastatals have in place a system of accounting for custodianship and expenditure control.
Good financial control system helps to increase efficiency and to decrease waste, unintentional errors and frauds in the organization. Though it may not be possible to have a general financial control system suitable for all organistions, but there are some essential features, which a good control must possess, which if found lacking indicates that the system is faulty and weak. These are:
(a) Qualified, honest and sincere personnel.
(b) Clear definition of functions
(c) Effective checks and counter balances.
(d) Proper authorization of transactions.
(e) Adequate recording.
These are other features of a financial control system such as efficient procedures, rotation of duties, business and ethical code of conduct.
The control system should not revolve round one person no matter how highly placed. It should rather revolve around procedures, processes and techniques.
This brings us to internal audit, when internal audit is present and effective in an organization, it should be a deterrent to regalities, because it is an important element of a system of internal (Financial) control.
Wolf (1985:64) “Auditing today” defined auditing as the independent statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation. The auditor being responsible in the fulfilling of this function”.
In large organizations an important element of internal (financial) control is the internal audit staff. Swager (1973:15) “The practices of modern internal auditing appraising operational management New York” defined it as “professional level employees and / or on the job trained employees with the responsibility of investigating through out the organization, the efficiency of operations in every department or unit”. He maintained that they or a continuous studying both administrative and financial control and reporting to the top management on compliance with organizations, standard and other problems which requires strengthening of internal controls.
They as mostly concerned with a running view of routine transactions and operation and with the improvements of accounting methods from the points of view of efficiency and elimination of errors and fraud.
The auditing guideline on internal controls as reported by Wolf (1985:120) “Advance auditing and investigation” state that the auditor will need to ascertain and record the internal control system in order to make preliminary evaluation of the effectiveness of its component controls and to decide the extent of his reliance thereon. He went further to say that the auditor when considering the risk of irregularities or assessing, internal controls should place more emphasis on the control aspect of:
- Segregation of duties.
- Authorization, particularly of expenses item.
- Completeness and accuracy of accounting data
- Safeguard procedures e.g. signing of cheques.
- Comprehensiveness of controls, including all relevant sub-system.
- Verification of the accuracy of the transactions.
In large organizations the internal audit staff are different from other accounting staff, and are many in number with the general authority to inspect and verify the transaction within the organization.
2.3 THE 1988 CIVIL SERVICE REFORMS ON FINANCIAL CONTROL SYSTEM AS IT AFFECTS GOVERNMENT PARASTATALS
The problem of developing a system of co-ordinating or ensuring that activities of various government agencies/authorities are adequately harmonized is still persistent and parastatals and their parent ministries have continued to operate in relative isolation, but the civil service re-organzation decree No. 43 of 1988 sought to ensure that ministries and parastatals were restructured in a way that wide spread inefficiency and corruption attributable to government owned establishment would be put in check.
Significantly, the 1988 civil service re-organisation was inspired by a dismal past. Take for instance, the annual reports. There have been reported cases for loss of cash occasioned by theft, extravagance embezzlement, waste, negligence, inadequate security and non-compliance with existing rules and regulation amounting to N16.9m in 1982 and N29.7m between 1980 and 1987.
In the schedule to the decree under the guideline for the implementation of the service reforms are provisions meant to amend and / or supplement the revised financial regulations. It contained detailed processes, procedures and guidelines for public sector accounting at the National and state levels.
It serves as the manual for the practice of public sector accounting government parastatals and seeks to check financed malpractice and to ensure accountability.
2.4 GOVERNMENT ACCOUNTING AND CONTROL
The 1999 Nigerian Constitution provides for the financial management in the public sector. The finance ordinance of 1958 and various loans with respect to expenditure control banking foreign exchange market, audit etc also gave backing to the financial management.
The Nigerian constitution contains provisions regulating certain financial matters such as consolidated revenue fund, the preparation of estimates, contingency fund, public debt and audit of public accounts.
With respect to the day-to-day government accounting practices and procedures, they are carried out on the basic of guidelines set out in the understated document.
(a) Financial regulations for the federal government
(b) Financial instructions for the state government.
(c) Financial memoranda for the local government.
These documents are the amplification of the audit act of 1956 and the finance ordinance of 1958 and any other act of the National Assembly having relevance of financial matters from where they derive their authority.
The position of the public accounts committee and the auditor general are provided for in the constitution to police or serve as checks or the financial management system. The position of the accountant general is hat of chief accounting officer of the government. Therefore, government parastatals accounting system and control are based on the government accounting and financial regulations
2.5 STORE CONTROL
Store is a general term describing goods held in the store house or stock yards. The bulk of these good are intended for sole or use as input in production. Store covers finished goods awaiting dispatch to customer scraps and other packages held pending return to suppliers.
The store unit is a very important arm in any establishment; its role as far as a healthy existence of an organization cannot be over-emphasized. Since funds are spent to either produce or procure the goods in the store. Thus the store should be given equal attention as cash.
The stores function assists production of goods and services and no government parastatals can be efficiently managed without it.
The following are considered internal control massive with respect to stores:
RECEIPT OF STORES: This requires that stores are examined for quantity or weight and quality against the local purchase order (LPO) invoice or stores issue voucher (SIV) if the store came up from a government ministry.
Issuing of stores, the store keeper ensure that appropriate authorized the issuance and proper documentation made.
STOCK TAKING: Process of verifying the quantity advance of the entire range of items held in the store physically.
2.6 CASH RECEIPT AND DISBURSEMENT
Cash is more susceptible to theft than any other asset. A good financial control dictates that all cash receipts be deposited intact as they are received and that all cash which should be received was actually received and that only authorized disbursements are made, disbursement be made by and hat all receipts and disbursement be properly accounted for in the records.
2.7 BUDGETING
Budgeting is regarded as the process of formulating into plan all the estimates of income and expenditure of an organization with the aim of using it to plan, co-ordinate and control the monetary commitments of an organization towards the attainment of its objectives. Budgeting is also a plan quantified in monetary terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and / or attain a given objectives. Budget thus provides the yardstick for control of operations, revenues and costs and also over the person responsible for the operations, a related revenue and expense. Budget is divided into:
(a) Revenue
(b) Expenditure
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