CHAPTER ONE
1.1 BACKGROUND INFORMATION
To achieve the key financial objective of the firm, that is, profit maximization, the
two pre-requisites are efficient utilization of resources and margins management.
“The two main pre-requisites for profit maximization are efficient utilization of
resources and margins management; hence, profit is maximized when resources are
efficiently utilized and margins are well managed. (Ayodeji, 2011: 107). The efficient
utilization of resources argument is the economists‟ viewpoint to profit maximization
while margins management is the accountants‟ viewpoint to profit maximization.
Efficient resource utilization can otherwise be called economic efficiency. It can be
sub-grouped into productive and allocative efficiency. Achievement of productive
efficiency requires operational and production control, as productive efficiency
requires quality control leading to efficient materials or stock control, labour or
personnel control whereas, allocative efficiency on the other hand, requires efficient
personnel planning and control, recruitment policy and quality control.
Margins management another aspect has two elements; Cost or expense minimization
and revenue maximization. Cost minimization is anchored on cost control and cost
reduction strategies. Hence, margins management requires cost control.
From all the foregoing, it is evident that achievement of economic efficiency and
margins management will be a mirage if effective control strategies are not put in
place, whether financial or non-financial. As a result of this, in the internal operations
and workings of an entity, there is the need to put proper systems of control in right
perspectives, such internally entrenched controls are termed internal controls.
Internal control, the strength of every organization, has become of paramount
importance today in our Organizations. The reason being that the control systems in
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any organization is a pillar for an efficient accounting system. The need for the
internal control systems in an organization cannot be undermined, due to the fact that
the economy, which has a crucial role to play in the economic development of a
country, is now being characterized by economic instability, slow growth in real
economic activities, corruption and the risk of fraud. Fraud, which is the major reason
for setting up an internal control system, has become a great pain in the neck of many
Nigerian organizations. (Olaoye Clement Olatunji 2009)
For organizations to be able to function effectively and contribute meaningfully to the
development of a country, the industry must be safe, stable and sound. And for these
conditions to be obtained there must be a sound accounting system, which is
occasioned by an internal control system.
A system of strong internal controls can help to ensure that the goals and objectives of
a banking organization will be met, that the bank will achieve long-term profitability
targets and maintain reliable financial and managerial reporting.(Etuk Ifiok Charles
2011).
These days, many people are talking about how to control financial security. One
strategy is to improve the internal control system that was first put forward in the
United States. The current representative outline, the COSO report (Internal controlIntegrated Framework), has reached maturity, and the basic framework for internal
control systems has already been formed. The report concluded that internal control
systems have the following features: (1) effectiveness and efficiency of operations;
(2) completeness and accuracy of records (3) adherence to management policies (4)
safeguard the assets of the organization. For organizations, an internal control system
is a necessity. Without it, they will have difficulty achieving profitability or normal
operations. (Sato Takahiro; Pan Jia 2012).
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Internal controls, however, are the whole systems of control, financial or otherwise,
established by the management to carry out 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.
Profitability is the profit earning capacity which is a crucial factor contributing to the
survival of the firms. The perpetual existence of the firms depends on the profit
earning capacity of the firm, which is also considered to be the main factor in
influencing the reputation of the firm. Therefore, it is necessary to differentiate profit
and profitability at this juncture.
Profit, from the accounting point of view, is arrived at by deducting from the total
revenue of an organization all amount expended in earning that income whereas
profitability can be measured in terms of profit shown as a percentage of sales known
as profit margin (T.Venkatesan ; Dr S.K. Nagarajan 2012).
1.2 Statement of the Problem
Establishment of an Internal Control System has been seen as a key aspect of
controlling a business organization as an important management tool of co-ordination
for achieving business profitability. It has been defined by the Operational Standard
(of Auditing Guidelines) as “the whole system of controls, financial and otherwise,
established by the management in order to carry out 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 the records”.
By this, the objectives or purposes of internal control system can be obtained from the
definition. These are:
I. To ensure that the business is carried out in an orderly and efficient manner
II. To ensure adherence to management policies.
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III. To safeguard the assets of the organization.
IV. To secure the completeness and accuracy of records.
All these objectives are believed to be instrumental to the achievement of the
profitability objective of a business firm, as each one should engender either cost
minimization or revenue maximization or even both, the two being the two aspects of
profitability maximization objective.
However, with the entrenchment of internal control system in most organizations,
some of them still find it difficult to achieve the financial objective of profitability;
hence, it appears that internal control system does not have any positive bearing on
corporate profitability. As a result of this, the research problem lies on the fact that, it
is doubtful whether:
I. economic efficiency can engender cost minimization and revenue
maximization
II. adherence to management policies actually fosters cost minimization and
revenue maximization.
III. safeguard of corporate assets specifically enhances profitability
IV. completeness and accuracy of records can be instrumental to corporate
profitability.
1.3 Research Objectives
Bearing in mind the significance of internal control system in the achievement of
corporate financial objectives, and the research problem in specifics, there is the need
to carry out a research of this nature with the objective of considering, evaluating,
assessing, studying and examining the impact of internal control system on the
corporate profitability. Therefore, the specific objectives of this study are to:
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I. assess the level of influence economic efficiency has on revenue
maximization.
II. consider the extent to which adherence to management policies can foster
revenue maximization.
III. examine the extent to which safeguard of corporate assets can engender cost
minimization.
IV. examine the degree of impact completeness and accuracy of records have on
cost minimization.
1.4 Research Questions
As a direct consequence of the fact that the research is both quantitative and
qualitative, the following questions were asked to which answers were supplied to
find dependable solutions to the research objectives:
I. Does economic efficiency have any influence on revenue maximization?
II. To what extent can adherence to management policies engender revenue
maximization?
III. Do safeguard of assets have any positive bearing on cost minimization?
IV. Do completeness and accuracy of records have any impact on cost
minimization?
1.5 Research Hypotheses
Stemming from the specific research problems and objectives, as well as research
questions, the following hypotheses were tested in this research:
Hypothesis I
Ho1: There is no significant relationship between economic efficiency and revenue
maximization.
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Ha1: There is significant relationship between economic efficiency and revenue
maximization.
Hypothesis II
Ho2: There is no significant relationship between adherence to management policies
and revenue maximization.
Ha2: There is significant relationship between adherence to management policies and
revenue maximization.
Hypothesis III
Ho3: There is no significant relationship between safeguard of assets and cost
minimization.
Ha3: There is significant relationship between safeguard of assets and cost
minimization.
Hypothesis IV
Ho4: There is no significant relationship between completeness and accuracy and cost
minimization.
Ha4: There is significant relationship between completeness and accuracy and cost
minimization.
1.6 Significance of the Study
Due to the current situation of the organizations generally, there is the need to search
for alternative strategies, policies, guidelines and solutions to the poor performances
of organization.
However, students and researchers of high working experiences would benefit from
this study, as the conceptual framework and theoretical framework of this research
would enhance their knowledge and understanding of the subject matter.
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Also, the members of the organization including the management, stakeholders and
directors would find this work a useful guide in minimizing their cost and maximizing
their revenue.
This study would as well be helpful to the regulatory authorities of Internal control
system. This is in order for them to evolve better policies in achieving the soundness
and the stability of Internal Control and ensuring adherence to management policies.
Therefore, the significance of this research work is a bi-faceted one, which is to
identify areas of possible improvements and find solutions to the listed problems on
one hand and to contribute to the body of knowledge.
1.7 Scope of the Study
This research focuses on Impact of Internal control system on cost minimization and
revenue maximization as the two aspects of profitability. The scope of the issues that
were examined is limited to the overall objectives of the research. The causes, effects
and solutions to any irregularities discovered are widely addressed. However, the
spatial dimension covers the corporate entities in Nigeria.
1.8 Limitations of the Study
Here we identify the various challenges and constraints that were faced by the
researcher from attaining the scope of the study to the fullest.
Some of these constraints include:
1. Materials: All relevant information needed for this study was not provided due
to the fact that there were restricted access to materials needed for this study.
Some corporate entities are reluctant to releasing some information about the
financial statement of their organization.
2. Finance: Lack of sufficient funds to execute the research project could also be
seen as a challenge of the researcher. As a result there were restriction and
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limits that the researcher could go because sufficient finance is needed to
execute the project fully.
3. Information adequacy: Unavailability of Information required for effective
research may be a limitation of the study. Facts were not easy to come by as a
result of the fact that some of the information were outdated or not related to
the study.
1.9 Organisation of the Study
This research work is structured as a five-chapter work, such that the general
introduction is covered by chapter one, chapter two covers literature review, chapter
three discusses the research methodology, chapter four is devoted to data presentation
and analysis while chapter five is meant for conclusion, recommendations and
suggestion for further studies based on the findings from the study.
1.10 Definition of Terms
ACCOUNTING SYSTEM: It is the system of recording, processing & reporting
transactions and financial events as a basis for preparing financial statement in an
organization. It can also be seen as an organized set of manual and computerized
accounting methods, procedures and controls established to gather, record, analyze,
summarize, interpret and present accurate and timely financial data for management
decisions.
INTERNAL CONTROL SYSTEM: This can be defined as the whole system of
controls, financial & otherwise, established by the management in order to carry on
the business of the enterprise in an orderly & efficient manner, ensure adherence to
management policies, safeguard the assets, deter and detect errors, fraud, and theft &
secure as far as possible the completeness & accuracy of the records.
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PROFITABILITY: It is the primary goal of all business ventures. Without
profitability, the business will not survive in the long run. Profitability is synonymous
with profit maximization. It is the ability of a business to make profit. A profit is what
is left of the revenue a business generates after it pays all expenses directly related to
the generation of the revenue and other expenses related to the conduct of the
business activities.
COST MINIMISATION: It refers to controlling costs, reducing excessive expenses or
eliminating undue ones, thus applying cost control and cost reduction principles. It
also implies keeping costs or expenses at the barest minimum.
REVENUE MAXIMISATION: It implies that the sales revenue of the firm has to be
maximized in order to achieve a high level of income capable of absorbing the
expenses of the firm and providing the firm with a reasonable degree of net
profitability. It usually requires managerial efficiency in the utilization of capital
employed or assets in generating sales revenue over and over again.
ECONOMIC EFFICIENCY: It is a term that implies an economic state in which
every resource is optimally allocated to serve each person in the best way while
minimizing waste and inefficiency. It can also be referred to as a situation in which it
is impossible to generate a larger welfare total from the available resources. It
indicates that a balance between benefit and loss has been achieved.
MANAGEMENT POLICY: It can be referred to as a set of policies that address
various aspects of collections management. The policy defines the scope of a
museums collection and how the museum cares for and makes collection available to
the public. A collections management policy also explains the roles of the parties
responsible for managing the organizations collections.
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ASSETS: An asset is anything of value that can be converted into cash. Assets are
owned by individuals, businesses and governments. An asset is an economic resource.
Anything capable of being owned and controlled to produce value and that is held to
have positive economic value is considered an asset. Assets represent value of
ownership that can be converted into cash (although cash itself is also considered an
asset).
COMPLETENESS OF RECORDS: It is important to keep complete records. Records
such as: banking information, proof of income, expenses, cashbooks and wage books.
It also needs to be organized and to be kept up to date and held for a period of seven
tax years.
ACCURACY OF RECORDS: This can be described as keeping records without
material errors and are up-to-date and it is important because they make it quicker for
your tax agent or accountant to do your books and will save you money, give you the
information you need to manage your business and help it grow, make it easier to get
a loan.
STEWARDSHIP: Here, both the directors and managers act as stewards of the
shareholders, who may be referred to as Lords. The directors and managers are
required to be faithful in the running of the affairs of their lords (i.e. the shareholders)
in their operation in stewardship capacity: they are expected to be faithful as to time,
money, resources and quality of information given to their lords specifically, they are
expected to give reports of their stewardship annually through annual reports and
accounts called financial statements.
AGENCY RELATIONSHIP: Here, the board of directors / management act as the
agent of the body of shareholders, the principal. The board of directors or
management can bind their principal (the body of shareholders) by taking decisions,
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making agreements, entering into contracts, disposing of properties (i.e. assets) on
behalf of their principal, the body of shareholders. But they have the common law
duties of obedience: care and skill; and personal performances as well as fiduciary
duties of Uberrimae Fidei.
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