CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND STUDY
Internal financial controls are systems within a company that design methods and procedures to produce effective operations, establish reliable financial reporting, avoid fraud and maintain compliance with regulations and laws. Internal financial controls evaluation is meant to help institution review and assess the structure of accountability within the organization. An effective system of internal financial controls gives assurance regarding the integrity of financial reporting and safeguarding of assets. Fraud can easily be detected through internal controls. Such controls also help accuracy in financial reporting. Asare, T. (2006). Internal financial controls are used by organisations to make sure financial information is accurate and valid. The existences of internal financial controls are important because they protect the integrity of an organisation’s financial information and allow stakeholders a measure of financial health. Strong internal controls can also increase the profitability of a company. Krishnan (2005).
Internal control as “Comprising the plan of an organization and all the co-ordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, prorate operational efficiency and adherence to prescribed managerial policies.” The definition of internal control is divided into financial internal control and non-financial (administrative) internal control.Financial internal control pertains to financial activities and may be exemplified by controls over company‟s cash receipts and payments financing operations and company‟s management of receipts and payments.Non-financial internal control on the other hand deals with activities that are indirectly financial in nature i.e. controls over company‟s personnel section and its operations, fixed assets controls and even controls over laid down procedures (Reid and Ashelby, 2002). A sound internal control system helps an organization to prevent frauds, errors and minimize wastage.Custody of assets is strengthened; it provides assurance to the management on the dependability of accounting data eliminates unnecessary suspicion and helps in maintenance of adequate and reliable accounting records.This study therefore attempts to establish the effectiveness of internal control system in manufacturing firms in Kenya (Amudo and Inanga, 2009).
Mawanda (2008), states that “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. Preparing reliable financial information is a key responsibility of the management of every public company. The ability to effectively manage the firm’s business requires access to timely and accurate information. Dixon et al (1990) found out that appropriate performance measures are those which enable organizations to direct their actions towards achieving their strategic objectives. Stoner (2003) refers to performance as the ability to operate efficiently, profitably, survive, grow and react to the environmental opportunities and threats. In recent years the aspect of internal control system has achieved great importance since it is designed to safeguard the company’s assets against misuse, ensure compliance with the company’s laid policies, ensure the company’s personnel are efficiently utilized and the company runs in an orderly and efficient manner. So this study focuses on the internal financial control system in institution of higher learning, using Osun State University as a case study.
1.2 STATEMENT OF THE PROBLEM
There are various components of internal financial control systems used to develop and evaluate an organizational financial regulatory compliance. These components are control environment, risk assessment, control activities, information and communication and monitoring. They need to work together to form a strong set of methods and procedures the company follows in its operations. In addition to these internal control system, there are other laws and institutional frameworks and are established to ensure sound financial administration of state and other enterprises. With increasing donor support for the education sector and increasing budgetary allocation there are calls for stringent financial management to ensure value for money and thereby increase the total well-being of the country. Again, internal financial controls are enforced better in profit organizations compared to non-profit organizations. Therefore, there is the need to evaluate internal financial control system in institution of higher learning, using Osun State University as a case study.
1.3 OBJECTIVES OF THE STUDY
The general objective of this study is to examine internal financial control system in institution of higher learning, using Osun State University as a case study. The specific objectives are: 1. To examine if there are operational internal financial controls systems in Osun State University. 2. To ascertain the nature of the internal financial control system implemented in Osun state University. 3. To find out the eect of internal financial control system on the financial performance of Osun state University. 4. To investigate the other conventions and laws that govern financial management in Osun state University. 5. To establish the consequences for compliance or non-compliance of such systems and regulations in Osun State University.
