CHAPTER ONE
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
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 control- Integrated 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).
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).
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:
- To ensure that the business is carried out in an orderly and efficient manner
- To ensure adherence to management policies.
- To safeguard the assets of the organization.
- 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:
- economic efficiency can engender cost minimization and revenue maximization
- adherence to management policies actually fosters cost minimization and revenue maximization.
- safeguard of corporate assets specifically enhances profitability
- completeness and accuracy of records can be instrumental to corporate profitability.
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:
- assess the level of influence economic efficiency has on revenue maximization.
- consider the extent to which adherence to management policies can foster revenue maximization.
- examine the extent to which safeguard of corporate assets can engender cost minimization.
- examine the degree of impact completeness and accuracy of records have on cost minimization.
