EFFECT OF INTERNAL CONTROL SYSTEM ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES

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EFFECT OF INTERNAL CONTROL SYSTEM ON THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES

1.0 INTRODUCTION TO CHAPTER ONE 

1.1 Background of The Study

Every organisation, business or non-profit, has objectives and goals that they want to attain (Chukwu, 2012). The purpose of a profit-making company is to meet the expectations of its owners by maximising expected return on capital.

Small and medium-sized businesses may be small in size and scope, but they nevertheless require efficient organisation management. This is where Internal control comes into play.

As a result of the recent surge in accounting scandals, the internal control function has gotten a lot of attention as a vital contributor to good company governance and financial reporting.

This is due to the fact that a high-quality internal control function is concerned with enhancing financial reporting by assuring standard compliance. 2008 (Prawitt, Smith, and Wood).

According to Chukwu (2012), in order for an organisation to carry out its operation, various resources, such as materials, machines, and money, must be placed in place. These must be well-coordinated in order for the organisation to be successful.Management is a group of people who employ these variables.

Management cannot exist without an organisation because the two are linked. As a result, the internal control system assures management of the reliability of the accounting data used in the organization’s decision making.

An internal control system has been discovered to be extremely important to a business, particularly in ensuring the dependability and correctness of financial data. Furthermore, it is a topic that has received far too little attention in management literature (Changchit,Holsapple, and Madden, 2001).

Similarly, the quality of an organization’s internal control system has a considerable impact on management guideline accuracy. Similarly, organisations that disclose an inadequate internal control system are more likely to have management errors in their operations than firms that declare an effective internal control system (Feng and McVay, 2009).

As a result, it is the responsibility of an organization’s management to guarantee that an effective internal control system is in place to assure the achievement of the organization’s defined objectives. This is because management, not auditors, is responsible for establishing and monitoring effective internal control systems.

Changchit et al., 2001; Holsapple et al., 2001; Madden et al., 2001). Simultaneously, a good internal control system is a key driver of profits quality (Church and Schneider, 2008).

Similarly, a strong internal control system is critical to a firm’s performance (Jokipli, 2010). In keeping with the preceding point, an effective internal control system can help to ensure the effectiveness of internal audit.

Internal control systems are an essential component of any organization’s managerial process, whether it is a small or medium-sized business. It should be set up to provide reasonable confidence that operations are carried out efficiently and effectively.

Organisations build internal control systems to assist them in achieving performance and organisational goals, preventing resource loss, producing trustworthy reports, and ensuring compliance with laws and regulations.

An internal control system is a network of systems built within an organisation to provide reasonable assurance that organisational goals will be met.

1.2 statement of the Problem

One may not fully comprehend the need of an internal control system in an organisation until they see one that does not have one. In the absence of appropriate internal control mechanisms, an organisation risks preparing false financial statements and records,

stealing and mismanaging the organization’s finances, and failing to implement accounting rules in accordance with applicable standards.

An internal control system is beneficial to a company, particularly in terms of ensuring the dependability and correctness of financial data. Internal control is a topic that has gotten less attention in management literature (Changchit, Holsapple, and Madden, 2001).

The quickly changing economic and competitive contexts, fluctuating consumer expectations and priorities, and restructuring for future growth and societal trends demonstrate the extent to which an organization’s internal controls should be constructed to enable continual growth in organisational performance.

Management and people must be involved at all levels of the organisation to address risks and provide reasonable assurance of the achievement of the organization’s mission and general objectives.

Internal control, which ensures the stability of any company, has so grown in importance nowadays. This is due to the fact that the control mechanisms in place are a cornerstone for both an efficient accounting system and the attainment of organisational goals.

As a result, greater research on the influence and effectiveness of internal control systems is required. The purpose of this research is to look at the relationship between internal control systems and the performance of small and medium-sized businesses in the Ilorin metropolitan.

1.3 Objectives of The study

The general goal of this research is to assess and determine the impact of internal control systems on the performance of small and medium-sized businesses in Ilorin.

The following are the study’s particular objectives:

1. to assess the influence of the internal control system on the return on investment (ROI);

2. to determine whether the occurrence of fraud and revenue loss is the result of a weak or non-existent internal control system in the company.

1.4 Research Questions

This study will be guided by the research questions listed below.

1. How much influence does the internal control system have on the return on investment?

2. To what extent does the occurrence of fraud and revenue losses in an organisation originate from a weak or non-existent internal control system?

1.5 Hypothesis statement

In this investigation, the following null hypotheses will be tested:

Ho1: The internal control system of the organisation does not assure the proper use of its cash and assets.

Ho2: Fraud and revenue loss in an organisation are not the result of a weak or non-existent internal control system.

1.6 justification of The study

There is no doubt that some research has been undertaken on internal control systems; however, the current study emphasises the importance of an efficient internal control system on the performance of small and medium-sized firms in the Ilorin metropolitan.

This research will go a long way towards assisting small and medium-sized firms in determining the impact of internal control weaknesses and suggesting strategies to fix them. It will also reveal issues caused by a faulty internal control system.

This would also act as a reliable reference for future researchers to use in furthering their research.

1.7 scope and limitations of the Study 

This study will concentrate on the activities of small and medium-sized businesses in Kwara. The study would take a sample of small and medium-sized businesses in the Ilorin city.

The purpose of this study is to demonstrate the impact of internal control systems on the performance of chosen small and medium-sized businesses.

The study’s main restriction would be the short time frame allotted to complete it. Other constraints include a budgetary constraint, restricted personnel and material resources for doing the research, and the survey respondents’ low reading level.

1.8 Definition of Terms 

The following terminology will be used throughout this study project and must be defined. They are as follows:

Internal examiner

In contrast to the external auditor, the internal auditor is a SME employee whose primary responsibility is to advise management on whether the SME’s major operations have effective risk management and internal controls (Putra, 2008, p. 1).

Internal audit plays a broad role in reviewing internal controls since ‘everyone from the mailroom to the boardroom is involved in internal control’ (Institute of Internal Audit, 2008).

The internal auditor’s task ranges from reviewing the organization’s tone and risk management culture at one level to evaluating and reporting on the efficacy of management policy execution at other SMEs (Institute of Internal Audit, 2005, p.1).

Control

Is a present-day exercise undertaken to reach a future-oriented plan.

Management

It is defined as the process of planning, organising, coordinating, and controlling an organization’s actions. It is viewed as a collection of people who monitor and regulate the operations of the organisation in order to fulfil the organization’s goals.

Audit

This is the independent examination and expression of opinion on an enterprise’s financial statements by an appointed auditor in accordance with that appointment and in accordance with legislative requirements and professional obligations.

Performance

It refers to a continuous practise of controlling the standards against which an institution, agency, or initiative can be held accountable.

1.9 plan of The study

This study’s report is divided into five chapters. The first chapter serves as the study’s introduction. The second chapter is a review of pertinent literature. The technique of the research study is covered in Chapter three.

The fourth chapter would include the data presentation, analysis, and discussion of findings, while the fifth chapter would include the study’s summary, conclusion, and recommendations.

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