INTERNAL CONTROL IN AN ORGANIZATION AS A WATCHDOG FOR FRAUDULENT PRACTICES

INTERNAL CONTROL IN AN ORGANIZATION AS A WATCHDOG FOR FRAUDULENT PRACTICES

 

ABSTRACT

This study looks at Internal control in an organization as a watchdog for fraudulent practices. Internal control being an integral part of corporate governance has seen a lot of reform due to the corporate scandals and financial crisis in the economic environment causing regulator to focus on increased disclosure requirements especially in the areas of corporate governance. Internal control disclosure requirement   ranged from  the requirement of the foreign Corrupt practice Act (FCPA) of 1977 to Sarbanes Oxley’s Act of 2002 which required the assessment of internal control structure and the Turnbull report of 1999 which also  required an organization wide risk management approach to internal control. Nigeria has continued to experience high level of financial   loss due to fraudulent practices. Unfortunately, there are no empirical studies on the effectiveness of internal control with reference to SOX  requirement and the prescriptions of Turnbull report in Nigeria. The  broad objective of  the study is to examine the effectiveness of the internal control system in an organization as a watchdog over fraudulent practices. Specifically, the study examined  the internal control variables which include internal audit, audit committee, ethical tone and risk assessment to see if there is a positive and significant relationship between their effectiveness and fraud prevention and also to examine if there is a relationship between  sources of fraud detection  and strength of  internal control processes. The study adopted the analytical survey method to gather information on the variables; internal audit, audit committee, ethical tone and risk assessment. The population of the study comprised of senior  management and staff of internal control department of the firms listed on the Nigeria stock exchange that are been audited by the bid four audit firms. Using  the judgmental sampling technique  we  chose 2 senior  managerment  and 4 staff of internal  control department of the firms quoted on the Nigeria stock exchange  that are being audited by the big four audit firms (KPMG, PWHC, AWD, E&Y). Data were collected by means of questionnaire with response options graduated into five likert scale designed to capture information on the extent of compliance on the internal control guidelines. Data were also extracted from the records of the Economic and Financial Crimes Commission (EFCC) of firms where fraud had occurred. The logistic regression analysis was adopted to test four hypotheses while the Pearson’s chi square was used to test the fifth hypothesis. The result showed that positive and significant relationship existed between effective internal audits, effective audit committee, ethical tone at the top and risk assessment in Nigerian quoted  firms. The result also showed that the strength of internal control process is positively and significantly related to the sources of fraud detection in an organization. The study provides an insight into internal control practices in Nigerian firms. The organizations  have not imbibed  the prescriptions of the recent corporate governance practices as prescribed by Sarbanes Oxleys Act (Sox) of 2002 and the Turnbull report of 1999.  The study therefore recommends  that due   to the effect of non compliance to these recommendations there should be sanctions put in place to ensure compliance, investigative function established to investigate and recover assets, ensure a more vibrant audit committee and the audit committee should adopt the prescription of the American Institution of Certified Public Accountant (AICPA) to address the risk of management override of internal control. The study has provided opportunity for future research into internal control practices of firms not listed on the Nigeria stock exchange and those not audited by the big four audit firms.