CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Globalization and the advance of technology has become a centre of focus for businesses today. As a result of this rapid changes, business organizations have tend to extend their operations and activities beyond domestic borders result for which increase risk, fraud and other irregularities.

This has made internal control an imperative tool for sustainable business operations. 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 business organizations (Amudo and Inanga, 2009).

Despite the fact that internal control system is expensive to install and maintain, it gradually evolved over the years with the greatest development occurring at the beginning of 1940‟s. Not only have the complexities of the business techniques contributed to this development but also the increased size of business units which have encouraged the adoption of methods which while increasing efficiency of business, acts as a safeguard against errors and frauds.

According to (Shard and David, 2010), the implementation of a budget is tightened to a set of policies and priorities put in place by an entity and are by means of managerial effort met through effective and efficient process of control. Therefore, in order to achieve these goals the process of internal control needs to be efficient, practical and orderly to help conduct businesses.

(Mawanda, 2008) also stated that the implementation of every strategic budget comes along with proper internal control system. According to him, effective internal control system improves the reliability and reporting process of business organizations. This play a key role in enhancing management responsibility aimed at meeting up with timely and accurate financial information.

However, controls are mainly in-built in corporate financial management system within the private sector. Financial management here include legal and organizational framework for supervising all phases of the budget cycle, including the preparation of the budget, internal control and audit, procurement, monitoring and reporting arrangements, and external audit. The broad objectives of corporate financial management are to achieve overall fiscal discipline, allocation of resources to priority needs, and efficient and effective allocation of corporate services.

Moreover, investors must be able to place confidence in an organization’s financial reports if the organization wants to raise capital in the public securities markets. Management’s ability to fulfil its financial reporting responsibilities depends in part on the design and effectiveness of the processes and safeguards it has put in place over accounting and financial reporting.

Without such controls, it would be extremely difficult for most business organizations especially those with numerous locations, operations, and processes to prepare timely and reliable financial reports for management, investors, lenders, and other users.

While no practical control system can absolutely assure that financial reports will never contain material errors or misstatements, an effective system of internal control over financial reporting can substantially reduce the risk of such misstatements and inaccuracies in a company’s financial statements (Kaplan, 2008; Cunningham, 2004; INTOSAI, 2004).

Cunningham (2004), further added that internal controls are effected by people not merely policy manuals and forms, but people functioning at every level of the institution. Internal control only provides reasonable assurance to the organization’s leaders regarding achievement of operational, financial reporting and compliance objectives; promoting orderly, economical, efficient and effective operations; safeguarding resources against loss due to waste, abuse, mismanagement, errors and fraud.

Internal controls lead to the promotion of adherence to laws, regulations, contracts and management directives and the development and maintenance of reliable financial and management data, and accurately present that data in timely reports (Kaplan, 2008; Cunningham, 2004; INTOSAI, 2004).

1.2 Problem Statement

Effectiveness of internal control on budget implementation should be considered most important in every organization because the task of internal controls is to prevent and detect fraud in the organization. Internal controls are put in place to ensure safe custody of all assets; to avoid misuse or misappropriation of the firm’s assets and to detect and safeguard against probable frauds.

Every organization should have management of the highest qualifications, caliber and dedication since its inception. The management should meet regularly to review the affairs of the organization and to direct the strategic path of the organization and also ensure continued goal congruence (Reid & Smith, 2000).

The implementation of a standard budget must be guided by an effective and efficient system of control. This is because through it activities it serves as a tool to detect and prevent loop holes emanating from fraud. However, the inaccuracy of this tool results in financial scandals and unadjusted operational errors (systematic or human), errors from figure transposition and other financial transactions posted in wrong accounts which if not properly looked upon may result in some serious financial loss within the nearest future (Campion, 2000).

Muthinji (2009) carried out a study on the challenges of budget implementation at the commission for higher education. His aim was to study the challenges of budget implementation and its effectiveness at the commission. He found out that budget was important for communication and there is an increasing trend towards decentralization. Murrison (2001) did a survey on budgeting practices among the major British Non-Governmental organizations in Kenya. He focused on their budgeting practices and the extent to which budgets are used as a management control tool. The result showed that 100 percent of the Relief projects over estimated their income.

Systems in a business organization should evolve over time and all the departments and units of the firm should undergo positive transformations. The organization should also employ world class professionals to fill all the keys departments and units. This should probably be ensured by having a transparent and open system of selection and recruitment aided by an ably staffed Human Resource Department of the organization. All departments and units should be adequately staffed with qualified and competent staff. The organization’s records and accounting systems should be refined overtime and be audited by professionally trained and recognized auditors with a good reputation (Chenhall, 2003).

An organization should always have an internal audit department to help in compliance with the internal policies and procedures. Most organizations put the above efforts in order to achieve positive performance.

However, despite all these efforts, organizations still struggle with liquidity problems, untimely financial reports, inefficient accountability for the organization’s financial resources, frauds and misuse of the organization’s resources as well as a number of decisions made not yielding the expected results. Furthermore, business transactions are not carried out according to the Generally Accepted Accounting Principles (GAAPs).

This leaves the assets of an organization being improperly safeguarded, records being incomplete and information being inaccurate which often results in misleading financial statements that cannot be relied on by the stakeholders of the firm.

Jeremiah Munene (2013) conducted a study and found out that some of the challenges experienced in regard to internal controls include; struggles with liquidity problems, financial reports are not made timely, accountability for financial resources is wanting, frauds and misuse of institutional resources have been unearthed and a number of decisions made have not yielded the expected results.

Moraa Ondieki (2013) also conducted a study and stated that internal controls can have features built into them to ensure that fraudulent truncations are flagged or made difficult, if not impossible, to transact. Internal control audits provide assurance that controls are working, but they do not necessarily detect fraud or corruption. The objectives of internal controls audit relate to management’s plans, methods, and procedures used to meet the organization’s mission, goals, and objectives.

PROCASUR Africa Report (2012) added that poor control systems in has led to huge investments lost through fraud and misuse of assets that are used to generate revenues while members and institutions have suffered big losses. Inadequate controls have also led to corruption and collusion of management and external auditors leading to organizations failing to achieve their set objectives. Technological changes have also brought with them challenges in control systems and this has necessitated the development of new ways of controlling organizations.

This study shall attempt to investigate the persistent poor budget implementation of business organizations in Cameroon from the perspective of internal controls which has hitherto been ignored. The effectiveness of internal controls on an organization’s budget implementation should be a key concern for most organizations.

Since internal controls help to prevent and detect fraud in an organization, business organizations in Cameroon should give much importance to internal audit which is generally a feature of large companies. It’s a function provided either by employees of the entity or it can be sourced from an external organization in order to assist management in achieving corporate objectives.

The code of corporate governance highlights the need for an organization to maintain a good system of internal controls in order to manage the risks that the organization is prone to.

Internal audit can play a key role in assessing and monitoring internal control policies and procedures. The objective of a business organization is to make profit and generate income can be attained through implementation of strong internal controls which contain different components of control such as the control environment, risk assessment, control activities, information and communication and monitoring.

The study attempts to answer the following question; what is the effect of Internal Controls on Budget Implementation of Business Organizations in Cameroon?

1.3 Objectives of the Study

1.3.1 Main Objective

The main objective of this research is to examine the effect of internal control system on budget implementation of business organizations in Cameroon.

1.3.2 Specific Objectives

1. To identify the problems associated with weak internal control of business organizations in Cameroon.
2. To examine the budgetary policies put in place at the different companies to guide the budget implemented.
3. To access how effective these policies are in the businesses.
4. To recommend those things that must be done and put in shape by the company to ensure an effective internal control system.

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