Abstract

The globalization of the economy, technological advancements, complexity of business and allegations of fraudulent financial reporting have recently sharpened the ever-increasing attention on internal controls and internal auditing. Simultaneously, the capital markets have seen many new financial instruments and players been introduced, making transactions and operations more complex.

In this research titled “the role of internal control on the performance of commercial enterprises. The objective of this research work is to examine the role of internal control on the performance of commercial enterprises.

To accomplish this objective, data was collected with the use of questionnaires administered to the Head office of CONGELCAM SA at Douala a Cameroon enterprise that deals with the importation, exportation and commercialization of frozen products. A cluster sample was used to attain this objective. 60 questionnaires were administered and 50 were answered which gave us room to analyze the data using mean, standard deviation, percentages and the hypothesis is tested using chi-square.

The data was analyzed based on the following control components; control environment, risk assessment, control activities, Accounting Information and communication System and monitoring. These components were drawn from related literature review such as COSO and other literatures relating to internal control which were highly rated.

Based on the analyzed data, we found out that there exists a positive relationship between the various components of internal control and the performance of commercial enterprises and a conclusion was drawn based on this that internal controls are vital for the efficient, effective and profitable running of commercial enterprises.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Internal controls have existed from ancient times. In Hellenistic Egypt there was a dual administration, with one set of bureaucrats charged with collecting taxes and another with supervising them. In the Republic of China, the Control Yuan, one of the five branches of government, is an investigatory agency that monitors the other branches of government.

The practice within the United States Industrial setting moved Auditing from protecting the assets of single business proprietors, to protecting the numerous stakeholders in an American economy where ownership and management of companies had become divorced from each other.

Regardless of the changing nature of the audit, a large portion of the audit focus was still on the possible fraudulent actions of clerical employees, with no mention of potential problems within the ranks of the management of the company itself.  Thus, nearly 100 years before the problems at Enron and other early twenty-first century audit failures, the seeds of discussion existed regarding not only the necessity of internal control reviews during an audit, which should be investigated and reported for the protection of stakeholders, but also the corporate administrator’s role in financial reporting.

As a reaction to the stock market crash in the fall of 1929, the Congress passed two acts to stabilize the market and ensure proper reporting to investors. The first was the Securities Act (1933), which required publicly held companies to register their market securities and make regular financial disclosures.

The second was the Securities Exchange Act (1934), which created the Securities and Exchange Commission (SEC), an organization tasked with regulating exchanges and brokers as well as monitoring the financial disclosures of publicly held companies.

With the coming of the war in 1941, the major focus of internal control measures from 1941 to 1945 was to identify and reduce fraud and abuse among defense contractors. This type of contract auditing was the responsibility of the internal audit staffs of many of the large corporations.

In November 1949, the Committee on Auditing Procedure of the AIA now known as AICPA issued a report entitled Special Report on Internal Control, which included a definition of internal control. The report indicated that “Internal control comprises the plan of organization and all of the co-ordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies”.

The problems led to Congressional hearings in February 2002, but they did little to calm the fears of investors. In an effort to assuage the public outrage over the Enron scandal and other high-profile financial scandals at the turn of twenty-first century, as well as mute the criticisms over the weak regulatory oversight by the government, the Congress of the US passed a sweeping market reform act that became known as Sarbanes-Oxley Act (31st July 2002).

In Cameroon, internal control measures are practice by the Government, establishing the Ministry of the Supreme State Audit (MINCSP) with an objective to fight against the practice of corruption, embezzlement and all the malfunctions in the public sector of Cameroon.

Supreme State Audit incriminates SODECOTON General Manager, Iya Mohamed who was found guilty of 20 managerial lapses that cost the state 9 billion. The MINCSP in Cameroon has also undertaken to encourage transparency in the management of public affairs measures for management in corporations to establish controls and check their effectiveness in order to increase the reliability on audited financial statements following the collapse of micro financial institutions like FIFFA, National Corporate Fund (NCF), Global Business Financial (GBF), Compagnie financière de l’estuaire du Cameroun (CO-FINEST).

The Supreme State Audit (SAI) appointed by the Head of State has also got jurisdiction over businesses in Cameroon. One of the major roles played by the SAI to control corruption in the Public sector is by carrying out punitive actions against government officials for poor management, fraud and corrupt practices. ‘‘Operation Sparrow Hawk’’ is also a corrective measure taken by the Head of State to fight against corruption and the misuse of public funds.

In this respect the discrepancies of the Higher Education sector and weaknesses in the secondary education can also be attributed to embezzlement for this, we can notice the removal of the former Minister of Secondary Education Louis Bapes Bapes sentenced 20 years of jail due to misuse and embezzlement of funds.

Another scandal is the case of Marafa Hamidou Yaya, former minister of territorial administration and decentralization and Yves Michel Fotso, former Director of defunct state air transport company CAMAIR who was held guilty of misappropriation and sentenced 25 years of jail. This led to the closure of Yves Fotso’s corporations such as FGH-SA and Clean OIL.

Equally the National Anti -Corruption Commission (CONAC), is an institutional body established by the Head of State to fight against corruption in the country.

1.2 Statement of the Problem

The causes of the current economic and financial crises and the occurrence of ever repeating accounting and business scandals throughout business history are often associated with “detached”, “corrupt” and “greedy” corporate cultures. The absence of adequate internal controls as set by the SOX ACT and other regulatory bodies generally lead to the collapse of companies.

Enron was ranked by Chief Executive Magazine as having one of the nation’s five best boards in 2000. The Enron Board of Directors failed to safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States. Also, we witness the fall of WorldCom due to poor corporate ethics. Parmalat in Europe and Chou Aoyama in Asia.

The override of internal controls such as authorization, separation of duties, passwords, physical checks and supervision or lack of these controls in commercial enterprises usually lead to fraud, pilferage, theft, embezzlement and hence reduces performance.

This reflects the practices in the public sector of Cameroon and can be seen through embezzlement in the Ministry of Health by former minister Owona Olanguena, fraud by Marafa Hamidou Yaya, Louis Bapes Bapes found guilty of misappropriation of funds in the Ministry of secondary education and mismanagement in public universities. This goes a long way to reduce performance. Performance is view in terms of profitability, liquidity, customer satisfaction, employee and managerial performance, strategic performance and reputation.

When a company operates without an effective system of internal controls, employees complete job tasks in an environment without the assurance of personal safety. This leads to high rates of employee dissatisfaction, absenteeism and low rates of employee retention. Employers then spend unnecessary time and effort recruiting, interviewing, hiring and training new employees on a regular basis.

The integrity of financial records and managerial reports tends to be questioned by business partners and stakeholders, such as investors. The company’s reputation suffers when it experiences non-compliance with laws, regulations and other requirements occur and may even lead to legal action.

Customers notice when a company seems to be run without regard for internal controls. High rates of customer dissatisfaction, poor sales and lack of lucrative business partnerships reflect a company that lacks direction and focus. Waste, inefficient use of resources, poor management decisions and high rates of product errors, loss of records, carelessness and mistakes generally demonstrate poor business practices and ineffective management.

Due to corruption and malpractices in administration and weak internal controls, we could   trace the collapse of companies in Cameroon such as FIFFA, COFINEST, NCF, CECO, FGH-SA, and Clean OIL. However the government instituted regulatory agencies such as National Anti-Corruption Commission CONAC, MDPRSS, and Supreme State Audit which have taken corrective measures to discourage corruption, embezzlement and misuse of funds. Weak internal control will obviously lead to reduced performance, in this perspective; the following research questions shall guide this study,

• What is internal control?
• Can a good internal control system improve the performance of commercial enterprises?

What are the system of controls to safeguard cash and inventory?

Are control activities   effective to assure employee performance?

Are the control measures accurate enough to reduce pilferage?

Can a good internal control system increase the productivity in commercial enterprises?

Can the management of commercial enterprises be guided by internal controls?

Can good control increase the profitability of commercial enterprises?

1.3 Objectives

1. To identify the problem associated with internal control and performance of commercial enterprise.
2. To examine the impact of internal control on performance of commercial enterprise.
3. To make recommendations.

1.4 Hypothesis

Ho: Internal control does not significantly affect the performance of commercial enterprises.

H1: Internal control significantly affects the performance of commercial enterprise.

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