Abstract

  The globalization of the economy, technological advancements, the 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 context, 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 Cameroonian 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. 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 reviews such as COSO and other literature relating to internal control which was 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 those internal controls are vital for the efficient, effective, and profitable running of commercial enterprises.

CHAPTER ONE

INTRODUCTION

1.1 Background to Study

Internal controls refer to the measures instituted by an organization so as to ensure the attainment of the entity’s objectives, goals, and missions. They are a set of policies and procedures adopted by an entity in ensuring that an organization’s transactions are processed in the appropriate manner to avoid waste, theft, and misuse of organization resources.

Internal control, according to the Committee of Sponsoring Organizations of the Tread way Commission (COSO), is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations, and safeguarding of assets against unauthorized acquisition, use or disposition.

It is worth noting that internal controls only provide reasonable but not absolute assurance to an entity’s management and board of directors that the organization’s objectives will be achieved. “The likelihood of achievement is affected by limitations inherent in all systems of internal control” (Hayes et al., 2005).

Internal control will ensure that errors and irregularities are avoided or made apparent. Internal control is a system comprises of the control environment and procedures. It includes all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objectives of ensuring as far as practicable the orderly and efficient conduct of its business so as to safeguard assets, to prevent and detect fraud and error to ensure accuracy and completeness of accounting records and the timely preparation of reliable financial information (SAS 300.1).

During the period from approximately 1905 to 2004, the definitions, meaning, and use of internal controls in auditing as well as their impact on audit engagements have developed and transformed. These changes were often a reaction to a major change in the economic situation of the country as a whole or to the actions of individual firms within the economy.

In 1892, Lawrence Dicksee made it clear that the object and scope of an audit were threefold. Dicksee also stated that the “whole duty of the auditor is to ascertain the exact state of the client’s affairs upon a certain given date”

The author then explained that this duty may be accomplished by “testing” the accounts, but he never discussed the concept of internal control in any fashion as it relates to those tests.

According to Montgomery the purpose of an audit had moved from just the detection of both fraud and errors to the primary purpose to “ascertain the actual condition and earnings of an enterprise for (a) its proprietors, (b) its executives, (c) bankers and investors who are considering the purchase of securities.

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 for Montgomery, 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, 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

In 1934, Victor H. Stempf proceeded to discuss the fact that it is the responsibility of the company, not the independent auditor, to detect fraud within the company. He stressed fraud and defalcation investigations would be a duplication of the work done by the company’s internal audit staff.

Stempf made these very pointed comments even though the 1931 Ultramares case had ruled that professional liability could attach to auditors in the case of fraud and negligence.

The concept of independent auditor responsibilities was to evolve through litigation and authoritative pronouncements over the next 70 years culminating with SAS 99 in 2001, which finally placed an affirmative responsibility on auditors to detect fraud.

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 staff 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 coordinate 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 debacle and other high-profile financial scandals at the turn of the 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.

The Ministry of the Supreme State Audit (MINCSP) was established 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 which 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. In this effect, the SAI has the power to take punitive actions.

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. This task is done by the Budget and Finance Disciplinary Board headed by Henri Eyebe.

‘‘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 vice chancellor of the University of Buea and of Douala.

Minister of Secondary Education Louis BapesBapes sentenced to 20 years of jail due to misuse and embezzlement of funds.

Another scandal is the case of Marafa HamidouYaya, former minister of territorial administration, and Yves Michel Fotso, former Director of defunct state air transport company CAMAIR which were held guilty of misappropriation and sentenced to 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 Problem Statement and Justification of Study

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, segregation 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 Health Ministry by former minister Owona Olanguena, fraud by MarafaHamidouYaya, Louis BapesBapes 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 viewed in terms of profitability, liquidity, customer satisfaction, employee and managerial performance, strategic performance, and reputation.

Due to corruption and malpractices in administration and weak internal controls can be traced 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 the National Anti-Corruption Commission CONAC, MDPRSS, and Supreme State Audit which have taken corrective measures to discourage corruption, embezzlement, and misuse of funds.

Weak controls will obviously lead to reduced performance, in this perspective; the following research questions shall guide this study,

1. Can a good internal control system improve the performance of commercial enterprises?
2. What is the system of controls to safeguard cash and inventory?
3. Are the control measures accurate enough to reduce pilferage?
4. Can misappropriation of assets affect the performance of a commercial enterprise?
5. Can the management of commercial enterprises be guided by internal controls?

1.3 Objectives of Study

The main objective of this study is to examine how internal control affects the performance of a commercial enterprise, taking CONGELCAM S.A as a case study. The specific objectives are as follows,

1. To determine if a good internal control system can improve the performance of commercial enterprises.
2. To examine the system of controls put in place to safeguard cash, non-current assets, and inventory.
3. To establish a relationship between good accounting practices and performance in commercial structures.
4. To enable management of commercial enterprises to adopt adequate internal controls.
5. To examine the impact of misappropriation of assets on the performance of commercial enterprises
6. To make necessary recommendations on the internal control structure of the organization

1.4 Hypothesis

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