Abstract: This research examined Internal Control Variables and Profit Maximization in Medium Scale Enterprises in Akwa Ibom State. It is so worrisome that medium and small scale enterprises in Nigeria have not performed creditably and they have not played the expected significant role in economic growth. They have not influenced apprentice training so as to accelerate employment and alleviation of poverty. This however becomes a great concern for the government, business practitioners and the organized private sectors. Internal control occur at all levels of a business enterprise, such components must be present for an organization to perform successfully in terms of protection of assets, proper financial reporting, and compliance with operational requirements of the medium scale enterprises. This study however highlights the following internal control variables as the key components of organizational performance and productivity. They are separation of duties, internal audit, authorization of transactions, standardized documentations and organizational plans.
Separation of duties is very critical in the successful running of a medium scale enterprise. It ensures that separate individuals or groups of individuals carry out the main functions of an organization of authorization, executive, custody and recording. Thus, for an organization to be effective, internal checks should be routine system under which the work relating to carrying out and recording of transactions is arranged in such a manner that the work of one staff is automatically checked by another. With this adequacy of internal control system, a need for authorization of transactions to ensure that the funds and property of the company’s are kept under proper custody, and that there is no improper application of company’s funds and property while expenditure and revenue are duly authorized and accounted for. While preparation of good accounting records (that is profit and loss account and balance sheet) follows basic principles, there is therefore need for organizational plans for adequate separation of company operations into appropriate divisions and sub-divisions; establishment of clear lines of responsibility between different categories of company’s activities; overall co-ordination of company’s activities.
Internal Control Variables and Profit Maximization in Medium Scale Enterprises in Akwa Ibom State
1.1 Background of the Study
The desire to generate profit, with a sense of independence, is the main reason to go into business venture. The ability of the entrepreneur to stay afloat and make profits in a large scale depends on the creativity and expertise of the entrepreneur in mobilizing the factors of production and managing the organization’s internal systems in an efficient manner.
Agu (2015), defined business as any occupation in which men at the risk of loss, seek to make money above their cost of producing the products or by selling the services at a profit. All profits oriented and lawful economic activities that are organized and directed towards providing goods and services can be seen as business. According to the Nigerian Institute of Management (2009), a medium scale business enterprise is a business organization that has full-time labour force of 26-100 people, and a total cost of working capital, less cost of land of forty million to two hundred million naira. Business enterprises that fall under medium scale enterprises include transportation companies, hotel services, supermarkets, pharmaceutical stores, chain stores, poultry farms, piggeries, water production outfits and bakery industries. For medium scale business to meet up with all its obligations and social responsibilities, proper management of all resources is required. The success of any business depends to a large extent on effective managerial operations. Managerial operations deal with supervision, designing and organizing the process of production.
It entails accountability and regular accounting reconciliation. Occasional accounting and reconciliations can ensure that the business in the accounting system match up with the balances in the accounts held by other entities, including banks, suppliers, and credit customers (Sendel, 2019).
According to the author, internal controls are policies put in place to ensure the continued reliability of accounting system. Accuracy and reliability are paramount in the accounting world. Managers cannot make fully informed financial decisions without accurate financial records. Financial reports can also contain errors. Frazer (2012), defined internal control as all policies and procedures which management uses to ensure reliability of financial reporting, compliance with laws and regulations, effectiveness and efficiency of operations.
According to Sydney (2019), internal system is the whole system of controls; financial and otherwise, established by the management to help to carry on the business of a company in an ordinary manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records. Internal control also ensures the prevention of wastes, frauds, inefficiencies and reliability in accounting policies. They are simply good business practices. Campbell and Hartcher (2014), emphasized that internal controls are the methods or procedures adopted in a business to safeguard its assets, ensure whether financial information is accurate and reliable, ensure compliance with all financial and operational requirements. They generally assist in achieving the business objectives. The same authors saw internal control as a management tool used to provide reasonable assurance that management objectives are being achieved.
It is clear that internal control is concerned with the control operatives in every area of corporate activity of an organization. According to Ozigbo and Orife (2014), internal control has a significant relationship with fraud prevention. Internal controls are necessary to reduce the risk of fraud. A business owner can never know if his information is complete, accurate or reliable. Proper internal control systems acts as a pillar for an efficient accounting system for the achievement of organizational goals. Church and Schneider (2001) saw effective internal control systems as fundamental drivers toward profit maximization.
According to Badera and Saidin (2013), many entrepreneurs do not consider internal controls as something they are responsible for, but rather a function of an auditor or an accountant. Nevertheless, to be effective either in small, medium or large scale enterprises, managers of businesses must take the responsibility to introduce and monitor internal controls.
According to Monday, Inneh and Ojo (2014), control is a basic human requirement which has existed throughout the ages in different facets of human activity and that it is an accepted device for optimum utilization of resources and opportunities for maximization of profits. It is commonly believed that the need for an internal control system develops as the organization grows.
Efficient management of medium scale enterprises does not only bring profit and economic benefits to the operators, but also brings about the growth of the national economy. Aina (2016), maintain that medium scale enterprises promote industrial and economic developments and are responsible for the production of immediate goods and the transportation of rural technology. Schmiemann (2009) saw medium scale enterprises as the key driver to any country’s economic growth. According to Evans (2000) managers of medium scale enterprises should possess adequate financial planning skills and organizational planning competencies.
Business enterprises need many interrelated components of an internal control structures to ensure strong control of the day to day activities. These include separation of duties, internal audits/checks, authorization of transactions, standardization of documentation and organizational plans. A firm should develop specific control activities – policies, practices and procedures to help ensure that employees properly carry out management directives. The responsibility of establishing and maintaining an adequate system of internal control lies with the individual firm. Effective control provides reasonable assurance regarding the accomplishment of established objectives. Internal control variables operate at levels of effectiveness. Effective controls provide reasonable assurance regarding the accomplishment of established objectives.
Separation of Duties are those controls which ensure that separate individuals or groups of individuals carry out the main functions of an organization of authorization, execution, custody and recording. Separation of these critical duties is to minimize the inherent risk of frauds or errors, it helps to ensure that no one person is responsible for all aspects of a transaction. In many cases, the jobs are not arranged in such a way that the work of one person is complementing to that of another or independently checked by another person. This situation always paves way for fraud and errors, involvement of a single individual to do all the jobs of an enterprise increase the risk of accidental errors and deliberate frauds.
Internal audit involves such activities as:
- Reviewing the soundness, adequacy, and application of accounting, financial and other operating controls and recommending effective control at a reasonable cost
- Appraising the quality performance in carrying out assigned responsibilities.
- Creating the effectiveness of established policies and plans.
- Recommending ways for operational improvements.
Authorization of Transactions are the controls which specify the person responsible for authorizing and approving transactions and the limits of such authority. All transactions which are not authorized and approved by responsible officials are capable of ruining enterprise.
Standardized Documentation is lacking in many medium, scale enterprises. Akpan-Udo (2015), saw inability to keep proper and standardized business document as improper for any business outfit. The author opined that many proprietors of businesses put the blame of their failure on witchcraft, instead of looking at themselves.
Organizational Plan is indispensable for successful operation of medium scale enterprises. McQuerrey (2012) defined a organization plan as a detailed account of how an individual or group proposes to go about accomplishing a new business concept. McQuerrey also opined that organizational plan includes an overview of a project or job, a break down of how individual tasks will be accomplished, a timeline for its completion and cost projections for its implementation.
Due to the increase in accounting scandals in recent years, the internal control function has received impressive attention as an important contributor to effective governance and financial reporting. This is because a high quality internal control function focuses on improving financial reporting (Prawit, Smith and Wood (2014). According to Sanusi (2008), the prime aim of most business endeavours is not only to render services but also to make reasonable returns to the shareholders. This situation places special responsibility on management of medium scale enterprises to establish a reliable control system for the prevention and detection of fraud. Sanusi (2008) opined that loss prevention must be put in place to minimize opportunity for embezzlements.
According to Changchit, Holspepple and Madden (2001), an internal control system has been found to be so significant to organizations especially in the assurance of the reliability and accuracy of the financial reports. Similarly, quality of an organization’s internal control system has significant impact on the accuracy of management guidelines. Feng and Melley (2001), noted that firms that disclose ineffective internal control system have larger tendency of experiencing management errors in their operation than those firms that report effective internal control system.
Therefore, it is the responsibility of management of an organization to ensure that effective internal control system is put in place that will ensure the achievement of organizational established objectives. This is because establishment and supervision of effective internal control systems are the responsibility of management not the auditors. To be meaningful, detection of frauds should be timely so as to prevent or reduce loss of funds. Musa (2008) vehemently maintained that time is the essence of fraud detection. Therefore the business internal check system should ensure early detection of frauds. If the policies laid down by the system are properly and regularly followed, these should include:
- Call-over of daily operation on ledgers
- Dual controls over assets and other security documents
- Separation of control by officials over transactions from start to finish
- Daily agreement by journalisation
- Regular balancing of all books of account
- Daily examination by responsible officials and men of the inspection department
- Checking and authorization for payment of instruments by independent officials.
Musa (2018), stated that a very sound internal check system will not only prevent fraud, but will detect fraud at a very early stage. One might not really appreciate the impact of internal control system in an organization until one sees an organization that is run without internal control system. The absence of effective control measures exposes an organization to the preparation of inaccurate financial statements and records. It also leads to stealing and mismanagement of organization’s funds as well as non implementation of accounting policies which is in consistent with applicable standards.
Accordingly to Medden (2001), an internal control system is valuable to an organization especially in the aspect of assurance of reliability and accuracy of the financial reports. Consequently, inspection should undertake regular spot-checks of all books of account. This research therefore seeks to appraise internal control variables and profit maximization in medium scale enterprises in Akwa Ibom State.
Internal Control Variables and Profit Maximization in Medium Scale Enterprises in Akwa Ibom State
1.2 Statement of the Problem
The contributions of medium scale enterprises have been globally acknowledged as a springboard for sustainable economic development in many countries of the world in term of foreign currency earnings. According to Akingunola (2011) medium scale businesses have been in the forefront of employment generation, development of entrepreneurship, mobilization of local savings, linkages with bigger industries and provision of avenues for self-employment. However, it has been observed that medium scale businesses in Akwa Ibom State are always very popular at the beginning, but thereafter experience poor patronage resulting in business stagnation, stunted economic growth and eventual fold up. Udokang (2016) maintained that most medium scale enterprises hardly survive for ten years before folding up.
It is however true that the death of the owner of any business can bring such businesses to closure. It is equally true that inability to manage the available funds as well as other materials is perhaps the biggest problem facing most medium scale enterprises. Udokang (2016) posited that the inability of the owners and managers of these establishments to successfully handle these challenges are obvious indicators of managerial incompetency.
Certain factors militate against the smooth running of medium scale enterprises in Akwa Ibom State. These include; not being able to have a clear cut separation of duties. Moreover, where, internal checks and internal audits are not carried out periodically, there is the tendency for leakages. A weak control environment often indicates weakness in the other components of the internal structure. Standardized documentation is very crucial for the smooth running of a business. There must be a proper accounting system. Lack of it does not augur well for the enterprise. Internal control system cannot be effective without an adequate organizational plans which include establishment of clear lines of responsibility between different categories of offices. Getting organized is about having systems in place to manage the business. It is about establishing a routine by which an enterprise can accomplish as much as possible in a given period of time. A clearly established set of goals keep successful entrepreneurs from getting stuck.
Several studies have been conducted on internal control mechanism and profit maximization in various parts of Nigeria, but no similar studies have been found for Akwa Ibom State, especially on business operating within Uyo metropolises. The task of this study therefore is to determine the extent to which internal control mechanisms such as separation of duties, internal audits, authorization of transactions, standardized documentation and organizational plans influence profit maximization in medium scale enterprises in Akwa Ibom State.