INTERNAL CONTROL EFFECTIVENESS IN RIVERS

STATE GOVERNMENT OWNED TERTIARY

INSTITUTIONS

Kurotamunobaraomi, Tamunosiki
sikilization@gmail.com
08064932808
and
Gbomor, Monday
gbomsday@gmail.com

Department of Accountancy, Port Harcourt Polytechnic, Port Harcourt.

ABSTRACT

The study empirically assessed internal control quality and effectiveness in Rivers State
government-owned tertiary institutions. This was done to determine the quality of
internal auditing, ascertain the effectiveness of the control environment and unravel the
quality of internal control practices in the institutions. Consequently, primary data were
obtained from all, but Kenule Beson Saro-Wiwa Polytechnic due to its geographical
location. Copies of the research instrument – questionnaire were distributed to
respondents from whom 43 valid copies were retrieved and used for the analysis.
Thereafter, the one sample T-Test was used to analyse the data. The results from the
analysis showed that internal auditing in government-owned tertiary institutions is not
effective, internal control environment of Rivers State Government-owned tertiary
institutions is effective and, internal control practices in Rivers State Government-owned
tertiary institutions is effective. It was therefore recommended that internal auditing
should be structured better and given an appreciable level of independence, there should
be improvement in the control environment, and, control practices and activities should
be simplified.
Key Words: Control Environment, Internal Auditing, Control Practices, Effectiveness

INTRODUCTION

Globally, even in the most advanced capitalist economies, state involvement in economic activities is a
common decimal. For instance, during the 2008 financial crisis, the United States under the leadership
of George W. Bush doled out over $700 billion to the private sector (Temple-Raston, 2008). This is
similar to regular practices in Nigeria as the government has on several occasions, most recently at the
peak of the covid-19 pandemic, involved in business oriented schemes and assisted businesses through
direct and indirect financing (Ishaku, Kakanda & Danladi, 2020). This is replicated by other tiers of
government that engage indirectly in business or directly through the establishment of publicly owned
companies or firms referred to as parastatals; which are expected to operate competitively with other
privately owned businesses. Quite unfortunately, most of these publicly owned businesses are almost
always in perpetual “intensive care” like the government owned petroleum company – Nigeria National
Petroleum Corporation (NNPC), that has remained perpetually unprofitable, and obviously inefficient
with an unending string of losses and capacity underutilization (Esiedesa, 2021). Another of such, is the
Auto-syringe Plant owned by the Rivers State government that evaporated in less than a year of its
commencement (Fidelis, 2018).

Irked by the colossal corporate catastrophe these corporations have become in Nigeria, analysts,
researchers, and other interests groups have adduced several reasons. Lenz (2017) blamed the terrible
performance on protracted bureaucratic systems and the lethargic disposition of the civil service which
is easily transmitted to such independent entities. Perhaps, a public institution – the Federal Ministry of
Finance (2006) most succinctly captures the rationale for the perennial underperformance of these
parastatals as high level of fraud, nepotism and racketeering in recruitment. Phenomena that are deeply
engrained in the mainstream civil service and other government circles and establishments, especially in
climes with ominous disregard for processes and regulations as well as apparent institutional and
structural weaknesses. This translates to poor internal checks, thus lack of proper internal control.
Consequently, Ndanyi (2021) posited that accounting systems of government owned companies (GOCs)
fail to install accounting systems that provide proper financial records, thus impede internal controls.

Laxity in internal control practices has culminated in several financial scandals which have triggered
reactions for tighter regulations and enhanced accounting standards and corporate governance codes
(Sarbanes & Oxley, 2002; Financial Reporting Council of Nigeria Act, 2011). In America, scandals such as
Enron resulted in the enactment of Corporate and Auditing Accountability and Responsibility Act
(Sarbanes & Oxley, 2002). Internal control system was not extricated several other scandals
internationally or here in Nigeria. This scenario is worse in GOCs where political patronage and executive
fiats override existing internal audit processes and internal control structures, thus leading to failure in
terms of performance.

The discourse – internal control practices has been broadly discussed in existing literature, availed
theoretical underpinnings, provided conceptual relations and subjected to empirical scrutiny by several
scholars over the years possibly due to the growing importance of internal control in achieving
organisational goals as scandals and collapse such as Enron, Parmalat, Worldcom, etc are practical
demonstrations of the consequences that internal control failure portends. However, despite the
plethora of studies in this regard, there are several calls in extant literature for further studies on this
important concept in other conceptual, theoretical, methodological, analytical and geographical
jurisdictions (e.g. Lenz & Hahn, 2015; Ahmad, 2015; Arena & Azzone, 2019; Cohen & Sayag, 2018;
Mihret, James & Mula, 2010), since what currently prevails is a scratch on the surface (Lenz, 2017).

In furtherance, there is no consensus in existing literature as regards internal control practices, as

studies have considered specific aspects of the phenomenon, ignoring the fact that internal control is a
system that overlaps heavily into internal auditing. These studies either emanate from the prism of core
bureaucratic paradigm, thus focus exclusively on measures such as segregation of duties, authorisation,
etc (Askoy & Kahyaoglu, 2016). In the same vein, the super-structure of control environments is rarely
considered in studies that focus on internal control. This is very narrow and fails to consider the entire
gamut of internal control.

Also, it is observed that a preponderance of studies focused on the private sector (e.g. Arena & Azzone,
2019; Cohen & Sayag, 2018; George, Karagiorgos & Konstantinos, 2015, Hung & Han, 2012; Lenz &
Saren, 2012; Sarens, Abdomohammadi & Lenz, 2012), while the public sector is given little or no
attention, especially in the less developed countries (e.g. Alzeban & Gwilliam, 2014; Badara & Saidin,
2013; Ahmad, Othman & Jusoff, 2009. Indeed, the attention accorded to public sector establishments in
relation to internal control is sparse, with little or no consideration of its quality in such organisations.
Therefore, this study takes the internal control discourse further by assessing its quality in government
institutions using internal auditing, control environment and control practices as variables.

LITERATURE REVIEW

Several scholars have over the years studied this phenomenon and enriched it conceptually,
theoretically and empirically.

Internal Control: In Context

Internal control could be given different interpretations by different individuals or groups, therefore
could be confusing is not properly defined. Schroy (2010) states that internal control is the a collection
of the organisation’s structure, work and authority flows, people and management information systems,
designed to help the organisation accomplish specific goals or objectives. Adding that it is a means by
which an organisation’s resources are directed, monitored and measured; thereby playing a vital role in
curtailing and detecting fraud so as to protect the organisation’s resources. This position elaborates
among others, the detection of fraud but fails to emphasise the correction of such errors.

Foulks (2014) opines that it is a system that comprises of control environment and control procedures
applied by top executives and management if a firm to attain its goals by ensuring practical, orderly and
efficient conduct of an organisation. This might be in form of adhering to policies, safeguarding assets,
prevention and detection of fraud, accuracy in accounting records and timely preparation and
presentation of financial reports. Whittington (2019) added that internal control system encompasses
policies and procedures instituted by management to guarantee realistic assurance that the
organisation’s nominated objectives are attained. The rationale for realistic assurance is hinged on the
premise that there could be structural imperfections and that the organisation’s internal control should
not be beyond the derivable benefits.

According to Swamy (2014), internal controls in accounting system ensure that transacted transactions
are sanctioned and authorised by the appropriate level of management. This is instructive as
organisational activities are carried out in consonance with the laid down policies and stipulated plan. All
transactions need to be recorded in the relevant bools periodically, accurately and systematically
(Adeyemi & Olarenwaju, 2019). This generally suggests that internal controls are built into the internal
audit system so as to ensure that fraudulent transactions are quickly noticed, flagged and/or made
difficult, if not impossible to transact. Based on these, internal control could be defined as any system
established or adopted by an organisation which may be mandatory, advisory or proprietary in nature,
for the direction, prevention, detection and correction of errors for the achievement of specific
objectives and goals. Thus, it is important to note that for any control system to be instituted, there
must first be potential internal control risks.

Internal Control: Its Components

Control environment, risk assessment, information and communication, control activities and
monitoring have been identified as components of internal control (COSO, 2002). The control
environment sets the tone of an organisation in arousing control awareness, instilling discipline and
enhancing structure. Control environment incorporates the integrity, moral qualities and skill of the
entity’s people in the organisation’s rationality and style as well as allocation of power and obligation.
Control activities are policies, practices and procedures that ensure compliance with management’s
directives. These activities include approvals, authorisations, verifications, reconciliations, reviews of
operating performance, security of assets and segregation of duties. The monitoring component entails
an independent or quasi-independent evaluation mechanism that checks the quality of the system’s
performance. This involves an integration of regular management and supervisory activities, thus
internal auditing is a viable means of instituting monitoring in an organisation.

Richard (2018) asserts that control environment is the foundation of internal control system, as it sets
the tone at the top and influences the control consciousness of all employees. As stated by Jokipii
(2006), it is the style, philosophy and supportive attitude, in addition to ethical values, competence,
morale and integrity of those involved with the organisation. Similarly, Whittington and Pany (2016)
refer to control environment as the aspect of internal control that offers the structure and discipline for
the realisation of the main objectives of internal control systems in addition to the climate which affects
the entire quality of the systems of internal control. From the above description, control environment
relates to the management and other key staff who make decisions in an organisation reflecting their
philosophy and style. Equally, control environment from the foregoing is influenced by the culture of
organisation and has a way of impacting on the manner in which an organisation’s activities are
structured (Ndugu, 2013). Therefore, for an organisation to achieve its goals, management, board of
directors and other key personnel ought to uphold good ethical values and integrity (Kaplan, 2013).

Internal auditing has been quite a dynamic subject as its emphasis and roles have changed in recent
time. Initially, internal auditing is based on a one-size-fits-all format where cyclical and methodological
schedules that had auditor’s performance checked against an organisation’s policies and procedures to
guarantee proper functioning of internal controls. This basically centred the responsibility of internal
auditing on risk identification and reduction. This approach is no longer tenable, given the information
and technological sophistication that prevails in the modern business and organisational setting. Internal
auditing is therefore a deliberate, objective, assurance and consulting activity meant to provide value
and improvement in an organisation’s operations (Sawyer, 2017). Kiabel (2012) adds that it is a
mechanism of monitoring organisational activities with a view of assessing the effectiveness of control
procedures.

Empirical Review

Christopher, Serens and Leung (2019) evaluated the internal control function in a sample of 34
Australian companies through the functional relationship with both management and the audit
committee. An email based survey identified a number of threats to professional independence arising
from internal audit’s link with the audit committee. These threats include failure of reporting directly to
the audit committee, the audit committee’s lack of exclusive responsibility for hiring, firing and
evaluating the chief executive audit executive and dearth of accounting knowledge by committee
members. Serens and De Beelde (2006) used a case study approach on five Belgian companies to study
the expectations of senior management and internal auditors with respect to the relationship between
the two parties. They found that when internal audit operates primarily in a management support role,
there is a lack of perceived objectivity and the relationship with the audit committee is weak. They also
found that senior management’s expectations significantly influence internal audit and that the support
of senior management is critical to the acceptance and appreciation of the internal audit function within
the organisation. Van Pearsem (2015) in a multiple case study of six senior internal auditors in New
Zealand found that internal auditors’ close relationship with management can place their independence
from management at risk.

Babatunde and Shakirat (2018) studied stakeholders’ perception on the effectiveness of internal control
function on financial accountability in the Nigerian public sector. Findings show that there is a
considerably significant correlation in the respondents’ perception that financial accountability is
substantially influenced by internal control function and that application of penalty for violation of moral
conduct impacts conformity with internal control. In a related investigation, Abdali (2018) considered
the impact of applying corporate governance on the quality of internal audit in industrial companies
listed in Alardnellorac financial market. The study surveyed 114 finance directors and heads of
department of accounting, internal auditing and managers, as well as workers in the accounting and
internal audit departments in these companies from whom data were collected and analysed to show a
statistically significant effect of corporate governance on the quality of internal audit of listed
companies.

In an attempt by Haylas and Ashton (2019) to provide proof on the effectiveness of specific internal
control in noticing defects that undermine financial statements credibility recommended that all
computed errors are focussed in comparatively few audits which occur in reasonably predictable
industries. The significant aspect of such defects affect income but the direction of effect might be an
understatement or overstatement. In relation to the signalling of an error, they indicate that the
principal aspect of financial statements errors are basically heralded by casual audit procedures such as
critical reviews and discussions with the client. Personnel challenges such as inexperience,
ineffectiveness, inadequate knowledge and insufficient control follow-up or reviews were found
influential in causing the errors. Salih (2020) in a similar manner assessed internal control of Ethiopian
airline and reported that the lack of segregation of accounting and custodian functions was the greatest
weakness of the airline. The study therefore recommended the need to centralise cash receipts,
strengthen the audit unit, separate purchase activities and establish a perpetual inventory system for
tickets.

Closely related is the study of Adeyemi and Olarenwaju (2019) who investigated the internal controls of
Nyayo bus Services Corporation – a State corporation. They learnt that cash receipts as well as cash
disbursements bear moderately strong controls attributed to the fact that the government accounting
system is still in fairly intact. However, operations in the payroll and stores leave a lot to be desired.
There is further evidence that the internal audit was being underutilised as the unit was given the
responsibility of control checks which is the role of examination section as structured by the
organisation. This culminated in the duplicity and fusion of roles, which ultimately undermines the
internal audit function. Mutua (2017) also evaluated the impact of risk based audit on financial
performance in commercial banks in Kenya. Although the study centred on risk-based audit, it
recognised the need for appropriate internal audit to achieve financial performance. Questionnaire
were used to obtain primary data from the study’s respondents and analysed through the Pearson
Product Moment Correlation and regression models to show that there is a weak link between audit
work and financial performance.

Drazen and Van de Ven (2019) examined the nexus between internal control (experience and accounting
qualification) and organisational performance with growth opportunities and audit committee
independence in Malaysia. The sample was selected from primary sources through the administration of
questionnaire. Financially conscious staff of 60 listed Malaysian firms were considered in the study. The
study also employed multiple regression analysis to test the association between internal audit and firm
performance to find a significant relationship exists simultaneously between experience and quality of
internal audit and firm performance. A similar study had been conducted in Nigeria by Kiabel (2012) who
investigated internal audit and performance of government enterprises in Nigeria by applying cross-
sectional survey design to obtain primary data via questionnaire from top auditing staff of 45
parastatals. The data were analysed through descriptive and inferential statistical tools that include
Pearson Product Moment Correlation and Step-Wise Regression model to find that there is a weak
positive relationship between internal audit practice and profit, insignificant positive link between
internal audit practice and return on investment, a negative insignificant association between internal
audit practice and return on equity and finally, that there is no significant relationship between internal
audit practice and performance.

METHODOLOGY

The study is essentially a survey of government-owned tertiary institutions in Rivers State, Nigeria. These
include Rivers State University, Ignatius Ajuru University of Education, Kenule Beson Saro-Wiwa
Polytechnic, Port Harcourt Polytechnic, and College of Health Technology. However, due to the
geographical location of Kenule Beson Saro-Wiwa Polytechnic, it was exempted from the study, thus a
sample of 92 staff was drawn from the estimated population of 150 which includes senior
administrative, management and accounting/bursary staff of the other institutions. Given the nature of
the sample, primary data were obtained through questionnaire administered to the 92 selected
respondents from the institutions. However, only 43 copies of the research instrument were correctly
filled by the respondents and used for the study. Thereafter, the one-sample T-test was used to analyse
the data.

ANALYSIS AND RESULTS

The results obtained from the analysis are summarised in Table 1 below:

Table 1 Summary of Results

Mean T-Statistics P- Value
Internal Auditing 3.96 2.166 0.96
Control Environment 4.12 2.81 0.49
Control Practices 4.15 2.177 0.45
Source: See Appendices

The results in the table above shows that the average respondents affirms or “agrees” to the subject of
internal auditing in the institutions as the mean stands at approximately 4. As regards control
environment, they “strongly agree” to its suitability in tertiary institutions in Rivers State. Similarly, they
“strongly agree” to the existence of internal control activities and practices in government owned
tertiary institutions in Rivers State.

Beyond these, the inferential statistical results show that internal auditing in government-owned
tertiary institutions in Rivers State is not effective. This is demonstrated by the t-statistics which is 2.166,
and a p-value of 0.096 which is above the significant threshold of 0.05. As regards the effectiveness of
control environment the t-statistics and p-value are 2.806 and 0.049 respectively; indicating that the
internal control environment of tertiary institutions in Rivers State is effective. In the same vein, internal
control practices in government-owned tertiary institutions in Rivers State are effective as proven by the
t-statistics and p-values that are 2.177 and 0.045 respectively.

IMPLICATIONS AND DISCUSSION

The results show that most respondents completely agree to the implementation of sound internal
control system in government-owned tertiary institutions in Rivers State. This generally implies that
internal control system does not just exixt, but is fully appreciated by personnel and management of the
institutions. The structures, practices, activities, procedures and environment that define internal
control are seen and appreciated by the institutions.

The study shows that internal auditing in the institutions of interest is not effective. This generally
implies that internal auditing is not sufficiently achieving its purpose in public tertiary institutions in
Rivers State. This shows that some or all of the cardinal components of internal auditing are
compromised. For instance, there could be recurring incidences of interference in the internal audit
work by senior non-audit staff, engagement of unqualified staff for audit work, and absolute disregard
for internal audit office. This is similar to the empirical positions of Serens and De Beelde (2006) who
observe weak internal audit practice in institutions; while Van Peursem (2015) notes management
interference with internal audit weakens it.

As regards the effectiveness of the internal control environment, it is observed from the empirical
evidence that the internal control environment of tertiary schools in Rivers State is effective. This goes
to show that management’s philosophy as regards internal control, complies with the institutions’
policies, staff training and reward system for compliance or otherwise with the internal control system is
observed and understood by personnel. This position is in consonance with the findings of Haylas and
Ashton (2019) who provide proof of internal control environment’s effectiveness in public corporations
in New Zealand. In contrast, Salih (2020) observed that the internal control environment in Ethiopian
Airline is weak, thus ineffective.

It is further observed that internal control practices and activities in government owned tertiary
institutions is effective. This implies that internal control practices such as checks, reviews, monitoring,
segregation of responsibilities and duties, authorisation, etc are well implemented and given top
priority.

CONCLUSION AND RECOMMENDATIONS

The study aimed at assessing the effectiveness of internal control in government-owned tertiary
institutions in Rivers State. The analysis has availed us evidence on the existence of internal control
systems in these institutions. It can thus be concluded that government-owned tertiary institutions have
internal control systems in place. However, as regards the effectiveness of internal control systems,
there are diverse positions. For instance, while internal audit is seen to be ineffective in its
implementation, control environment and control practices are seen to be effectively structured in the
institutions of interest. Therefore, given that the results are mixed, there is no empirical conclusion as
regards the effectiveness of internal control of Rivers State government-owned tertiary institutions. This
creates the need for this study to be extended to other institutions, possibly in other jurisdictions.

Sequel to the findings and deductions from the study, the following recommendations are proffered:

1. Internal auditing should be restructured and given more appreciable level of independence to
as to make it more effective.
2. There should be improvement in the control environment, especially as regards rewarding good
behaviour,
3. The internal control activities should be simplified to enhance effectiveness.

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APPENDICES
S/N Description/Scale SA A UN D SD Total

1 Effectiveness of Internal
Auditing
 There is freedom to plan 17 12 7 3 4 43
and conduct audit work
 Management creates 21 12 3 5 2 43
 academic departments and
other administrative offices
 The internal audit 13 14 6 3 7 43
department has a chain of
command
 The internal audit staff 15 13 7 1 7 43
have the required
qualifications and
experience
 There is regular and general 16 13 5 6 3 43
evaluation of personnel
performance
2 Effectiveness of Internal
Control Environment
 Management rewards acts 5 9 13 11 5 43
that promote honesty
 The school’s governing 16 13 6 3 5 43
council does not interfere
with management’s
decision
 The department complies 17 11 8 1 6 43
with set standards and
policies
 There is regular training of 5 6 12 13 7 43
staff
 The department prepares 21 12 3 2 5 43
and sends reports to the
governing council
3 Effectiveness of Internal
Control Practices
 There are mechanisms for 17 12 7 5 2 43
identifying and evaluating
things that pose threat to
the school
 Roles are clearly defined 15 12 5 7 4 43
and segregated
 There are clearly 16 12 6 7 2 43
established communication
channels
 There is periodic evaluation 19 14 5 3 2 43
of business processes and
inventory
 There is limit to every 17 12 4 7 3 43
personnel’s authority
INTERNAL AUDITING EFFECTIVENESS

One-Sample Statistics

N Mean Std. Deviation Std. Error Mean

AUD 43 3.9600 1.00970 1.94127

Source: SPSS Version 22

One-Sample Test

Test Value = 0

t df Sig. (2-tailed) Mean Difference 95% Confidence Interval of the

Difference

Lower Upper

AUD 2.166 43 .096 3.96000 -9.1236 73.8436

Source: SPSS Version 22

CONTROL ENVIRONMENT EFFECTIVENESS

One-Sample Statistics

N Mean Std. Deviation Std. Error Mean

ENV 43 4.1200 1.1599 0.92114

Source: SPSS Version 22

One-Sample Test

Test Value = 0

t df Sig. (2-tailed) Mean Difference 95% Confidence Interval of the

Difference

Lower Upper

ENV 2.806 43 .049 4.12000 .3086 58.7314

Source: SPSS Version 22

INTERNAL CONTROL PRACTICES EFFECTIVENESS

One-Sample Statistics

N Mean Std. Deviation Std. Error Mean

PRC 43 4.15000 1.19243 1.06771

Source: SPSS Version 22

One-Sample Test

Test Value = 0

t df Sig. (2-tailed) Mean Difference 95% Confidence Interval of the

Difference
 Lower Upper

PRC 2.177 43 .045 4.15000 -9.0347 74.6347

Source: SPSS Version 22