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THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE FINANCIAL MANAGEMENT OF ADO EKITI LOCAL GOVERNMENT, EKITI STATE

CHAPTER ONE

INTRODUCTION

Background to the Study

The recent global pressured on corruption control and management of public funds is the major factor that necessitate the implementation of good internal control system in every organization, both private and public sectors at federal, state down to the local government level, to ensure financial accountability and transparency in the management of fund at all levels. From the study of International Organization of Supreme Audit Institutions [INTOSAI], (2014), accountability is a process whereby an organization are held responsible for the decisions and actions including the stewardship of funds, fairness and all aspect of performance.

New Public Management (NPM), an international public reform movement formulates significant improvement in the management of public treasures in many countries, to promote good management system that will work towards efficiency, effectiveness and proper accountability, which can only be realized through effective internal control system (Campbell, 2008). However, Internal control system is a process, effected by entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of organizational objectives (Alan, 2005). According to Wahab (2008), internal control system is a process designed and effected by the board member, administration and staff of an organization to effectively and efficiently achieve operational financial and compliance objectives. Effective internal control system involves regular review of quality of financial and operating information, review of policies regarding the control of assets, employee’s assessment and compliance with organizational policies, procedures, laws and regulations (Kenneman, 2014).

Internal control system plays a significant role in eradicating errors and omission to the barest minimum in an organization according to (Financial Management Manual, 2005). Internal control system for a business are similar to check and balance in the government, they are process put in place to make sure that things stay in the right track. Internal controls are useful for every business but are critical for organization with employees, especially employees who handle valuable assets.

Retails business in which customer have direct access to small product can also benefit enormously from internal control procedure while internal control are crucial from helping you detect dishonesty, it can also help you to reduce risk that simple mistake will keep you from seeing in your organization, concentrate on poverty as detected inadvertent errors, so setting up a system of internal control can keep such problem from getting out of hand. When you have internal control in place, you are protecting your assets as well as the accuracy of the accounting record in proper place of accountability. The types of control to put in place depend largely on the size and nature of the organization i.e. either a private or public sector as in the content of these studies lies on a public sector organization.

Internal control serves as the strength of every organization. The reason being that the control system in any organization is a pillar for efficient accounting system. The establishment of an effective system of internal control that is capable of preventing fraud and also ensures government transactions are carried out under lawful procedure has been adopted. The essence being that, effective and efficient use of government activities has necessitated the need to establish sophisticated internal control system that would prevent fraudulent practices, financially or otherwise.

Therefore, increasing attention has been paid to method of internal control in recent years. Not only the complexity modern business techniques but also the size of business unit encourage the adoption of method which, whilst increasing the deficiency of public sector business, also as safeguard against errors of fraud.

Traditionally, most of our constitution and institutions arrangement have been the management and accounting of public funds. As a result of this, various rules, regulations and instructions are instituted to guide public officers in the proper conduct of the finance entrusted in their care. The constitution generally sets out total financial management and accounting of the public funds which has been in demand to the public sector more so the rendering or proper stewardship of income and expenditure of public funds.

Management involves responsibility of effective and economically planning and regulation of the operation of the operation of an enterprise which entails controls of the established pattern of accountability over receipts and expenditure of public funds. Public funds should be used for the public purpose so as to obtain proper value for money spent. Government in the recent times believes at the demand of public financial management that is by ensuring that all financial transactions are properly documented and conducted in accordance with providing rules and regulations, but this has proved wrong because public funds can be and quite often sophisticated and embezzled within the frame work of laid down procedures through inflated contract and over statement of bills and the accounting system. The values of law or the system of the organization or the management that do not know and do their work. This work seeks to look into problems and stewardship being carried out.

Some factors that relate to management control system in the local government are lack of accountability to manage accounting system, less budget participation in the local government and improper of recording and reporting of income and effective way to find sources of income in the local government (Alim and Abdullah, 2010). Consequently, it will reduce the quality of management in which the administration of the local government is not based on Islamic requirement. In addition, a weak internal control system will increase the risk in managing the local government performance and influence the internal and external management control system which will affect the financial management practices in the local government.

Quality financial management in local government includes steps taken by local government management to increase the level of management quality in the local government. For example, by organizing seminars for the public in order to build a better relationship between the public and the local government’s management and the activities performed by the managing officer in the local government at the national level. It follows comprehensive financial management practices, which would directly increase the efficiency, effectiveness and value maximization of the local government (Wahab, 2008).

Management control system is important to financial management practices in the local government to ensure efficient and proper financial management practices, to ensure the operation runs smoothly in compliance with rules and regulation, to determine the ability of local government management in measuring and managing activities effectively and to provide information in making better decisions. Therefore, to have a better local government management, those entrusted with management of local government such as chairman and treasurer of local government need to play a role in ensuring the effectiveness and efficiency of financial management practices in the local government. Thus, the objective of this study is to examine the effect of internal control system on the effective and efficient management of local government.

Statement of the Problem

For the fact that local government authority derives its revenue from both internal and external sources, the internal source include fines, rates, taxes fees and so on, while the external source of revenue include majorly the monthly allocation from federal government treasury account. Therefore, it is the responsibility of local government governing bodies to ensure accountability in the disbursement of this revenue in providing infrastructure service to the community to foster economic development at the grass root level. In a nutshell, there is need for public officials to respond periodically to questions concerning their activities and to be held responsible for exercising the authority given to them. This process can only be effective through proper internal control systems. This is so because the importance of an internal control unit on financial management in local government is for the verification of accounts, check cases of fraud and embezzlement within the ministries. But in recent times most of these controls are no longer functioning as it seems inevitable resulting to misappropriation of funds in such local government. However, this study would address these stated problems by critically taking a cursory look at the impact of internal control system on the financial management at local government authority level in Nigeria.

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