THE EFFECTIVENESS OF INTERNAL CONTROLS TO THE PREVENTION OF FRAUD AND THEFT IN PARASTATALS
KANYIMO KUDAKWASHE W
PROJECT PROPOSAL SUBMITTED PARTIAL FULFILLMENT OF THE REQUIREMENTS OF FACULT OF COMMERCE
TABLE OF CONTENTS
1 Introduction 3
1.1 Background 3
1.1.1 Overview of Parastatals 3
1.1.2 Overview of Internal Control 4
1.2 Problem Statement 4-5
1.3 Research Objectives 5
1.4 Research Questions 5
1.5 Research Hypothesis 5-6
1.6 Scope of the Study 6
1.7 Significance of the Study 6
1.8 Definition of terms 6-7
2. Literature Review 7
2.1 Theoretical Framework 7
2.1.1 Historical development of internal control 7
2.2 Internal Control Defined 7-8
2.3 Elements of Internal Controls 8-9
2.4 Internal control objectives 9-10
2.5 Benefits of internal control 10
2.6 Limitations of internal control 10-11
3. Research Methodology 11
3.1 Introduction 11-12
3.2Population and Sampling 11
3.2.1 Population 11
3.2.2 Sample Size 11
3.2.3 Sampling techniques 1-12
3.3 Sources of Data 12
3.3Data Collection 12
4 Research Plan 12-13
5 References 14
Several studies have been carried out in Zimbabwe to find out why many of the government parastatals and other industries which kicked off on a high note fail to progress further to increase its revenues and service provision. It is said that most of the parastatals have been stagnant in operation and some have fallen to the extent that they have even failed to render the specific services under that ministry. Due to this, the government have adopted to both internal and external controls which helps this organisations to achieve its goals and also increment in the service provision and generate more revenue for the government since the state owned organisations consist of forty percent of the gross domestic product (GDP) of the country.
It has been found that the main reason why parastatal have not been prospering is that internal control have not been taken seriously which have resulted in fraud and theft because the poor control environment which create an opportunity for either shop floor workers or management to be involved in either of the two. The government has stated in the Public Finance management act that in every parastatal they will be appointed an internal auditor and external auditor who ensures that internal control have been carried out effectively and try to create the environment for the internal control. Therefore this research is there to assess the effectiveness of the internal control the prevention of fraud and theft in these government parastatals. Bureaucracy vested in the state owned organisations results in creation of a good environment for both fraud and theft since the chain of command is too long and authority is sometimes override by political affiliations which will therefore result in failure to follow the proper channels and effective use of internal control
1.1.1 GENERAL OVERVIEW OF PARASTATALS
The government as the major shareholder or the co-owner to say they been worried by the closure and down scaling of enterprise such as ZUPCO, NRZ and AIR ZIMBAMBWE which all of the three entities falls under the transport sector which has been the source of survival of most the business man in Zimbabwe. The government believes that failure in parastatal is a result of mismanagement, fraud, theft and corruption as the financial minister P. Chinamasa told the Financial Gazette companies and Markets in April 2016. The finance minister who is responsible of the fiscal policy believes the parastatal are over charging its production overheads, under capitalisation of assets, corruption and theft of assets and funds of production by employees. The government has formed a document which governs how the internal controls by which they believe that they prevents the threat to prosperity of state owned enterprise which is called the Corporate Governance Frame for State Enterprise and Parastatals in Zimbabwe (ministry of state enterprises and parastatals November 2010). According to constitution of Zimbabwe the state appoints a minister who is responsible for each ministry, that minister has a duty to appoint a board of director who will responded to internal checks and controls in order to protect the interest of the government. The board will then appoint an internal auditor who then facilitate that the internal control are functional and effective and makes sure that the preparations and the presentation of the financial statement a properly carried during the financial period before the publication of the financial statements.
1.1.2 OVERVIEW OF INTERNAL CONTROLS
Internal Control provides reasonable assurance that the objectives of the organization are being achieved in the following categories: effectiveness and efficiency of operations including the use of the entity’s resources. Reliability of financial statement and other report for internal and external use, compliance with applicable laws and regulation. Internal control was designed to provide reasonable assurance regarding preventions of or prompt detection of unauthorized acquisition, use or disposition of organizations assets. Internal Control is not one event, but a series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. Internal control was recognized as integral parts of each system that management uses to regulate and guide its operations rather than as a separate system within an organization.
Isidore (2006:81) in his definition of internal control stated, the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the organization in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. The key concepts from the above definition can be summarized as follows:
a. To ensure that a structural framework exists for the efficient and effective channelling scare resources,
b. To ensure that policies decided on and adopted by management are consistently followed by those responsible for implementing them;
c. To ensure that expensive assets on which operations critically depends are properly secured and safeguarded to prevent misuse and misappropriation,
d. To ensure that important document which provides the information on which significant strategic and decision are based provide a complete accurate and timely record of relevant events.
1.2 PROBLEM STATEMENT
Internal Controls in public sector organizations are often misconstrued and often aligned with political and management affiliations rather than they being looked at objectively and holistically. This state of affairs often results in mistrust of the public in the Internal Controls in the public sector, particularly in the local government systems (Assemblies).
In spite of various pronouncements on internal audit in the Zimbabwean Public Sector, the general opinion according to literature is that most of the public enterprises have failed to deliver on the purposes for which they were established. Many people accuse managers of public enterprises in Zimbabwe of ineffectiveness and inefficiency in terms of resource control. They argue that poor application of internal control principles and procedures leads to blatant diversion of scarce resources with its attendant consequences on the traditional accountability of government to the public. In fact, Lee, Johnson and Joyce (2004) observe that internal control is desired to provide some assurance to stakeholders that scarce resources are not diverted away from basic considerations inherent in financial management system design.
An increasing change in the organizations environment has become a common feature in modern organizations and business which call for effective internal control systems to promote efficiency, effectiveness and compliance with rules and regulations. There have been calls for better internal controls in organizations. Internal controls are therefore looked upon more and more as a solution to a variety of potential problems in organizations including the government parastatals.
1.3 RESEARCH OBJECTIVES
1.3.1 MAIN OBJECTIVES
1. To assess the strength and weakness of internal controls in parastatals with the view to determine the ability to minimize fraud and theft.
2. To ascertain how far the internal controls systems in parastatals had aided in management realisation of their organisation goals.
3. To discuss how far possible mismanagement in parastatals could curtail good internal control systems.
1.3.2 SECONDARY OBJECTIVES
1. To assess the relevance and appropriateness of the internal control system adopted as a measure to prevent fraud and theft in the organisation.
2. To ascertain the extent at which the parastatal staff complies with the internal controls put forward as a measure to prevent fraud and theft.
1.4 RESEARCH QUESTIONS
1. To what extent does strength and weakness of internal controls in parastatals with view to determining their ability to minimize fraud and theft?
2. How far the internal controls systems in parastatals has aided in management realisation of their organisation goals?
3. To what extent does mismanagement in parastatals could be curtailed through the institution of good internal controls?
4. To what extent does the internal controls measures the relevance and appropriateness of the adopted controls in preventing fraud and theft?
5. To what extent does the internal controls assess the degree of compliance of the parastatal staff?
1.5 RESEARCH HYPOTHESIS
Ho: Internal controls are effective on preventing fraud and theft in parastatals.
Hi: Internal controls are not effective in preventing fraud and theft in parastatals.
Ho: Internal controls adopted are relevant and appropriate for the prevention of fraud and theft.
Hi: Internal controls adopted are not relevant and appropriate for the prevention of fraud and theft.
Ho: Parastatal staff will comply with the internal control that have been adopted by the organisation in the prevention of fraud and theft.
Hi: Parastatal staff will not comply with the internal controls that have been adopted by the organisation in the prevention of fraud and theft.
The research work is carried out to examined fraud and theft prevention and controls, management’s effort to avoid dishonesty and corruption in parastatals. The research is focused on Zimbabwean parastatals reference of ZESA HOLDINGS under ZPC OR ZETDC due to the fact that it is likely easy to access research material, financial and time constraints and non-disclosure of certain information from the management due to the ZESA’s secrecy policies.
1.7 SIGNIFICANT OF THE STUDY
This refers to the importance or usefulness of the research to the parastatals, public limited, private limited companies, the individuals and the public at large. The aim of most researches is to provide knowledge and information that will bring about a better understanding of the topic under review. This study is aimed at providing an understanding on the effectiveness of internal controls on parastatals as obtainable in ZESA HOLDINGS.
The research will be able to know the extent to which internal controls in the entity have help management in the realization of the firm goals. The research will also enable the management to appraise the internal controls in operations with a view to correcting any weakness which may be evident during the prevention process. When completed the research findings and recommendations will form a base to rely upon by subsequence researchers which may wish to make further inquiries in the field of internal control operating in parastatals.
1.8 DEFINITIONS OF TERMS
Internal control: – is the planning, implementation, evaluating and correction of performance in order to ensure that organisation objectives are achieved.
Parastatal: – An organisation owned or controlled wholly or partly by the government of the country.
Prevention: – The system of stopping the bad habits or attitude of fraud and theft from happening.
Fraud: -is any irregularities involving the use of criminal deception to obtain an unjust or illegal advantage. As applied to financial reporting, fraud constitutes of any act or omission of an act that is required or the commission of deceitful and therefore dishonest nature
Theft: – This is an act of unlawful taking of property which belongs to another party.
2.1 Theoretical Framework.
Internal control can be understood differently by different people in different circumstances. This has led to confusions among businessmen, regulators, regulators and others. This problem is often worsening when the terms are not well defined in our laws and other regulations. To arrest these organization problems, this study has dealt with the needs and expectations, management and organizations, workers and the general public as a whole. In this regard, internal control is defined and described to:
Establish a common definition that serves the needs of different parties
Provide a standard against which business and other entities (Both large and Small) in the Public and Private sectors as well as profit oriented or non-profit oriented can assess their control systems and determine how to improve upon them.
2.1.1 Historical development of internal control
Since about 1900 accounting and business writers have made internal control very popular especially in relation to the work of an auditor. The indication given by this is that internal control is a new concept to both auditor and management. However, accounting and auditing have existed for a long time in the past but the same cannot be said about internal control.
The purpose of this session of this study is to show some summaries of extract from previous research works so as to provide some insight into the development of internal controls. According to Stone (2009), the early signs of internal control, particularly internal audit can be found in the records of early Mesopotamian civilization, – the summaries around 3600 to 2200 BC. He quotes Kenneth Most S. as saying; “It was customary for summaries to be prepared by scribes other than those who had provided original list of payments. Further, the document of the period revealed tiny marks, dots and codes at the sides of the figures indicating that checking had been performed”.
2.2 Internal Control Defined
Internal control is broadly defined by Njanike and Mutengezanwa (2011) as step by step programmes and processes instituted by management of an organization which helps the organization to achieve its goals and objectives as well as complying with laws and regulations.
This definition is further expatiated to give full meaning to effectiveness, efficiency and reliability, as follows: Effectiveness and efficiency of the operations of the entity seeks to address the based business and corporate objectives, achieving targets as well as protecting the resources of the entity.
The other category of reasonable assurance that internal controls seek to provide, relates to reliable financial reporting which encompasses consolidated financial statement. Thirdly internal controls provide assessment of compliance with laws and regulations.
The different aspect of the above definition deals different aspects of the organization. Deducing from the above definition internal control system can be seen to operate at different levels of effectiveness. The above categories can be measured on the basis of how each aspect has been able to achieve its objectives of reliable financial statements, compliance with laws and regulations and safeguarding the resources of the entity.
The American Institute of certified public Accountants (AICPA) in its guidelines on the Statement of internal control systems issued in 1995 defined internal control as a process effected by those charged with governance, management and other personnel, designed to provide reasonable assurance about the achievement of the entity’s objections relating to the;
Safeguarding of organizational assets
Checking the accountancy and reliability of its accounting data
Promotion and operational efficiency
Encouraging adherence to policies for accounting and financial controls.
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report on internal control, – Internal Control – Integrated Framework (1992) also defined internal control as follows; “Internal control is a process developed to guarantee with reasonable certainty, that the objectives of the company are achieved.”
Price Water House Coopers in (2008) defined an internal control system to consist of all procedures methods and measures (control measures) instituted by the Board of Directors and executive management to ensure that operational activities progress in proper fashion.
Considering the various definitions provided by authorities and earlier writers on the subject, internal control reflects the following fundamental concepts;
Internal control is a process – it is an ongoing activity that is interconnected to operations of an organization and which is seen as an important part of the organization.
People related – this means internal controls do not work on their own, they have to be implemented by people i.e. management and other employees.
Reasonable Assurance – can only give a reasonable assurance.
2.3 Elements of Internal Controls
COSO IC – Integrated framework, 1992 (Knechel, 2007) gives specific components of the ICS as below:
Control environment- the essence of an effectively controlled organization lies in the attitude of its management (Aarens et al, 1997). The control environment consists of actions, policies and procedures that reflect management attitude about the control of the entity. This touches on integrity and ethical values, commitment to competence, Board of Directors or audit committee participation, management’s philosophy and operating style, organization structure, and assignment of authority and responsibility and Human Resource practices.
Risk assessment – Management assesses, identifies and analyses risks relevant to the financial reporting in conformity to GAAP. This becomes a point of designing and operating ICS’s to minimize errors and irregularities. The auditor assesses risks to decide evidence needed for audit.
Control activities – are policies and procedures, in addition to those included in the other four components, that help ensure necessary actions are taken to address risks in the achievement of the entity’s objective eg segregation of duties (authorization, custody, operations and documents, electronic data processing), proper authorization, proper documentation and records, physical control over assets and records and independent checks on performance.
Information and communication – readable and readily understood information is important for the dissemination of instructions downwards, through all the internal channels of communication. The flow of information should be adequate, sufficiently detailed and explicit, accurate and up to date in an upward direction, as part of a routine management information system (Woolf, 1982).
Monitoring – involves ongoing/continuous or periodic assessment of the quality of ICS performance by management to see if ICS are understood, implemented and need for revision, external and internal audit reports, financial statements, regulatory reports can be used. It can be achieved through use of internal audits and audit committees.
2.4 Internal control objectives
According to Poubel de Castro (2009), internal control has the following objectives;
a) Ensuring accuracy of information
Internal controls play a key role in the accuracy of information provided by the organization for its stakeholders. It is very important for a manager to ensure that controls are working properly (Johnson and Kaven 2012). Accuracy of accounting information has to be taken into consideration when designing the internal controls.
b) Promoting operational efficiency of the organization
Ensuring operational efficiency help an organization to avoid waste of resources and providing an important medium to undertake tasks and achieve satisfactory performance. Internal control helps to establish standards of performance and ways to develop a multiple functions which are directed towards organizational objectives. There are many ways to ensure operational efficiency. They include recruiting and selecting qualified personnel, education and training.
c) Compliance with laws and regulations
One of the important objectives of internal controls is to ensure compliance with laws and regulations. This is also to ensure that employees comply with organizational policies and programmes for onward attainment of organizational objectives. In order for controls to work effectively, all the members in the organization must work hand-in-hand.
d) Safeguarding of assets
Assets are tangible and intangible resources of an organization which are deployed in the day-to-day operations. These are resources own by the entity which are used in the production of goods and services and for administrative purposes. Assets should be protected from misuse, theft or misappropriation.
e) Prevention and detection of fraud
Controls are very important to detect fraud that may occur during operations of the entity or through the financial statement. Fraud can occur through the use of unapproved means by members of the entity. In recent times, a study conducted by KPMG, entitled “Fraud in Brazil”, shows the main causes and the paths taken by to pinpoint fraud in the Brazilian public service. The research shows that 7% of frauds are as result poor attitude, 13% relates to the override of controls by management, 17% and 63% represents particularity and lack of internal controls respectively.
2.5 Benefits of internal control
2.5.1 Benefits of Internal Control to the entity
On the literatures reviewed on previous studies one can identify the following principal benefits that may arise for an entity from instituting and effectively implementing a sound system of internal control:
1. “Internal control can drive performance and create value for your organization instead of only assuring conformance” – Edward Chow Chairman, IFAC PAIB Committee (2011)
2. “Internal control helps management to design, implement and maintain controls and then internal audit ensures that management sticks to them,” – Cees Klumper, Vice-President, Internal Control, Ahold (Dutch stores group). (2009)
3. Helps in the maximization of opportunities and minimizing losses.
4. Internal control ensures the appropriate steps are taken in risk management with the aim of achieving organizational objectives.
5. A good Internal Control system offers good financial reporting practices and hence accurate information for the various stakeholders.
6. With effective internal control, assets are safeguarded and operational performances are improved.
2.6 Limitations of internal control
Effective internal controls can also have certain limitations which are likely to impact on the operational performance of an entity. There is a high possibility of limitations which inherent in the internal control systems. These may include the following:
a) Errors of Judgment: internal controls are designed and implemented by humans. Most these controls, management use judgments in designing and implementing them and hence there can be errors in either the design stage or implementation stage. Incorrect judgments could be as a result of inadequate information available during the design or implementation stage.
b) Failures: Flaws in controls established can occur when there is miscommunication. Errors can also occur when there is lack of adequate training of personnel of the organization. Complexity of information technology usage can also cause failures in the control systems.
c) Management override – this occurs when a senior manager bypass protocol. There is a high risk involved when senior management are able to override laid down policies or procedures for legitimate course of action.
d) Collusion: when two or more individuals come together to defraud the organization, they can be said to have colluded. When these employees carries an important control function, can perpetuate fraud and hide the evidence.
e) Resource limitations – due to the scarcity of resources, organizations have to prioritize the control activities to make the use of resources. In other words, resources are not available to put every control activity into practice.
f) Only cost effective internal controls are applied- the cost of to set up an internal control must not outweigh the benefits of the internal control.
3.0 RESEARCH METHODOLOGY
This chapter discusses the methodology employed to achieve the objectives of the study. This research is a non-experimental exploratory study designed to determine the effectiveness/ impact of internal control on corporate governance particularly in state or government organizations. It is also to recommend strategies for effective and efficient ways by which internal control activities can impact on performances of parastatals, using ZESA HOLDINGS (ZPC OR ZETDC) as a case study.
3.2Population and Sampling
The population of the study is the management and other staff of ZESA HOLDINGS (ZPC OR ZETDC).
3.2.2 Sample Size
A sample size of thirty (30) staff members of the selected case study institution is to be selected for the study. This thirty staff member is going to consist of five (5) management staff members and twenty-five (25) other staff.
3.2.3 Sampling Technique
The staff will be taken from various departments which includes Finance, Human Resource, Operations, Maintenance and administration. Quota sampling is to be used when selecting management to ensure that one of each of departmental managers is selected and on other staff simple random method is to be used so that every staff member gets an equal chance to participate in the study.
3.3 Sources of Data
Questionnaires and interview guide are the main research instruments to be used to gather the primary data for the study. Both open and closed ended questions, based on the objectives of the research are to be used.
Data consisted of issues in internal and external audit reports on the accounts and operations of the organisation for the past five years, and other audit reports implementation related issues. Journals and periodicals from renowned audit bodies and institutions are to be collected and reviewed.
3.4 Data Collection
Data will be collected from two main sources for this study with the view to produce objective and valid conclusions. Data will be collected from primary and secondary sources. Most researchers agree that qualitative research should try to use as many different sources as possible.
4.0 PLAN OF ACTION
4.1 Time Budget
Activity Time Frame
Chapter 1: Introduction 10 days
Chapter 2: Literature Review 15 days
Chapter 3: Research Methodology 20 days
Chapter 4: Plan 5 days
Total 50 days
The table above shows the fifty (50) days required conducting the research in order to fulfil its requirement and this is to be done next semster
4.2 Resources Required
Expected Expenditure Amount ($)
Transport and Food 20
Cell phone Charges 10
The table above shows sixty (60) dollars will be required to facilitate the project to be carried out and this is cost likely to be financed personally.
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