THE IMPACT OF INTERNAL CONTROL ON COMMERCIAL ENTERPRISE PERFORMANCE CASE STUDY: CONGELCAM S.A.
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Internal controls and internal auditing have recently received more attention due to the globalization of the economy, technological improvements, the complexity of company, and suspicions of fraudulent financial reporting.
Simultaneously, several new financial instruments and participants have entered the capital markets, making transactions and operations more complex.
In this context, the goal of this study is to look into the impact of internal control on commercial company performance.
To achieve this goal, data was gathered through questionnaires sent to the Head Office of CONGELCAM SA in Douala, a Cameroonian company that works with the importation, exportation, and commercialization of frozen foods.
To achieve this goal, a cluster sample was used. We distributed 60 questionnaires and received 50 responses, allowing us to examine the data. The following control components were used to examine the data: control environment, risk assessment, control actions, Accounting Information and Communication System, and monitoring.
These elements were derived from related literature reviews such as COSO and other highly rated publications on internal control.
We discovered a positive relationship between the various components of internal control and the performance of commercial enterprises based on the analyzed data, and we came to the conclusion that internal controls are critical for the efficient, effective, and profitable operation of commercial enterprises.
THE FIRST CHAPTER
1.1 Study Background
Internal controls are the safeguards put in place by an organization to guarantee that its objectives, aims, and missions are met. They are a set of policies and processes implemented by an institution to ensure that an organization’s transactions are conducted correctly in order to avoid waste, theft, and misuse of resources.
Internal control, as defined by the Committee of Sponsoring Organizations of the Tread way Commission (COSO), is a process carried out by an entity’s board of directors, management, and other personnel to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, financial reporting reliability, compliance with applicable laws and regulations, and asset safeguarding against utmost risk.
Internal controls offer management and the board of directors of a business with reasonable but not absolute certainty that the organization’s objectives will be met. “All methods of internal control have limits that affect the possibility of success” (Hayes et al., 2005).
Internal control will ensure that errors and anomalies are detected and corrected. Internal control refers to the control environment and procedures that make up a system. It encompasses all policies and procedures implemented by an entity’s directors and management to help them achieve their goals of ensuring, as far as possible, the orderly and efficient conduct of its business in order to protect assets, prevent and detect fraud and error, and ensure the accuracy and completeness of accounting records and the timely preparation of reliable financial information (SAS 300.1).
Internal control definitions, meaning, and application in auditing, as well as their impact on audit engagements, evolved and transformed between roughly 1905 and 2004. These modifications were frequently in response to a significant change in the country’s overall economic position or the actions of individual businesses inside the economy.
Lawrence Dicksee defined the purpose and scope of an audit as tripartite in 1892. “The entire role of the auditor is to discover the exact state of the client’s affairs on a certain date,” Dicksee added.
The author then went on to explain that this obligation may be fulfilled by “testing” the accounts, although he never mentioned internal control in relation to those tests.
According to Montgomery, the major goal of an audit has shifted from just detecting fraud and errors to “ascertaining the true state and earnings of an organization for (a) its proprietors, (b) its executives, (c) lenders, and (d) investors who are considering the purchase of securities.”
The practice of auditing in the United States industrial context evolved from protecting the assets of single business proprietors to safeguarding the interests of many stakeholders in an American economy where company ownership and management had become detached.
Regardless of the evolving nature of the Montgomery audit, a substantial chunk of the attention remained on alleged fraudulent conduct by clerical employees, with no indication of potential concerns within the company’s senior ranks.
Thus, nearly a century before the problems at Enron and other early twenty-first-century audit failures, the seeds of debate existed about not only the importance of internal control reviews during an audit, which should be investigated and reported for stakeholders’ protection, but also the role of the corporate administrator in financial reporting.
Congress approved two acts in response to the stock market disaster in the fall of 1929, in order to stabilize the market and assure proper reporting to investors. The Securities Act of 1933 was the first, and it required publicly traded businesses to register their market securities and provide regular financial disclosures.
The second was the Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC), an agency charged with regulating exchanges and brokers as well as overseeing publicly traded businesses’ financial reports.
Victor H. Stempf went on to say that it is the corporation’s job, not the independent auditor’s, to discover fraud within the company in 1934. He emphasized that fraud and defalcation investigations would be a repetition of the company’s internal audit team’s work.
Despite the fact that the 1931 Ultramares judgment had decided that auditors might be held liable for fraud and carelessness, Stempf made these incisive remarks.
Over the next 70 years, the notion of independent auditor obligations evolved via litigation and authoritative statements, culminating in SAS 99 in 2001, which gave auditors an affirmative responsibility to prevent fraud.
Internal control procedures were primarily focused on identifying and reducing fraud and abuse among defense contractors from 1941 until 1945, when the war broke out. Many large corporations’ internal audit departments were responsible for this type of contract auditing.
The AIA’s Committee on Auditing Procedure, now known as the AICPA, published a report titled Special Report on Internal Control in November 1949, which included a definition of internal control.
“Internal control” was defined as “the plan of organization and all of the coordinated 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,” according to the report.
The issues prompted congressional hearings in February 2002, but they did nothing to assuage investor concerns.
The US Congress passed the Sarbanes-Oxley Act on July 31, 2002, in response to public indignation over the Enron fiasco and other high-profile financial scandals at the turn of the twenty-first century, as well as concerns of the government’s insufficient regulatory control.
The Ministry of the Supreme State Audit (MINCSP) was founded with the goal of combating corruption, embezzlement, and any other misbehaviors in Cameroon’s public sector.
SODECOTON General Manager Iya Mohamed was found guilty of 20 managerial lapses costing the state $9 billion by the Supreme State Audit. Following the collapse of micro-financial institutions such as FIFFA, National Corporate Fund (NCF), Global Business Financial (GBF), and Compagnie financière de l’Estuaire du Cameroun, the MINCSP in Cameroon has 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 (CO-FINEST).
The Head of State’s designated Supreme State Auditor (SAI) has jurisdiction over all firms in Cameroon. As a result, the SAI has the authority to impose sanctions.
Punitive actions against government personnel for bad management, fraud, and corrupt acts are one of the key roles played by the SAI in combating corruption in the public sector. The Budget and Finance Disciplinary Board, led by Henri Eyebe, is in charge of this responsibility.
“Operation Sparrow Hawk” is also a corrective action performed by the President to combat corruption and the misappropriation of public monies. In this regard, we can trace the disparities in the Higher Education sector and deficits in secondary education to embezzlement, as evidenced by the expulsion of the former vice chancellors of the Universities of Buea and Douala.
Louis Bapes, the Minister of Secondary Education, was sentenced to 20 years in prison for misusing and embezzling funds.
Another controversy involves former Minister of Territorial Administration Marafa Hamidou Yaya and Yves Michel Fotso, former Director of the defunct state air transport business CAMAIR, who were found guilty of misappropriation and sentenced to 25 years in prison. FGH-SA and Clean OIL, two of Yves Fotso’s companies, were forced to close as a result of this.
Similarly, the National Anti-Corruption Commission (CONAC) was founded by the President of the Republic to combat corruption in the country.
1.2 Problem Statement and Study Justification
The reasons of today’s economic and financial crises, as well as the recurrence of accounting and business scandals that have occurred repeatedly throughout history, are frequently linked to “detached,” “corrupt,” and “greedy” corporate cultures.
Companies typically fail due to a lack of effective internal controls, as defined by the SOX ACT and other regulatory agencies. In 2000, Chief Executive Magazine named Enron’s board of directors as one of the country’s top five.
The Enron Board of Directors failed to protect Enron stockholders, contributing to the collapse of the United States’ seventh-largest public firm. In addition, we have seen the demise of WorldCom, Parmalat in Europe, and Chou Aoyama in Asia owing to weak corporate ethics.
Internal controls such as authorization, segregation of duties, passwords, physical checks, and supervision are often overridden or absent in commercial companies, resulting in fraud, pilferage, theft, and embezzlement, and therefore lowering performance.
This represents Cameroon’s public sector practices, as seen by former Health Minister Owona Olanguena’s theft, fraud by MarafaHamidouYaya, and Louis BapesBapes’ abuse of funds in the Ministry of Secondary Education and mismanagement at public universities.
This has a significant impact on performance. Profitability, liquidity, customer satisfaction, employee and managerial performance, strategic performance, and reputation are all factors considered.
The failure of firms in Cameroon such as FIFFA, COFINEST, NCF, CECO, FGH-SA, and Clean OIL can be related to corruption and malpractices in administration, as well as insufficient internal controls.
The government, on the other hand, established regulatory institutions such as the National Anti-Corruption Commission CONAC, MDPRSS, and Supreme State Audit, which have taken corrective steps to prevent corruption, embezzlement, and misappropriation of funds.
In this context, weak controls will definitely lead to lower performance;
the following research issues will guide this study:
Is it possible for a good internal control system to help businesses perform better?
What is the control mechanism in place to keep cash and inventory safe?
Is the accuracy of the control methods sufficient to reduce pilferage?
Can asset misappropriation have an impact on a company’s performance?
Internal controls can they be used to govern the administration of commercial enterprises?
1.3 Study Objectives
The major goal of this research is to look at how internal control influences a commercial enterprise’s performance, using CONGELCAM S.A as a case study.
The following are the specific goals:
To see if a good internal control system may help commercial firms operate better.
To look into the controls in place to protect cash, non-current assets, and inventory.
To establish a link between sound accounting procedures and commercial structure performance.
To assist commercial enterprise management to implement effective internal controls.
To investigate the influence of asset misappropriation on commercial enterprise performance.
To give required recommendations about the organization’s internal control structure
HO: The performance of commercial enterprises is unaffected by internal control.
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THE IMPACT OF INTERNAL CONTROL ON COMMERCIAL ENTERPRISE PERFORMANCE