CHAPTER ONE

INTRODUCTION

1.1      Background to the Study

In this study, the researcher examined the effectiveness of company’s internal control over financial reporting.

Internal control over financial is defined as a process designed by, and under the supervision of the registrant’s principal executive and financial officer, or persons performing similar functions and effected by the registrant’s board of directors management and other personnel, to provide reasonable assurance regarding the liability of financial reporting and the preparation of financial statement for external purposes in accordance with generally accepted accounting principle and includes those policies procedures (Public Company Accounting Oversight Board, 2004).

The researcher use sample of companies that disclosed the effectiveness of internal control over financial reporting in the Nigeria stock exchange. Under section 302 of Sabanes-Oxley Act (2002), company’s executives are required to certify that they have evaluated the effectiveness of their internal controls over financial reporting.

Section 404 of Sabanes-Oxley Act (2002) require that each annual report includes an assessment by management of the effectiveness of the internal control structure and procedures of the issuer for financial reporting that is attested to by the company’s public accountants.

Internal control over financial reporting has been recognized as an important feature of a company (Kinney, 1990, Kinney 2000, Kinney 2001). However, prior to Sabanes-Oxley (2002), standard in place were very limited in scope.

Sabanes-Oxley (2002) Define internal control as “a process affected by an entity’s board of directors, management and other personnel, design to provide reasonable assurance regarding the liability of financial reporting. But the (1992) framework broadly defined internal control in terms of achieving

1.     Reliability of financial reporting

2.     The effectiveness and efficiency of operations.

3.     Compliance applicable laws and regulations (Statement of auditing standard section 319).

Following from the above, the focus of this study is to ascertain the determinants of the effectiveness of internal control over financial reporting in Nigeria.

1.2      Statement of Problem

Companies in Nigeria like other companies in the world perform internal audit function to meet the obligation for the firms were established. In the performance of duties assigned, due to lack of financial reporting, there will not be effectiveness in internal control system. For these companies to meet their objectives, internal control must be properly introduced to ensure effectiveness and efficiency in the enterprise.

1.3      Research Questions

The following are the research questions:

1.     Is the age of a company a determinant of effectiveness, of its internal control?

2.     Is the side of a company a determinant of effectiveness of it’s internal control?

1.4   Objectives of the Study

The main objective of this study is to examine the effectiveness of internal control for all the companies listed on the Nigeria stock exchange as at 31st December, 2012.

Following from the above, the specific objectives of this study are:  

1.     To investigate whether the effectiveness of internal control are associated with the company’s size measured by market value of equity.

2.     To investigate whether the effectiveness in internal control are associated with the company’s age, measured by the difference between the date of incorporation and ‘the date this study was embarked upon.

1.5   Statement of Hypothesis

In order to be successful or achieved a reliable result in this study and to effusively study the determinant of effectiveness in internal control over financial reporting in Nigeria companies, the following hypothesis were formulated:

Hypothesis One

HI:    The size of a company is not a determinant of the extent of effectiveness in it’s internal control.

HO: The size of a company is a determinant of the extent of effectiveness in it’s internal control.

Hypothesis Two

HI:    The age of a company is not a determinant of the extent of effectiveness in it’s internal control.

HO:   The age of a company is a determinant of the extent of effectiveness in its internal control.

1.6   Significance of the Study

As a result of the efficiencies in internal control in Nigeria companies. There has been an increase in production of goods and services which has affected the increase of wealth in the country positively. This study is designed in such a way as to make managements to sort out strategies that will enhance strict adherence to their regulation so as to be more improving wealth of the country.

This study is designed in such a way as to make meaningful contribution to the entire human society. Having gone through the hypothesis of the study, both the people in the society and the government can devices strategies that can help to be more improving the internal control system in Nigeria Companies. This will bring about more positive effect in Standard of living and maintenance of the business environment.

Academicians will benefit from this study because before now, they see weakness in internal control as just internal control problem and not as a significant deficiency. This study will help them to be able to differentiate efficiency from a significant deficiency

1.7   Scope of the Study

The study cover’s all the companies listed on the Nigeria stock exchange as at 31stDecember, 2013. The study will focus on effectiveness. In internal control over financial reporting in quoted companies with emphasis on the determinant of the effectiveness.

1.8   Limitation of Study

In nature any development is clouded with hindrance. This project work is not going to be an exception.

The problem encountered, by the researcher is:

1.     Death of literature: The literature in this area that is available in library and other sources are limited to a few.

2.     Attitude of Respondents: The reluctance on the part of appropriate authorities of the Nigeria Company to furnish accurate information for proper and adequate analysis. To the companies, some significant department like the auditor and finance department were meant to be a top secret to the company alone. In respect of this, the researchers have to make used of mostly secondary sources of data.

However, in-spite of the above problems, the researcher tried as much as possible to make sure that the study was not seriously affected in terms of validity and reliability.

1.9   Definition of Terms

The Age Of The Company: Is the difference between the date of incorporation and the date this study was embarked upon (2013).

The Size Of The Company: Is defined based on the size of activities and the number of employees. Large Size Company tends to be more complex and engaged in larger number and variety of transactions. It also has an adequate number of employees, compared to small size company.