CHAPTER TWO
LITERTURE REVIEW
INTRODUCTION
Reading the news papers, listening to news on the various electronic media, one cannot dispute the fact that Internal Controls in public sector work places are very less than standard satisfactory. The work places in this country appear to be characterized by immoral acts such as selfishness, greediness, misconduct, falsification of accounts, bribery and abuse of power.
The result is that people have no confidence in the public sector organization in which they work. Attitudes associated with behavior such as anyone who is wealthy and successful is suspect. In public mind, a person becomes wealthy by cheating the public who is the tax payer.
According to Woode, a person becomes wealthy by cheating the tax man through evasion and exploiting his labor force and price rifling. Immoral behavior involves people at all levels of organization such as artisans, professionals, managers, employers and even the executives.
Internal controls are moral principles or beliefs of what is right or wrong. This belief guides individuals in their dealings with others and groups especially stakeholders (management and employees) and provides a basis for deciding whether behavior is right or wrong. Internal Controls helps people to determine moral response to the situation in which the best course of action is unclear. Internal Controls goes beyond rules or what the law says but rather is the accepted norms of a particular society. Thus, how to even talk varies from one society to the other.

FUNDERMENTAL CONCEPTS
Internal Control is designed to achieve objectives in three categories. In financial reporting category, the objectives are reliable published financial reports (e.g. annual financial statements, interim financial reports) and safeguard assets from unauthorized use (e.g. embezzlement, theft, damage, unauthorized purchase or disposition)
In operations category, some examples of objectives are good business reputation, return on investments, market share, new product introduction, safeguarding assets in the content of their effective and efficient.
People are the key component of an entity’s internal control. A company may have policy manuals, forms, computer-controlled information and accounting and other features of control but people make the system work at every level of company management. People establish the objectives, put control mechanisms in place, and operate them.
Internal Control provides reasonable assurance, not absolute assurance, that category control objectives will be achieved. Since people operate the controls, break down can occur. Human error, deliberate circumvention, management override, and improper collection among people who are supposed to act independent can cause failure to achieve objectives.
Internal control can help prevent and detect these people – caused failure but cannot guarantee that they will never happen.
Internal control is a process, not an end in itself, but a means to ends (i.e. the category objectives). It is a dynamic function (process) operating everyday within a company framework (structure).

COMPONENTS OF INTERNAL CONTROL SYSTEMS
An entity’s internal controls consist of the following five components, these are: 1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring

CONTROL ENVIRONMENT
The control environment sets the tone of an organization by influencing the control consciousness of its people. As such, it reflects the overall attitude, awareness, and actions of the board of directors, management, and others concerning the importance of control and its emphasis in the entity. It is the foundation for all other components of internal controls.
RISK ASSESSMENT
Risk assessment is the process the entity goes through to identify and analyze the relevant risks which may affect the achievement of the organization’s objectives. For example, management must evaluate the risk that its computer system may be destroyed or damaged and that it will lose all its information stored on the system. Once it assesses the risk, it designs cost-effective controls, such as regular backup of computer files and off-site storage, to mitigate the risk.
CONTROL ACTIVITIES
Control activities are the policies and procedures implemented by management to ensure the accomplishment of objectives and the mitigation of risks. Examples of important control activities include performance reviews, segregation of duties, computer data entry edit controls, and physical controls that limit access to assets.

INFORMATION AND COMMUNICATION
Information and communication refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable the accomplishment of the organization’s objectives. It includes the organization’s accounting system and methods for recording and reporting on transactions.
MONITORING
Monitoring is a process that assesses the quality of internal controls over time. It involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions. Monitoring can be done through ongoing activities or separate evaluations. Ongoing monitoring procedures are built into the normal recurring activities of an entity. Internal auditors, customers, and regulators contribute to the monitoring of the internal controls. There is a logical loop to an organization’s internal controls, starting with the control environment, leading to the identification of specific organizational risks, the establishment of control activities, the design of an information and communication system, and providing feedback through regular monitoring activities.

CONTROL ACTIVITIES * Performance Reviews- Management’s continuous supervision of operations * Segregation of duties – designed to reduce opportunities for a person to be in a position to perpetrate and conceal errors and frauds when performing normal duties. * Physical control – Designed to ensure safeguarding and security of assets and records * Information Processing Controls – Including approvals, authorization, verification and reconciliations.

FACTORS THAT LEAD TO INTERNAL CONTROL VIOLATION
According to G.A Steiner and J.F. Steiner (1985), strong forces in organization shape internal controls depending on how they are managed; these forces elevate or depress standard of conduct. Some of the prominent and interrelated forces that shape conducts are: a. Leadership b. Strategies and policies c. Organization culture d. Individual characteristics

LEADERSHIP
The example of entities’ leaders is perhaps the strongest influence on integrity. Not only do leaders set formal rules, but by their example, they can reinforce or undermine right behavior, subordinates are keen observers and quickly notice if standards are in practice, upheld or evaded. Exemplary behavior is a powerful tool available to all managers.
Many employees are prone to cynicism. Diverting blames for mistakes, breaking small promises, showing favoritism and diversion of trivial company resources for personal use are ill-advised- because if the leader does it, and opportunistic employee can rationalize his or her entitlement to do it also.

STRATEGIES AND POLICIES
A critical of managers to create strong competitive strategies that enable the organization to meet financial goals without encouraging moral compromise. In entities with deteriorating business, managers have great difficulty meeting performance targets and may feel pressure to compromise moral standards. Even excellent overall strategies needs to be carried out with policies that support honest achievement. Unrealistic performance goals can pressure those who must make them work.
Moreover, reward and compensation systems can also expose employees to moral compromise.

CORPORATE CULTURE
Corporate culture refers to a set of values, rituals, formal rules and physical artifacts that characterize a company. Every corporate culture has a moral dimension reinforced not primarily by formal policies but by daily habit and shared beliefs about which behaviors are rewarded and which are penalized. Moreover, this factor is also attributed to moral muteness. That is, managers are unable to raise and discuss moral issues.
INDIVIDUAL CHARACTERISTICS
Behavior is motivated by a mixture of internal disposition and situational incentives. In corporation with a dreary moral climate, corrupt leaders and high pressure to achieve numbers, otherwise honest individuals may be pushed to compromise.

HOW TO IMPROVE THE ORGANISATION’S INTERNAL CONTROL SYSTEMS
According to Robert Kreitner and Angelo Kinck, Organization Behavior , page 39-41, the improvement of on the job controls could be improved by following the below actions.
a. Managers behaving morally. Managers are potent role models whose habits and actual behavior send signals about the importance of moral conduct. Moral behavior is top-to-bottom proposition.
b. Screening potential employees. Surprisingly, employees are general lax when it comes to checking references, credentials, transcripts and other information on applicant resumes. More diligent action in this area can screen out those given to fraud and misrepresentation. Integrity testing is fairly valid but no panacea.
c. Developing a meaningful internal control can have a positive impact if they satisfy these three criteria: * They are distributed to every employee * They are firmly supported by top management * They are evenly enforced with rewards for compliance and strict penalties for non compliance.
d. Reinforcing internal control. Behavior that is reinforced tends to be repeated, where as behavior that is not reinforced tends to disappear. Moral conduct too often is punished while immoral behavior is rewarded.
e. Creating positions, units and other structural mechanisms to deal with internal control needs to be an everyday affair, not a onetime announcement of a new internal control that gets filed away and forgotten.

THE UNIQUENESS AND SIMILARITIES OF PUBLIC ENTITIES IN RELATIONS TO PRIVATE SECTOR ORGANISATIONS.
Public sector organizations are all entities like any other business but there are some factors which distinct them from the private sector based on their uniqueness, there are some similarities which at times make it difficult to know those owned by individuals.

Aidan and Lawton, Organizational Management in Public Sector, pp 6-7, outlines some of the uniqueness of the public entities to be as follows: a. Public sector organizations are not exposed to the competitive world of the market and hence have no incentives to reduce cost or operate efficiently. b. Objectives are usually ill defined and expressed in vague sterms such as serving the public, maintaining law and order, reducing inequality, reducing poverty or improving health. c. Strategic planning in more difficult because of the short term considerations of politicians. d. The public sector organizations are funded by taxation not by charging its services. e. Certain goods have to be provided by the state. Defense, law and order and street lighting are consumed collectively , in theory equally available to all. The provision of such public goods cannot be left to the vagaries of the market.

The factors that show the similarities between these two include the following: a. Increasingly the public sector charges for some of its services, for example through increased prescription charges or charges for leisure facilities. b. The private sector also operates within a particular environment as decisions made buy politician to for example keep interest rates high will have a profound effect upon the way existence of some firms faced with high borrowing costs and reduced sales. c. The activities of the private sector are also regulated over unfair trading practices, health and safety work or environmental pollution. d. Public and private partnerships have developed over urban redevelopment where groups such as business in the community have promoted private sector organization involvement at local levels.

COMMON INTERNAL CONTROL PRACTISED IN ORGANISATIONS
An organization has several internal controls which are used by it to operate, and these controls include. a. Adherence to the law and accepted standards of behavior b. Integrity and honesty in all our dealings c. Respect for individuals d. Innovation, the seeking and acceptance of charge and the prompt adoption of relevant new techniques. e. The expectation of high performance standards from employees and willingness to recognize and reward achievement. f. Courtesy, concern and quality in personal presentation, language and appearance. g. Concern for the environment, http:/www. Pearson. Educ.com

PRINCIPLES OF PUBLIC SECTOR ORGANISATIONS
Aidan Rose and Alan Lawton (1999) in reference to Organization for Economic and Development (OECD), key principles that public sector entities must observe are as follows: a. Controls for public service should be clear. b. Control guidance should be available to public servants. c. Public servants must know their rights and obligations when exposing wrong doing. d. Political commitment to internal control should reinforce the conduct of public servants. e. Decision-making process should be transparent and open to scrutiny. f. There should be clear guidelines for interaction between the public private sectors. g. Managers should demonstrate and promote moral controls for their subordinates to emulate. h. Adequate accountability mechanisms should be in place in the public service. i. Appropriate procedures and sanctions should exist to deal with misconduct.