The Impact of Internal Control Systems on Road Construction: a Case Study of the Ministry of Works and Infrastructure

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CHAPTER 1

1. INTRODUCTION

1.1 Background To The Study

Control" and "organization" are terms indispensable in the framing of any understanding of modern business: as such they are terms which almost go before comprehension, as the givens of discourse. At the same time, they represent critical forms of modern knowledge-power. First, they are central to the structuring and running of the modern world in general (and not just the economic world): but also, as is increasingly recognized, they are vehicles that predispose us to see the world as a site where the power of expert knowledge must operate, even as they remake the world into such a site (Hoskin 2002).

In the processes of organization, planning and decision-making are a pre-condition and pre-requisite to effective and efficient performance in an organization. The quality of decision making in an organization depends on selecting proper goals and identifying means for achieving them. By separating the planning decision process from the decision control process is an important method of maintaining control over the members of the organization. Sequel to the aforementioned, by assigning planning decisions to one set of individuals and control decisions to another set of individuals, there is less chance that individual decisions will stray from those desired by the organization. Also by separating responsibilities for planning decisions and control decisions, the members of the organization monitor each other. Furthermore, separating planning decisions from control is a procedure used in internal control systems. According to Kathleen M. Eisenhardt, “control can be achieved by minimizing the divergence of preferences among organizational members. That is, members cooperate in the achievement of organizational goals because the members understand and have internalized these goals”. Internal control system is a system of checks and balances to verify that transactions are recorded and implemented correctly. An internal control system dissuades employees from committing fraud against the organization by establishing a trail of documents and by using the separation of duties so that employees monitor each other. Wolfgang(2008) states that “every business organization is subject to some kind of risks depending upon several factors such as the products and services it sell, the market in which it functions, the sources through which it is financed, and the way it utilizes its resources. Hence, it is important to coordinate every aspect of a business organization in an effective way through an effective internal control system or a corporate internal control system”. Rogers 2008 adds: “if Project goals are not aligned with organization’s strategic goals, it implies a negligent organization and system which is void of internal control. In a study of 10,000 projects, 70% failed because of communication breakdowns/failures - that is, people who saw something “wrong” did not say anything about it”. Determining whether a particular internal control system is effective is a judgment resulting from an assessment of whether the five components – Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring – are present and functioning. In 1992, the Auditing Standards Board (AU319) adopted the definition of internal control published by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission which defines it as “a process effected by an entity’s board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of organizational goals and objectives in the following categories:

➢ Operational effectiveness and efficiency.

➢ Reliability of financial reporting.

➢ Compliance with applicable laws and regulations”.

Internal controls are to be an integral part of an organization’s financial and business...
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