THE IMPACT OF INTERNAL CONTROL SYSTEM ON REVENUE GENERATION

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THE IMPACT OF INTERNAL CONTROL SYSTEM ON REVENUE GENERATION

CHAPTER ONE

INTRODUCTION

1.0. BACKGROUND OF THE STUDY

Every organization has a purpose, which includes making some product and rendering some services at a price. For normal operations of the business organization, it is the product or services of the firm that cause cash receipts (revenue) to flow into the firm. Revenue is associated with products or service of a firm as source of expected cash receipts. Revenue is an event; an increase that applies definitely to value that is monetary. This increase occurs because the firm undertakes certain activities or there is any performance by the firm.Revenue therefore refers to the monetary event of asset valves increasing in the firm due to the physical event of production or sales of the firms’ products or services. In Kam (1987:237), Financial Accounting Standard Board(FASB) defines revenue as inflows or other enhancements of assets of an entity or settlements of its liabilities (or combination of both) during a period from delivery or producing goods, rendering service or other activities that constitutes the entity’s ongoing major or central operations. In addition, Hongreen et al (2002:568) described revenue as inflows of asset (almost always cash or accounts receivables) received for products or services provided to customers.

On the basis of the above, National Electric Power Authority now Power Holding Company of Nigeria is a government owned public utility establishment enjoying almost total monopoly in generating, transmitting and delivering electricity to all homes and businesses in Nigeria. According to the establishments customer service chartered (2004), her mission as a service industry is to satisfactorily meet customers electricity demand in the most cost effective manner using proven technology and well motivated customer friendly work force with adequate consideration for the environment. Her goals include:

I. To continuously improve her service to her customer.

II. To realize full payment for timely accurate and complete billing of electricity delivered.

III. Institutionalise business and commercial orientation among the work force.

IV. Gradually aiming at closing the gap between demand and supply by upgrading and expanding, generating, transmission and distribution of infrastructure.

V. To improve skills and motivation of staff.

To achieve the above mission and goals, the management of the establishment must adopt measures to ensure that available resources are prudently used to obtain valve for money from resources allocated to them. Management in turn should generate operational data with which they evaluate the efficiency and effectiveness of their operation. It is fundament aspect of management stewardship responsibility to provide interested parties with reasonable assurance that their organisation is effectively controlled and that the accounting data it receives on a timely basis are accurate and dependable. Developing a strong system of internal control provides this assurance.

Thus, internal control is defined as the whole system of control, financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner to ensure adherence to management policies safeguard the assets and secure as far as possible the completeness and accuracy of the records. In addition the American institute of Certified Public Accountants in 1949 defined internal control as comprising the plan of organisation and all the coordinate methods and measures adopted within a business (or non profit making body) to safeguard its assets, check the accuracy and reliability of its accounting data promote operational efficiency and encourage adherence to prescribed managerial policies. A ‘system’ of internal control extends beyond those matters which relate directly to the functions of the accounting and financial department. However, it is an established fact that all the business units and service centre of power holding company of Nigerian plc in Enugu state are often plagued by accounting and administrative control problems as it affect revenue generation and other assets. As a result the establishment revenue base has assumed a downward trend. It has also been shown that despite considerable investment, public service delivery by the establishment is widely perceived to be unsatisfactory and deteriorating from bad to worse.

The complete dependence on capital grants allocation from government is also known. What is not known is the degree to which internal control weaknesses and reduced allocation from government contribute to the problem. The incidence of internal control weaknesses unsatisfactory and deteriorating service delivery have the undesired effect of not only weakening the establishment’s ability to provide electricity supply effectively, but also encourages collusion, fraud, asset conversion, genuine and deliberate mistakes, corruption, lack of transparency and accountability for revenue collection and accountability for revenue collection and other assets. For the enhancement of the attainment of the mission and goals, it is therefore necessary that these hindrances be removed. It is against the above background and evaluate that this research carried out to examine and evaluate the internal control system in operation at holding company of Nigeria in Enugu state.

1.1 STATEMENT OF PROBLEM

The incidence of internal control weaknesses, unsatisfactory and deteriorating service delivery have the undesired effect of not only weakening the company’s ability to effectively provide electricity supply but also encourages collusion, fraud, embezzlements, loss of cash (revenue), assets conversion genuine and deliberate mistakes, corruption, lack of transparency and accountability for revenue collection and other assets. Despite considerable investment, public service delivery is unsatisfactory and degenerating. The company is not able to break even and sustain itself from the revenue obtained there from. This impacts so negatively on the company’s existence. For the enhancement of the attainment of the mission and goals of the company, it is therefore necessary that these hindrances be removed. The management of the company should familiarize themselves with internal control procedures that will ensure effective service delivery and the desired revenue generation.

Unfortunately, there has a dearth of adequate information in this regard. No determined effort has been made to investigate the problem of weak internal control over service delivery and revenue generation. Therefore the main motivating factor underlying this study is the desire to break new grounds with the intent of shedding more light on this problem and seeking avenues for solving it. Thus, the purpose of this study is to examine and evaluate the internal control system in operation at power holding company of Nigeria in Enugu state with a view of knowing its impact on revenue generation in the state.

1.2 OBJECTIVES OF THE STUDY

The main objective of this study is to evaluate, the internal control system in operations at power holding company of Nigeria in Enugu state. Other objectives of the study are:

I. To examine the types and techniques of internal control system for revenue generation adopted by Power Holding Company of Nigeria in Enugu state.

II. To determine the impact of internal control system on revenue generation.

III. To identify the strengths and weaknesses of the system of internal control in all departments in power holding company of Nigeria in Enugu state.

1.3 SIGNIFICANCE OF THE STUDY

This study is significant for the following reasons:

i. These studies will highlight the accounting and administrative control problems plaguing power holding company of Nigeria in Enugu state.

ii. It will enable managers of services, organizations and government owned public utility establishments to bring the accounting and the internal control procedures inherent in them in conformity with internal accounting standards and practises.

iii It will help government owned establishments to assess then internal control measures and make amends where necessary.

iv. The study could arouse further research into some other further research into some other functional areas in the company by students and accountants. It will also help to broaden (my) researchers’ knowledge.

1.4 SCOPE AND LIMITATION OF THE STUDY

Although the study was to evaluate the internal control system in operation at power holding company of Nigeria in Enugu state, to ensure accurate and reliable data collection it was limited to the study of the internal control measures at the Enugu district unit of power holding company of Nigeria plc. This covers internal control as it affects revenue generation (handling of cash) assets control administrative control and manpower control as well.

The researcher due to the following could not take a wider range of study:

i. Inability to have access to some relevant documents from the officials in the company.

ii. Financial and time constraint, which confined the researcher to only Enugu destruct unit.

1.5 RESEARCH HYPOTHESIS

Based on the objectives of this study the following null and alternative hypotheses were developed.

Ho1: Effective internal control does not ensure effective service delivery and desired revenue generation.

HA1: Effective internal control system ensures effective service delivery and desired revenue generation.

Ho2: Weak internal control system does not encourage collusion, fraud, embezzlement, loss of revenue, assets conversion and computation in power holding company of Nigeria.

HA2: Weak internal control system encourages collusion, fraud, embezzlement, and loss of revenue, assets conversion and computation in power holding company of Nigeria.

1.6. RESEARCH QUESTIONS

The following are a few of the questions, which were asked in the questionnaire in the carrying out of this research work.

1. Does the internal audit system ensure that operations comply with set policies and promote accuracy and reliability of transactions?

2. Are internal /external auditors independent of those whose functions they appraise?

3. Based on the evaluation of the internal control system, is it effective and efficient?

4. Is the accounting and operational routine sit out in an accounting Manuel?

1.7. HISTORICAL BACKGROUND OF NATIONAL ELECTRIC POWER AUTHORITY (NOW POWER HOLDING COMPANY OF NIGERIA)

National Electric Power Authority was established by Decree No.24 of 1st April 1972 with the amalgamation of the Electricity Corporation of Nigeria (ECN) and the Niger Dam Authority (NDA). Electricity Corporation of Nigeria was the brainchild of the 1960 independence in Nigeria whereas the Niger Dam Authority existed and was the source of power during the colonial era. National Electric Power Authority was empowered to maintain an efficient, coordinated and economic system of electricity supply to all channels of the nation.

ENUGU DISTRICT BUSINESS UNIT OF POWER HOLDING COMPANY OF NIGERIA IN ENUGU STATE.

Following the unbundling of NEPA into 18 successor companies in tandem with the Electric Power Sector Reform (EPSR) Act 2005. Enugu Electricity Distribution company plc is one of the 18 companies that emerged from power holding company of Nigeria seguel to the on-going power sector reform.

Enugu Electricity Distribution Company is among the eleven electricity distribution-marketing companies in Nigerian. The corporate Affairs Commission registers it under the Nigeria Law. The company was granted operational License in 2006 by the Nigerian Electricity Regulatory Commission (NERC). It has 14 business districts. It is in charge of 5 states in south east geopolitical zone namely Abia, Anambra, Ebonyi, Enugu and Imo state. The registered office is okpara Avenue PMB 01287 Enugu.

The day-to-day administration of the company and formulation policies rests on the shoulders of the (CEO) Chief Executive Officer. The Chief Executive Officer is ably assisted by Department heads (Assistant general managers) that are in charge of various departments. The departments include technical services customers, human resources and administrative, finance and accounts, audit public affairs and legal. The business is overseen by business managers who routinely report to the chief executive officer all this are to help facilitate prompt attention to customer issues and distribution of power.

1.8. DEFINITION OF TERMS

REVENUE: This describes the amount of money a company generates in a set period of time through the sale of products or services.

INTERNAL CONTROL SYSTEM: This is the whole system of control, financial and otherwise established by the management in order to carry on the business of the enterprise in an order to carry on the business of the enterprise in an orderly and efficient manner.

AUDITING: An activity earned on by the auditor when he verifies or examines accounting information determines the accuracy and reliability of the accounting statement and reports and then expresses his opinion.

CONTROL ACTIVITIES: Policies and procedures that management has established

AUDIT: An independent examination of and the subsequent expression of opinion upon the financial statements of an organization.

INTERNAL CHECK: This is the allocation of authority and work in such a manner as to afford checks as the routine transactions of day to day work by means of the work of one person are being proved independently by another or the work of a person being complementary to that of another.

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