The Role of Information Technology in Development of an Effective Internal Control System

Chapter One of The Role of Information Technology in Development of an Effective Internal Control System

 INTRODUCTION

BACKGROUND OF THE STUDY

Firms are essential building blocks of any nation’s growth and development. As business units, it is natural for firms (no matter their nature and form) to experience risks and opportunities. What determines the survival rate of a firm is the set of mechanisms it has put in place to help maximize opportunities and to nip deviations in the bud.

These set of mechanisms imprinted in an organizational system of operations is in auditing parlance called Internal Controls.

Thus in order to understand the role of information communication technology in the development of an effective internal control system, it is important to completely understand the concept of internal control and its importance. Infact, according to COSO 2004, an effective internal control system is a sine qua non for a reliable Enterprise Risk Management.

The International Auditing and Assurance Standards Board defines internal control as, “the process designed, implemented, and maintained by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.” However, this definition is based on the definition given by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

An enriched and broadened definition of internal control, taking into account some of the suggestions of IFAC’s Global Survey on Risk Management and Internal Control (2011), would be: Internal control is an integrated part of an organization’s governance system and risk management, which is understood, effected, and actively monitored by the organization’s governing body, management, and other personnel, to take advantage of opportunities and to counter the threats, in line with risk management strategy and policies on internal control set by the governing body to achieve an organization’s objectives through, among other things:

 executing effective and efficient strategic and operational processes;

 providing useful information to internal and external users for timely and informed decision making;

 ensuring conformance with applicable laws and regulations, as well as with the organization’s own policies, procedures, and guidelines;

 safeguarding the organization’s resources against loss, fraud, misuse, and damage; and

 safeguarding the availability, confidentiality, and integrity of the organization’s information systems, including IT

Even before the outbreak of the worldwide construction and mortgage industry meltdown in 2009, huge efforts have been taken by countries all over the world to ensure firms take necessary steps to set up an effective internal control system. For example, The Public Company Accounting Reform and Investor Protection Act (2002), otherwise generally referred to as the Sarbanes-Oxley Act, (2002), introduced in the United States, made it mandatory for management to initiate good internal control and provide assessment of its effectiveness. By doing this, regulatory bodies in various countries firmly believe that the concept is very important for the ultimate survival of independent business units and in turn the national economic system as a whole.

However, as it has been discovered after various researches, it is not easy for a firm to successfully implement its’ internal control system effectively. More so, in a construction industry which is quite unique from other sectors of the economy, it becomes more difficult to successfully implement the details of the inbuilt internal control system in order to achieve the aforementioned objectives for setting up an internal control system.

A typical construction process demands heavy exchange of data and information between project participants on a daily basis (Maqsood et al., 2004). This makes the construction industry one of the most information-intensive industries, and requires close coordination among a large number of specialized but interdependent organizations and individuals to achieve the cost, time and quality goals of a construction project (Toole, 2003).

Although construction firms have devised several means and inventions to run an affective set of risk-minimizing mechanisms all to no perfect results, with the rise of industrialization, construction firms have found answers to internal audit problems in information technology (Krishna M et al., 2011).

In fact, in regards to the specific nature of the construction industry, ICT has been shown to be a vital tool in assisting the construction industry to cope with the increasing complexity of its products as well as the increasing demands of its clients and regulators (Betts, 1999), and to enhance construction productivity (Liston et al., 2000). It is also widely reported that the use of information and communication technology (ICT) with properly defined structures and communication interfaces has in the manufacturing industry, proved to be an efficient tool that supports the integration of processes for product development, production, materials supply, communication and maintenance processes. As a result, the technology (ICT) has been widely applied across many sectors to increase competitiveness and reduce cost and is widely seen today as a vehicle to gain competitive advantage ((Marsh et al.2000; Earl, 1993).

More specifically, in relation to achieving an effective internal control system, Gunasekaran et al (2001), reported that through the use of ICT on construction projects, contractors can benefits from improved operational efficiency, improved quality, reduced project time and cost and increase profit levels. Similarly, Brown et al, (1996) cited that, downward cost pressures, time specific nature of construction projects, increased specialization and technical complexity of projects are major reasons that create demand for ICT usage in the construction industry. This trend was also recounted in Ozumba et al (2008) and hinted that, the use of ICT has the potential to enhance both intra and extra site communication including benefits such as enhanced data and material management and in essence enhance overall site management processes.

Given the significant role of an effective internal control system in the performance of an organization – especially construction firms, this study seeks to investigate the role of Information Technology in achieving this goal- an effective internal control system.

STATEMENT OF THE PROBLEM

From the background information provided, it is evident that the presence of an effective internal control system is needed in order to achieve the goals of starting a business. However, a firm faces a lot of challenges in implementing this required set of mechanisms. A firm which refuses to surmount these challenges will found itself in deep abyss. As succinctly supported by Pickett (2005: 86) thus:

“Poor controls lead to losses, scandals; failures and damage to the reputation of organisations in whatever sector they are from. Where risks are allowed to run wild and new ventures are undertaken without a means of controlling risk, there are likely to be problems”

In helping to solve these challenges in setting up an effective internal control system it has been observed that Information Technology has a huge role to play in developing an effective internal control system. This is not to say that the usage of Information Technology in the construction industry is not without its attendant problems.

This research study will therefore seek to highlight the various challenges faced by construction firms in Lagos in achieving an effective internal control system and the role of Information technology in countering these challenges and in turn leading to emergence of an effective internal control system.

AIM AND OBJECTIVES OF THE STUDY

The aim of this study is to identify the roles of information technology in the development of an effective internal control system.

In consideration to the problems identified above, the objectives of this research are to:

i. To evaluate the importance of information technology in internal control system of a business.

ii. Highlight the various levels through which Information technology has been used in developing an effective internal control system in a typical construction firm in Lagos.

iii. Evaluate the response and reactions of construction firms to the usage of Information technology

iv. Identify ways of increasing the usage of Information technology in the internal control processes of construction firms.

  SIGNIFICANCE OF THE STUDY

This study is significant due to the weighty effect of the internal control system on survival of the construction firms – significant entities in the development of the nation

The benefits to be accrued on the completion of this study are:

a. To serve as a reference for the evaluation of the benefits and challenges of using Information Technology in the development of an effective internal control system

b. To serve a ready source of information for governmental and quality-control entities seeking to promote the best practices in the formation of a standard construction industry.

c. To serve as a foundation for future studies into the application of Information technology in the construction industry as a whole.

RESEARCH QUESTIONS

This study is intended to provide answers to the research questions listed below in order to achieve the previously listed objectives

1. What is the importance of information technology in internal control system of a business?

2. What are the various levels through which Information technology is being used in developing an effective internal control system in a typical construction firm in Lagos?

3. What have been the responses and reactions of construction firms to the usage of information technology?

4. What processes have to be put in place in order to increase the usage of ICT in the internal control processes of construction firms?

RESEARCH HYPOTHESIS

The research proposition will be developed from the research objectives. The proposition is to be evaluated by analyzing data collected from questionnaire shared.

Null hypothesis (H0): Information Technology is not useful in the development of an effective internal control system in construction firms in Lagos.

Alternate hypothesis (H1): Information Technology is useful in the development of an effective internal control system in construction firms in Lagos.

SCOPE AND LIMITATION OF THE STUDY

This research focuses on Information and Communications Technology (ICT) and its role in the development of an effective internal control system.

For this purpose, the study is restricted to only construction firms in Lagos. This is because not only does construction firms represent a huge percentage of the total product market in an economy, Lagos as the commercial center of Nigeria gives an representative view of what is the standard in other parts of the country. (Oduwaye, 2013)

Other constraints that are to be anticipated in the course of this study are: shortage of time and finance, bureaucracy, uncooperative attitude of respondents, inaccessibility of respondents.

However, despite all the aforementioned limitations, the researcher shall try as much as it is possible to carry out an error free research and present useful conclusions which would be relevant.

ORGANIZATION OF THE STUDY

The study consists of five chapters. Chapterone being the first chapter gives an introduction to the study. It also gives the reasons why the study is embarked upon as well as highlighting the scope and limitations of the study.

Chapter two takes care of the general review of existing scholarly literatures. It also covers the explanation of relevant theories. Chapter three covers the research methodology taking into account the research design, sampling procedure, data collection instrument and its validation as well as statistical tools. Chapter Four presents data gathered and make an analysis as to how the results are produced in a coherent form. The Last chapter being chapter five discusses findings, makes recommendation and concludes the study.

 DEFINITION OF TERMS

INTERNAL AUDIT

Investopedia.com defines Internal Audit as the examination, monitoring and analysis of activities related to a company’s operation, including its business structure, employee behavior and information systems. An internal audit is designed to review what a company is doing in order to identify potential threats to the organization’s health and profitability, and to make suggestions for mitigating the risk associated with those threats in order to minimize costs.

Also, IIA (Institute of Internal Auditors) defines Internal Audit as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes

INTERNAL CONTROL SYSTEM

According to the sawyer’s guide for internal auditors, internal control is defined in accounting and auditing, is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad concept, internal control involves everything that controls risks to an organization.

THE CONSTRUCTION INDUSTRY

According to the Standard Industrial Classification, The construction industry is a branch of manufacture and trade based on the building, maintaining, and repairing structures. To put it more succinctly, the construction industry involves among other features:

• The construction or erection of a building or structure that is or is to be fixed to the ground and wholly or partially fabricated on-site
• The construction, erection, installation, extension, alteration or dismantling of a transmission or distribution line, or plant, plant facility or equipment used in connection with the supply of electricity; or an air-conditioning, ventilation or refrigeration system
• The alteration, maintenance, repair or demolition of any building or structure, excluding electrical or metal trades maintenance or repair work

INFORMATION AND COMMUNICATION TECHNOLOGY

Techopedia defines Information and communications technology (ICT) as the technology used to handle telecommunications, broadcast media, intelligent building management systems, audiovisual processing and transmission systems, and network-based control and monitoring functions. ICT tools are developed mainly to handleInformationandaidcommunication.

The phrase -ICT was coined byStevenson inhis 1997 report to the UK Government and promoted by the new National Curriculum documents for the UK in 2000. In addition to the concepts included in Information Technology (IT), ICT encompasses areas such as telephony, broadcast media and all types of audio and video processing and transmission.