CHAPTER I
1.0 Introduction
In this chapter the researcher explores, the company background, the background of the study, statement of the problem, research questions, research objectives, and limitations of the research, significance of study and definition of terms.
The study is to make an evaluation of internal controls on finance operations. The main problem of this is to investigate Noczim after having been split into Petro-trade and NOIC and inherited the issues under concern. This is what prompted the research to be undertaken. The study is to establish that there is an internal control policy that is prevalent at both Petro-trade and NOIC. The study was carried out because of the importance of the oil and procurement and distribution sector in the whole world paying closer attention to Petro-trade and National Oil Infrastructure Company both companies being Zimbabwean based. Another factor was the issue of salary gates and cash gates that could have hit other Government owned entities.
1.1 Background to the study
At independence in 1980 the Zimbabwe Oil Procurement Consortium (ZOPCO) a consortium of companies, which had taken over Genta was responsible for the procurement of petroleum products, due to the problem experienced by ZOPCO which led to high shortages in 1982, the government decided to take control of the sector considering the strategic importance of petroleum products, hence the formation of the National Oil Company of Zimbabwe (NOCZIM).
ZimOnline (3 September 2010) alleged that Noczim had been split into two companies namely, Petro trade and the National Oil Infrastructure Company (NOIC).The article published stated that the Energy and Power Development Minister Elton Mangoma said the government has split Noczim into to two companies, one to focus on trading(Petro trade) and the other on infrastructure development(NOIC). The move was meant to ensure viability and profitability of the companies.
“As of the 1st of January 2011 there will be two successor companies to Noczim, one playing a regulatory role and the other focusing on infrastructure development,” he said.
The Minister said the move to unbundle the government-controlled Noczim followed the realisation that it was not viable for the enterprise to be both a regulator and a player.
The Minister said the government was yet to decide exactly how much it would require potential investors to plough into the oil trading company formed out of Noczim.
“The partner for the infrastructure company will be taken in on an operational basis and they will be assisting in the stock management of the company,” he said. “For the trading one we are looking for an equity partner though we are yet to come up with the actual figure of the kind of investment we require.” – ZimOnline
Internal control systems within companies have been questioned all over, particularly in Zimbabwe because of some spectacular and well published corporate collapses. Perpetuated by the harsh economic environment and the collapse of many businesses including the United Merchant Bank which collapsed on the 31st of July 1998, Trust Bank which collapsed on the 18th of September 2007 and ENG which also collapsed on the 23rd of September 2004, just to name a few.
It was alleged in Financial Gazette that Noczim’s financial position was worsened amid allegations of fraud and extravagant expenditure. “Information at hand shows that as of March 6 2008, Noczim was making on average a 23% loss on all products. Further investigations revealed that losses by the company were due to lavish spending by the management, including the purchase of top-of-the-range luxury cars, internal loans, holiday allowances, massive travel allowances and unnecessary million-dollar developments.”
On 24 May2010, Stanley Gama published an article in the Financial Gazette reporting that, in 2008 the directors and one board member awarded themselves holiday allowances of U$$12 000 each while middle managers were awarded between $4000 to $5000. The organisation’s bankruptcy came to light after the Zimbabwe Revenue Authority (ZIMRA) desperately moved in, in a bid to recover the money owed to them. It was assumed that NOCZIM owed ZIMRA over US$25 million dollars. However the figure ballooned to about US$135 million due to penalties for failure to pay duty on time.
The Financial Gazette’s staff writer Levi Mukarati, reported on 2nd June 2011 that, “The finance director has been failing to advise the chief executive officer on major investment decisions. The chief executive officers’ handling of expenditure decisions was such that there was little room for advice from the finance department. As a result the ZIMRA debt ballooned to an unsustained level. According to minutes of a Noczim board meeting held in May 2010, the fuel procurement company collected US$85,986,455 from fuel companies on behalf of ZIMRA from February 2009 and remitted part of the money and retained over US$29 million.” Staff at Noczim on unbundling constitutes staff at Petro trade and Noic.
Against the background of corporate turbulence and the loss suffered by NOCZIM, the researcher feels there is need for this study to analyse internal operations. The standing of the finance function seems to have been greatly compromised by its failure to advice and point out the discrepancies pertaining to the manner in which the finance operations had been run down.
1.2 Problem Statement
The oil industry is a critical sector in many countries in the world. Cases of corruption have been erupting in many countries especially Africa for example Nigeria and Libya just to name a few. The oil sector therefore affects the economy both positively and negatively. Noczim having been split into Petro trade and Noic has inherited the issues under concern. This has prompted the research to be undertaken. Despite the existence of well-built computerized accounting systems and internal controls, cases of interruption; misstatements and inappropriate reporting have persisted to escape the attention of the auditor.
1.3 Research objectives
? To determine the implementation of internal controls on policy in the fuel sector.
? To determine the impact of computerised information systems on the work of the internal auditor.
? To investigate the ways in which computerisation has affected audit steps.
1.4 Research questions
? In what was has computerisation of information systems affected the capturing, recording, storage and processing of accounting transactions in the fuel sector?
? What procedures and controls have been implemented to mitigate challenges brought by internal controls in the fuel sector?
? What is the policy position on internal controls in the fuel sector?
1.5 Research Assumption
The assumption is that effective internal controls on will positively affect the financial operations within a firm or an entity paying special attention to the Oil Procurement and Distribution sector.
1.6 Overview of Research Methodology
Polit and Hungler (1999) describes the research design as a blueprint, or routine, for conducting the study in such a way that maximum control will be exercised over factors that could interfere with the validity of the research result. The researcher’s overall plan for obtaining answers to the research questions guiding the study. The designing a study helps researchers to plan and implement the study in a way that will help them obtain the intended results, thus increasing the chances of obtaining information that could be associated with the real situation.
In trying to access an evaluation of internal controls on financial operations within the oil sector, interviews will be carried out as research instrument with the managers of National Oil Infrastructure Company and Petro-trade (Pvt) Ltd. Interviews and questionnaires have been selected as a research instrument because of the need of obtaining highly personalised data.Questionnares will also assist to obtain some uniform answers to assist in data analysis.
1.7Scope of study
The intended study will focus on the impact of internal controls on the work of the internal auditor in a fuel company. The application of information systems and its impact to the reliability of audit results is somehow beyond organizational control. Reliance on these systems on the assumption that everything is being done on a computer is cost effective, fast, reliable and accurate but may have repercussions to the fuel company. Factors such as programmer errors may cause software flaws which the auditor may overlook resulting in the auditor giving the wrong opinion. Thus, even though these systems are more crucial within modern day business than ever, they should be adopted and implemented with much scepticism. On the same token, the audit profession has also been affected and as such cannot turn a blind eye on matters to do with these systems. Thus it is inevitable that the audit profession has responded to these systems.
1.8 Significance of the study
The study will be of key importance to selected organisations Petro-trade and the National Oil Infrastructure Company (NOIC) as well as other firms using computerised information systems whose financial statements and activities are subject to some degree of audit on the impact of these systems on the work of the internal auditor. It will highlight the contribution of computerised information systems in improving the quality of internal audit work for firms in different sectors in the economy of Zimbabwe. Most importantly the research will also focus on areas that need the special attention of auditors to minimize detection risk. Consequently the aim will be to suggest measures that can be taken to minimise the challenges the internal auditors may face in the course of their work.
The study will provide theoretical basis on accounting information systems successful adoption dimensions to firms. It will provide practical guidance for accounting information systems implementation in small and medium business. It will also provide empirical and practical contributions for organisations in effectively applying accounting information system and auditing in computer environments to increase transparency, efficiency and effectiveness in their operations.
Chapter 3
Research Methodology
3.1 Introduction
The purpose of this chapter is to establish the methods used for data collection and analysis processes. This chapter describes all the activities and procedures that were used to carry out the research. It will provide the plan of the study as well as support the validity and reliability of research results.
3.2 Research Design
According to Cooper and Schindler (2003, p146), a research design is a plan and structure of investigation so conceived as to obtain answers to research questions. Leedy (1993, p114) views it as planning the overall design carefully. The research design therefore is a plan for the entire research study that gives the framework of the research’s plan of action.
A survey can be both qualitative and quantitative in nature. Research designs can take three forms namely; descriptive, explanatory, or exploratory research.
Explanatory research (casual study) is a type of study that is concerned with learning why one variable produces changes in another (casual effect) thus such research would be trying to explain relationships among variables.
Exploratory research is a type of study that is carried out when the area of investigation is also new and so vague that a researcher needs to do an exploration just to learn about the dilemma or problem being faced.
Descriptive study is a research takes a descriptive and a case study approach on the evaluation of internal controls on finance operations within the Oil Procurement and Distribution sector. According to Gilbert Churchill (1983), a good descriptive study pre-supposes prior knowledge about the phenomena being studied. The aim of a descriptive study is to learn who, what, when, where and how questions of a topic. The study may be simple or complex.
3.2.1 Justification
Descriptive and case study approach is a convenient approach because the area of study is clearly defined. Information is already available because the researcher will be in contact with the sources of information. The approach has the disadvantage of being expensive to undertake, and takes time to complete. A case study approach is where the researcher deals with the study of a specific industry or institution and in this case, it is Noic and Petro-trade. This enables relevant solutions to arise, which are suitable for the organisation in question. This approach has focus on analysis and it dwells on specifics of the industry or an organisation under research.
3.3 Data Collection
3.3.1Data Type
Primary data
Primary data refers to data structures of variables that have been specifically collected and assembled for the current research problem. The researcher will make use of primary data to gather information pertaining to the main research topic. The writer used two sources to collect the primary data that is questionnaire and interviews. A detailed questionnaire was drafted which was also used in the interviews. Qualitative data is to be collected by the questionnaires and is to be analysed through the use of pie charts, bar charts and tables
Secondary data
It is information collected by individuals or agencies or institutions other than the researcher him or herself. Emory (1980 p50) explained secondary data as information collected by others for another purpose. These were read to provide valuable information for the research. In order to have an in-depth understanding of the subject matter and lay down a strong foundation for the primary data collection, extensive consultations of books, financial reports and internal sources were also included, minutes of meetings, as well as management reports were reviewed. External sources included textbooks, newspapers, websites, manuals and journals.
Secondary sources explored varied from sources within the organisation and those exclusive of the organisation. An advantage of using secondary data is that it helps to make primary data collection more specific since with the help of secondary data, we are able to make out what the gaps and deficiencies and what additional information needs to be collected. A disadvantage of secondary data is that the accuracy of such data is not known. (www.managementstudyguide.com/second… 23/08/2011@15:45)
3.3.2 Collection tools
Questionnaires
According to Zikmund (2000, p 366), a questionnaire is an instrument for collecting data through carefully laid down questions. Skinner (1990) defined a self-administered questionnaire as one in which the respondent fills in the questionnaire rather than the interviewer. A questionnaire presents information in writing to the respondents and requires a written down response targeting information as per the research question. Leady (1980) views a questionnaire as a common place for observing data beyond the physical reach of the observer. Martins (1995) stated three characteristics of a good questionnaire; these are clarity, devoid of leading and complex questions. Questionnaires therefore, appeals for simple and easily understood questions which individuals can interpret and make meaning and sense out of. The questionnaires will be delivered in person or electronically to selected candidates to allow quick responses. Both closed and open questions will be used in the questionnaire.
Interviews
Interviews will be held to get professional views on the topic and to compliment information gathered by the questionnaire. Interviews help by providing clarification on some issues, which could otherwise not be clearly addressed in questionnaires. Kotler (1999 p77 🙂 identifies two forms of face-to-face interviews namely individual and group interviewing. Individual interviewing give every respondent the chance to say out his or her line of thought without being influenced by group psychology. The interviews to be employed by the researcher will be exhaustive in nature.
Likert Scale
It is a method of ascribing quantitative data to make it amendable to statistical analysis. A numerical value is assigned to each potential choice and a mean figure for all the responses is compared at the end of the evaluation or survey. Likert (1932) developed the principle of measuring attitudes by asking people to respond to a series of statements about a topic, in terms of the extent to which they agree with them, and so tapping into the cognitive and affective components of attitudes. A Likert type of scale assumes that the strength or intensity of experiences is linear, that is on a continuum from strongly agree to strongly disagree and makes the assumption that the attitudes can be measured.
3.3.3Population and Sample
Population is defined by Levin (1994:52) as a collection of all the elements we are studying and about which we are trying to draw conclusion. Cooper and Schindler (2003:179) define population as the total collection of elements about which we wish to make some inference. A research population thus refers to the total set of units in which the investigation is interested. A population is accordingly an aggregation of elements from which the sample is actually drawn from. The population is composed of all companies in the Oil procurement and distribution sector. It is not possible to cover all these companies hence sampling techniques were employed to find a representative sample of the population.
A sample is a representative part of a target population taken to show what the rest of the population is like. It is ideally synonymous with entire population conveniently scaling down the study elements where it is impossible to study the whole population. Levin (1994, p52) defines a sample as a collection of some, but not all of the elements of the population under study, used to describe the population. The sample size is composed of 8 Departments within Petro-trade and NOIC (NOCZIM) comprising of 30 employees.
3.4 Data Analysis
Cooper et al (1998) defined data analysis as the reduction of accumulated data to a manageable size, developing summaries, looking for patterns and applying statistical techniques. In analyzing the data, both qualitative and quantitative techniques were used. The gathered responses were analyzed through the use of graphs, tables and pie charts. The observational results were then used to analyse, describe, present and interpret data. It is from this analysis that some conclusions were drawn.
The researcher used tables to present collected data. Tables were used to show all data collected which was collected and being in numerical form since tables have rows and columns. Tables are very simple to use and understand that everyone who can read the project can understand.
Both pie charts and bar graphs were used to present the collected data. The data would be from the table then the data will be expressed in percentages forms. The pie charts and bar graphs are also easy to understand and they have a clear visual impression.
3.5 Limitations
The research encountered some limitations which hampered the smooth progress of the project. Time was a limiting factor during the progress of the project. Much time was spent during the analysis of past journals, gathering relevant data from the internet and waiting for response from the submitted questionnaires hence less time was taken to carry out the research perfectly. The cost incurred during the research was greatly exceeding bounds of reason and this was a limitation to the research. The cost incurred included transport costs, telephone costs, and internet access costs plus printing costs. During the research, some managers were unwilling to respond to the questionnaires due to work demands of the company hence being a vulnerability to the research process.
3.6 Conclusion
This chapter has outlined the research methodology selected and how research instruments are developed and carried out. It also explained how the data is going to be processed, consolidated and presented. The rigorous process of analysis contained in the next chapter will enable the drawing up of conclusions, which will be helpful to companies within the Oil Procurement and Distribution sector.
4.0 Introduction
The previous chapter looked at research methodology. This chapter focuses on the presentation and analysis of research findings through the use of tables, graphs descriptive summaries and pie charts as well as interprets the data. It also presents and analyses the findings from the primary research conducted through questionnaires and telephone interviews.
Section A: Analysis of responses to section (A) of the questionnaire to embassies
4.1 Response rate
Response rate can also be called return rate or completion rate. Response rate measures the percentage of respondents who completed the questionnaire amongst the sample size.
According to Babbitt (2011) the respondent’s rate is as follows:
Number of actual responses *100% = Rate of response
Total number approached
The researcher distributed 30 questionnaires to NOCZIM staff at the headquarters which constitute of the sample size.30 out of 30 were returned making an overall response rate of 100% from the staff members.
Table 4.1
No. of Questionnaires Issued Responded Response Rate
30 30 100%
Table 4.2: Break Down of Respondents
Departments
Frequency Percent Valid Percent Cumulative Percent
procurement 4 13.33 13.33 13.33
salaries 5 16.67 16.67 30
finance 4 13.33 13.33 43.33
human resources 4 13.33 13.33 56.66
information 3 10.00 10.00 66.66
marketing 3 10.00 10.00 76.66
legal 4 13.33 13.33 89.99
treasury 3 10.00 10.00 100.00
Total 30 100.0 100.0
Overall the response rate of most departments was 100%, even thou the research could not get responses from the other 2 department out of the 10 department which were targeted.
4.3 Discussion of findings
4.3.1Do you consider yourself as part of management team?
Table 4.3 Management team
Frequency Percent Valid Percent Cumulative Percent
Valid yes 13 43.33 43.33 43.33
no 17 56.67 56.67 100.0
Total 30 100.0 100.0
Fig 4.1 management
Amongst the 30 respondent 13 were management and 17 were employees setting out a ratio of 43.33:56.67 of the responses given on each of the question asked in the questionnaire. This improved results since perceptions between management and employees are different.
4.3.2 Total years of Work Experience with this Organization (NOCZIM)
Fig 4.2 working experience
The number of respondent in regarding to working experience was normally distributed 7-9 and 10-12 year consist most of the respondents. This give a fair response on the effective of internal controls since response is given on analysis of the prior years in the organisation.
4.3.3 Who do you think is responsible for the internal controls in your organisation?
Fig 4.3
This question was asked who you think is responsible for the internal controls in your organisation. The data above shows that 45.45% of the respondents claims that senior management are responsible, 36.36% claims that everyone is responsible and 18.18 % believe that supervisor are accountable for internal controls in the organisation. This show that they are different perceptions towards whom to be responsible of internal control, in general everyone should be found responsible of the internal controls in the organisation since some of them are embedded in the companies code of ethics and values but the senior management should be in charge of ensuring that the organisation keeps an effective internal control system to safeguard the shareholders’ interests.
4.3.4 Which of the following types of fraud mostly affects your organization?
Fig 4.4
The common types of fraud that affect parastatals are fraudulent statements, misappropriation of assets, inventory fraud and skimming. The researcher discovered that 8 of the respondents indicated that misappropriation of assets affects the organisation, 8 stated that they are mostly affected by fraudulent statement. 3 showed that they are mainly affected by skimming while the other 3 cited that they are affected by inventory fraud.
4.3.5 Which of the following types of theft mostly affects your organisation?
Fig 4.5
The common types of theft that affect parastatals are identity theft, embezzlement, pilferage and robbery. The researcher discovered that 4.55% of the respondents indicated that identity theft affects the organisation, 40.91% stated that they are mostly affected by embezzlement. 45.45% showed that they are mainly affected by pilferage and the remaining 9.09% stated that they are affected by inventory fraud. This shows that parastatals are mainly affected by pilferage.
4.3.6 To what extent do fraudulent and theft activities affect the performance of your organisation?
Fig 4.6
This question was designed to collect the views of the respondents on the extent to which the organization is being affected by fraudulent and theft activities. 59.09% of the respondents believed that fraudulent and theft activities have a large effect on the overall performance of an organization since it reduces the profits of an organization and increase operational costs. The researcher found out that 40.91% believed that fraudulent and theft activities affect the organization to a lesser extent and 0% claimed that this activity has no effect to the organisation.
4.3.7 How often does your organisation periodically review the following procedures to ensure that proper controls have been instituted?
Fig 4.7
The main purpose of the question was to see how frequent periodic evaluations of procedures are being done. Frequency of periodic evaluations enables the researcher to how long does it take to identify fraudulent or theft activities being done. Findings from the research shows that evaluations of security procedures are relatively being carried out monthly while financial accounting procedures and recruitment and selection are being evaluated yearly.
4.3.9What is your overall opinion on the effectiveness of internal controls within NOCZIM?
The findings presented that 45.45 % of the population claimed that the internal controls in the organisation are effective but emphasised on improving time clocking and segregation of duties.22.72% stated that internal controls are present but they are not properly executed by both management and employees and the remaining 27.27% could not state whether the controls are effect or not but only laid on aspects the needs to be improved in the internal control system of the organisation.
4.4 Summary
The chapter dealt with the presentation and analysis of the research findings. Data presentation and analysis was also done through the use of tables, graphs, descriptive summaries and pie charts. Chapter five looks at the summary of findings, conclusions and recommendations.
CHAPTER FIVE: SUMMARY, CONCLUSIONS ; RECCOMMENDATIONS
5.0 Introduction
Chapter four concentrated on data presentation and analysis. This chapter gives a summary of the research findings, recommendations and conclusions that the researcher has made on the evaluation of internal controls on finance operations in the Oil, Procurement and Distribution sector in Zimbabwe
5.1 Chapter Summary
Chapter one of this research introduced the topic, exploring the company background, the background of the study, statement of the problem, research questions, research objectives, significance of study and definition of terms.
Chapter two was based on review of past publications on the topic and related material. It introduced the subject of internal control. The definition, policy position, implementation, reviews and the best practices in respect of internal controls were explored. A review of both the theoretical and empirical literature, on the research objectives was the prime focus of the chapter. The literature review was divided into five parts in line with the five sub-research questions. Under each objective relevant data was gathered.
Chapter three subsequently established the methods used for data collection and analysis processes. The chapter described all the activities and procedures that were used to carry out the research. It provided the plan of the study as well as supported the validity and reliability of research results.
Chapter four covered the presentation and analysis of research findings through the use of tables, graphs descriptive summaries and pie charts. It also presented and analyzed the findings from the primary research conducted through questionnaires and telephone interviews, that was then used in coming up with the research finding and recommendations given in this chapter.
5.2 Major Research findings
5.2.1 Policy position on internal controls.
? It was established that there is an internal control policy that is prevalent within NOIC and Petro-trade.
? The internal control policy is clearly documented at Petro-trade and NOIC
5.2.2 Implementation of internal controls on policy in the fuel sector.
? It can be concluded that both employees and officers agree that the internal policy should be implemented by the finance director together with the finance manager
? Staff at Petro-trade and NOIC shared the same opinion that the implemented internal controls were sound within the organisation.
? It was established that there are adequate personnel to implement the internal control policy within the organisation.
? It can be concluded that factors outside the control or influence of management was affecting the entity’s ability to achieve all of its goals.
5.2.3 Reviews of internal controls in the fuel sector.
? It can be concluded that at Petro-trade and NOIC, the internal audit department’s core function was performing reviews of internal controls
? Internal control reviews was being performed on the following processes within the organisation; cash receipts, accounts receivables, cash disbursements, procurement and payroll.
? Staff at Petro-trade and NOIC are not aware that there is a committee that reviews and manages internal controls in the organisation.
5.2.4 The best practice in respect of internal controls in the fuel sector
? It was established that the best practice in respect of internal controls at Petro-trade and NOIC was the planning process; the companies should discuss the use of internal controls that define them as a whole.
? It can be concluded that establishing secure internal controls is a must for the organization, regardless of the size.
? The Internal audit department at Petro-trade and NOIC needs to make sure established internal controls and policies are effective in the long run
5.3 Conclusion in respect of main question
An evaluation of internal controls on finance operations within the Oil sector.
The evaluation can be concluded that there is an internal control policy that guides finance operations within the Oil Procurement and Distribution sector. The implemented internal controls can be improved so as to reduce the risk of staff abusing the systems.
5.4 Recommendations
? Every process and activity used in the finance function of the fuel sector should have written procedures to follow and should be communicated within the department.
? The organisation should have a committee that reviews and manages internal controls
? In reinforcing integrity, Petro trade and Noic should avoid practices that may inadvertently provide incentives or temptations for inappropriate activities. Examples of such policies and practices include remuneration and sanctions based on forward-looking factors (e.g. strategic success) rather than short-term profitability or growth indicators. This should be balanced by discouraging the company from increasing senior management’s risk appetite by skewed rewards, e.g. huge bonuses for reaching ambitious targets but little penalty for under-achieving.
? All personnel within the company have an Internal Control responsibility. It is therefore essential that all of them understand the importance of internal control and engage actively in the process according to their responsibilities and specific duties. Written codes of conduct should be drawn up. Responsibilities, accountability, procedures, information and reporting channels amongst others should be documented as appropriate.
? Competence should reflect the knowledge and skills needed to accomplish different tasks. The board should decide on the overall guidelines to Human Resource policies and practices such as hiring, evaluating and compensating. Management should specify the competence levels, knowledge and skills for particular jobs.
? In establishing and maintaining an effective system of internal control Petro trade and Noic should regularly assess both the internal and external risks that it faces. Assessment should include the identification and analysis of all the significant risks that company in the fuel sector are exposed to, and act accordingly.
? The organisation should have a sound internal control policy that ensures the safeguarding of assets and resources
5.5 Conclusion
From the research undertaken it was recognised that the fundamental of internal controls as documented in the COSO Internal Control-Integrated Framework is sound if applied. The research reviewed that internal controls play a vital role in the organisation, thus minimising the risk of abusing the organisation’s assets and resources.
Areas for further research
? The benefits associated with an effective internal control policy in the Oil Procurement and Distribution sector in relation to the profitability of the company
? Management should research on the internal control policy and how it is rated among companies within the Oil Procurement and Distribution sector. This will help to identify areas to improve in the system.
