ABSTRACT
This study looks at Internal control in an organization as a watchdog for fraudulent practices.
Internal control being an integral part of corporate governance has seen a lot of reform due to the
corporate scandals and financial crisis in the economic environment causing regulator to focus
on increased disclosure requirements especially in the areas of corporate governance. Internal
control disclosure requirement ranged from the requirement of the foreign Corrupt practice Act
(FCPA) of 1977 to Sarbanes Oxley’s Act of 2002 which required the assessment of internal
control structure and the Turnbull report of 1999 which also required an organization wide risk
management approach to internal control. Nigeria has continued to experience high level of
financial loss due to fraudulent practices. Unfortunately, there are no empirical studies on the
effectiveness of internal control with reference to SOX requirement and the prescriptions of
Turnbull report in Nigeria. The broad objective of the study is to examine the effectiveness of
the internal control system in an organization as a watchdog over fraudulent practices.
Specifically, the study examined the internal control variables which include internal audit, audit
committee, ethical tone and risk assessment to see if there is a positive and significant
relationship between their effectiveness and fraud prevention and also to examine if there is a
relationship between sources of fraud detection and strength of internal control processes. The
study adopted the analytical survey method to gather information on the variables; internal audit,
audit committee, ethical tone and risk assessment. The population of the study comprised of
senior management and staff of internal control department of the firms listed on the Nigeria
stock exchange that are been audited by the bid four audit firms. Using the judgmental sampling
technique we chose 2 senior management and 4 staff of internal control department of the
firms quoted on the Nigeria stock exchange that are being audited by the big four audit firms
(KPMG, PWHC, AWD, E&Y).
Data were collected by means of questionnaire with response
options graduated into five likert scale designed to capture information on the extent of
compliance on the internal control guidelines. Data were also extracted from the records of the
Economic and Financial Crimes Commission (EFCC) of firms where fraud had occurred. The
logistic regression analysis was adopted to test four hypotheses while the Pearson’s chi square
was used to test the fifth hypothesis. The result showed that positive and significant relationship
existed between effective internal audits, effective audit committee, ethical tone at the top and
risk assessment in Nigerian quoted firms. The result also showed that the strength of internal
control process is positively and significantly related to the sources of fraud detection in an
organization. The study provides an insight into internal control practices in Nigerian firms. The
organizations have not imbibed the prescriptions of the recent corporate governance practices as
prescribed by Sarbanes Oxleys Act (Sox) of 2002 and the Turnbull report of 1999. The study
therefore recommends that due to the effect of non compliance to these recommendations
there should be sanctions put in place to ensure compliance, investigative function established to
investigate and recover assets, ensure a more vibrant audit committee and the audit committee
should adopt the prescription of the American Institution of Certified Public Accountant
(AICPA) to address the risk of management override of internal control. The study has provided
opportunity for future research into internal control practices of firms not listed on the Nigeria
stock exchange and those not audited by the big four audit firms.
