THE EFFECT OF INTERNAL CONTROL ON FINANCIAL PERFORMANCE (A CASE STUDY OF HARGEISA LOCAL GOVERNMENT)

CHAPTER ONE

1.0 INTRODUCTION

This chapter presents the background of the study, statement of problem, purpose, objectives, specific objective of the study, research questions, scope, and significance of the study about the internal controls and performance of public sector organization in Hargeisa Somaliland.

1. Background

Internal control as individual enterprise system is not as broad as other management spheres in science directions. The definition of internal control was presented for the first time in 1949 by the American Institute of Certificated public Accountants (AICPA). It defined internal control as a plan and other coordinated means and ways by the enterprise to keep safe its assets, check the covertness and reliability of data, to increase its effectiveness and to ensure the settled management politics. However, the presented definition of control concept has been constantly improved, and nowadays there is quite an extensive set of conceptions that indicates the system of internal control as one of the means of leadership to ensure safety of enterprise assets and its regular development. In 1992, its analysis distinguished the concepts of risk and internal control. Now, the concept of internal control involved not only accounting mistakes and implementing means of their prevention, but also a modern attitude that might identify the spheres of control management and processes, and also a motivated development of their detailed analysis (COSO 1992).

At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g., how to ensure the organization’s payments to third parties are for valid services rendered.) Internal control procedures (Anderson, 2008).

As 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. (sawyer’s 2012).

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