CHAPTER 1 INTRODUCTION 1.1   Background of the Study

Every organization be it production or services oriented are set up to achieve its laid down objectives at a minimal cost. To set these aims, the management of these organizations mostly the services oriented is allowed the operational freedom to design and install some form of internal order or procedure of carrying out its daily business activities. This internal order of conducting transactions is commonly referred to as internal control of that organization.

General emphasis has been made on the effect of internal control system on corporate profitability in the hotel industry. But there still exist the problem of loss, damage or deterioration of assets through improper internal control system. Management seeks to get things done through people, these involves three phases of activities namely: planning, execution and review.

In planning phase, goals to be achieved are specified, so also are means (technology) for achieving them. The role of management in planning is precisely to decide which goals are to be entertained by the whole hotel industries and by what means the goals of the industries can be achieved. In execution phase, the specified goals to be achieved and the means to achieve them are carried out by the management. The efficiency and effectiveness of the management will be fully used to make sure that the goals are being achieved. In the review phase, achieved results are compared with the goals that were set and accepted at the beginning. The objective of this phase is to determine whether the hotel industries through its various activities units have been successful in achieving its goals. It is a phase of critical introspection to discover the reason for failure if there was any.

According to Theodore Levitt, in Osaze (1994), the management consists of the rational assessment of a situation and the systematic selection of goals and purposes as well as the means and the systematic development of strategies to achieve these goals. The marshaling of the required resources, the rational design, hotel industries direction and control of the contraries required to attain the selected purpose.

Finally, the motivating and rewarding of people to do the work, in addition to the controlling behaviors, tactical managers pay attention to controlling the technical aspect of work, money (financial), operations and information. The use of control is based on the same criterion utilized in defining each of the unit workflows and the time coordinates of the system. The control should indicate when the individual unit flow, one intermeshing with one another (Liteva 1968). The essence of control is to monitor and measure performance in line with the predetermined objective of the hotel industries.

Against this, internal control is being defined;

INTERNAL CONTROL: This can be said to be the whole system of controls financial and other wise established on the enterprises in 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 record.

Internal control is an indispensable and to efficiency management , particularly in a hotel industry and it extends beyond accounting and financial functions, its scope is companywide and embraces such varied activities as;

1. Employee training programme
2. Internal auditing
3. Statistical analysis
4. Quality control
5. Production scheduling etc.

Internal control in present day usage embraces all departments and affects all activities of every business to profit maximization.

PROFIT: this is said to be the difference between the cost of producing the company’s products and the amount for which they are sold (Bians, 1987). In the same vein, Awujo (1994) defined it as simply the amount of money left after total expenses are deducted from total revenue.

To ensure that profit is realized in business, control mechanism must be put in place. Awujo captured this opinion as he rightly stated that, when standard of performance are established by management, they must provide some degree of guidance for subordinates in accomplishing the assigned task. Thus, the controlling process establishes standards, communicates, measures performance against them and identifies deviation from them. Profit is the pivot which the wheel of the organization rotates.

1.2   Statement of Problem

Organizations continue to experience low levels of revenue generation most of which are manmade and therefore avoidable. Despite the numerous rules and regulations, the varying levels in revenue generation occur across all entities in the government and private sectors. No matter how well it is designed and operated, an internal control system can only provide a reasonable, not absolute assurance that the objectives of the industry’s internal control system are met in terms of revenue generation. An analysis of the problems related to this whether there are effective internal control systems since such systems help in preventing or enable earlier detection of the problems that led to the losses (Rezaee, 2002).

According to (Kirsty, 2008) an internal control system creates an organization’s confidence in its ability to perform or undertake a particular task and prevents errors and losses through monitoring and enhancing organizational and financial reporting processes as well as ensuring compliance with pertinent laws and regulations. Muio (2012) studied the impact of internal control systems on the financial performance of hotels in Port Harcourt and established a significant relationship between internal control and corporate profitability in hospitality industry and Njui (2012) investigated that internal control and audit helps in promoting good governance in public sectors.  He also found that internal control has the greatest effects on corporate profitability within government ministries followed by risk management while compliance and consulting has the least effect.

1.3   Purpose of Study

The purpose of study is to determine

1. how segregation of duties helps to improve the profit margin of organization.
2. how physical asset helps in the return on asset.
3. the impact of internal check on return on equity.

1.4   Research Questions

Various questions will be asked on each problem area to be considered in order to confirm the effect of internal control on organization profit in any selected hotels in Port Harcourt.

1. To what extent does segregation of duties aid organizations profit?
2. To what extent does physical asset help in return on asset?
3. To what extent does internal check improve return on equity?

1.5   Research Hypotheses

The following hypotheses were drawn from the purpose and research questions to guide the making of inferences in the study.

Ho1: There is no significant relationship between segregation of duties and organization’s profit.

Ho2: There is no significant relationship between physical asset and return on asset.

Ho3: There is no significant relationship between internal check and return on equity.

1.6   Scope of Study

The study centered on effect of internal control on corporate profitability of hospitality industry with emphasis to three (3) selected hotels in Port Harcourt namely, Sasun hotels, Aldgate hotels and Hotel presidential.

S/N  Name of Hotels       Address/Location

1      Sasun Hotels,  Plot 206, Trans-Amadi Industrial Layout Port Harcourt

2      Aldgate Hotels        308 Sani Abacha Road GRA Phase 3 Port Harcourt

3      Hotel Presidential   Birabi Street, Rumudaolu Port Harcourt

1.7   Significance of Study

The importance of this study is to recognize the controlling importance of the internal control aspect of business enterprise. This is because a company’s capital and efficiency has a lot to contribute to profitability of an organization. If these will be achieved, there has to be an increase in internal control system.

However, present practice indicates that it has no means to reach its declared goal of defining organization responsibility within an organizational framework. It will be necessary and pertinent to plan in order that the required internal control ensures the profitability of a business enterprises and achieving their goals. The control should indicate when an individual or departmental work flow is intermeshing with one another.

The functioning of the study will help the government policy formation and management of any firm on improving the state of internal control on organization.

The academicians are not left out as it will be of immense help in respect of future research in related areas of study.

1.8   Theoretical Chat/Conceptual Framework

Conceptual framework is a construct that depicts the interrelationship between the independent and dependent variables and their various metrics and indices (Ben 2015). Conceptual framework is an organization or matrix of concepts that provides a focus for inquiry “Effect of internal control on corporate profitability of hospitability industry”. The independent variable on the stated topic is the “internal control” while the dependent variable is “corporate profitability”.

1.9   Operational Definition of Terms

The following terms as used in the study are defined for clarification.

1. Internal control: This is the measures an organization employs to ensure that opportunities for fraud or misfeasance are minimized. Examples ranges from requiring more than one signature on certain documents, security arrangements for stock handling division of labour, keeping of control accounts, use of special password, handling of computer files etc. It is one of the principle concerns of an internal audit to ensure that internal controls are working properly so that the external auditor can have faith in the accounts produced by the organizations internal control.
2. Internal control system: internal control system can be described as any action taken by an organization to help enhance the likelihood that the objectives of the organization will be achieved. The system should ensure that management policies are adhered to, assets well safeguarded and the records of the company’s activities are both complete and accurate. The internal control system is made up of both accounting control and non-accounting control which is known as administrative control. They are explained thus;

• Accounting control: This comprises the methods and procedures that are mainly concerned with the authorization of transactions, the safeguarding of assets and the accuracy of the accounting records. Good accounting controls help increase efficiency, the help decrease waste, intentional errors and frauds.
• Administrative control: Administrative control or work practice controls are changes in work procedures such as written safety policies, rules, supervision, schedules and training with the goal of reducing the duration, frequency and severity of exposure to hazardous chemicals or situations.

1. Internal Control Question: This is a document used by an auditor to assess the internal control of an organization. Question will be tailored to the cycle being audited; for example, the sales or revenue cycle will check that, sales are authorized, goods are invoiced, invoiced are properly prepared, recorded and supported and payment is received at the correct time. The questionnaire will be used by the auditor to identify strengths and weaknesses in the system which can be used to predict the errors or irregularities that could occur. These predictions enable he auditors to design substantive tests to discover errors.
2. Profitability: This is the ability of a business to earn a profit. A Profit is what is left of the revenue a business generates after it pays all expenses directly related to the generation of the revenue, such as producing a product and other expenses related to the conduct of the business activities.
3. Organization: This is a group such as a club or business that has formed for a particular purpose. It can also be said to be the act of planning and arranging things effectively. It can also be the way in which the different parts of a system are arranged to work together.
4. Internal audit: This is the type of audit examination performed within an enterprise or an audit that an organization carries out on its own behalf, normally to ensure operating satisfactorily.
5. Control: This is the ability to direct the financial and operating policies of another undertaking with the intention of gaining economic benefits from its activities and measuring performance in line with the predetermine objectives of the organization. Control can consists of verifying whether everything occurs in conformity with the plan adopted. The instructions issued and object to point out weakness and errors in order to rectify them and to prevent reoccurrence.
6. Planning: This is one of the functions of management accounting in which plans for the future activities and operations of an organization are incorporated into budget.