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THE ROLE OF INFORMATION TECHNOLOGY IN THE DEVELOPMENT OF AN EFFECTIVE INTERNAL CONTROL SYSTEM

ACCOUNTING PROJECT TOPICS AND MATERIALS

CHAPTER ONE

INTRODUCTION

1.1 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: 1. executing effective and efficient strategic and operational processes; providing useful information to internal and external users for timely and informed decision making; 3. ensuring conformance with applicable laws and regulations, as well as with the organization’s own policies, procedures, and guidelines; 4. safeguarding the organization’s resources against loss, fraud, misuse, and damage; and 5. 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.

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