This study is motivated by a desire to examine the determinants of the persistence of internal control weaknesses. In light of the empirical review and other discussions, a number of questions arose as to whether the size of a company is a determinant of weaknesses in its internal control, to examine if the age of a company a determinant of weaknesses in its internal control as well as to ascertain if a company’s financial performance a determinant of weaknesses in its internal control. The population of this study constitutes banks quoted in the Nigeria Stock Exchange. Questionnaire was administered to some selected staff of the sampled banks operating in Nigeria. Data was collected and analyzed using the simple percentage, descriptive statistics and Z-test. This study revealed among other things that the size of a company has a positive effect on a company’s material weakness, that is, as the company improves in its financial status, there will be less possibility of material weakness, and the age of the company has a positive effect on the possibility of material weakness, this means that as the company grows in age, there will be possibility of material weakness. It is recommended that management of companies should put in more effort to ensure that their internal auditors are competent, regardless of the size of the companies to ensure sophisticated internal control system.
Background of the Study
Statement of the Research Problem
Research Objective
Scope of the Study
Significant of the Study
Limitation of the Study
Origin of internal control
TYPES of internal control
Essential element of internal control
Expected Quality of a Bank for Effective Internal Control System
Computer and Internal Control System
Objective of Internal Control
Components of Internal Control
Classification of Internal Control
Relevance of Internal Control
Behavioural Aspect of Internal Control
Cost benefit of Internal Control
Limitation of Internal Control
Empirical Review on the Determinant of Internal Control Weakness
Determinant of the Application of Internal Control in an Organization
The Effect of Size, Age and Financial Resources on Company Internal Control
Identification of Material Weaknesses in Internal Control
Financial Reporting (financial Statement)
Research Design
The Population of the study
Sample Size
Data Collection Method
Source of Data
The Research Instrument
Reliability of Research Instrument
Data Analysis Method
4.1    Introduction
4.2    Descriptive Statistics
4.3    Test of Hypotheses
Summary of findings
The Sarbanes-Oxley Act (SOX) of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, was enacted on July 30, 2002 in response to a number of major corporate and accounting scandals of large companies in the U.S., such as Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom. Section 404 of the Sarbanes-Oxley Act requires management of publicly traded companies to assess their company’s internal control material weakness (MW) and to provide an internal control report as part of their periodic report to stockholders and regulators. The Act requires all public companies to maintain accurate records and an adequate system of internal accounting control. SOX also dramatically increased the penalties for false financial reporting on both management and external auditors (Cheh, J. J., Lee, J., and Kim, I., 2010).
Even though the Act helped improve the quality and transparency of financial reports and give investors more confidence in financial reporting through added focus on internal control, increasing costs of compliance has been a major concern of many companies.
A survey by Financial Executive International (O’Sullivan, 2006) found that public companies have incurred greater than expected costs to comply with section 404 of SOX: 58% increase in the fees charged by external auditors. It was estimated that U.S. companies would have spent $20 billion by the end of 2006 to comply with the law since it was passed in 2002. AMR Research also estimates that companies are spending about $1 million on SOX compliance for every $1 billion in revenues.
Internal control systems have long been advocated as a mechanism for establishing high quality financial reporting, and firms have voluntarily used them for this purpose. In response to several high-profile financial frauds, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued their Internal Control-Integrated Framework in September 1992. This report provided a foundation for assessing internal control effectiveness. Since then, several waves of accounting scandals have led to regulatory requirements for managers and auditors to report on internal control effectiveness. Most recently, the Sarbanes Oxley Act (SOX) internal control provisions have fueled the ongoing debate among regulators and practitioners about the effectiveness of this type of regulation in improving financial reporting quality given the subsequent financial crisis. In a speech delivered at the U.S. Chamber of Commerce Global Capital Markets Summit, James Turley (2008), Chairman and CEO of Ernst & Young, calls for “a global debate about what management should be saying about its controls, (and) what auditors should be saying about them, if anything.”
Supporters of internal controls regulation argue that limiting managerial discretion improves financial reporting quality. While potentially true for firms with material internal control weaknesses, limiting managerial discretion may not improve financial reporting, on average, for all regulated firms and could potentially reduce financial reporting informativeness. For example, Bagnoli and Watts (2005) show that managers with discretion to report conservatively can signal their private information about the probability of good future prospects. Essential to resolving this argument is the ability to isolate changes in financial reporting due to internal controls regulation. In their study evaluating the effectiveness of SOX internal controls regulation, Hochberg et al. (2009) point out that “the central challenge to distinguishing between the two main views … is the lack of a control group of … firms unaffected by the legislation.”
The internal control provisions of the Federal Deposit Insurance Corporation Improvement Act of 1992 (FDICIA) facilitate meeting this “control group” challenge by exempting some firms from these provisions. In the absence of an explicit exclusion, the FDICIA provisions apply to all insured depository institutions. Such an exclusion exists for the FDICIA internal control provisions, in contrast to all other FDICIA provisions.
FDICIA exempts institutions with assets less than $500 million from its internal control monitoring and reporting requirements. Specifically, these institutions are exempted from FDICIA’s requirements that management issue a report on the effectiveness of internal controls over financial reporting, and that their independent public accountant attest to management’s report. This exemption provides a control group unaffected by the internal control legislation, but otherwise similarly affected by the remaining FDICIA provisions.
In the light of the above, the researcher intends to ascertain the determinants of weaknesses in internal control in Nigeria.
It is possible to identify three levels of determinants of firms’ performance. The first, relates to external factors that are beyond the control of the firms, and are generally economy-wide. Second, are factors that are internal and under the direct purview of the firms. These factors, which include managerial efficiency, governance structure, ownership structure etc affects the ability of the firms to cope with external factors. Finally, there are other factors such as size, leverage, and nature of the industry that affect firms’ performance. However, internal control is considered to involve a set of complex indicators, which face substantial measurement error due to the complex nature of the interaction between governance variables (such as board size, board composition, return on assets etc) and firm performance indicators. Nevertheless, previous empirical studies have provided the nexus between internal control and firm performance. However, despite the volume of the empirical work, there is no consensus on the impact of internal control on firm performance. Consequently, this lack of consensus has produced a variety of ideas (or mechanisms) on how internal control influence firm performance
Against this backdrop, the following research questions are raised:
Is the size of a company a determinant of weaknesses in its internal control?
Is the age of a company a determinant of weaknesses in its internal control?
Is a company’s financial performance a determinant of weaknesses in its internal control?
The main objective of this study is to examine the determinants of weaknesses in internal control over financial reporting in Nigeria.
The specific objectives of this study are:
To verify if size of a company is a determinant of weaknesses in its internal control.
To find out if the age of a company a determinant of weaknesses in its internal control.
To ascertain if a company’s financial performance a determinant of weaknesses in its internal control.
The following hypotheses are formulated in this study:
Hypothesis I
Ho:    Size of a company is not a determinant of weaknesses in its internal control.
H1:    Size of a company is a determinant of weaknesses in its internal control.
Hypothesis II
Ho:    The age of a company is not a determinant of weaknesses in its internal control.
H1:    The age of a company is a determinant of weaknesses in its internal control.
Hypothesis III
Ho:    Company’s financial performance is not a determinant of weaknesses in its internal control.    
H1:    Company’s financial performance is a determinant of weaknesses in its internal control.
This study focuses on the determinant of weaknesses in internal control in quoted companies in Nigeria.
The sample size will be restricted to some selected companies quoted in the Nigeria Stock Exchange.
Temporally or in term of time series, a period of five (5) years is used i.e. 2006 to 2010.
Geographically, the study will specifically be restricted to companies operating in Benin City, Edo State.
This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs.
Stakeholders: This study will be important and beneficial to stakeholders of an organization to know the determinant of weaknesses in internal control over financial reporting.
The Government: It will acquaint the government of the determinant of weaknesses in internal control over financial reporting and how it should be managed.
The public: This study will help to restore the lost confidence of the public as regard internal control and financial reporting.
Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.   

In the course of conducting this research work, the researcher encountered some constraints. These constraints are:
Inadequate Study Materials: Research materials were of limited supply due to the practicality of the study. Where they were available; the cost involved in sourcing for them was very expensive.    
Lack of Access to Current Data: Most managements and staff of the establishment would not want to disclose important or relevant information about their organizations on this subject matter, except were such is permitted by law to be disclosed.  
Finance Cost: The cost involved in sourcing for the available materials and other necessary information was very high within the reach of the student researcher.
Cheh, J. J., Lee, J., and Kim, I. (2010), Determinants of Internal Control Weaknesses, Contemporary Management Research, 6(2): 159-176.
O’Sullivan, K. (2006). The Chase for Clarity. CFO, September, 65-69.
Bagnoli, M., and Watts, S., (2005). Financial Reporting and Supplemental Voluntary Disclosures, Journal of Accounting Research 45(5): 885-913.
Turley, J., (2008). The changing dynamics of global capital markets. United States Chamber of Commerce – Global Capital Markets Summit, htm.
Hochberg, Y., Vissing-Jorgensen, A., Sapienza, P., (2009). A Lobbying Approach to Evaluating the Sarbanes-Oxley act of 2002. Journal of Accounting Research, 47(2): 519-583.
Carnell, S., (1997). Treasury Defends FDICIA Bank Reform. Journal of Accountancy, 183, 15.


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