Peer Reviewed Journal

SMCC Business Administration Journal

ISSN Print: 2508-0512 · ISSN Online: 2508-0520
Volume 2 · June 2020

Evaluation of the Internal Control System

of Seventh-Day Adventist Hospitals in South
Philippine Union Conference
MARK LOUI ALOJADO
https://orcid.org/0000-0002-9172-9141
bobongalojado@gmail.com
Mountain View College, Mt. Nebo, Valencia City, Philippines

IAN KIM ERANA

https://orcid.org/0000-0002-2567-2941
kimi75055@gmail.com
Mountain View College, Mt. Nebo, Valencia City, Philippines

MIVY PUNAY
https://orcid.org/0000-0002-4309-2633
punymivy@gmail.com
Mountain View College, Mt. Nebo, Valencia City, Philippines

FELIX E. ARCILLA JR.

https://orcid.org/0000-0002-2669-2979
felixarcilla2@gmail.com
Saint Michael College of Caraga, Nasipit Agusan del Norte, Philippines

Gunning Fog Index: 16.90 • Originality: 99% • Grammar Check 99%

Flesch Reading Ease: 23.44 • Plagiarism: 1%

ABSTRACT

It is essential to implement an effective internal control system in every organization

to help achieve its goals. This study was intended to evaluate the internal control systems
of the Seventh-day Adventist hospitals in the South Philippine Union Conference
(SPUC) by adapting the Committee of Sponsoring Organizations of the Tread Way
Commission (COSO) theoretical framework for the analysis of internal control. The

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researchers used descriptive research methods to determine and analyze the evaluation
of internal control systems. The study employed the purposive sampling technique.
The Seventh-day Adventist hospitals were selected based on the existing hospitals in the
South Philippine Union Conference. All four (4) hospitals currently operating within
the South Philippine Union Conference became the subject of this study.The findings
of the study revealed that the control environment, risk assessment, control activities,
information and communication, and monitoring were found to be slightly strong
implemented. It indicates that there is still space for improvement. It was recommended
that hospitals enhance their internal control policies and procedures, increase the level of
implementation to improve and strengthen the adequacy and soundness of the internal
control systems. Moreover, create and establish an internal control systems committee
composed of competent and trustworthy employees chosen among the respective
groups of respondents.

KEYWORDS

Internal control system, control environment, risk assessment,

control activities, information and communication, monitoring, Seventh-Day
Adventist Hospitals, SPUC, descriptive, Philippines

INTRODUCTION

Any company needs to have an efficient internal control structure to aid in

achieving its goals (Ackah & Kondegri, 2014). As early as the beginning of the twentieth
century, with economic growth, and many other factors, it became more difficult for
organizations to maintain control of their business activities and operational efficiency.
To overcome such problems, the role of internal control was emphasized.
According to the American Institute of Certified Public Accountants (AICPA)
(2005), “Internal controls are put in place to keep the company on course towards
profitability goals and achievement of its mission, and to minimize surprises along the
way. Internal controls promote efficiency, reduce risk of asset loss, and help ensure the
reliability of financial statements and compliance with laws and regulations.” Further,
Almakhadmeh (2014) defines internal control as a tool used by top management to
provide the interested parties with accurate, timely, and necessary information adopted
in the decision-making process. The success of internal control depends on the level of
implemented procedures in the enterprise and the effectiveness of these procedures to
preserve the assets. The resources of the enterprise and optimal exploitation of resources
increase productive competency, besides stimulating the staff to grasp and deploy the
policies.
Furthermore, Boynton & Johnson (2006), in the COSO report, define internal
control as a process, effected by an entity’s board of directors, management, and other

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personnel, designed to provide reasonable assurance regarding the achievement of

objectives in the following: i) Reliability of financial reporting. ii) Compliance with
applicable laws and regulations. iii) Effectiveness and efficiency of operations.
Achieving these objectives will require that each organization clearly states
procedures to maintain proper internal control policies. All around the world, ethical
issues in accounting have generated a lovely debate. These debates relate to the credibility
of an organization’s accounting and the need for stricter regulations to ensure that the
organizations present themselves correctly. This development is due to some occurrences
in the business environment. Many of the new laws result from scandals where it was
perceived that the investors were being “ripped off” by the inappropriate conduct of
senior executives. One only must consider the Salad Oil company, Polly Peck, Maxwell
Pensions, Enron, WorldCom, to name. However, a few realize that the potential for
mischief has existed over the centuries and no doubt still exists today.
Moreover, Colbert (1996) provides tools for a better understanding of internal
control. Between 1988 and 1996, five documents were published. Each one of these
documents made a specific contribution to the concept.
Lainhart (2000) said that a framework providing a tool for business process owners
to efficiently and effectively discharge IS (information system) control responsibilities.
Cohen & Sayag (2010) helps internal auditors on the control and audit of information
systems and technology. COSO (1992) makes recommendations to management
on evaluating, reporting, and improving control systems. It guides external auditors
regarding the impact of internal control on planning and performing an audit of an
organization’s financial statements (Colbert & Bowen, 2005).
The need for an internal control system is also relevant to the Seventh-day Adventist
hospitals. Each hospital must focus on what constitutes the “raison d’être” of the
Adventist philosophy of living with integrity and honesty, and internal control is a tool
for such evaluation.

FRAMEWORK

The study was anchored on the Committee of Sponsoring Organizations of the

Tread Way Commission (COSO, 1992) theoretical framework to analyze internal
control.
Firms need five interrelated components of an Internal Control Structure to ensure
strong control over their activities. These are control environment, risk assessment,
control activities, Information and communication, and monitoring components
(COSO 1992). The extent to which each component is implemented is influenced by
the size and complexity of the hospital, management philosophy, and corporate culture.
Management and personnel in selected levels must be involved in this process to
address risks and to provide reasonable assurance of the achievement of the entity’s
mission and general objectives. The management is responsible for designing internal

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control policies and procedures based on the COSO’s five elements of internal control
to meet internal control objectives.
The five elements of internal control include control environment, risk assessment,
control procedures, information, and communication, monitoring.

The Control Environment

This element reflects management philosophy and its position primarily. This is the
regulatory environment of integrity and ethical values, the efficiency of the individual in
the organization, and an ineffective control environment that would invalidate or cancel
interest components of internal control systems. The regulatory environment is the base
and foundation of the internal control components.

Risk Assessment
Risk assessment challenges that most organizations face include changes in the
operating environment. Changes in customer requirements are the rapid growth of
the enterprise or restructuring of the company, changes in technology, competitive
threats, regulatory changes, economic factors, adoption of new accounting principles,
or changing accounting principles, etc. It is the management’s responsibility to identify
such risks and to control them to enable the organization to achieve its objectives.

Information and Communication

Information and communication are an essential part of internal control. For
management to take important decisions and ensure compliance with reporting, legal,
and regulatory requirements, they need relevant information. The internal control
system is an integral process because it is not one event or circumstance but a series of
actions that spread its activities. These actions occur throughout an entity’s operations
on an ongoing basis. They are pervasive and inherent in the way management runs the
organization. Therefore, internal control is different from the belief that it is something
added to an entity’s activities or as a necessary burden.
The implementation of internal control requires significant management initiative
and intensive communication by management with other personnel. Therefore, internal
control is a tool used by management and is directly related to the entity’s objectives. As
such, management is an essential element of internal control. However, all personnel in
the organization play crucial roles in making it happen.
The internal control system is intertwined with an entity’s activities. It is most effective
when built into the entity’s infrastructure and is an integral part of the essence of the
organization. Internal control should be built-in rather than built-on. Building internal control
becomes part of the basic management processes of planning, executing, and monitoring.
People are what make internal control work. Individuals accomplish it within an
organization, by what they do and say. Consequently, internal control is affected by
people. People must know their roles and responsibilities and limits of authority.

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Control Activities
According to Boynton & Johnson (2006), the fourth element, control activities,
is the policies and procedures that ensure that management directives are carried out.
They also help ensure that necessary actions are taken to address any risks that threaten
the organization’s objectives.
Control activities occur throughout the organization, at all levels, and in all
functions. They include a range of supervision, performance reviews, information
processing, physical controls, and segregation of duties (Boynton & Johnson,
2006).

Supervision
Dascălu & Nasta (2015) emphasized that competent supervision ensures that
internal control objectives are achieved with supervision. Assigning, reviewing,
and approving an employee’s work encompasses clearly communicating the duties,
responsibilities, and accountabilities assigned to each staff member; systematically
reviewing each member’s work to the extent necessary; approving work at critical points
to ensure that it flows as intended.
A supervisor’s delegation of work should not diminish the supervisor’s accountability
for these responsibilities and duties. Supervisors also provide their employees with the
necessary guidance and training to ensure that errors, waste, and wrongful acts are
minimized, and that management directives are understood and achieved.

Performance reviews
These control activities include reviews and analyses of actual performance versus
budget forecasts and prior period performance, relating different sets of data to one
another, together with the analyses of the relationships and investigative and corrective
actions (Salosagcol et al., 2018).

Information Processing
Various controls were performed to check accuracy, completeness, and authorization
of transactions (Salosagcol et al., 2018).

Physical Controls
These activities encompass the physical security of assets, including adequate
safeguards such as secured facilities over access to assets and records; authorization for
access to computer programs and data files; and periodic counting and comparison with
amounts shown on control records (Salosagcol et al., 2018).
Assets and vital records should have limited access in the organization. Such controls
reduce the risks of theft, misappropriation of the organization’s property. Direct entry
and indirect access should be limited to authorized personnel.

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According to Warren et al. (2005), “control procedures are established to provide

reasonable assurance that business goals will be achieved, including the prevention and
fraud” (p. 186).

Segregation of duties
Boynton et al. (2001) indicated that “segregation of duties involves ensuring that
individuals do not perform incompatible duties.” The authors also state that “duties are
considered incompatible from a control standpoint when an individual can commit an
error or fraud and then be in a position to conceal it in the normal course of his or her
duties” (p. 336).

Monitoring
The last component of the internal control enables the management to gather
feedback on how effective internal control policies and procedures are. The feedback is
then used for the improvement of the internal control systems. The management and
internal audit supervise this component.

OBJECTIVE OF THE STUDY

The main purpose of this study was to evaluate the internal control policies,
procedures, and practices of Seventh-day Adventist hospitals in the South Philippine
Union Conference.

METHODOLOGY

Research Design
The researchers used descriptive research design by Creswell (2016) to determine
and analyze the evaluation of internal control systems of Seventh-day Adventist hospitals
in the South Philippine Union Conference.

Population and the Sampling Technique

The study targeted employees in administrative and accounting positions at the
Seventh-day Adventist hospitals in the South Philippine Union Conference. There are
four (4) hospitals operated by the Seventh-day Adventist church in the conference.
These are:
1. Adventist Medical Center – Valencia (AMCV)
2. Davao Adventist Hospital, Inc.
3. Gingoog Sanitarium and Hospital (GSH)
4. Adventist Medical Center – Iligan (AMCI)

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Table 1. List of Seventh-day Adventist Hospitals in SPUC

Name of the Hospital Location
Adventist Medical Center - Valencia A. Aguilar St., Valencia City, Bukidnon
Davao Adventist Hospital, Inc. Central Park Boulevard, Talomo, Davao City, Davao del Sur
Gingoog Sanitarium and Hospital C. Bagaipo St., Gingoog, Misamis Oriental
Adventist Medical Center – Iligan Andres Bonifacio Ave., Iligan City, Davao del Nort

Table 1 shows the four (4) hospitals within the South Philippine Union Conference.
The respondents were selected purposively using the following criteria: they should be
working in the finance office or accounting office (Sundalangi, 1991).

Profile of the individual respondents

The respondents of this study were classified according to their positions: 2 Vice-
President for Finance, 5 Controller/Chief Accountant, 2 Treasurer, Manager, 12
Accounting Staff, 5 Cashier, 1 Secretary and 1 Other with a total of 29 respondents.
The researchers used the purposive sampling technique in choosing the respondents,
and the criteria are the respondent must be an administrative or accounting personnel
(Sundalangi, 1991).

Research Instruments
Data were collected using standardized questionnaires because it allows the
researchers to reach a large sample within a limited time. Borg et al. (1993) observe that
questionnaires are used to obtain descriptive information from a larger sample.
The researchers used structured questionnaires to collect data. The structured
questionnaire included the Likert rating scale method as they are easy to complete and
do not put off respondents. It also helped the researchers compare responses given to
different items and minimize subjectivity and use quantitative analysis (Mugenda &
Mugenda, 2003).

Data Gathering Procedures

Before the survey was conducted, the researchers asked for the approval of the
designated personnel of each subject hospital. The survey lasted only about 10-15
minutes and was arranged conveniently to the employees’ schedule (e.g., during break).
Participation in the survey was entirely voluntary, and there were no known risks to
participation in this study. All information provided was kept in utmost confidentiality
and was used only for academic purposes. The names of the respondents or the names
of the hospitals have not appeared in any research study or publications resulting from
this study unless agreed. Also, the researchers have done proper disposal of the data after
it has been tallied to protect the respondents.

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After the data were analyzed, each respondent of the hospitals receives a copy of the
abstract. If they are interested in greater detail, an electronic copy (e.g., pdf ) was made
available.

Statistical Treatment of Data

The mean was the statistical tool used for treating the data.

RESULTS AND DISCUSSION

Table 2. Summary of the Respondents’ Perception on the Internal Control Components

Variables Mean Verbal Interpretation
Control Environment 4.15 Slightly Strong
Risk Assessment 4.13 Slightly Strong
Information & Communication 4.10 Slightly Strong
Control Activities 4.03 Slightly Strong
Monitoring 4.15 Slightly Strong

Table 2 shows the Summary of Respondents’ Perception on the Internal Control

Components. In all organizations, just like in Seventh-day Adventist hospitals, the
control environment should set the tone in the organization. It should “influence the
control consciousness of its people” and be the foundation for all other components of
internal control, “providing discipline and structure.”
Control environment as first with a mean of 4.15 which means that the
implementation of the Seventh-day Adventist hospitals’ internal control system in
South Philippine Union Conference is slightly strong. This indicates that subject
hospitals give enough attention to ethical values and integrity, operating style, mission
and corporate goals, and competence. The control environment is the foundation, the
cornerstone of internal control. When the control environment is given the necessary
attention, the chances are high that the other components of internal control will be
well implemented. This agrees with Schneider et al. (2009), who states that “the control
environment provides discipline and structure for the other components.”
Management should know that when personnel is ethical, financial reporting
tends to be more reliable, and employees are likely to follow policies, procedures, and
regulations. This agrees with Goleman et al. (2012) when they state that “honest,
efficient people can perform at a high level even when there are few other controls to
support them.” They also mention that “even if there are numerous other controls,
incompetent or dishonest people can reduce the system to shambles.”
As a Christian institution, it is not surprising to find that management does show
concerns for control environment as suggested by Boynton & Johnson (2006) that
management should “set the tone by example, by consistently demonstrating integrity

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and practicing high standards of ethical behavior.” This indicates that Seventh-day
Adventist hospitals in the South Philippine Union Conference practice Christian values
in the organization. Most of the respondents have a strong commitment to their beliefs
as Seventh-day Adventists.
In addition, Risk assessment is an ongoing process to identify, analyze, and manage
risk. Management needs a plan to identify both external and internal risks. The plan
will help management understand how those risks affect their activities, assess their
significance, manage their effect, and provide continuous monitoring. Risk identification
can often be integrated with an organization’s planning activities (Mishra, 2019).
The respondents’ perception in subject hospitals on risk assessment with a mean
of 4.13 is verbally interpreted as slightly strong. This indicates that management of
the subject hospitals do give enough attention to technology issues and appropriately
address those issues, approved and document systems software changes, plan for new
programs, periodically measure objectives, and are concerned for rapid growth.
Organizations, whether they are hospitals or not, face risks from within and from
outside the organization. Ignoring risks will not prevent them from happening. From
within, the risk may arise from sources such as employees, students, or pupils. Employees
can commit errors or fraud. Employees may collude and misappropriate assets. If errors
can be reduced and even avoided through competent and capable employees, fraud
can only be solved if employees are honest and have good values. Management needs
to be aware of these realities and emulate an environment conducive to strong positive
Christian values (Mwambazambi & Banza, 2014).
On the other hand, Control activities are the internal policies and procedures that
help ensure management directives are carried out. They help ensure necessary actions
are taken to address risks to achieve the entity’s objectives. Control activities occur
throughout the organization, at all levels, and in all functions.
Control activities achieved the lowest mean of 4.03 among the five components
of internal control. However, it still belongs to the interpretation ‘slightly strong’ just
like the rest. This indicates that the management of subject hospitals gives attention to
supervision, segregation of duties, and safeguarding of assets (Ndege, 2016).
Also, Information and Communication pertinent information must be identified,
captured, and communicated in a form and time frame that enables people to carry
out their responsibilities. Information systems deal with internally generated data and
information about external events, activities, and conditions necessary to both informed
business decision-making and external reporting (Salamai, 2019).
The respondents’ perception of information and communication in the subject
hospitals has a mean of 4.10 and is verbally interpreted as “slightly strong.” This
indicates that respondents’ do see a clear picture of information and communication
in their organizations. The respondents believe that the hospital can prepare timely
and accurate financial reports, give adequate information to complete their job
responsibilities, convey a clear understanding of the respondents’ roles in the control

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system, and generate sufficient reports to properly manage the institution (Coller et al.,
2018).
On the other hand, monitoring is the review of an organization’s activities and
transactions to assess the quality of performance over time and determine whether
controls are effective. Management should focus monitoring efforts on internal control
and the achievement of the organization’s mission. For monitoring to be most effective,
all employees need to understand their mission, objectives, risk tolerance levels, and
responsibilities (Buchanan & Huczynski, 2019).
The respondents’ perception of monitoring has a mean of 4.15. It is verbally
interpreted as “slightly strong.” It indicates that management takes adequate actions
to correct deficiencies reported by the General Conference Auditors Service; policies
or procedures are in place to assure that corrective actions are taken on a timely basis
when control exceptions occur. Procedures are in place to monitor when controls are
overridden; procedures determine if the override is appropriate; procedures require that
management review control processes to ensure that the controls are being applied as
expected. Management understands and monitors the broad organizational control
environment; internal control is monitored by management through ongoing efforts;
management takes proper actions to address monitoring results (Alles et al., 2018).

CONCLUSION

Based on the findings, the study revealed that the control environment, risk
assessment, control activities, information and communication, and monitoring
were found to be slightly strong implemented. It indicates that there is still space for
improvement. It should be clear how important internal control is to all businesses,
regardless of size. The result is supported by COSO (2004), who stated that an effective
internal control system allows a business to monitor its employees. Moreover, the
management is responsible for designing internal control policies and procedures based
on the COSO’s five elements of internal control to meet internal control objectives.

RECOMMENDATIONS

The researchers recommended that hospitals enhance their internal control policies
and procedures and increase the level of implementation thereof by doing the following:
1. Improve and strengthen the adequacy and soundness of the internal control
systems of the hospitals.
2. Create and establish an internal control systems committee composed of
competent and trustworthy employees chosen among the respective groups of
respondents.
3. Consider ethical values and integrity when dealing with employees.
4. Make job descriptions available for all employees regardless of their position,

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and each administrator should keep a copy of the job description. A code of
conduct or code of ethics should also be available for all employees.
5. Train employees on a regular basis to help them improve their competence and
skills.
6. Communicate the organizations’ mission clearly to all employees as often as
possible.
7. Implement segregation of duties strictly and make sure that jobs are rotated.
8. Monitor the entire internal control systems regularly by the committee.

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