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Internal Control and Financial Performance of Hospitality Organisations in Rivers State

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European Journal of Accounting, Auditing and Finance Research

Vol.6, No.3, pp.32-52, April 2018


___Published by European Centre for Research Training and Development UK (www.eajournals.org)
INTERNAL CONTROL AND FINANCIAL PERFORMANCE OF HOSPITALITY
ORGANISATIONS IN RIVERS STATE
Eke Gift O.
Department of Accountancy, Rivers State University, Port Harcourt, Nigeria

ABSTRACT: In the recent past, a number of organisations across the world failed
irrespective of internal controls. This has raised concerns about the relevance and influence
of internal control, especially as it affects the financial performance of an organisation. The
main objective of this study was to determine the effect of internal control on financial
performance of hospitality organisations (HOs) in Rivers State. The survey research design
was adopted for this study. The population of the study was made up of all HOs operating in
Rivers State. Convenience sampling technique was adopted in selecting twenty HOs that
constitute the sample of this study. Data collection was done primarily using structured
questionnaire and secondarily through journals, textbooks and the internet. The questionnaire
was validated by senior academic and professional colleagues. The reliability index of the
instrument was 0.765 obtained using the Cronbach Alpha technique. Data analysis was carried
out using descriptive statistics of percentages, means and standard deviations. Linear
regression and correlation analysis were used in testing the hypotheses postulated. The
investigation found that internal controls to a significant extent influence financial
performance of HOs and that a positive relationship exist between internal control and
financial performance of HOs in Rivers State. The study concluded that the control
environment affects total revenue as such influences the financial performance of HOs, its non-
existence or inadequacy may spell doom for an orgainsation. One of the recommendations
made was that management of HOs should regularly upgrade their information and
communication framework to enable them cope with the frequent changes in the global
environment and as such improve their financial performance.
KEYWORDS: Internal Control, Control Environment, Risk Assessment, Information and
Communication, Financial Performance.

INTRODUCTION
The success of an organisation depends largely on the measures it has put in place to support
its operations and facilitate the achievement of its objectives. Such measures may include, but
not limited to, having policies and procedures for execution of operations, establishing
standards for recruitment and competency development of employees, development of policies
which govern the behaviour of organizational members, having security measures to guarantee
assets protection, establishing proper procedures for record keeping, defining reporting
relationships among organizational members, establishing procedures for authorization of
transactions and the limits thereon as well as top management supervision. These measures,
together with many others, such as internal auditing, budgeting, performance evaluation, etc.,
that an organisation may implement in order to achieve its objectives, constitute the internal
control system of the organisation.
Many business failures around the world, in the recent past, have been partly attributed to
internal control failures. It is common knowledge that the collapse of some companies across

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
the world, notable among which are Enron Energy Corporation, WorldCom, Tyco (in the US);
Maxwell Communications Corporation, the Mirror Group Newspaper (in the UK); as well as
NITEL and NAFCON (in Nigeria) was due to internal control failure and by extension
corporate governance failure. Few years ago a number of hospitality organisations (HOs),
especially hotels, in Rivers State which were known to be performing excellently in financial
terms collapsed irrespective of the existence of internal controls (ICs). Hospitality
organisations in Rivers State like Hotel Olympia, Port Harcourt International Airport Hotel,
Erijoy Hotels and Illusions Night Club, just to mention a few, are no more in existence; some
others like Delta Hotels Ltd and Mr. Biggs are merely existing. Internal controls are expected
to assist organisations, whether profit making or not, achieve their objectives. However, the
collapse of organisations like Enron, WorldCom, NITEL and NAFCON have raised concerns
about the relevance and influence of internal control, especially as it affects the financial
performance of an organisation. Furthermore, many empirical studies like those carried out by
Kinyua (2016), Kiabel (2007), Nyakundi, Nyamita & Tinega (2014), Njeri (2014), Ejoh &
Ejom (2014), Etengu & Amony (2016), just to mention a few, focus on industrial sectors such
as manufacturing, banking, tertiary education, agriculture as well as oil and gas. There appear
to be no empirical research, especially in Nigeria and Rivers State in particular, on the effect
of internal control on financial performance of HOs. Hence, there is need to investigate the
effect, if any, of internal control on the financial performance of HOs in Rivers State and the
nature of the relationship between internal control and financial performance of HOs. Thus, the
main objective of this study was to determine the effect of internal control on financial
performance of HOs in Rivers State.

LITERATURE REVIEW
Theoretical Review
The systems and agency theories are considered to be relevant to this study. They are discussed
below.

Systems Theory
The early proponents of the systems theory were Ludwig Von Bertalanffy, a biologist, and
Kenneth Boulding, an economist. Von Bertalanffy (1968) initially developed the systems
theory in response to the increasing fragmentation and duplication of scientific and
technological research and decision making in the first half of the 20th century. The General
System Theory (often referred to as GST) is a collection of ideas and principles of several
theories of diverse disciplinary backgrounds; it has as its subject matter the formulation and
derivation of those principles which are valid for "systems" in general. According to Von
Bertalanffy (1968:37), “General system theory is a general science of "wholeness" which up
till now was considered a vague, hazy, and semi metaphysical concept”.
The major aims (assumptions) of general systems theory as pointed out by Von Bertalanffy
(1968:38) are:
(1) There is a general tendency towards integration in the various sciences, natural and social.
(2) Such integration seems to be centered in a general theory of systems.

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
(3) Such theory may be an important means for aiming at exact theory in the non-physical
fields of science.
(4) Developing unifying principles running “vertically" through the universe of the individual
sciences, this theory brings us nearer to the goal of the unity of science.
(5) This can lead to a much-needed integration in scientific education.
The systems theory is now generally used and applied in all aspects of life and virtually all
disciplines (Ottih, 2003). The general system theory views systems, whether biological, solar,
physical or organizational, as a ‘whole’ even though they are made of various components.
This view was supported by Cleland & King (1975), who defined a system as an organized or
complex whole; an assemblage or a combination of things or parts forming a complex or
unitary whole. Thus, a system is a set of elements or components that are interrelated to one
another in such a manner that they form a discernable whole and tend to achieve common
objectives. We are interested in the general systems theory to obtain a better understanding of
internal control which is a sub-system within a larger system - ‘the organisation’.

Agency Theory
Jensen & Meckling (1976) developed the agency theory and in explaining the theory viewed
the firm as a nexus of contracts between different stakeholders of the organisation. They
pointed out that the owners and executives of an organisation may have differences in opinion
with regard to the best interests of the organisation. The objective of agency theory is to
determine optimal contract between the principal and the agent. The agent tries to maximize
personal gains by satisfying principal's economic objectives and as such the agent's
commitment level is a function of perceived reward value for satisfying principal's objectives.
The agency theory is based on the agency relationship. Jensen & Meckling (1976) pointed out
that an agency relationship is one in which one or more persons (the principal{s}) engage
another person (the agent) to perform some service on their behalf which involves delegating
some decision making authority to the agent. Perhaps the most recognizable form of agency
relationship is that of employer and employee. Other examples include state (principal) and
ambassador (agent); constituents (principal) and elected representative (agent); organization
(principal) and lobbyist (agent); or shareholders (principal) and directors (agent). Thus, the
relationship between the principal and the agent based on the contract is a focal point of agency
theory. Principal wants to maximize his/her benefits while minimizing reward to the agent at
the same time. On the other hand, the agent wants to maximize his/her benefits. The basic
assumption of agency theory is that the principal's wealth, per se, would not be maximized
because of the following reasons:
(1) The agent and the principal have different goals;
(2) The agent and the principal have different access to information; thus, the principal cannot
effectively monitor what the agent does and know which information the agent has; and
(3) The agent and principal have different propensity towards risk.

34
ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
Conceptual Review
Overview of Internal Control
The American Institute of Certified Public Accountants (1949) defined internal control as the
plan of the organisation and all coordinate methods and measures adopted within a business to
safeguard its assets, check the accuracy and reliability of its accounting data, promote
operational efficiency, and encourage adherence to prescribed managerial policies. This
definition also recognizes that a system of internal control extends beyond matters which relate
directly to accounting and finance.
A contemporary definition of internal control is that given by the Committee of Sponsoring
Organisation of the Treadway Commission (COSO). COSO (1992) defined internal control as
a process effected by those charged with governance, management and other employees to
provide reasonable assurance regarding the achievement of an entity’s objectives in the
following areas: efficiency and effectiveness of operations, reliability of financial information
or reports, and compliance with legal and regulatory requirements. Arens, Elder & Beasley
(2003) argued that a system of internal control consists of policies and procedures designed to
provide management with reasonable assurance that the company achieves its objectives and
goals.
The underlying ideas behind the concept ‘internal control’ as can be deduced from the
definitions examined above include:
 Internal controls are established and maintained by management and those charged with
governance. This is consistent with the requirement that management is responsible for
the preparation of the financial statements in accordance with generally accepted
accounting principles (GAAP).
 Everybody in an organization is responsible for ensuring that internal controls work.
 Internal controls provide reasonable but not absolute assurance about the achievement
of objectives and that the financial statements are fairly stated. They are developed after
considering both costs and benefits of the controls.
 Internal controls do not provide absolute protection in the event of unavoidable
incidents or calamities.
 Internal controls cover both the financial and non-financial aspects of an entity’s
operations.

Objectives of Internal Control


The ultimate purpose of internal control is to to facilitate the achievement of the objectives of
an organisation. COSO (1992) opined that internal controls are designed to achieve the
following specific objectives:
1. Efficiency and effectiveness of operations: As pointed out earlier, to be efficient
means the ability to optimize resource utilization, i.e. ensuring that there is a rewarding
relationship between resources employed and the results achieved, while to be effective
implies attaining the specific objectives set and achieving the intended results. Controls
within an organisation are meant to encourage efficient and effective use of resources,

35
ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
including personnel, to optimise the company’s goals (Arens, Elder & Beasley, 2003).
An important part of these controls is accurate information for internal decision making.
Another important part of effectiveness and efficiency as pointed out by Arens, Elder
& Beasley (2003) is safeguarding of assets and records. The physical assets of an
organisation can be stolen, misused or accidentally destroyed unless they are protected
by adequate controls. The same is true of non-physical assets such as accounts
receivables, important documents (confidential contracts), and records (general ledger
and journals). Thus, internal controls are designed to enable an organisation execute its
operations in an orderly, efficient and effective manner.
2. Reliability of financial reports: Financial reports communicate information about an
entity’s resources, obligations and owners’ equity. To ensure financial reports contain
and communicate valid information to assist users in making informed economic
decisions, control measures are necessary. Internal controls ensure that information is
fairly presented in accordance with applicable reporting requirements such as generally
accepted accounting principles (GAAP), international financial reporting standards
(IFRS), etc.
3. Compliance with applicable laws and regulations: Organisations are required to
comply with many laws and regulations within (and even outside) the jurisdictions they
operate. Examples of laws and regulations an entity may be required to comply with
include environmental protection laws, civil rights laws, income tax regulations, money
laundering regulations, etc. Internal controls are required to identify applicable laws
and regulations, prevent non-compliance with such laws and regulations and as such
avoid penalties and damages to the organisation arising from non-compliance with
relevant laws and regulations.

Components and Measurement of Internal Control


Internal control is made up of five interrelated components which can be used to measure the
strength and quality of internal controls in any organisation and in Hos specifically. These
components as pointed out by COSO (1992) and cited in Meisser (2000); Millichamp & Tailor
(2008); Eke (2015); Arens, Elder & Beasley (2003); BPP Learning Media (2010) and their
measurement bases are discussed below:

Control Environment
The control environment includes the governance and management functions as well as the
attitudes, awareness and actions of those charged with governance and management towards
internal controls and its importance to the organisation. The control environment sets the tone
of an organization, influencing the control consciousness of its people. It is a foundation for all
other components of internal control, providing discipline and structure. Thus, the control
environment is the atmosphere created by management that shapes the way things are done and
how organisational members behave towards the achievement of the organisation’s objectives.
Factors which are often used to measure the strength and quality of an organsation’s control
environment include: integrity and ethical values; a commitment to competence; management
philosophy and operating style; involvement of the board and audit committee; organisational
structure; assignment of authority and responsibility; and human resource policies and
procedures.

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
Risk Assessment
An internal control system should be able to address risks relevant to achieving corporate goals.
Business risk is any factor, pressure or force that may prevent an entity from achieving its
objectives, operating profitably and surviving. Risk assessment is the identification and
analysis of risks relevant to the achievement of corporate objectives, determination of how such
risk should be managed and implementation of a process to address such risks (BPP Learning
Media, 2010). Factors which may pose risk to an organisation and which serve as bases for the
measurement of risk include: incompetent management and staff; legislation; poor strategy and
financial structure; political changes; competition; technological changes; accounting
pronouncements; natural disaster; etc.

Control Activities
Control activities are policies and procedures that ensure that management directives are
carried out. They are on-going actions that organizational members take to ensure proper
execution of operations and are particularly designed to support accurate, complete and reliable
financial transaction processing. Examples of control activities which also serve as indices for
measurement of internal control include: segregation of duties, authorization, supervision,
physical controls (security measures), performance reviews, etc.

Information and Communication


Information and communication system is the component of internal control which ensures that
the organisation obtains pertinent information and communicates it to interested users. It
involves communicating within the organization and with external parties. The information
and communication system produce reports, containing operational, financial and compliance
related information, that make it possible to run and control the business.The financial aspect
of the information system includes procedures for initiating, recording, processing and
reporting on the entity’s financial operations or transactions. The effectiveness of an entity’s
(HOs in our case) information and communication system can be measured on the basis of
timeliness, use of internet or computer based devices in processing transactions and transfer of
information, ease of dissemination of information as well as proper storage and retrieval of
processed information.

Monitoring
Monitoring is a process that assesses the quality or effectiveness of internal controls over time.
It includes regular management and supervisory activities, and other actions personnel take in
performing their duties. Devices used in monitoring internal controls and which are also used
to measure the quality of the monitoring system include budgeting and budgetary controls,
performance evaluation, establishment of standards, internal auditing as well as top
management supervision.

Financial Performance
Before we delve into the concept of financial performance especially as it applies to HOs, it is
important that we appreciate what ‘performance’ is. Georgopolis & Tannebaman (1957), as
cited in Adebawojo, Enyi & Adebawo (2015), defined performance as the extent to which
organisations, viewed as social systems, fulfil their objectives. Thus, performance can be
viewed as a composite reflection of how well an organisation attains its objectives.

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
Stoner (2003) described performance as the ability to operate efficiently, profitably, survive,
grow and react to environmental opportunities and threats. Performance is “doing today what
will lead to measured valued outcomes tomorrow” (Lebas & Euske, 2002:3). In essence,
performance is the result of organizational activities over a given period of time.
Financial performance is the degree to which financial objectives are being or has been
accomplished (BPP Learning Media, 2016), that is, the ability of an organisation to achieve its
financial targets. Financial objectives include, but are not limited to, shareholder wealth
maximisation, profit maximisation, revenue growth, earnings per share growth, restriction on
the level of gearing as well as enhanced liquidity or solvency (BPP Learning Media, 2010;
Pandey, 2010).
Mishkin (2007), cited in Kinyua (2016), argued that financial performance is a measure of a
company’s policies and operations in monetary terms. It is a general measure of a firm‟s overall
financial health over a given period of time, and can be used to compare similar firms across
the same industry or to compare industries or sectors in aggregation.

Measurement of Financial Performance


Financial performance is often measured using various variables to determine how well an
entity had attained its financial objectives over a period of time. To appreciate how financial
performance is measured, it is important to understand what performance measurement is.
Performance measurement is the process of quantifying the efficiency and effectiveness of past
action (Illmer, 2011). In more concrete terms, performance measurement is the process of
measuring how well organizations are managed against their targets and the value they generate
for their stakeholders. From a broader perspective, Upadhaya, Munir, & Blount (2014) pointed
out that performance measurement is the process of collecting, analyzing and/or reporting
information regarding the performance of an individual, group, organisation, system or
component. It can involve studying processes/strategies within organisations, or studying
engineering processes/parameters/phenomena, to see whether output are in line with what was
intended or should have been achieved.
BPP Learning Media (2016) argued that performance measurement aims to establish how well
something or somebody is doing in relation to a plan. The ‘thing’ may be a machine, a factory,
a subsidiary or an organisation as a whole while the ‘body’ may be an individual employee, a
manager, or a group of people. Relating the definition of BPP Learning Media to the concept
of financial performance, financial performance measurement can said to mean the process of
determining how well an organisation had attained its financial objectives.
Financial performance measures are typically monetary measures relating to revenues, costs,
profits, return on capital, asset values or cash flows (BPP Learning Media, 2016; Pandey,
2010). For the purpose of this study, financial performance of HOs is measured using:
1. Total Revenue (TR): This is the sum of all the incomes generated by an organisation
from its normal (ordinary) operating activities. Revenue can be generated from sale of
manufactured goods or services, sale of inventory of goods purchased for resale or from
rent of assets or through royalty. HOs generate revenue through accommodation
services, sale of foods and drinks to guests (customers), rent of halls, car hire services,
night club services, internet and business center services, cinema ticketing, etc. The
more revenue a HO generates, the better it is said to have performed financially.

38
ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
2. Profitability (Net Profit): Hospitality organisations and many profit making
organisations utilize accounting profit to measure their performance. Profit can be
expressed as either gross profit or net profit. It is the excess of revenue over costs or
expenses in a given period of time (usually one year). Our concern in this study is net
profit. Net profit is measured as:

Net Profit = Revenue Less Cost of sales (or Direct Costs) Less Operating Expenses
(Administration and Distribution Expenses)
A hospitality organisation can be said to have performed well financially if the size of
its net profit is large, that is, it makes sufficient revenue to cover its direct costs and
operating expenses.
3. Return on Assets (ROA): Return on assets is a measure of the operational profitability
of an organisation in relation to the total assets it has; it reflects an organisation’s ability
to deploy its assets profitably (Pandey, 2010; Ezirim, 2004). Thus, ROA is measured
as follows:

ROA = Net Profit After Tax Divided by Total Assets.


Empirical Review
A number of studies have been carried out on internal control (as independent variable) and
financial performance (as dependent variable). Some of the studies reviewed are examined
below with a view to relating them to the current study, establishing a common ground and
identifying differences.
Kinyua (2016) examined the effect of internal control systems on financial performance of
companies quoted in the Nairobi securities exchange. The main objective of the study was to
determine the effect of internal control systems on financial performance of companies quoted
in the Nairobi securities exchange. The study was considered relevant to our investigation
because it examined the impact of internal control on financial performance. The study which
was a primary data study adopted the descriptive research design and data were collected using
structured questionnaire. The study found that internal control has a significant relationship
with financial performance and concluded that internal control system is a positive significant
predictor of financial performance. The findings of the study, according to the author, suggest
that internal control systems especially risk management, corporate governance, control
activity, internal control environment and internal audit function are significant areas
management of companies should give great attention to in order to improve their financial
performance.
Nyakundi, Nyamita & Tinega, (2014) carried out an investigation on the effect of internal
control system on financial performance of small and medium scale business enterprises in
kisumu city, Kenya. The major purpose of the study was to assess the relationship between
internal control system and return on investment. The study which was a primary data study
adopted the cross-sectional survey research design and was conducted on one hundred and
seventeen (117) small and medium scale business enterprises in kisumu city, Kenya. Stratified
and simple random sampling techniques were used while data were collected using structured
questionnaire and interviews. The result of the analyses revealed a significant change in the
financial performance of small and medium scale enterprises which is linked to the existence

39
ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
of an internal control system. It concluded that internal controls significantly influence the
financial performance of Small and Medium scale Enterprises and recommended that
proprietors of Small and Medium scale Enterprises should be trained on the significance of
internal control.
Kiabel (2007) carried out a study on accounting control practices and financial performance
of government-owned companies. The aim of the study was to assess the impact of accounting
control practices on the financial performance of government-owned companies with specific
reference to Rivers State-owned companies. Correlational research design was adopted for the
study and data were obtained using structured questionnaire and through interviews. The study
found a weak significant relationship between accounting control practices and financial
performance of government-owned companies. This finding, according to the author was
largely due to the inadequacy and poor implementation of accounting control practices in most
of the firms surveyed. The study, therefore, concluded that accounting control practices
contributed very little to financial performance of government-owned companies. The study
recommended that government-owned companies should follow proper budgeting procedures
to enhance their financial performance.
In another study, Etengu & Amony (2016) examined the role of internal control system on the
financial performance of non-governmental organisations in Uganda. The purpose of the study
was to establish the effect of control environment, control activities and monitoring on the
financial performance of non-governmental organisations in Uganda using International Union
for Conservation of Nature as case study. The survey design was adopted for the study and data
were obtained using structured questionnaire and interview; hence, the study was a primary
data study. The findings of the study revealed a significant relationship between each of the
measures of internal control (control environment, control activities and monitoring) and
financial performance. The study recommended that control environment, control activities,
and monitoring should be enhanced in order to further improve the financial performance of
International Union for Conservation of Nature.

Njeri (2014) investigated the effect of internal controls on the financial performance of
manufacturing firms in Kenya. The primary objective of the study was to determine the effect
of internal control system on financial performance of manufacturing firms in Kenya. Twenty
(20) manufacturing firms constituted the sample of the study. The study used primary and
secondary data. Primary data were obtained using structured questionnaire while secondary
data were obtained from the financial statements of the manufacturing firms surveyed. The
study which adopted the multiple regression approach to data analysis found that most of the
manufacturing firms surveyed had a strong control environment which impacted positively on
the financial performance of the firms. The study concluded that manufacturing firms that had
invested on effective internal control systems had improved financial performance as compared
to those manufacturing firms that had a weak internal control system. Consequently, it was
recommended that the governing body (the board) of manufacturing firms, supported by the
audit committee, should ensure that the internal control system is periodically monitored and
evaluated.
Using the case study approach, Ejoh & Ejom (2014) carried out a study to determine the impact
of internal control activities on financial performance of tertiary institutions in Nigeria. The
study which was a primary data study adopted the survey design and data were collected using

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
questionnaire and interview guide. Percentages, tables, correlation coefficient and z-scores
were used in analyzing data. The study revealed that there is regular review of financial
transactions by management, strict adherence to budget provisions, and adequate segregation
of duties, but that staff are not adequately trained to implement the accounting and financial
control system. The study concluded that all activities of the College are initiated by top
management and that there is clear separation of roles in the institutions’ finance and accounts
department and that superior officers in the College supervise regularly work done by their
subordinates – all these point to the fact that a system of internal control exist in the institution.
The study recommended that management of the institution should organize regular training
for staff on control mechanism.

In a study to determine the Effect of internal control on financial performance of micro-finance


institutions in Kisumu central constituency of Kenya, Oyoo (2014) used descriptive and
correlation research design to investigate the relationship between internal control and financial
performance of Micro-Finance institutions in Kenya. The study which was a primary and
secondary data study adopted the convenience sampling technique. Data were obtained using
semi-structured questionnaire and from audited financial statements of the Micro-Finance
institutions studied. The study revealed that there is a positive relationship between internal
control and financial performance of Micro-finance Institutions at Pearson correlation
coefficient of 0.447. The study concluded that internal control affects financial performance of
Micro-finance Institutions by 44.7% and 55.3% by other factors. The study recommended that
keen attention should be paid to adopt more efficient management information systems.

METHODOLOGY
Research Design
This study adopted the survey research design. Survey design was appropriate as this study is
a primary data research. Survey design enables a researcher to obtain data which describes,
explores, and quantifies social phenomena, particularly issues, conditions and problems that
are prevalent in the society at a particular point in time (Mugenda & Mugenda, 2012; Cooper
& Schindler, 2011). Survey design ensures that data is obtained from dispersed respondents
about the concepts being studied; it is an easy, convenient and cost effective method of
collecting data required for the study.

Population of the Study


The population of this study was made up of all HOs operating in Rivers State. However our
emphasis in this study was on hotels, specifically five-star hotels and as such HOs that do not
fall within this category are excluded. Information available at the Rivers State Ministry of
Commerce and Industry indicates that there are 62 five-star hotels currently operating in Rivers
State.

Sample Size Determination and Sampling Procedure


The sample size for this study was fifty (54) HOs, obtained using the Taro Yamane formula
for sample size determination. However, only twenty HOs (five-star hotels) were sampled since

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ISSN 2053-4086(Print), ISSN 2053-4094(Online)
European Journal of Accounting, Auditing and Finance Research
Vol.6, No.3, pp.32-52, April 2018
___Published by European Centre for Research Training and Development UK (www.eajournals.org)
they could conveniently be assessed. This study adopted the random sampling technique in
selecting the HOs (hotels) that constituted the sample of this study. Random sampling
technique ensures that the sample elements have an equal chance of being included in the
sample, thereby eliminating bias. Adopting convenience sampling technique, three copies of
the questionnaire were administered on senior personnel selected from the administration,
accounting and internal audit units of each of the HOs (five-star hotels) that constituted the
sample of this study. In all sixty (60) copies of questionnaire were administered by hand.

Methods of Data Collection


Structured questionnaire was used in collecting primary data on internal control and financial
performance of the HOs surveyed while secondary data sources were journals, textbooks and
the internet.

Validity and Reliability of Research Instrument


The data collection instruments were validated by senior academic and professional colleagues.
The reliability index of the instrument was 0.773 and was obtained using the Cronbach Alpha
technique.

Data Analysis Techniques


Data analysis for this study was done using descriptive statistics of percentages, means and
standard deviation. The following hypotheses were formulated to determine the influence of
internal control on financial performance of HOs.
HO1: Control environment does not have a significant effect on financial performance of HOs
in Rivers State.
HO2: Risk assessment does not have a significant effect on financial performance of HOs in
Rivers State.
HO3: Information and communication does not have a significant effect on financial
performance of HOs in Rivers State.
HO4: Firm size, government policies/regulations and technology do not have significant effect
on the relationship between internal control and financial performance of HOs in Rivers
State.
The hypotheses formulated were tested using the linear regression and correlation techniques.

Variables and their Measurement


The variables for this study were internal control and financial performance. Internal control
was the independent variable and was measured using the Control Environment (CE), Risk
Assessment (RA) and Information and Communication (IC). Financial performance was the
dependent variable and was measured using Total Revenue (TR), Profitability (specifically,
Net Profit {NP}) and Return on Assets (ROA). The relationship between the independent and
dependent variables was believed to be affected by moderating factors such as Firm Size (FS),
Government Policies/Regulations (GP/R) and Technology (T). Values were assigned to these
variables adopting the five-point Likert Scale of the form strongly agree, agree, disagree,
strongly disagree and undecided.

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Model Specification
This study used the linear regression statistic to investigate the effect of internal control on
financial performance and the relationship between internal control and financial performance
of HOs in Rivers State. The model for this study is of the form:

FP = β0 + β1CE + β2RA + β3IC + β4FS + β5GP/R + β6T + ɛ


Where:
FP = Financial Performance
β0, β1, β2, β3, β4, β5, β6 = Regression coefficients
CE = Control Environment
RA = Risk Assessment
IC = Information and Communication
FS = Firm Size
GP/R = Government policies/Regulations
T = Technology
ɛ = Error term

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS


Data Presentation
In this section, we present and analyse data obtained for this study using means and standard
deviations based on a five-point Likert Scale of the form strongly agree (4), agree (3), disagree
(2), strongly disagree (1) and undecided (0). The expected mean is 2 obtained by dividing the
sum of the weights of the scale by the total number (i.e. 4+3+2+1+0÷5). The actual mean of
each of the responses was compared with the expected mean and a decision made on that basis.

Descriptive Statistics for Internal Control


Table 4.1 summarises the results obtained in respect of the proxies for internal control.
Statements were made to determine the nature and quality of the control environment, risk
assessment framework as well as the information and communication sub-system of the HOs
surveyed. An overall (average) mean of 3.47 and standard deviation of 0.80 were obtained for
control environment, indicating that the HOs surveyed have a strong control environment
which is believed to enhance their financial performance. An overall mean and standard
deviation of 3.43 and 0.751 respectively were obtained for risk assessment; this indicates that
the HOs surveyed have a strong risk assessment framework. The overall mean for information
and communication is 3.79 with a standard deviation of 0.239. The means obtained are higher
than the expected mean of 2 and as such indicate that the HOs surveyed have internal controls
that support their financial performance.

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Table 4.1: Summary of Results for Internal Control (I.C)

Internal Control Proxies N Mean Standard Deviation


Control environment 48 3.47 0.802
Risk assessment 48 3.43 0.751
Information and communication 48 3.79 0.239
Source: Author’s Computation, 2017.

Descriptive Statistics for Financial Performance


Table 4.2 shows the overall result obtained in respect of financial performance measured in
terms of total revenue, profitability and return on assets. Statements were made in respect of
the measures of financial performance to assess the financial performance of the HOs surveyed.
An overall mean of 3.65 was obtained for total revenue; the overall mean for profitability was
3.76 while that for return on assets was 3.70. Since the means obtained are higher than the
expected mean of 2, the HOs surveyed have performed well financially.

Table 4.2: Summary of Results for Financial Performance (FP)

Financial Performance Proxies N Mean Standard Deviation


Total revenue 48 3.65 0.479
Profitability (net profit) 48 3.76 0.481
Return on assets 48 3.70 0.520
Source: Author’s Computation, 2017.

Test of Hypotheses
Linear regression and correlation statistical techniques were used in testing the hypotheses
stated earlier in this study to determine the effect of the measures of internal control (control
environment, risk assessment and information and communication) on the measures of
financial performance (total revenue, profitability and return on assets) and hence establish the
relationship, if any, between internal control and financial performance. Regression analysis is
a statistical process of estimating the relationship between variables; it helps in generating an
equation that describes the statistical relationship between variables (Marshall & Rossman,
2006). The coefficient of correlation measures the strength of the relationship or going
togetherness of variables (Mac’Odo, 1997).

Regression Analysis of Internal Control Environment and Total Revenue


HO1: Control environment does not have a significant effect on financial performance of HOs
in Rivers State.
The result of the test is presented in Table 4.3.

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Table 4.3: Regression Output of Control Environment and Total Revenue

Model Summary

Adjusted Std. Error of


Model R R Square R Square the Estimate
1 .603a .364 .350 .16752
a. Predictors: (Constant), CONTROL ENVIRONMENT (X)

The result shown in Table 4.3 shows that the coefficient of correlation (R) is 0.603 and the
coefficient of determination (R2) is 0.364 at 5% level of significance. The correlation
coefficient of 60.3% indicates a positive linear relationship and high degree of correlation
between control environment and total revenue. The coefficient of determination indicates that
36.4% of increase in total revenue (of HOs) is influenced by the control environment while
63.6% is due to other variables. These results do not support HO1 which states that control
environment does not have a significant effect on financial performance of HOs in Rivers State.
The Analysis of Variance (ANOVA) result (shown in the appendix) is a further confirmation
of the fitness of the regression model given the significance of the parameters. The computed
F is 26.302 which is greater than the critical (table) value of F (4.08), at 5% level of significance
and degrees of freedom of 1 and 47; again, the p-value (0.000) is less than the level of
significance (0.05). Hence, we conclude that control environment has a significant effect on
total revenue.

Regression Analysis of Risk Assessment and Profitability (Net Profit)


HO2: Risk assessment does not have a significant effect on financial performance of HOs in
Rivers State.
The result of the test is presented in Table 4.4.

Table 4.4: Regression Output of Risk Assessment and Profitability

Model Summary

Adjusted Std. Error of


Model R R Square R Square the Estimate
1 .639a .408 .395 .17521
a. Predictors: (Constant), RISK ASSESSMENT (X)

The result shown in Table 4.4 shows that the coefficient of correlation (R) is 0.639 and the
coefficient of determination (R2) is 0.408 at 5% level of significance. The correlation
coefficient of 63.9% indicates a positive linear relationship and high degree of correlation
between risk assessment and profitability. The coefficient of determination, on the other hand,
indicates that 40.8% of the increase in profitability of the HOs surveyed is influenced by risk
assessment measures implemented by the HOs while 59.2% is due to other variables. These
results do not support HO2 which states that risk assessment does not have a significant effect
on financial performance of HOs in Rivers State.
The Analysis of Variance (ANOVA) result (shown in the appendix) is a further confirmation
of the fitness of the regression model given the significance of the parameters. The computed

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F is 31.696 which is greater than the critical (table) value of F (4.08), at 5% level of significance
and degrees of freedom of 1 and 47; again, the p-value (0.000) is less than the level of
significance (0.05). Hence, we conclude that risk assessment has a significant effect on
profitability.

Regression Analysis of Information and Communication and Return on Assets


HO3: Information and communication does not have a significant effect on return on assets of
HOs in Rivers State.
The result of the test is presented in Table 4.5.

Table 4.5: Regression Output of Information and Communication and Return on Assets

Model Summary

Adjusted Std. Error of


Model R R Square R Square the Estimate
1 .552a .304 .289 .21651
a. Predictors: (Constant), INFORMATION &
COMMUNICATION (X)

The result shown in Table 4.5 shows that the coefficient of correlation (R) is 0.552 and the
coefficient of determination (R2) is 0.304 at 5% level of significance. The correlation
coefficient of 55.2% indicates a positive linear relationship and high degree of correlation
between information and communication and return on assets. The coefficient of
determination, on the other hand, indicates that 30.4% of the increase in return on assets of the
HOs surveyed is influenced by information and communication while 69.6% is due to other
variables. These results do not support HO3 which states that information and communication
does not have a significant effect on return on assets of HOs in Rivers State.
The Analysis of Variance (ANOVA) result (shown in the appendix) is a further confirmation
of the fitness of the regression model given the significance of the parameters. The computed
F is 20.114 which is greater than the critical (table) value of F (4.08), at 5% level of significance
and degrees of freedom of 1 and 47; again, the p-value (0.000) is less than the level of
significance (0.05). Hence, we conclude that information and communication has a significant
effect on return on assets.
Discussion of Findings
The results presented in table 4.1 show that the HOs surveyed have internal controls that
support their operations and enhance their financial performance. The mean obtained for
control environment is 3.47 which is greater than the expected mean of 2; this implies that the
HOs surveyed have strong control environment. The mean obtained for risk assessment (3.43)
is greater than the expected mean (2) and is a confirmation that the HOs surveyed are alert to
circumstances that may pose threat to their ability to achieve their objectives. The mean for
information and communication is also greater than the expected mean indicating that the HOs
surveyed have measures that enhance information processing and dissemination. On the
overall, the results provide evidence of the existence of relevant controls that support
favourable financial perfoamance in HOs in Rivers State.

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The results for financial performance presented in table 4.2 indicate that on the overall the HOs
surveyed perform well in financial terms. The mean of 3.65 obtained for total revenue is an
indication that the HOs surveyed generate sufficient revenue to cover their operational cost.
The findings of the study also indicate that the HOs surveyed are profitable and earn sufficient
returns on their investment; the means of 3.76 and 3.70 obtained for profitability and return on
assets provide further evidence about the favourable financial performance of the HOs
surveyed.
The regression results from this study presented in tables 4.3, 4.4 and 4.5 confirm that a strong
and positive linear relationship exist between internal control and financial performance in HOs
in Rivers State. However, the regression results do not support the null hypotheses, hence, the
study could not find a justifiable reason to accept them.

SUMMARY, CONCLUSION AND RECOMMENDATIONS


The major findings of this study are summarized in this section. Conclusion was made based
on the findings and recommendations advanced on the basis of the results of the study and
conclusion.

Summary
This study investigated the effect of internal control on financial performance of HOs in Rivers
State. The study sought to determine the extent to which the measures of internal control
(control environment, risk assessment and information and communication) influence financial
performance (total revenue, profitability and return on assets) of HOs in Rivers State. The
results of the study indicate that internal controls to a significant extent influence financial
performance of HOs. The study found out that there exist a positive relationship between
internal control and financial performance of HOs in Rivers State.

CONCLUSION
Based on the findings of the study, we conclude as follows:
1. The control environment affects total revenue as such influences the financial
performance of HOs, its non-existence or inadequacy may spell doom for an
orgainsation.
2. Risk assessment influences profitability and by extension the financial performance of
HOs and enables a hospitality organisation prevent and overcome avoidable dangers or
threats to their operations.
3. Information and communication have a significant effect on return on assets of HOs.
4. The financial performance of hospitality organisations is also influenced by moderating
variables such as firm size, government policy/legislation and technology

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RECOMMENDATIONS
The following recommendations are advanced based on the findings and conclusions of this
study:
1. Management of HOs should continually imbibe the attitude of designing and
maintaining sound control environment as the success of their business depends to a
significant extent on the strength of the control environment. This can be done by
ensuring that: there is a culture of integrity and ethical behaviour within the
organisation, the directors and audit committee meet regularly to appraise the
performance of the organisation, competent personnel are engaged and their
competence continually improved to make them perform better as well as designing
appropriate human resource policies to motivate employees.
2. Management and those charged with governance of HOs should always be alert to all
possible circumstances (business risks) that may threaten the entity’s ability to achieve
its objectives. This can be achieved through regular assessment of the operating
environment of the organization to identify threats arising from competition,
legislation, technological changes, etc.; the internal audit unit can assist in this regard.
3. The Information and communication framework of organisations operating in the
hospitality industry should be regularly upgraded to enable them cope with the frequent
changes in the global environment and as such improve their financial performance.
HOs can take advantage of emerging trends in information and communication like the
internet and social media to enhance their visibility and as such increase their clientele
base and their financial performance.
4. HOs should strive towards expanding their operations, adjusting to government policies
and technological changes as these factors significantly influence financial
performance. Expansion can be achieved through investment in assets.

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APPENDIX
FURTHER REGRESSION RESULTS
1. Regression Output of Control Environment and Total Revenue.

ANOVAb

Sum of
Model Squares df Mean Square F Sig.
1 Regression .738 1 .738 26.302 .000 a
Residual 1.291 46 .028
Total 2.029 47
a. Predictors: (Constant), CONTROL ENVIRONMENT (X)
b. Dependent Variable: TOTAL REVENUE (Y)

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 2.441 .242 10.096 .000
CONTROL
.351 .068 .603 5.129 .000
ENVIRONMENT (X)
a. Dependent Variable: TOTAL REVENUE (Y)

2. Regression Output of Risk Assessment and Profitability.

ANOVAb

Sum of
Model Squares df Mean Square F Sig.
1 Regression .973 1 .973 31.696 .000 a
Residual 1.412 46 .031
Total 2.385 47
a. Predictors: (Constant), RISK ASSESSMENT (X)
b. Dependent Variable: PROFI TABI LI TY (Y)

Coefficientsa

Unstandardized Standardized
Coef ficients Coef ficients
Model B Std. Error Beta t Sig.
1 (Constant) 2.870 .167 17.195 .000
RISK ASSESSMENT (X) .272 .048 .639 5.630 .000
a. Dependent Variable: PROFITABILITY (Y)

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3. Regression Output of Information and Communication and Return on Assets.

ANOVAb

Sum of
Model Squares df Mean Square F Sig.
1 Regression .943 1 .943 20.114 .000 a
Residual 2.156 46 .047
Total 3.099 47
a. Predictors: (Constant), INFORMATION & COMMUNICATION (X)
b. Dependent Variable: RETURN ON ASSETS (Y)

Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 1.314 .538 2.443 .018
INFORMATION &
.636 .142 .552 4.485 .000
COMMUNICATION (X)
a. Dependent Variable: RETURN ON ASSETS (Y)

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