DEPARTMENT OF ACCOUNTING & INFORMATION SYSTEMS

BBA Program

INTERNSHIP REPORT
ON

THE INTERNAL CONTROL SYSTEM OF TITAS GAS TRANSMISSION & DISTRIBUTION CO LTD.
SUBMITTED TO Md. Safayat Hossain Lecturer Department of Accounting & Information Systems University of Dhaka

SUBMITTED BY Alokananda Bhowmik ID No. 15061 Department of Accounting & Information systems University of Dhaka

DATE OF SUBMISSION: 25th February, 20

LETTER OF TRANSMITTAL

Date: February 25, 2013 Md. Safayat Hossain Lecturer Department of Accounting & Information Systems University of Dhaka.

Subject: Submission of Internship Report.

Respected Sir, With great gratification, I am here with submitting my Internship Report on The Internal Control System of Titas Gas T&D Co. Ltd. that you have assigned me as an essential requirement of the internship program. To prepare the report I collected what I believe to be most relevant information to make my report as analytical and reliable as possible. But it was an enormous task to present the data in the right way. I have concentrated my best effort to achieve the objectives of the report and hope that my endeavor will serve the purpose. I request you to excuse me for any mistake that may occur in the report despite of my best effort. I sincerely hope that you would consider my endeavor and will find this report satisfactory. Thank you again for your support and patience.

Yours sincerely,

Alokananda Bhowmik ID: 15061 Accounting & Information Systems University of Dhaka.

ACKNOWLEDGEMENT

Successful conclusion of any course requires support from various personnel and I was fortunate to have that support, direction, and supervision in every aspect from my teacher, Titas officials and friends. First of all, I pay my gratitude to the omnipresent Almighty for enabling me to complete this Internship Report within due course of time. I am deeply indebted to my faculty Mr. Md. Safayat Hossain, Lecturer, Department of Accounting & Information Systems, University of Dhaka for his whole-hearted supervision during my organizational attachment period. My appreciation and gratefulness also goes to Mr. Humayun Kabir Khan, manager of Accounts Section, as my organizational supervisor. It would have been very difficult to prepare this report up to this mark without their guidance. My gratitude goes to the entire Department of Accounting & Information systems of University of Dhaka for arranging Internship Program that facilitates integration of theoretical knowledge with real life situation. I also show my utmost thankfulness to all the officials of Titas Gas T&D Co Ltd. The speed and helpfulness of the officers really helped me in obtaining the necessary information in time. I would also like to thank Mr. Md. Abdul Aziz khan, Managing Director of Titas Gas T&D Co. Ltd. who made the door of Titas wide open for me and Mr. Sankar Kumar Das, Director (Finance) for his kind concern and helpfulness during my stay at Titas. And finally, words are very few to express my enormous humble thanks to my affectionate parents for their prayers and supports that enabled me to conclude my internship program.

EXECUTIVE SUMMARY Titas Gas Transmission & Distribution Company Limited is the largest integrated natural gas distributor in Bangladesh serving more than 15 million consumers in Dhaka and Mymensingh. The company has more than 50 years of experience in operation and maintenance of gas transmission and distribution system. Its activities also include planning, designing and maintenance of pipelines for gas transmission. Titas operates in a region of the country that has a rapidly growing demand for natural gas and power generation due to significant industrial development. Internal control systems is a topical issue following global fraudulent financial reporting and accounting scandals in both developed and developing countries. A proactive preventive approach to the problem requires a critical evaluation of existing internal control structures in organizations to determine their capacity to ensure that the organizations activities are carried out in accordance with established goals, policies and procedures. In this report, an attempt was made to know about the internal control system of Titas. There is several global guidance setting bodies that provides general guideline to the professionals regarding the internal control system. An endeavor was made to describe the internal control of Titas according to those established guidelines and finally recommendations were made to the inconsistencies that were noticed during the preparation of the report. The report contains 4 chapters. In the introductory chapter, objectives, methodology and limitations of the study were mentioned. The second chapter is based on literature review. It contains the Internal Control frameworks recommended by various international guidancesetting organizations like COSO and ICGN. In the third chapter, a historical overview of Titas was given. Internal control system of Titas was also discussed in this chapter. In the fourth chapter, an analytical evaluation was made regarding the presence of internal control in Titas and various deficiencies therein were identified. Later recommendations for the remedial of the problems identified were also given.

TABLE OF CONTENTS

CHAPTERS Chapter 1 1.1 1.2 1.3 1.4 Chapter 2 2.1

TOPICS Introduction Background of the Report Objectives of the Report Methodology Limitations Literature Review Committee of Sponsoring

PAGE NO.

1 2 3 5 6 7

Organization (COSO) 2.2 Chapter 3 ICGN Framework Titas & Its Internal Control System 3.1 3.2 History of Titas Description of Control 13 15 12

Established by Titas 3.3 Evaluation of Internal Control established by Titas Chapter 4 4.0 4.1 Discussion & Findings Discussions & Findings Weaknesses 30 34 23

Recommendations Conclusion Reference Appendix

36 38 39 41

Acronyms

BGFCL: Bangladesh Gas Field Company Ltd. CBA: CG: Collective Bargaining Agreements Corporate Governance

COSO: Committee for sponsoring Organization ERP: Enterprise Resource Planning

GTCL: Gas Transmission Company Ltd. ICGN: International Corporate Governance Network IOC: T&D: International Oil Company Transmission & Distribution

CHAPTER 1 INTRODUCTION

1.0. Introduction
1.1. Background of the report

Natural gas contributes the lions share in our total energy sector. Exploration by the public companies along with the foreign companies (IOCs) has established the existence of a significant gas sources. Still the amount of extractable reserve of natural gas is uncertain and yet to determine. Titas Gas Transmission & Distribution Co. Ltd. (from now on Titas) is the countrys largest integrated gas company meeting 63 per cent of the total gas demand, serves in two most populated and industrially flourished region of the country.

Titas is a government owned company which off-loaded its 25 per cent ownership in the share market just 4 years ago. Still its operation is hugely controlled by the government due to the fact that it is mostly state owned and that it deals with public resource. Better management of overall functionality will be hampered if good and efficient internal control system is not present in any entity. Internal control system is implied in every organizations and their nature is the same. But the objectives they are intended to achieve will be mostly dependent on the nature and objectives of the organization. In line with the common practice all over the world, Titas has its own internal control which ensures that good corporate governance does prevail in the company.

This report is an essential requirement of the internship program for successful completion of BBA course. Practical experiences along with the class-room experience make our learning sustainable and implementable. For that purpose, the university authority has attached me to Titas Gas T&D Co. Ltd and my supervisor assigned me to work on internal control system of that company. Internal control systems are essential to the success and endurance of any organization. They keep the organization on the rails. This report discusses the internal control system of Titas
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which attempts to identify various control mechanisms, the problems therein, the reasons for such inconsistencies and finally some recommendations were made to overcome the shortcomings of the system.

During my six weeks time at Titas, I worked in the Accounts Department under the Finance Division. The Accounts department has four sections and I got the opportunity to overview the activities of all the four sections. Most of the time, I worked with accounting related issues and get introduced with the existing internal control system through my day to day work. Besides, discussion with management of Titas put light into the issue and helped me to identify the major control mechanisms.

Efficiency of operation is increased if a sound accounting mechanism is in place. In my six week time at Titas, I learned that Titas has its own internal control system which is directed towards better operational management, financial reporting and compliance with the rules & regulations. And all these things make Titas to some extent different from the other government and nongovernment organizations.

1.2.

Objectives of the Paper

This paper evaluates the existing internal control systems of Titas directed towards the management of the organizations. Specifically, the paper: Ascertains whether internal control exists in the organization to ensure that it is running in the intended direction Examines whether such control is effective or otherwise and whether such control systems comply with globally-accepted internal control mechanisms or the international standards

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Attempts to identify the shortfall of the control system and tries to recommend some remedies.

The objectives raise a vital question whether or not the existing internal control systems in Titas are effective. This includes the following minor but inter-related questions:

What role should internal control system play in the management of Titas? Does management of the company appreciate, understand, and clearly respond to this role?

What internal control systems are currently in use? Do they include all the expected elements of internal control systems?

To get the answer of the above questions certain methods were adopted for the investigation. In the later part of the paper, discussions were made on the selected methods and tried to justify such selection.

1.3.

Methodology

As the report pertains to describe the internal control system of Titas which is pervasive but is not a very easy task to rules out in paper , this study tried to discuss the internal control based on two frameworks Framework of the Committee of Sponsoring Organizations (COSO) of the Treadway Commission & The International Corporate Governance Network (ICGN) framework

In case of qualitative research, several research methods are available, such as- grounded theory, ethnographic, phenomenology, case study etc. The study uses a case study method. The justification is that the study investigates details of a real life phenomenon using multiple sources of evidence. The sources of evidence are data collected through: interviews, observations, and documentary analysis, extraction of data and information specific to an organization and use of
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confidential information tailored to suit the study. This method aims at the comprehensive understanding of a single, distinctive case.

Earl Babbie (1998) supports the choice saying that whereas most research attempts to limit the number of variables considered, the case study seeks to maximize them. Ultimately, the researcher executing a case study typically seeks insights that will have a more generalized applicability beyond a single case under study. In view of the fact that this study involves an investigation of whether internal control systems established by Titas are effective, the case study method is used.

Keeping the research approaches in mind, this study will go for deductive method where relationships among different variables will be established and a structured method (in this case the framework depicted in Figure 2) will be used.

To make this report more meaningful and presentable two sources of data were used widely. As-

Primary Data Working in Titas as an internship student gave me the privilege of accessing different organizational documents which is neither very much available on internet and different publications nor people outside the organization could have access to them. Extensive discussion with the managers and DGM of the accounts section opened up the broad way of knowing their day to day operations as well as the details accounting procedure.

Secondary Data The Annual reports of the company for the last five years and different publications of Petrobangla and the Ministry of Finance made it possible to mention the latest data on Titas. Besides, the publications of ICGN and the COSO framework served as the principle secondary source of data.

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1.4.

Limitations

Everything comes with a downside. This report is of no exception. While working on the report, one thing that stood as an impediment is that there was absence of previous studies on the topic. Though there are numbers of studies on the gas sector of the Bangladesh but no studies were conducted on Titas. So, there was lack of scope of consulting the ideas of others. Likewise, crucial information was collected directly from the company personnel. As there are no publications from where necessary data could be obtained, interviewing and close group discussions were often very painstaking. Use of subjective judgments while rating the control variables can be counted as a limitation. The study was based on my 6 weeks working experience at Titas. But six week time was not enough for over viewing all the control activities of Titas. Another thing that could be counted as a shortfall is that lack of experience of working in the related fields of this study.

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CHAPTER 2 LITERATURE REVIEW

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2.0. Literature Review

Internal control provides a means of assurance that corporate objectives are being achieved (COSO framework, 2011). Though this report mainly focuses on the internal control system of Titas but two other things must also be discussed along with this because internal control cannot be well understood without understanding these two phenomenon. The first thing is, Internal Audit function, which helps in evaluating the business processes and procedures to assess the effectiveness of control systems and compliance thereof, highlights the weaknesses in the internal control systems and recommends solutions to overcome the weaknesses. It also enables the organization to improve operational efficiency and accuracy and reliability of its financial data. Institute of Internal Auditors (IIA) is a guidance-setting body which is audit profession's global voice, chief advocate, recognized authority, and principal educator (Wikipedia).

The other thing is Corporate Governance which has become a buzz word in todays corporate world. Corporate governance (CG) is the system by which companies are directed and controlled. In general, CG deals with laws, procedures, practices and implicit rules that determine companys ability to take managerial decisions vis--vis its claimantsin particular, its shareholders, creditors, customers, the State and employees. However, a somewhat broader definition would be to define CG as a set of mechanisms through which a single country or firms within a country operates when ownership is separated from management ( Du, Hua, 2006).

Corporate governance therefore calls for three factors: 1. Transparency in decision-making; 2. Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and; 3. The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization.

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The International Corporate Governance Network (ICGN) which was founded in 1995, is an initiation of major institutional investors, represents investors, companies, financial intermediaries, academics and other parties interested in the development of global corporate governance practices.

2.1. Committee of Sponsoring Organization (COSO)

In response to widely publicized business failures in the USA in the late 1970s and mid-1980s, the National Commission on Fraudulent Financial Reporting (the Treadway Commission) was inaugurated to identify factors that caused fraudulent corporate financial reports and make recommendations that resolve such issues. The recommendations directly addressed the problems of weakness of internal controls and emphasized the importance of the control environment, codes of ethical conduct, management reports on effectiveness of internal controls and development of a common definition and framework of internal control. The evolutionary process of developing a generally accepted definition and framework of internal control was realized in 1992 with the publication of a landmark report on internal control: Internal Control Integrated Framework, referred to as COSO (Committee of Sponsoring Organization).

Hence, COSO provides the necessary guidelines for establishing internal control while IIA is a guidance-setting body for internal audit professionals and ICGN is the global partner for developing corporate governance practice around the world. In this section, the report will try to describe the international standards of internal control which stand as a guide to the internal audit professionals and corporate governance practice.

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The Institute of Internal Auditors defines internal control as follows:

a process within an organization designed to provide reasonable assurance regarding the following primary corporate objectives: the reliability and integrity of information compliance with policies, plans, procedures, laws and regulations the safeguarding of assets the economical and efficient use of resources the accomplishment of established objectives and goals of operations or programs

As mentioned before, COSO is a voluntary private sector organization established in USA. It is dedicated to improving the quality of financial reporting through business ethics, effective internal controls, and corporate governance. COSO was originally formed in 1985 to sponsor

the National Commission on Fraudulent Financial Reporting, an independent private sector initiative. It is concerned with factors that can lead to fraudulent financial reporting. COSO has developed principles of internal control. It defines internal control as follows:

Internal control is a process, affected by an entitys board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

Effectiveness and efficiency of operations Reliability of financial reporting Compliance with applicable laws and regulations

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It identifies the key concepts of internal control as follows:

Internal control is a process. It is a means to an end, not an end in itself. Internal control is affected by people. Its not merely policy manuals and forms, but people at every level of an organization.

Internal control can be expected to provide only reasonable assurance, not absolute assurance, to an entitys management and board.

Internal control is geared to the achievement of objectives in one or more separate but overlapping categories.

Components of internal control: Control Environment Risk Assessment Control Activities Information and Communication Monitoring Activities

A direct relation exists among the objectives, which are what an entity strive to achieve, components, which represent what is needed to achieve the objectives and the operating, legal and other structural units within the entity. The essential elements of an effective internal control system must be present and functioning effectively for any internal control system to achieve organizations objectives. According to COSO, the control elements have the following characteristics or principles-

Five Principles relating to control environment: 1. The organization demonstrates a commitment to integrity and ethical values 2. The board of directors demonstrates independent independence of management and exercises oversight for the development and performance of internal control

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3. Management establishes, with board oversight, structures, reporting lines and appropriate authorities and responsibilities in the pursuit of objectives 4. The organization demonstrates a commitment to attract, develop and retain competent individuals in alignment with objectives 5. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives. Four principles regarding Risk assessment1. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives 2. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed 3. The organizations consider the potential for fraud in assessing risks to the achievement of objectives 4. The organization identifies and assesses changes that could significantly impact the system of internal control.

Three principles relating to control activities1. The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable level 2. The organization selects and develops general control activities over technology to support the achievement of objectives 3. The organization deploys control activities as manifested in policies that establish what is expected and in relevant procedures to affect the policies.

Three principles relating to information and communication1. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control
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2. The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of other components of internal control 3. The organization communicates with external parties regarding matters affecting the functioning of other components of internal control Two principles relating to monitoring activities1. The organization selects, develops and performs ongoing and/or separate evaluations whether the components of internal control are present and functioning. 2. The organizations evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

The COSO framework may be relevant to larger organizations, but inappropriate for small ones due to costs and operational complexity. Management of small organizations may not need formal internal controls for the reliability of the records and other information, because of their personal involvement in the operations of the organization.

Another weakness of the COSO mechanism is failure to recognize Information Technology (IT) as one of the major control components. IT is crucial to an internal control framework. Today, organizations use IT for initiation, authorization, recording and processing of transactions. IT ensures effectiveness of internal controls. However, COSOs failure to recognize IT as a control component motivated other bodies to design and develop frameworks to remedy the omission. One such framework is the Control Objectives for Information and Related Technology (COBIT 1996, 1998, 2000, 2005, 2007). In this report, along with the five elements of the COSO framework, the IT element of the COBIT framework will be taken into consideration.

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2.2. ICGN Framework

ICGN statements on global corporate governance rules out the various principles for good corporate governance such as-

The corporate objectives of the corporation should be to optimize over time to time the returns to its shareholders and the board should develop and implement a strategy which will improve the equity value over the long term. Corporations should disclose relevant and material information concerning the corporation on a timely basis and along with the financial information; disclosures should be made on the ownership and voting rights of the company. The ICGN supports the development and harmonization of the highest-quality international accounting and financial reporting standards. The audit should be undertaken by independent external auditors which will also be approved by the board or the appropriate authority.

Besides the general guidelines, ICGN also provides some guidance on issues like shareholders ownership, responsibilities and voting rights and remedies all are aimed to better practice in the corporation to enhance the corporate governance of the concerned corporations.

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CHAPTER 3 TITAS & its INTERNAL CONTROL SYSTEM

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3.0.
3.1.

Titas & Its Internal Control System

Overview of Titas

Titas Gas Transmission & Distribution Co. Ltd., countrys significant provider of natural gas, was established on November 20, 1964 following a significant gas discovery at Titas Gas Field in 1962. The company began its commercial operation with the commissioning of gas supply to Siddhirganj Thermal Power Station on April 28, 1968 after construction of 14 inch dia 58 mile long Titas-Demra gas pipeline by the then East Pakistan Industrial Development Corporation.

At the beginning, 90% of its shares belonged to the then Pakistan Government and Pakistan Shell Oil Company owned the rest. Till the liberation of the country, Titas had been able to supply gas to two power stations, one fertilizer factory and about 2000 customers in other categories. After liberation of the country the company was nationalized under the Presidential Order No. 2711972 and its overall activities has been placed under the supervision of Bangladesh Oil, Gas & Mineral Resources (Petrobangla). Under the Nationalization Order of 1972, all the government owned shares of the company were vested in the Government of Bangladesh (GOB). In accordance with an agreement signed between Shell Oil Company and GOB on August 9, 1975, the ownership of the remaining 10% shares was transferred to the GOB through Petrobangla in exchange for a lump-sum payment of 100,000. After the independence of Bangladesh in 1971, the company started its journey as a company of Petrobangla with the authorized and paid up capital of Tk. 1.78 crore.

Subsequently, the companys Board was vested with full autonomy & exercises all financial powers as per Companys Act 1994 as stated in the government gazette notification no. dated 5 November, 2002. Recently, the company has been listed with Dhaka Stock Exchange on June 9, 2008 & with Chittagong Stock Exchange on June 19, 2008 under the direct listing rules of Securities and Exchange Commission to offload 25 per cent of its shares in the stock market.
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Table 1: Titas at a glance:

Date of Incorporation Corporation Administrative Ministry Franchise Area Authorized Capital Paid up capital ( as of June 30, 2012) Number of customers ( as on June 30, 2012) Market share in sales Sources of gas supply (fields) Manpower Listed with DSE Listed wiith CSE

November 20, 1964 Bangladesh Oil, Gas & Mineral Corporation (Petrobangla) Ministry of Power, Energy & Mineral Resources Greater Dhaka & greater Mymensingh Tk. 2000 crore Tk. 942.12 crore Total 15,35,592 63% Titas, Habiganj,Narsingdi, Kailashtila,Jalalabad,Bibiyana, Bazar, Rashidpur,Bianibazar & Bangura gas field. 2,446 June 9, 2008 June 19, 2008

Moulovi

Titas Franchise Area TFA includes Dhaka Metropolitan City Greater Dhaka Narayanganj, Sonargaon, Rupganj, Araihazar Keraniganj, Munshiganj, Mirkadim Tongi, Savar, Dhamrai, Manikganj, Aricha, Gazipur, Sreepur Madhabdi, Narshingdi, Ghorashal

Greater Mymensingh - Tangail, Mirzapur, Jamalpur, Sherpur, Tarakandi; - Mymensingh, Netrokona, Bhaluka, Trishal, Gafargaon; Kishoregonj, Bhairab Bazar.

Brahmanbaria
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Brahmanbaria, Ashuganj, Bhairab Bazar.

For enhancing operational efficiency and ensuring good maintenance, Titas divided its franchising area into several zones and divisions. For example, Dhaka metropolitan city is subdivided into 13 zones.

3.2.

Descriptions of Control Established by Titas

Internal control system is fundamental to the success and survival of organizations. It keeps the organization on the rails. Corporate governance which has become a phenomenon across the world can be strengthened by ensuring better control in the organization. With an efficient and effective internal control placed in the organization, it is assumed that the overall performance of the organization will improve. Internal control is inherent in every organization. Though it is an abstract idea still it enhances the likelihood of achieving the objectives of the organizations and adapt to changes in the business or operating environment. Titas is a government company where day to day operation is strictly controlled and the company is under the purview of the concerned ministry which amounts to greater control than any other private companies. Natural gas can spur the growth of development of any country. As we know, Titas is the sole distributor of natural gas in countrys two most industrially flourished areas; the company plays important socio-economic roles in its areas of operation. Thats why it must ensure better performance by establishing and ensuring better internal control in the organization.

Like every other organizations, Titas has its own internal control placed within the entity so that it can perform its operations effectively & efficiently, can ensure compliance with all the required legal restrictions and can create more accountability among the employees. The effect
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of internal control is pervasive but in this report, the internal control employed in Titas will be discussed from 3 aspects. The COSO framework discussed in the previous chapter also tried to describe internal control in terms of these three aspects. And the report, as mentioned before, will attempt to discuss the internal control in Titas according to the COSO framework.

Operational Control Titas is the countrys major distributor of natural gas. The main objective of Titas is to supply natural gas to customers of different categories under Titas Franchise area, thereby reducing dependency on imported liquid fuel. Towards this end, the company has to construct, operate and maintain pipelines, stations and associated facilities. It transmits natural gas from the gas through national grid line and distributes the same to different consumers. The operation of Titas may be represented as-

Operation

(i)

Procurement

Transmission

Distribution

Figure 1: Operation of Titas

Procurement (Intake) Exploration and Production activities are operated by three (3) state owned companies and four International Oil Companies (IOC) under Production Sharing Contracts (PSC). Titas is solely a trading concern. It buys gas from the gas fields and then sells it to different types of customers.

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 Transmission Presently, Gas Transmission Company Ltd. (GTCL) has the responsibility to gradually establish the national gas grid for the uninterrupted transportation of natural gas in a safe, reliable and economic way. Titas pays GTCL wheeling charges or transmission charges for the amount of gas transmitted through their lines. But before the establishment of GTCL, the transmission activities were also undertaken by Titas along with the distribution activities. Even now, a portion of gas lifted by BGFCL is transmitted by Titas.

Distribution Titas serves around 1.5 million customers of 8 different types in its franchise area. They includepower, fertilizer, feed gas for CNG, captive power, industry, tea-estate, commercial & domestic.

To increase efficiency and effectiveness in the above mentioned operational activities, the following internal controls are put in place The intake is controlled by the use of meter at both ends. Titas keeps track of the volume of gas procured or purchased from different gas fields by establishing metering and valve system. At the end of the month, the gas fields send bills to Titas for their payment. After verifications of the bills, the company makes necessary arrangements for payment. Likewise, meter is also used to measure the gas transmitted by GTCL. Titas pay GTCL wheeling charges or transmission charges on the gas transmitted. Thats why GTCL also requires to submit their bills to Titas which are paid after due verifications. Besides, certification by a technical person will be required before payment is made. Meters are used to measure the consumption of gas by different customers but domestic consumption is still unmetered due to some technical weaknesses. The domestic households pay at a uniform rate regardless of their uses. But the amount of gas

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consumed by the domestic users constitutes a small portion of the total consumptions and this unmetered consumption is in no way financially hampering the company. The meter readings from the gas fields, GTCL and different customers are sent to the Central Database at the head-office and the accounts division. The bills from the gas fields and the bills to the customers will constitute the accounts payable and the accounts receivables. So, the meter readings will work as source data or evidence data of the payables and receivables amounts. Besides, there are Metering Department and Vigilance Department. The Metering Department tests the accuracy of the meter reading and the Vigilance Department inspects the yard of the customers for illegal gas connections.

Besides, Mobile Court has been established under the Mobile Court Act to search and penalize illegal gas users and tempering of meters.

So, from the above discussions, it is evident that Titas use various internal control mechanisms which will increase their effectiveness of operations. The specific target used to determine whether a control is operating effectively is called the control objective. We can place the Control objectives of Titas under several detailed categories to capture effectiveness Verifications: The amount of gas procured, transmitted and distributed will be measured and verified with the help of meters and technical certifications.

Reasonableness: Amount of payables and receivables will have to appear reasonable relative to the meter reading.

Compliance: Gas connections will be provided as per the decisions and approval of the technical committee and upon the receipt of security deposits, otherwise it will be considered as illegal connection and such customers will be charged with penalties. The vigilance department will check such inconsistencies by paying a visit to the yard of the customers.
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 Financial reporting effectiveness Titas has got such a recording procedure which is partly computerized and partly manual. When companies around the world are opting for ERP software, there is still an absence of a central computer system to bind the whole company into a single system. Still spreadsheet program such as Microsoft Excel is used to make all the necessary statements. According to the requirement of the Bangladesh Securities and Exchange Commission, Titas prepares quarterly reports before preparing the annual reports. Following control activities can be included (but are not limited to) to enhance reliability of financial reporting Segregation of duties- Separating authorization, custody, and record keeping roles to detect and prevent fraud or error by one person.

Authorization of transactions - Review of particular transactions by one or more appropriate person(s). All the bills are approved by a person who is empowered to do so.

Retention of records - Maintaining documentation to substantiate transactions.

Supervision or monitoring of operations - Observation or review of ongoing operational activity.

Physical verifications: Moveable assets are verified each year whereas immoveable assets are verified once in every five years.

Budget- Budgets are used as a major financial control tool. There is a separate section under the Finance division (Budget Section) who prepares budget for each year. The budgets must be approved by the board of directors and the ministry. Before any payment is made, every bill is verified to see if it was previously included in the budget. This can put check to unauthorized expenditures.
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Internal audit: There is an internal audit department who review and approves all the transactions made within the company. Usually they perform post audit and pre-audit review. Pre-audit is done before payment (usually for amounts above tk. 500) is made to verify authenticity and proper authorization. Post-audit is the statutory audit. Each year the company engages a CA firm to perform audit to find any fraud and defalcation. Post audit also ensures that all the transactions were recorded properly while complying with all the accounting rules and company policies and they reflect the true financial condition of the company. The government also perform audit , done by the Directorate of Commercial Audit of the government to find out fraud and misappropriation and to find out whether the companys rules and regulations were observed before each payment and receipt.

Top-level reviews:

Top-level reviews include analysis of actual results versus

organizational goals or plans, periodic and regular operational reviews, metrics, and other key performance indicators (KPIs). Besides, management review of reports comparing actual performance versus plans, goals, and established objectives are placed in the Management Report which is also prepared along with the financial reports.

Controls over information processing- A variety of control activities are used in information processing. Examples include edit, checks of data entered, accounting for transactions in numerical sequences, comparing file totals with control accounts, and controlling access to data, files and programs.

Compliance with all the relevant laws, rules and regulations Being enlisted in the stock market, Titas is needed to comply with some regulations which companies in general are also needed to follow. At the same time, it needs to abide by some special acts and regulations, as it is a government organization. Since Titas is the sole provider of

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gas in its franchise area which creates the scope of practicing monopoly, strict compliance of different acts and regulations is demanded by the regulatory bodies. To govern the corporate environment in Titas, following legal measures are in practice: Securities and Exchange Ordinance 1969 Securities and Exchange Commission Act 1993 Companies Act 1994 Gas marketing Policy 2004 Bangladesh Energy Regulatory Commission (BERC) Act 2003 Rules for Government Commercial Audit Public Procurement Rules

However, to institutionalize the practice of corporate governance in Bangladesh, initiatives have been taken by the Bangladesh Securities and Exchange Commission (BSEC). BSEC issued a notification on Corporate Governance Guidelines (CG Guidelines) for the publicly listed companies of Bangladesh under the power vested on the Commission by Section 2CC of the Securities and Exchange Ordinance, 1969. The CG Guidelines were issued on a comply or explain basis, providing some breathing space for the companies to implement on the basis of their capabilities.

Titas has already complied with these BSEC notifications in its annual report of the FY 2011-12 and it is planning to undertake audit on Corporate Governance soon.

Besides, as we know, Titas is a company of Petrobangla which is under the Ministry of Power, Energy & Mineral Resources Division, the company needs to follow all the decisions and guidelines of the ministry and Petrobangla.

In case of determining the selling price of gas, Titas needs to comply with the policies of BERC which is an independent and impartial regulatory commission for the energy sector.

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Corporate Governance in Titas As we know, Corporate Governance (CG) is the system by which companies are directed and controlled. In general, CG deals with laws, procedures, practices and implicit rules that determine companys ability to take managerial decisions vis--vis its claimantsin particular, its shareholders, creditors, customers, the State and employees. All corporate governance systems revolve around four core principles: Fairness, accountability, responsibility and transparency (Dr. Hua, 2006). And they govern the corporate government of the organization.

In 2012, Bangladesh Securities & Exchange Commission has made an order that requires the listed companies to prepare a notification on comply or explain basis. Titas has complied with the BSEC guideline in the year 2011-12 and has included such issues as-

Soundness and efficiency of internal control Appointment of head of internal audit Suspected or presumed fraud or irregularity or material defect in the internal control system

Internal audit services.

This indicates that Titas is opting for creating a corporate environment that will require much more accountability, transparency and responsibility. But as Titas is mostly controlled by the government (as the board of directors is consisted of government officials) there is a chance that it may be treated as a government department and unit. As a result, unlike the private concern, it
may not have its board or management changed via a takeover or proxy contest, and cannot go

bankrupt. In addition, it has free equity and a very low cost of subsidized loans. Thus, the incentives for board members and managers to maximize the value of the company and keep costs in check are reduced. Also there is a chance that accountability and performance may also be hindered by political interference, poorly defined non-commercial objectives, and an absence of transparency. Strong internal controls, good disclosure, independent boards of directors, and other CG tools can help
34

state -owned enterprises like Titas perform well and act in the best interests of citizens and other shareholders.

3.3.

Evaluation of Internal Control established by Titas

In the earlier section, internal control of Titas was discussed. This section of the report will try to examine the effectiveness of existing internal control system of Titas so that we can know all the components of internal control and the short-comings thereon. A similar type of study was conducted by Angella Amudo and Eno L. Inanga on 2009 where they developed a conceptual model that was used in evaluating the internal control systems in Public Sector Projects in Uganda financed by the African Development Bank. This report will also use the model developed by Amudo and Inanga to evaluate the control established by Titas.

Internal control is a process of integrated sets of activities originated by top personnel of an organization and embedded within all the organizations activities to achieve goals. This comprises two sets of variables: dependent and independent. Influence of authority is the cornerstone of independent variables that ensures that the independent variables function to generate the outcome of the dependent variable.

Figure 2 shows the conceptual model components of dependent and independent variables.

The effectiveness of internal control is the dependent variable. This is achieved by the presence and proper functioning of all the (predefined) independent variables in relation to each category of the objectives. Proper functioning of independent variables provides reasonable assurance of proper functioning of dependent variable.

35

That is-

Effectiveness of internal control (i.e. dependent variables) = (independent variables)

Then the organization realizes preset objectives of efficient and effective operations, generation of accurate, reliable and informative financial reports that comply with relevant legal and regulatory requirements (note that there are 3 objectives mentioned in figure 2). The objectives are overlapping. This means efficient and effective operations produces accurate, reliable and informative financial reports that comply with applicable laws and regulations. Figure 2: Conceptual model of internal control

Source: International Research Journal of Finance and Economics (2009)

36

The objectives, depicting overlapping interrelationships are numbered 1, 2 and 3 in Figure 2- (1) include efficiency and effectiveness of operations (2) accuracy and reliability of informative financial reporting and (3) compliance with applicable laws, regulations, policies and procedures. The independent variables determine the effectiveness of an internal control system. The presence and proper functioning of all the components of the independent variables ensures effectiveness of internal control system. This achieves each category of objectives 1, 2 and 3 in Figure2.

The independent variables comprise major and minor components. Individual minor components jointly provide for and form a specific major independent variable. The measurement of minor independent variables locates any weaknesses existing in the major independent variables. The major independent variables include: Control environment Risk assessment Control activities Information and communication Monitoring Information Technology

The minor independent variables include: Authorization and approval procedures Assignment of authority and responsibility Accountability obligations Segregation of duties Limit of amount eligible to expend Proper Documentation Controls over access to resources Presence of internal audit Verification Reconciliation

37

Review of operating performance Supervision Human resource policies and practices

A direct relationship exists between the outcomes of the dependent and the independent variables. All the independent variables are relevant to each category of objectives. Internal control processes (minor independent variables) affects the effectiveness of internal control systems, which is subject to the organizations determined objectives. All the independent variables are interdependent but each has an impact on the effectiveness of internal control systems.

Different approaches to the evaluation of effectiveness of internal controls are available. The study uses the model in Figure 2. In this regard, controls evaluation is a step toward achieving the studys objectives once the questions under the study are answered. The questions under the study are formulated to identify the existence or otherwise of each variable of internal control.

The conceptual model in Figure 2 identifies three objectives of the effectiveness of internal control systems.

[*] The first is operational efficiency and effectiveness. Effectiveness relates to the quality of controls over the achievement of specific management objectives, while efficiency addresses the quality of controls yielding an optimum quantify of resource inputs to productive outputs. This objective determines whether the organization is reasonably assured that no material inefficiencies exist in the organization or the processes.

[*] The second objective related to the first one, is accuracy of financial reports and statements produced. This objective emphasizes the adequacy and effectiveness of management controls over the preparation of financial reports and ensuring reliability in external reporting.

[*] The third is the organizations compliance with applicable laws, regulations, policies and procedures. This focuses on the adequacy and effectiveness of management controls that govern
38

adherence to external laws and regulations. This checks the correlation between the laws and entitys procedures and actual practice.

This study identifies the following six essential components of an effective internal control system: control environment, risk assessment, control activities, information and communications, monitoring and information technology.

The model includes working relationships, which is taken into account to achieve effective functioning of the six core control components.

These six control components are assessed before expressing opinion on the design and effectiveness of the overall internal control systems. But this alone cannot identify the exact weaknesses in the internal controls. To do this, core control components are broken down into minor independent variables and those that fall under each of the major independent variables identified. The control components instituted for management of these projects are measured against the components identified in the benchmark.

In table 2 ( the table can be viewed in the appendix), each of the major independent variable of the model is defined using several minor independent variables, which are used for rating the effectiveness of controls in the projects, and locate internal control weaknesses. To understand and apply the criteria to control components the analysis uses binary numbers of 0 and 1 as ratings. A rating of 1 reflects a control component with control problem, while 0 rating signifies a control component with no control problem.

Table 2 defines each major independent variable with a set of corresponding minor independent variables, used as criteria for rating the effectiveness of controls in the projects. Each major

39

independent variable and their respective minor independent variables have to ensure consistency in the evaluation process.

The assigned ratings (either 0 or 1) must match the predefined criteria of the minor independent variables in Table 2 during evaluation. In the final evaluation, if controls provide reasonable assurance that management objectives will be achieved, a 0 rating is assigned. A 1 rating is recorded if controls do not provide such assurance. Use of judgments plays a significant role in assigning these ratings. However, corrective recommendations indicate that there exists a problem with the controls evaluated. The evaluation processes commences as shown in Table 3(see appendix).

The findings of this study is summarized in Table 4 that determines whether internal control implemented by management works in line with the company objectives.

Table 4: Control Evaluation Table Control Evaluation Table Ratings 0: No Problem exists 1: Problem exists Effectiveness efficiencies operations Models Objectives & Reliability of financial reporting of Compliance with laws, regulations, policies procedures Control Environment Risk Assessment Control Activities
Benchmark Control

&

0 1 0

0 0 0 0

1 0 0 1

Information
Components

&

Communication Monitoring Information Technology Overall 0 0 0 0 1 0 0 0 0

Detailed analysis is done in previous section

40

Analysis and interpretation of the evaluation results in Table 4 generate interesting findings. As we can notice, all the objectives of effectiveness of internal control amounts to zero i.e. no severe control problem exist in the existing control system. But as we can see, some of the components of internal control have resulted into 1 which indicates problem. As a result, the minor independent variables indicating problem will require further clarification.

41

CHAPTER 4 DISCUSSIONS & FINDINGS

42

4.0.
4.1.

Discussions & Findings

Discussions & Findings

In the preceding chapters, the study discussed about the existing internal control system of Titas and their implications. This system will steer Titas to achieve the objectives of operational effectiveness & efficiency, accurate and reliable financial reporting while complying with applicable laws, rules and regulations. The study examined managements compliance with established internal control mechanisms and identifies the variance between expectation and reality.

The result of internal control evaluation of Titas reveals the following control activities Control over sales and purchases Control over bank and cash balances Control over inventory Control over payroll Monitoring the reporting activities

The internal control of Titas is described in chapter 3 and an evaluation is done on the effectiveness of the control in chapter 4. The study identified some control components or variables (in table 2) to measure the effectiveness of the control system. They are-

Control Environment Organizational structure reflecting chain of command Segregation of duty Documented and updated human resource policies and procedures Delegation of responsibilities and follow up action to get feedback on results of tasks delegated Integrity and ethical values are demonstrated.

43

Risk Assessment Specific objectives with sufficient clarity Identification of risks that affect achievement of the objectives Criteria for ascertaining critical risks Existence of mechanisms for mitigating critical operation risks.

Control Activities Authorization of Transactions Segregation of duties. Verifications of transactions before making payments Accurate recording of zonal receipts Collections from the customers by the authorized banks are timely transferred to the mother accounts Key accounts records like bank, cashbooks, loans, accounts payables etc are reconciled on a regular basis. Bank guarantees are checked for renewal There is control over access to resources There is accountability of funds advanced to the employees Management does review operations Internal auditors are present Procedures have been documented/ regularly updated in respective manual for example finance, staff rules and regulations and operations manuals Staffs are supervised while they carry out their schedule of duties.

Information and Communication Key criteria for evaluating performance are identified, collected and communicated. Reports on Internal audit and Corporate Governance is incorporated in the Annual Report Employees do understand their control responsibilities. Complaints and disputes by suppliers are resolved in a timely manner.
44

Grievances of customers are properly addressed

Monitoring Activities There are independent process checks or independent evaluations of controls activities on ongoing basis. Interim financial statements are prepared

Information Technology IT system to monitor & supervise the zone offices and sales centers across the franchise area is present. Restriction of personnel in accessing all levels of different modules in computer Integrated computer system exists that encompasses the whole company

Now, if we look at table 3, the internal control scenario of Titas will be clear to us. From the discussions, following things can be found-

In the control environment, organizational structure does adequately reflect chain of command, responsibilities are delegated and follow up action is made to get feedback on results of performance of tasks delegated, human resource policies and procedures are documented & being updated time to time.

In case of risk assessment, it was found that management has specified the objectives with sufficient clarity. Risk assessments are not undertaken. However, operational risks are not perceived as threat as Titas is the sole provider of gas in its franchise area & as it is a government company.

No problems could be identified in the Control activities. It was found that transactions are properly authorized, duties are segregated, stuffs are supervised, verifications of transactions are done before making payments, zonal receipts are recorded accurately, bank guarantees are checked for renewal and control over access to resources exists. Besides, management does review operations and internal auditors are present.
45

Control in the information and communication component of internal control was also satisfactory. Key criteria for evaluating performance are identified, collected and communicated. Employees understand their control responsibilities, Complaints and disputes by suppliers are also resolved in a timely manner.

Interim financial statements are prepared and there are process for evaluating that controls activities on ongoing basis.

Information and technology component of internal control, however, was not found to be satisfactory.

Now, the questions arise in the study, that were mentioned in the first chapter of the report along with the objectives of the study, can be considered. Our first question was- what role internal control of Titas should play. The COSO and other framework described in the conceptual framework chapter answer the control mechanisms Titas may employ. The second query was on the current internal control of the company. The current internal control practice of Titas was also duly described in the third chapter of the report. The dependent and independent variables identified and evaluated in table 2 and 3 , to measure the effectiveness of the existing control mechanisms, may also help to understand the control in Titas.

It is to note that internal control is an implied concept which is inherent in every entity. But the question is how effective that control is and how efficiently it is directing the organization in its desired direction. As mentioned in the previous chapter, we have expressed the effectiveness of internal control as the function of some independent major and minor variables. The minor variables constituted 6 major components which also falls under 3 objectives we want to gain through the internal control. So, achievement of control in the minor independent variables will ultimately result in successful or effective attainment of the 3 key objectives.

According to the analysis showed in Table 3, there exists some control problems. Nonetheless they do not pose any threat to the effectiveness of the internal control as in Table 4 the overall score for all the key objectives are 0. Still, it is necessary to understand such inconsistencies. This study will also try to focus on the variables identified with control problems.
46

4.2.

Weaknesses

Weaknesses found during the study can be summarized as follows In the Control environment of Titas, work distribution among the mid-level personnel of some divisions was found uneven. This is due to shortage of manpower in some particular divisions. Unethical practices in the zonal offices and sales offices are open secret. This includes providing illegal connection of gas lines, providing connection without taking the security deposit, unauthorized use of gas and so on. But these are mostly done by the staffs with lower ethical values who are driven by their own self-interest and for which the company should not be blamed of. In the Risk Assessment component of control the analysis identified that the management has not identified risks that affect achievement of the objectives and a criteria for ascertaining which risks are more critical. The company is the sole provider of gas in its franchise area. As a result, it kind of has a monopoly in its area of operation as it does not have any competitors. Hence, chances of events which may pose significant threat to its operations are very meager. It may be the cause why Titas does not undertake any risk assessment procedures. Some technical inefficiency may pose threat to the operation of the company. There is no way to test the accuracy of the meter reading of the intake of gas from the supplying gas fields and due to technical shortfall the accurate amount of gas supplied and received may not be known. On the other hand, differentiating the national gas and the IOC gas is also not possible. It could create problems in the pricing policy of the company. We have noticed that Titas is trying to improve its control mechanisms. Proper preparation and maintenance of records and statements are made by the company. But still some matters will need further improvements. There exists two months time lag
47

regarding receiving the journals from the sales and zone offices and regarding preparations of the reconciliation statements. This problem occurs because recording and accounts preparation in the large part are still manual. It was also noticed that collections by the authorized banks from the customers are not deposited to the mother accounts timely and it often requires much persuasion by the company to ensure timely deposit by the banks. In the information and communication component of control, it was found that Titas does not include any report on its internal control and corporate Governance in its annual report. In case of the monitoring activity of Titas it was found that supervision of metering department and vigilance department is poor to check malpractice of the lower staff and some other CBA leaders. Titas is still working partly manual and partly computerized system in all its activities. It uses different software for different component tasks but not any single software to integrate the whole organization. Though the activities of the zonal offices are set by the head office still their direct monitoring and supervision is not possible due to the lack of a central integrated system.

48

Recommendations
In the earlier sections, the existing internal control systems in Titas have been described. Though the overall control system is effective enough to achieve the objectives of the company, still there were some minor inconsistencies which may hamper the efficiency of the company. In this section, the study will try to provide some recommendations for the company so that it can perform better and can bind the whole company with a dynamic internal control system. Proper work distribution among mid-level management should be made for ensuring better management of the company. As domestic consumption is still unmetered, improved mechanisms should be introduced to bring these households under the metering system so that Titas would be able to keep track of all the gas it is distributing for the household consumptions. As a result, there will be lack of opportunities for non-payment or illegal gas connections. Exemplary punishment should be given to those staffs that are found guilty of malpractice. It may reduce the rate of unethical practices.

The company certainly should make risk assessments even if any such risks are still not evident. Research programs should be undertaken that can help to identify problems in its operational and control activities. Besides market analysis can also be done. With all these initiatives, the company can certainly perform better and can make predictions about the future performance and market scenarios.

Accuracy of the meter reading should be ensured. Technology can help in this regard. More strict and accurate meter reading and inspections will be helpful in preserving natural gas and preventing the misuses.
49

 Technical mechanisms should be introduced to differentiate the gas intakes from the national gas field and IOC fields. This will help to adopt better and more reasonable pricing policy.

Audit on internal control should be undertaken & should also be included in the annual report of the company. More training facilities for the employees can be provided to keep them updated with the practices which are followed by the energy sectors of the developed countries. This will make them more efficient and better corporate governance can be ensured.

Mobile court should be more active. They should pay more frequent surprise visits to the yard of the customers, detect illegal connections and tempering of meters and impose them exemplary punishment. Besides, they should find out the Titas employees engaged in illegal activities and should be brought under legal action to curb their corruption. Activities of the CBA should be more controlled so that they cannot create undue pressure on the company management for their personal interest. ERP software can be introduced in the company. Use of technology will help the company perform faster and better. It will also help to access real time data and will ensure accuracy of data. As a result, more integration among the regional offices and the head offices will be possible.

50

Conclusion
Power and energy is critical to the socio-economic development of any country. Bangladesh is not well endowed with most sources of energy. It has negligible resources of coal and oil, little hydropower potential and nuclear power potential is beyond its reach. It is evident that gas sector of our country is very crucial if we want to escalate to our desired status of middle-income country that we envisages to achieve within the year 2021; as nearly all of our industries, commercial activities and power generation is dependent on the gas industry. Hence, Titas plays an important role in the socio-economic environment of the country. The financial and corporate strategy of a company is underpinned by effective internal systems (Dejan 2011). The reliability of the internal control system, improved process of risk management, and, above all, efficiency & effectiveness of the controls established must be ensured. There are two terms that come automatically with internal control. They are- internal audit and corporate governance. Internal audit helps to maintain the internal control mechanisms that are already established in the company and ensure that they are effective. On the other hand, the ultimate target of establishing internal control mechanisms is to attain a good corporate governance practice in the company. So we can understand how these three are intertwined.

In this report, internal control system of Titas is described in the light of the international standards of internal control or global practices. The control system has also been evaluated using a conceptual model which showed that control is Titas is satisfactory enough. But still there were some short-comings in the total system for which some recommendations have been made.

As we know natural gas in not a renewable source of energy, it is very important that we put check on any unauthorized use or wastage of this valuable natural resource. Titas, as they deal with this resource, must keep this in their mind and should employ better control in their overall activities as a natural gas distributor. In this regard, internal control system cannot be compromised and there lies its significance.

51

References

ICGN Statement on Global Corporate Governance Principles (Revised 2009) www.icgn.org (accessed: 2.2.2013)

Kimberly A. Galt, Pharm. D., Ph.D. (c ), Qualitative, Quantitative and Mixed Methods Approaches to Research and Inquiry, August 26, 2009.

Committee of Sponsoring Organization (COSO), Internal Control- Integrated Framework 2011. http://www.coso.org/documents/coso_framework_body_v6.pdf (Accessed: 2.2.2013)

Amudo, Engello & Inanga, Eno. L. , Evaluation of Internal Control Systems: A Case Study from Uganda, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 27 (2009) http://www.eurojournals.com/finance.htm (accessed: 2.2.2013)

Internal Control www.RogerCPareview.com (assessed: 5.2.2013)

Ljubisavljevi, Sneana & Jovanovi , Dejan , Empirical Research on the Audit Position of companies in Serbia, ECONOMIC ANNALS, Volume LVI, No. 191 / October December 2011, UDC: 3.33 ISSN: 0013-3264

Unegbu, Angus Okechukwu & Kida, Mohammed Isa, Effectiveness of Internal Audit as Instrument of Improving Public Sector Management, Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 2 (4): 304-309, Scholarlink Research Institute Journals, 2011 (ISSN: 2141-7024) (jetems.scholarlinkresearch.org)

International Standards for the Professional Practice of Internal Auditing ( Standards)

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Mihret, Dessalegn Getie & Yismaw, Aderajew Wondim, Internal audit effectiveness: an Ethiopian Public Sector Case Study, Managerial Auditing Journal, 22 (5). pp. 470-484.
ISSN 0268-6902.

Swinkels, Walter H.A. , Contributions and limits of Internal Auditing to the Internal

Control of the Firm , 7th European IACG Conference Paper W.H.A. Swinkels March 14, 2009 wswinkels@deloitte.nl Zhang, Jane J., Corporate Governance, Internal Control and the Role of Internal Auditors A Survey of Chinese Managers (2009)

Li, Chan & Rupley, Kathleen Hertz, Internal Governance, External Governance, and Internal Control Material Weakness Remediation

Moeller, R. (2009). Brinks Modern Internal Auditing: A Common Body of Knowledge. New Jersey, Canada: John Wiley & Sons.

Soh, D. & Martinov-Bennie, N. (2011). The internal audit function: Perceptions of internal audit roles, effectiveness and evaluation. Managerial Auditing Journal, Vol. 26, No. 7: 605-622, Emerald Group Publishing Limited

http://en.wikipedia.org/wiki/Internal_control (accessed : 4.2.2013)

Babbie, Earl (1998) Survey Research Methods 2nd Edition. Wadsworth Publishing Company

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APPENDIX

54

Table 2: Rating criteria for internal Control

Appendix

Rating criteria for internal control components as defined by the Benchmark Control Components Control Environment
Major independent variables

Criteria for a 1 rating Minor independent variables Organizational structure does not adequately reflect chain of command Segregation of duty is not properly done Human resource policies and procedures not documented & updated Responsibilities are delegated and no follow up action is made to get feedback on results of performance of tasks delegated Does not demonstrates a commitment to integrity & ethical values Management has not specified the objectives with sufficient clarity Management has not identified risks that affect achievement of the objectives. Management does not have a criteria for ascertainment of which risks are most critical. Management has not put in place mechanisms for mitigation of critical operating risks that may arise.

Risk Assessment

55

Control Activities

Information & Communication

Monitoring Activities Information Technology

Key control activities of the projects are not functioning as intended: Transactions are not authorized There is no segregation of duties. Verifications of transactions before making payments are not done Zonal receipts are not recorded accurately on a timely basis Collections from the customers by the authorized banks are not timely transferred to the mother accounts Key accounts records like bank, cashbooks, loans, accounts payables etc are not reconciled on a regular basis. Bank guarantees are not checked for renewal There is no control over access to resources There is no accountability of funds advanced to the employees Management does not review operations Internal auditors are not present and where present there is limitation in scope of their responsibilities by management. Procedures have not been documented/ regularly updated in respective manual for example finance, staff rules and regulations and operations manuals Staffs are not supervised while they carry out their schedule of duties. Key criteria for evaluating performance are not identified, collected and communicated. Reports on Internal audit and Corporate Governance is not incorporated in the Annual Report Employees do not understand their control responsibilities. Complaints and disputes by suppliers are not resolved in a timely manner. Grievances of customers are not properly addressed There are no independent process checks or independent evaluations of controls activities on ongoing basis. No interim financial statements are prepared No IT system to monitor & supervise the zone offices and sales centers across the franchise area. No restriction of personnel in accessing all levels of different modules in computer No integrated computer system exists that encompasses the whole company

56

Table 3: Evaluation Process

Appendix

Control comp.

Benchmark for rating internal control when a problem exists Minor indept. Variables

Assessments of Ratings of internal functioning of internal control components control components Minor indept. Variables 0 1 (a) 0

Major independent variable Control Environment

(a) Organizational structure does not adequately reflect chain of command (b) Segregation of duty is (b) Segregation of duties at not properly done some level of management was found to be unclear which was due to lack of number of personnel in that specific area Human resource policies and procedures not documented & updated (d) Responsibilities are delegated and no follow up action is made to get feedback on results of performance of tasks
57

(b) 1

(c) 0

(d) 0

Major independent variable Risk assessment

Control Activities

delegated (e) Does not demonstrates a (e)Complaint regarding commitment to integrity & unethical practices by the ethical values lower level employees often is heard but which are often outside the purview of the management. (a) Management has not specified the objectives with sufficient clarity (b) Management has not (b)There may be identified risks that affect disagreements between the achievement of the intake metering of the objectives. supplier gas fields of Titas and those of Titas and due to technical shortfall the amount of gas transferred may not be known accurately (c )Management does not (c)Risk assessments are have a criteria for not undertaken ascertainment of which risks are most critical. (d)Management has not put (d) As Titas is the sole in place mechanisms for provider of gas in its mitigation of critical franchise area & it is a operating risks that may govt. company, operational arise. risks are not perceived as threats. (a)Transactions are not authorized (b)There is no segregation of duties. Verifications of transactions before making payments are not done (d)Zonal receipts are not recorded accurately on a timely basis (e)Collections from the customers by the authorized banks are not timely transferred to the mother accounts

(e) 1

(a) 0

(b) 1

(c) 1

(d) 1

(a) 0 (b) 0 (c ) 0

(d)0

(e) 0

58

Information & Communicati on

(f)Key accounts records like bank, cashbooks, loans, accounts payables etc are not reconciled on a regular basis. (g)Bank guarantees are not checked for renewal (h)There is no control over access to resources (i)There is no accountability of funds advanced to the employees (j)Management does not review operations (k)Internal auditors are not present and where present there is limitation in scope of their responsibilities by management. (l)Procedures have not been documented/ regularly updated in respective manual for example finance, staff rules and regulations and operations manuals (m)Staffs are not supervised while they carry out their schedule of duties (a)Key criteria for evaluating performance are not identified, collected and communicated. (b)Reports on Internal audit and Corporate Governance is not incorporated in the Annual Report

(f) 0

(g) 0 (h) 0 (i) 0

(j) 0 (k) 0

(l) 0

(m) 0

(a )0

(b)Though the annual reports provide for a sustainability report it does not provide Internal audit report or any report on Corporate Governance yet which the BSEC has asked for. (c ) 0

(a) 1

(c)Employees do not understand their control responsibilities. (d)Complaints and disputes by suppliers are not
59

(d ) 0

Monitoring Activities

Information Technology (IT)

resolved in a timely manner. (e)Grievances of customers are not properly addressed (a)There are no independent process checks or independent evaluations of controls activities on ongoing basis. (b)No interim financial statements are prepared (a)No IT system to monitor & supervise the zone offices and sales centers across the franchise area (b)No restriction of personnel in accessing all levels of different modules in computer (c )No integrated computer system exists that encompasses the whole company

(e) 0 (a ) 0

(b ) 0 (a) 1

(b ) 0

( c) 1

60

Titas Franchise Area

Appendix

61

62

63