Risk Management And Financial Performance Accounting Essay

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In recent times, the issue of corporate scandals and lack of compliance to financial standards couples with the growing demand for high - quality financial reporting around the world have become matters of social and business concern. An attempt to meet such high demands and also to prevent the misconducts, the regulators more especially management must put in place mechanisms that will help improve the quality of financial reporting, compliance to regulations and timely delivery of reliable financial statements and prevent possible corporate scandals. Internal control system an integral component to corporate governance and risk management is one of the key factors that have been identified.

Internal control systems are set of policies and measures adopted by an entity to ensure that the entity's daily transactions are processed in the most appropriate manner so as to avoid waste or misuse of the entity's resources, pilfering and accurate and reliable presentation of financial statements. In effect internal controls can be seen as processes designed and effected by those responsible for governance, management and other personnel to provide a reasonable assurance about the attainment of set objectives with regard to; reliability of the financial reporting, effectiveness and efficiency of operations and strictly complying with applicable laws and regulations as stated by Committee of Sponsoring Organizations of the Treadway Commission (COSO in 1992). It is however worth stating that, internal control system itself only provides reasonable but not full assurance to management and the other various stakeholders that, the entity's goals can be attained. Hayes et al stated in their studies that the likelihood of entity's achievement is affected by the limitations that are inherent in all systems of internal control such as flexibility of managers to override the board's decision due to agency problem, human errors and lack of the needed resources for full implementation of control system. Again control system itself is a process or a means to an end and not an end in itself and hence is only geared towards attainment of set goals in one or more different ways but in overlapping categories. That is the internal control system addresses different needs and allow a direct focus in meeting those separate needs as they surface in the course of carrying out and implementing the set policies and regulations.

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Though internal control system itself is not entirely an end to companies attainment to its set goals at the end of a particular period, its absence in an organization makes that entity to be more vulnerable to possible financial risks like improper recording and posting of financial transactions, misappropriation of funds, increase in unauthorized transactions and bankruptcy, which all affect the financial performance of an entity. In other to ensure enhancement in entity's performance, attainment of desired goals and compliance with laws and regulations, there is the need for internal control mechanisms to be put in place.

1.1.1 Problem Statement

The growth and survival of companies in recent times largely depend on how management effectively and efficiently manages the financial resources entrusted under their care towards the attainment of the set goals of the company. COSO's framework therefore concluded that objective setting is regarded as a precondition to internal control because it helps managers in identifying risks of the company. However the effectiveness of the internal control is measured by how the set goals of the company are attained and how effectively and efficiently the risk identified are controlled.

Internal controls are installed to ensure that processes operate as designed and that risk treatments in risk management are successfully implemented. Controls itself exists to keep performance as well as state of affairs within the expected. In order to enhance the effectiveness of internal control activities in Ghana, the Central Bank and the republic have put in place various legislation and among them include 1992 Fourth Republican constitution, the Financial Administration Act (Act 654), the Criminal Code of 1960 (Act 29), the Public Procurement Act (Act 663) and finally the

Internal Audit Agency Act (Act 658).

It is worth noting that internal control itself only provides a reasonable assurance and not absolute assurance to managers that the set goals will be attained at the end of the period. This is due to the fact that people who operate the system might breakdown, occurrence of human errors and improper collusion among people who are supposed to act independently, all preventing the internal control system to achieved the set goals.

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The Ghana Stock Exchange market also in attempt to make the internal control system works put measures in place to ensure that its listed members published a timely and reliable audited annual financial statement at the end of its financial period. And this give much confident to investors to invest more in most of its listed members thereby increase the capital base of the individual company and the stock exchange in the long run

Despite the exchange's improvement in more than twenty years of operation, it still have the following problems; (1) information lag thus a situation where a company might release its annual statement but nothing will happen until three or four months by which time things would have changed, (2) increasing determination of prices by minority momentum investors (3) few listed companies on the market and (4) the exchange failure to enact law that will compile its listed company to disclose their internal control mechanisms in their annual financial statement. The study therefore seek to examine the poor financial performance of companies listed in GSE in respect to internal controls which the exchange have not mandate the listed companies to include in their annual financial report

1.2 Purpose and Significance of the study

The main purpose of this study is to establish the influence of internal control system and financial performance of listed companies in Ghana Stock Exchange market. The study on the other hand may seek to:

Examine whether listed firms in Ghana stock exchange market report on their internal controls in their annual financial statement.

Study how control environment and risk management affect the company performance in the stock exchange

Establish the relation between the internal control and financial performance of listed companies in Ghana.

The study when completed will have the following significance:

It will help the players in the Ghana stock exchange market to establish the possible effect of internal control on companies performance

It will also contribute to the wider range of research questions regarding influence of internal control on firm's performance in a non- internal control environment

It will also offer the stock exchange a mandatory inclusion of internal control disclosure in their Act under the disclosure policy.

1.3 Research Contents

The study would be organized under five chapters and each chapter is develop to help the research accomplished its aim. It would however commence with title page that includes cover page, Signature page and Authorization page, abstract, list of tables. Chapter one will open the research by highlighting on the background and statement of the problem that necessitate the study, contribution as well of the significance of the study. Chapter will review the literature for the whole study. Chapter three will sort to develop the hypotheses of the study that will be resolved in the later chapter.

The data collected from the exchange market will be presented and analyzed in chapter four. Finally the last chapter will conclude the study with the limitations of the study and possible future researches.

1.4 Contributions

The financial crisis that hit the world financial market, open another door for business research around the globe into finding ways and means of establishing a strong financial system. The earlier researchers' contribution was gear towards establishing an effective internal control in business organizations as the most effective measure of stabilizing the financial systems. It was however seen that weak internal control system give rise to frauds, misrepresentation of financial statements, bankruptcy hence financial crisis. Most of the emerging researches also contribute on financial performance of listed companies more especially in a regulatory environment where companies are compiled by law to make a full disclosure of their internal control system in their annual financial statement but little work have been done in developing country with a non-regulatory environment.

The study will therefore seek to establish the relationship between internal control system and firm financial performance as measured by reporting, liquidity and profit margin in a non-regulatory internal control environment like Ghanaian Stock exchange market. This helps to add to the few studies that have been conducted on the existence of internal controls in a non-regulatory control environment.

3 HYPOTHESES DEVELOPMENT

3.1 Reporting

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In an enforced business setting, managements are required to report on their internal control at the end of their financial year. This is because the investors do value the cost they incur in monitoring management when pricing their claims as supported by researched conducted by Jensen and Meckling 1976. Therefore the motivational drives for management to report on their internal control are higher when the other monitoring controls are weaker and hence the overall agency problem is higher. (Leftwich et al., 1981; Eng and Mak, 2003; Gul and Leung, 2004). On account of the above, managements now have incentives to disclose information on their internal control so as to lower monitoring costs of investors and at the same time to inform them about the effectiveness of the system.

Though corporate governance best practice requires a full disclosure of firms' internal control, it does not detail what management should disclose making it very flexible for most managers to use their own discretion in deciding on the extent and the contents of their internal control in their annual report. This lead the study to the following hypothesis:

3.2 Control Environment and Financial Performance

According to the studies of Whittington and Pany (2001), control environment as identify by COSO, set tone for the organization by influencing the control consciousness of people and hence it serve as a foundation for all other components of internal control. The findings of Goodwin-Stewart & Kent (2006), and Sarens & De Beelde (2006) all advocate for management (control environment) as the cornerstone for an effective internal control system. Sarens & De Beelde in particular also emphasizes the "tone at the top, the level of risk and control awareness" as critical to the success of an internal control system.

In other related studies control environment factors are identified. Dezoort et al., 2002; Spira, 2002, identify the audit committee and overall board of directors as some key component of control environment because of their significant influence on the entity's performance. This was also supported by Raghunandan et al., 2001; Sarens et al., 2009; Scarborough et al., 1998 in their studies which state that active audit committee could consider the internal audit function as a necessary source of information to execute its monitoring responsibilities that is to say an effective audit committee institute in a firm may push for better staffed internal audit functions. It is however clear that strong and effective installed control environment determines firm's survival hence influences its performance. This therefore set our first hypothesis:

H1 = there is a significant relationship between the control environment factors, as measure of internal control and company performance in Ghana stock exchange market.

3.3. Risk Management and Financial Performance

In an attempt by managers to keep their business in operation, there has been anew turn to ensure that potential treats are timely determine and possible action taken to prevent it from occurring or reducing its impact on the performance of the business. Stoddard, J., 2004 concluded his study by stating that risk management is an overwhelming task for every organization such that businesses that implement effective risk management become successful while those that do not practice this activity proved to be unsuccessful. With this assertion we can therefore say risk management is an essential component that affects firm's financial performance. This assertion leads to the development of the second hypothesis that:

H2 = there is a significant relationship between the risk management and company performance in Ghana stock exchange market.

3.4. Internal control and financial performance

The ultimate aim of internal control system is to safeguard the interest of investors as corporate governance mechanism (Becht, Bolton, and Roell, 2005). This assumption give rise to what internal control must constitute. COSO (1992) clearly outline the key component of an effective internal control to be sound control environment; sound risk assessment process; sound operational control activities; effective information and communication system and finally; effective monitoring and evaluation system.

Another reason for sound internal control mechanisms installation in an organization lies in agency theory and risk management. According to Jensen and Meckling (1976) the demand for internal control is mainly derives from occurrence of agency costs. It therefore clear that internal control has an influencing effect on the performance of a firm.

With regard to the mentioned matters about the research problem, significance and the related studies in the literature and the theoretical basis, there are possible relationship between the internal control and company performance. From the above the remaining hypotheses are set as follows:

H3 = there is a significant relationship between the monitoring and the company performance

H4 = there is a positive relationship between internal controls and company performance.

4 EMPIRICAL ANALYSIS

4.1 Sample Selection

The data for the study was obtained from audited financial statements of thirty listed companies on the stock exchange market based on the annual report available between 2000 and 2010. The researcher therefore used purposive sampling technique to select the sample size. Purpose sampling technique was used because the study was targeting companies who have been listed in the Ghana stock exchange for at least ten years since its establishment. And more also this technique ensures that relevant people with useful information for a study are only captured and studied. A total of thirty companies from across all the industries were finally used as sample for the study.

Nine different internal control indexes were examined and place under four different internal control factors recommended by COSO.

4.2 Data Management

The data collected from the sample size was fed into Statistical Package for Social Scientist for easy analysis and interpretation of results. The relationship that exists between the internal control and financial performance of the firms was assessed using correlation. Multiple regressions and ordinary least square (OLS) were also used in the estimation and interpretation of the data.

4.3 Regression

The study adopted the economic model that was in line with most of the studies conducted in the same field and it is stated as:

Y = β0 + βFit + eit

Where Y is the dependent variables used in the study, β0 is constant and β0 is the coefficient of the explanatory variable whereas the eit is the error term. From the above the below equation was evolve for the study.

Performance = β0 + β1CONTENV + β2RISKMGT + β3MONT. + β4CODE + eit

The idea was to determine now the internal control measured by the independent variable have effect on the company's performance.

4.4 Descriptive Statistics

Tables 1 and 2 below show the variables and their descriptions as used in the study

Table 1a: Dependent variable description

Variable

Measurement

REP= Reporting

Reporting variable is set to 1 if firm discloses its internal control in their

LIQ = Liquidity i.e Current Ratio

Current Assets

Current Liabilities

PM = Profit Margin

Net Profit after tax

Turnover

Table 1b: Independent variable description

Variable

Measurements

Control environment

Control environment variable set to 1 if reported in the annual financial statement, 0 otherwise.

Risk management

If the company reports on the risk management activities, one (1) and zero for otherwise

Monitoring

Monitoring variable also set to 2 if there is report on external independent auditor and as well report on the duties of internal audit committee and 0 if otherwise.

International code

Reference to any international internal control code gives the firm one(1) and zero if not

The table 2 below shows the descriptive statistics of all the variables used in this study

Table 2: Descriptive Statistics

REP

LIQ

PM

CONENV

RISKMGT

MONT

CODE

Mean

0.4692

1.4106

0.0469

2.9619

0.5191

1.3402

0.1114

Std. Dev

0.0500

1.1458

2.3371

1.1863

0.5004

0.4745

0.3151

Variance

0.2498

1.3128

5.46224

1.4074

0.2504

0.2251

0.0993

Skewness

0.1234

5.2551

-8.2150

-0.6038

-0.0763

0.6747

2.4696

Kurtosis

1.0152

42.827

104.872

1.7732

1.0058

1.4552

7.0991

Range

1

12.7945

39.76

3

1

1

1

Minimum

0

0.0794

-29.2

1

0

1

0

Maximum

1

12.8739

10.56

4

1

2

1

N Valid

341

341

341

341

341

341

341

Missing

0

0

0

0

0

0

0

The mean of REP of the total sampled firms is about 46%, that of LIQ is 1: 1.4 and the mean of PM is 4.7%. The result clearly shown that on average, out of the total firms listed on the exchange market, the number that report or disclosed their internal control mechanism on their annual financial statement is closed to half of the total population in the market thus 46% of 100%. And that those who disclosed their internal control mechanisms are able to meet their short term financial obligation as and when it falls due hence have their current ratio to be 1:1.4. The average periodic profit earned over the ten years was also GH 4.7.

The result above also shows that out of the four (4) elements measured under the control environment factor (management responsibility, internal audit committee, ethical values and assignment of duties and organizational structure), firms that report their internal control mechanisms, on average also have three out of the four factors which make the study to conclude that the listed firms in the exchange market have control system in place which accounted for their financial performance as seen above. From the above analysis the study conclude that listed firms in Ghana stock exchange market have some level of internal control mechanism installed in their company only that most don't see the need to report them on their financial statement this supported the study undertaken by Joseph at el., 2012 that attested on the existence of internal control system of listed companies in the Ghana stock exchange only that there is more room for improvement in the effectiveness of the internal control system especially in the areas of control activities and monitoring. This makes the study to agree with earlier studies that listed firms in Ghana stock exchange reports on internal controls in their annual financial statement.

The study also identified two (2) monitoring factors namely; reports of existence of internal control by an external independent auditor and implementation of recommendation by auditors in the next year's annual report. The result shown that about 1.3 out of the 2 factors examined was put in place by those who report their internal control system. Again almost 52% of the sample size population has put some measures in place to at least manage the financial risk that might occur in the course of their daily operations. These attest to the fact that most of the listed firms understood the implications of risk on financial performance and hence are ready to fight it. It is rather unfortunate that out of the total firms that have been sampled, only 11% thus three out of thirty listed firms report on their internal control mechanisms in their annual reports with reference to an international internal control code. Though the remaining 35% out of 46% do report on their internal control mechanisms, they do so based on what their management has designed without making any reference to any of the international code standards like reports of COSO, Turnbull, and SOX.

4.3 Regression Analysis

The tables 3a, 3b and 3c below present the correlations among all the variables used in the study. From table 3a using the Pearson correlation, REP is positively correlated with the firm's control environment factors and it is significant (sig 0.0000). Similar results appeared for risk management, monitoring and reference to international code and are all significant. However control environment and risk management have relatively stronger correlation with reporting variable among other independent variables as they have about 52% and 51% respectively and with monitoring factor having the lowest correlation with the reporting variable.

The positive correlation that exist between the dependent variable and the independent variables indicate that firms disclosure policy in annual report will increase when there is adequate internal control mechanism put in place by that firm.

Table 3a: Correlations (Pearson) - REP as firm performance indicator AT significance level of 5%

REP

CONENV

RISKMGT

MONT

CODE

REP

1.0000

0.5214

0.5051

0.1311

0.3767

CONENV

0.5214

1.0000

0.4298

0.1537

0.2553

RISKMGT

0.5051

0.4298

1.0000

0.0841

0.3036

MONT

0.1311

0.1537

0.0841

1.0000

0.1981

CODE

0.3767

0.2553

0.3036

0.1981

1.0000

Sig (1-tailed) REP

-

0.0000

0.0000

0.0154

0.0000

CONENV

0.0000

-

0.0000

0.0044

0.0000

RISKMGT

0.0000

0.0000

-

0.1211

0.0000

MONT

0.0154

0.0044

0.1211

-

0.0002

CODE

0.0000

0.0000

0.0000

0.0002

-

Obs.

341

341

341

341

341

Table 3b: Correlations (Pearson) - LIQ as firm performance indicator AT significance level of 5%

LIQ

CONENV

RISKMGT

MONT

CODE

LIQ

1.0000

0.0837

-0.1130

-0.0479

-0.0888

CONENV

0.0837

1.0000

0.4298

0.1537

0.2553

RISKMGT

-0.1130

0.4298

1.0000

0.0841

0.3036

MONT

-0.0479

0.1537

0.0841

1.0000

0.1981

CODE

-0.0888

0.2553

0.3036

0.1981

1.0000

Sig (1-tailed) LIQ

-

0.1229

0.0371

0.3780

0.1017

CONENV

0.1229

-

0.0000

0.0044

0.0000

RISKMGT

0.0371

0.0000

-

0.1211

0.0000

MONT

0.3780

0.0044

0.1211

-

0.0002

CODE

0.1017

0.0000

0.0000

0.0002

-

Obs.

341

341

341

341

341

Table 3b indicates that though LIQ is positively correlated with control environment, it is not statistically significant (sig 0.1229). However LIQ is negatively correlated with the other three internal control factors but only risk management is significant (sig 0.0371). Though the other two variables are not statistically significant, their negative correlation shows that the absence of internal control mechanism in a firm makes that firm financially vulnerable in meeting its short term financial obligations.

Table 3c: Correlations (Pearson) - PM as firm performance indicator AT significance level of 5%

PM

CONENV

RISKMGT

MONT

CODE

PM

1.0000

0.0155

-0.1508

-0.1248

0.0133

CONENV

0.0155

1.0000

0.4298

0.1537

0.2553

RISKMGT

-0.1508

0.4298

1.0000

0.0841

0.3036

MONT

-0.1248

0.1537

0.0841

1.0000

0.1981

CODE

0.0133

0.2553

0.3036

0.1981

1.0000

Sig (1-tailed) PM

-

0.7756

0.0053

0.0211

0.8069

CONENV

0.7756

-

0.0000

0.0044

0.0000

RISKMGT

0.0053

0.0000

-

0.1211

0.0000

MONT

0.0211

0.0044

0.1211

-

0.0002

CODE

0.8069

0.0000

0.0000

0.0002

-

Obs.

341

341

341

341

341

Table 3c also shows that PM which is the last financial performance indicator of this study is positively correlated with control environment and reference to international code variables but not statistically significant (sig 0.7756 and 0.8069 respectively). It however shows that the profit margin of the firm can only increases when those two factors are installed in a firm. On the other hand risk management and monitoring variables are negatively correlated with firm's profit margin and are all significant (sig 0.0053 and 0.0211 respectively). This negative relationship make the study to agree with the earlier study on the need for listed firms on Ghana stock exchange to do more work on their risk management and monitoring activities so as to enhance their financial performance in the long run.

Table 4a: ANOVA - REP as dependent variable

MODEL

SUM OF SQ

DF

MEAN SQ

F

SIG

1 Regression

37.407

6

6.234

43.82

0.000

Residual

47.520

334

.1423

Total

84.927

340

.2498

Predictors: (Constant), conenv, riskmgt, mont, code

Dependent variable: REP

Table 4b: ANOVA - LIQ as dependent variable

MODEL

SUM OF SQ

DF

MEAN SQ

F

SIG

1 Regression

19.876

6

3.313

2.59

0.018

Residual

426.475

334

1.277

Total

446.351

340

1.313

Predictors: (Constant), conenv, riskmgt, mont, code

Dependent variable: LIQ

Table 4c: ANOVA - PM as dependent variable

MODEL

SUM OF SQ

DF

MEAN SQ

F

SIG

1 Regression

113.917

6

18.986

3.64

0.002

Residual

1743.217

334

5.219

Total

1857.137

340

5.462

Predictors: (Constant), conenv, riskmgt, mont, code

Dependent variable: PM

Tables 4a, 4b and 4c show the analysis of variance (ANOVA) of the variables. With F- values of 43.82 (sig 0.000), 2.59 (0.018) and 3.64 (0.002) for REP, LIQ and PM as financial performance indicators of the study respectively, it clearly shows that there is a strong relationship between the dependent variables (REP, LIQ and PM) and the four independent variables (control environment, risk management, monitoring and reference to international internal control code) at 1%, 5% and 10% statistical significant levels.

Table 5: Coefficient estimates Dependent Variables

Independent Variables

Dependent Variables

REP

LIQ

PM

Conenv

.144

[0.020]*

(0.000)

.174

[0.139]*

(0.003)

.210

[0.118]***

(0.075)

Riskmgt

.297

[.047]*

(0.000)

-0.375

[0.139]*

(0.007)

-0.973

[0.282]*

(0.001)

Mont

.0155

[.046]

(0.733)

-0.113

[0.132]

(0.393)

-0.684

[0.269]**

(0.011)

Code

.3113

[.072]*

(0.000)

-0.276

[0.208]

(0.187)

0.570

[0.424]

(0.180)

Constant

-.166

1.271

0.782

R2

0.4041

0.0426

0.0514

Adjusted R2

0.3970

0.0312

0.0401

F - Statistics (4, 336)

56.95

3.74

4.55

P > F

0.0000

0.0055

0.0014

No of observations

341

341

341

St error are shown in the form [ ], while the p - values are in the form { }

* , **, *** indicate statistical significance at 1%, 5% and 10% respectively.

Table 5 shows the results of the coefficient estimates. The control environment has a coefficient of 0.144. This indicates a positive relationship between it and REP and is statistically significant at 1%, 5% and 10% levels. Similar result is shown for risk management and code. However monitoring variable shows a positive relationship between the REP but is not statistically significant (sig 0.733)

The table further reveals that both control environment and risk management are statistically significant (sig. 0.003 and 0.007 respectively) but control environment is positively related to LIQ while the risk management is negatively related to LIQ. Though monitoring and reference to international code is not significant, they have negative relationship with the LIQ. Again it can be seen clearly that control environment is positively related to PM and is significant (sig 0.075), whiles risk management and monitoring variables are negatively related to PM and are also significant (sig 0.001 and 0.011 respectively).

By analyzing, the descriptive tables and the table 5 above it is clear that the control environment has a positive relationship with the three performance indicators and is significant with all the performance indicators used in the study at 1%, 5% and 10% levels respectively. The result above seem to attest to Whittington and Pany's findings that control environment set tone of the organization even in a non-regulatory internal control environment. DeZoort et all., 2002 defined in his work that control environment which is reflected by the audit committee aims at " protecting the owners' interests by monitoring management's actions, in terms of financial reporting, risk management and internal control". Hence owners' interests can only be protected through accountability and accurate reporting of financial statement. It is therefore clear that control environment is highly related to financial performance and hence our hypothesis one (H1), there is a significant relationship between the control environment and company financial performance on Ghana stock exchange market is accepted.

From the risk management perspective, though it is seen as significant in all the three performance indicators it is only positively related to reporting But the case is different for liquidity and profit margin as it negatively relate to and at a significant level. The negative relationship with liquidity also confirm that when a firms' risk management system is less effective, it increases the current ratio of that firm much higher that it gives an impression that most of the firm's financial resources are idle and could negatively affects the financial performance of that firm. The two implications thereby attest to most of the studies carried out that risk management has positive effects on the financial development of firms (Abdulazzi et al., 2012).

Though the relationship between risk management and profit margin is negatively related, it only attest to the fact that most listed companies in Ghana stock exchange do not report in their annual financial statement their risk management activities due to the stiff competition they faced in the market even though their management might use their experience or traditional method in dealing with most of the risk the business might face. On account of risk management and financial performance, the second hypothesis (H2) there is a relationship between risk management and company performance on Ghana stock exchange market is accepted in the case of reporting and liquidity but rejected in the case of profitability.

COSO's report on monitoring guidance suggests that an effective monitoring system put in place by a company may help improved the internal control system which in turns increases the likelihood of the organization in achieved its set objectives hence increases its financial performance. But our statistically analysis does not support this assertion even though the reporting and liquidity level seems to attest to COSO's report, but they are all not significant (sig 0.733 and 0.393 respectively). Again the profit margin which is significant at 0.011 has a negative relationship with the monitoring which does not support the assertion of COSO that effective monitoring installed seeks to improve financial performance of a firm. And hence most listed firms on the Ghana stock exchange market do not monitor effectively their internal control mechanisms that they have installed in their company hence Our third hypothesis however, H3 = there is a significant relationship between the monitoring and the company performance is rejected.

But this confirm to the study conducted by Joseph at el., 2012 that reveals the weakness in monitoring system put in place by the listed firms in Ghana stock exchange market. On account of reference to the internal code, it is clear that firms that structured their internal control system based on international standard perform financially well than those that do not. The statistically analysis shows a positive relationship between reporting and reference to international code and is significant (sig 0.000) indicating that firms financial performance increases when they employed international internal control code. Though similar interpretation can be deduced from liquidity and profit margin, they are not statistically significant in this study. Hence internal control mechanisms affects financial performance of listed firms in Ghana stock exchange market can be accepted.

5.4 Relationship between Internal Control and Financial Performance

This section answers the last hypothesis and the main objective of the study. The relationship between the internal controls and financial performance of listed companies in the Ghanaian stock exchange market was examined using control environment, risk management, monitoring and reference to international code as indicators of internal control whilst reporting, liquidity and profit margin were common measures of financial performance.

Table 6 Pearson's Correlation analysis at 0.05 significant level.

The correlation table presents the relationship between internal controls measured by control environment, risk management, monitoring and reference to international code as against measures of financial performance. The results show that control environment that set the tone for every organization relates positively to financial performance. However the remaining indicators; risk management, monitoring and code relate positively to reporting but negatively to liquidity and profit margin. This can be attributed to the less factors examined under risk management and monitoring as a result of the information available.

The result in general terms shows that there is a relationship between internal control and firms' financial performance and hence strong internal control must be installed in all the listed companies to enhance performance.

5 CONCLUSIONS AND FUTURE RESEARCH

5.1 Conclusion

There is no doubt that several reaches have been conducted and there are still on - going studies on the examination of the relationship between firms' financial performance and internal control mechanisms in organizations but the results of these studies are mixed.

This study specifically examines the relationship that exist between firm performance, using three financial indicators (REP, LIQ and PM) and four internal control mechanisms (control environment, risk management, monitoring and reference to international code). Sample size of thirty (30) listed firms on Ghana Stock exchange between 2000 and 2010 was used. The study employs multiple regressions and the method of estimation was OLS. However, the study reveals the following outcomes:

There is a positive and significant relationship between control environment (an internal control mechanism) and all the three financial indicators (REP, LIQ and PM) used in the study.

There is also a significant relation between risk management and the three financial indicators only that it relates positively to only reporting whiles it relate negatively to both LIQ and PM

Monitoring factor is negatively related to PM and is statistically significant too but it has no significant relationship with REP and PM

There is positive and significant relationship between code and reporting but it has no statistically significant relationship with LIQ and PM.

Listed firms on Ghana stock exchange markets have their own internal control mechanisms installed in place and hence choses to report on it or not.

5.2 Limitations

As a result of time and resources constraints, it was impossible for the researcher to employed primary data collection techniques where welled worded questionnaires will be developed and administered as well as interviews conducted to the top level management of all the listed companies on the exchange market to ascertain the existence of the internal control mechanisms in their respective outfits. Hence the researcher belies that some companies might have the system in place working more perfectly but failed to report it in their annual statement.

More also though companies in Ghana are not mandated to give annual report on the effectiveness of their internal control system, it is possible that those companies who tries reporting it might not also report appropriately the result of their monitoring which might also affect the outcome of this study.

Finally, people might not read this work hence might not get the benefits of this study. However, the intention of the researcher will be to step out a little higher with this topic through writing of papers and possibly doing presentation in conferences in the near future.

5.3 Future Research

More research should be conducted into the risk management activities and monitoring of internal control system of the listed companies in the stock exchange market and relate it to how it affects their performance. And also future researches should increase the sample size to even study the small and medium scales firms in Ghana. This is because these categories of firms account for close to 75% of the total number of firms in the country.

Again future studies in the same area efforts should be put in place to increase the internal control mechanisms variables recommended by the international code like COSO so as to make the outcome of the study to be more robust.

Acknowledgements

First of all, l will like to that this opportunity to thank all people who made a contribution in my academic life up to this level.

I would like to express my sincere heartfelt gratitude to my supervisor, Prof Yang QingXiang, for her support and encouragement throughout the writing of this thesis. Prof Yang, you indeed restored hope back in me at the time l felt hopeless; a can do spirit that lead me through to the end. Yes no amount of words can express my sincere gratitude for your endless moral and academic support during my research period. May you find favour and luck in all your future endeavors.

I am also greatly indebted to all the lecturers (professors) of school of management, the entire staff and the 2010/2012 academic year international students for making my two years studying in Wuhan worth living.

I take this opportunity also to thank my entire nuclear family back home in Ghana for their care, love and encouragement shown me during my two years of study in China. I am particularly indebted to my Dad; Jacob Kwesi Agboado and my loving sisters Belinda and Lucky for their sound financial support for my stay here in Wuhan. May the good Lord richly reward you in multiple folds.

Last but not least, my warmest regards and blessings go to HUST Bible Study Group members for your prayers and positive contributions made to my life. God bless you all.