Internal controls are defined by James (2004) as the methods and measures taken by an organization to monitor assets, prevent frauds, minimize errors and verify correctness of financial statements.
Stake holders are the individuals or group who can be affected by organization's actions. (Wikipedia)
1.1: INTRODUCTION TO THE PROBLEM
This research proposal concentrates on improving the standards of internal controls currently in place at Unilever UAE for safeguarding the stake holders' interest. According to Ministry of Commerce UAE (2010) audit of the Unilever UAE revealed different frauds of more than 14 million AED during the year 2009. Further to that managers have been abusing the authority by unauthorised actions, using the organizational property and reputation for the personal gains. Unilever is also facing the public scandal of child labour now a days, child labour is common in Emirate's culture but strictly prohibited by local and international laws. Hence all these elements are not only causing fatal injury to the stake holders' interest but also destructing financial and strategic assets of the organization. Norman (2010), the CEO acknowledged in a news interview that management believes the proceduresÂ involved in internal control systems are inefficient toÂ protect organizational assets and compliance with laws and regulations.
1.2: BACKGROUND TO ORGANIZATION;
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Unilever United Arab Emirates had a turnover of AED.Â 233 million in 2009, and enjoys a leading position in most of its core Home and Personal Care and Foods categories. Unilever owns more than 400 brands as a result of acquisitions however the company focuses on what are called the "billion-dollar brands". The Unilever UAEÂ operates throughÂ 7 regional offices, 4 wholly owned and 6 third party manufacturing sites across United Arab Emirates. Organization is currently employing more than 7400 people.
1.3: RESEARCH PURPOSE;
This research will identify material flaws into the current internal controls system of Unilever. This research will investigate how other global companies like Unilever operates effective internal control systems in Middle East. Hence benchmarking internal control systems will help to provide valuable recommendations that how these internal controls may be improved to safeguard stakeholders' interest. Already many researchers has been working into the area of internal controls however this research is specifically focusing safeguarding the organizational assets through effective internal controls in the culture of United ArabÂ Emirates. This research will add value to the knowledge specifically for the UAE. Talha (2007), UAE is a country where most of the people responsible for internal controls are not those who are trained and qualified for the same. Besides that, successful research will be helpful for the researcher to pursuit his career into Unilever UAE.
1.4: RESEARCH QUESTIONS;Â
During the research the researcher will try to investigate the following questions;
How do large, public listed multinational conglomerates operate effective internal control system to ensure governance and safeguarding of assets?
What are the link between internal control systems, governance and safeguarding of assets?
What is the effect of national culture on the approach to internal controls?
Why did Unilever fail to prevent and detect frauds and lack of compliance with the legal requirements?
What are the effects of improved internal controls on Unilever's financial performance and market position?
1.5: RESEARCH OBJECTIVES;
Establish and evaluate how large multinational conglomerates operate internal check and control system with a view to ensuring governance and securing their assets on behalf of stake holders.
Analyse how internal control system enhances governance and safeguarding of assets.
Analyse and explain effect of national culture on the approach to internal check and control.
Critically evaluate Unilever UAE's failure to prevent and detect the frauds that took place and lack of compliance with legal requirements.
Recommend improved internal control and governance system to Unilever's management.
2: LITERATURE REVIEW;
It is acknowledged by Diana (2008) that previous research on internal controls has most of the time focused primarily in the context of internal and external auditors' work in the United States of America and the United Kingdom thus providing a lack of research conducted to evaluate the contribution of internal controls purely for safeguarding assets and stake holders' interest specifically in the corporate culture of United Arab Emirates.
2.1: LINK BETWEEN INTERNAL CONTROL SYSTEMS AND GOVERNANACE IN MULTINATIONAL CONGLOMERATES
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Stephen et al (1997), According to International accounting standard asset is anything owed by organization that provides economic benefits.Â Lynford (2008)Â defines 'Internal Controls' as the set of procedures to protect organization from loss or misuse of its assets, it also ensures that organizational policies are in consistent with the applicable laws and regulations. According to Matthew (2008) internal controls are an integral part of organizational governance and helps in the detection of frauds and technical errors.
In an article Manmohan et al (2006)Â argues that in multinational conglomerates internal controls and risks are dynamically linked with organization's strategic objectives. According toÂ Suzanne et al (2010)Â any change in the corporate objectives must consider in a corresponding re-evaluation of risks and internal controls.Â Warren et al (2009)Â suggests that in global organizations senior management requires re-evaluation of risks and controls as a standard component of corporate planning process.Â Michael (2007)Â emphasises that internal control is a critical part of corporate governance process. The senior executives have primary responsibility for the governance process and all members of the organization are responsible for internal controls. Mark et al (2007) strongly disagrees with Michael, he believes that only internal auditors should be responsible for checks and controls.
Erich (2007)Â believes that internal controls are directly integrated with all other corporate governance objectives such that these objectives are reinforced by internal control procedures and policies.Â Dent (2002)Â disagrees with Dent and Michael he insists that internal control and corporate governance should be treated as separate issues which are not linked with the other corporate governance objectives.Â Yass (2007)Â elaborates the theory of internal controls and efficiency that describes controls is not always meant to prevent frauds but it also detects human error and increase efficiency. Critical evaluation of the literature discussed in this paragraph will provide foundation for more research to identify the link between internal control systems, governance and safeguarding of assets.
Â 2.2: NATIONAL CULTURE OF UAE & APPROACH TO INTERNAL CONTROLS
Article written by Kristy (2008)Â refers towards a recent research by 'Price Waterhouse Coopers' which indicates shortage of Audit talent in UAE and most of those charged with the responsibility of internal controls don't have sufficient capabilities to face the challenges.Â Laura (2003)Â Â discuss the research published by 'Institute of Internal Controls' Florida USA revealed that supply of internal controls auditors is much less than demand in Asia and every two out of three organizations don't have people who can test and evaluate its controls system. Hollinger Clark 1983, surveyed 10,000 workers discovered a direct correlation between age and theft, Hollinger Clark's research concludes that younger employees are less committed but on the other side bigger corruption usually takes place at higher positions he also argued that corporate frauds takes place due to job dissatisfaction. Mohammed (2004)Â conducted a survey of 12,000 employees working at different levels in the UAE and discoveredÂ Â Â that six out of every ten employees are not satisfied with their jobs. Outlined literature discussed in the paragraph gives reasonable clues that corporate culture of the United Arab Emirates has significant influence over approaches to the internal checks and controls, further research will reveal the actual myth.
Cressey (195O)Â discovered the fraud triangle theory which describes that risk of fraud is higher in the organizations that accommodate three elements of pressure, rationalization and opportunity for fraud in their environment.Â Yan (1997)Â adds that this pressure may be financial or work related and an effective combination of preventive internal controls should be applied for employees not to go under pressure.Â Tumpal (2009)Â states, the 'rationalization' side of fraud triangle consists of feelings like, 'nobody will get hurt', 'I deserve more' or 'they owe me' etc. It is better to apply detective controls to investigate why employees' think so, rather than applying only preventive controls.Â Richard (1996)Â disagree with Tumpal, he insists that detective controls should only be designed to detect errors and irregularities.Â Giovanna et al (2010)Â discovered that inadequate internal controls regarding environment, accounting procedures, access to secret information, performance and operations provide opportunities of fraud to the employees. The research carried will recognize whether existing internal controls are sufficient and appropriate in context of fraud triangle at Unilever UAE. The literature will also be helpful to discover which type of controls are the most effective in the corporate culture of the United Arab Emirates.
2.3: INTERNAL CONTROLS AND RSIK OF FRAUDS:
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Famous auditor Jan (2009)Â agrees that sufficient and appropriate internal controls are defence against fraud and misuse of assets however poor controls do not mean that fraud will certainly take place, it actually does open opportunity for frauds bit wider.Â Douglas (2000)Â describes that it is important to assess the control environment to develop effective internal controls.Â Yan (1997)Â explains that control environment consists of organizational culture, internal policies, organizational structure and management perception in governance. Denis et al (2002)Â argues that culture has direct effect over the control environment.Â Michael (2008)Â emphasises that before implementing controls it is very important to critically identify risks in achieving objectives.Â Spencer (1999)Â discovered that failure to access inherent risks mean organization will develop controls that would not prevent frauds. Relevant controls should be established to minimize specific risks.Â MarcoÂ (2006) suggests that management should ensure whether significant changes into internal and external environment have been incorporated into internal controls system.Â Antonino et al (2010): Failing to maintain an effective system of internal controls can not prevent frauds, which result lacking stakeholders' confidence.Â Kwansagool et al (2009)Â wrote a detailed research paper in the journal of governance and management, concluding that controls that do not appreciate segregation of duties like; making bank deposits, posting them into accounts and performing reconciliation etc, results high risk of frauds.Â Dorothy (1996)Â adds poor physical controls over blank cheques and inventory provides ideal environment for fraud. Related Literature discussed in this paragraph will provide a background to evaluate Unilever's failure to prevent and detect frauds and an insight to improve system of controls and governance.
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3.0 RESEARCH DESIGN:
This part provides proposed design of the research. According to Neil (2010) research design is a set of methods, approaches and strategies that is employed to complete the research.
3.1: RESEARCH METHODOLOGY;
This is a philosophical approach to research through scientific method. According to Delbert (2002) this approach recognises that knowledge based on experience and positive verification is the only authentic knowledge. Scientific method tries to discover the laws of occurring physical and human events. This approach blindly accepts wrongness of deviance and entirely ignores the subjectivity of the deviant by assuming the absolute objectivity whereas it never addresses it. The researcher agrees that true objectivity is impossible and while conducting the proposed research it is important to consider subjective side of the deviant. Hence substantial part of the research will not be completed by following positivism.
It is described by Thomas et al (2006) that interpretivism emphasises the importance of considering peoples' thoughts and ideas to understand the happening of any event. John (2009) adds that interpretivism recognises that knowledge comes from interpretation and meaningful nature of individuals' participation is important for investigation purpose because using only scientific methods are inappropriate. The researcher believes that in this case of Unilever UAE employees' thoughts, ideas, behaviours and actions are very vital to reach some decisive findings further that by only applying scientific tools may not be exhaustive. Hence the researcher will prefer to conduct the most part of his research by following the assumption of interpretivism.
In the Bryan (1992) point of view qualitative research involves analysis of the culture, surrounding environment, behaviours, feelings or process etc. It does not include the analysis of numerical data. This type of research involved field work. The primary aim of this type of research is to complete a detailed description. In the qualitative research the researcher don't has clear idea of what he/she is actually looking for. The researcher himself acts as data collection tool. To investigate the problems outlined in the proposed research, interpretation of events, observing the processes and in-depth interviews are of key importance. Hence the researcher will prefers to follow the qualitative methodology to reveal mystery behind the curtains in case of Unilever UAE.
Quantitative research includes the analysis of numerical data. Mark et al (2009) recognises that this type of research mainly includes systematic investigation of numerical properties and their relationships. Issues that are measurable in numbers are important for this type of research. Quantitative research aims to construct statistical models to reveal the observations of the issues. Quantitative data has been efficient and posses ability to test hypothesis. Since the researcher acknowledges the fact that most of the issues under investigation in the proposed research are difficult to quantify and using the quantitative approach may miss the contextual details of the issues, hence he will be less dependent on quantitative method.
3.2; RESEARCH APPROACH;
3.2.1: INDUCTIVE REASONING APPROACH;
Chris et al (2005) defines inductive research approach as a logical reasoning that draws generalized conclusion by gathering certain set of observations. Inductive reasoning is also called as 'bottom-up' approach as it starts from observations that further defines the patterns and ultimately develop a generalized theory or fact. For the purposed research to be carry out the researcher will be using the inductive reasoning starting by observing different areas of organization and ultimately concluding that what was actually happened credible logic that why it so happened in case of Unilever UAE? Advantage of using this approach is the truths that it establishes are absolute.
3.2.2: DEDUCTIVE REASONING APPROACH;
According to Graham (2006) deductive approach was developed by ancient Greeks. This approach is closely associated with mathematics. This type of research starts from more general to more specific. It relates at-least two general concepts to a specific case. It evaluates deductive arguments. For detective reasoning arguments based on laws, rules and accepted principles are generally used. The research to be carried out will be using less deductive approach and more inductive approach as discussed above.
3.3; RESEARCH METHODS;
3.3.1; Research Strategy and Data Collection;
As discussed above the research will be conducted using the inductive and qualitative approach. For the purpose of data collection the researcher intends to follow the survey strategy. John (2009) agrees that it is a popular and effective strategy in corporate research and most frequently used to answer who, what, where and who questions. Surveys are popular to collect large amount of data in large population with the most economical way. Using this strategy will give control over the research process and when sampling will be used it will generate findings representative of the whole population. The researcher will avoid using the experiment or case study research strategy concerning its disadvantages for this research, appendix 'A' annexed at the end of this proposal contains all the said disadvantages.
The research will be based only on the primary data collected solely for the proposed research. For the purpose to collect the data the researcher personally intends to visit Unilever UAE in February 2011. Kindly refer appendix 'B' for the reasons why researcher do not want to use secondary data. The researcher will incorporate different tools to collect primary data.
As the first tool of data collection the researcher will be conducting in-depth semi structured face to face interviews with eight to ten key senior management personals. The researcher believes that the research to be carried out has complex subject matter and it is very important to obtain detailed information regarding the research problems from high status respondents in the organization. The researcher acknowledges that it will be more time consuming and expensive way to collect the data but he appreciate that nature of the research is inherently sensitive and apart from that successful research will yield a long term benefit to the researcher. Kindly refer appendix 'C' for the advantages of in depth interviews.
The second method for collecting data will be questionnaire survey from the employees working within in the Unilever UAE. According to Delbert (2002) point of view questionnaire containing the open ended questions is one of the most effective qualitative data collection tool. Questionnaire will be filled out in the presence of researcher. Random sampling will be made at tactical level, middle level and senior level employees respectively. The questionnaire will contain such open ended question that will help to understand the controls environment of the Unilever UAE. Kindly refer appendix 'D' for the advantages using questionnaire survey.
Apart from data collection tools discussed above, internal controls and procedure manuals, audit reports, financial statements, and researcher's personal observation during his visit to the Unilever UAE will contribute significant addition to the qualitative data obtained for the proposed research.
3.3.2; ÂDATA ANALYSIS TECHNIQUES AND PROCEDURES;
Since most of the data collected during the research is suppose to be qualitative data, the researcher will prefer to interpret all the data manually. In depth review of literature will give an insight how large multinational conglomerates operate an effective system of internal controls, it will also provide a fair view that in the corporate culture of UAE what is the industry's good practice regarding system of controls. Apart from that international standards of internal controls and internal financial reporting standards will also be helpful to decide a bench marking criteria against which data collect will be evaluated.
'Narrative Analysis' approach will be used to critically evaluate employees' behaviour towards internal checks and controls. 'Content Analysis' technique will also be helpful interpret the raw data. Jakson (2007) states content analysis consists of reading and re-reading the raw data to find out similarities and difference. It is helpful to categories the data. Lan (2008) agrees that content analysis is very helpful to disclose the link between causes and effects. Hence it will be equally useful while analysing the data collected from the Unilever UAE.
Another data analysis technique that will be employed is 'Analytical Induction'. Adil (1989) recognises that analytical induction closely check whether each statement follows logically what went before. It also helps to explain why different people arrive at different conclusions. It will help to identify employees' hidden assumption regarding control environment. Further to that analytical thinking will reveal possible flaws in reasoning, the evidence or the way of making decisions.
The researcher will again review data analysis techniques and procedures once all the data will be collected, according to the nature of the raw data obtained.
3.4; CREADIBILITY, VALIDITY, REALIABILITY AND GENERALISABILITY OF THE PROPOSED RESEARCH;
The research will be carried out at the prevailing issue at Unilever UAE. The research will be based purely on the primary data collected for the purpose. Data will be collected by the researcher himself. Face to face interviews and questionnaire filled in the presence of the researcher will avoid chances of communication error. Interview will be recorded and a detailed track record in the shape of personal notes will be kept right from the beginning. Before publishing the findings of the research, the researcher intends to discuss the same with the Chief Audit Executive of Unilever UAE and will consider his opinion. Being the member of Institute of Internal Controls (IIC) USA, the researcher got access to its research support helpline. Where data observations lead the researcher to assume something, the researcher will not be judgemental immediately until he does not seek an expert opinion from 'Institute of Internal controls' and the management of the organization. The research finding will not only be useful for the Unilever UAE, but it will stand equally helpful for all other global conglomerates operating in the all Asian countries.
The researcher got personal interest in the Unilever UAE, he has been working there as a 'management trainee' in the organization. Researcher's previous academic background is from the accounting and auditing major. He feels very confident while investigating the issue of internal controls, an area of knowledge about whom he got relevant qualifications, experience and training. Formerly being a part of the organization researcher is very familiar with the culture and the operating procedures of the organization. Researcher's brother is working as a middle manager in the same organization that will be providing him full support during the course of the research. Researcher is very confident that if he is able to achieve the research objectives, he will be offered a position in the Unilever UAE as per their recruitment policy.
5.0 ACCESS AND ETHICS
The researcher has already obtained a formal permission from the Unilever UAE. The management of the organization not only granted the permission but they really appreciate the initiative taken and promised to extent full support and access to the data required to complete the research. Researcher got personal and professional references within the organization that will help him to provide useful resources to complete the research.
During the process of data collection, employees will take part in the surveys with their free consent. The participants will have right to decline participation and all the participants' anonymity will be maintained. Researcher acknowledges that he may have access to the confidential data of the organization hence the information will not be disclosed to third party without the formal consent of the management. Any information obtained during the course of research will not be used for personal gains. It will be made sure that any process of the research does not cause injury to the credibility of the organization or its employees. The management will have right to refuse access to any data or information held with them, in such a situation the researcher will try to seek alternative available data to complete the research.
Searching the Relevant Literature
Critical Evaluation of the Literature
Approval of Research Proposal
Data Analysis & Writing up Primary Research Draft
Preparing Final Research Draft
(The area highlighted represents the corresponding dates)