1.1 Introduction
Internal control systems refer to the procedures, policies, and mechanisms implemented within an organization to safeguard assets, enhance operational effectiveness, and ensure compliance with regulatory requirements. They are essential for mitigating risks, particularly in industries like oil and gas, where financial discrepancies and operational inefficiencies can lead to significant losses and damage to reputation (Afolabi & Oladele, 2020). ExxonMobil, as a leading multinational in the oil and gas industry, relies heavily on effective internal control measures to manage its vast and complex operations, ensuring that it maintains high performance standards and minimizes potential risks.
The oil and gas industry is one of the most significant sectors in the global economy, playing a critical role in providing energy and supporting various economic activities worldwide. In Nigeria, the oil and gas industry is particularly influential, contributing a substantial share of the country's Gross Domestic Product (GDP) and foreign exchange earnings (Okoye & Alao, 2019).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
The importance of internal control systems (ICS) in business organizations has been widely recognized since the early 20th century. However, it was not until the mid-20th century, with the emergence of corporate scandals and financial crises, that the focus on the role of internal controls in enhancing organizational performance became more prominent. In the context of the oil and gas industry, the history of internal control systems is closely tied to the sector's increasing complexity, global operations, and the growing need for effective risk management (Siyanbola & Dada, 2021).
Historically, the oil and gas industry has been characterized by complex operations, including exploration, production, refining, and distribution of energy resources. As early as the 1970s, oil companies, particularly multinational corporations such as ExxonMobil, began to realize the need for strong internal controls due to the industry's vulnerability to various risks, including fluctuating commodity prices, regulatory changes, and environmental risks (Ekanem & Olayemi, 2018).
In the 1990s, following a series of high-profile corporate scandals, such as Enron and WorldCom, the importance of strong internal controls was further emphasized. In response to these scandals, the U.S. Congress passed the Sarbanes-Oxley Act in 2002, which mandated stricter internal control standards for publicly traded companies, including those in the oil and gas sector (U.S. Congress, 2002). The Sarbanes-Oxley Act also led to the establishment of more rigorous auditing and compliance requirements for companies, including ExxonMobil.
The evolution of internal control systems in the oil and gas industry continued into the 21st century, with increased focus on risk management and operational efficiency. Companies began to integrate technology into their internal control practices, using automated systems for monitoring and reporting. For example, ExxonMobil introduced enterprise risk management (ERM) systems in the early 2000s to assess and mitigate risks associated with its global operations (Smith & Adams, 2020).
In recent years, the growing emphasis on sustainability and environmental, social, and governance (ESG) factors has further highlighted the importance of internal control systems. Oil companies are now faced with the challenge of implementing controls not only for financial and operational risks but also for environmental and social risks (Olusola & Abiola, 2022). ExxonMobil, as a global leader in the oil and gas sector, has been at the forefront of implementing and refining internal control systems. The company has continuously updated its internal control frameworks to address both industry-specific challenges and global best practices, ensuring that its operations remain efficient and compliant with regulatory standards.
The oil and gas industry is a pivotal sector in the global economy, supplying essential resources for transportation, electricity generation, and industrial production. In Nigeria, the oil and gas sector is the cornerstone of the economy, accounting for approximately 90% of export earnings and a substantial portion of government revenue (Nwankwo & Udo, 2020). Internal control systems encompass a set of policies, procedures, and practices aimed at safeguarding assets, enhancing accuracy in financial reporting, promoting operational efficiency, and ensuring compliance with laws and regulations (COSO, 2013). In industries with complex operations and high financial stakes, such as oil and gas, internal controls play a critical role in mitigating risks associated with financial misstatements, fraud, and operational failures. Effective internal control mechanisms can prevent errors and irregularities, enabling companies to function smoothly and efficiently, even in high-risk environments (Olawale & Ibrahim, 2018).
Over the years, the importance of internal controls in the oil and gas industry has grown due to increasing regulatory scrutiny and the need for transparency. With cases of fraud and mismanagement leading to financial losses and reputational damage, organizations are prioritizing strong internal control systems as a means of achieving sustainable growth and competitive advantage (Adeoye & Onyekachi, 2019). In addition, the dynamic and volatile nature of the oil and gas sector amplifies the importance of internal controls in maintaining organizational stability. Factors such as fluctuating oil prices, geopolitical risks, and environmental concerns create a challenging business environment, necessitating stringent controls to protect assets and ensure financial stability (Smith & Adams, 2020). Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the impact of internal control systems on the performance of oil and gas industry.
1.3 Statement of Problems
Investigation revealed that the oil and gas sector is highly vulnerable to external risks such as fluctuating global oil prices, regulatory changes, and geopolitical instability, which is a constant challenge for maintaining effective internal controls (Ogunleye & Adejumo, 2019). There is also the problem of inadequate training and capacity building for staff on internal control procedures, leading to inconsistent enforcement of policies across the organization (Akinmoladun et al., 2020).
Furthermore, the problem of limited resources, both financial and technological, is a critical constraint that hampers the full implementation of robust internal control systems, which is a key challenge for companies operating in the oil and gas industry (Olowookere & Olusola, 2018). It is against the backdrop that this study seeks to address these problems by evaluating the impact of internal control systems on the performance of oil and gas industry.
1.4 Aim and Objectives of Study
The aim of the study is to examine the impact of internal control systems on the performance of oil and gas industry using Exxonmobil Upstream Nigeria as a case study. In achieving this aim, the following specific objectives were laid out as follows:
- To identify the key components of internal control systems that contribute to improved performance in the oil and gas industry.
- To examine the relationship between internal control systems and organizational performance in ExxonMobil Upstream Nigeria.
- To investigate the challenges faced by ExxonMobil in implementing effective internal control systems.
- To assess the effectiveness of internal control systems in ExxonMobil Upstream Nigeria.
- To evaluate the role of internal control systems in mitigating risks and ensuring compliance with regulatory standards in the oil and gas sector
1.5 Research Questions
The research study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- How effective are the internal control systems implemented by ExxonMobil Upstream Nigeria in achieving operational efficiency and preventing fraud or errors?
- What is the relationship between internal control systems and the financial performance of ExxonMobil Upstream Nigeria?
- Which components of internal control systems have the most significant impact on the performance of ExxonMobil Upstream Nigeria?
- What challenges does ExxonMobil Upstream Nigeria face in implementing and maintaining effective internal control systems?
- To what extent do internal control systems in ExxonMobil Upstream Nigeria contribute to risk management and regulatory compliance in the oil and gas industry?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between the internal control systems and the performance of ExxonMobil Upstream Nigeria.
- H1: There is a significant relationship between the internal control systems and the performance of ExxonMobil Upstream Nigeria.
Hypothesis Two
- H0: The implementation of effective internal control systems in ExxonMobil Upstream Nigeria does not significantly improve organizational performance.
- H1: The implementation of effective internal control systems in ExxonMobil Upstream Nigeria significantly improves organizational performance.
1.7 Significance of Study
The findings will inform industry leaders, policy makers, and corporate managers about best practices in designing and implementing internal control systems, which will help improve decision-making processes and organizational sustainability.
Furthermore, the study will highlight the role of internal controls in ensuring regulatory compliance and mitigating the risks that are prevalent in the oil and gas sector, such as fluctuating oil prices, environmental challenges, and legal issues.
Ultimately, the study will contribute to the body of knowledge on corporate governance, particularly within the oil and gas sector, and may serve as a reference for future research and policy development in corporate control systems.
1.8 Scope of Study
The scope of the research is focused on the impact of internal control systems on the performance of oil and gas industry using Exxonmobil Upstream Nigeria as a case study.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
- Delays in Response from Respondents: Many individuals within the company were unable to provide timely responses due to busy schedules and competing priorities. This delay in feedback limited the ability to conduct interviews and gather firsthand insights, which impacted the richness of the data collected.
1.10 Definition of Terms
Internal Control Systems:
Internal control systems refer to the processes, policies, and procedures implemented by an organization to ensure the integrity of financial reporting, compliance with laws and regulations, operational efficiency, and the prevention of fraud or errors (COSO, 2013).
Performance:
Performance, in the context of this study, refers to the effectiveness and efficiency of ExxonMobil Upstream Nigeria in achieving its organizational goals, particularly in terms of profitability, operational efficiency, and risk management. Performance is typically measured through financial indicators such as return on assets (ROA), return on equity (ROE), and overall productivity (Kaplan & Norton, 1992).
Oil and Gas Industry:
The oil and gas industry encompasses the processes involved in the exploration, extraction, refining, and distribution of oil and natural gas. It is one of the largest and most critical sectors in the global economy, heavily regulated and impacted by factors such as environmental concerns, political instability, and fluctuating commodity prices (Yergin, 2008).
…
