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Proceeding - Kuala Lumpur International Business, Economics and Law Conference Vol. 1.

November 29 - 30, 2014. Hotel Putra, Kuala Lumpur, Malaysia. ISBN 978-967-11350-4-4

154

DEVELOPMENT DESIGN OF INTERNAL CONTROL FOR COOPERATIVE ENTITY

Drs.Kusmuriyanto, M.Si

Economic Faculty

Semarang State University, Semarang, Indonesia

Email: [email protected]

Lyna Latifah, S.Pd, M.Si

Economic Faculty



Indah Anisykurlillah, S.E, M.Si, Ak

Economic Faculty



Nurdian Susilowati, S.Pd, M.Pd

Economic Faculty



ABSTRACT

Cooperatives entity play important role in Indonesian sector of economy. As a foundation of national economic,

cooperatives entity should attaining continuous quality improvement into strong, healthy, independent and

competitive to face global economic development that very dynamic and challenging. Internal control that fit with

cooperative entity is needed. The study objectives is to design quality improvement specially Internal Control for

Cooperatives entity . Research and Development method employed in this research. The study provides case studies

of the organizational financial management practices of 10 cooperative entities reform. The observed practices are

analyzed and interpreted within internal control activities. Accordingly, we recommended (a) the pattern of new

member acceptance by a selective orientation of potential candidates for productive enterprises, (b) transparency rules

and operational procedures both savings and loans as well as ongoing reporting with effective monitoring,(c) standard

operational procedures and standard operational management.

Keyword: design, internal control, cooperatives

INTRODUCTION

Cooperative by ICA statement is an autonomous association of people united voluntarily to fulfill their common

economic, social, and cultural needs and aspirations through jointly-owned and democratically-controlled enterprises

(Berhane:2013). Cooperative plays an extremely important role in the economic and social development in Indonesia.

The major benefit of cooperatives for a region or a country is at economic part since it provides the job opportunity to

support the small and medium enterprises. Moreover, cooperatives can give a significant contribution to economic

growth of a region and it is a potential instrument for eliminating poverty and ending unemployment. For these

reasons, cooperatives must be strong, healthy and give excellent services to the society. There are many types of

cooperative such as housing, retailer, utility, worker, credit union, consumer and others.

The focuses of this research are credit union cooperatives. They were owned and controlled by their members without

any shareholder. The members save their money regularly and then lend the money to other members. The credit

union cooperative tends to be high risk than other types of cooperative.

However, cooperatives often face obstacles in their businesses. The different types of cooperatives tackle different

kinds of problems. For a certain reason, cooperative can be failed. Some cases of nonperforming loans at credit unions

become a big problem for the cooperatives. Fraud is the most common case in the credit union cooperatives. It

indicates the lack of risk management by the credit union cooperatives. The failure to implement the effective

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processes and procedures can increase the risks of fraud, the violations of laws and the mismanagement of funds. The

system and procedure availability to control and manage risk are a fundamental requirement for the cooperatives to

avoid the material and non-material losses.

According to Miller (2003), the poor internal control leads to asset misappropriations, corruption, organizational fraud

and fraudulent financial statements. Whatever the case is, every organisation, not only the cooperative (Tunji:2013),

must install the efficient and effective internal control system to protect its assets from the possibility of losses caused

by the funds misapplication, the fund misuse and the vandalisation of company’s property, expropriation and errors

made by inefficient and inexperienced personnel. Actually, internal control system cannot eliminate all errors and

irregularities, but at least, it is expected to alert the management about the potential problems which can be controlled

before they become the bigger problems. Nevertheless, the established internal controls system must be evaluated

from time to time to provide management the assurance effectiveness. The internal control system can be effective if

its components are present and function effectively for operations, financial reporting and compliance.

According to the results of Cooperative Development Seminar in Central Java Province, there are some weaknesses in

the cooperatives. The internal control cooperative organization is still weak because there are the absence of a written

job description, double duties, the lack of provisions, and the lack of application of sanctions. In order to maintain the

company's assets in a preventive, detective and corrective, an internal control system within the framework of

cooperative management is necessary.

The quality of the internal control system will affect the performance of the organization. It also applies to the

cooperative (Muraleetharan, 2009). The research of Suna Pius M (2008) found that managers influence the

implementation of the control system. The taken actions are monitoring and supervising of each activity within an

organization. The cooperative managers must ensure that the activities carried out by the managers and the employees

run as it should, so the goals can be achieved effectively and efficiently. The managers need to supervise or control

the activities of his subordinates. Controlling is very important to tackle the errors and irregularities so that the goal

can still be achieved. Hence, the controlling function cannot be separated from the other functions of management

(planning, organizing, and directing). Therefore, managers have to design and create the adequate control system,

such as the internal control.

It is a very important study because many cooperatives got losses due to the fund misappropriation done by the

managers and employees. The various efforts can be made to prevent the fraud by providing the adequate system of

internal control. Cooperatives have many different businesses such as business cooperatives, consumer cooperatives,

cooperative production, service cooperatives and credit unions. Since the characteristics of cooperatives are different,

so it takes the different internal control system.

Based on the background above, the research problems are:

1 What are the activities required in an internal control?

2 How is the model development of internal control system in the credit union cooperatives?

THE LITERATURE REVIEW

Cooperative

Cooperative is cooperation. Based on Enriquez (1986), cooperative is helping each other or hand in hand.

Cooperative, based on ILO is an association of persons who join voluntarily to achieve the common economic end,

controlled by business organization, making equitable contribution to the required capital and accepting the fair share

of the risk and benefits.

Internal Control

According to IFAC, Internal Control is one of the best defenses against business failure, the important driver of

business performance which manages the risk and enables the creation and preservation of value. The successful

organizations know how to take the advantage of opportunities and counter the threats through the effective

application of controls and therefore it can improve the performance. Auditing Practices Committee defined internal

control system as the whole system of controls, financial and others, established by the management in an orderly and

efficient manner to ensure the adherence of management policies, to save the assets and to secure as far as possible the



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completeness and accuracy of the records. COSO’s definition of “internal control is the process effected by an entity’s

board of directors, management and other personnel, designed to provide reasonable assurance regarding to the

achievement of the following categories:

1) effectiveness and efficiency of operations;

2) reliability of financial reporting and,

3) compliance with applicable laws and regulations

Internal control is an integral part of an organization’s governance system ability to manage the risk, which is

understood, effected, and actively monitored by the governing body/ management and other personnel to take

advantage of the opportunities and to counter the threats to achieve the organization’s objectives.

SAS 78/ COSO stated five internal Control Components:

1.Control environment

1) Integrity and ethics of management,

2) Organizational structure,

3) Role of the board of directors and the audit committee,

4) Management’s policies and philosophy,

5) Delegation of responsibility and authority,

6) Performance evaluation measurement,

7) External influences—regulatory agencies,

8) Policies and practices managing human resources.

2. Risk assessment

Is to identify, analyze and manage the risks which are relevant to the financial report, such as:

1) changes in external environment,

2) risky foreign markets,

3) significant and rapid growth that strain the internal controls,

4) new product lines,

5) restructuring, downsizing,

6) changes in accounting policies.

7)

3. Information and Communication

The AIS should produce high quality information by :

1) identifying and recording all valid transactions,

2) providing timely information in appropriate detail to permit proper classification and financial

reporting,

3) accurately measuring the financial value of transactions,

4) accurately recording transactions in the time period in which they occurred.

5)

Auditors must have sufficient knowledge of the IS to understand:

a. the classes of transactions ;

i. how these transactions are initiated [input]

ii. the associated accounting records and accounts used in processing [input]

b. the transaction processing steps from the initiation of a transaction to its inclusion in the financial

statements [process]

c. the financial reporting process to compile financial statements, disclosures, and estimates [output]

4. Monitoring

The process for assessing the quality of internal control design and operation by;

1) procedures Separating

a. test of controls by internal auditors

2) Ongoing monitoring:

a. computer modules integrated into routine operations

b. management reports which highlight the trends and exceptions from normal performance



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5. Control activities

1) Policies and procedures to ensure that the appropriate actions are taken to respond the identified risks

2) Divided into two distinct categories:

a. IT controls— specifically related to the computer environment

b. Physical controls—primarily pertain to human activities

METHODOLOGY

The researchers have chosen to carry out a descriptive qualitative research design in order to map the internal control

activities and the need of internal control model for the credit union cooperative. The qualitative study allowed

researchers to explore the behaviours, perspectives, feelings, and experiences in depth, quality and complexity of a

situation through a holistic framework (Holloway and Wheeler 2002). The visual stage of this research can be seen in

the figure 1 below:

Figure 1.

The Research Steps: Research and Development

Population/Sample:

The population of this research were 76 cooperatives in Semarang. The data were based on the Department of

Cooperatives and SMEs Semarang. Cormack (2000) suggested that the qualitative researchers can use a few selective

sample because of the in-depth nature of the study. The data sources were the identification of the needs and activities

of internal control in credit union cooperatives obtained by using purposive sampling. Purposive sampling is a

sampling technique with particular data sources intentionally. Thus; the study got 10 cooperatives as the samples.

Data Collection

In a qualitative study, it requires one round of open ended, semi-structured, and in-depth interviews. The researchers

chose an open-ended interviews as it allowed the participants to discuss their opinions, views and experiences fully in

detail, whereas; the closed ended questions may inhibit them to express their full opinions and feelings. Through the

use of semi-structured interviews the researchers prepared the topics or questions (Polit and Beck (2008).

RESULT OF THE STUDY

The first step of this research was studying the literature on the internal control system of cooperatives. The researcher

read various references about the internal control systems in general through books such as; Accounting Information

Systems, Accounting Systems, Information Systems Management, and Auditing.

In addition, the information about internal control cooperative can be obtained by interviewing the managers. The data

related to internal control are as follows:

Preliminary Study

1. Literature Review 2. The Need

assesment 3. The Early design of

model formulation 4. Mapping

internal control activity

Validation the

Early Model

Structure

Model test in

Cooperative

Revision model Dessimination

model



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1. Generally, the cooperatives had the computerized accounting system to obtain the daily financial statement to

control. However, there were difficulties to find errors in the data entry.

2. Bad loans at credit unions ranged from 5% -10%. Bad loans were addressed by providing advance warning letter,

but when it was not be paid three times, it will be executed the guarantee.

3. There were several cooperatives that already had SOP and SOM, but mostly they found difficulty in preparing the

grounds. Therefore; Internal control as the part or job description is required.

4. Cooperative found difficulty to supervise the collectors since the collectors usually received the payment from the

customers.

The Development of Internal Control Model for Credit Unions Based on those existing data, the map of internal

control activities can be seen from the figure 2:

Figure-2 The Map of Internal Control Activities

The activities which need the internal control are:

1. Selecting the credit request from the customer by the officer. The administrative requirement must be

completed with the supporting documents. The internal control must include; the clear job description, no

doubled job, analyzing the credit feasibility, comparing the guarantee and the debt plafond, the supporting

forms, and the procedure operational standard

2. Approval of Credit.

The Internal control needs to include: analysis of the presence of collateral and proof of ownership of collateral, the

collateral assessment team, authorization, standard operational procedures, the letter contract, the proof of collateral

acceptance.

3. Disbursement.

The internal control needs to include: Standard operating procedure, authorization, forms, recording duties

separation and cashier.

4. Payment of the installments

The Internal control requires to include: supervision on the collector, of receipt of the form,

`

Internal control customers

Credit

requestlaunching

Guarantee

excecution

Credit

approval disbursment

Solving the

bad debt

Process

payment

Internal

control

Internal

control

Internal

control



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5. Handling of bad debts

It is done in 2 ways: preventive and curative. Preventive method is done by assessing potential borrowers based on the

5 C; they are character, capital, colateral, capacity and condition.

Curative method is done by giving the warning letter, sanctions, withdrawal of the guarantee.

6. Withdrawal of collateral

It is needed the withdrawal guarantees if borrowers have received a warning letter, but they still did not make any

payment.

The Model of Internal Control for Credit Union Cooperatives

The Internal Control developed by the researchers is the adoption of the COSO internal control that is fit to the needs

of the cooperative.

1. Employee Moral

Development

2. Enforcement Honest

3. Delegation of

authority

1. Risk

Identification

2. Risk Analysis

1. Job description

2. Formulir

3. SOP dan SOM

4. Otorization

5. Controlling to

staff

client periodically

checks on loans and

savings

1. Effective

Supervision

2. The role of

regulatory bodies

1. 5 C (character,

capacity, capital, collateral,

condition)

2. Funding analysis 3. on desk dan on

site momitoring

Revitalitation:

1. Reschedulling(jadwal

ulang)

2. Restrukturing(susun

ulang)

3. Reconditioning(persy

aratan ulang)

1. excecution

2. Collection agent

1. Loan activities in

a Credit union

cooperatiDisburs

emen

2. Installment

3. Handling Bad

Debt

4. Repayment with

Warranty

Saving Activity

Bad debt

Control

Environment

Risk

Assessment

Control

Activities

Communication

and information

Internal

Control

Monitorng

Internal control model for an credit union cooperative

SIA

(databased Management

System)

1. Recording periodical

2. Form and proof of transactio

3. Reconciliation

4. Security of

information

Data

source:

Formulir,

otorisasi

Validasi

input:

Edit

Program,

Data

maintanance: password,

reconsiliation,

back up



160

Development of COSO Internal Control especially for credit unions:

Based on activity of unions, cooperative control system can be formulated as follows:

1. Control environment. It required employee moral development, policies that uphold honesty, clear

delegation of authority on cooperative applications. For instance: treasurer and the cashier are responsible for

the authenticity of the securities that are stored in metal cabinets. In the other hands, each member of the loan

ceiling should be adjusted to the subject, mandatory savings and special mandatory savings.

2. Risk. It identify risks and analyze risk. Besides that, it preferred loan service to sequences loan and

responsibility, acceptance of loans should be done by the members themselves.

3. Control activities. It not allowed to hold concurrent position. Cash holder should be completely separate from

the books and the cashier should not be concurrently working on a bookkeeping accounts or vice versa.

Implementation of making the bank reconciliation should not be the account holder. It should be created a

Standard Operating Procedures and Standard Operating Management. For authorization of competent

officials, cashiers must affix a stamp "paid" in cash evidence supporting documents if the payment is

complete. The cashier had to put a stamp "Receipt" on the cash evidence supporting documents if the money

is received. All checks should be serial numbered and each number must be accounted for, whether used or

not. All petty cash expenditures must be approved by the manager (certain cooperatives), and moreover

should be approved by the treasurer or chairman. Lastly, a loan application letter must be signed by the

group.

4. Communication. It can be done periodically by checking savings loan balance and the balance of the

customer, and then communicate with customers.

5. Monitoring of internal control. Cash receipts are recorded on the similiar day with the maximum cash

balance per day and must be counted into the bank. Petty cash fund is filled by using the imprest system.

Conclusion:

The credit union cooperative is risker than the other types of cooperatives. A lot of bad debt made big problem for

those credit union cooperatives. The availability of a system and procedures to control and manage risk is the

fundamental requirement for the cooperatives to avoid the material and non-material losses.

REFERENCE

Berhane, Ghebremichael (2013). The Role of Cooperative in Empowering Woman. Journal of Business Management

& Social Sciences Research (JBM&SSR), Volume 2, No.5.

Cormack D. (2000). The Research Process in Nursing. 4th edn. Blackwell Science

Ltd., Oxford, Great Britain.Miller, J. (2003), Internal Control measures in Corporations.

Miller, J. (2003), Internal Control measures in Corporations

Muraleetharan, P. (2009). Internal control and impact to financial performance of the organization (Special reference

public and private organization in Jaffna District). Dept of Accounting, UniOf Jaffna.

Polit D.F. & Beck C.T. (2008). Nursing research: Generating and Assessing Evidence for Nursing Practice. 8th edn.

Lipponcott, Williams & Wilkins. Great Britain.

Tunji, Siyanbola Trimisiu(2013). Effective Internal Controls System As Antidote For Distress In The Banking

Industry In Nigeria. Journal Of Economics And International Business Research (JEIBR), Vol. 1(5), pp. 106-

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