Factors that Contribute to the Effectiveness of Internal Audit in Public Sector

Transcription

1 DOI: /IPEDR V Factors that Contribute to the Effectiveness of Internal Audit in Public Sector Zulkifli Baharud-din 1, Alagan Shokiyah 2, and Mohd Serjana Ibrahim 3 1, 2 Administrative Science & Policy Studies Universiti Teknologi MARA Shah Alam Selangor, Malaysia 3 Internal Audit Division Ministry of Science, Technology & Innovation Malaysia Abstract. The establishment of IA function is important as an essential internal assurance mechanism in public financial controls and as a tool for monitoring and evaluating financial management activities in government agencies. In addition it will assist government organizations to achieve accountability and integrity, improve the implementation of government programs and develop confidence among citizens and stakeholders as well as to cater any risk of mismanagement of public fund. This study investigates the factors that contribute to the effectiveness of internal audit in the Malaysian public sector. It is to determine the auditors perception toward the effectiveness of internal audit work, influenced by the quality of audit work in order to perform in an effective manner as control instrument in public financial management. It also aims to determine the relationship between factors that contribute to the effectiveness of IA works in promoting better transparency and integrity of public management. The scope of this study covers the internal auditors that work in the ministries in Putrajaya. This study employs a cross sectional survey to investigate the effectiveness of internal audit. Several statistical techniques such as the descriptive statistic, correlation and regression analysis were used to analyse the data from the survey. The result of the study showed that there were significant positive relationships among the factors analyzed in this study such as auditor competency, auditors independence and objectivity and management support to the effectiveness of internal audit. Thus, the effectiveness of internal audit will depend strongly to the attributes of the factors analysed in this study. Keywords: Internal Audit, Quality of Audit Work, Public Financial Management, Competency, Independence, Objectivity, Management Support and Effectiveness of Internal Audit. 1. Introduction There is general concern among the Malaysian public over the effective and transparent Public Financial Management (PFM) regarding the use of public money. Every year government has involved in collecting and spending hundreds of billion ringgits of public money through the various ministries and agencies for government program and activities. This revenue and expenditure may constitute the main factor for economic growth stimulation of the country. Due to this huge money involved, government need efficient and effective financial management machinery to functioning with accountability and due diligent conforming to the stipulated rules and regulation and other instruction pertaining to financial management. So, all government ministries, departments and agencies are supposed to maintain the accuracy and reliability accounting record for the purpose of auditing and future use. All transactions should be properly authorized, executed and recorded. Funds are expended for legitimate purposes in appropriate ways, and financial record reflect true and fair organisation s financial condition. In addition, the sound financial management control should be in place which includes allocation of the fund according to stipulated objectives, clear rules of responsibilities, ensuring the expenditure according to the set budget and procedures. The government is aware that high quality of financial management will lead to the success of government programs and activities. Therefore, to further enhance the credibility of PFM, the government has established the Internal Audit (IA) Unit in many government departments and agencies by the virtue of issuance of Federal Treasury circular no 9/2004. This circular indicates the requirement of the establishment of IA unit and governing the tasks and responsibilities of internal auditing in the public sector and as an internal control mechanism in government agencies to look into the financial management integrity and Corresponding author. Tel.: ; fax: address: zulkiyah@yahoo.com; Alaganshokiyah@gmail.com; mserjana@mosti.gov.my. 126

2 value for money expenditure to the government program and activities. Irregularities in spending public money have been highlighted by the Auditor General (AG) in his annual report Amrin Buang [3]. Some of these weaknesses and irregularities involve serious violation of established financial management guidelines and procedures such as poor planning of procurement, equipments supplied, work done and services rendered not in accordance with the original specification, cost overrun due to delays in project completion, improper payment made for equipments not supplied, work not done and services not rendered, equipment and good procured at a much higher cost than market value, procurement not done according to established regulations. Thus the role of IA unit is to determine that internal control is in place by reviewing policies and practices in the organization in order to avoid loss of financial resources, noncompliance and also to provide reasonable assurance that public money has been spent in an efficient and effective manner. Based on the government emphasize on IA function, audit services can no longer move out of their customary ways of thinking and common work. Audit services also can help organization for the success of better financial management in public service by playing the effective and efficient roles to promote better governance in managing public money. The research examined on what factors that contribute to the effectiveness of IA in order to perform their duties effectively and indirectly can assist the public sector in managing the public resources efficiently. Factors such competency of the auditors, independence and objectivity of Internal auditors and management support may be the causes that affect the effectiveness of IA function. 2. Literature Review Auditing is originally a financial management concerned with assessing practice for the internal financial status of the organization and the evaluations of the financial performance of the organization [13]. After the revolution and beginning the 20th century the reporting practice of auditors, which involved submitting reports of their duties and findings, was standardized as the Independent Auditor's Report [13]. Since then, the auditing practices have evolved over the years and develop into the broader aspects to become into a field of fraud detection and financial accountability. It also provides feedback on organization financial information and reporting. It also becomes a tool for an analysis of any fraudulent activity, potential and actual within the organization. In Malaysia, IA profession has became into the main business after the formation of the Institute of Internal Audit (IIA) Malaysia. IIA Malaysia was established in 1977 as a Chapter of The Institute of Internal Auditors Inc, USA and elevated to the status of a National Institute in There are a number of researches had been done in the area of the IA in private and public sector. The fact that effective IA can contribute to the significant impact to the quality of management has raised the interest for researchers to explore into this matter. Effectiveness of IA will contribute to the effectiveness of the client and the organization as a whole [7]. The IA findings and recommendations are clearly crucial to the management of public office to follow through and immediately rectify the problems in the organisation. Mihret & Yismaw [12] suggested public sector organizations are required to have an internal audit function to support effective management in managing public funds. So many findings from the research done linked the effectiveness of the internal auditor contribution to effective management and internal control of the agency. According to Okafor & Ibadin [14] that the internal audit exercises a critical role in improving corporate governance in organizations. In terms of accountability and management relationship, Saren and De Beelde [15] found that Internal Auditors are playing a pioneering role in the creation of a higher level of risk and control awareness in managing risk in the management system. Internal audit is a comfort provider to the Audit Committee especially in its assurance role and its involvement in improving internal control [15]. Barry J. Cooper, Philomena Leung and Clive M.H. Mathews [5] on their study on Benchmarking- a comparison of IA in Australia, Malaysia and Hong Kong found that 51.7 % of Malaysian CEOs and 50.5% Hong Kong CEOs were more assertive in their opinions about IA being an independent evaluation function on the effectiveness of management. Furthermore, Australian research study on Financial Reporting and Auditing Bridging the Expectation Gap suggested that apart from management, internal auditing is the centre of integrated activities within organization, and it is the best suited for the new roles as agent of change. 127

3 2.1. Auditors competency Competency can be relate to the ability of an individual to perform a job or task properly base on the educational level, professional experience and the effort of the staffs for continuing professional development. Auditors competency determines the effective auditing in the organization. It contributes to the ability of the auditors to perform the systematic and discipline audit approach to improve the effectiveness of IA. Mihret & Yismaw [12] concluded in their study that IA office constantly face the problem of low technical staff proficiency and high staff turnover, which would limit it capacity to provide effective service to management. Whereby Angus Okechukwa Unegbu, Mohamad Isa Kida [4] found in their study that, IA can effectively carry out their duty in the public sector if there are enough IA personnel with required competencies. Competency of auditors determines the quality of the audit work performed in an organization. Competency is measured in terms of academic level, experience, skill and the effort of the staffs for continuing professional development. Competency determines the efficiency of the auditor in setting a systematic and disciplined approach to evaluate and improve the effectiveness of the organization s activities and financial management as well as governance processes Independence /objectivity of internal auditors The other factor that may contribute to the effective government audit activities is the need of organizational independence and objectivity which can allow the audit activity to conduct work without interference by any party for the audit task. The independence and objectivity of internal auditing is with respect to both assurance services and consulting for the organization. Independence and objectivity are closely related where the freedom from conditions that may threaten objectivity and no significant quality compromises are made during rendering the audit service [8]. In fact, the audit activity should have sufficient independence from those it is required to audit so that it can both conduct its work without interference and be seen to be able to do so [9]. This is very crucial element in conducting audit because the auditors can access to any document relating to the audit work without favour and fear. This will make the auditors provide the objective report and reliable professional judgement on the auditing work to achieve the mandate given to them with integrity. Independence of auditors would not be considered to be impaired if the auditors do not appear to act in a capacity equivalent to a member of client management or as an employee [6]. In certain extent there is a confusion of the role of IA as internal auditors are part of the management team and at the same time to independently evaluate management s effectiveness and efficiency. However, in more recent years, there has been heightened interest in issues associated with the independence and objectivity of internal audit. This could affect the effectiveness of internal auditing as even though internal auditor are charged with upholding the best interests of their employer, they may be reluctant to counter management, regardless of consequences [15] Management support to the roles of IA The support and commitment of management also have the certain impact to make sure IA is functioning effectively. The success of IA function will depend on the strength of management s support for the auditing process. They have to accept the fact that the IA process is just as critical and important activity as any other process within the organization. Some study found that without management approval, support, and encouragement, the IA audit process are likely to face failure and worse time and money wasted. A Md Ali, A Ahmi and MH Shahdan [1] on their study on IA in the state and local government of Malaysia found that, the effectiveness of the IA function in State and Local Government appears to be directly related to the management style of organization heads and their links, relationships and position in the social contract. Some IA function appears to be doing well, the determining factors appear to be the attitude and leadership qualities of the head of an organization and audit reports that are ignored by everyone [1]. Mihret & Yismaw [12] on their study also found that IA recommendations are not afforded enough attention. Though the audit reports are generally well prepared, they do not separately highlight the status of past audit results and they could be presented in a more consistent way. Besides, the audit evidence is attached to the reports. This provides a bulky appearance of the audit reports and reduces readability. The distribution of the audit reports is limited where copies are not provided to other senior management officers 128

4 to which related to audit report. Their study also concluded that management supports to internal audit as a determinant of internal audit effectiveness. Auditors Competency Independence/Objectivity of IA Internal Audit Effectiveness Management Support 3. Methodology Fig. 1: Shows the research framework for this paper. Malaysian Government ministries had formally established their IA department by adopting the staffing of the National Audit Department. The Strategic Financial Planning Division of Federal Treasury is responsible for the monitoring and coordinating the operation of IA Department to all public agencies. From the data given by this division, the total number of IA auditors in government agencies throughout of the country has currently increased to 1,086 staffs compared to 640 in Out of this number 636 or 56 % of them are seconded staff from National Audit Department. For the purpose of this study, only IA staffs that are seconded from the National Audit Department are selected to answer the questionnaires as targeted sample. The questionnaires were distributed randomly to the IA Department of ministries located in Putrajaya through the IA head of the Department. Out of this number the total of 330 questionnaires were distributed through the IA department head to the related ministries which constitute 51.56% of the total population. The questionnaires are divided into five sections which are demographic profiles of the respondents, auditor competency, independence/objectivity of internal auditors and management support. The items asked in the questionnaire are developed based on a previous study approach by Zeleke Belay [17] and Aaron Cohen & Gabriel Sayag [2]. Certain modification has been made to the questionnaires accordingly as to accommodate with this study objective. The independent variables were measured on a five-point Likert scale of: Strongly disagree = 1, disagree = 2, neither agree nor disagree = 3, agree = 4, strongly agree = Results The sample size was 330 IA auditors of which the returned response was 191 or (57.9%). Table 1 shows the general demographic profile of the respondents. It depicts that most of the respondents were females(57.1%). In addition majority of the respondents (65.0%) are at the age of below 39 years old. (83.2%) of respondents are married. (94.3%) holds tertiary level education with either diploma, bachelor or master degree.the table also shows that most respondents are at the grade of middle managers and below (86.3%). On having any affliation to a professional body only (28.3%) were members to either national or international body. Interm of auditing experience (57.6%) has experience 10 years and below. On income, majority of the respondents (83.2%) were from the income group that earns less than RM5000 per month. Table 2 shows the Chronbach s Alpha for all variables, Kline [10] indicated that a value of 0.7 Cronbach s Alpha or higher is considered acceptable. The statistics show that all variables exhibited values ranging to 0.835, which suggested that the data are reliable and consistent with acceptable research standards. 129

5 Thereon, a bivariate correlation was undertaken between the independents and dependent variables. It was hypothesized that a positive relationship would exist between auditors competency and Effectiveness of IA and this is rightly evidenced where r = It was hypothesized also that the Independence/objectivity of internal auditors has positive relationship with IA effectiveness and the result of Pearson Correlation indicated that r = (See Table 3). Table 1: Respondents Demographic Profile Respondents profile Frequency % Gender Male Female Age Maritul Status Single Married Others Education Level Secondary Diploma Bachelor Master Grade of Services G27 G G41 G G48 G JUSA C and above Member of Professional Body Auditing Work Experience MIA IIAM None Less than 5 years years years years More than 20 years Income level RM 1000 RM RM 3001 RM RM 5001 RM More than RM Table 2: Reliability Analysis for Independent and Dependent Variable Variable No of Item Cronbach s Alpha Auditors Competency Independence/Objectivity of IA Management Support Internal Audit Effectiveness

6 Table 3: Pearson Correlation N Variables Mean SD Auditor s Competency Independence/ Objectivity of IA ** Management Support **.703** Effectiveness of IA **.602**.659** ** Correlation is significant at the 0.01 level (2-tailed) 5. Discussion, Conclusion and Recommendation From the previous section, the result indicated lack of qualified, skill and experience of the auditors in internal audit department may cause the delay in auditing work. From the profile of the respondents only 32.5% of the respondent are from professional group of service and the rest are from supporting group of service. From the response only half of the respondents (50.3%) are poses the degree holder and above and the rest are from diploma holder and below. Furthermore, most of the respondents (57.6%) do have less than 10 years experience in auditing. With all these fact, it can be assumed that internal auditors working in public sector have relatively still lack of qualified, skill and experience of the auditors. This finding also support by Zeleke Beley [17], that organizations have problems of human resource by not having sufficient staff, nonexistence qualified staff, insufficient of skill and experience, inflexible staffing strategy which contribute to the set back to the effort of strengthening internal audit function in the organisation. Pearson Correlation statistic found that there are significant positive correlation between auditor competency, independence/objectivity of IA and management support to the effectiveness of IA. The finding indicates the greater of IA effectiveness will depend to auditors competencyand management support. As such any negative factor that affected to these factors will give a significant change in the effectiveness of IA. Krisnamoorthy [1] concluded that it is futile to attempt a rank ordering of the three factors of objectivity, work performance and competence are interrelated and no single factor can be used in isolation to make an overall evaluation of the strength of IA function. Management support is the most influencing factor among the factors that contribute to the variation of quality audit work and this obviously crucial factor to the effective IA function. The finding is collaborate with Aaron Cohen & Gabriel Sayag [2] who s found that the support of management is almost crucial to the operation and success of IA. It may even be that all the other determinants of IA effectiveness derive from the support of top management, given that hiring proficient IA staff, developing career channels for IA staff, and providing organisational independence for IA work are all results of decisions made by top management.however, not all of these factors are under internal auditors control. Among controllable factors, the most relevant deal with competence and professional proficiency of internal auditors. Some attributes beyond the control of public internal auditors. As to conclude, the effectiveness of IA function was perceived to be quite high even when there certain low agreement to the certain factors being analysed. 6. References [1] A. Ali, J. D. Gloeck, A. Ahmi, and M. H. Sahdan. Internal Audit in the state and local government og Malaysia, 131

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