ROLE OF INTERNAL AUDITORS IN RISK MANAGEMENT Essay Example for Free

ROLE OF INTERNAL AUDITORS IN RISK MANAGEMENT EssayEffectiveness of Internal Auditing of institutions and bodies formed under Acts of sevens has been less analyze and reported in the books. The take aim is foc apply in examining the relationship between the employees position and acquaintance and the cozy Audits effectiveness in delivering on their roles in a rapidly evolving environment and human races aw atomic number 18ness of their roles. The main aim of this research study is to break in understandand measure the effect of employees attitude and erudition on the effectuality of intragroup analyze in earth institutions, with superlative degreeic Social Security Fund as a case study. A survey of straind 425 employees go come forth be undertaken and the extends of the quantitative and qualitative survey findings will be reported.The research is designed to be conducted using both(prenominal) quantitative and qualitative approaches by use of literature revi ew, survey, and case study. Data will be collected from the chosen sample through structured questionnaires and semi-structured interviews as well as review of available documents and records targeting members of the Internal Audit. Data will be analyzed using the Statistical Package for Social Scientists (SPSS) version 11.0 tool, which is a computer ground automated statistical tool and conclusions deciphern from the findings of the study, recommendations will be made which will avail institutions to determine paradigm shift in attitude and perceptions by employees necessary to keep the substantial quiz as an good critical function relevant in the future for robust reality orbit financial management and governance to assist organizations come across their goals.CHAPTER ONEINTRODUCTION1.0 Background to the Study.Traditionally, internal canvasing in the public sector served as a simple administrative modus operandi to ensure compliance and it comprised mainly of checking for accuracy of transactions, pre-payment verification and manipulate, counting assets and reporting on past events to various levels of management. However, combinations of factors in the social-political and stinting discourse globally permit led to greater citizen aw atomic number 18ness and participation in the public sector governance. As a gist, public institutions are miserable towards higher levels of transparency, efficiency, accountability and integrity in the use of public resources.Consequently, the bring of Internal Auditors (IIA, 1999a) redefined internal analyzeing as . an free, bearing self-confidence and consulting activity designed to amount value and improve an organizations operations. It helps an organization accomplish its objectives bybringing a systematic, disciplined approach to judge and improve the effectivity of risk management, control, and governance processes. This definition signifies that internal audit has undergone a paradigm shift fr om an emphasis on accountability about the past to improving future outcomes to help auditees operate more effectively and efficiently (Nagy and Cenker, 2002 Stern, 1994 Goodwin, 2004). Since, the definition equally serves both the private and the public sectors (Goodwin, 2004), it is used in this study as a seat to analyze public sector internal audit effectiveness. Internal audit is effective if it meets the intended outcome it is supposed to bring about. Sawyer (1995) states, internal auditors think over is not done until defects are corrected and remain corrected. Van Gansberghe (2005) explains that internal audit effectiveness in the public sector should be evaluated by the conclusion to which it contri hardlyes to the demonstration of effective and efficient service delivery, as this drives the demand for improved internal audit services.Traditionally, ineffectiveness of internal audit has been as a result of under supplying, unqualified and nonprofessional staff and under funding. Despite invigorated internal audit function with sufficient well trained, qualified and professional staff topped up with adequate funding in the public sector institutions such as National Social Security Fund (NSSF), and being charged with responsibilities of advising management on issues of policy and compliance, accountability, financial reporting, safeguarding of assets, risk management, prevention of fraud and on economic and efficient use of resources (PFA, 2003) there are continued incidences of budget deficits, unpaid utilities, unremitted pensions, nonproductive investments, irregular payments, unaccounted for funds, loss of pension cash, non compliance with policies and procedures and general mismanagement of funds. A report by the Auditor General tabled in Parliament in June, 2013 indicated savers could have lost billions of shillings in dubious transactions and shady land deals (SNP, June 6, 2013).There is urgent need to point critical success factors to enab le the internal audit to perform effectively the roles for which it is intended in the public sector financial management and governance.1.1Statement of the ProblemPublic sector institutions have functional well funded internal audit departments with well qualified and professional staff whose role is to come through the management with re-assurance that internal controls systems are adequate and that they are complied with, that risk exposures are set and takeressed, and that fraud is quickly identified and inherently deterred. However, internal auditors have continued to be ineffective as envisaged by continued incidences of fraud and corruption, abuse of trust and outright financial mismanagement of massive scale due to perception and attitude issues towards their work. This precipitates the increased risk of financial failure of the institutions, poor and compromised service delivery, public agitation and political disaffection towards the government of the day. Little has b een researched on the effect of employees perception and attitude on the effectiveness of internal auditors. This study accordingly is meant to bridge that gap by finding out to what extent the employees perception and attitude is attributed to ineffectiveness of the internal auditors thus affecting the delivery of assurance services central to organization achieving its objectives.1.2Purpose of the ResearchTo determine paradigm shift in employees perception and attitude necessary to keep the internal audit as an effective and critical function relevant in the future for robust public sector financial management and governance.1.3Objectives of the ResearchThe research will be guided by the following objectives1. To determine the effect of perception and attitudes on the effectiveness of internal audit in the public sector financial management and governance.2. To identify value addition services required to enhance relevance and effectiveness of the internal audit function in the p ublic sector. 3. To identify the measures that would enhance or maintain better perception and more positive attitude by employees towards internal auditors.1.4Research QuestionsThe research questions of this study shall be1. How does employees perception and attitudes towards internal auditors affect internal audit effectiveness in the public sector financial management and governance? 2. Which value addition services are required to enhance relevance and effectiveness of the internal auditors and in effect ensuring they are perceived well? 3. What steps can be taken to ensure the employees continually maintain a positive perception towards the internal auditors so as to achieve organizational goals?1.5Significance of the StudyThis study seeks to generate useful insights on how managing employees attitude and perception affects internal auditors effectiveness which then can be used by the government and public institutions. This promotes effectiveness in the role of internal audit functions in the public sector financial management and governance by addressing the employees attitude and perception. It can overly be used by researchers for further research as this is a new area to be studied.1.6 Basic assumptions of the studyIt is assumed that the respondents would be co-operative and provide accurate information when responding to the research questions. It is as well as assumed that the sample size to be chosen will be adequate to enable the researcher draw valid conclusions about the tribe.1.7Limitations of the studyTime constraint is a limiting factor because the study has to be conclude at bottom a short time. handiness of funds is also a limiting factor to the study since the researcher is self sponsored. There is also no assurance that the respondents would return all the questionnaires punctually completed, neither is there a guarantee that the subjects would respond to all the questions put forward to them comprehensively. The answers of some r espondents may not be representative of the whole population. The circumstance of the subjects may affect their responses as emotions may be involved thusaffecting their accuracy in responding.1.8Delimitation of the studyThe study shall be restricted to trio Branches of National Social Security Fund, within Rift Valley region. The study shall focus on how effectiveness of internal audit functions in public sector financial management and governance are affected by employees perceptions and attitudes. Public sector may be defined to include the Central Government, the courts, the National Assembly, the Senate, Constitutional Commissions, County Governments and institutions and bodies formed under an Act of Parliament. For precision and focus, the declare oneself of this study shall be restricted to public sector institutions formed under an Act of Parliament and case study is NSSF. Literatures on other independent variables are not to be studied as this research is to be narrowed down to employees perceptions and attitudes only. Due to time constraints and the budget, population to be studied is only narrowed down to NSSF staff which is convenient to the researcher within the province. On the methodology to be used, Telephone interviews wouldnt be applied as it is unreliable, the employees may not cooperate, and is expensive than a candid face to face interview where all staff may be met in the same place as per their convenience.1.9Organization of the studyChapter one provides a background on internal audit effectiveness, statement of the problem, purpose and objectives of the research, research questions that the study looks forward to answering, significance of the study, basic assumptions of the study, limitations to the study and delimitations of the study. Chapter Two outlines the various schools of thought on what constitutes internal audit effectiveness and factors affecting it, as expounded in various literatures available. Chapter three outlines th e research design and methodology used for purposes of completing the study. It also describes in details research design, target population, sample, sampling procedure and data solicitation instruments. Chapter four will contain data analysis, presentation and interpretation while chapter five shall provide a summary of findings, discussion, conclusions and recommendations. This is followed by references and appendices sections.CHAPTER dickensLITERATURE REVIEW2.0 IntroductionThis chapter is will cover critical review of literature by other scholars and writers in relation to and the implication of employee perception and attitude on internal audit function and its effectiveness in the public sector financial management and governance.2.1 Internal Audit FunctionInternal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organizations operations (IIA, 2002). It helps an organization accomplish its objectives by bringing a sy stematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes (Collier, etal, 1991). With this description forming a foundation, the essential characteristics of an effective internal audit function can be framed.According to Institute of Internal Auditors (IIA, (1999), internal audit is an important part of the corporate governance structure within an organization. Corporate governance includes those oversight activities undertaken by the board of directors and audit committee to ensure the integrity of the financial reporting process. Three monitoring mechanisms have been identified in the corporate governance literature. They are external auditing, internal auditing and directorships (Anderson et al, 1997 William, 2000) as well as the audit Committee (IIA, 2003).2.2Internal Audit EvaluationEvaluating the internal audit function is to examine how well it can detect errors within an organization as well as fraud that have received greater emphasis (Rittenberg Anderson, 2006). The internal audit function is an important function that has been shown to add value and reduce detected errors by external auditors (Godwin, 2003 Carcello, 2005). Farber (2005), observed that the objective of internal audit function is to improve on the effectiveness of risk management, control and governance. Nestor (2004)observed that internal audit function is taken to be an important governance tool to protect corporations from internal criminal behavior. Further, the professional literature suggests that internal audit is a vital tool in fraud detection when assets are misappropriated by employees or outsiders (Carcello et al, 2005b Rittenberg and Anderson, 2006). As a result of the increase in accounting scandals in recent years, the internal audit function has received impressive attention as an important contributor to effective public sector financial management and governance.Furthermore, the issue of effectiven ess of internal audit is indispensable because it will create improvement in the government ministries (Unegbu Kida, 2011). In line with this, consideration over the measurement of the effectiveness of internal audit function keep receiving significant challenges, consisting the finding of the best and relevant method for bill the efficiency and effectiveness of internal audit (Bota Palfi, 2009 IIA, 2010 Spertus et al, 2010). In this vein, measurement of internal audit effectiveness should be considered because it has a role to play in achieving public sector objectives. Therefore, Arena and Azzone (2010), Chaveerug (2011) and Mihret et al, (2010) emphasize the need for future studies to examine the factors that influence internal audit effectiveness and the possible interactions among them. Equally, it is interesting to focus on the position that will lead to the strength of internal audit effectiveness (Aguolu, 2009). Consequently, many studies that have been conducted on inte rnal audit effectiveness give more fill to private sector and the central government and its various ministries and departments. Internal Auditing of institutions and bodies formed under Acts of Parliament has been less studied and reported in the literature.2.3Internal audit effectivenessThe word effectiveness have been defined by different researchers, for instance Arena and Azzone (2009) defined effectiveness as the capacity to obtain results that are lucid with targets objective, while, Dittenhofer (2001) view effectiveness as the ability toward the achievement of the objectives and goals. In the same context, a program can be seen as effective if its outcome goes on with its objectives (Ahmad et al, 2009 Mihret et al, 2010). In this situation, internal audit effectiveness meansthe ability of the internal auditor to achieve the established objective within the public sector institution.This goes along that the objectives of an internal audit for every organization depend on t he goals set out by the management of the organization (Pungas, 2003) as such, the objective of internal audit in public sector institutions should also go a long with the set up goals by the management of the particular institutions and Acts of Parliament that established them. With depend to that, the internal audit should be able to achieve the established objective in order improve the performance of the organization. Consequently, to determine whether the internal auditing function is operate effectively or not, some things have to be considered which include identification of the basic objective of internal auditing define the goals to be accomplished by the internal auditing and establish measures that will assist toward the achievement of those goals (Aguolu, 2009 Dittenhofer, 2001) while Cassandra et at (2008) argued that in order to achieve internal audit objective, three basic conditions must be satisfied i.e. independence organizational status and objectivity, also (Fe izizadeh, 2012) consideration was that, for an internal audit function to achieve high levels of effectiveness these four items must be consider goes along with stakeholder needs achieves best to his abilities complies with relevant professional standards and performance measures.Thus, Beckmerhagen et al (2004) also argued that the audit effectiveness should not be measured based on achievement of the audit objectives or on the number of findings of the internal auditor alone, but also more important is to determine the quality and suitableness of the audit plan, execution and follow-up. Similarly, Shareholders have the power to remove any internal auditor that is ineffective (Dhamankar Khandewale, 2003). This should also be the case in public sector, where internal auditors that are not effective despite the provision of all necessary measures that might have improved their effectiveness, should be removed by the stakeholders.Generally, researchers have also indicated some of the reasons behind the ineffectiveness of internal audit to include ineffective management controls, non clear definition of objectives by some organizations and inadequate support from top management (Ahmad et al, 2009 Dittenhofer 2001Unegbu Kida, 2011). Therefore, in line with their findings, the implications of an ineffective internal audit in a public sector management can lead to the possibility of the payoff of fraud low or non compliance with internal policies and procedures ineffective financial decision for successful operation (Unegbu Kida, 2011). Hence, the effective internal audits carry out an independent evaluation of the financial and operating information and systems and procedures with a view to provide good recommendations for improvements (Mihret Yismaw, 2007 New Delhi, 2006). That is why proper internal organization is also essential factor that lead to the achievement of internal audit effectiveness. Similarly, internal audit effectiveness can also be enhanced by ensuring consistency in the documentation of audit work, quality of reporting and proper implementation of their recommendation (Mihret Yismaw, 2007).Therefore, having such effective internal audit within organization, will automatically helps to achieve performance and profitability and prevent in loss of revenues particularly in public sectors (Vijayakumar Nagaraja, 2012), even though Pilcher Gilchrist and Singh (2011) observed that efficiency and effectiveness of audit in a public sectors context is more complex than in the private sectors.Several studies have been conducted on the internal audit effectiveness. For example the study carried out by Ahmad et al (2009) on the effectiveness of internal audit in Malaysian public sector, using simple percentage for data analysis found the lack of audit staff is ranked as the major problem faced by internal auditors in conducting an effective internal auditing. The study concluded by suggesting that future studies should adopt othe r methods such as field survey of wider groups of internal auditors both in public and the private sectors. Likewise, Theofanis, et al (2011) examine the relationship between element of internal control system and internal audit effectiveness and the result of the study reveal positive relationship between the two relationships.Even though the studies used only 52 Hotels in Greek as a sample and mail survey for data collection, but at conclusion they suggest that if future studies should carried out research on internal audit effectiveness with large sample, the result will be better than their own. Also Feizizadeh (2012) carried out study on strengthening internal auditeffectiveness and found that most of the companies measure and quantify the performance effectiveness of their production line activities. Therefore, looking at the above studies, they consider the effectiveness of internal audit at companys level, hotels and banks ignoring such effectiveness at local level. In thi s vein, this study extends the previous study through examining such effectiveness at public sector institutions and mainly on the employee perception and attitude which many did not cover.3.4 Conceptual FrameworkFigure 1 Conceptual Framework of factors influencing Internal AuditCHAPTER THREERESEARCH METHODOLOGY3.0IntroductionThis chapter will focus on the methodologies used for the study which will include research design, study area, identification of the target population, sample selection method and size, data collection techniques, data analysis methods and the pass judgment constraints.3.1 Research designThe study will adopt a cross sectional survey design where both qualitative and quantitative methods of data collection and analysis will be used. The respondents will be selected from different departments within the branch this includes managers, Internal Audit, Human Resource, Information technology staff, Finance and Accounts staff of NSSF.3.2Scope of the studyThe study w ill be carried out at NSSF Branches at Nandi Hills, Kericho and Sotik in Rift Valley Region. All information and respondents targeted to participate in the study are expected to be easily accessible in the offices situated in these places. Other variables will not be considered in this study. It is limited to the attitude and employees perception3.3PopulationThe public sector in Kenya constitutes the central government and the allied ministries and departments, the county governments and the related departments, the courts, constitutional commissions and institutions and bodies formed through Acts of Parliament. It is the single largest employer of internal auditors, but the target population for this study within the NSSF will include and be stratified as Branch Managers, Accountants, and other staff, totaling 425 possible respondents.3.4Sample Selection and SizeA purposive sample is used. Accordingly a survey type of research will be adopted in which a sample from the target popul ation will be used for the study. The total staff population in NSSF is 1455. To arrive at the sample size for the purpose of this research study, a sample size calculating machine is used. By putting the confidence level at 95% and a confidence interval of 4, the sample size needed to be selected is from the 1455 employees will be 425 which represent 29.2% of the sample target population. This represents an average of a third of the total number of members of staff and will be representative enough for this research. It is distributed as shown in the table belowComposition of staff with NSSF Kenya for the purpose of the research working. CategoryTarget PopulationTarget SamplePercentage of target populationManagers