ABSTRACT
Well performing internal audit function has been argued as
one of the strongest means of internal control to monitor and promote good
governance system in an organization. While internal audit can be used in order
to assist management in order to instill a strong ethical tone in the entire
organization, a poor attitude by the management can make it hard for the
internal auditor to uphold ethical behaviour. As a result, many countries have
increased attention on internal audit as an important component of government
financial management and as a tool for improving the performance of the
government sector. The objective of this study was to establish the effectiveness
of internal audit in promoting good governance in the public sector in Ghana
with special focus on the Ministries, Department and Agencies (MDAs) and
Metropolitan, Municipal and District Assemblies (MMDAs). The research was both
quantitative and qualitative in nature with both descriptive cross-sectional
design method and regression analysis preferred for the study. The study also
uses logistic estimation technique on the primary data collected to find out
the association between corporate governance and internal systems of risk
management, compliance and consultancy and internal controls.
The research established that internal audit
significantly affects internal controls, risk management and compliance and
consultancy. However, internal control and compliance and consultancy are less
likely to ensure good corporate governance. The study therefore recommend that
the government should recognize the contribution of internal auditing and
embrace it as an effective tool so as to realize their objectives set.
CHAPTER ONE
INTRODUCTION
Background to the Study
A system of effective internal
controls is a critical component of company management and a foundation for the
safe and sound operation of organisations. As such, ineffective internal
controls result in ineffective programmes and losses (Financial Management
Manual, 2005). According to Baltaci and Yilmaz (2006), the effort to reform a
fiscal system should include internal control and audit due to the crucial role
they play in enhancing accountability and effectiveness. Internal audit
provides both governments and related parties with a powerful tool for
understanding the extent to which the public institution in question has
delivered on budget and effective services.
Well performing internal audit
function is one of the strongest means of internal control to monitor and
promote good governance system in an organisation. Internal auditing is an
integral part of the corporate governance framework in both the public and the
private sectors (Cohen & Hanno, 2002). As a result, in many countries it
has received an increasing attention as an important component of government
financial management and as a tool for improving the performance of the
government sector. The definition of internal audit contains two fundamental
roles:
Assurance Services to the
administration, audit committee, and management, guidance on assessing the
effectiveness of corporate management,
risk management, and control processes established by management, and
Consulting Services to the
management on risk management and controls (The Institute of Chartered
Accountants in England and Wales, 2011).
Analyzing this definition, it seems
that the internal audit has evolved from a function of independent evaluation
to a function of risk management, so that today it is the primary need of any
organisation (Munro & Stewart, 2011). This is because it provides the
creation of the added value of organisations through independent, objective
assurance and consulting activities (Pickett, 1997).
By assessing the management
process, the internal audit provides appropriate recommendations to improve it
by fulfilling the following objectives (from the framework of professional
activity, Croatian Institute of Internal Auditors, 2011):
promoting appropriate ethical
principles and values within the organisation,
ensuring effective management of
performance and establishing responsibilities in the company,
effective communication of
information on risks and control to the relevant parts of the company,
effective coordination of
activities and communication of information to board members, external and
internal auditors, and management.
Good governance is considered as a
tool that is used in order to achieve the strategies of an organisation (Belay,
2007). Thus, a number of issues including allegation of financial improprieties
and lack of corporate governance structure joined with
allegations of financial statement fraud of many government departments has
helped to grind the ever increasing attention on corporate governance in
wide-ranging and the audit committee in particular. As a result, the function
of the committee had changed over years (Rezaee & Olibe, 2003).
Cohen and Hanno (2000) using the
Public Oversight Board’s perspective, defined corporate governance as “those
oversight activities undertaken by the board of directors and audit committee
to ensure the integrity of the financial reporting process” However, the best
way to define the concept is to adopt the definition shared by the Organisation
for Economic Cooperation and Development (OECD, 2004) countries: “Corporate
governance is the system by which a business corporation (or a nonprofit
organisation) is directed and controlled, at its senior level, in order to
achieve its objectives, performance and financial management, and also
accountability, integrity and openness”.
Roe (2004) defines corporate
governance as the relationships at the top of the firm-the board of directors,
the senior managers, and the stockholders. In his opinion institutions of
corporate governance are those repeated mechanisms that allocate authority
among the three and that affect, modulate and control the decisions made at the
top of the firm. The above definition of corporate governance indicates idea of
objectives correspondence, incentives, monitoring and control.
Corporate governance has been
reflected upon since the beginnings of the modern corporation (Kim &
Nofsinger, 2007), it certainly has received increased attention and scrutiny
over the last two decades. In this period, corporate governance
issues have become important not only in the academic literature, but also in
public policy debates. Corporate governance ranges throughout countries and
firms. A higher quality of corporate governance allows firms to gain access to
capital markets more easily, which is greatly significant for firms, which mean
to boost their funds.
This view of governance focuses on
the control environment and control activities. Corporate governance issues are
in general receiving greater attention as a result of the increasing
recognition that a firm’s corporate governance affects both its economic
performance and its ability to access long-term, low investment capital
(Mordelet, 2009). Other recent research shows the assurance, compliance and
consultant roles of internal auditing are now being recognized at board level
in many organisations as valuable contributors to good governance practices.
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