EFFECT OF THE INTERNAL AUDIT FUNCTIONS ON CORPORATE EFFICIENCY

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The function and the Existence of Internal audit department in an organization cannot be over emphasized considering the enormity of trust and responsibility attached to this department of an organization. This brings to mind why the writer chose to research on the subject, Internal auditing as an Instrument for Effective management.

       Internal auditing (IA) serves as an important link in the business and financial reporting processes of corporations and not for profit provides (Reynolds 2000). Internal auditors play a key role in monitoring a company’s risk profile and identifying areas to improve risk management (Goodwin-steward and kent 2006). The aim of internal auditing is to improve organizational Efficiency and Effectiveness through constructive criticism. IA has four main components: (1) verification of written records (2) analysis of policy (3) Evaluation of logic and completeness of procedures, internal services and staffing to assure they are efficient and appropriate for the organization’s policies; and (4) reporting recommendations for Improvements to management (Eden and Moriah 2006).                                                                                                                                       

      Internal auditing becomes necessary as a result of the extended span of control faced by the management concerning the employment of men and material in the conduct of organizational affairs. The work of the internal audit are very important In the most modern organization and have trust of responsibility to advice the management and enforce the operations of internal control, and the internal checks in the organization. The inefficiency in the organization during day to day activities are controlled.

   Internal audit is an independent appraisal activity in the organization as a service to the management.

The duties are usually define by management and these include:

Measurement of the adequacy and effectiveness of the internal control system on a continuous basis;

Routine checks to prevent and detect errors and frauds;

Provision of hireling advice to management on internal control matters;

Investigation of reported cases of all practices;

Provision of statistical data for management information and decision making; Other special assignment such as disposal of asset, staff audits.

         Inspite of this being a seemingly exacting and challenging function of the internal audit department. In some organization, the management starves the internal auditors of funds, staffing and training. It is necessary for internal audit to have credibility by having an internal auditors persons of integrity.

The above qualities of internal auditors contributed to the inefficient of the internal audits of the organization world-wide.

As regards, the problems which usually affects the internal audit departments, the staff of some organization treats the internal audit as “blood hound” and not “watch dogs”. The fraudulent staff would will not normally corporate with the internal auditors as regard to the supply of information which should be used for the effective checks of the works in the organizational activities.

In our society where the business culture has been overridden in recent times with fraudulent practices penetrated by management and employees, the lack of clear understanding of the duties of an auditor in relation to fraud detection has often led to unjustifiable criticisms of his role. Auditors are known to be competent, honest and independent professionals who express unbiased opinion on the truth and fairness of the financial statement as presented by management to members of the company. The accounting profession has over the years built a reputation, which encourages others to rely upon the opinions auditors express. If these opinions are unclear or even unreliable, serious consequences may and indeed have resulted.

The auditor’s duty is to examine the financial records of the company and to take reasonable care to ascertain that the financial records show the company’s true position. The auditor is expected to prepare a detailed report to the company members and the report shall state the matters set out in schedule six to this act. The auditor is also to consider whether the information given in the director’s report for the year for which the accounts are prepared is consistent with those accounts; and if they are of opinion that it is not, they shall state that fact in their report. If the subsiding company and its auditors fail to provide this information, every other officer who is in default shall be guilty of an offence and liable to fine. That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Gay et al 2007). This debate has been especially highlighted by the collapse of both small and big corporations across the globe. The auditing profession in Nigeria has caught the media’s attention following financial scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afribank, and Bank PHB among others.

There seems presently to be a misconception that auditors’ duties are largely the preventing, detecting and reporting of fraud, for example, Idris (2009). Financial report users’ perceptions of the extent of fraud in Nigeria, and to determine their perceptions of the auditor’s responsibilities in detecting fraud and the performance of related audit procedures. The paper also aims to ascertain whether the report users’ perceptions of auditors’ responsibilities on fraud are consistent with those of the auditing profession as expressed in auditing standards in Nigeria.

Fraud, according to Adeniji (2004) and ICAN (2006), is an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 2008 and, Bostley and Drover 2002). Fraud has increased considerably over the recent years and professionals believe this trend is likely to continue. According to Brink and Witt (2002), fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management. ISA 240 ‘The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statement (Revised)’ refers to fraud as “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Aderibigbe and Dada (2007) define fraud as a deliberate deceit planned and executed with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether the perpetrator benefits from his/her actions.

Weirich and Reinstein (2000 cited in Allyne & Howard 2005), define fraud as “intentional deception, cheating and stealing”. Some common types of fraud include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales, undeclared stock, making unauthorized “write-offs”, and claiming excessive or never-incurred expenses. Pollick (2006) regards fraud as a “deliberate misrepresentation, which causes one to suffer damages, usually monetary losses”. Albrecht et al (2005 cited in Allyne & Howard, 2005) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud, customer fraud, and miscellaneous fraud. Fraud also involves complicated financial transactions conducted by white collar criminals, business professionals with specialized knowledge and criminal intent (Pollick 2006).

The terms fraud, waste and abuse are often used interchangeably, even though they are conceptually and legally distinct. They nevertheless often coexist, frequently arise from the

same underlying factors, and, in terms of prevention, they are often amenable to the same countermeasures. Fraud against the government is more easily accomplished in an environment of administrative and fiscal laxity. Indeed, it may well be that a significant proportion of revenue loss flows less from deceit than from careless or inefficient management of public resources. In any event, the appearance of carelessness and inefficiency can be an invitation to perpetrators of fraud.