Research Proposal

INTERNAL AUDIT FUNCTION IN PROMOTING GOOD

GOVERNANCE IN THE PUBLIC SECTOR

MODULE CODE: QUAN 3401

ACADEMIC YEAR: 2016/2017

MODULE CONVENOR: DR K.D.PADACHI

COHORT: BFM 14B/PT

PRESENTED BY: Sample

Not for circulation – except for you to get an idea

 TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION

1.0 Introduction 3

1.1 Background of the Study 3

1.2 Problem Statement 4

1.3 Aims and Study Objectives 4

1.4 Significance of the Study 4

CHAPTER 2: LITERATURE REVIEW

2.0 Introduction 5

2.1 Internal Auditing 5

2.2 Good Governance 6

2.3 Role of Internal Auditors 7

2.4 Importance of Good Governance 7

2.5 Internal Auditing and its impact on Good Governance 8

2.6 Conclusion 9

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CHAPTER 3: RESEARCH DESIGN AND METHODOLOGIES

3.0 Introduction 10

3.1 Study Objectives 10

3.2 Research Plan 10

3.3 Sources of Data 11

3.4 Targeted Population 11

3.5 Sampling Plan 11

3.6 Research Instrument 12

3.7 Questionnaire Design 13

3.8 Pilot Testing 13

3.9 Execution of Survey 13

3.10 Data Analysis Technique 13

3.11 Limitation of the Study 14

3.12 Summary 14
References 15

Appendix20

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 CHAPTER 1

1.0 Introduction

A professional, independent and objective internal audit service is one of the key elements of
good governance in the public sector. Following the series of large scandals and failures at the
beginning of the 21st Century, all over the world there was a realisation that Internal auditing
plays an important role in the achievement of good governance in terms of transparency and
accountability in the management of public resources.

1.1 Background of the Study

Internal auditing is an integral part of the good governance mosaic in both the public and the
private sectors (Cohen et. al., 2002). In many countries, therefore, it has received an increasing
attention as an important component of public financial management and as a tool for improving
the performance of the government sector. According to the professional guidance of the
Institute Internal Auditors (2012), public sector governance encompasses the policies and
procedures used to direct organisation’s activities to provide reasonable assurance that objectives
are met and that operations are carried out in an ethical and accountable manner.

Similarly, in Mauritius, the Government of Mauritius has in April 2013 published the Internal
Standard Operational Procedure Manual that states the purpose of the internal audit activity
(IAA) is to provide independent and objective appraisals and consultative services regarding risk
management, control, and governance processes of financial, operational and information
technology areas, and other relevant matters within the Ministry/Department.Thus, reflecting the
commitment ofthe Government to archivegood governance.

Although much importance has been given to the internal audit Function worldwide, there is a
need to assess whether the internal audit function has been able to achieve good governance in
the Mauritian Public sector.

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1.2 Problem Statement
Internal auditors often find themselves in an inconsistent position while discharging their duties.
They have to review the conduct and assess the effectiveness of the work of the top management
(Accounting Officers) but at the same time they have to report to these Accounting Officers for
any weakness or deficiencies noted.

In the same manner if there is no strong commitment by Management to initiate appropriate

remedial actions based on the internal audit reports, the achievement of good governance become
difficult.

Conflicts in different internal auditing roles in enhancing corporate governance have not gone
away with contradicting opinions on how internal audit affect the corporate governance with
some citing a positive effect (Herdman, 2002; Richards, 2002) and some saying it has very
minimal effect if any (Davidson et al., 2005).

Over the years the public sector has been receiving a lot of critics from the National Audit
Bureau. For instance, for the 18 months’ period January 2015 to June 2016 the National Audit
Bureau has highlighted major wastage of public funds. A question is left unanswered as to
whether internal auditors should be among the ones to blame when such wastages are highlighted
in the National Assembly.

1.3 Aims and Study Objectives

This study therefore aims at assessing the effectiveness of the internal auditors in the promotion
of good governance in the public sector.

The objectives of the research project are to examine:

1. Factors influencing the effective performance of internal auditors

2. The extent to which Ministries are willingto support internal Audit function
3. The relationship between the effectiveness of internal audit function and good
governance in the Public sector.

1.4 Significance of Study

The significance of the study will be to establish the relationship between the effectives of the
Internal Audit Function and good governance in the public sector.

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 CHAPTER 2

Literature Review

2.0 Introduction
This Chapter explores the principles of internal auditing and good governance and their
importance in the public sector. It also lays emphasis on the different views of Researchers on
how effective and efficient internal auditing has been in promoting good governance in the
management of public fund. Some of the theoretical views are also outlined and their main
findings are described.

2.1 Internal auditing

The Internal Audit Standard Operational Procedure Manual (Ministry of Finance and Economic
Development, 2013) defines internal audit as an independent objective assurance and consulting
activity designed to add value and improve an organization’s operations.

The Institute of Internal Audit (2004) has redefined internal audit activity as a tool to evaluate
and contribute to the improvement of risk management, control and governance, recognizes the
assurance and consulting role of internal auditing in corporate governance. The Internal audit
moves within a greater scope of management philosophy and of practical application, and adds
up value, offering at the same time a systematic scientific approach on the assessment and the
improvement of the effectiveness of businesses (Papadatou, 2005; Karagiorgos et. al, 2006).

More recently, IIA (2011) has described Internal auditing as:

“Internal auditing is an independent, objective assurance and consulting activity designed to

add value and improve an organisation’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplines approach to evaluate and improve the
effectiveness of risk management, control and governance processes.”

From the above definitions, it is clear that the internal audit is not just an one-sided tool for
controlling the order and rightness of certain situations, but it is a method of detecting the value
added up to an organisation, achieving the index of effectiveness and profitability of the
organisation (Nagy and Cenker, 2002; Goodwin, 2004 Karagiorgos et. al, 2007).

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2.2 Good Governance

There is no universally agreed-upon definition for the term “public sector governance.” What is
understood by the term appears to vary considerably between jurisdictions.

Good governance encompasses the notions of compliance, accountability, and transparency

(MacMillan, Money,Downing and Hillenbrad, 2004), and how managers exert their functions
through compliance with the existing laws and regulations and codes of conduct (Cadbury,
2000). The importance of good governance lies in its quest at crafting/continuously refining the
laws, regulations, and contracts that govern companies ‘operations, and ensuring that shareholder
rights are safeguarded, stakeholder and manager interests are reconciled,and that a transparent
environment is maintained wherein each party is able to assume its responsibilities and
contribute to the corporation’s growth and value creation (Page, 2005). Governance thus sets the
tone for the organization, defining how power is exerted and how decisions are reached.

A narrow view of Good Governance portrays it as an enforced system of laws and of financial
accounting, where socioenvironmental considerations are accorded a low priority
(Saravanamuthu, 2004). There is, however, a broader Good Governance conception,
emphasizing every business’ responsibilities toward the different stakeholders that provide it
with the necessary resources for its survival, competitiveness, and success (MacMillan et al.,
2004). As such, managers are primarily accountable toward stockholders whose wealth and
fortunes are at stake. But they are also responsible toward employees, suppliers, customers, and
communities whose investments in the company are equally significant in otherimportant
respects. Thus, within this broader conception, the interests of all stakeholders are accorded due
regard and consideration and posited as constraints on managerial action and shareholder rights
(Kendall, 1999).

Cadbury, 2000 defines Good Governance as “the system by which companies are directed and
controlled. The term governance like corruption is a broad topic that could be subjected to varied
and diversified interpretations and beliefs, and therefore may be quite difficult to measure to any
reasonable degree of reliability; hence no single definition may be sufficient for the concept of
governance. According to Downer (2000: 17), “governance is the exercise of power or authority
-political, economic, administrative or otherwise – to manage a country's resources and affairs. It
comprises the mechanisms, processes and institutions, through which citizens and groups
articulate their interests, exercise their legal rights, meet their obligations and mediate their
differences”. Governance includes activities that ensure a government’s credibility, establish
equitable provision of services, and assure appropriate organization of government officials to
reduce the risk of public corruption (IIA, 2006).

Recent and monumental corporate scandals and failures have redirected attention to issues of
good governance, ethics, trust, and accountability, heightening the debate on topics of Good
Governance and the ethics of economic conduct (Marsiglia and Falautano, 2005).

Ogundiya (2010) argued that many people may differ about the best means of achieving good
governance, but they quite consent that good governance is very important for social and
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economic progress. The Organization for Economic Cooperation and Development (OECD)
defines good governance “as a concept consisting of a set of principles that address the effective
functioning of government, the relationship of citizens and the parliament as well as the
relationship of government. These principles consist of respect for rule of law, openness,
transparency and accountability to democratic institutions, fairness and equity in dealing with the
citizen’s” (OECD, 2004: 28).

2.3 Role of Internal Auditors

As an essential element of a strong public sector governance structure, internal auditing supports
the governance roles of oversight, insight, and foresight. Because the public sector’s success is
measured primarily by its ability to deliver services successfully and carry out activities in an
equitable and appropriate manner, public sector audit activities should have the authority and the
competency to evaluate financial and performance compliance, effectiveness, economy, and
efficiency. Moreover, internal auditors must protect the core values of the public sector, as it
serves all citizens.

Globally, public sector entities at all levels have created internal audit activities to serve
organizations through their focused, real-time presence within the organization.

Internal audit function consists of policies and procedures designed to provide management with
reasonable assurance that the public sector achieves its objectives and goals (Monday et al.,
2014). It is part of the internal monitoring system of the organisation and therefore should be
positioned within the organisation such that the independence of internal auditors can be
guaranteed. Internal auditing has been found to be an instrument for improving public sector
management (Unegbu and Kida, 2011).

Although the internal audit activity can add significant value to the organization because of its
detailed familiarity and understanding of operational conditions, it may be hampered in
upholding the public trust if protections to its independence are not established and cannot be
maintained. Public sector entities must establish protections to ensure that internal audit activities
are empowered to report significant issues to appropriate oversight authorities. Safeguarding
auditor independence is particularly needed when the internal audit activity reports to officials
who also may be held accountable for any significant problems.

2.4 Importance of Good governance

The subject of governance has become a pertinent issue for business, government, politics, and
the general public. In both the private and the public sectors, there is an increasing demand for
good governance in terms of accountability and transparency.

Good governance became a highly topical business issue at the beginning of the 21st century
following a series of large corporate scandals and failures. Good governance refers to
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government agencies’ conduct in implementing innovativePolicies and programs to increase the
quality of public service with the ultimate aim of increasing economic growth (Grindle, 2004;
Hellman et al., 2000). Such innovative policies and programs address governance aspects such as
transparency, accountability, participation and professionalism (Liddle and Mujani, 2005).

Good governance leads to good management, good stewardship of public money, good public
engagement and, ultimately, good outcomes for citizens and service users. Good governance
enables an authority to pursue its vision effectively as well as underpinning that vision with
mechanisms for management of risk (OECD, 2004). No governance system, no matter how well
designed, will fully prevent greedy, dishonest people from putting their personal interests ahead
of the interests of the organizations they manage. However, certain steps can be taken to improve
good governance and thereby reduce opportunities for accounting fraud and irregularities.

According to Badra, 2012, internal audit units are established to ensure adherence to financial
regulations, laid down procedures, policies and plans. Thus, internal audit function plays a
significant role in promoting good governance in public sector administration.

2.5 Internal auditing and its impact on Good governance

Belay (2007) conducted a study on effective implementation of internal audit function to

promote good governance in the public sector in Ethiopia. The study revealed that the internal
audit function in the public sector had less satisfactory involvement to assess the effectiveness of
governance structure due to lack of resources, poor leadership for internal audit function,
absence of appropriate frame work to measure internal audit function performance, and lack of
competent personnel.

Ali et al. (2007) examined the role of internal audit in promoting good governance in the State
and Local Governments of Malaysia. The study employed in-depth interview via face-to-face
and telephone modes. Using descriptive statistics, the findings showed that the internal audit
function in the Malaysian State and Local Governmental Bodies had less satisfactory
contribution to the effectiveness of good governance due to lack of audit personnel and lack of
requisite skills and competency by the audit personnel. However, there was independence of
internal auditors and top management support to internal audit processes in the organisations.
Similarly, Ahmad et al.(2009) investigated the effectiveness of internal audit in Malaysian public
sector. The study revealed that that the lack of qualified audit staff was ranked as the major
problem faced by internal auditors in conducting an effective internal auditing.

Cohen and Sayag (2010) assessed the effectiveness of internal auditing in public organizations in
Israel. Professional proficiency of internal auditors, quality of audit work, organizational
independence, career and advancement and top management support were the variables used to
determine internal audit effectiveness. The findings of the study showed that top management
support was the most crucial to the operation and success of internal audit. This implied that
other determinants of internal audit effectiveness depend on top management support for internal
audit activity.

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Unegbu and Kida (2011) conducted a study on the effectiveness of internal audit as instrument to
improve public sector management in Kano State of Nigeria. Using Chi-square statistical tool to
test the hypotheses, the study showed that internal audit contributes positively to good
governance in the public sector by effectively checking fraud and fraudulent activities. In a
related study by Suyono and Hariyanto (2012), they examined the relationship between internal
control, internal audit and organisational commitment with good governance in Indonesia. The
results showed that internal audit, internal control and organizational commitment had significant
relationship with good governance. Rahmatika (2014) examined the impact of internal audit
function effectiveness on quality of financial reporting and its implications on good governance
in Local Government Provinces in Indonesia. Employing structural equation modelling (SEM),
the results showed that the effectiveness of the internal audit function had significant effect on
the quality of financial reporting; internal audit function had significant effect on good
governance application, and quality of financial reporting had significant effect on good
governance application.

Barasa (2015) examined the role of internal audit in promoting good governance in public
institutions in Kenya. Internal audit function was measured by risk management, control process,
and governance process, while accountability, transparency, effectiveness, efficiency and
responsiveness measured good governance. Using correlation analysis, the study showed that
there was a strong significant relationship between internal audit and good governance in public
institutions.

2.6 Chapter Summary

The literature review has shown that public sector auditing is crucial to good public governance
and it has an impact in promoting good governance. However further research needs to be
carried out on the extent to which internal auditing has been effective in its promotion to good
governance in the public sector. In addition, research has to be carried out on what are the
hurdles that are obtruding internal auditors to achieve good governance in the public sector.

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 CHAPTER 3

Research Design and Methodologies

3.0 Introduction

This chapter describes the research design, the targeted population, the sample size, the research
methodologies and instruments used to collect primary data and analyse the data.

3.1 Study Objectives

The ultimate aim of this study is to assess what extent internal auditing has been effective in the
promotion of good governance in the public sector and what are the hurdles that are obstructing
internal auditors to achieve good governance in the public sector.To attain these aims, the study
objectives are to identify stakeholders in the public sector administration and to gather their
opinions on the effectiveness of internal auditors. In addition to assess the problems that are
encounter by the internal auditing in their performance of their duties, the staff of the Internal
Control Cadre will be selected.

3.2 Research Plan

The research design constitutes the blueprint for the collection, measurement and analysis of data
(Cooper &Schinder, 2007). Based on the above study objectives, a plan has been devised to
collect information as it was a quantitative research. The plan consists of making decision on the
sources of data, targeted population, sampling, research instrument, and contact methods and
data collection.

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3.3 Sources of Data

In line with the study objectives primary data will be collected through self-administered
questionnaires as it is the main research instrument used for quantitative research. This approach
is most suited for this study.

3.4 Targeted Population

Target population refers to all the members of a real or hypothetical set of people, events or
subjects to which a researcher wishes to generalize the results of the study (Ngechu, 2004). The
targeted population for this particular study includesthe officers working in the 24 Ministries in
the Public Sector who are as follow:

1. Managers and Assistant Managers working in the Finance cadre

2. Deputy Permanent Secretaries and Assistant Permanent Secretaries working in the
Administration cadre
3. Managers and Assistant Managers in the Internal Control

3.5 Sampling Plan

For the purpose of this study the targeted population will be restricted to officers working in Port
Louis which represent 75% of the ministries located in the center of Mauritius. This is so mainly
for reasons of time constraints, practicability, convenience and costs constraints. The study will
adopt a stratified random sampling technique to give an equal chance of selecting each officer
from within the particular Cadre .In total a sample of 150 officers will be selected and the
following officers are:

- 25 Managers and 25 Assistant Manager of the finance officers,

- 25 Deputy Permanent Secretaries, 25 Assistant Permanent Secretary in the Administrative

cadre

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- 12 Managers, 15 Assistant Managersand 23 Principal Internal Control Officers in the Internal
Control

The purpose of choosing 150officers is to improve the meaningfulness of the information and
ultimately represent a more realistic outcome of the study objectives.

3.6 Research Instrument

Survey is one of the most appropriate methods used in collection of primary data (Said and
Khasharmeh, 2014). Therefore, our data source is coming from a questionnaire that will be used
for the needs of our study and assess the internalaudit’s effectiveness and good governance in the
public sector.The questionnaire used for this particular study had been adapted from a study
carried out by Padachi (2016) in his research on “Assessing Corporate Governance Practices of
Mauritian Companies”.

3.7 Questionnaire Design

For the purpose of this study, the questionnaire (see Appendix A) consisted of different open
ended and close ended questions. Each of them had a specific objective. The types of questions
used were multiple choice questions, dichotomous questions and likert scale questions. A five
point non-comparative Likert scale was used for the structured questions, the intent of the Likert
is that the statement represents different aspects of the same attitude. Likert scale is simple to
construct, and easy for the respondents to read, understand and respond appropriately to the
statements put across. The Likert scale enhances the production of highly accurate results during
analysis. Secondary data was collected from government reports, magazines, newspapers and
journals.

The questionnaire was made up of 4 sections namely Section A, B, C and D having a specific
purpose which is obviously linked to the initial study objectives. Should have elaborated on the
different sections.

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3.8 Pilot Testing

One of the most important steps before administering the questionnaires is pilot testing. The
objective of this step was to detect any unclear questions that are the ultimate aim was to ensure
consistency and reliability of the questionnaire. Five questionnaires were distributed to the
different officers of the Finance cadre, Administrative Care and internal control cadre posted in
the different Ministries. A few modifications in terms of language used were done.

3.9 Execution of Survey

The survey will be administered through a questionnaire. The questionnaires will be handed
over to the respondents and same will be collected within the next 2 to 3 days. As such the
respondents will have ample time to choose their answers and also sufficient time to fill in the
questionnaires. They will be made aware of the confidentiality of the information gathered and
that the information will be used purely for academic purpose.

3.10 Data Analysis Technique

Analysis will be done with the help of the Statistical Package for the Social Science (SPSS)
version 18 to generate results for various tests such as mean, one sample test and chi-square test.
Microsoft Office tools namely Microsoft Excel and Microsoft Word version 2010 will be used
for high quality graphical presentations such as tables and bar charts and writing the report
respectively.

A multivariate regression analysis will be also used to determine the relationship between the
independent variables and the dependent variable. The regression equation is:

Y = β0 + β 1 X 1 + β 2 X 2 + β 3 X 3 +ε ,

whereY = Good Governance in the ministries,

β 0= Constant Term,

β 1, β 2 and β 3, = Beta coefficients

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X 1 = Effective internal auditing Function (understanding of the internal control system in place,
Assessment of the internal control systems, effective reporting and follow up),

X 2 - Management involvement (proper record keeping, communication, monitoring and taking

remedial actions),

X 3 = Compliance and Consulting (compliance with specified procedures, provision for the timely
reconciliation of accounts, promoting accountability, fraudulent activities or irregularities, ensure
effectiveness and efficiency of operations, reviews of operational and financial performance)

ε = Error term

3.11 Limitations of Methodology

Given the different locations of the Ministries, it will be time consuming to contact each officer
individually; therefore, some questionnaires will be transmitted online to officers instead of
meeting in person upon their request for filling of the questionnaire.

3.12 Validity and Reliability

3.12 Summary

This chapter focuses on the research plan where the target population and sample is defined. It
also highlights on the research instrument which explained the questionnaire design as well as
the types of questions used. In addition, a pilot testing will be carried out to ensure the reliability
and consistency of the questionnaire. Finally, the focus is made on how the data will be obtained
from the questionnaires analyzed and presented using SPSS as well Microsoft Office tools and
the limitations of the study is also integrated.

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APPENDIX I

Questionnaire

Dear Respondent,

I am a part time student of the University of Technology, Mauritius, studying BSC (Hons) in
Finance with Specialisation in Public Finance. As part of the dissertation requirements I am
carrying a research on “Internal Auditing and good governance in the public sector’.

I shall be very grateful if you could devote some of your precious time to complete the annexed
questionnaire. Please note that all information provided in the questionnaire will remain
confidential.

Thank you in advance for taking the time to assist in this research and hoping that you will
respond positively.

Yours sincerely

SharmilaBaznauth

Tel: 59485897
Email:sbaznauth@yahoo.com

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APPENDIX II

Questionnaire: INTERNAL AUDIT FUNCTION IN PROMOTING GOOD GOVERNANCE

SECTION A

RESPONDENT PROFILE

The Profile of respondents help to heighten the relevance and determination of the facts gathered
1. Name of the Ministry where you work…………………………………………………….
2. Post held……………………………………………………………………………………
3. Gender: Male Female

4. Highest level of Education

(a) Secondary
(b) Undergraduate Degree
(c) Post graduate Degree
(d) Professional Degree

5. How many years of service do you have in the public sector?

(a) 0-10 years

(b) 11-20 years

(c) More than 20 years

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SECTION B

Internal Control and the Effectiveness of Internal Audit Function

1. How you will rate the internal control systems in your Ministry? Use a scale of 1-5 where 5 very
strong, 4=strong, 3=moderate, 2= weak and 1= very weak

1 2 3 4 5
System and procedures
Financial controls
Managerial controls
Operational controls
Communication and information flow
Records keeping and its availability

2. How effective Internal auditing is in promoting good governance in your ministry? Use a scale of 1-5
where 5= very effective, 4= effective, 3 = Moderately effective, 2= slightly effective and 1= ineffective

1 2 3 4 5
Risk Mitigation
Risk Monitoring
Suggest risk management strategies
Provide assurance that the risks are
being appropriately managed
Assess ethics and values within the
organization,
Assess performance management
Assess communication of risk
Unplanned and informal reviews of
other areas of concern, including
unacceptable levels of risk
1 2 3 4 5
1 2 3 4 5
COMPLIANCE
Ensure that public spending is within
budgetary provisions
Ensure disbursements comply with
specified procedures
Provides for the timely reconciliation of
accounts
Provides effective systems for managing
and accounting for physical and financial
assets

Promoting accountability
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 Providing information about any
fraudulent activities or irregularities
Ensure effectiveness and efficiency of
operations
Ensure reliability and integrity of
financial and operational information
A source of information on major frauds
and irregularities
Reviews of the agreement framework
and specific compliance issues
Reviews of operational and financial
performance
Suggestions for more helpful and
competent use of resources
Appraisals of the achievement of
corporate goals and objectives
Compliance with laws, regulations, and
contracts
Advice and comment on devotion to the
values and code of conduct/code of
ethics

3.What are the obstacles according to you prevent Internal Auditors from performing their duty
effectively?

(a) Lack of tools for effective delivery

(b) Lack of commitment by Management

(c) Lack of skills and knowledge of Internal Auditors

(d) Auditees are not always cooperative / Lack of information

(e) Independence/ interference of Management/political party

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SECTION C

Good Governance

1. How would you rate the following attributes of good governance in your ministry in the last five
years?

Greatly Improved (4) Constant (3) Decreasing (2) Greatly

Improved (5) Decreasing (1)
Discipline
Transparency
Independence
Accountability
Responsibility
Fairness
SocialResponsiblity

SECTION D

1. Do you agree that a strong Internal Audit Function helps in promoting good governance?

(a) Strongly agree

(b) Agree

(c) Neutral

(d) Disagree

(e) Strongly disagree

THANK YOU FOR YOUR COOPERATION

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