Internal Audit Effectiveness And Public Sector Financial Reporting Quality Of Selected Federal Government Health Institutions In Lagos State
Internal Audit Effectiveness And Public Sector Financial Reporting Quality Of Selected Federal Government Health Institutions In Lagos State
Abstract
This study was carried out on the internal audit effectiveness and public sector financial reporting quality of selected federal government health institutions in Lagos State. The study was carried out to examine the effect of internal audit standards on audit effectiveness in public sector financial reporting quality, examine the effect of internal audit independence on audit effectiveness in public sector financial reporting quality, examine the impact of professional competence on financial reporting quality in the public sector, examine the effect of top management support on audit effectiveness in public sector financial reporting quality, and find out the factors affecting internal audit effectiveness in the public sector. The survey design was adopted and the simple random sampling techniques were employed in this study. The population size comprised of accounting/financial staff of the selected Federal Government Health Institutions In Lagos State. In determining the sample size, the researcher conveniently selected 57 respondents and 50 were validated. Self-constructed and validated questionnaire was used for data collection. The collected and validated questionnaires were analyzed using frequency tables. While the hypotheses was tested Pearson Correlation statistical tool, SPSS v23. The result of the findings reveals that internal audit standards has a significant effect on audit effectiveness in public sector financial reporting quality. The result of the findings reveals that internal audit independence has a significant effect on audit effectiveness in public sector financial reporting quality. Therefore, it is recommended that Public sector institutes should recognize that technical proficiency of a professional includes a continual awareness of developments taking place in operational activities, this gives opportunity to professional to study, understand, and apply new development on auditing procedures and dissemination of relevant financial information which will enhance reporting quality. To mention but a few.
Table of Content
Chapter One:
Introduction
- 1.1 Background of the Study
- 1.2 Statement of the Problem
- 1.3 Objective of the Study
- 1.4 Research Questions
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of the Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organization of the Study
Chapter Two:
Review of Literature
- 2.1 Conceptual Framework
- 2.2 Theoretical Framework
- 2.3 Empirical Review
Chapter Three:
Research Methodology
- 3.1 Research Design
- 3.2 Population of the Study
- 3.3 Sample Size Determination
- 3.4 Sample Size Selection Technique and Procedure
- 3.5 Research Instrument and Administration
- 3.6 Method of Data Collection
- 3.7 Method of Data Analysis
- 3.8 Validity of the Study
- 3.9 Reliability of the Study
- 3.10 Ethical Consideration
Chapter Four:
Data Presentation and Analysis
- 4.1 Data Presentation
- 4.2 Analysis of Data
- 4.3 Answering Research Questions
- 4.4 Test of Hypotheses
Chapter Five:
Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
- REFERENCES
- QUESTIONNAIRE
Chapter One
Introduction
1.1 Background of the Study
The attributes of internal audit practice are very central to the internal control system of both public and private organizations. Internal auditors play a vital role in promoting ethical business principles, based on the best practices of an internal control system. In most cases, external auditors put more reliance on the internal control system of firms to be audited the absence or weakness of which put the auditor into inquiry. Therefore internal audit is a powerful internal control mechanism that must be well established by an organization for a better financial reporting quality. For instance, Soh and Martinov (2011) argued that the management and the external auditor should assess the quality of internal control, which includes evaluation of the quality of the internal audit function, as the internal control in its wider sense, including the internal audit function.
Internal auditing (IA) is recognized as a valuable monitoring and advising mechanism in ensuring the reliability of financial reporting (Prawitt, Smith and Wood 2009; Lin et al.2014; Johl et al. 2016). Continuous cooperation with the board of directors, executive directors and external auditors in the context of testing the effectiveness of internal control over financial reporting, IA is assigned an active role in ensuring the integrity, quality and reliability of the financial reporting process (Subramaniam and Stewart 2006; Prawitt et al. 2009; Sarence, De Beelde and Everaert 2009). It is expected that internal audit, through the process of discovery of defects, analyzing causes and proposing measures for removing the shortcomings act as a “constructive critic” who constantly contributes to the improvement of the organization and “uphold ethics and corporate integrity” (Aghghaleh F. Sh. et al. 2017, 105). Johl et al. (2016) agree that the competences and responsibilities of IA in implementing effective management processes give to IA a critical role in ensuring the integrity of the financial reporting process.
The main objective of financial reporting is to provide high quality financial information about economic entities that is useful for economic decision making. According to International Accounting Standard Board (IASB), (2008), high quality financial reporting is critical to investors and other stakeholders in making investment, credit and similar decision. An important variable of financial reporting that is usually used as a yardstick of financial reporting quality is accounting earnings, as it is reported in the published financial report of firms is expected to provide a timely and reliable input to potential investors, shareholders, creditors, employees, management, financial analysts, regulators and other stakeholders for efficient economic decisions.
It is in view of the importance of quality financial reporting that the International Federation of Accountants (IFAC) and its audit arm International Auditing and Assurance Standards Board (IAASB), stated that audit services is an assurances service that the financial statements prepared by the relevant authority is true and fair, and free from intentional and unintentional errors and misstatements, and conform to the relevant rules and regulations guiding the preparation and presentation of accounting information (IAASB, 2016).
In addition, Internal auditors are concerned with the entire range of an organization’s internal controls that includes operational, financial, and compliance controls (Simmons, 1997). Contemporary internal controls and well-functioning internal audit systems are meant to deliver key assurances to all stakeholders against corruption, waste, and inefficiencies in public services. In the absence of a control system with internal audit as a safeguard for checking efficiency and effectiveness of that system, government offices are vulnerable to waste, corruption, and inefficiencies.
The goal of internal audit function should be to add value and improve an organization’s operations and control structure. Effective and efficient audit of accounts ensures the proper reporting of the activities of an organization (Okezie, 2008; Nwaorgu, 2003). Internal auditing ensures that funds have been expended in accordance with the terms by which such monies were appropriated and that accounts have been properly prepared (Johnson, 2004). It provides both governments and related parties with a powerful tool for understanding the extent to which the public institution has delivered on-budget and effective services. Therefore, internal audit is “a well-defined activity and a recognized profession” (Manasseh, 2007; IIA, 1994) that is performed by professionals who determine whether the organization’s decision making is sound and effective. The elements of effective internal audit comprises; auditor independence, good working relationship, proper staffing and training, exercising due care, evaluation of internal control systems, proper reporting and follow-ups, among others (IIA, 2004).
1.2 Statement of the Problem
Internal controls are the safeguards put in place by an organization to ensure that its priorities, goals, and missions are met. They are a collection of policies and procedures used by an agency to ensure that an organization’s transactions are handled properly in order to prevent waste, theft, and abuse of resources. Internal controls are mechanisms developed and implemented by those in charge of governance, management, and other staff to provide fair assurance that an entity’s goals in terms of financial reporting reliability, operational effectiveness and performance, and compliance with relevant laws and regulations are being met (Mwindi, 2008). Internal audit is a control set up by management to review and report on the adequacy, efficacy, and adherence of the internal control structure established by management. Examining financial and operational records, evaluating compliance with relevant laws, management practices, and reporting requirements, and conducting value for money checks and fraud investigations are some of the other roles performed by internal auditors to ensure quality financial reporting.
Many businesses have failed, and large corporations have failed, as a result of their failure to adopt and implement sound financial management practices, which occurred in the absence of investors and other financial data users. Most corporate failures over the years went unnoticed by their shareholders and other financial information users until they collapsed due to attractive and healthy financial statements being published. In Nigeria, many public sector entities in recent time have been characterized with the high incidence of fraud, misappropriation, misapplication of funds and poor operational efficiency (Jenfa, 2003). Despite the fact that internal audit departments exist in public sector entities in Nigeria, various forms of financial crimes still continue. For instance, there are cases of fraud, irregularities and even breaches of other controls (Okoya, 2002).
Hence, corporate accounting scandals coupled by an outcry for transparency and integrity in financial reporting have given rise to two logical outcomes. Internal audit skills are now critical in resolving the complicated accounting manipulations which have muddled financial statements. In addition, public outcry for change and regulatory action has modified the face of corporate governance. As a result, the bar of ethical and legal scrutiny has been raised for agents of organizations working for the principals. These outcomes are jointly responsible for addressing public anxieties about the financial reporting system. However, laxity still exists in implementing these internal audit findings and recommendations. (Kinyua et al., 2018). With regard to the above, this study seek to examine internal audit effectiveness and public sector financial reporting quality.
1.3 Objectives of the Study
The main aim of this study is to examine the internal audit effectiveness and public sector financial reporting quality of selected federal government health institutions in Lagos State.
Other aims of this study are:
- Examine the effect of Internal Audit Standards on audit effectiveness in public sector financial reporting quality.
- Examine the effect of internal audit independence on audit effectiveness in public sector financial reporting quality
- Examine the impact of Professional Competence on financial reporting quality in the public sector.
- Examine the effect of top management support on audit effectiveness in public sector financial reporting quality.
- Find out the factors affecting internal audit effectiveness in the public sector.
1.4 Research Questions
The study will be guided by the following questions.
- Does internal audit standards have a significant effect on audit effectiveness in public sector financial reporting quality?
- Does internal audit independence have a significant effect on audit effectiveness in public sector financial reporting quality?
- Does professional competence of auditors have a significant effect on internal audit effectiveness in public sector financial reporting quality?
- Does top management support have a significant effect on internal audit effectiveness in public sector financial reporting quality?
- What are the factors affecting internal audit effectiveness in the public sector?
1.5 Research Hypotheses
Ho: There is no significant positive relationship between internal audit effectiveness and public sector financial reporting quality.
Ha: There is a significant positive relationship between internal audit effectiveness and public sector financial reporting quality.
1.6 Significance of the Study
The project intended to bring to light the issues of internal auditing effectiveness in public sector with a view of coming up with possible ways to improve it.
The research work will be of vital importance to the government, bringing to light the challenges hampering the efficiency of the internal auditing and how these challenges can be tackled.
The research work will also be of significance to the management or head of department of various public corporations so as to see the importance of effective internal control system and the discharge of their responsibilities to the auditors as a yardstick to improve organizational performance. It is also necessary for the auditors to understand their loopholes so that necessary adjustments could be made to enhance their efficiency.
1.7 Scope of the Study
This study focuses on the internal audit effectiveness and public sector financial reporting quality of selected Federal Government Health Institutions In Lagos State. The study will further ascertain the factors affecting internal audit effectiveness in the public sector. Hence, accounting/financial staff of the selected Federal Government Health Institutions In Lagos State will serve as respondents.
1.8 Limitations of the Study
In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. However, the researcher were able to manage these just to ensure the success of this study.
Moreover, the case study method utilized in the study posed some challenges to the investigator including the possibility of biases and poor judgment of issues. However, the investigator relied on respect for the general principles of procedures, justice, fairness, objectivity in observation and recording, and weighing of evidence to overcome the challenges.
1.9 Definition of Terms
Auditing:
This is the process by which a competent independent person accumulates and evaluates evidence about quantifiable information and established criteria.
Internal Control:
Internal control is the whole system of control, financial and otherwise, established by management in order to carry on with the business to an enterprise in an orderly manner, ensure adherence to management policies, safeguard its asset and secure as far as possible the completeness, accuracy and reliability of books and other records.
Public Sector:
Consist of all organization whose control lies in the hands of the public and whose objective involves the provision of services where profit is not the primary motive.
1.10 Organization of the Studies
The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, population of the study, sample size determination, sample size, and selection technique and procedure, research instrument and administration, method of data collection, method of data analysis, validity and reliability of the study, and ethical consideration. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.
Chapter Five
Summary, Conclusions and Recommendations:
5.1 Introduction
This chapter summarizes the findings on the internal audit effectiveness and public sector financial reporting quality of selected federal government health institutions in Lagos State. The chapter consists of summary of the study, conclusions, and recommendations.
5.2 Summary of the Study
In this study, our focus was on the internal audit effectiveness and public sector financial reporting quality of selected federal government health institutions in Lagos State. The study is was specifically aimed to examine the effect of internal audit standards on audit effectiveness in public sector financial reporting quality, examine the effect of internal audit independence on audit effectiveness in public sector financial reporting quality, examine the impact of professional competence on financial reporting quality in the public sector, examine the effect of top management support on audit effectiveness in public sector financial reporting quality, and find out the factors affecting internal audit effectiveness in the public sector.
The study adopted the survey research design and randomly enrolled participants in the study. A total of 50 responses were validated from the enrolled participants where all respondent were accounting/financial staff of the selected Federal Government Health Institutions In Lagos State.
5.3 Conclusions
In the light of the analysis carried out, the following conclusions were drawn.
Internal audit standards has a significant effect on audit effectiveness in public sector financial reporting quality.
Internal audit independence has a significant effect on audit effectiveness in public sector financial reporting quality.
Professional competence of auditors has a significant effect on internal audit effectiveness in public sector financial reporting quality.
Top management support has a significant effect on internal audit effectiveness in public sector financial reporting quality.
The factors affecting internal audit effectiveness in the public sector include; shortage of qualified personnel, lack of professional independence, lack of privileges of office, and hazards of office.
5.4 Recommendation
Based on the findings the researcher recommends;
- Public sector institutes must analyze, define, and incorporate control setting, information, and communication components of the internal control system that are appropriate for their work processes, as well as enhance the current components.
- Public sector institutes must ensure that their accounting system is completely computerized and that their staff has the capacity to increase the accuracy of financial reports in order to make informed decisions.
- Public sector institutes must also take measures to strengthen its internal auditing processes.
- Public sector institutes should recognize that technical proficiency of a professional includes a continual awareness of developments taking place in operational activities, this gives opportunity to professional to study, understand, and apply new development on auditing procedures and dissemination of relevant financial information which will enhance reporting quality.
- Auditors should be motivated financially as this might give them adequate resources to conduct a thorough audit capable of uncovering material misstatements and errors in the financial proclamations.
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