INTERNAL AUDIT AND CORPORATE GOVERNANCE EFFECTIVENESS IN THE NIGERIAN OIL AND GAS SECTOR: EVIDENCE FROM SELECTED OIL AND GAS COMPANIES IN RIVERS STATE

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1 INTERNAL AUDIT AND CORPORATE GOVERNANCE EFFECTIVENESS IN THE NIGERIAN OIL AND GAS SECTOR: EVIDENCE FROM SELECTED OIL AND GAS COMPANIES IN RIVERS STATE EKE, GIFT O. ABSTRACT The major objective of this study was to determine the extent to which internal auditors assist management of oil and gas companies in achieving effective corporate governance. The descriptive research method was used in the investigation and the survey design was adopted. Sixty (60) respondents randomly selected from the internal audit, accounting and operations units of the Nigeria Liquefied Natural Gas (NLNG) Company, Nigerian National Petroleum Company (NNPC) and Total E&P in Rivers State were surveyed. Data were collected through the review of literature as well as questionnaire administration and structured interviews. The reliability index of the instrument was 0.81 and was obtained using the spilt-half technique. Percentages were used in summarizing data obtained. Theinvestigation found out that internal auditors to a significant extent assist management of companies operating in the Nigerian oil and gas sector in achieving effective corporate governance. Thus, it was concluded that internal auditors play a significant role in ensuring corporate governance effectiveness in the Nigerian oil and gas sector. One of the recommendations made was that Oil and gas entities should sustain the significant and positive influence of internal auditing on corporate governance by continuously enhancing the competency of internal auditors through training and development. KEY WORDS: Internal audit, corporate governance, oil and gas, internal control. 1.1 INTRODUCTION Lack of or inadequate corporate governance has been identified as a major cause of failure of many organisations across the world in the recent past. The collapse of companies such as Polly Peck, the Mirror Group Newspapers, BCCI and Maxwell Communications Corporation (in the UK), Enron Energy Corporation, WorldCom, Adelphia, Tyco International and Peregrine Systems (in the US) as well as NITEL and NAFCON (in Nigeria) have been discovered to be due to corporate governance deficiencies. Investigations carried out in the UK and US which gave rise to the Combined Code on Corporate Governance (in the UK) and enactment of the Sarbanes-Oxley Act (in the US) identified non-existence or ineffectiveness of internal audit in the affected companies as one of the major causes of corporate governance failures. Internal audit is traditionally a feature of public sector and large organisations. The internal audit function facilitates the achievement of the nominated objectives of an organisation. The origin of internal auditing is not certain, however, the history of modern internal auditing can be traced to the Industrial Revolution period.internal auditing began as a one-person clerical function that primarily involved performing independent verification of bills before payment. Over the years, internal auditing has evolved into a highly professional activity that extends to the appraisal of 105

2 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State the efficiency and effectiveness of all aspects of an organisation's operations, both financial and non-financial. These changes have led to the establishment of internal audit departments by many organisations.internal audit plays an important assurance role in an organisation's governance processes, particularly in the area of risk management and control (Aguolu, 2002; Millichamp& Taylor, 2008; & Meisser, 2000). In recent times, the expectations placed upon internal audit have increased and the function is being relied on to make a significant contribution. 2.1 THEORETICAL REVIEW This section presents a theoretical framework of the concept of internal auditing and corporate governance. We begin by examining the meaning of internal auditing and corporate governance. Thereafter, we shall examine the functions of internal auditors, internal audit assignments, principles of corporate governance and internal audit's role in corporate governance in the oil and gas sector. 2.2 MEANING OF INTERNAL AUDITING In its simplest term, internal audit is an audit conducted in respect of the affairs of an organisation by its employees or by an external service provider (Eke, 2015). Traditionally, internal auditing is described as an independent appraisal function within an organisation for the review of accounting, financial and other operations as a basis of service to management (Millichamp& Taylor, 2008). From this definition, the following deductions can be made: Internal auditors carry out independent reviews of the operations of an organisation. The internal auditor's work focuses on both the financial and non-financial aspects of an organisations operations. Internal auditors report to management. In an effort to explain the meaning of internal auditing, the Institute of Internal Auditors (IIA), a US based professional body, provided a contemporary definition of internal auditing. It defined internal audit as an independent, objective assurance and consulting activity designed to add value and improve the operations of an organisation.this definition recognises that the internal audit function: Should be independent of management and be able to make objective judgement Provides reasonable assurance regarding the achievement of objectives in all aspects of an organisation's operations Helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes (Institute of Internal Auditors, 2002). 2.3 CONCEPT OF CORPORATE GOVERNANCE Corporate governance was not a recognised business management concept until the early 1990s when a number of business failures in the UK prompted the UK government and regulatory 106

3 Nigerian Journal Of Oil And Gas Technology - Vol 2 No. 2 authorities to set up committees to investigate the failures. The term corporate governance is synonymous with efficiency and effectiveness in the administration of an organisation. Corporate governance, therefore, means the system by which an organisation is directed and controlled (Eke, 2015, Millichamp& Taylor, 2008 & BPP Learning Media, 2010). It encompasses the processes, customs, policies, laws and institutions affecting the way an organisation is directed, administered and controlled. Corporate governance also focuses on the relationships among the various stakeholders associated with a corporation and the goals for which the corporation is set up. Corporate governance is designed to ensure accountability by individuals entrusted with the resources of an organisation through mechanisms that attempt to reduce the principal agent problem associated with the management of business and nonbusiness organisations. A good corporate governance system should ensure that: There is a healthy board culture which safeguards policies and processes. An independent audit committee is in place to provide oversight on the activities of the board of directors. A strong internal control system exist. The organisation is committed to responding to existing legislation and external market influences. The external auditor's independence is preserved. 2.4 FUNCTIONS OF INTERNAL AUDITORS In order to perform its work efficiently and effectively, internal audit will need to have unfettered access to necessary information, people, records and outsourced operations across the organisation. Whether in the public or private sector, internal auditors perform functions which are designed to add value and improve an entity's operations.the functions performed by internal auditors as identified by Aguolu (2002), Millichamp and Taylor (2008), BPP Learning Media (2010) and the Institute of Internal Auditors (2002) include: To determine the reliability and integrity of financial information and reports made available to management for decision making. To monitor and review the effectiveness of the internal control system of the organisation. To safeguard assets and records of the business. To prevent and detect fraud. To carry out information technology and financial audit. To appraise the economy, efficiency and effectiveness of resource utilization. To support or assist the external auditor to ensure that the external audit is conducted effectively and thereby resulting in cost savings. To carry out investigations into any aspect of the business that may be of concern to the management or the audit committee. 107

4 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State 2.5INTERNAL AUDIT ASSIGNMENTS A PRACTICAL PERSPECTIVE This section considers the various tasks that can be carried out by the internal audit department in the performance of its function and in order to achieve organizational objectives. The assignments internal auditors execute are designed to identify, analyse, evaluate and record sufficient information to achieve the engagement's objectives. The head of internal audit will need to determine how internal auditors carry out their work and the level of evidence required to support their conclusions. The assignments performed by internal auditors as pointed out by Okezie (2015), Eke (2015), Aguolu (2002), Millichamp & Taylor (2008), BPP Learning Media (2010) and the Institute of Internal Auditors (2002) are summarized below: Figure 2.1: Internal Audit Assignments Source: Eke, G.O. (2015) Financial Audit: Financial audit involves reviewing evidence to substantiate information contained in the accounting records and financial statements made available to management for decision making. Financial audit focuses on transactions and events related to revenue or sales, cash, acquisition of assets, expenditure, financial capital receipts and payments, personnel and payroll, as well as external financial reporting. 108

5 Nigerian Journal Of Oil And Gas Technology - Vol 2 No. 2 Operational/Process Audit: This is designed to ensure that policies are adequate and that they are working effectively, i.e. as intended. Operational audit serves as a management performance monitoring tool. Information Technology Audit: Information technology audit is the examination of the controls within an organisation's information system infrastructure. This audit entails a consideration of the internal controls within an organisation's information technology (i.e. computer) environment to determine whether they are adequate and operating effectively so as to guarantee the reliability of information processed using the computer. Value for Money Audit: Value for money audit is an examination of the economy, efficiency and effectiveness of resource utilization in achieving objectives. Value for money is typically judged by comparison, that is, comparing current levels of an operation with previous levels of the same operation or with alternatives, thereby enabling the value for money auditor identify areas of waste in an organisation's operations. Regulatory Compliance Monitoring: Compliance with both internal and external rules, laws and regulations affecting an organisation is a pan aecia for the achievement of objectives. As part of its duties, the internal audit function monitors and ensures compliance with regulations affecting the organisation. To achieve this, a constant awareness of the operating environment of the organisation is required. Instances of deviations can then be identified and adjustments made accordingly. Internal Control Review and Monitoring: Internal auditors play a primary role in ensuring that financial and operational controls are adequate and operating effectively. Internal auditors are required to carry out a continuous evaluation of the system of internal control to determine whether it is operating effectively, identify weaknesses in the system and suggest improvement strategies to be implemented by management. Risk Assessment/Management: This is a continuing process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and financial resources to mitigate the adverse effects of loss. Fraud/Other Investigations: Unlike the external auditor, the internal auditor is responsible for fraud prevention and detection. Whenever there are suspected or actual cases of fraud in an organisation, it is the duty of the internal audit function to carry out investigations to ascertain whether fraud had actually occurred, identify those involved and quantify the loss occasioned by the fraud as well as make recommendations to management on the controls required to forestall future occurrence of the identified fraud. 109

6 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State 2.6 PRINCIPLES OF CORPORATE GOVERNANCE In designing and implementing a corporate governance system, an oil and gas sector organisation and any organisation for that matter should observe a number of principles. The principles identified by the Organisation for Economic Cooperation and Development (OECD) tend to be the reference point of contemporary discussions on corporate governance. The principles suggested by the OECD (2004) are designed to enable businesses achieve proper governance. These principles include: Rights and equitable treatment of shareholders: An effective corporate governance framework should ensure that the rights of shareholders are protected and help shareholders to exercise those rights. Organisations can assist shareholders exercise their rights by effectively communicating information about the operations of the entity to the shareholders and by encouraging them to attend general meetings. Information about the operations of an entity is communicated through the financial statements and other management reports. Shareholders have right to vote at general meetings, appoint the directors, be entitled to dividends, etc. A corporate governance framework should also ensure equitable treatment of all shareholders. Interest of other stakeholders: A corporate governance system should protect the interest of other stakeholders such as employees, creditors, suppliers, investors, customers, government and the society at large. Organisations have legal, contractual, social and market driven obligations to non-shareholder stakeholders. An effective corporate governance framework should therefore take into account the interest of stakeholders established by law or through mutual agreements in the distribution of the wealth created by the business. Role and responsibilities of the board: The board should have a mix of skills and understanding to manage the affairs of the company effectively. The corporate governance system should ensure that the board is able to provide the strategic direction that the company needs to succeed and that the board has adequate size, is independent and committed to fulfilling its responsibilities and duties. Integrity and ethical behaviour: Companies should have a culture that considers integrity and adherence to ethical requirements in business practice as important. Organisations should develop a code of conduct to be observed by those charged with governance and all organisational members. Disclosure and transparency: Because accountability is central to effective governance, organisations should ensure timely provision and accurate disclosure of information regarding their financial operations. Procedures should also be implemented to safeguard the integrity and ensure the independent verification of the company's 110

7 Nigerian Journal Of Oil And Gas Technology - Vol 2 No. 2 financial reports. The corporate governance framework should also ensure that information pertaining to the financial and other operations of the business is presented in a clear and transparent manner (OECD, 2004). 2.7 ROLE OF INTERNAL AUDITORS IN CORPORATE GOVERNANCE EFFECTIVENESS IN THE NIGERIAN OIL AND GAS SECTOR The Internal Auditor's ultimate role in respect of corporate governance is to assist management in achieving effectiveness in governance activities. In order to objectively support management in the improvement of corporate governance, internal Auditors strive to maintain independence from daily operations; therefore, they do not design and maintain the system of corporate governance(eke, 2015; Aguolu, 2002; Millichamp& Taylor, 2008; &Meisser, 2000). The roles of the internal auditor vis-à-vis corporate governance in the Nigerian oil and gas sector can be summarized into three major areas discussed below: Monitor and Review the Entity's Risk Management System Risk is the possibility of an event occurring and which will have an impact on the achievement of objectives. It is as an unrealised future loss arising from a present action or inaction. Risk can also be defined as the potential of losses and rewards resulting from an exposure to a hazard or as a result of a risk event. Thus, any factor that prevents an entity from achieving its objectives is risk. The management of an entity has ultimate responsibility for risk management (Eke, 2015; Aguolu, 2002; Millichamp& Taylor, 2008; & Meisser, 2000); the internal auditor can, however assist management in risk management by: Facilitating the identification and evaluation of risks. Coaching management on how to respond to risk. Coordinating risk management activities. Maintaining and developing risk management framework. Championing establishment of risk management processes. Reviewing the management of key risks. Evaluating the reporting of key risks. Evaluating risk management processes. Giving assurance that risks are correctly evaluated. Giving assurance on the risk management processes Monitor and Review the Entity's Internal Control System Another important area the internal auditor can assist management of an oil or gas organisation in improving its corporate governance is in respect of internal controls. The Internal Auditor's role in this regard is to evaluate the adequacy and effectiveness of internal controls and make recommendations where control improvements are needed (Institute of Internal Auditors, 2002, & COSO, 1992). To do this requires: Continuous monitoring and review of the control environment to determine whether it is strong or weak. 111

8 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State Reviewing documentations and approval procedures to ensure that authorization controls are operating as intended. Observing transaction processing to ensure that there is proper segregation of duties. Regularly carrying out physical inspection of assets to ensure they still exist and are in good condition. Evaluating the adequacy of security measures over assets and records. Monitoring transaction record keeping to ensure it is done properly. Continuous monitoring and evaluation of compliance with internal policies, legal and regulatory requirements Monitor and Review the Integrity of Financial Reporting The financial statements of an entity should show a true and fair view of the operations of the entity. The management of an oil and gas sector entity is responsible for the reliability of the financial statements. In order to enhance the integrity of financial reporting, management is required to put in place, a structure of review and authorization procedures designed to ensure the truthful and factual presentation of the entity's financial position. Internal audit is a major structure through which management can enhance the integrity of financial reporting (Institute of Internal Auditors, 2002). The internal auditor's role is, therefore, to monitor and review the integrity of financial report by: Understanding the entity's financial reporting policies and ensuring that preparers of the financial statements comply with the policies in the preparation of the financial statements. Reviewing processes and procedures in place for initiating, recognizing, measuring and recording transactions to avoid instances of omissions and errors. Review accounting controls to ensure that they are adequate and operating as intended. Reviewing documentations in respect of recorded transactions and agreeing same with the existing records. Reviewing compliance with applicable reporting standards, legal and regulatory requirements. 3.1 METHODOLOGY The descriptive research method was used in conducting the investigation and the survey design was adopted. The survey design afforded the researcher the opportunity to gather evidence about the concepts being studied by sampling the opinion of sixty (60) randomly selected respondents from the internal audit, accounting and operations units of the Nigeria Liquefied Natural Gas Company (NLNG), Nigeria National Petroleum Company (NNPC) and Total E&P which are based in Rivers state.the questionnaire and structured interview guide were the instruments used for collecting data in the course of the study.the reliability index of the instrument was 0.81 and was obtained using the spilt-half technique. Data analysis was carried out by the use of simple percentages. 112

9 Nigerian Journal Of Oil And Gas Technology - Vol 2 No DATA ANALYSIS Data obtained in the course of the study are analysed below using percentages beginning with analysis of the questionnaire distributed. Table 4.1: Questionnaire Distribution Category of Total Number of Total Number of Total Number of % o f Total % of Total Respondents Questionnaire Questionnaire Questionnaire No. No. Not Distributed Retrieved Not Retrieved Retrieved Retrieved NLNG Staff NNPC Staff Total E&P Staff Source: Field Survey, 2016 Table 4.1 above shows the various categories of respondents that were administered questionnaire in the course of the survey undertaken during the study. The proportion of the questionnaire retrieved vis-à-vis that not retrieved is as shown against each category of respondents. In all, a total number of sixty (60) questionnaire were administered on respondents, out of which, fifty (50) were retrieved, representing percent of the total while ten (10), representing percent of the total were not retrieved. Table 4.2: Data Showing that Internal Auditors Play a Role in Corporate Governancein the Oil and Gas Sector Research Question 1 Response Options No. of Respondents Do you think that internal auditors play any role in corporate governance in the oil and gas sector in Nigeria? Who Choose the Options Specified Yes No 2 4 Undecided 2 4 Total Percentage (%) 113

10 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State Source: Field Survey, 2016 The data shown on Table 4.2 above indicates that 92% of the respondents covered were of the opinion that internal auditors play a role in corporate governance in the oil and gas sector in Nigeria, 4% of the respondents covered do not think that internal auditors play a role in corporate governance in the oil and gas sector in Nigeria, while the remaining 4% were undecided. Given that 92% of the respondents asserted that internal auditors play a role in corporate governance in the oil and gas sector in Nigeria, we conclude that internal auditors play a role in corporate governance in the oil and gas sector in Nigeria. Table 4.3: Extent to Which Internal Auditors Contribute to Corporate Governance in the Oil and Gas sector Research Question 2 Response Options No. of Respondents Who Choose the Options Specified Percentage (%) To what extent do you think that internal auditors contribute to corporate governance in the oil and gas sector? To a significant extent Not to a significant extent 2 4 Undecided 0 0 Total Source: Field Survey, 2016 The data shown on Table 4.3 above indicates that 96% of the respondents covered were of the opinion that internal auditors to a significant extent contribute to corporate governance in the oil and gas sector, 4% of the respondents covered were of the opinion that internal auditors do not to a significant extent contribute to corporate governance in the oil and gas sector. Given that 96% of the respondents asserted that internal auditors to a significant extent contribute to corporate governance in the oil and gas sector, it is apparent that internal auditors to a significant extent contribute to corporate governance in the oil and gas sector. 114

11 Nigerian Journal Of Oil And Gas Technology - Vol 2 No. 2 Table 4.4: How Internal Auditors Contribute to Corporate Governance in theoil and Gas sector Research Question 3 Response Options No. of Respondents Who Choose the Percentage (%) Options Specified How, in your opinion, do internal auditors By monitoring and reviewing risk contribute to corporate By monitoring and governance in the oil reviewing internal and gas sector? controls By monitoring and reviewing the integrity of financial reporting Others 0 0 Total Source: Field Survey, 2016 Table 4.4 above indicates that 24% of the respondents covered were of the opinion that internal auditors contribute to corporate governance in the oil and gas sector by monitoring and reviewing risk, 40% were of the opinion that internal auditors contribute to corporate governance in the oil and gas sector by monitoring and reviewing internal controls, while 36% asserted that internal auditors contribute to corporate governance in the oil and gas sector by monitoring and reviewing the integrity of financial reporting. 5.1 CONCLUSIONS Based on the findings of the study, the following conclusions were made: Internal auditors play a role in corporate governance effectiveness in the Nigerian oil and gas sector. Internal auditors to a significant extent contribute to corporate governance effectiveness in the oil and gas sector. Internal auditors assist management in achieving corporate governance effectiveness by monitoring and reviewing risks, internal controls and the integrity of financial reports. 5.2 RECOMMENDATIONS The following recommendations are advanced based on the findings and conclusions of the 115

12 Internal Audit And Corporate Governance Effectiveness In The Nigerian Oil And Gas Sector: Evidence From Selected Oil And Gas Companies In Rivers State study: For internal auditors to continue to play a role in corporate governance effectiveness in the oil and gas sector, management of oil and gas entities should provide an enabling environment to help internal auditors discharge their duties effectively. Oil and gas entities should sustain the significant and positive influence of internal auditing on corporate governance by continuously enhancing the competency of internal auditors through training and development. For the internal audit function to effectively undertake the task of monitoring and reviewing risk, internal control and financial reporting and thereby support management in achieving effective corporate governance, the head of the internal audit unit should be a qualified accountant with appropriate experience and authority. REFERENCES Aguolu, O. (2002). Fundamentals of auditing. Enugu: Meridian Associates Asika, N. (1991). Research methodology in the behavioural sciences. Lagos: Longman Nigeria Plc. BPP Learning Media (2010). Audit and assurance: international. London: BPP Learning Media Ltd. Eke, G. O. (2015). Audit and assurance demystified. Port Harcourt: Double-Entry Professional Services. Eke, G. O. (2016). Role of Internal Auditors in Internal Control Effectiveness. Paper Presented at the Workshop Organised for Internal Audit Staff of the Rivers State University of Science and Technology, Port Harcourt, Jan Institute of Internal Auditors (2002). Internal auditing: history, evolution and prospects. Florida: The Insitute of Internal Auditors Research Foundation. Messier, W.F. (2000). Auditing and assurance services: a systematic approach. Boston: McGraw- Hill Higher Education. Millichamp, A.H., &Taylor, J.R. (2008). Auditing. Book Power: United Kingdom. OECD (2004). OECD Principles of corporate governance. Paris: OECD Publications Service. Okezie, B. N. (2015). The impact of emotional intelligence on the roles ofinternal auditors. The Nigerian Accountant, 48 (2),