ROLE OF INTERNAL AUDITING TO PROMOTE GOOD CORPORATE GOVERNANCE IN THE PUBLIC SECTOR

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1 234 ROLE OF INTERNAL AUDITING TO PROMOTE GOOD CORPORATE GOVERNANCE IN THE PUBLIC SECTOR DR.D.GURUSWAMY* *Assistant Professor, Department of Accounring and Finance, College of Business and Economics, Mekelle University, Mekelle, Ethiopia. ABSTRACT The role of auditors in auditing has increased dramatically in the past two decades, primarily because of the increased size and complexity of many corporations. Internal auditing is an independent, objective assurance and activity designed what value and improves and an organizations operations. An internal audit function could be viewed as a first line defense against in adequate corporate governance and financial reporting. Corporate governance is an organizational approach which provides assurance to external stakeholders that an organization unfulfilling its responsibility to them. It is built around stewardship, leadership and control. Internal audit is a fundamental element of corporate governance structures and process with in most organizations. The main objective of this study was to examine the current level of internal auditor s independence and corporate governance of Ethiopian Telecommunication Corporation, Mekelle branch. The study design was descriptive type and to achieve the objectives of this study, the researcher used both primary and secondary data. The primary data were collected through questionnaires and secondary data would be gathered form company reports and manuals, different published books, journals, articles and other publications. The result of the study implies that the internal audit department position has been at corporate level, audit committees have significant responsibility for the governance of internal auditing and the internal audit is facing a risk of lack of expertise, lack of management respect, lack of opportunity for professional development and domination by dishonest management. KEYWORDS: Corporate Governance, Internal Auditing, Ethiopian Telecommunication Corporation. INTRODUCTION A number of changes and forces have influenced the auditing profession in recent years. Advances in technology greater stakeholder awareness and the actions of regulatory body to name but a few have caused the auditing profession to reexamine its purpose, focus and approach. As a result the profession has progressed form a transaction based approach to a risk based approach. These changes have affected both the internal and external auditing components of the profession. Internal auditors usually assists management in ensuring that there is a pop roper internal control systems in place and that the operations of the company carried out efficiently, effectively and economically. External auditors on the other hand, are interested in the truth and fairness of the financial statement. In order to achieve this objective the internal auditors should perform their job independently without management influence. Internal auditors are employed by companies to do both financial and operational auditing. Their role in auditing

2 235 has increased dramatically in the past two decades, primarily because of the increased size and complexity of many corporations. Internal auditing is an independent, objective assurance and activity designed what value and improves and an organizations operations. An internal audit function could be viewed as a first line defense against in adequate corporate governance and financial reporting. With appropriate support from the board of directors audit committee, the internal audit staff in the best position to gather intelligence on in appropriate accounting practices, in adequate internal controls, and ineffective corporate governance. The presence of internal auditors will reduce any weakens in the accounting system and implementation of their recommendation will improve control and reduce the risky of fraud and errors. Corporate governance is an organizational approach which provides assurance to external stakeholders that an organization unfulfilling its responsibility to them. It is built around stewardship, leadership and control. Internal audit is a fundamental element of corporate governance structures and process with in most organizations. Considering all this issues, since internal audit and corporate governance has become a topic of discussion in this study the current level of internal auditor s independence and corporate governance of public enterprises will be dealt with. Telecommunication industry was started during the region of emperor Menilik in the 94 while the construction of the capital city Addis Ababa. They were followed by the inter urban network construction to connect many important centers of the empire by 1930 the total route distance urban network already reached 700km to connecting 170 towns and villages in Ethiopia. Ethiopia joined ITU (international telecommunication union) in 1932 and was showing good profess in the area until the Italian occupation of during this period the line seriously damped because of the consecutive wars and patriots who wreaked many of the installations to percent their use by the enemy. After the end of the war against Italy, during which telecommunication, network was destroyed, Ethiopia reorganized the telephone, telegraph and postal services in In 1952 the imperial board of telecommunications (IBTE) was established by proclamation no, 131/52 in The board had full financial and administrative autonomy and was in charge of the provision and explanation of telecommunications services in Ethiopia. The imperial board of telecommunications of Ethiopia, which be come the Ethiopian telecommunication authority in 1981, was placed in charge of both the operation and regulation of telecommunication services in the wake of the market reforms. In 1996, the government established separate regulatory body, the Ethiopian Telecommunication Agency (ETA) by proclamation 49/1996, and during the same year by regulation 10/1996, the council of ministers set up the Ethiopian Telecommunication Corporation (ETC). At present, the total number of exchanges are 306 with a total exchange capacity of 780,000 lines; out of this 171 are automatic digital exchange with 760, 368 capacity of lines. The remaining lines are connected to manual exchanges. To run its operation Ethiopian telecommunication with its objective of giving economical, tidy and sustainable

3 236 communication service in the whole country and to build and repair telecommunication facilities and innovate wide service in the country. With this objective Ethiopian telecommunication established its branches in different regions, cities and towns of the country. Among those branches Mekelle City Telecommunication Branch will be dealt with since as to the best of the researcher s knowledge, there is no previous research study in The Role of Internal Auditing to Promote Good Governance in the case study of Ethiopian Telecommunication Corporation, Mekelle Branch, Tigray. This therefore is the rational for undertaking the study. STATEMENT OF THE PROBLEM Internal audit is an increasing useful and important function for every organization. External auditors can rely on the work of internal auditors in carrying out their external audit duties as both auditors are concerned that proper controls are in place. The US statement on auditing standards (SAS), the auditors, consideration of the internal audit function in an audit of financial statements, provides general guidance about: evaluating all internal auditors competence, objectivity and work performance and using an internal audit or to modify the nature, scope, and timing of audit work and to provide direct assistance on an audit. Corporate governance is an internal system encompassing polices process and people which serves the needs of shareholders and other stockholders by directing and controlling market place commitment and legislation plus a health board culture which safe guards policies and processes. Internal corporate governance also controls monitor activities and then take corrective action to accomplish organizational goals. Given the above and other benefits of internal audit function: Is internal audit needs been formally evaluated as part over all corporate governance arrangements? Does the senior management respond positively to internal audit finding and recommendations? Does internal audit utilize the latest audit methodologies and related information technology based solutions? Does line management routinely seek internal audit assistance and advice on key business risks and controls? OBJECTIVES OF THE STUDY The main objective of this study was to examine the current level of internal auditor s independence and corporate governance of Ethiopian Telecommunication Corporation, Mekelle branch. The specific objective of this study was stated as follow: 1. To assess the quality of internal audit from the perspective of internal audit independence and corporate governance.

4 To examine the internal audit objectivity from the perspective of internal audit independence and corporate governance. 3. To know the performance of internal audit independence. 4. To identify factors that affects the internal audit independence. METHODOLOGY The study design was descriptive type to describe characteristics of population or phenomenon. And the questionnaire of the study distributed to employees those who are auditors by using census or covering all population. In order to examine the extent of internal audit independence and corporate governance, the study used qualitative data type. The study also used both primary and secondary data sources. To achieve the objectives of this study, the researcher used both primary and secondary data. The primary data were collected through questionnaires and secondary data would be gathered form company reports and manuals, different published books, journals, articles and other publications. The researcher applies both precoding and post coding techniques to check omission, legibility, and clarity responses before dictation. The research was presented in the tabulation forms with descriptive analysis. Simple tabulation with application of percentages was applied. SCOPE OF THE STUDY The research paper provides some theoretical background about the internal audit independence and corporate governance. The study scope was Ethiopian Telecommunication Corporation (ETC) at Mekelle Branch. SIGNIFICANCE OF THE STUDY It will help the managers of the company and their external auditors to identify circumstances under which it will be economically advantageous to involve the internal; audit department and will be implications for setting and restructure an internal audit department. It will identify major factors that affect the internal audit independence by corporate management. To create awareness about the importance of the internal audit assistance and advice on the key business risks and controls for to days dynamic business environment management. DATA ANALYSIS AND PRESENTATION In this part pertains to the detailed analysis and interpretation of collected data. In the survey a total of questionnaires were distributed to employees (auditors) of Ethiopia Telecommunication Corporation (ETC), Mekelle branch and all the questionnaires were returned. The analysis is presented in six major classes as: 1. Personal background of the respondents

5 Organizational issues and position assignment 3. Internal audit independence and management response 4. Internal audit responsibility and assignment 5. Internal audit contribution 6. Corporate governance responsibility TABLE1 GENERAL BACK GROUND OF THE RESPONDENTS Item Description Responses No % 1 Sex Male Female Experience with organization < 1 year 15 years years Above 10 years Education level Certificate Diploma First degree Above degree 1 st Source: Questionnaire Table1 shows that the general characteristics (back ground) of survey that includes sex, level of education and experience with organization. The table indicates 10 (55.6 %) employees included in the study are males and 8 (44.4 %) are females. Concerning the experience with organization 8 (44.4 %) of employees have spent 15 years with organization and also 7 (38.9

6 239 %) of employees have spent 610 years with organization. Regarding the level of education 14 (77.8 %) are first degree holder, where as, 4 (22.2 %) employees are diploma holders. Thus, regarding the gender, majority of the employees are male. The majority of ETC employees of internal auditors have spent 110 work experience and also majority of them have BA degree regarding the education level. This enables internal auditors to perform their work efficiently, effectively and properly. Table2 indicates the organizational issues and position assignment. In item 1 of the table discloses that all (%) responded that internal audit department is positions at corporate level. This implies that department has sufficient autonomy for implementation of their professional services. In item number 2 of the table shows that 11 (61.1 %) and 7 (38.9%) of the respondents responses chief executive officer and board audit committee respectively with regard to who approves the internal audit charter. In item number 3 of the table reveals that 8 (44.4 %) and 8 (44.4%)of respondents replied chief executive officer and staff respectively with regard to who have internal audit job position. Also 2 (11.1 %) employees responses the manager has internal audit job position. TABLE2 ORGANIZATIONAL ISSUES AND POSITION ASSIGNMENT Item Description Response 1 Where is an internal audit department positioned in your organization No % Corporate level Business unit Consultant Other 2 In your organization who approves the internal audit charter? Chief executive officer Board audit committee

7 240 Chief financial officers Other 3 Who are having internal audit job position in your organization Chief executive officer Manager Staff Consultant Other What is the scope of internal auditing Financial activities Operational activities Strategic initiatives Regulatory compliance Other In your organization who appoints the internal auditors Administrators of the corporation The head of internal audit department Ministry of infrastructure Other

8 241 Source: Questionnaire In item number 4 of the table concerning of what is the scope of internal auditing, out of respondents, 14 (77.8) says financial activities and 4 (22.2 %) responses operational activities with regard to the scope of internal auditing. In the last item of table shows that 15 (83.3 %) employees responses the internal auditors are appointed by head of internal audit department. Also 3 (16.7%) responses internal auditors are appointed by administrators of the corporation This result implies that internal audit department position has been at corporate level. The chief executive officer and the board audit committee approve the internal audit charter and the majority of the internal job position is on the hand of chief executive officer and staff. The scope of internal audit is both the financial activities and operational activities. Regarding who appoints internal auditors, the result supports a significant preference for the head of internal audit department and less for the administrators. As it can be seen from Table3 reveals the internal audit independence and management response. In item number 1 of the table indicates that out of respondents, 17 (94.4%) respondents says yes, and 1 (5.6%) says no with regard to about internal auditors free from conflicting duties and investigating any area. According to the respondents response almost all of the response shows that the internal auditors are free from conflicting duties and are able to investigate any areas. Therefore, the internal auditor could investigate any misleading conditions in unbiased and impartial manner. In item number 2 of the table shows that 10 (55.6%) of the respondents responses, the major risks facing the internal auditors was lack of management respect and 4 (22.2%) and 4 (22.2%) of respondents responses the major risks facing the internal auditors are lack expertise and lack of opportunity professional development respectively. In item number 3 of the table reveals that 15 (83.3%) of respondents said sometimes and 3 (16.7%) replied yes concerning the positive management response for the internal audit finding and recommendation. This result indicates the relationship between senior management and internal audit department are not smooth and they are not accomplishing their work in a state of cooperation. Therefore, those affect the overall companies operational performance and bottle neck for development. In item number 4 of the table explains that, out of respondents, 13 (72.2 %) of respondents said sometimes, 2 (11.1%) no and 3 (16.7%) of respondents replied yes regarding the line management routinely seek internal audit assistance and advice. This result implies that the relationship between internal audit department and line management are weak and could affect the company s operational efficiency and effectiveness.

9 242 In item number 5 of the table indicates that, 14 (77.8 %) and 4(22.2%) of respondents responses yes and no respectively, with regard to internal auditors independent of operational management. This result shows that the majority of the respondents replied internal auditors are independent of operational management and it implies they can perform their professional practice without any intervention in the regular operational activities. TABLE3 INTERNAL AUDIT INDEPENDENCE AND MANAGEMENT RESPONSES Item Description Responses No % 1 Are internal auditors free from conflicting duties and are able to investigate any area Yes No Some times 2 What are the major risks facing internal auditors Lack of expertise Lack of management respect Lack of opportunity for professional development Domination by dishonest management Other %

10 243 3 Does the senior management respondents positively to internal audit findings and recommendations Yes No Some times 4 Does the line management routinely seek internal audit assistant and advice Yes No Some times 5 Are internal auditors independent of operational management Yes No Some times Source: Questionnaire

11 244 TABLE4 INTERNAL AUDIT RESPONSIBILITY AND MANAGEMENT ASSIGNMENT Item Description Responses 1 To whom does the internal audit presently reports No % Chief executive officer Board audit committee Chief financial officer Other 2 In your opinion to whom the internal audit responsible Chief executive officer Board audit committee Chief financial officer Other Source: Questionnaire Table4 reveals the internal audit responsibility and management assignment. In item number 1 of the table confirms that 10 (55.6%) of respondents response board audit committee, 5 (27.8%) responses chief executive officer and 3 (16.7%) responses, chief financial officer with regard to, to whom the internal audit presently reports. Depending on this study, the preference of the chief financial officer was not statically significant. But the preference for board audit committee was extremely significant. In item number 2 of the table indicates 8 (44.4%) of respondents responses board audit committee, 6 (33.3%) responses chief financial officer and 4 (22.2%) responses chief executive officer concerning to who the internal audit responsible according to their opinion. Thus, the result implies that for the internal auditors responsible to the board audit committee has been favorable for their work, independence and for the performance of their job objectively.

12 245 As it can be observed from the Table5 shows the internal audit contribution towards the organization. In item number 1, about the internal audit role, the majority 15 (83.3%) of the respondents responses shows monitoring the company s overall performance, but 3 (16.7) respondents says the role of internal audit is monitoring non audit services. Therefore, we can conclude that the role of the internal auditor is to monitoring company s overall performance. In the last item of the table, about the contribution of internal audit, 14 (77.8%) of respondents responses internal controlling purpose, 3 (16.7%) responses management advisory service. Therefore, the internal audit was facilitating internal controlling purpose rather than facilitating work performance and management advisory service. TABLE5 INTERNAL AUDIT CONTRIBUTION Item Description Response What is the internal audit role No % 1 Monitoring non audit services Monitoring management performance Monitoring company s overall performance Other What is the contribution of internal audit To facilitate work performance Management advisory service Internal controlling purpose Other Source; Questionnaire

13 246 Table6 shows the corporate governance responsibility. In item number 1 shows that 16 (88.9%) respondents said yes and 2 (11.1) said no with regard to the role of the corporate governance to contribute more for internal audit independence. In item number 2 of the table indicates that 17 (94.4) respondents said yes and 1 (5.6) said no. This implies that the corporate governance gives feedback at right time for internal auditors. In item number 3 of the table shows that, out of respondents, 16 (88.9%) responses yes and 2 (11.1%) responses no with regard to formal strategy of internal audit department. The last item of the table describes that 16 (88.9%) respondents responses, audit committee and 1 (5.6%) and 1 (5.6%) responses chief executive officer and chief financial officer respectively. Therefore, based on this result the corporate governance role contribute great role for the internal audit independence and internal audit department have formal strategy such us audit charter in terms of reference. The result of the study also shows that audit committees have significant responsibility for the governance of internal auditing. TABLE6 CORPORATE GOVERNANCE RESPONSIBILITY Item Description Response 1 Does the corporate governance role contribute more for internal audit independency No % Yes No In your opinion does corporate governance give feedback at right time for internal auditors Yes No

14 247 3 Does your internal audit department have formal strategy like audit charter in terms of reference Yes No Who has the responsibility for the governance of internal auditing Chief executive officer Audit committee Chief financial officer Other Source: Questionnaire CONCLUSIONS The result of the study implies that the internal audit department position has been at corporate level. The chief executive officer and the board audit committee approve the internal audit charter. The scope of internal audit is both the financial and operational activities. With regard to the relationship between senior management and internal audit department are not smooth and they are not accomplishing their work in a state of cooperation. Majority of the respondents replied internal auditors are independent of operational management and this helps them to perform their professional practices. Internal audit was facilitating internal controlling purpose rather than facilitate work performance and management advisor services. The majority of the internal job position is on the hand of chief executive officer and staff. Regarding who appoints the internal auditors, the result supports a significant reference for the head of internal audit department and less for the administrator. The respondent s responses, almost all of the responses that the internal auditors are free from conflicting duties and are able to investigate any areas. Also the study implies that the relationship between internal audit department and line management are week and could affect the company s operational, efficiency and effectiveness. The preferences of the chief financial officer were not statically significant, but the preferences for board audit committee were extremely significant. Audit committees have significant responsibility for the governance of internal auditing. The internal audit is facing a risk of lack of expertise, lack of management respect, lack of opportunity for professional development and domination by dishonest management.

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