EFFECT OF INTERNAL AUDIT ON MANAGERIAL PERFORMANCE IN PUBLIC ENTERPRISE

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EFFECT OF INTERNAL AUDIT ON MANAGERIAL PERFORMANCE IN PUBLIC ENTERPRISE

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The term audit is derived from the latin verb “Audire” which means “to hear”. The origin of audit dates from ancient times when the landowners allowed tenant farmers to work on their land whilst landowners themselves did not become involved in the business of farming. The landlords relied upon an overseer who listened to the accounts of stewardship given by the tenants this period the word audit is described as: The ,independent examination of, and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation. Furthermore, the introduction of the joint stock company increased the supply of capital for industry and commerce. The small privately owned business, which was financed by a sole trader or a partnership gave way to the form of organization now familiar as the limited company. The body of shareholders delegated some of their members to act as a board of directors, and periodically the board submitted accounts to the shareholders so that they could be aware of the state of affair of the enterprise in which they had an interest. It was therefore necessary for the shareholders to satisfied the accounts presented of the directors did provide an objective view of the state of affairs of the company. The joint stock company Act of 1844 .was the fist legislation in Britain fore quire all incorporated businesses to hand their annual financial statements examined by an auditor. Early auditors were, in many cases non accountants who were required state whether the accounts showed a `true and correct’ view of state of affairs of the, it was the company’s Act 1900 that required auditor to be independent and it was not until the 1948 Companied Act that he was required to be professionally qualified. At this juncture, it was more appropriate to define audit as: An exercise whose objective is to enable auditors to express an opinion whether the financial statement give a true and fair view (or equivalent) of the entity’s affairs at the period end and of its profit and loss (or income and expenditure) for the period then ended and have been properly prepared in accordance with the applicable reporting framework (for example relevant legislation and applicable accounting standards) or where statutory or other specific requirement prescribed the term, whether the financial statements “present fairly”.

WHAT IS INTERNAL AUDIT Internal audit are those audit that are being carried out by employees within an enterprise. Internal audit is an independent appraisal functions established by the management of an organization for the review of the internal control system as a service’, to the organization. It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper economic efficiency and effective use of resource. The institute of internal Auditors (IIA), the professional body of internal auditors, define the function in the following way. “Internal auditing is an impendent appraisal activity within the organization, for the review of operations as a service to management. It is a management control which functions by measuring and evaluating the effectiveness of the controls”. The scope of the internal audit within an organization is broad and may involve topic such as the efficacy of operations, there liability of financial reporting and investigating fraud, safeguarding assets compliance with laws and regulations.

INTERNAL AUDIT AND THE PREVENTION OF FRAUD By definition, internal control is an independent appraisal function within an organization, carried out by employees of the organization, for the review of operations (financial and otherwise): as a service to management. It is a management controls which functions, by measuring and evaluating the effectiveness of other controls. Fraud or irregularities, which arise in the conduct of the affairs of a company, may be classified broadly into: Defalcations involving the misappropriate of money or goods, such acts may be performed by an individual or group of individuals without the knowledge of the board of directors, or sometimes, by the board with the intention of defrauding the member. Fraudulent manipulation of , financial statements not involving defalcation. The main reasons for this are: To attempt to improve the apparent position or the company e.g to justify a dividend that would not otherwise have been payable or to assist in raising new finance: or To attempt to defraud the tax authorities by reducing taxable profits. The internal auditors should continuously review the existing controls to ensure that they are followed and update them when need be. This shall ensure that the occurrence of fraud is prevented and that when any such ‘frauds occur, they are easily and timely identified and reported to management. It is his duty to search for fraud, to examine the books, accounts and control/processes/system with the objective of discovering whether there have been defalcations or other irregularities by directors or employees of the company. However, if the directors of the company decide to defraud the members, there is not much the internal auditor can do. Being a staff of the organization, he probable reports to the directors and depends on the board for his remunerations, promotion and other employment incentives. Similarly, where the management .of business wish to manipulate the a misleading impression without actually diverting any of the business assets, the internal auditors cannot do much as management misstate the assets or liabilities. While the more common target for manipulations is stock, other areas are also susceptible. financial statements to give It is painful to observe that in practice, members in the employment of companies as accountants, finance controller, internal auditors etc are used to, enhance and perpetuate these management/ directors aided fraud. Members must always beings to bear on all activities they are carrying out for clients and employees the institute’s codes of professional conduct and ethics. Misappropriation of cash may result from the making of fictitious payments or the diversion of cash receivable. The number of ways in which these may be done depend on the systems of control in existence and the ingenuity of the person or persons involved. In many cases, it is the attempt to cover of rather than the original theft that is detected. So prevention of fraud is continuous review of controls and operations. The opportunities for fraud will depend on the system of controls. Particularly, important are those leading to segregation of duties. Although frauds involving collusion are not uncommon, it is generally agreed that the chance of detection rises with the number of people involved.

1.2 STATEMENT OF PROBLEM

Despite the fact that there are installed control and check of resources, embezzlement and fraud of resources misappropriate of funds, errors, irregularities and mistake stills find their ways into the public enterprises. Internal audit department was established to reduce those excesses however, in Nigeria public enterprises this is not so, as there are series of problem which has been hindered in the internal audit efficiency

1.3 PURPOSE OF THE STUDY

The broad objective of this is to examine the effect of internal audit on managerial performances in public enterprise (NNPC). However, some of the specific objectives are as follows: To identify the factors that hinder audit efficiency in NNPC as a public enterprise. Reduce excesses of the internal auditing department of NNPC Identifying problems and accountability in NNPC. Examine the factors that hinder internal audit efficiency and how these factors are impinged. It is also shapes up performance of management

1.4 SIGNIFICANCE OF THE STUDY

The role of internal audit department is called upon to play especially in public enterprise and the ignorance of the employees makes this study important With sound internal audit, management that is characterized by fraud, errors, irregularities, and mistakes in the public enterprises which has resulted by the notion that government business are not supposed to make profit is bound to be eliminated. The management, employers, employees as well as student benefit from this study.

1.5 RESEARCH QUESTIONS

Below are some questions that would be answered during the course of this research works. What is the impact of internal audit on the performance in public sector Does establish control failed to enhance management performance in Nigeria public enterprise (NNPC) Is there any factors that determine the performance of the management in NNPC Does effective internal audit enhance reduction of fraud? Is there any factor that prevent; internal audit from being effective and efficient in NNPC.

1.6 STATEMENT OF THE HYPOTHESIS

To ensure a mere analytical result oriented research, hypothesis are formulated and tested on the research objectives. The decision criteria are to accept the null hypothesis

(HO) and reject the alternative hypothesis

(Hi ) or otherwise based on the result of the test performed. The research hypotheses are stated below:

Hypothesis one

HO: Internal audit has no significant impact on the reduction of embezzlement in public enterprises

Hi : Internal audit has significant’ impact on the reduction embezzlement in public enterprises

Hypothesis two

HO: Established control has no significant effect on managerial performance.

Hi : Established control has significant effect on managerial performance.

1.7 DELIMITATION OF THE STUDY

The scope of limited to various measurement of internal audit which are used in public enterprises. The constraints to this study are time, in adequate information, lack of enough literature on this subject arid information which are considered confidential were not revealed by some of the staff.

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