The Influence of the Audit Committee on the Internal Audit Department in the System of Corporate Governance in Ghana


Academic Paper, 2020

28 Pages, Grade: 1.00


Excerpt

Table of contents

1 INTRODUCTION

2 LITERATURE REVIEW
2.1 THEORETICAL REVIEW
2.2 EMPIRICAL REVIEW
2.3 Summary of Literature Review

3 RESEARCH METHODOLOGY
3.1 Study Design
3.2 The Population Size, Sample and Sampling Technique
3.3 Research Collection and Validity of the Research Instrument

4 RESULTS AND DISCUSSION
4.1 Demographic Characteristics

5 Conclusion
5.1 Recommendation

6 REFERENCES

ABSTRACT

Internal audit and audit committee members plays a vital role in the corporate governance process. The study, therefore, seeks to ascertain the practices of the audit committee and internal audit improving corporate governance among companies in Ghana, with specific attention to analyse the audit committee's impact on improving internal audit operations; identifying the relationship between the internal audit unit and the audit committee members and also analyse the impact of the internal audit department and audit committee members to the risk management strategy of companies. The study results were obtained by using data gathered from the internal auditors and audit committee members through the questionnaire survey method. Primary data was used, it was gathered using questionnaires. A total of 68 usable questionnaires out of 70 questionnaires distributed to 40 internal auditors and 30 to audit committee members were considered suitable for analysis. The findings of the study revealed that the audit committee has influence in improving the audit activities of companies, again the finding did show a level of impact of teamwork between the internal audit department and the audit committee on improving good corporate governance and it was also found out that audit committee and internal audit sometimes play role in risk management strategy. It is recommended that management and those responsible for corporate governance should make an attempt to inject more qualified and skilled staff into the internal audit unit. Again in order for the internal audit unit to make a very reasonable contribution to the company's corporate governance, the unit should become the company's Strategic Business Unit. Each company's internal audit unit should improve its financial, operational and compliance audit performance to contribute more to corporate governance in that company.

Keywords: corporate governance system; internal audit unit; audit committee members

1 INTRODUCTION

Corporate governance consists of laws, practices and processes governing and controlling businesses. Corporate governance has become a significant problem in developing countries in the past couple of decades. Managers, owners, and corporate executives have begun to understand that a good corporate governance structure can give advantages to their businesses (Carcello, 2019).

Good corporate governance enables raise in share prices and makes capital acquisition easier. When things are achieved illegally, when corporate governance is not respected and when cohesive measures are not taken, shareholder value is lost. Corporate governance communication is the main element in the relationship between society and the business, the majority of businesses aim for the best level of business administration.

The Board of Directors are the main immediate to stakeholders that influence corporate governance, they are voted by shareholders or other associates of the board and stand-in for the company's shareholders. The Board is responsible for making significant choices such as appointments of corporate officers, audit committee members, executive compensation and dividend policy. Corporate governance is improved both in the private division and in the public division by the presence and appropriate functioning of the Audit Committee (Cadbury Report, 1992). An audit committee is unique of the main working committees of a board of directors in charge of the control of financial reporting and disclosure. An audit committee is a group of managers responsible not for managing the company, but for supervising how the company is regulated, recorded and carried on (Arthur, 1998).

The audit committee shall retain communications with The Chief Financial Officer (CFO) and the Controller about financial matters and internal control systems. Also, the Committee is authorised to conduct unique inquiries when accounting procedures are determined to be difficult or suspicious or when severe employee problems occur. The Committee would be supported by an internal auditor.

Internal audits assess internal checks of a company, including its management and accountability procedures. It ensures adherence with legislation and regulations and supports the precise and timely disclosure and compilation of accounting information. Internal audit should ensure that any detected faults are resolved and also ensures such fault doesn't happen again. The internal auditor must be objective and independence.

They should be free to perform their duties in the right way and also you have to decide which subject they are auditing and when, what questions or ratings they will increase.

Internal audits can take place on a daily, quarterly, monthly or annual basis, some departments can be audited more frequently than others, for instance, a manufacturing system can be frequently audited for quality control and the department of human resources can only be audited quarterly. The audit committee performs a significant part in corporate governance in relationships to the leadership, control, and accountability of the organisation, portion of which the internal control of the organisation is used to safeguard the quality of financial reporting leadership and accuracy.

The Audit Committee should confirm that the internal audit is liable for ensuring that its work is done properly and demonstrably efficient in the accomplishment of results. The internal audit assesses and reports on the suitability of internal controls to contribute to correct use of the resource, which is objective of corporate governance. For good corporate governance to be achieved the company must straighten its internal controls and that is the duty of the internal auditor. The internal audit must access the internal control and make recommendations on how to improve upon it. Holt and DeZoort (2009) indicate that the internal audit shows a distinctive part in corporate governance by monitoring risks that pertain to the firm and ensures that all organisational processes are controlled efficiently and effectively.

This paper seeks to exams the relationship that exists among the audit committee, internal audit and its part in the corporate governance system. A critical analysis of the circumstances leading to the collapse of businesses shows that the majority of these corporate failures could be avoided if effective audit committees and internal audit department are in place to check management activities, especially concerning financial reporting and other accounting practices. Yeboah (2009) posit that led to the collapse of Ghana Airways indicated that the main factors that brought the corporation to its needs were government interference, lack of working capital, poor management practices and poor accounting practices. Also, the majority of the few studies that were made accessible on this topic were performed for advanced states such as the U S A, the UK, Canada, and Australia (Pomeranz, 2001).

In the review of the literature, it was established that not much studies have explored the impact of the audit committee and internal audit department enhancing of corporate governance in developing economy like Ghana. Therefore, there is limited knowledge.

Objectives of the Study

The foremost aim of the study is to analyse the Influence of Audit Committee and Internal Audit improving Corporate Governance System. But precisely, the study hopes to accomplish the following objectives;

1. To analyse the audit committee's impact on improving internal audit operations.
2. To identify the relationship between internal auditing and the audit committee.
3. To analyse the impact of the internal audit department and audit committee member to the risk management strategy of companies.

2 LITERATURE REVIEW

2.1 THEORETICAL REVIEW

Agency Theory

Agency theory defines the relationship among managers (e.g., corporate stakeholders) and representatives (e.g., corporate directors). This concept shows that the company's directors employ the officers to do their job. The principals delegate the work of administration of the organisation to the executives or managers, as agents to the shareholders. The agent, on the contrary, is to make a decision that is in the greatest interest of the shareholder (the principal). The main characteristic in agency theory is ownership and control segregation. The theory stipulates that staff are liable for their duties and responsibilities. Ross Stephen (1975) and Mitnick Barry (1982), independent and roughly concurrent, was the first scholars to explicitly propose that we create a theory of the agency and to begin its creation. The economic theory of agency was originated by Ross (1975) and it was instituted by Mitnick (1982). Ross (1975) is responsible for the beginning of the economic theory of agency, and institutional is for Mitnick (1982), these approaches are similar in their basic concepts. Ross (1975), started the Agency's research on compensation contracting issues; essentially, the agency was seen as an incentive issue. In reaction to a fundamental imperfection of agency relation, Mitnick (1982), introduced the now prevalent understanding that agency builds and develops to cope with the agency.

Chen el at. (2012) conflict of interest natural in any relationship in which one party must act in the best interests of another. The agency problem is used to refer to the conflict of interest which subsists among the company management and the shareholders. The agents are anticipated to operate for the principal and decide what will be useful to the shareholders. If the shareholder(s) is separated from the management of the firm, the managers required to make a decision that will benefit the shareholders (Cohen & Uliana, 1990).

Setia-Atmaja et al. (2011) the appointments of honest and ethical executives are a way of reducing the agency problem. The issue, however, is how to determine whether or not a manager is honest. Therefore, something must be done beyond the executives ' appointment, for this reason, the auditors should work on behalf of the owners and examine the conduct of the managers ' business and report to the owners. The audit is, however, limited to financial audits that can detect financial fraud.

Stewardship Theory

The theory of stewardship states that an agent defends and make the most of the wealth of shareholders through good firm performance. Stewards are managers and supervisors who work for shareholders, who protect the shareholders and make profits. When organisational achievement is achieved, the stewards are happy and driven. It stresses that employees or executives are more self-reliant to maximize shareholder returns. Employees take over their employment and operate diligently with them. Stewardship Theory, created by Donaldson & Davis (1993), is a fresh approach to comprehend the relationship between the company's property and governance. This theory emerges as an important counterweight to the theory of the agency.

2.2 EMPIRICAL REVIEW

Most research has been prepared in the extent of corporate governance, audit committee and internal audit separately but not much has been done in combining all the three areas. The need to build powerful governance systems resulted in numerous examiners to study the fresh corporate governance structure and examine their connection with the internal audit system.

Studies on Corporate Governance

The Cadbury report which was done the Committee on the Financial Aspects of Corporate Governance, eight (8) reasons called for the committee's work. The committee put light on the need of audit committee and internal auditing as part of internal control and the need for corporate governance to prevent corporate failure. An audit committee should be established by all firms' listed (Cadbury report, 1992). The committee made a lot of recommendations. This committee pioneered research into corporate governance systems. Much have not been done in Ghana contest, Abor and Adjasi (2007) have done a lot of research works on corporate governance but not in terms of internal audit and audit committees. Appiah (2011) in corporate governance, forecast of bankruptcy is becoming increasingly important.

Riyadh et. al. (2017) their studies was on the corporate governance among banks in Iraq, their studies were limited in scope, but they only took on banks leaving other sectors of the economy. Their studies attempts to provide insight to create the internal audit role in business organisations, which is a significant component of corporate governance reporting since it straight impacts the welfares of entirely stakeholders, such as clients, vendors, staff, clients, creditors and government agencies, as well as illustrating the need to alter the organisation's perspective. A recent study on corporate governance discovers that various corporate governance views can help to clarify and comprehend the complexities experienced by corporate governance performers and the motivations and actions of these performers (e.g. Beasley et al., 2009. Cohen et al., 2007, Hermanson et al., 2012).

Tumwebaze et al. (2018) extended the borders of the literature by looking at corporate governance, internal audit role and responsibility in legal corporations, they tried finding out the role of corporate governance and internal audit role on responsibility in legal establishments.

Studies The Audit Committee's Impact On Improving Internal Audit Tesk

Kyereboah (2008) it discovered that big and autonomous boards improve company quality and that mixing the roles of Chief Executive Officer and Chairman has an adverse effect on corporate results. Boards and indeed top managers have a precarious role to play in organisations ' strategic direction and success. The increasing awareness of the benefit of excellent internal controls and the complexities of a big organisation's appropriate internal control scheme has resulted to the growth of internal audits as a type of command over all other internal controls (Stettler, 1977).

The relationship regarding the audit committee and the internal audit role and also with the audit committee's impact on the interactions established in Tunisia was examined by Boubaker and Taher (2013) their research has revealed that the audit committee's capability and regularity of meetings have a favourable effect on the audit committee's interaction with the internal audit feature, while the audit committee's dimension has a negative impact on this communication. Moreover, according to the study results, there is no substantial impact on the interaction among the audit committee and the internal audit function on the independence of the audit committee members.

Studies on the Relationship between Internal Auditing and the Audit Committee

Alzeban & Sawan (2015) concentrated on the connection among the audit committee and internal audit reporting line, internal audit suggestions and weakness improvement, there was some concentration on whether appropriate surveillance procedures have been implemented to tackle internal control weaknesses. 338 of UK listed firms, data were sampled from the chief internal auditors and yearly reports. The results show that internal control flaws are indeed influenced by whether the internal audit reporting line is largely intended to be carried out through the audit committee or management and whether recommendations from the internal audit are executed. Goodwin & Yeo (2001) they investigated the relationship between the audit committee and the internal audit activities in Singapore and found that there is a greater likelihood that an audit committee composed solely of non-executive representatives will have greater communication with the internal audit feature than those audit boards composed of executive representatives, i.e., the regularity of conferences between audiences.

Zain & Subramaniam (2007), research outcomes in Malaysia that demonstrate scarce, casual interaction between audit committee members and internal audit activities as well as the need for transparency on accounting have been acquired, the significance of the audit committee's impact in promoting the activities of internal audit transactions is emphasized in accordance with the study results. Drogalas et al. (2016) studied the quality of audit and the part of internal auditing in consulting, emphasizes the new internal audit management-oriented range and value-added. Using regression analysis to analysed their data collected using survey questionnaire method, at the end their result shown that the consulting of internal audit and the audit committee have a good impact on corporate governance, the studies only looked at the consulting role of both the internal audit and the audit committee but failed to take a look at both internal control and the audit committee as means of internal control. Members of the audit committee must operate diligently to efficiently monitor the economic reporting method (Carcello, 2019). Zaman et al. (2011) finds a positive relationship among ' correctly formed ' audit committees and audit charges, but only for large businesses. Sarens et al, (2009) their study, based on 4 Belgian case studies, provides insights into (1) what motivations the audit committee to seek support for the internal audit task; and (2) what makes the internal audit task an professional body to provide the audit committee with relief

Studies on the Impact of the Internal Audit Unit and Audit Committee Member to the Risk Management Strategy

Also, a bond between the lack of authorised monitoring and monitoring procedures and reporting shortcomings in internal controls is found. Marx (2009), the main aim of his paper was to investigate the audit committee's tasks and disclosure performs in major listed firms in South Africa, leaving out small companies, this makes the result not generally accepted. The data was gathered by inspecting annual accounts and questionnaires distributed to the members of the audit committee in the population. The study's basic results are that these companies ' audit committees perform fairly well their normal duties of supervising external audit, internal audit, financial accounting, internal control and risk management while addressing evolving problems such as sustainability reporting and compliance with ethics to a smaller extent. It was also discovered that the handling of duties conducted by audit committees in the annual report was of a poor level and does not represent the real state of relations. Per the sample of this study, the finding can't be said the same in small firms. Cao et al. (2015) through their research explores adjustments in China's audit policy after the implementation of risk-based auditing principles better than an internal control-based audit method. Unambiguously, they study if auditors are applying the risk-based audit method to assess corporate governance afore allocating audit resources. The findings indicate that the connection between audit effort and corporate governance was poor in the internal control-based inspection approach. However, implementing the risk-based method needed by the latest auditing principles has considerably improved the connection among audit work and corporate governance. Overall, their results indicate that China's compulsory change to risk-based auditing has optimised audit activity.

The study by Tušek (2015) analyses the audit committee's impact on the internal audit activities to accomplish the many tasks and duties of contemporary internal auditing in the corporate governances system. The study took a look at the impact of the internal audit sector and audit committee members to the risk management strategy. Subramaniam et al. (2011) the aim of their paper was to investigate the consequence of the role of internal auditors in organizational risk management (ERM) on expectations of their ability to disclose a failure in risk processes and whether this willingness to report is influenced by a strong relationship with the audit committee. Fukukawa et al. (2014) paper introduces an approach to evaluating the risk of financial statements fraud and audit program planning and illustrates its application by simulating its use in Olympus ' 1999 audit. The approach incorporates a rigorous approach to risk assessment.

2.3 Summary of Literature Review

In addition to the information irregularity among management and absentee proprietors, the agency problem associated with the segregation of ownership and governing creates the demand for an independent audit body such as the audit committee and internal audit division. It is the duty of internal audit department to check that the financial statements are reasonably reported in compliance with the relevant regulatory standards and that these statements represent the entity's true economic situation and operating performance, and the audit committee help in this role. The independent verification of the auditor thus adds credibility to the financial statements of the company. Lin et al. (2006) it is therefore expected that a quality audit will restrict opportunistic earnings management. It is evident from the above that truthful, dependable and exhaustive reporting on the task carry out by both the audit committees and internal audit unit is essential in order to obtain assurance from the function of the audit committee for shareholders and stakeholders alike. While audit committees and internal auditors are before than well recognised both locally and overseas, there has been limited empirical research on their relationship and disclosure practices in Ghana to date. In other words, there is a lack of study on the relationship, effect and contribution of AC and IA to risk management in Ghana, although much greater research efforts have been demonstrated over the past two decades in the United States, Croatian and other western nations. As indicated by Tušek (2015), most of the audit committee and internal audit studies used American data and, as a result, the literature of the audit committee could be described as a literature based on the U.S. An empirical study on the effectiveness of audit committees and internal auditors is not only necessary but also valuable in order to promote the effective functioning of the AC and IA systems in companies in Ghana. Furthermore, given the vital part that an audit committee may perform in the board's financial reporting governance structure and control and risk management and other related aspects, there is a need for empirical data that can be used to assess current audit committee and internal audit relationship and disclosure practices to provide a basis for future references. Furthermore, audit committee followers and internal audit unit must have a clear appreciative of their roles within the organization in order to enable them to function effectively. The study therefore seeks to examine influence of audit committee and internal audit improving Corporate Governance System in selected firms in Ghana.

3 RESEARCH METHODOLOGY

3.1 Study Design

The objective of this study is to examine the audit committee's impact on enhancing internal audit tasks or the effectiveness of the establishment's internal audit function. This included examining the aspects of excellent corporate governance, the position of the internal audit unit and corporate governance system, and the contributing factor of internal audit service efficiency.

Therefore, this research was organised in the context of a descriptive research approach. Descriptive research is described as a technique of study that explains the features of the researched population or event. This methodology relies more on the study topics "what" than the study topic's "why." The approach was selected because, instead of manipulating the variable, the researcher would portray the situation that occurred at the moment of the studies and also because the sample size in descriptive research is commonly large, info collection is fast and economical.

3.2 The Population Size, Sample and Sampling Technique

Creswell & Zhang (2009) explicated that population type is in two forms, i.e.: targeted and accessible populations. The research population include internal auditors and audit committee fellows in Ghana. The researcher look forward of interviewing 70 people, 30 of which is audit committee members and 40 are internal auditors he population of 70 was chosen because of the common nature of the respondents.

The internal auditors and audit committee members were selected because they form the basis for this study. The total population targeted was all the internal auditors (IA) and audit committee (AC) member in Ghana. The research was targeted at IA and AC members in Kumasi, of which forty (40) are internal auditors and thirty (30) are audit committee members, this population was selected of the limited staff in these sectors. This research also used 38 IAs and 30 ACs.

3.3 Research Collection and Validity of the Research Instrument

The primary data was gathered using questionnaires. The study was performed from August 6, 2019, to August 15, 2019, on the sample size of seventy (70) respondent. The questionnaires were answered by the internal auditors and audit committee fellows in Ghana. The same questionnaire was structured into three groups for both internal auditors and audit committee fellows, based on the research's goals. Grouped as follows: the General company data, Information on the prevailing relationship among the internal audit department and the audit committee and the respondents ' views on the connection between the internal audit function and the audit committee. These questions were all of closed questions format. The questionnaires were pre-tested with two audit committee members and three internal auditors making it five sample size. The researcher and each of the participants examined every question during the pre-test to ascertain what they (participants) believed the issues were asked so respondents in the large study will have no trouble answering the questions.

4 RESULTS AND DISCUSSION

4.1 Demographic Characteristics

In order to carry out the analysis of the information gathered in order to reply the study questions, a quantitative review was carried out on the demographic characteristics of the examines in order to assist in the analysis, since these characteristics are considered to influence the results of the debate and the importance of the generalization of the study findings.

The first question was to know the position of the respondents in the company since the questionnaires were for internal auditors and audit committee fellows, they were given the chance to answer the questions. As presented in Table 1, of the overall number of research participants, 38 or 55.9% were internal auditors, while 30 respondents or 44.1% are audit committee members.

By implication, the internal auditors are more in the selected companies then audit committee members. The findings shows that although internal audit is not common among firms in Ghana, it was relatively common than audit committee.

The respondents were also enquired to indicate the type of economic activities their company were involved in, it was a closed question of nine option, from which a respondent was to select one. The research comprises businesses from different economic operations, as can been shown in Table 1. Financial Services recorded the highest figure of 27 respondents’ representing 39.7 percent, followed by other businesses actives which also recording 13 respondents’ which is 19.1 percent, the rest of the economic activities managed 28 of the respondents’ which also is 41.2%, as shown in Table 1. The results infer that the majority of respondents who take part in the study were employed in the financial services sector and by so doing the financial services sectors lead in the employment of internal auditors and audit committee fellows in Ghana.

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Details

Title
The Influence of the Audit Committee on the Internal Audit Department in the System of Corporate Governance in Ghana
College
Kwame Nkrumah University of Science and Technology
Grade
1.00
Author
Year
2020
Pages
28
Catalog Number
V536616
ISBN (eBook)
9783346176295
ISBN (Book)
9783346176301
Language
English
Tags
audit, committee, corporate, department, ghana, governance, influence, internal, system
Quote paper
Wiredu Richard (Author), 2020, The Influence of the Audit Committee on the Internal Audit Department in the System of Corporate Governance in Ghana, Munich, GRIN Verlag, https://www.grin.com/document/536616

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