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IMPACT OF INDEPENDENCE ON THE EFFECTIVENESS OF SERVICES RENDERED BY INTERNAL AUDITORS..

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Auditor independence and objectivity are the cornerstones of the profession. The assurance services provided by auditors derive their value and credibility from the fundamental assumptions of independence of mind and independence in appearance. Prior research on auditor independence and objectivity has been undertaken predominantly in the context of external audit. However, in more recent years, there has been heightened interest in issues associated with the independence and objectivity of internal audit. The motivation for research growth in the area is related to the evolving and expanding role of internal audit as a key corporate governance mechanism as well as an internal consultancy service. In this regard, internal auditors are in a unique situation as providers of both assurance services within the organization and consultancy services to managers. Not surprisingly, this dual role has generated significant debate as it has the potential to place the internal auditor in a situation of conflict. Furthermore, as employees of the organization, the ability of internal auditors to exercise true objectivity has also been questioned (Paape, 2007).

In recognition of the potential for conflict, the Institute of Internal Auditors (IIA) has issued a number of professional standards and guidelines with respect to independence and objectivity. In fact, in 2001 the IIA published “Independence and Objectivity: A Framework for Internal Auditors” (IIA, 2001) as a guide for managing threats to objectivity. The framework identifies seven key threats: self-review, social pressure, economic interest, personal relationship, familiarity, cultural and cognitive biases. It also identifies a variety of safeguards against these threats.

To date, there have only been a limited number of prior reviews of the internal audit literature. Bailey, Gramling and Ramamoorti (2003) edited a monograph published by the IIA Research Foundation on research opportunities in internal auditing. There were two key objectives of this monograph. It was intended, first, to inspire academic research on topics of relevance to internal auditing and, second, to bridge the gap between academics and practitioners. As such, it is a blend of theory and practice, designed to familiarize academic researchers with internal audit practice (Editorial Preface, xi – xii). Each chapter of the monograph raises a series of research questions related to a specific topic in internal auditing and we refer to these where relevant.

In 2006, the IIA commissioned the 2006 Global Common Body of Knowledge study, engaging researchers from around the world “to better understand the expanding scope of internal audit practice” (Cooper, Leung and Wong, 2006). An initial phase of this study has resulted in three related literature reviews. Cooper et al. (2006) examined the internal auditing literature in the Asia Pacific region, Hass, Abdolmohammadi and Burnaby (2006) studied the literature from the Americas, while Allegrini, D’Onza, Paape, Melville and Sarens (2006) performed a similar review of the European literature. The purpose of these reviews was to document changes in internal audit as a result of shifts in global business practices. Where relevant, we draw on aspects of these studies that relate to internal audit objectivity.

1.2 Statement of Problem

An internal auditor occupies a unique position within an organization. The auditor is employed by the organization but is also expected to review the conduct of operations. This has a potential to create significant tension since the internal auditor's “independence” from management is necessary for the auditor to objectively assess management’s actions. Internal auditing’s in-depth knowledge and understanding of operational conditions of the audited entity can add significant value to the organization. However, it may be hindered in upholding the public trust if measures to protect its independence are not developed, implemented, and maintained. These measures include provisions to ensure that the internal audit activity is empowered to report significant issues to those charged with governance; is supported by management formally and in practice; and is provided with sufficient resources to effectively perform its duties. Internal auditing is performed in diverse environments and within organizations that vary in purpose, size, and structure. In addition, the laws and regulations within various countries differ from one another. Particularly, public sector auditors operate in organizational structures that are as complex and varied as the many forms of government that exist throughout the world today.

The International Standards of Supreme Audit Institutions (ISSAI) and the Institute of Internal Auditors’ (the IIA’s) International Standards for the Professional Practice of Internal Auditing (Standards), present general terms to allow adoption in different national contexts with the understanding that implementation will be governed by the environment in which the internal audit activity carries out their responsibilities and in accordance with the applicable laws and regulations. The IIA’s Standards are universal and are intended to apply to all members of the internal audit profession.

Internal auditing has become a factor of the new accountability and control era. The manner in which public sector entities maintain internal control and how they are held accountable has evolved to require more transparency and more accountability from these organizations that spend investor or taxpayer funds. This trend has significantly impacted how management implements, monitors, and reports on internal control.

Although internal auditors can be a valuable advisory resource on internal control, the internal auditor should not be a substitute for a strong internal control system. A system of internal control is the primary response to risks.

The role of internal auditing has evolved from an administrative procedure with a focus on compliance, to an important element of good governance. In many cases the existence of internal auditing is mandatory.

In describing public sector auditing, the Lima Declaration calls for internal audit services to be functionally and organizationally independent as far as possible within their respective constitutional frameworks (ISSAI 1/section 3, par. 2).

The IIA’s Standards and Code of Ethics recognize the importance of internal auditors maintaining their independence and objectivity when performing their work, irrespective of whether the internal auditors are engaged in public or private sector audits. In addition, the IIAStandards advocate a strong system of internal control that is monitored by a well-resourced internal audit activity as a fundamental feature of good governance. In the public sector, a strong system of governance is essential in ensuring adequate service delivery to the public at large.

The appearance or perception of a lack of independence and objectivity could be as damaging as the actual condition. If internal auditors are involved in developing the internal control systems, it may become difficult to maintain the appearance of independence when auditing these systems.

1.3 Objective of the Study

The purpose of this study is to examine the impact of independence on the services rendered by internal auditors with particular reference to Enugu State University of Science and Technology (ESUT). Some other objectives of this study are:

1.  To examine the extent of independence in the role of internal auditor in ESUT.

2.  To evaluate the various activities of internal auditor in the university.

3.  To check if internal auditor performs its duties and obligations without any influence by the school management.

4.  To evaluate how the services rendered by the internal auditor contribute to the developmental process of the new face of ESUT.

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