1.1. BACKGROUND OF THE STUDY
Today, several forces have led to a quiet revolution in internal audit. Democracy requires government to be accountable in its use of public money and in providing effective, efficient, and economical service delivery. Ever larger and more complex systems require greater competencies, thus internal audit has had to become ever more professional. (Cecilia Nordin Van Gansberghe, 2003.)
Reporting relationships of internal auditing has changed and developed together with the progress of internal auditing. At the beginning reporting lines of internal auditors went to the accounting level and external auditors, who saw internal auditors mainly as assistant in financial audits. Accordingly as functions and roles of internal auditing expanded, changed and shifted more to management oriented matters than accounting matters, reporting lines have also been transformed and currently in many countries internal audit reporting have also been transformed. Internal audit reporting lines ideally classified in to administrative and functional, the chief audit executive should report functionally to the board or audit committee and administratively to the chief executive officer of the organization. (Rolandas Rupsys, 2005.)
In addition, the development in internal audit profession brings change in the scope and the reporting relationship with internal audit customers. Initially the major role of internal auditing focused on an accounting oriented function that has been gradually transformed into management oriented profession. Previously internal auditors were seen just as an assistant of accountants and an external auditor but recently internal audit is certainly is considered an independent profession, which is playing a significant role in the management of organizations.
Besides, Independence of auditors have always been a sensitive issue, especially for internal auditor in which the internal auditor expected to be independent, while he/she is the employees of the organization, above all, not clearly organized structure or reporting line make the problem more complicated.
Moreover, the emergence of the concept corporate governance and audit committee brings change in the reporting relationship of internal auditors. In many countries internal audit required to report functionally to audit committee and it is also play key role to assist the board and/or its audit committee in discharging their governance responsibility.
The main purpose of this project is to conduct a survey study through analyzing the reporting
structure of internal audit, and identify the correlation of internal audit scope, independency, good
governance and audit committee with internal audit reporting relationship in relevant with Ethiopian Public Enterprises and make recommendations on this particular concern.
1.2. STATEMENT OF THE PROBLEM
Internal audit is facing many challenges, some of the challenges identified by the Ministry of Finance and Development, in Internal Audit Manual are: lack of expertise leading to trivial auditing findings, lack of opportunity for professional development, repetitive audit routines which staffed members can predict, being assigned to tasked such as accounting and pre-control of expenditures with the internal auditor subsequently have to audit (conflict of interest) , inability to insist on getting significant information because fears of losing promotion opportunities and job security
(lack of independence), wrong perception of the audit function and auditors by the staff of the public body.
The above-mentioned problems can be classified into two categories with some overlapping. First, the competency of internal auditor that leads to trivial audit finding, lack of professional development, repetitive audit work, and non-value added internal audit report. Second, structural problem (reporting relationship) in the form of assigned task that impair the auditor independency, and fear of losing promotion, job security , and wrong perception about internal auditors as fault-finders and their task as policing rather than auditing.
Above all, vague reporting relationship brings: –
- Poorly motivated and frustrated internal audit staff because of limited scope of audit
- Lack of independence
- Weak organizational governance
- Internal auditor can also suffer from low status that leads to inefficient and ineffective internal audit work.
1.3. RESEARCH QUESTIONS
The study will try to answer the following research questions.
- To whom the internal audit unit report in Ethiopia public enterprises?
- Does the current reporting relationship of Public enterprises actually or potentially impair the internal auditor’s independency?
- Are the public enterprises internal audit purpose, authority and responsibility formally defined in the internal audit manual or charter?
- Does the reporting relationship in Ethiopian public enterprises promote the role of internal auditors in good governance?
- What is the level of management or the employee awareness about the role of internal auditing?
- How is the educational qualification and professional experiences of internal auditors?
- Are the internal auditors satisfied with the management response for audit findings?
- What are the major activates or scope of Ethiopian public enterprises internal auditors?
1.4. OBJECTIVES OF THE STUDY
The study tries to analyze the reporting line of internal audit and investigate its relationship with internal audit scope, independency, good governance and audit committee, furthermore conduct a survey study on selected Ethiopian public enterprises and recommend possible ways to cope up the problems identified from the research result, so that to promote the image of internal audit profession. Specifically the researcher plans:
- To Investigate the reporting line of internal audit unit in Ethiopian Public enterprises, and its actual or potential effect on internal auditor’s independency
- To assess the quality of public enterprises internal audit unit
- To look in to the responsiveness for corrective action from the management
(Conflict of interest)
- To examine whether managers or employees of those organizations have proper understanding and knowledge of internal audit role in good governance
- To recommend alternative solutions for the actual problems that will be identified by this research.
The preliminary study, observations made by the researcher, and different previous researches on this subject show reporting lines of internal audit activity are not always organized and practice as they should be ideally (theoretically). In addition, it has direct impact on audit scope, independency, and internal audit contribution for good governance that negatively affect the effectiveness of internal audit.
1.6. SIGNIFICANCE OF THE STUDY
The researcher believes that the result of this research project would have the following
- This project paper could be used as an initiation for those who are interested to conduct a detailed and comprehensive study regarding the internal audit in Ethiopian Public enterprises.
- It will enable the governing body, specifically the managements, the higher responsible body, and audit committee of selected public enterprises, to be aware of the importance use of internal audit, and gives insight how they use the internal audit service most efficiency.
1.7. SCOPE AND LIMITATION OF THE STUDY
The researcher believes that the findings of this study would have been more productive if it has been conducted on all governments and non-governments organizations in Ethiopia. However, due to time and financial constraints, it is out of the reach of the researcher to incorporate all in this study. Due to this, the project is limited to 12 randomly selected organizations from non- budgetary government organizations (Public Enterprises).
1.8 RESEARCH METHODOLOGY
This research uses both stratified and random sampling method. First the public enterprises was
divided into four sectors as shown in table one, then the non-budgetary organizations (public
enterprises) were grouped in different strata according to their sector, and three organizations
are randomly selected from the public enterprise in the sector
|No||Sectors||Selected public enterprises|
|1||Financial Sector||Construction & Business Bank|
|2||Commercial Bank of Ethiopia|
|3||Ethiopian National Insurance|
|4||Construction Sector||Tikur Abay Construction|
|5||Construction Material Supply|
|7||Transportation, Communication and Power||Ethiopian Shipping Lines|
|9||Ethiopian Telecommunication Corp.|
|10||Manufacturing||Zequala Steel Rolling Factory|
|11||Aday Ababa Yearn Share cop.|
|12||Yekatit Paper Convert|
Table one: sample public enterprises
The researcher will use both primary and secondary sources of data.
Primary data was obtained through structured questionnaires, as well as the over all observation of the researcher. Questionnaires will be distributed to the internal auditors, and internal audit services users (i.e. managements) in the selected public enterprises.
Secondary data sources were the selected:
- Internal audit manuals
- Websites and other documents that are related to the topic under study
1.9. Analysis Method
Both quantitative and qualitative data analysis method were used. First the data were collected
through the questionnaires and analyzed by using spreadsheet for descriptive statistics and
qualitative method of analysis is employed for feedbacks obtained using open-ended questions then
graphs, tables and charts were used to present the research findings.