THE ROLE OF INTERNAL AUDITORS AND FINANCIAL REGULATORS IN INTERNAL FINANCIAL CONTROL OF PUBLIC SECTOR
CASE STUDY OF STATE GOVERNMENT MDAs
1.1 Background to the Study
In Nigeria, financial control is a key element of the system of internal controls, and financial Matters are so important that they receive constitutional recognition. Osita (2008:134) says, “However it is almost impossible to study auditing, or to be able to perform any meaningful audit in practice, without having a perfect grasp of the concept of internal control. In reality, internal control forms the bedrock of auditing both from the point of view of the Executive and the Auditor. An effort to deal with any audit related problem, in practice, will involve a critical analysis of controls relating to the matter under consideration”.
MBEOO3 (2010:7), states that, “Internal Financial Control is the first line of defence in safeguarding the assets of the organisation which is largely achieved through prevention and detection of errors and fraud”. Osita (2008:137) continues that, “Internal control has the primary objective of preventing fraud or errors. This objective may be impossible to achieve since fraud and errors are known to have occurred even in the best system of internal control. However, a good system of internal control ensures that where errors and fraud takes place, they are detected within a very short space of time. It is therefore, expected that the effect of a good system of internal control is to reduce the incidence of fraud or errors.” Osita (2008:137) concludes that, “the system of internal financial control is intended not only to maintain an adequate method of processing accounting data, but also to safeguard the system from financial losses”.
Lubin et al (2008:2), says, “A well-prepared budget could be undone during its execution if sound internal control and accounting systems are not in place to ensure that the budget is being implemented as planned, and in accordance with prospective cash flows”. Financial control exists in every Public Financial Management (PFM) system, in one form or the other, irrespective of its architecture and/or specific inheritance (Lubin, 2008:3). In the absence of a sound PFM system, the management of public finances faces several risks (Lubin, 2008:10). Financial control covers all government expenditure, irrespective of the institution undertaking the expenditure, the nature of the expenditure, or the source of financing (domestic versus foreign). Financial control is applied to budgeted and unforeseen expenditure and more generally to all decisions that have a financial impact on government (Lubin, 2008:12).
Lubin et al (2008:3-4), continues, “financial control is, therefore, a key component of the overall internal control system and can be defined as a set of ex ante verifications undertaken during budget execution to ensure that: (i) public resources are committed and expended in accordance with the budget law, existing financial laws and regulations and government priorities (as set in the budget or the cash plan); and (ii) the principles of economy and consistency are observed in the use of public resources”. Lubin et al (2008:24), emphasises that, “A strong and robust financial control system is necessary for embedding other PFM reforms, and promoting fiscal discipline, good governance, and the confidence of the private sector in transacting with the government. For the financial control reform to be effective and sustainable, it should be cast within a comprehensive and strategic framework of PFM reforms ultimately aimed at reducing manifestations of weak control in the short run and establishing good governance in the management of public finances in the long run”.
Government officials are responsible for safeguarding the assets of the State. They are empowered by the constitution and enabling laws in exercising authority over the assets belonging to the government. Adequate system of internal controls also assists the government in protecting the assets and ensuring that scarce resources available to them are transparently and efficiently deployed in providing social amenities for the citizens. Success of internal control system is measured by the reliability of financial reporting, level of compliance with applicable laws and regulations, and finally the effectiveness and efficiency of its operations. Effective Internal Control System would help government programme managers to achieve desired results through effective stewardship of public resources. Effective Internal Control System should be implemented by Oyo State Government in every sections of the Public Service to safeguard the assets, improve operational efficiency and productivity (MBEOO3, 2010:7).
In real practical scenarios, the Auditor will make a preliminary evaluation of the entity’s internal controls. If the controls are likely to lead to a true and fair set of financial statements, the auditor will test those controls. If they appear weak, he will not rely on the internal controls, but carry extensive testing of the transactions and balances which appear in the financial statements. If the controls are operating correctly, the auditor can reduce the extensive testing described above and adopt a reliance approach. If not, he will be forced into a substantive approach. Finally, the auditor will review the financial statements as a whole and formulate his audit opinion, whose end result is an audit report. In summary, the Auditors evaluate the system of internal controls, spot the weaknesses in the system, and recommend corrections meant to improve or expand the system (Adeniyi, 2012:15).
Kuo-Tay and Ronald (1992:3-4), explained concisely the role of auditors in internal controls. “When conducting an audit, auditors first review the existing or proposed internal accounting control system. Based on this review, they obtain their perceptions of the internal control systems. Auditors would then organize these perceptions and model them through some representation scheme. Thereafter, they would perform reasoning based on this representation to evaluate the control procedures. As a whole, the effectiveness of evaluating internal control systems depends on the performance of reviewing, modelling, and reasoning. In an audit without any external aids, auditors need to rely solely on their own mental capabilities in performing these three tasks. They have to observe the system, construct a mental model of the system, and conduct mental reasoning for the evaluation of the system. Because observing, mental modelling, and mental reasoning require significant cognitive efforts, auditors might commit mistakes due to the limitation of human mental capacity. As a result, several tools have been developed to help auditors mitigate this limitation in modelling and reasoning. Traditionally auditors have used system flowcharts and checklists to help evaluate internal accounting control systems. System flowcharts can help auditors organize their observations, while checklists can enhance auditors’ ability in attending to important control issues. Although these two methods are useful, they do not offer a systematic algorithm for system evaluation. Users must rely on their own analytical abilities to evaluate the system. Since humans have only limited analytical capability and research has shown that the evaluation of internal control procedures is a Non-deterministic Polynomial-time (NP) Complete Problem, such unsystematic approaches will very likely result in inaccurate assessment of system reliability or ignorance of crucial control weaknesses. This problem would be even more serious if the system is fairly large or the auditor does not have enough experience. A problem is NP-complete if it admits only exponential-time solutions and it can be solved in a reasonable amount of computing time only when the problem size is small. Therefore, NP complete problems are considered intractable”.
In broad sense, a financial regulator may be a public authority, a government agency, or a professional institute, who is responsible for exercising autonomous authority over some area of human activity, in a regulatory or supervisory capacity. Regulatory independence refers to the ability of an agency to have an appropriate degree of autonomy in setting rules and regulations for the sectors under its supervision, within the confines of the law. According to the IOSCO principles, the regulator should be operationally independent from external, political, or commercial interference in the exercise of its functions, and powers, and accountable in the use of its powers and resources. Independence will be enhanced by a stable source of funding for the regulator, according to IOSCO (Arunma, 2015:24-25).
Key public financial sector regulators in Nigeria are as follows:
- Central Bank of Nigeria (CBN)
- Nigerian Deposit Insurance Commission (NDIC)
- National Pension Commission (PenCom)
- National Communications Commission (NCC)
- National Insurance Commission (NAICOM)
- Securities and Exchange Commission (SEC)
- Financial Reporting Council (FRC)
- Asset Management Corporation of Nigeria (AMCON)
- Federal Ministry of Finance (FMF)
- Association of National Accountants of Nigeria (ANAN)
Financial regulators in Nigeria, establish laws, rules, and standards relating to the preparation of financial statements for external purposes. These financial reporting rules and standards form the basis upon which management specifies suitable objectives for the entity and its subunits. When specifying suitable external reporting objectives relating to the preparation of financial statements, management considers the accounting standards that are applicable to that entity and its subunits. Management also specifies the accounting principles that are appropriate in the circumstances. Regulators usually carry out a series of examinations of records and accounts of organizations within their area of jurisdiction, with a view to ensuring the soundness of the organizations, their level of risk exposure and compliance with laid down procedures. In Oyo State, Central Bank of Nigeria (CBN), Federal Ministry of Finance (FMF), Financial Reporting Council (FRC), and Oyo State Audit are the major regulatory players that influence Internal Controls in the MDAs.
1.2 Statement of Problems
Adeniyi (2012:194), said, “No internal control system is fool proof. In fact, the Auditing Practices Committee (APC) guidelines specifically made out this point: No internal systems, however elaborate can by itself guarantee effective administration, and the completeness and accuracy of the records, nor can it be proof against fraudulent collusion, especially on the part of those holding positions of authority or trust”. GAO (1985:1-3), asserts in its report that, “Widespread and often long-standing weaknesses and breakdowns in agency internal controls continue to result in wasteful spending, poor management, and losses involving billions of dollars of state funds. The weaknesses have also made outright fraud more feasible, erode public confidence, and undermine the state government’s ability to operate effectively; thus have a profound effect across the spectrum of government programs and operations.”
ISP014 (2009:4) states that, “The situation in Oyo State Government indicates that basic account keeping is weak; and cash planning is not effective”. Also from ISP014 (2009:9), “In Oyo State Government, it has been shown that whilst existing Financial Instructions, controls and rules contain generally clear rules for commitment control, there is a widespread failure to comply with such control”. Eze and Ofoegbu (2014:19), posits that, “Public audit seeks inter alia to ensure that laws, policies and established processes have been followed; monies misappropriated or stolen recovered and clear rules of fiscal and other conduct established”. However, there is a clear failure of audit goals in the state, as the treasury keeps incurring losses; the value for money for state expenditure is absent; and public resources are constantly mismanaged.
ISP014 (2009:24) states that, “The internal audit function is meant to assist the chief executive or chief accounting officer of the MDA to maintain compliance of the internal control, and laid down accounting procedures for the MDA. The internal auditors though staff of the Accountant General are in an awkward position as they are meant to be responsible to the chief accounting officer of the MDA they work in. More often than not the internal auditors are incapable of standing up to the chief accounting officer on issues that contravene proper procedures because they are usually junior officers. Sometimes, political heads or heads of MDAs ignore reports that are critical of them. It has been seen that the internal audit function has broken down over the years”.
1.3 Objectives of the Study
The main objective of this study is to assess the Role of Internal Auditors and Financial Regulators in the Internal Financial Control of Government MDAs in Oyo State. Secondary objectives are as follows:
- To determine the extent to which Internal Financial Control is adequate in Oyo State Ministry of Finance.
- To identify the impact of societal values on Internal Financial Control in Oyo State Ministry of Finance.
- To know how there is full compliance to the system of Internal Financial Control in Oyo State Ministry of Finance.
1.4 Research Questions
- To what extent is the Internal Financial Control in Oyo State Ministry of Finance adequate?
- What is the impact of societal values on Internal Financial Control in Oyo State Ministry of Finance?
- How is there full compliance to the system of Internal Financial Control being designed?
1.5 Hypotheses of the Study
- Internal Financial Control is not adequate in Oyo State Ministry of Finance.
- Societal values have no positive impact on Internal Financial Control in Oyo State Ministry of Finance.
- There is no full compliance to the system of Internal Financial Control in Oyo State Ministry of Finance.
1.6 Significance of the Research
To the Policy Makers, this research would provide some exposure opinions that they might consider in decision making. No Governance, No Politics! No Politics, No Policy! No Policy, No Production!! No Production, No Output!! No Output, No Service Delivery!!!
To Heads of MDAs, this research would help them in analysing checks and balances in Internal Financial Control (IFC), so that deviations would be corrected. It would guide them in ensuring better productivity in the Public and Civil Service.
To the General Public, this research would describe the meaning, process and significance of internal financial controls in Government MDAs. It would also highlight its role in promoting better output and better service delivery to the people.
To the Researcher, this research would give him an added advantage in professional experience, and in the award of the B.Sc. degree in Accountancy. It would also give him an opportunity to know how Internal Financial Controls works in the real system of good governance of Oyo State.
There is a dearth of empirical studies on Internal Financial Control, as it influences all spectrums of government programs and public financial management in Nigeria. This research is the first of its kind, to concentrate on Internal Financial Control in Government MDAs, thereby filling that research gap in the Nigerian Public Sector. All other researchers rather conduct studies on Internal Control in a Company (Aigbokhaevbolo, 2013; Chukwu, 2012; & Zhijun et al, 2014); in Non-For-Profit Organisations (Christine et al, 2009; Mohamad et al, 2014; & Stewardship, 2013) and in Local Banks (Gamage et al, 2014; Jat, 1992; Oyeyiola, 1996; Nwaze C., 2011).
1.7 Scope of the Research
The focus of this research is on “the Role of Internal Auditors and Financial Regulators in the Internal Financial Control of Government MDAs: Lessons from Ministry of Finance (MoF), Oyo (Oyo State)”. Practically, doing a research on internal financial control in the public sector is a great niche in the field of accounting, financial reporting, and public management.
Since the research topic is directly related to Internal Auditing, we are of the opinion that Internal Controls is usually handled within the jurisdictions of Compliance and Financial Audit. It is one of the principal concerns of an internal audit, to ensure that internal controls are working properly, so that external auditors (like the Auditor General of the State), can have faith in the accounts produced by the organisation.
Since the Ministry of Finance and Economic Development (MoFED) is the heart of Government, I didn’t need to conduct this research, on the entire Ministries, Departments, and Agencies (MDAs) in Oyo State. So if the MoF succeeds, the government shares from that success. And if MoF fails, (particularly in the economy or the management of the state’s finances), then the government has failed. Thus, focusing on the MoF, will therefore serve as a blueprint for internal financial controls, which other MDAs in Oyo State, will follow.
1.8 Limitations of the Research
- Low Network Coverage: In Renaissance University, where I am currently searching for relevant data particularly online journals, we have challenge of low network coverage. Therefore I had to make use of the limited resources in the Digital Library, while I used brief break during the semester to get research materials.
- Time Constraints: I had lots of time constraints during this research study. We were not given adequate time, during the week, by the Department; so often times we had to miss lectures, in order to get out there and get project results. However, within this limited time, I was still able to achieve efficiency.
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