Factors that Contribute to the Effectiveness of …

1 DOI: 2014. V70. 24 Factors that Contribute to the Effectiveness of internal audit in Public Sector Zulkifli Baharud-din1 , Alagan Shokiyah2, and Mohd Serjana Ibrahim3 1, 2 Administrative Science & Policy Studies Universiti Teknologi MARA Shah Alam Selangor, Malaysia 3 internal audit Division Ministry of Science, Technology & Innovation Malaysia Abstract. The establishment of IA function is important as an essential internal assurance mechanism in public financial controls and as a tool for monitoring and evaluating financial management activities in government agencies. In addition it will assist government organizations to achieve accountability and integrity, improve the implementation of government programs and develop confidence among citizens and stakeholders as well as to cater any risk of mismanagement of public fund. This study investigates the Factors that Contribute to the Effectiveness of internal audit in the Malaysian public sector.

2 It is to determine the auditors perception toward the Effectiveness of internal audit work, influenced by the quality of audit work in order to perform in an effective manner as control instrument in public financial management. It also aims to determine the relationship between Factors that Contribute to the Effectiveness of IA works in promoting better transparency and integrity of public management. The scope of this study covers the internal auditors that work in the ministries in Putrajaya. This study employs a cross sectional survey to investigate the Effectiveness of internal audit . Several statistical techniques such as the descriptive statistic, correlation and regression analysis were used to analyse the data from the survey. The result of the study showed that there were significant positive relationships among the Factors analyzed in this study such as auditor competency, auditors independence and objectivity and management support to the Effectiveness of internal audit .

3 Thus, the Effectiveness of internal audit will depend strongly to the attributes of the Factors analysed in this study. Keywords: internal audit , Quality of audit Work, Public Financial Management, Competency, Independence, Objectivity, Management Support and Effectiveness of internal audit . 1. Introduction There is general concern among the Malaysian public over the effective and transparent Public Financial Management (PFM) regarding the use of public money. Every year government has involved in collecting and spending hundreds of billion ringgits of public money through the various ministries and agencies for government program and activities. This revenue and expenditure may constitute the main factor for economic growth stimulation of the country. Due to this huge money involved, government need efficient and effective financial management machinery to functioning with accountability and due diligent conforming to the stipulated rules and regulation and other instruction pertaining to financial management.

4 So, all government ministries, departments and agencies are supposed to maintain the accuracy and reliability accounting record for the purpose of auditing and future use. All transactions should be properly authorized, executed and recorded. Funds are expended for legitimate purposes in appropriate ways, and financial record reflect true and fair organisation s financial condition. In addition, the sound financial management control should be in place which includes allocation of the fund according to stipulated objectives, clear rules of responsibilities, ensuring the expenditure according to the set budget and procedures. The government is aware that high quality of financial management will lead to the success of government programs and activities. Therefore, to further enhance the credibility of PFM, the government has established the internal audit (IA) Unit in many government departments and agencies by the virtue of issuance of Federal Treasury circular no 9/2004.

5 This circular indicates the requirement of the establishment of IA unit and governing the tasks and responsibilities of internal auditing in the public sector and as an internal control mechanism in government agencies to look into the financial management integrity and Corresponding author. Tel.: + 603-55435839; fax: + 603-55444131. E-mail address: 126value for money expenditure to the government program and activities. Irregularities in spending public money have been highlighted by the Auditor General (AG) in his annual report Amrin Buang [3]. Some of these weaknesses and irregularities involve serious violation of established financial management guidelines and procedures such as poor planning of procurement, equipments supplied, work done and services rendered not in accordance with the original specification, cost overrun due to delays in project completion, improper payment made for equipments not supplied, work not done and services not rendered, equipment and good procured at a much higher cost than market value, procurement not done according to established regulations.

6 Thus the role of IA unit is to determine that internal control is in place by reviewing policies and practices in the organization in order to avoid loss of financial resources, noncompliance and also to provide reasonable assurance that public money has been spent in an efficient and effective manner. Based on the government emphasize on IA function, audit services can no longer move out of their customary ways of thinking and common work. audit services also can help organization for the success of better financial management in public service by playing the effective and efficient roles to promote better governance in managing public money. The research examined on what Factors that Contribute to the Effectiveness of IA in order to perform their duties effectively and indirectly can assist the public sector in managing the public resources efficiently. Factors such competency of the auditors, independence and objectivity of internal auditors and management support may be the causes that affect the Effectiveness of IA function.

7 2. Literature Review Auditing is originally a financial management concerned with assessing practice for the internal financial status of the organization and the evaluations of the financial performance of the organization [13]. After the revolution and beginning the 20th century the reporting practice of auditors, which involved submitting reports of their duties and findings, was standardized as the Independent Auditor's Report [13]. Since then, the auditing practices have evolved over the years and develop into the broader aspects to become into a field of fraud detection and financial accountability. It also provides feedback on organization financial information and reporting. It also becomes a tool for an analysis of any fraudulent activity, potential and actual within the organization. In Malaysia, IA profession has became into the main business after the formation of the Institute of internal audit (IIA) Malaysia.

8 IIA Malaysia was established in 1977 as a Chapter of The Institute of internal Auditors Inc, USA and elevated to the status of a National Institute in 1988. There are a number of researches had been done in the area of the IA in private and public sector. The fact that effective IA can Contribute to the significant impact to the quality of management has raised the interest for researchers to explore into this matter. Effectiveness of IA will Contribute to the Effectiveness of the client and the organization as a whole [7]. The IA findings and recommendations are clearly crucial to the management of public office to follow through and immediately rectify the problems in the organisation. Mihret & Yismaw [12] suggested public sector organizations are required to have an internal audit function to support effective management in managing public funds. So many findings from the research done linked the Effectiveness of the internal auditor contribution to effective management and internal control of the agency.

9 According to Okafor & Ibadin [14] that the internal audit exercises a critical role in improving corporate governance in organizations. In terms of accountability and management relationship, Saren and De Beelde [15] found that internal Auditors are playing a pioneering role in the creation of a higher level of risk and control awareness in managing risk in the management system. internal audit is a comfort provider to the audit Committee especially in its assurance role and its involvement in improving internal control [15]. Barry J. Cooper, Philomena Leung and Clive Mathews [5] on their study on Benchmarking- a comparison of IA in Australia, Malaysia and Hong Kong found that % of Malaysian CEOs and Hong Kong CEOs were more assertive in their opinions about IA being an independent evaluation function on the Effectiveness of management. Furthermore, Australian research study on Financial Reporting and Auditing Bridging the Expectation Gap suggested that apart from management, internal auditing is the centre of integrated activities within organization, and it is the best suited for the new roles as agent of change.

10 Auditors competency Competency can be relate to the ability of an individual to perform a job or task properly base on the educational level, professional experience and the effort of the staffs for continuing professional development. Auditors competency determines the effective auditing in the organization. It contributes to the ability of the auditors to perform the systematic and discipline audit approach to improve the Effectiveness of IA. Mihret & Yismaw [12] concluded in their study that IA office constantly face the problem of low technical staff proficiency and high staff turnover, which would limit it capacity to provide effective service to management. Whereby Angus Okechukwa Unegbu, Mohamad Isa Kida [4] found in their study that, IA can effectively carry out their duty in the public sector if there are enough IA personnel with required competencies. Competency of auditors determines the quality of the audit work performed in an organization.