EFFECTS OF THE INTERNAL AUDIT ON CORPORATE PERFORMANCE (A CASE STUDY OF TWO SELECTED MANUFACTURING COMPANIES IN ABIA STATE)

CHAPTER ONE

INTRODUCTION

1. 1. BACKGROUND OF THE STUDY

Internal audit is an independent, material and consultancy activity, which adds value and improves the functioning of an organization. It aids the organization to achieve its aims by means of a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and the management process. Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It serves as an important link in the business and financial reporting processes of all organizations. Internal auditors play a key role in monitoring a company’s risk profile and identifying the areas to improve risk management. Their aim is to improve organizational efficiency and effectiveness through constructive criticism (Goodwin, 2009). Internal audit control comprises the plan of the organization and all methods and measures adopted within a business to safeguard operational efficiency, and encourage adherence to prescribed managerial policies. It has five main components namely verification of written records, analysis of policy, evaluation of the logic and completeness of procedures, internal services, and staffing to assure that they are efficient and appropriate for the organization’s policies, and reporting recommendations for improvements to management (Hutchinson & Zain, 2009) [10]. Internal Audit has become an indispensable management tool for achieving effective control by detecting the weaknesses in management operations. Internal auditing provides a basis for correcting deficiencies that have eluded the first line of defense before these deficiencies become uncontrollable or are exposed in the external auditor’s report (Sarens & De Beelde, 2006). Internal audit is a broad term which means a number of checks and controls exercised in a business to ensure efficient and economic working. Internal audit is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of business, including internal check, internal audit and other forms of control. It involves a sort of vigilance and direction over important matters like budget and finance, purchases and sales and internal administration by the management; for example, in case of proprietary concern, such a control would be exercised by the proprietor while the case of a joint stock company, it would come from the directors. Thus, it may be stated that internal audit provides a measure for the management to obtain information, protection, and control which is quite important for the successful working of a business organization (Collier & Gregory, 2012). Globally, financial scandals have been witnessed triggering reaction for tighter regulation and enhanced standards for accounting and corporate governance (Sarbanes & Oxley, 2 2009). In America, scandals such World.com and Enron in year 2009 where investors lost over $180 billion led to enactment of Corporate and Auditing Accountability and Responsibility Act (Sarbanes & Oxley, 2009). These major financial scandals were caused by poor internal control systems including weak corporate governance which the Sarbanes Oxley Act of 2009, tried to address. In South Africa, the effects and implementation of the King II Report on audit practices on organization performance have not been clearly measured or the results reported. However, this is contributed by failure of regulatory bodies providing little guidance on how these evaluations should be performed. He suggests that this process should be customized for individual companies and that it cannot be a case of one size fits all (Mahadeva, 2009).The internal audit is very crucialinside a company that the internal audit is regarded as the main element in the application of accounting systems which in turn, helps in evaluating the work of the company. The internal audit is considered as the strength of business accounting as it is the section that records all businesses related to the sector. The effectiveness of internal audit helpsin developing the work of the company because the financial reports reflect the internal audit unit’s quality. The financial and corporate strategy of a company is underpinned by effective internal systems in which the internal audit has an important role in raising the reliability of the internal control system, improving the process of risk management and above all, satisfying the needs of internal users. The internal audit encourages and  enhances the system of responsibility that the executive directors and employees have towards the owners and other stakeholders (Eighme & Cashell, 2009). A viable internal audit functions is one of the most grounded devices to screen and improve corporate performance. Cohen (2009) pointed that internal auditing practices is a crucial part of corporate performance in both private and public sectors. Internal control refers to the measures founded by an association in order to guarantee achievement of the substance's targets, goals and operations. These are terms and conditions employed by a firm in guaranteeing that organizations exchanges are prepared in the suitable way to maintain a strategic distance from waste, burglary and abuse of organization assets. Therefore, the study seeks to examine the effects of the internal audit on corporate performance, a case study of two selected manufacturing companies in Abia State.

1. 1. STATEMENT OF PROBLEM

Internal Audit is referred intention and self-governing appraisal benefits in an organization that deals with risk management, control and governance by accessing and evaluating their viability in accomplishing the organizations set objectives. Amid the most recent two decades evaluating capacities have risen as key systems in fortifying corporate administration universally. It was at first connected as non-compulsory practices to upgrade responsibility. As of late, various expert and administrative foundations in numerous nations have suggested the general utilization of inner practices and pushed for the extension of their part. The occurrence of prominent corporate disappointments, highlighted grave shortcomings in corporate administration structures exemplified by misrepresentation, poor bookkeeping and the disappointment of inner controls (Turner, 2013). This gave episodic confirmation supporting discernments on the insufficient evaluating hones in observing danger and controls in enterprises and their compelling commitment to administration. Recent corporate bookkeeping embarrassments and the resultant objection for straightforwardness and genuineness in reporting have offered ascend to two divergent yet sensible results. These call for investigation on the effect of internal audit on corporate performance.

1.3 AIMS OF THE STUDY                   

The major aim of the study is to examine the effects of the internal audit on corporate performance. Other specific objectives of the study include;

1. To examine the internal auditing practices in selected manufacturing companies in Abia State
2. To examine the effect of qualifications of the chief audit executive on corporate performance.
3. To examine the effect of size of the internal audit on corporate performance.
4. To examine the effect of experience of the internal audit on corporate performance 
5. To examine the relationship between internal audit and corporate performance selected manufacturing companies in Abia State.
6. To examine the effect of qualification of the internal audit on corporate performance
   1. RESEARCH QUESTIONS

1. What is the internal auditing practice in selected manufacturing companies in Abia State?
2. What is the effect of qualifications of the chief audit executive on corporate performance?
3. What is the effect of size of the internal audit on corporate performance?
4. What is the effect of experience of the internal audit on corporate performance?
5. What is the relationship between internal audit and corporate performance selected manufacturing companies in Abia State?
6. What is the effect of qualification of the internal audit on corporate performance?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There are is no significant effect of size of the internal audit on corporate performance.

H1: There is a significant effect of size of the internal audit on corporate performance.

Hypothesis 2

H0: There is no significant relationship between internal audit and corporate performance selected manufacturing companies in Abia State.

H1: There is a significant relationship between internal audit and corporate performance selected manufacturing companies in Abia State.

1.5SIGNIFICANCE OF THE STUDY

This study will help in increasing the role and image of internal audit in manufacturing companies to make it more effective and professional. It will help the shareholders appreciate the role of the internal audit as one of the most important managerial control systems in an organization required to safeguard their interests.  The study would also be of immense benefit to students, researchers and scholars who are interested in developing further studies on the subject matter.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to effects of the internal audit on corporate performance, a case study of two selected manufacturing companies in Abia State.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8OPERATIONALDEFINITION OF TERMS

Internal Audit: According to Nagy and Crenker (2009) internal audit is a function independent, objective assurance and consulting activity designed to add value and improve organization’s operations.