Theabove internal audit functions are very key and relevant in enhancing corporategovernance structures of an organization, thereby increasing shareholder value.In order to play a positive and effective role in enhancing corporategovernance, internal unit should be adaptive to new changes and should operatelike any other business unity and hold itself accountable for operationalexcellence. Internal audit should be a key driver to the organization’s valuecharter and should high quality service to the organization. It should also a catalyst for strengtheningorganization internal controls and its control environment through continuousassessment and monitoring of internal controls. Internal audit should be viewedas a effective driver for enterprise efficiency for both in terms of operationsand general wide management of the organization.
In order to assist anorganization accomplish its objectives as decided by the board enshrined in itsstrategic plan, internal audit should develop specific strategy that matches oraligned to key business risks, operations and financial priorities. CONCUSIONFinally,it is worth noting that internal audit acts as an important line of defense forany company and its failure may lead to the failure of the organization itself.The recent corporate governance scandals under investigation such as Tesco andMobily, have one issue in common; misstatement of the financial figures. Theinternal auditors thus may have a responsibility in educating audit committeeson what is important and the questions audit committees are supposed to raiseat their meetings. Historically, when internal audit focused on monitoringbusiness operations, processes and internal control functions, it examinedwhether a control was being performed or procedures were followed and reporteither in affirmative or in negative. Whereas now internal audit’s focus is noton whether a control is being performed but on whether it is the right controland if it is being performed correctly and cost effectively.
The internal auditactivity and certainly audit committees should be more forward than backwardlooking.InternalAudit must also maintain an up-to-date set of policies and procedures, andperformance and effectiveness measures for the Internal Audit function.Internal Audit should continuously improve these in light of industrydevelopments. Due to its complexity and importance, it is recommended that therole of internal audit is articulated in an Internal Audit Charter that isreviewed annually, possibly by a third party, in order to make sure that it ismatching with the evolving best practices.
Sincethe quality of the carrying out the internal audit function may have seriousimplications on the company and on its stakeholders, the internal audit shouldestablish and maintain a quality assurance and improvement program. Where theinternal audit function is outsourced to an external provider, Internal Audit’swork should be subject to the same quality assurance work as the in-housefunctions and the results of this quality assurance work should be presented tothe Audit Committee at least annually for review.Dueto their important role, it is recommended that the Chief Audit Executive, andother senior managers within Internal Audit, have an open, constructive andco-operative relationship with regulators which supports sharing of informationrelevant to carrying out their respective responsibilities. In such cases,however, it is important that this be done within the framework of corporategovernance of the organization, the one that is approved by the board ofdirectors and endorsed by the owners if necessary.TheInstitute of Internal Auditors has issued Standard No 2060 on internal auditreporting to senior management and to the board, which specifies that “thechief audit executive must report periodically to senior management and theboard on the internal audit activity’s purpose, authority, responsibility, andperformance relative to its plan.
Reporting must also include significant riskexposures and control issues, including fraud risks, governance issues, andother matters needed or requested by senior management and the board.”Theinternal auditor should, at least annually, carry out an assessment of theoverall effectiveness of the governance, risk and control frameworks of theorganization, together with an analysis of themes and trends emerging frominternal audit work and their impact on the organization’s risk profile. Acomprehensive report is then presented to the audit committee and the boardwith the results and recommendations as well as the challenges that may needboard interventions to handle.Internalauditor, with the help and guidance of the audit committee, must be able to setthe right priorities. Therefore it is recommended that internal audit follows arisk based approach, focusing on the high risk areas, going down the ladder asmuch as possible. The audit committee also assists the internal audit bydiscussing with him/her the adequacy of resources and skills available toaddress risk identified with the audit committee. It is the role of the board/audit committee to make sure that internal audit has enough resources and calibersto do their job right, keeping in mind that the failure of internal audit is afailure of the board itself and may represent high risk on the organization.Theinternal auditor should, at least annually, carry out an assessment of theoverall effectiveness of the governance, risk and control frameworks of theorganization Apart from agencyproblem, others include those arising between external stakeholder and ownersof the corporation.
External stakeholders includegovernment and the general public among others. Such external stakeholdersusually impose certain conditionality which organizations are suppose adherewhich if not adhered to can attract legal action such penalties or closurewhich might ultimately affect the organization’s going concern status andtherefore affect shareholder value. If such a negative aspect was to happenmight put a very big question mark on existence of corporate governance structureswhose main objective is to safeguard and increase shareholder’ investment.
Inthis aspect, internal audit plays an important positive role by regularlyevaluating and assessing compliance risk as part of risk-based audits andrecommending for any mitigation measures to reduce or eliminate such risks. Enhancing Compliance Suchaccountability requirements are fundamental key aspects of corporate governancefor any organization to be successful and increase shareholder value. In linewith this objective, internal audit examines the financial records prepared bymanagers and assess the accuracy and reliability of information therein inorder to detect any possibility of fraud or error.
As can cited from the Enronscandal, one of the major risks that was noted from the case was fraudulentaccounting through illegal means such off balance accounting, insider dealings,inadequate disclosures of fundamental information related to organization’soperations and lack of transparency among others. In this regard, internalaudit provides an independent and objective examination of organizationalaffairs and audit communicate results to the board through audit committees inorder to detect any misappropriations, fraud or error. Therefore internal auditincreases accountability and transparency of organization activities, thusenhances corporate governance. Inthe view of Orjioke, (2002) and Muhammad, (2004) accountability is thecompulsion to react to a responsibility that has been conferred on someone. Itis an obligation which requires managers to answer to the investors for theexecution of their assigned responsibilities.
It usually measures performanceagainst defined criteria such as agreed rules and standards and requiresmanagers to report fairly and accurately on the performance of organizationaffairs (Adegite, 2010). United NationsDevelopment Programme outlined three pillars of accountability Tagged ATI(Accountability, Transparency and Integrity). Accountability which is dividedinto: (a) Financial accountability – the obligation of anyone handlingresources, public office or any other position of trust, to report on theintended and actual use of the designated office. (b) Administrativeaccountability – this type of accountability involves a sound system ofinternal control, which complements and ensures proper checks and balancessupplied constitutional government and an engaged citizenry. These includeethical code, criminal penalties and administrative reviews.
Tool for increasing PerformanceManagement & Accountability Oneof the fundamental principles which auditors should possess is integrity whichmeans having virtuous character which values high ethical morals and values(ACCA – Advanced Audit and Assurance, 2016). Everest and Trembla (2014)revealed that ethics of auditing should not solely only consider the auditpractice but rather also consider the character of the auditors. Therefore, internal auditors should exerciseobjective judgment and maintaining professional integrity as an essential role.
This is in line corporate governance requirements which insist on havingmanagers with high integrity and one that plants a culture that values highethical values and morals. Therefore internal auditors, through both objectiveaudit work and their high personality helps to increase organizationalaccountability. Promotes ethics and values Internal controlsare a whole range of control activities put in place by management to minimize risksand ensure that organizational processes and procedures are adhered to.Internal audit should provide an assurance that internal controls aresufficient and are working well in order to minimize the space for errors and misconduct.Internal Auditing should conduct a comprehensive analyses and appraisals of allbusiness activities and provides management with appropriate recommendationsconcerning the activities reviewed. This should include business processaudit which should appraise the adequacy and efficiency of accounting,financial and operating controls; information system audits which focus ontechnical Information System audit activities, system development andapplication reviews and cost-effective internal control is in place.
InternalAuditing can instigate or partake in internal control related business processimprovement activities in order to identify and minimize control deficienciesin business processes, thus resulting in strengthened internal control and optimalperformance. In evaluating controls, internal audit also assesses compliance tolaws and regulations and related risks arising from failure to adhere to suchregulations. Evaluation of Internal ControlsThefollowing are the major role internal audit plays in corporate governance:Toachieve its roles/ functions, different types of audits are conducted andinclude: financial audit, operational audit, compliance audit, performanceaudit and program audit among others. § provides an independentassurance that the organization is operating as intended § ensuring adherence tointernal controls, laws and regulations § ensures attainment ofeffective performance management and accountability § promotes ethics and valueswithin an organization§ risk monitoring and managementand communication information on risks identified and of appropriate controlsto different areas of the organization Thereforeinternal auditing plays critical role/functions in corporate governance andincludes the following:§ Effectively coordinatingthe activities of and communicating information among the board, external andinternal auditors and management.”§ Promoting appropriateethics and values within the organization§ Ensuring effectiveorganizational performance management and accountability§ Effectively communicatingrisk and control information to appropriate areas of the organization Internal auditshould therefore evaluate and make appropriate recommendations for improvingthe organization’s governance process in its accomplishment of the followingobjectives:§ Accomplishment of establishedobjectives and goals for operations or programs. § Effectiveness and efficiency ofoperations§ Economical and efficient use ofresources; and § Safeguarding of assets; § Compliance with policies, plans,procedures, laws, and regulations;§ Reliability and integrity ofinformation; Standardsfor the Professional Practice of Internal Auditing General Standard 300 outline thescope of work of internal auditors and included the following paramountobjectives: Internalauditing is an independent, objective assurance and consulting activitydesigned to add value and improve an organisation’s operations (IIA 1999).
Internal auditing is an effective and critical tool of corporate governancewhose main objectives is to evaluate and improve the effectiveness of riskmanagement, control and governance structures. Thus, internal auditing is anindependent ‘eye’ of investors which ensures attainment of organizationobjectives (strategic, operation, reporting and compliance objectives) andimproves governance systems. Internal auditing plays important role corporategovernance through its monitoring function (Ghita et al. 2010).
The role ofinternal auditing should be more in detail than the traditional concept ofcontrolling and safeguarding corporate assets, regulatory compliance andenforcing corporate policies. The critical role of internal audit is rather tofocus on value creation for an organization, and on evaluating and suggestingimprovements to corporate governance systems of organizations. Corporategovernance is the broad term desribes the processes, customs, policies, lawsand institutions that directs the organizations and corporations in the waythey act, administer and controll their operations. It works to achieve thegoal of the organization and manages the relationship among the stakeholdersincluding the board of directors and the shareholders.
It also deals with the accountabilityof the individuals through a mechanism which reduces the principal-agentproblem in the organization. Fine corporate governance is an essential standardfor establishing the striking investment environment which is needed bycompetitive companies to gain strong position in efficient financial markets.Good corporate governance is fundamental to the economies with extensivebusiness background and also facilitates the success for entrepreneurship.During the last two decades the research area in finance is primarily focus onthe area of corporate governance. The separation of ownership from control isthe core of the agency problems facing by the firms (Berle & Means 1932;Jensen & Meckling 1976). This leads to many issues related to efficient controlfor the assets of corporations in the interest of all company’s stakeholders. Agreat research has been done in the area of corporate governance by keeping theagency related problem. Core (1999) firms who have weaker governance to directand manage company matter face greater agency problems.
The agency problemallows manager to extract more private benefits and the firm ultimatelyperforms worse. Firms therefore, needed for the improved corporate governancein order to survive for long term growth and survival. A good corporategovernance can occur in the organization by putting the balance between theownership and control and also among the interests of stakeholders of the firm.This approach might be helpful in developing the positive attitude among themanager and shareholders and reduces the agency problems in the firms. Thispaper presents the broad view of corporate governance from various perspectivesand tries to link it with the agency problems where required. It gives anoverview that how corporate governance handles the deviation between themangers and shareholders interests.
The mechanism of effective corporategovernance will help to determine the difference between ownership and controlby giving the view of topic from different angles and tries to solve the agencyproblems in the organizations.Introduction Keywords: Corporate governance, agencytheory, ownership, shareholders, managers. CorporateGovernance is a broad term defines the methods, structure and the processes ofa company in which the business and affairs of the company managed anddirected.
Corporate governance also enhances the long term shareholder value bythe process of accountability of managers and by enhances the firm’sperformance. It also eliminate the conflict of ownership and control byseparately defines the interest of shareholders and managers. This paperreviews the extensive literature of corporate governance practices to find outthe main role internal audit plays in corporate governance of companies andinstitutions. The paper also focuses on to reduce the principal-agent problemdue to the effective role of internal audit in corporate governance mechanism inthe organizations.