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CERTIFICATION
The undersigned certifies that he has read and hereby recommends for acceptance by the Open University of Tanzania a dissertation entitled “Challenges Facing Internal Auditing in Financial Control in Local Government Authorities in Tanzania: The Case of Dodoma Municipality”, in fulfilment of the requirements for the degree of Master of Business Administration of the Open University of Tanzania.
Prof. Ahmed Mohamed Ame
(Supervisor)
Date…………………………
DECLARATION
I, AbdulwahabYussufKhamis, declare that this dissertation is my own original work and that it has not been presented and will not be presented to any other University for a similar or other degree award.
Signature…………………………..
copyright
No part of this dissertation may be reproduced, stored in any retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the author or the Open University in that behalf.
ACKNOWLEDGEMENTS
I am here by acknowledging that the successful accomplishment of this study has been contributed by various people in terms of views, ideas and assistance by one way or another, starting from the origin to the destination point of this dissertation. Therefore, I would like to recognize the followings as part of my successes.
Firstly, my spiritual grateful is extended to Allah who gave me supremacy of conducting this course despite the existed challenges in cultivating this work. He was the only God who gave me grace, blessings and confidence in undertaking this mammoth task and completing successfully with a strong health.
With a great honour, I would also like to extend my special thanks to my Supervisor Dr. Ahmed M. Ame from the University of Dodoma, for his precious guidance, consultancy, tolerance and constructive criticisms which put me into right shadow incompletion of this work successfully. Indeed, he has given me much goodwill in terms of confidence as well as sacrifices strong enough for undertaking the similar tasksin days to come. On the same line, I would like to provide my amiablethanks to Mr.Michael JosephatMwacha, forequipping me with necessary knowledge which was eventually needed to conduct myMBA course, together with giving me materials and moral support for the course.
More important still, I sincerely appreciate Dodoma Municipal Council management for allowing me to conduct this study in their organization, especially the Municipal Director Mr. Robert Kitimbo.In the spirit of unity, I would like also to thank my study’s respondents from Planning Department, Finance Section and Internal Audit Unit for their acceptance of joining with me in this study as well as their much tolerance during the data collection. It is my faith that, my study report could be meaningless if their contribution were missed.
Finally, I nominate my special gratitude to the Directors and Staffs’ members from two centers of the Open University of Tanzania, namely; Zanzibar Center and Dodoma Center for their encouragements of giving me a good corporation in needed materials as well as academic support.
Furthermore, I am so delighted in expressing my special thanks to my family members for their encouragement, support and tolerance while I was doing this study. Namely; my bearing parents, sisters and brothers. I unconnectedly take this opportunity to thank heartedly my beloved sister Mw. TatuYussufKhamis for her help in conducting this study. On the same line, I recognize my lovely parents’ in-law Mr. Mohammed Ali Khelef and Mwatima Ali due to their spiritual care for me as well as encouragement which enabled me to terminate my study fruitfully. Much love for you all.
Last, but not least, my special and sincere appreciations are extended to my sweet and lovely wife Dr.Asya M. Ali, who showed much attentiveness to me during the hunt of my course. In fact, she put on view adeepest tolerance and patience during my absence, together with using her medical knowledge for encouraging me politely to terminate my studies in excellence level. At the same point of gratitude, I could not neglect my appreciation to mycharming children, my handsome son YaasirAbdulwahabYussuf and my beautiful daughter AzydaAbdulwahabYussuf as part of my success in this study. Even though, I do apologize to them for missing me most of the time due to the study.
DEDICATION
This dissertation is dedicated tomy dearly loved parents Hon. YussufKhamis Mahmoud and Asia Ali Shoka who played their positionwell for upbringing me in harmony with great cornerstones of loving education, working hard objectively and being tolerant and contented one to what I earn, whereby their knowledge fitted out me in starting and vanishing this dissertation effectively. May Allah bless to them. It is also dedicated to my beloved late son MansoorAbdulwahabYussufwhofor infinity gives me effortlessness inputting into operation my works due to the recall of his esteemed smile.
ABSTRACT
There has been a contention from the general public and the press on the misuse and mismanagement of public funds notwithstanding the work done by the internal auditing in LGAs coupled with the government efforts to ensure proper utilization of public funds. This study was conducted in order to meet three specific objectives, namely; to understand the mechanism used by LGAs in auditing activities, to examine the performance of current internal auditing in LGAs, and to investigate on the challenges which face internal audit unit in LGAs.
The study was adopted a case study methodology by taking Dodoma Municipal Council(DMC) as a case. Data was collected using a questionnaire and interview fromemployees and the top management, as well asdocumentary review. Further, data was analysed using both quantitative and qualitative techniques.It has been found out that the mechanism used by LGAs in auditing activities is somehow effective. Moreover, it was uncovered that performance of internal Audit in LGAs is good as shown by using various indicators from the study. Additionally, it has been discovered that DMC is strong in its internal environment due to the existence of amongst the friendly collaboration between auditors and those audited.Finally, the study discovered that LGAs face mainly four challenges in discharging its duties regarding internal auditing.From the study, the government was advised to restrain politicians from interfering with the internal auditors’ decisions together with considering contingency fund allocation to development projects.Finally, LGAs were advised to introduce programmed trainings to internal auditors for making value for money audit effective.
TABLE OF CONTENT
CERTIFICATION
DECLARATION
COPYRIGHT
ACKNOWLEDGEMENTS
DEDICATION
ABSTRACT
TABLE OF CONTENT
LIST OF TABLES
LIST OF FIGURES
LIST OF ACRONYMS
CHAPTER ONE
GENERAL INTRODUCTION
1.0 Introduction
1.1 Background Information
1.2 Statement of the Research Problem
1.3 Research Objectives
1.4 Research Questions
1.5 Significance of the Study
1.6 Scope of the Study
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
2.1 Conceptualization of Key Terms
2.1.1 Internal Audit
2.1.2 Internal Auditor
2.1.3 Internal Control
2.1.4 Financial Control
2.2 Theoretical Framework
2.2.1 The Policeman Theory
2.3 Empirical Review
2.4 Conceptual Framework
2.5 Research Gap
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
3.1 Study Setting and its Selection
3.2 Description of the Study Setting
3.2.1 Geographical Location
3.2.2 Infrastructure
3.2.3 Area and Physical Characteristics
3.2.4 Climate
3.2.5 Administrative Setup
3.2.6 Demographic Characteristics
3.2.7 Economy
3.2.8 Education
3.2.9 Structure of the Municipal Council
3.3 Research Design
3.4 Research Approach
3.5 Sampling Units, Size and their Selection
3.6 Data Collection Method
3.6.1 Questionnaire
3.6.2 Interview
3.6.3 Documentary Review
3.7 Data Collection Procedure
3.8 Data AnalysisTechniques
3.9 Validity and Reliability
3.10 Ethical Consideration
CHAPTER FOUR
FINDINGS AND DISCUSSION
4.0 Introduction
4.1 Profile of Respondents
4.1.1 Working Departments of Respondents
4.1.2 Sex Distribution of the Respondents
4.2 Findings and Discussion
4.2.1 Mechanism Used By LGAs in Auditing Activities
4.2.2 Performance of Internal Auditing in LGAs
4.2.3 Challenges which face internal audit unit in LGAs
CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.0 Introduction
5.1 Summary of the findings
5.1.1 Mechanism Used By LGAs in Auditing Activities
5.1.2 Performance of Current Internal Auditing in LGAs
5.1.3 Challenges Facing Internal Auditing Units in LGAs
5.2 Conclusion
5.2.1 Contribution to Policies
5.2.2 Contribution to Knowledge
5.2.3 Contribution to Best Practices
5.3 Recommendations
5.3.1 Recommendations to the Central Government
5.3.2 Recommendations to the Management of Local Governments
5.3.3 Recommendations to the other Stakeholders
REFERENCES
APPENDICES
Appendix 1: Questionnaire for Employees
Appendix 2: Protocol for Management
LIST OF TABLES
Table 4.1: Distribution of Respondents by Departments
Table 4.2: Sex Distribution of the Respondents
Table 4.3: Auditing Procedure Compared to the International Auditing Standards
Table 4.4: Selection of Audit Categories
Table 4.5: Rating of Fulfilment of the Requirements by Internal Auditing Mechanisms
Table 4.6: Rating of Effectiveness of Internal Financial Control
Table 4.7: Evaluation of Efficiency of the internal financial control
Table 4.8: Stakeholders’ Satisfaction Level on the Internal Auditing Performance
Table 4.9: Performance of Internal Financial Control
Table 4.10: Appraisal of the Level of Collaboration between Auditors and Auditees
Table 4. 11: Challenges which face Internal Auditing in LGAs
LIST OF FIGURES
Figure 2.1: Conceptual framework
Figure 3.1: Astronaut View of Dodoma
Figure 3.2: Dodoma Position in the Map of Tanzania
Figure 4.1: Relationships between Economy, Efficiency and Effectiveness
LIST OF ACRONYMS
CAGControl and Auditor General
CMTCouncil Management Team
DMCDodoma Municipal Council
EACEast Africa Community
IIAInternational Institute of Auditors
ILOInternational Labour Organization
IPSASInternational Public Sector Account Standard
IRDPInstitute of Rural Development Planning
KPMGKlynveld Peat Marwick Goerdeler
LAACCommittee for Local Authorities Accounts
LGAsLocal Government Authorities
REPOAResearch for Poverty Alleviation
TCAATanzania Civil Aviation Authority
URTUnited Republic of Tanzania
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CHAPTER ONE
GENERAL INTRODUCTION
1.0 Introduction
This chapter presents the general introduction in regard to the subject. The section begins with background information of research problem as well as statement of the problem portraying the gap of literature for study. It presents also objectives of the study, research questions and ending with the significance of the study to justify the undertaking of this study.
1.1Background Information
Ojo (2009) posits that the funds of local government councils are managed by the key officers of respective councils. Financial management has to do with the efficient use of funds. It is a method of showing and ascertaining the financial position of government or business over a period of time. Sound financial management systems are powerful instruments for preventing, discovering or facilitating the punishment of fraud and corruption. Important elements to that effect are the organization and staffing of revenue administration, the effectiveness of auditing systems and the realism of budgets (Langloiset al.,1998).
Auditing is essential because it gives concern on the evaluation of various controls, examining deviation from applicable standards and acts of irregularity, inefficiency and ineffectiveness with the motive of taking corrective action (Aikins, 2011). Recently, consideration in the topic of internal audit has been receiving more attention especially when considering its contributions to the management of public sector in the aspect of organizational resources (Theofanis, et al., 2011; Ussahawanitchakit and Intakhan, 2011). This is because internal audit has become an unavoidable control mechanism in both public sector (Cohen &Sayag, 2010) and private organizations.
The regular audit method complements the good efforts of financial control mechanisms. Audit is more or less a practice which may be called a technique for ensuring a more effective internal check on financial management. There should be a regular and independent examination of the books of accounts by appointed qualified auditors to ensure that the statement of account as recorded represents a true and fair-view of all the transactions during the period under investigation. Indeed, regular auditing of Local Government Councils accounts would ensure sanity, prudence and probity in the use and management of finances (Coker and Adams, 2012).
Internal auditing helps an organization to accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes (Pickeur, 2012). Actually, in certain countries, auditing has evolved to cover all aspects of governance. In some countries, the internal audit embarks on a man-date of evaluating programmes in the light of pre-set performance criteria and organizational objectives.In other words, the internal audit system in these countries adds value to the effectiveness of public sector operations by enabling objective scrutiny.
The internal audit function plays a crucial role in the ongoing maintenance and assessment of an organization’s internal control, risk management and governance systems and processes areas in which supervisory authorities have a keen interest. Furthermore, both internal auditors and supervisors use risk based approaches to determine their respective work plans and actions. While internal auditors and supervisors each have a different mandate and are responsible for their own judgments and assessments, they may identify the same or similar/related risks (Pickeur, 2012).The internal audit function should develop an independent and informed view of the risks faced by the organization based on their access to all records and data, their enquiries, and their professional competence. The internal audit function should be able to discuss views, findings and conclusions directly with the audit committee and the board of directors, thereby helping the board to oversee senior management (Pickeur, 2012).
Finance and its prudent management are the bedrock of effective functioning of local government. It is against this backdrop that Tonwe (1995) cited in Ojo (2009) argues that local governments require finance to perform their statutory functions. The ability of the local government to do this is largely dependent on availability of fund, coupled with efficient management which constitutes the required catalyst necessary for timely execution and completion of their development projects.
Internal audit unit functions as independent structure within local government and much of its work performed is based on local government's system of internal control. Even though the nature and position of the internal audit unit in local government differs from one country to another, but the internal auditors report to local governments has much significance(Mizrahi & Ness-Weisman, 2007).
The primary functions of internal auditing extends to oversight funds’ use, avoidance of unnecessary costs, confirmation of accuracy of information, local government’s management use for decision-making, oversight of accuracy of economic operations, analysis of fiscal performance efficiency and proposals for its enhancement and data quality assessment for management system (Mirzeyev, 2009). Therefore, internal audit can be seen as independent appraisal established within the organization with the aim of reviewing the effectiveness and efficiency of the activities of an organization, ensuring compliance with established regulations, evaluation of risk management and internal controls system of the organization (Ussahawanitchakit and Intakhan, 2011).
1.2 Statement of the Research Problem
Audit in Tanzania is emphasized under Section 26 of the Public Finance Act No.6 of 2001 (revised in 2004) as amended by the Public Audit Act No 11 of 2008 and Section 44 (2) of Public Procurement Act No.21 of 2004 (URT, 2009). According to the local government Act of 1982 as amended in 1999 of the United Republic of Tanzania (URT), Local Government Authority is a village, district town, municipal or city council. In Tanzania,Local government authorities are categorized into District Authorities and Urban Authorities which were established by the Local Government Acts Number 7and 8 of 1982, respectively. Rural authorities include Village Councils, Township Authorities and District Councils that cover a wide area and a population divided and grouped into hamlets, villages and wards. Wards are very important because they are the constituencies for elected councillors (Warioba, 1999). Urban Authorities include Town Councils, Municipal Councils, and City Councils, and have a structure which includes streets (Warioba, 1999). Furthermore, Fjeldstad (2004) declared that LGAs are responsible in delivering services to the citizens, as they operate in the citizens’ environment. So to be able to meet the demand for these services, government have put some mechanisms to control fund for efficient provision of those services to avoid misuses (Davies, 1998).Among of these mechanisms are expressed within Controller and Auditor General (CAG) report as internal audit units in LGAs which control fund received from central government and from own source collections (CAG REPORT, 2010/2011).
Looking into the developed countries literature, we find that the internal audit is supposed to be the custodian of internal control by providing assurance to the management that the organisation has put in place adequate and effective internal control system. Beside that, according to Hayes et al. (2005), under Policeman theory of audit services, the auditor is responsible for searching, discovering and preventing fraud. Nevertheless, Okwoli (2004) shares the view that, therequirement of internal audit is not only the detection and prevention of fraud and errors, but also reviewing the system of internal control.
Despite the importance of internal auditing in financial management in LGAs and the efforts made by the government to ensure proper use of public fund, still there is an outcry of misuse and mismanagement of public fund. For example, The Parliament Committee for Local Authorities Accounts (LAAC) has discovered that 50 per cent of the funds allocated for implementation of various projects in Sumbawanga Municipal Council in Rukwa Region were misused (CAG Report, 2010). In the next stage of the chain, the Dar es Salaam Municipal Council ordered fresh auditing of its accounts after discovering several discrepancies in the CAG report of 2008/2009 and 2009/2010 financial years. This implies that internal auditing in Tanzania is impaired by some impingements that it cannot deliver the expected outputs effectively. In addition to that, despite the existence of the audit units in the LGAs and elsewhere, there are still reports on several occasions of frauds, mishandling and misappropriation of public funds (CAG Report, 2010/2011). This situation motivated the study at hand to seek to investigate on the challenges facing internal auditing in financial control in local government authorities. In so doing, the study intended to take Dodoma Municipality to be the platform for the study.
1.3 Research Objectives
Generally, the study investigated on the challenges facing internal auditing in financial control in local government authorities in Tanzania by taking Dodoma Municipality as a case. In meeting this general objective, the study focused on the following specific objectives:-