INDEPENDENT INSTITUTE OF LAY ADVENTISTS OF KIGALI
(INILAK)
THE IMPACT OF INTERNAL AUDIT QUALITIES ON THE EFFECTIVENESS AND EFFICIENCY OF OPERATIONS IN PUBLIC INSTITUTIONS
A CASE STUDY OF MININFRA (2010-2013)
A Thesis submitted to theCoordination of MBA programin Partial Fulfillment of the Requirements for the Awards of
Masters Degree ofBusiness Administration, Accounting specialization.
JérômeSandoMASENGESHO
Supervised byDr Marvin E.Mbassana
June, 2015
DECLARATION AND COPYRIGHT
I declare that this work titled “The Impact of Internal Audit Qualities on the Effectiveness and Efficiency of Operations in Public institutions. A case study of MININFRA (2010-203)” is my own work; that it has not been submitted for any degree or examination in any other higher learning institution, and that all the sources I have used or quoted have been indicated and acknowledged by complete references.
JérômeSando MASENGESHO Date…………………………..
Signature……………………………
CERTIFICATION
This is to certify that this work titled “The Impact of Internal Audit Qualities on the Effectiveness and Efficiency of Operations in Public institutions. A case study of MININFRA (2010-2013)”is a study carried out by JérômeSandoMASENGESHOunder my guidance and supervision.
DrMarvin E.MbassanaDate………………………………
Signature………………………………….
DEDICATIONS
To my parents
To my brothers and sisters
To my colleagues
ACKNOWLEDGMENT
I would like to express my thanks to my supervisor, Dr Marvin E.Mbassana for his assistance and conducting this work I would also like to thank INILAK for the efforts and resources committed to my training. Thanks are further extended to all lecturers of INILAK especially those for Masters program for their efforts to impart to me all the knowledge I acquired in this program. Many thanks go to the Ministry of Infrastructures for their assistance in conducting this research.
Finally, I would like to recognize the contribution of my family for their spiritual and material support during my academic studies. I also thank my colleagues at INILAK, for their teamwork spirit and expertise that contributed to me to success of my studies. Above all, thanks to the Almighty God for the guidance and strength provided to me throughout the period of my studies.
JérômeSandoMASENGESHO
ABSTRACT
The topic of the research was “The Impact of Internal Audit on the Effectiveness and Efficiency of Operations in Public institutions. A case study of MININFRA(2010-2013)”. The researcher has taken the decision to undertake this research because according to the Auditor General’s reports (2011, 2012, and 2013), the ministry of infrastructure (MININFRA), inflated debts it owed some of its stakeholders.This issue was there whileall ministries, provinces and districts have internal auditors whose assignment is to help to avoid those mistakes
Three objectives were analysed including determining the quality of internal audit at MNINFRA to assess the level of effectiveness and efficiency of operations at MININFRA, to determine the relationship between quality of internal audit and effectiveness and efficiency of operations at MININFRA.
Finding showed a moderate level of internal audit quality in MININFRA with the mean of (m=2.92 and SD=1.33). The Finding was showed also that the overall level of effectiveness and efficiency of operations in MININFRA was moderate with the mean equals to (m=3.05 and SD=1.36). There was a positive moderate Relationship between internal audit and effectiveness and efficiency of operation in MININFRA because the Pearson correlation (r) was 0.76 with the P-value of 0.000.These finding motivate the institution to invest in internal auditing because it influence positively the operations in the institutions.
About recommendation, the Ministry of infrastructure should create a good environment, which provides independenceof internal auditors. It should also state a formal mandate of internal auditors so that they can know very well their assignment. Another research is required to determine the role of internal audit in reducing errors, fraud and embezzlement of public funds.
TABLE OF CONTENTS
DECLARATION AND COPY RIGHT iii
CERTIFICATION iv
DEDICATIONS v
ACKNOWLEDGMENT vi
ABSTRACT vii
TABLE OF CONTENTS ix
LIST OF ABBREVIATIONS, ACRONYMS AND SIGNS xi
LIST OF TABLES xii
LIST OF FIGURES xiii
LIST OF APPENDICES xiv
CHAPTER ONE: GENERAL INTRODUCTION 1
1.1 Background of the study 1
1.2 Statement of the Problem 3
1.3 Research Questions 3
1.4 Objectives of the study 4
1.5 Scope of the study 4
1.6 Significance of the study 4
1.7 Justification of the Study 5
1.8 Theoretical framework 5
1.9 Conceptual framework 6
1.10 Operational definitions 6
CHAPTER TWO: LITERATURE REVIEW 9
2.1 Introduction 9
2.2 Internal audit qualities 9
2.3 Effectiveness and efficiency of operations 16
2.4 Relationship between internal Audit qualities and effectiveness and efficiency of operations 22
2.5 Research gap 25
CHAPTER THREE: RESEARCH METHODOLOGY 26
3.1 Introduction 26
3.2 Case study profile 26
3.3 Research Design 28
3.4 Population, sample size and sampling techniques 28
3.4.1 Population (N) 28
3.4.2 Sample size (n) 29
3.4.3 Sampling techniques 29
3.5 Research Instrument 29
3.6 Validity of the Instrument 30
3.7 Reliability of the Study 30
3.8 Data collection procedures 31
3.9 Data analysis 31
3.10 Ethical Considerations 31
3.11 Limitations of the study 32
CHAPTER FOUR: DATA ANALYSIS AND ENTERPRETATION 33
4.1 Introduction 33
4.2 Personal characteristic of the respondents 33
4.3 Quality audit 35
4.4 Effectiveness and efficiency of operations 36
4.4. Relationship between internal audit qualities and Effectiveness and efficiency of operations at MININFRA 37
CHAPTER FIVE. CONCLUSION AND RECOMMENDATION 40
5.1Introduction 40
5.2 Conclusion 40
5.3 Recommendations 42
5.4 Area for further research 42
REFERENCES 43
APPENDICES 46
LIST OF ABBREVIATIONS, ACRONYMS AND SIGNS
CAE / :Chief Audit Executivem / : Mean
CIMA / :Chartered institute of management Accountants
CVI / :Content Validity Index
GoR / : The government of Rwanda
IPPF / : International Professional Practices Framework
MFI / :Microfinance
MININFRA / : Ministry of Infrastructure
MTEF / : Medium term expenditure framework
OAG / :Office of the Auditor General
R / : Pearson moment correlation
S.D / : Standard deviation
SFB / :School of Finance and Banking
SSG / :Senior supervisor groups
LIST OF TABLES
Table 1.Population of the study 29
Table 2:The Reliability of the instrument 31
Table 3: Age distribution of the respondents 33
Table 4: Sex Distribution of the respondents 34
Table 5: Distribution of Marital status 34
Table 6: Distribution of Education level 34
Table 7: Distribution of experience 35
Table 8: Quality of Internal audit 35
Table 9: Effectiveness and efficiency of operations in MININFRA 37
Table 10: Relationship between internal audit and Effectiveness and efficiency of operations 38
LIST OF FIGURES
Figure 1:Conceptual framework 6
LIST OF APPENDICES
Appendix 1:Questionnaire 47
Appendix 2: Table for determining sample size from a given population 51
Appendix 3: Raw data of Internal audit quality 52
Appendix 4: Raw data of Effectiveness and efficiency of operations 54
iii
CHAPTER ONE: GENERAL INTRODUCTION
1.1 Background of the study
Globally it is argued that understanding the concept of internal audit is essential for developing an understanding of its impact on the performance of an organization (Chartered institute of management Accountants (CIMA,2008). Internal audit of an entity is strictly interrelated to the structure used by management to oversee the activities of the organization. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interest of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently (CIMA, 2008).
Major recent financial scandals in the United States and Europe highlighted that when governance does not act in the interest of the stakeholders and does not identify, evaluate and respond to the company’s risks-or, in any another way, companies are fated to failure and public confidence in capital markets and companies in general is put at risk (Stevens, 2004).One of the main aspects which contributes to the failures relate to the internal audit developed around the disclosure of information to stakeholders. It appears that not achieving the objective of effective internal audit over financial reporting undermines the reputation of a company, even at the presence of any other control components, making it difficult or impossible for a company to be reliable on the market and to be able to collect financing resources, to be credible to stakeholders in general (Benjamin, 2008).
In Africa, there is limited research about the changing nature of internal auditinpublic institutions and the actual evaluation of the internal audits in organizations. Few works have been written concerning the creation and management of internal audits in non-governmental organizations, but research regarding internal audits in public organizations has been limited(Allen Tommasi, 2001). Further, given the African business environment, there appears a need for testing the evaluation methods of internalaudit overmanagement of public finance and benchmarking the results against best practices (Angella Inanga, 2009).
Furthermore, Rwanda has done major developments in managing public financefrom 1998. There was the establishment of the Office of the Auditor General (OAG) which reports to the Parliament. Its first report toParliament was completed in January 2004.
Since the decentralization process that started in 2001, major steps have been taken to develop financial capacity in the elected local administrations. They include installation of the local budgetary and accounting system sponsored by USAID, and training accountants from all districts to use the system. Similarly, training in MTEF techniques was provided to all districts. Again all Ministries, Provinces and Districts all have internal auditors(Office of the Auditor General, 2012).
Although Rwanda triedto normalizeaccounting standards and appropriate internal audit for public sector there are limitations in the legal and judicial frameworks and corporate governance. In addition, there is a lack of human capital in the public sector as well as in the accounting and internal auditprofession (MFI country report, 2008).Many institutions has internal audit unit. Although itis known that an effective internal audit provide a reasonable assurance with respect toperformance public financial management and the safeguarding of assets alongside changing with circumstances to curb internal cash flow problems, in many public institutions in Rwanda includingMININFRA there is a high level of fund mismanagement and embezzlement(Office of the Auditor General,2012).These problems cited above, have motivated the researcher to test if there is any effect of the internal auditon effectiveness and efficiency of operation atMININFRA.
1.2 Statement of the Problem
According to the Office of Auditor General’s reports (2011, 2012, and 2013), the ministry of infrastructure (MININFRA), inflated debts, it owed some of its stakeholders by about Frw 468 million. The report also accused MININFRA of 13 financial mismanagement cases including non-compliance to procurement (legal) procedures, posting errors, fines due to delays and inappropriate citizens’ relocation procedures, where citizens were relocated from areas supposed to be sites for public infrastructures, and in the end not paid- among others(Office of the Auditor General, 2011).
Parliament’s Public Accounts Committee (PAC) summoned MININFRA to explain themselves (Office of the Auditor General, 2011). However, PAC was not convinced. Thisissue is there, while all ministries, provinces and districtshave internal auditors whose assignment is to help to avoid operational mistakes(MFI, 2008). It is from these issues the researcher wanted to undertake this study in order to understand why there is low effectiveness and efficiency of operation despite the existence of internalAuditors at MININFRA.
1.3 Research Questions
This research answered the following questions:
1. What are the qualities of MININFRA internal audit?
2. What is the level of effectiveness and efficiency of operations at MININFRA?
3. Is there any relationship between quality of internal audit and effectiveness and efficiency of operations at MININFRA?
1.4 Objectives of the study
This study contains a general andspecific objectives. The general objective of the study is to assess the role of internal audit on effectiveness and efficiency of operations at MININFRA
The specific objectives were:
1. Todetermine the qualities of internal audit at MNINFRA
2. To assess the level of effectiveness and efficiency of operations at MININFRA.
3. To determine the relationship between quality of internal audit and effectiveness and efficiency of operations at MININFRA.
1.5 Scope of the study
Geographically the research is limited to MININFRA. About the time scope, this researcher consideredtheperiod of 2010-2013. This period was considered because it is the period where the General Office auditor has reported big problems in financial management at MININFRA. The research is limited on the relationship between internal audit and performance of public financial Management in MININFRA.
1.6 Significance of the study
The stakeholders of this research are MININFRA, OGA, the future researchers and the GoR in general MININFRA will benefit from this study as findings will show where the internal audit is weak and the ministry will make correction measures in accordance to the recommendations. Once the corrections measures are taken, OGA willbenefit because the mistakes during financial management of public fund will be minimized and there for the task will be easy. The GoR will benefit from this research because the mismanagement of public fund will be reduced. Researchers will use results of this study for future researches.
1.7 Justification of the Study
According to the OGA reports, there is a persistence of mismanagement of public funds in public institutions every year from 2004.Many of the institutions seem not willing to take the advice of Auditor General Office into consideration. Districts have ignored the advices for 46%, ministries for 45% and public commercial institutions for 66% (Office of the Auditor General, 2011).As the there is no empirical research to study real cause of this inefficiency and ineffectiveness of operation at MINIFRA,therefore the researcher has seen very important to conduct this research.
1.8 Theoretical framework
This study is based on the agency theory. Agency theory is the recognition that the inclination of agents. In this cases the directors or managers of the business, is to act rather more in their own interest than those of their employers and shareholders. In principle, the agency model assumes that no agents are trustworthy and if they can make themselves richer at the expense of their principals they will. The extent to which principals don’t trust their agents will tend to determine the level of the monitoring mechanism created for the overview of agents’ activities and the extent to which agents’ compensation levels are determined to be acceptable.