Academic journal article Academy of Entrepreneurship Journal

Investigating the Value Creation of Internal Audit and Its Impact on Company Performance

Academic journal article Academy of Entrepreneurship Journal

Investigating the Value Creation of Internal Audit and Its Impact on Company Performance

Article excerpt

INTRODUCTION

Effective Internal Auditing (IA) can help identifying ways to improve firm's efficacy, help in reducing overhead, safeguarding the firm from potential losses and operational risk (Alaswad and Stanisic, 2016). Carcello et al. (2017), Coetzee (2014), Odoyo (2014) and Bhana (2013), agree that companies should benefit from value addition in their Internal Audit Function (IAF) through bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management and organization's operations rather than focusing on traditional approach. Ege (2015) believes internal auditors should support the board and management by providing prudent advice (independent, objective assurance and consulting activity) towards enhancing the existing business processes and operations, contributing towards risk on business stability and enabling business performance, thus creating value. However, Prawitt et al. (2012), Ege (2015), Abbott et al. (2016) and Pizzini et al. (2015) suggest that internal auditing enhances parts of risk related to financial reporting like internal controls and financial reporting quality, reducing fraud and lowering external audit fees. Liu (2017) also highlighted that companies oppose the essence of IAF on cost considerations, as Anderson et al. (2012) claimed that IA budgets are substantial, often runs into millions of dollars. This prompted the researchers to explore into the additional value that firms can obtain from having an Internal Auditing Function so as to enhance business performance and creating a sustainable operating environment.

BACKGROUND OF THE STUDY

African Sun Limited (ASL) is a company with an established internal audit function, responsible for twelve of the company's strategic business units (eleven hotels and one casino). The audit function was affected by the restructuring exercise that took place during 2015 financial period, leaving the function with only three personnel staff from the previous number of eleven (Board minutes, 2015). This was due to the need to align the cost structure of the company and the current business performance (declining) as well as the benefits gained from the existence of the department in the firm (Board minutes, 2015). This move left the department under resourced and facing challenges in executing its duties and mainly concentrating on compliance and internal control auditing (Audit Committee presentation, 2016). Moreover, the company is facing a deteriorating internal environment due to the changes (restructuring) and the inability of the audit function to reinforce a robust internal control system as well as not performing efficiently.

The Internal Auditor Manager highlighted (Audit Committee minutes, 2016), that, the audit function has been carrying out insufficient audit procedures, especially for areas related to risk assessment due to its resource constrain. The same impact has also been noted on the 43% adverse variance of planned follow up audit and spot checks designed to enforce the audit recommendations (Audit plan review, 2016). This has raised the fear of weakening internal control environment and operational risk accumulating as a result of the restructuring that resulted in low skilled personnel occupying key positions, the use of semi-permanent staff and the change of operational processes (Ege, 2015).

The Risk profile revealed that the company is failing to achieve strategic objectives and budgets, and the potential for the internal operating environment worsening due to subtle backlash from the employees in the form of not putting maximum effort, pilferage, negative energy and inefficiencies increase and deliberate sabotage on the company due to the implementation of austerity measures on cost reduction (reduction in fringe benefits). This has been evidenced by the 27% increase in fraud cases and misuse of company property for personal gain during the 2016 financial period, with more than 75% of the cases exposed by tip off from other employees and third parties. …

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