This chapter presents the background of the study, a statement of the research problem, research objectives, research questions followed by the significance of the study, limitations of the study and delimitations.
1.1 Background of the study
Auditing denotes to an assessment of accounting transactions, records and other operations of the organization with the view of determining the accuracy and compliance with relevant accounting standards, policies, statutory provisions and professional pronouncements (Badara, 2012). Internal auditing involves an independent, objective assurance and consulting activity designed to add value and improve organization’s operations (Institute of Internal Auditors (IIA), 2009). It brings a systematic and disciplined approach for analyzing organization’s internal control systems such as risk management systems, governance processes, assets management procedures and production efficiency and recommending appropriate measures to be taken by the management (International Professional Practices Framework, 2011).
Effectiveness of an internal audit indicates the degree to which the established objectives are achieved (IIA, 2010). Effective internal audit function use logical procedures for analyzing operations of the organization and recommending suitable solutions to solve the problems or weaknesses identified during the audit process (Adel, 2011). Hence, internal audit function must be effective in order to achieve its goals (Dittenhofer, 2001).
Internal audit function has become as an important managerial control tool which is linked directly to the organization structure as it measure and evaluate the effectiveness of the internal control systems within the organization (Cai, 1997). In the public sector, internal audit function plays important roles in the overall process of achieving government objectives which include provision of social services to the community, building the culture of accountability, integrity and legitimacy in public service and ensure effective and efficiency use of public resources (Tulli, 2014).
Even though internal auditors play crucial roles in public institutions, they still face some challenges which deteriorate their effectiveness. Diverse factors that affect internal audit effectiveness have been identified by different researchers, for instance, absence of independence to internal auditors (Cohen and Sayag, 2010) and presence of weak audit committees (Goodwin and Yeo, 2001; Turley and Zaman, 2007).
Also, there are absence of clear reporting structure of internal audit in some public entities (Mbogella, 2011), absence of management support and insufficient resources to carry out audit activities as planned (Alzeban and Gwilliam, 2014; Sarens and Beelde, 2006; Mihret and Yismaw, 2007).
Despite the aforementioned research studies above, very few studies have narrated the influence of some elements of code of ethics for internal auditors on the effectiveness of internal audit function particularly in the public sector. Code of ethics promote moral values in the global profession of internal auditing. It contains principles that are relevant to the profession and practice of internal auditing and rules of conduct that describes behavioral norms expected from internal auditors (IIA, 2014).
Internal auditors are expected to apply and uphold integrity which brings confidence to stakeholders (IIA, 2014), be objective in gathering, analyzing and reporting of information (Seria, 2016), not to disclose any information acquired during the audit process without permission from the appropriate authority unless there is a legal or professional obligation to do so (Russell, 2012). Also, according to Bailey (2010), internal auditors are required to apply their knowledge, skills and experience in executing their day-to-day activities. All of these are essential elements of code of ethics for internal auditors.
Currently, there is an increase of general awareness all over the world for the need to pay greater attention to the improvement of public sector’s performance particularly in developing countries. Tanzania is one among the developing countries where by its government operates in a complex and challenging environment. This is because, government revenue and expenditure through its various ministries, departments, agencies and authorities stimulate lot of economic activities (Angus and Mohammed, 2011).
In Tanzania, the Public Finance Act, 2001 (revised 2004) provides internal auditors with a role of examining and evaluating the adequacy and effectiveness of internal controls, risk management controls and governance processes. Currently, the government is moving toward higher levels of transparency and accountability in the use of public money and efficiency in the delivery of public services which demand greater competency and professionalism from internal auditors in order to minimize and manage risk. As the result all public institutions including ministries such as the ministry of agriculture have already established internal audit functions.
The internal audit function at the ministry of agriculture assists the ministry in achieving its objectives effectively, efficiently, economically and ethically by providing unbiased and objective assessments. Internal auditors’ unbiased findings and recommendations represent critical input to good governance that can lead the ministry to take prompt and appropriate corrective actions to remedy identified weaknesses and deficiencies.
The main objective of the internal audit function at the ministry of agriculture is to provide advisory services to the Accounting Officer on the proper management of resources. Based on the risk based internal audit program of the ministry, the internal auditors are performing the following activities; Reviewing and reporting on proper control over the receipt, custody and utilization of all financial resources of the ministry and reviewing and reporting on conformity with financial and operational procedures laid down in any legislation or any regulations or instructions for control over the expenditure of the ministry.
Also, they review and report on the correct classification and allocation of revenue and expenditure accounts, review and report on the reliability and integrity of financial and operation data and review and report on the systems in place used to safeguard assets and verify existence of such assets.
Likewise, they review and report on the reactions by the management to internal audit reports, and assist management in the implementation of recommendations made by the Controller and Auditor General, review and report on the adequacy of controls built into computerized systems in place in the ministry and conduct performance audits on appraisal of development projects in the ministry. Thus, internal auditors need to be expert because, nowadays internal auditing is a profession which needs professional people to undertake in order to improve the effectiveness of the internal audit functions in their organizations.
Internal auditing is overseen and supervised by Code of Ethics (IIA, 2010) which requires internal auditors to uphold the principles and rules stipulated in the global code of ethics for internal auditors (Seria, 2016). Thus, internal auditors at the ministry of agriculture are supposed to possess high level of integrity, objectivity, confidentiality and competence. By doing so, they will establish trust and thus provides the basis for reliance on their works. Internal auditors need to apply their knowledge, skills, experience and make a balanced assessment of all the important situations and not unduly influenced by their own interests or by others in forming judgments (Rittenberg, 2015).
1.2 Statement of the problem
In recent years instances of weak internal audit functions in various organizations have increased (Cohen and Sayag, 2010; Arena and Azzone, 2009; Mihret and Yismaw, 2007). This situation throws light on the importance of having effective internal audit function specifically in the public sector. Public entities need to have effective internal audit function which will help them to have good governance, achievement of organization objectives and compliance with applicable laws (Horgan et al., 2012; Ijeoma and Nwufo, 2015; Salawu and Agbeja, 2007).
However, establishment of effective internal audit function has been a very challenging task in many public institutions. Several reasons have been explained by different researchers, for instance, in Tanzania, the studies by Mosha (2014), Ngopa (2013), Mgimba (2013) and Muro (2007) found that, existence of inadequate working facilities, weak audit committees, absence of management support, presence of few internal auditors in some public institutions, limited resources and cooperation among staff as major challenges hindering effectiveness of internal audit function in the public sector in Tanzania. Yet, some public institutions in Tanzania have got all the above necessities but their internal audit functions are still considered to be weak for example, the Ministry of Agriculture (Controller and Auditor General, 2015).
Internal auditing is a professional job which is overseen and supervised by Code of Ethics (IIA, 2010), it requires internal auditors to uphold the principles and rules stipulated in the global code of ethics for internal auditors (Seria, 2016). Internal auditors are supposed to possess high level of integrity, objectivity, confidentiality and competence in order to establish trust and thus provides the basis for reliance on their works (Russell, 2012). They need to apply their knowledge, skills, experience and make a balanced assessment of all the important situations and not unduly influenced by their own interests or by others in forming judgments (Pickett, 2010; Rittenberg, 2015).
However, very few researchers have explained about the role of code of ethics towards internal audit effectiveness. Hence, it is not clear how code of ethics for internal auditors influences the effectiveness of internal audit function in the public sector. Therefore, this research study has explored the influence of code of ethics on the effectiveness of internal audit function in the public sector and the ministry of agriculture in Tanzania was selected as the case study.
1.3 Research objectives
1.3.1 General objective
The general objective of the study was to assess the influence of code of ethics for internal auditors on the effectiveness of internal audit function in the public sector by taking the ministry of agriculture in Tanzania as a case of study.
1.3.2 Specific objectives
The specific objectives of the study were the following:
1. To examine the effect of integrity of internal auditors on the effectiveness of internal audit function in the Ministry of agriculture, Tanzania.
2. To determine the effect of objectivity of internal auditors on the effectiveness of internal audit function in the Ministry of agriculture, Tanzania.
3. To determine the effect of confidentiality of internal auditors on the effectiveness of internal audit function in the Ministry of agriculture, Tanzania.
4. To examine the effect of competence of internal auditors on the effectiveness of internal audit function in the Ministry of agriculture, Tanzania.
1.4 Research questions
The following were the study questions:
1. How does integrity of internal auditors affect the effectiveness of internal audit function in the Ministry of agriculture, Tanzania?
2. How does objectivity of internal auditors affect the effectiveness of internal audit function in the Ministry of agriculture, Tanzania?
3. How does confidentiality of internal auditors affect the effectiveness of internal audit function in the Ministry of agriculture, Tanzania?
4. How does competence of internal auditors affect the effectiveness of internal audit function in the Ministry of agriculture, Tanzania
1.5 Significance of the study
The study revealed sufficient information to the public on how integrity, objectivity, confidentiality and competence of internal auditors influence internal audit effectiveness. Hence, public institutions will benefit from the study findings to improve their internal audit functions.
Also, the study provided useful information which assist national and international professional bodies in reviewing and recommending best approaches of applying code of ethics for internal auditors in their public sectors.
Likewise, the study provided reference materials for students on internal audit courses and consequently contributes to their professional development.
Furthermore, the study is very important to academic researchers as the information provided will assist them in developing research papers focusing on the relationship between internal audit effectiveness and code of ethics for internal auditors. The findings of the study show that, there is a slightly linear relationship between the effectiveness of internal audit function and the elements of the code of ethics for internal auditors. Thus, this kind of findings will ultimately help academic researchers in the fields of auditing and accounting.