The Effectiveness of Internal Auditing in Saudi Arabian Local Government - Essay Example

?Running Head: THE EFFECTIVENESS OF INTERNAL AUDITING IN SAUDI ARABIAN LOCAL GOVERNMENT The Effectiveness of Internal Auditing in Saudi Arabian LocalGovernment Name: Institution: Course: Date: TITLE: THE EFFECTIVENESS OF INTERNAL AUDITING IN SAUDI ARABIAN LOCAL GOVERNMENT TABLE OF CONTENTS BACKGROUND/ INTRODUCTION ABSTRACT CHAPTER ONE JUSTIFICATION/ RATIONALE FOR THE STUDY PROBLEM STATEMENT OBJECTIVES FOR THE STUDY HYPOTHESIS CONTRIBUTION TO KNOWLEDGE CHAPTER TWO LITERATURE REVIEW BIBILIOGRAPHY CHAPTER THREE METHODOLOGY POPULATION SIZE AND TYPE SAMPLE DESIGN TOOLS FOR DATA COLLECTION CHAPTER FOUR DATA ANALYSIS DATA CLEANING, CLASSIFICATION, EDITING AND CODING DATA PRESENTATION CHAPTER FIVE REPORT AND FINDINGS CONCLUSION/ RECOMMENTIONS DISSERTATION APPENDIX ACKNOWLEDGEMENTS ABSTRACT The Saudi Arabian government is politically divided into fourteen emirates also known as provinces. These emirates are headed by brothers, sons, nephews and next of kin of the King who currently is king Abdullah. Internal audit is a requirement for all the organizations in King Abdullah Empire and as such, this research looks into internal audit efficiency in the local governments and zeroes in on the Al Sharqiyah emirate. Variables used to measure the efficiency include the competence of the staff in the audit department, the size of the department, the independence and autonomy of the audit department, the management support of the audit process, relationship of the internal practitioners with the internal auditors and eventually, the relationship between the audit council and the auditing department (Kamrava, 2010). The methodology used in the survey, archival and the conduction of the research involved the use of unstructured interviews (personalized and intercepted via telephone) and use of survey questionnaires, the respondents in this process included administrators form the Al Sharqiyah Municipal government and in this organization, the internal audit department will be fully utilized as a source of information, Correspondence with the governor or his handlers will be required to evaluate the efficiency of the operations in the local government and to have their opinion ad take on the role and importance of internal auditing in local government. The analysis of the findings will help determine the level of comprehension of the practitioners and stakeholders of the audit process and importance and also gauge their efficiency in the implementation of the same. A review of their competence levels will be of prime importance since it will also indicate the nature of the workforce in the local government versus the kind of work they do which in turn will assist in the evaluation of their efficiency at work. The background information on the structure of local government and audit requirements of local government as mandated by the Generally Accepted Auditing Principles and the Audit Practice in Local Government will be used as a yardstick in the measurement of efficiency of the practitioners, the internal audit process and the compliance of the administrators to the laid rules and regulations of internal auditing (Kamrava, 2010). BACK GROUND / INTRODUCTION OF THE STUDY Saudi Arabia, home to a massive population of 22.1 million people according to polls done in 2001 by the Saudi Department of Statistics. To manage this population that sits on land and water. The Saudi Arabian government has divided the nation onto fourteen provinces also known as emirates. These are namely Al Banah,Al Hudud as Shamaliyah, Al Jawaf, Al Madinah, Al Qasim, Al Qurayyaf, Ar Riyadin , Al Sharqiyah ,Asir Hail Jizan, Mkkah, Najra and Tabuk. All these emirates are either headed by brothers, sons and nephews and other kin to the King (currently King Abdullah) according to the economic and political significance of the emirate. This system allows the emirates to be divided into districts and sub-districts relative to their geographical size. With the developments in trade within Saudi Arabia and the world, the economy, social set up and political front of the nation has expanded and grown over the years. This has called for the development of strong systems to cope with the rise in cases of incorrect representation of information, fraud, corruption and embezzlement of funds especially in the rising wake of globalization. To take care of this, local governments have set up internal audit departments in accordance with the Government Audit Standards through the Cabinet Decree No. 235 (2004) mandated the establishment of internal audit departments in all organizations. This study zeroes in on the Al Sharqiyah emirate and more specifically the Municipal government. The research looks into the organization of this municipal government and focuses on the internal audit department. As a compliment to the research, independent external auditors who liaise with the governor and administrator of the organization were also reached. Counsel of the governor and administrators in the municipal council and external audit administrators was sought in the mission to determine the effectiveness of internal auditing in Saudi Arabian Local Government (Bernard, 2009). To evaluate the effectiveness of the internal audit, six pillars of auditing will be reviewed. These include the competencies of the audit department, size of the audit department management support of the audit process, the relationship between the external and internal auditors in the municipal government, autonomy/ independence of the audit department and the relationship between the audit council and the audit department. PERCEIVED ROLE OF INTERNAL AUDITING IN LOCAL GOVERNMENT OF SAUDI ARABIA In the new dawn of the 21st Century that has seen a lot of developments in the social, economic, political, and religious and trade arenas, globalization has been a big influence on the running of local and domestic activities especially by the government. Saudi Arabia has not been an exception to these new developments. There has been a lot of increased volume on spending in developmental projects, investments and acquisitions. This has as a result, led to the urgent need and importance to have reports and financial statements from all sectors, private and public to keep up with the growth and with the growth the evils that come with it which include fraud, corruption, misrepresentation of information amongst others. Therefore, the GAB has adopted and particular oversight function supported by certain specific agencies to implement and monitor the country’s assets and funds for the general welfare of the Saudi population and future. It was against this background that the GAB, through Cabinet Decree number 235(2004) mandated the establishment of internal audit departments in all organizations subject to its authority (IJGA, 2006). The objective of the issuance of this decree according to the findings of Abdul-Aziz (2006) was: 1. The need to reduce corruption in the public sector organizations and to reduce the number of errors, irregularities and fraud. 2. Identification and removal of weak internal controls and replace them with stronger systems of control. 3. The increased number and size of Government Organizations that increased operational overhead expenses and complicated the systems operations and thereby creating avenues for weaknesses. 4. The inability of GAB to review all the financial aspects of the public sector organizations efficiently and effectively due to the lack of qualified staff with the GAB and the substantial increase in the number of government organizations which bring them bigger budgets and increased thorough proof financial information for their raw data. 5. Increased number of errors and irregularities from a handful of organizations that did not validate their information before presenting it to the GAB for perusal and these same organizations made no efforts to correct and improve on their audit operations. 6. The need to respond to the International Organization of Supreme Audit Institutions (INTOSAI) request to establish internal audit units in all government organizations. 7. GAB’s awareness of the need and urgency of development and growth and thereby the need tom safeguard the resources and assets of the public. It is against this background that the Saudi Arabia government put a lot of effort in the establishment of audit units in all government organizations. The scope of the audit process involves the reviewing and analysis of the systematic procedures and systems concerned with managerial, operational, financial and budgetary functions in all government institutions. Any mishaps in the processes and transactions that are discovered are immediately corrected and preventative measures put against the recurrence of the same errors (Alex, 2011). For quality, efficiency evaluation and transparency, the GAB provides and annual report of the findings of its operations on the public consumption. A summary report on the errors seen in that year is indicated with their respective causes and remedies and structures put in place to ensure they do not recur is also indicated in the report. JUSTIFICATION/ RATIONALE FOR THE STUDY As a recap of the above background, there is reported growth and development of the economic, social and political reach of the local governments as a result of expanded and new markets that have risen from domestic and interregional and international trade if firms within the jurisdiction of the local government .This has prompted the expansion of the management, finance, operations, budgetary departments of the local governments as well as the establishment of an audit department to cope with the recent developments since the year 1992. The local governments headed by the governors who are appointed by the king or his council not only answer to the central government of Saudi Arabia but are also accountable for the citizen they serve since they have a great impact on their welfare (Ann, 2009). These governors and their council are not only responsible for the collection of tax revenues, provision of public services and maintenance of a corruption free Municipal/District but are also responsible for the judicial and legal affairs of their area of service and also have a steak at the security and patrol in their districts. Therefore, there is need for transparency and accountability of every activity done, decision made and penny made, borrowed and even spent by this institutions. It is against this rising need for reduction in the information asymmetry between the local government and the central government and the local government and citizens of Saudi Arabia that I ventured out to seek information to seal this gap and assess the effectiveness of the internal auditing process by the local government (Bernard, 2007). PROBLEM STATEMENT It is a requirement by the central government to have inbuilt audit departments in every organization in Saudi Arabia. Local government is the main focus of this study and the intention of to find answers to the effectiveness of the internal audit operations of the fourteen Saudi local governments. It will use the emirate of Al Sharqiyah as the prototype. To assist in this, the help of the governor and administrators of the Emirate will come in very handy (Kinney, 2008). OBJECTIVES OF THE SURVEY 1.To establish the effectiveness of internal auditing as perceived by the governor, his council and administrators in the Al Sharqiyah emirate and the body of organized external audit organizations and individual internal auditors at the Municipal based on the following six(6) variables: Competence of the Audit department. Size of the audit department. Relationship between the internal and external auditors associated with the local government of Al Sharqiyah emirate. Independence and autonomy of the audit department. Management support of internal audit. Relationship between the audit council and the audit department. 2. To identify the factors that influences the strength of internal auditing in Saudi Arabian Local Governments. 3. To provide recommendations and suggestions based on the findings of the research. RESEARCH QUESTIONS How does each and every one of the above named (6) audit variables affect the effectiveness of the audit process in the local government in Saudi Arabia (particularly the Al Shaqiyah emirate)? What is the relative strength of each of the variables in the local government of Al Sharqiyah emirate? HYPOTHESIS ALTERNATIVE: The internal audit process in the Saudi local government is effective according to the Generally Accepted Auditing Standards for Local Government. NULL: The internal audit process in the Saudi local government is not effective according to the Generally Accepted Auditing Standards for Local Government CONTRIBUTION TO KNOWLEDGE This academic study on The Effectiveness of Internal Audit in Local Government in Saudi Arabia is perceived by the researcher to be the first of its kind since it has specialized in its search for information to a narrower range of first the local government, secondly, the effectiveness of internal audit as a variable and lastly, it has narrowed the search scope to one emirate, the Al Sharqiyah emirate as the study area. Other works done on internal auditing was done by Abdul-Aziz who focused on Saudi Arabia as a whole while the other works have been done by Western scholars (Abdul-Aziz, 2010). This research work will provide a handy tool for: Administrators/ local governments and governors in who want to measure the efficiency of audits made to their organization and compare notes with the work done by other emirates’ governors. Auditors to evaluate the impact of their individual or joint work hence find areas of weakness to adjust or make improvements. It will form a study bench mark for auditing students to relate their class room work with what is happening and expected from them in the corporate world within their environment. Researchers who are interested in furthering on my research have a beginning point by using my work as a guide in their work. STUDY POPULATION This research narrows down its survey to the Al Sharqiyah emirate Municipal government. It utilizes the internal audit department in the local government, governor and administrators in the same organization and external administrators as representatives of their organizations and in their individual capacities as auditors. LITERATURE REVIEW This research is done under the empirical and theoretical works previously done by Abdul-Aziz .A. who did a research on the Effectiveness of Internal Auditing in the Saudi Public Sector (2004) His work was instruments in the determination of the working structure of the Saudi Public sector. Although his work was quite broad in scope, it gave a good guidance of how to go about conducting the research and its broadness provided me with the niche that formed the problem statement of my research, The Effectiveness of Internal auditing in the Saudi Arabia Local Government, as more narrowed down search that had one of the emirates Al Banah as its study sample. Work from Lawrence B.Swayer (5th ed) gave background information on the particulars of auditing, the Generally Accepted Auditing Principles, the Auditing requirements for local government, functions of the internal audit department, the measurement of an efficient audit department and the requirements of auditing and auditors and eventually helped derive the six (6) pillars of internal auditing that were used to test the hypothesis for this study. Armed with the two schools of knowledge, ventured out to discover how Al Sharqiyah Municipality representing Saudi Arabia’s local governments conducted their audit process and analyzed the results for test of effectiveness (Bernd, 2007). To understand the functioning of the Saudi Arabian government, work of Nimrod Raphaeli Saudi Arabia: A Brief Guide into its Politics and Problems was utilized. This was instrumental so as to understand the cohesiveness of the various local governments and the politics that they play with the citizens and the central government THE SAUDI ARABIAN PUBLIC SECTOR AND THE STATUS OF THE INTERNAL AUDIT WITHIN RESEARCH PROCESS METHODOLOGY This research utilized both utilize primary and secondary data sources with the effective use of survey questionnaires that will be used on respondents such as internal and external audit organizations that audit reports of the governors of the Municipal government or district and on the governors and administrators in the local government to evaluate the effectiveness of the work they pay for to be done. I will also conduct intercepted personal and /or phone interviews with the governor, some six administrators and three external administrators two will be representing their respective organizations and one representing themselves in their capacity as an auditor. From the data hunting adventures, I have in mind the agenda of collecting both qualitative and quantitative data that upon analysis and close scrutiny would be used to test my hypothesis as stated above in the hypothesis statement. Multiple regression techniques would be used to estimate the effect of the independent auditing variables on the effectiveness of the audit process. For the qualitative data, it will be analyzed thematically according the findings from the various respondents (Johnstone, 2009). SAMPLE DESIGN The research targets the local government in Saudi Arabia and zeroes in on the Al Sharqiyah emirate as the target population. The non-probability convenient sample population includes the governor, six senior administrators and two juniors from the operations, finance and management departments and one senior auditor from the audit department in the municipal government and from the external auditing organization, one senior auditor representing the firm and on another arena, the same auditor representing himself/ herself in his capacity as an auditor. COLLECTING THE DATA TOOLS FOR DATA COLLECTION Personal and intercepted interviews. A combination of open-ended and closed-ended questionnaire (see appendix for a sample of the questionnaires. DATA COLLECTION Data collection methods uses include the use of personalized and /or intercepted interviews via phone depending on the availability of the respondents. For the interviews, the researcher will utilize unstructured questions to ensure that sufficient information is collected from the respondents and also to avoid guided answers from the respondent. This will be very crucial to avoid biases in the process and the inclination of the interviewer to incorporate their own opinions into the findings thereby putting the entire mission in jeopardy. There will also be use of the hybrid (closed and open- ended) questionnaires that will be mailed to the respondents after prior engagement of the same respondents so as to ensure that they understand the particulars of the research and are well acquainted with my requirements as a researcher. Prior to the data collection exercise, the researcher will seek the relevant authorization from the local government. This is to ensure that the process is legal and they are minimal interruptions of the workforce in their normal working operations. (Check appendix for questionnaire sample) Ethical issues are to be sensitively considered and professionalism maintained throughout this research process (Moeller, 2009). . Legal requirements and petition for permission to conduct the interview shall be sought for in advance so as not to affect the normal operations of the organization of target. PILOTING THE QUESTIONNAIER A pilot study test of the questionnaires for soundness will be conducted using some audit students from the university as prototype target population and the manifest weaknesses will b corrected accordingly. A respondent sample space of thirty (30) students who are put together form varied schools and departments but mainly from the schools and departments of business, accounting, economics, statistics and finance will be used. These are selected by convenience since they are conversant with the research topic and the terminologies within the survey questionnaires. The defaults logged in the draft questionnaires will be identified and relevant corrections made in time to allow for reasonable time to do the actual data collection (Nimrod, 2006). ANALYSIS OF DATA DATA CLEANING, EDITING AND CODING According from the respondent type, i.e. senior manager and executive managers and according to the staff in the audit department, data will be categorized for easier analysis. From the groups of responses, data will be cleaned and edited for error elimination and there after coded according o the responses given. This will come in and in the analysis and the genera reporting of the findings as well as the test of the hypothesis. DATA ANALYSIS Data collected will be in two forms, qualitative and quantitative data. This will call for the use of correlation analysis will be used to find the relationship between the research variables and to find the relationship between the various departments as well as the relationship between the internal audit department and the external .regression analysis will be utilized to test for the significance of the hypothesis and he soundness of the research. These analysis will be very instrumental in the reporting of findings and eventually drawing the conclusion that will be used as a guide by the governors to the emirates and administrators of departments in local government to review their efficiency, administrators to check on their work impact, lectures and students include to the auditing field as a material used as a yard stick to measure up the requirements in the corporate world with what they learn in class and therefore find the niche(s) that they can fill. Qualitative findings will be analyses systematically. DATA PRESENTATION Eventually, the already cleaned, coded and edited data will be will be analyzed accordingly and presented using suitable techniques that are not only easy to understand but also communicate the information collected correctly. A suitable method will be the use of tables and pie charts to represent the information since they allow for comparison. DISSERTATION This research looks into just one aspect of internal auditing in local government. It does not; therefore exhaust the issue of auditing in the local governments of Saudi Arabia. As a result, there is a lot to be learnt and researched on in this field. For researchers who would wish to further this research based on other variables, or would want to further this research based on the effectiveness variable, they are allowed to use this work as literature review, a guide and also as a reference point. However, rules pertaining research works of fellow researchers should be adhered to maintain integrity in this field of study. APPENDIX1 QUESTIONNAIER FOR STAFF IN THEAUDIT DEPARTMENT This questionnaire is devised as a tool for as survey on the efficiency of the internal audits in local governments in Saudi Arabia. Your institution/ department forms an instrumental data source since your interaction with the audit department helps to gauge its efficiency in service provision (Eric, 2008). Kindly answer the questions as truthfully as is professionally and ethically possible. Forms once filled and verified for completeness and accuracy of information will be collected at the end of the exercise. SECTION 1 What is your position in your department? …………………………………………………… How many years have you served in that position? …………………………………………………………. What academic qualifications do you have? ……………………………………………………………. How many internal audit courses have you? List them down numerically. …………………………………………………………………. How many CPE hours do you have this year? ……… What do you understand by the tern internal audit? …………………………………………………………….. How often do you audit work from your department/ organization ANNUALY [ ] SEMI ANNUALY [ ] QARTERLY [ ] Do you have an external audit organization that verifies your internal audits? YES [ ] NO [ ] How frequently do they audit your work? ANNUALY [ ] SEMIANNUALY [ ] QUARTERLY [ ] Rate your relationship with the external auditors as indicated in the table below. Statement Ave. Rating by audit staff (scale of 1-10) External auditors are friendly and supportive External auditors are ready and willing to provide guidance and consultation where need be External auditors discuss their plans with the internal auditors where need be External and internal auditors meet frequently External auditors rely on internal auditors’ reports and work Internal and external auditors share their working papers Senior management helps to cooperate the relationship between the internal and external auditors Would you say that your department enjoys autonomy/ independence as a department from other departments? YES [ ] NO [ ] Explain your answer in (a) above ………………………………………………………………………………………. Is there support from the overall department office? YES [ ] NO[ ] If yes, indicate what kind of support. What are the challenges you face as an audit department? ……………………………………………………………………………. SECTION 2 Does your department cooperate with the other departments in the organization? YES [ ] NO[ ] If yes, how? On a scale of 1-10, rate the level of interdepartmental cooperation.[ ] Thank you kindly for your input to this research process. Your contribution to its success is highly appreciated. The findings of this research will be mailed back to you for your review of the correctness of the information you gave and were represented. You may use it according to what suits your needs. APPENDIX 2 QUESTIONNAIER FOR THE EXECUTIVE AND SENIOR& DEPARTMENTAL ADMINISTRATORS This questionnaire is devised as a tool for as survey on the efficiency of the internal audits in local governments in Saudi Arabia. Your institution/ department forms an instrumental data source since your interaction with the audit department helps to gauge its efficiency in service provision. Kindly answer the questions as truthfully as is professionally and ethically possible. Forms once filled and verified for completeness and accuracy of information will be collected at the end of the exercise (Coderre, 2009). SECTION 1 What is your position in your organization? …………………………………………………….. How many years have you served in that position? ………………………. What do you understand by the tern internal audit? ……………………………………………………….. Does your institution have an internal audit department? YES [ ] NO [ ] How often do you audit work from your department/ organization ANNUALY [ ] SEMI ANNUALY [ ] QARTERLY [ ] Do you have an external audit firm that verifies your internal audits? YES [ ] NO [ ] How frequently do they audit your work? ANNUALY [ ] SEMIANNUALY [ ] QUARTERLY [ ] What are the cadres of auditors you have in the audit department? ……………………………………………………………SECTION 2 Would you say that your department enjoys autonomy/ independence as a department from other departments? YES [ ] NO [ ] Explain your answer in (a) above ………………………………………………………………………. Is there support from the overall head office/ management for your department? YES [ ] NO[ ] If yes, indicate what kind of support. What are the challenges faced by the audit department? ……………………………………………………………………………. Does your department cooperate with the other departments in the organization? YES[ ] NO[ ] If yes, how? On a scale of 1-10, rate the level of interdepartmental cooperation. [ ]. Thank you kindly for your input to this research process. Your contribution to its success is highly appreciated. The findings of this research will be mailed back to you for your review of the correctness of the information you gave and was represented. You may use it according to what suits your needs. ACKNOWLEDGEMETS I would like to appreciate the input of my lecturers, authors of the books and other research work done in this field without whose reference this research process would be confused and tedious. Your direct and indirect contribution is highly appreciated. In the research process to be undertaken, the cooperation of the respondents and the permission granted to conduct the survey is appreciated in advance (Lawrence & James, 2008). Conclusion Finally, the topic on internal audits in local government should be discussed deeper in different parts of the world since this can help in maintaining the financial status of many countries. The same should be done in Saudi Arabia especially in the modern world where there is so much fighting in the Arab countries. Discussing internal auditing in local government will also help in better ways of keeping financial records of a country and in this case Saudi Arabia can really benefit from this study. The study will also be effective in maintaining economical relationship between different countries in the modern world. BIBILIOGRAPHY (1)Abdul-Aziz Alzeban (2010) THE EFFECTIVENESS OF INTERNA AUDITING IN THE SAUDI PUBLIC SECTOR (p33)University of Exeter. (2) Lawrence.B. Swayer, Mortimer A. Dittenhofer & James. H. scheiner (2008). Sawyer’s Internal Auditing (5th ed) The Practice of Modern Internal Auditing. (3) Nimrod Raphaeli,(2006) Saudi Arabia: A Brief Guide Into its Politics and Problems. Coderre, D (2009). Internal Audit: Efficiency through Automation. New York: John Wiley and Sons Moeller, R (2009). Brink's Modern Internal Auditing: A Common Body of Knowledge. New York: John Wiley and Sons Johnstone, K (2009).Auditing: A Business Risk Approach. New York: Cengage Learning Eric, S (2008). Banking Internal Auditing in Europe: Overview and Recommendations by the Banking Advisory. Hamburg: Verlag Bernd, S (2007). The role of internal audit in corporate governance in Europe: current status, necessary improvements, future tasks. Hamburg: Schmidt Verlag Ann, W (2009). SO 9001:2008 internal audits made easy: tools, techniques, and step-by-step guidelines for successful internal audits. California: ASQ Quality Press Kinney, W (2008). Internal Audit Handbook: Management with the SAP-Audit Roadmap. New York: Springer. Bernard, R (2007). The attitude of Libyan auditors to inherent control risk assessment. The British Accounting Review, 39, 39-59 Alex, S (2011). Modeling External Auditor’s Evaluations of Internal Auditing. New York: Journal of Accounting Research International Organization of Supreme Audit Institutions, (2006). International journal of government auditing, Volumes 15-19. New York: Cornell University Bernard, L (2009). Saudi Arabia: the coming storm. Retrieved on 29 Nov 2011 New York: Cengage Learning Kamrava, M (2010). The Modern Middle East: A Political History since the First World War. New York: Oxford University Press Read More