The Lack of an internal audit department in a company called Mawarid Islamic finance in the UAE - Research Paper Example

The Lack of an internal audit department in a company called Mawarid Islamic finance in the UAE Proposal: This proposal looks at the related problems of the lack of internal audit function in Mawarid Islamic Finance. Scope: In this project I will be discussing a problem in a company in a certain industry, I will provide a proposal in which I will argue about the problem, afterwards I will be presenting researches on the effect of that problem on the company and ways on how to solve the problem, finally I will be presenting the outcome of my research and I will include ways on how to overcome this problem, argue it, and try to solve it. Company Introduction: The company that I will be discussing is Mawarid Finance is an Islamic financing company established in 2006 in Dubai, United Arab Emirates with a paid up capital of AED 1 billion, and it is part of the financing industry. Mawarid Finance’s strategy focuses on supporting and developing the national economy through the provision of Islamic financial services and products for small and medium enterprises (SMEs), which form the backbone of a nation’s economy, to enable them to develop, grow stronger and faster(Mawarid.ae) (English 46). The organization specializes in developing Shariah complaint economical or financial services. It provides eMurabaha that allows its clients to buy the goods offline or online; financing for the purchase of the items; letter of guarantee covering bib; online labor guarantees, and advance payment bonds, together with guarantees for the retention monies, customs duty, labor, home financing, maintenance. Moreover, it offers vehicle and property financing for people, and different services to the corporate sector, which include working capital, assets, deposits, trading activities and financing projects (English 53). Mawarid Finance is the only UAE’s financial institution that is absolutely independent. However, in an attempt to ensuring that it hands itself operational independence, we find that the distribution of its shares has been done across over three hundred and fifty shareholders, whereby organizations or even companies own less than five percent each of the capital there is no stake of an individual shareholder that is more than two and half percent (English 54). Problem Statement: Lack of internal auditors has appeared as one of the fundamental factors that have led to misappropriation of funds in several companies and organizations. That is why several companies and organizations have adopted it to help in bringing accountability, so that each money spent can be accounted for. Background and Significance: Internal auditors play a very crucial role in the corporate governance of their organizations, financial reporting processes, analysis of risk management and internal control structure. During the last decade, they actively offered management with assurance and consulting services to help in conformity with the laws like the 2002 U.S. Sarbanes-Oxley. The internal audit resources have also seen expansion for the purposes of satisfying the increasing demand for the services to facilitate financial report and internal control’s executive certifications. In the future years, it might be expected of the internal auditors to broaden their role to responsibilities such as the improvement of risk management, reduction of organizational costs and complexity, and participation in the development of governance and strategic processes. For instance, the rules of Proxy Disclosure Enhancements of the United States Securities and Exchange Commission to reveal their governance measures, which include the structure of their board, the board’s supervision of risk management as well as its relationship with the executive practices and policies of compensation. The new proxy rules will actually exert pressure or compel the boards to show their role in the supervision of risk management, and further, this presents both opportunities and challenges for the CAEs (chief audit executives) and their teams of internal auditors. All companies that have the department of internal audit have had it very smooth in running their affairs. Their audit departments have helped in keeping track of where the money goes, and ensures that the money is put into good use, and not for the benefit of individuals. The departments have also helped the organizations in knowing if it is making or loosing more money. Internal audits helps companies in reviewing the processes’ efficiency together with the related international standards, shows commitment by the top management, offers scope of improvement, offers information for the management review meetings as well as helping in the improvement of client confidence and satisfaction. Objective Aim: The aim of the study is to examine the issue of lack of the internal audit department in the Mawarid Islamic Finance. Internal audit department has appeared to be a critical part of an organization and its presence helps in ensuring accountability. We are going to review the existing literature regarding the issue as well as how its absence has affected the running of the company affairs as well as how its presence can bring about change in the same company. Research Design and Methods: I plan to make a questionnaire to make an interview with the chief development officer of Mawarid Islamic Finance. SWOT Strengths: The products of banking which adhere to the laws of Islam are becoming more popular and accepted in the Gulf States and also as far as in the developed nations like the United Kingdom. Under the Islamic banking, we find that equity finance requires pre-rating and cost yield analysis of projects; this greatly subdues the tedious rivalry in the sector of finance to get more shares of credit and tends to offer constancy in the financial market. Islamic banks are not affected by the crisis of subprime mortgages. The banking of Islam can get rid of economic activities that are inexplicable, since each economic activity should be funded via legal contract together with physical authentication of real assets that are under contract. This means that there is no chance of funds diversification, which is vital to the company. Weaknesses: The banking laws in UAE do not overtly prohibit or forbid Islamic banking but there are some stipulations making Islam banking nearly an unviable option. The monitoring of data concerning firms in which the company operates would involve very high cost. The incapability to appraise a profitability of a project has appeared to act against the investment financing. This means that the evaluation efforts of the bank are frustrated by some borrowers as they hesitate in offering their businesses’ full disclosure. Opportunities: The largest population in Dubai comprises of Muslims, and this provides huge opportunities for exploitation. The Islamic banking might induce the political leaders to substitute subsidies and grants with the equity finance schemes via specialized financial institutions since equity finance enables or gives access to credit with no borrowers’ debts. Threats: The biggest threat to the financial institution is that posed by some of the established competitors such as Bank Muamalat. These competitors have financial might as compared to Mawarid Islamic Finance, which puts them in a position of asserting their authority or presence, thus capturing more clients. PEST Political The political environment in the United Arab Emirates is very stable and any businessperson can be attracted to set up a business there. The country is very peaceful, and all its problems are normally settled amicably. The country, in the year 1994 joined some other nations in trying to bring an end the secondary or derivative aspects of the Arab refuse against the Israelites. The UAE, unlike some other states like Qatar and Oman, does not have a direct relationship with the Israelites. The rate of integrated Customs Tariffs applied by the country’s customs is four percent of the Cost, Insurance and Freight Value. Nevertheless, the custom tariffs have a list of precuts and merchandise that are not inclusive of customs duty. This means that the bank has a very favorable environment for operations. Economic Free trade is the basis of the country’s economic environment and this encourages both foreign and local investors to bring their money into the country. The three factors that affect the country’s financial investment are GDP, Interest Rates and Inflation. The country’s GDP has been on a steady rise since the year 1999, while the rate of inflation has also gone down substantially. Social Social factor are usually very important in the process of analysis of any market worldwide. The social factors in the country have a significant impact in the establishment of the labor force in the country. The major religion in the country is Islam and people strictly follow the rules of the religion. This goes to the extend that some products are forbidden such as gambling and alcohol. The official language of the country is Arabic and English is used in business relation as it is the country’s second language. The country also experiences an upward trend in population growth rate, which is good for the bank’s market base. Technological Technology impacts channels of distribution, risk management, processing of transactions, credit analysis and marketing. The use of Internet is wide in the country, which means that people are in a position of easily accessing information regarding the bank, without necessarily having to struggle. Literature Review When we look at the New York School District’s case, we find that about eleven million dollars of public funds were squandered or misappropriated for the good of individuals who were employed by the district. Some of the items that were paid for or bought using the resources of the district were private loans and mortgages, unauthorized benefits and salaries, electronic equipment and computers, personal automobile financing, food, unauthorized travels, miscellaneous individual items, which included dry cleaning, fitness club fees as well as cable service. According to Albrecht & Albrecht (82), nevertheless, auditors ultimately established that this misuse of finances happened because there was a total or complete breakdown of the internal controls; that is the lack of presence of a sound business practices to uncover excessive and improper use of money established an environment whereby several abuses of fraud as well as some other dishonest activity took place. However, the good thing is that, with good and proper internal controls together with administrative supervision, it is true that such situations can be averted completely. It is always stated that “sunshine is the best sterilizer,” which indeed holds true when an internal auditing is utilized by an organization in ensuring and improving the efficiency of risk control, management, and processes of governance (Barra 17). The IIA (National Institute of Internal Auditors) developed a definition of internal auditing which is applicable to all those that apply their guidelines and standards: It can be described as an independent, objective assurance and a consulting activity that is specifically designed to add value as well as improve the operations of an organization. A study by Altamuro & Beatty, (57) revealed that internal auditing helps an organization or company in the accomplishment of its goals by establishing a methodical, disciplined approach to the evaluation and improvement of the efficiency of control, risk management and processes of governance. Principles The Institute of Internal Auditors offers basic guidelines that every internal auditor should follow so as to be in a position of maintaining that their actions are in compliance with the standards of IIA. Hose principles include: Integrity: The truthfulness or reliability of the internal auditors brings about trust and hence offers the basis for confidence and reliance on their decision. Objectivity: The internal auditors demonstrate the highest professional objectivity level in collecting, appraising and communication of information regarding the process or activity being evaluated. They make a balanced evaluation of all the appropriate circumstances and are not overly influenced by their individual interests or even by others in the formation of judgments. Confidentiality: They respect and recognize the ownership and value of information that they get and not reveal tit without proper authority except when there is a professional or legal compulsion to do so. Competency: They apply the skills, experience, and knowledge required in the execution of the internal auditing services. Corporate governance The improvement of corporate governance and enhancement of the dependability of the financial statements are getting considerable attention from the financial community, regulators, lawmakers, the accounting profession and the bodies that deal with standards-setting bodies. This attention that is well-deserved comes from the economic crisis that hit the world a few years ago, extensively publicized failure in business, high-profile fraud in financial statements, absence of heedful oversight by the audit committees, and boards of directors, inadequate structures of governance, irresponsible management, and audit functions that are inefficient (Ashbaugh-Skaife, et al, 170). Nonetheless, a close working relationship between the internal auditing and the audit committee can greatly see improvement in the efficiency of the corporate governance. First, we find that the objectivity and independence of the auditors can be made to be strong when they report their opinions and findings to the audit committee directly. In addition, by re-examining the opinions of internal audit before their dissemination to the full board, regulatory bodies, management and some other intended users, audit committees can be in a position of fulfilling oversight duties that are related to the internal controls, financial reporting, external auditing, risk management, taxes, ethics and whistle-blowing.   Historically, the companies that are publicly listed have not reported the activities of their corporate governance to the level that they state or report their fiscal activities. However, as that has started changing just recently, the reporting of corporate governance has gone past the obligatory periodic fiscal reports to include the board effectiveness, mission, vision and strategies. The internal auditors can make an opinion regarding the corporate governance of their organization and report or present their findings to the stakeholders that are interested; which include the executives, board, investors, regulatory agencies and external audits (Brandon 160). In these opinions, there should be revealed all the appropriate information regarding the effectiveness of the corporate governance of the organization and put its focus on the performance of sustainability in all parts of social, financial, ethical and environmental activity. Furthermore, they mush give transparent nonfinancial and financial information regarding the major performance indicators and how they affect all the stakeholders and examines the responsiveness of the organization to those parties’ needs. Risk management Companies or organizations of all sizes, complexities and types are experiencing various dangers that affect the trustfulness of financial statements and the internal control’s effectiveness. Effectual evaluation and proper reporting on the risk management by the organization needs internal auditors to help in the understanding of the risk evaluation process from the beginning to the end. Before the formulation of an opinion regarding the risk management by the auditors, they should establish and measure risks, and then weigh them against possible rewards to form sustainable performance (Brandon 162). They should make sure that the formulated process of risk examination is enhancing strategic decision-making as well as supporting the accomplishment of the objectives and goals of the organization. Moreover, they mush give sufficient information on risk evaluation to the senior management and the board to allow their easy making of strategic decisions that are risk informed. More so, they should give consulting services and assurance to the audit committee, board, and management regarding the risk management of the organization and risk appetite together with the efficiency of the process that is designed for the management of the risk and reduce their effect on the financial reporting (Brandon 168). However, the internal auditors at the United States- listed companies must report on the compliance of the organization with the new SEC understudy disclosure policies. On the basis of these steps, the auditors must formulate the overall opinions on risk management and report the findings to the management, the audit committee and some other stakeholders.  Internal Controls Traditionally, internal auditors have applied the approach that is risk-based in the auditing of controls over the operational effectiveness of their organizations, their financial report’s reliability, and adherence or compliance with the applicable regulations and principles. Internal auditors should centre their focus on the controls that are compliance-driven when offering assistance to the management in the preparation of reports on the internal control over the financial reporting (Bazerman 99). Nonetheless, even though the responsibilities of management for adherence cannot be renounced or delegated, the auditors can chronicle the design’s efficiency and the ICFR’s operation and also offer opinions and assurance on internal control. The level of the involvement of the internal auditing with Sections 302 and 404 is dependent on the resources of the audit function, charter, personnel qualifications, and professional standards and funding (Ashbaugh-Skaife, et al, 170). Besides conferring with the recommendations that are stipulated in the Practice Guide of IIA, internal auditors have to take into consideration the possible opportunities and challenges in the expression of audit opinions, and understand their limitations and objectives. They should make some recommendations regarding counteractive actions for the improvement or internal controls and taking notice of the commitment and willingness by the management to implement the remedies. The reliability and quality of the internal audit opinions is dependent on the objectivity, transparency, independence, constructive recommendations, and the organizations eminence of the signing of the report by the CAE (Picket 37). For relevance, recommendations and opinions must be related to the intended controls and established risks, and should be reliable, concise and constructive in the recommendations of improvements. Such recommendations can be made by auditors and an expressed on the internal control by:  Examining the manner in which the development and maintenance of the internal control system is done by the management, which is effective and sufficient in the risk management. Assessment of the effectiveness and efficiency of the controls and processes of risk management. Assessment of the entity-level controls which are relevant to the company’s ethical values and integrity, the style of operation and philosophy of the organization, the structure of the organization, procedures and policies of human resources, personnel’s integrity and competence and the assignment of responsibility and authority. Challenging the decisions of the management regarding the internal control when it is necessary. Working hand in hand with the management, audit committee and board of the organization in facilitating improvements in the structure of the internal control. Views expressed on the internal control have to be integrated in the annual reports. Provision of internal audit opinions regarding internal controls is still in its early times. However, with knowledge and experience, auditors might focus more on the provision of opinions regarding these features of internal control (Rezaee 92). Opinions add value By provision of recommendations and opinions, we find that auditors should be in a position of better assisting in the design together with implementation of their company’s systems of internal control, process of risk management and governance measures. The CAEs can assume the leadership position or role in the education and promotion of their department of internal audit to be proactive in the formulation and expression of the internal audit opinions (Albrecht, et al 125). How internal audit helps with increasing the performance of the company and fraud prevention They are responsible for helping their organizations in the prevention of fraud by evaluating and reviewing the effectiveness and adequacy of the system of their internal control, correspond with the level of a possible exposure within the company. The internal auditors should take the following into consideration when meeting their obligations: Control environment: Examine the control environment’s aspects, carry out practical fraud investigations and audits, report fraud audits results and offer support for efforts of remediation. They might also own the hotline of whistleblower in some cases. Fraud risk examination: Examine fraud risk assessment by the management, especially, their process for the identification, assessment and testing of possible scenarios and schemes of misconduct and fraud, which include those involving contractors, suppliers and even some other parties. Control activities: Examine the operating and design effectiveness of the controls that are fraud related; ensure that audit programs and plans tackle residual risk and include fraud audits; examine the facilities’ design from the perspective of theft or fraud and examine the suggested changes to legislations, or systems and their effect o the controls. Communication and information: Examine the communication and information practices and system’s operating effectiveness, and also offer support to the training initiatives that are fraud related. Monitoring: Examine the monitoring activities as well as the related computer software, support the supervision by the audit committee in matters related to fraud and control; support the fraud indicators development and hire and train workers so that they can have the required investigative experience. Methodology: The study is conducted by the use of interviews whereby the chief development officer of Mawarid Islamic Finance was asked to respond to some questions regarding his organization. The reason why I preferred the method of interview is because it gives a good and clear picture of how exact the situation is. In interviews, it is easy to get information required since there will be use of techniques such as facial expressions to express some feelings and gestures for illustration the exact situation. In addition, it is easy to dig deep into the discussion as the interviewer will tend to obtain some other information that might come up during the discussions and responses by the interviewee that would otherwise not be included in the questionnaire. Nonetheless, everything that has good side must always also have a bad one; that is, one of the biggest undoing of this kind of method is that the interviewee might be afraid to face the interviewer and give him or her the information that he or she requires. Some respondents might just be afraid of giving out the information that they know regarding something due to fear of the authorities or even appearing as betrayers. Questionnaire: Question Answer 1 Do you know anything about internal audit? 2 Does your company have a department of internal audit? 3 Has your company ever experienced cases of fraud or misappropriation of funds? 4 Do you always investigate into the cases of fraud and misappropriation of funds? 5 Is the process of investigation always fruitful? 6 Have you identified the obstacles to the achievement of desired results in the investigations? 7 Does your company always carryout a monthly review or reconciliation of its corporate social responsibilities? 8 Does your company always carryout a monthly review or reconciliation of its payroll reports? 9 Have you thought of a solution to the problem? 10 Is the administration effective in ensuring and improving the efficiency of risk control, management, and processes of governance? 11 Have you realized that it is due to lack of internal audit department that your company is experiencing all these problems? 12 Do you intend to establish the department of internal audit in your organization? Outcomes From the interview, it appeared that the Chief development Officer knows about the department of internal audit but has not established one in the company. Moreover, it appeared that the company has experiences several cases of fraud and misappropriation of funds, whereby investigations have been carried out but with very little success. The company has never identified the reason as to why the investigations have never been successful. Furthermore, the company does not always carry out a monthly review or reconciliation of its corporate social responsibilities, as well as review or reconciliation of its payroll reports. According to the Chief development Officer, the company believes that the best solution would be the establishment of the department of internal audit, of which plans are underway. Results and discussions From the study above, it was found that the chief development officer is fully aware of the department of internal audit as well as its benefits or importance, but has not been keen to establish one. Being a financial institution, meaning that the company deals primarily with matters of finances, it has been experiencing several cases of misappropriation of funds and some other forms of fraud, whereby a lot of money cannot be accounted for. The company’s administration has been trying to investigate the matters of fraud but with very little success. Some of the things activities that the company has been doing in order to make its operations clear and plain include a monthly review or reconciliation of its corporate social responsibilities and payroll reports. However, this has not been possible mainly because the administration is the top organ and can only do its work with the help of various departments in specific areas of the company. The administration has not also been effective in ensuring and improving the efficiency of risk control, management, and processes of governance. The company has however realized that it is due to lack of internal audit department that the company is experiencing all these problems, and is intending to establish one. Conclusion and recommendations From the study above, it is therefore beyond reasonable doubt that lack of the department of internal audit at Mawarid Islamic Finance is the primary problem that has led to increased cases of fraud and misappropriation of funds. As a financial institution, it is very important that the company establishes the department so as to gain trust of the clients, and also not to run into problems of settling debts that are unnecessary. Works cited Albrecht, W. S. and C. O. Albrecht. Fraud Examination and Prevention. South-Western Educational Publishing, 2007. Print. Albrecht, W. S., et al. Forensic Accounting. South-Western Publishing, 2003. Print. Altamuro, J. and A. Beatty. How does internal control regulation affect financial reporting? Journal of Accounting and Economics (February, 2010): 52-74. Ashbaugh-Skaife, H., et al. The discovery and reporting of internal control deficiencies prior to SOX-mandated audits. Journal of Accounting and Economics (September, 2008): 166-192. Barra, R. A. The impact of internal controls and penalties on fraud. Journal of Information Systems (Spring): 2010: 1-21. Bazerman, M. et al. Why good accountants do bad audits. Harvard Business Review (November): 2002: 97-102. Brandon, D. M. External auditor evaluations of outsourced internal auditors. Auditing: A Journal of Practice & Theory 29(2): 2010. 159-173. English, Mike (2010). 2010 Superbrands. Superbrands- Middle East. 45-55. Picket, K.H. Spencer “Audit Planning – A Risk Based Approach”. The Institute of Internal Auditors. Wiley. New Jersey: 2006. 37. Rezaee, Zabihollah. Financial Statement Fraud: Prevention and Detection. New York: Wiley; 2002. Print. Read More