THE SOUTHERN AFRICAN JOURNAL OF ACCOUNTABILITY AND AUDITING RESEARCH

 

Volume 17, Issue 2, January 2015

FEATURED ARTICLES

 

Practices of internal auditing in South Africa : editorial

Author: Herman De Jager

Affiliations: 1 North West University

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 1 – 4

Keyword(s): Audit education, Audit simulation, Audit student and Broad competence

Accreditation: Department of Higher Education and Training (DHET)

Abstract: Lenz and Hahn (2015:6) argue that in today’s complex business environment the internal auditing profession can “become either marginalised between a variety of other assurance, compliance and risk management functions or [it can] emerge as a recognised and stronger profession”, while the Institute of Internal Auditors (IIA) regards the internal auditing profession as being at a crossroads (IIA 2009). In response to these challenging statements, the editorial board of The Southern African Journal of Accountability and Auditing Research have published this special edition containing reflections on current internal auditing practices in a developing country, specifically South Africa.

 

Managing risk : what should internal audit do?

Author: P.C. Viljoen and K. Barac

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 5 – 17

Keyword(s): Enterprise risk management, Internal audit function, Internal audit profession, Internal audit roles, Managing risk, Risk assurance, Risk consulting, Risk evaluation and Risk identification

Accreditation: Department of Higher Education and Training (DHET)

Abstract: Internal auditors, having the required knowledge of risk management, organisational processes and internal controls systems, could perform a number of activities for the organisation in order to assist in managing risks. The Institute of Internal Auditors provides guidance to internal auditors indicating their related roles. Previous studies (which do not include a South African perspective) suggest that internal auditors’ involvement in these roles tend to differ between countries and could change over time. Additionally, while a key role for internal auditors is to identify and evaluate risks within an organisation, little guidance is provided as to how internal auditors should achieve this. This article explores internal auditors’ involvement in consulting and assurance activities within South African private sector organisations, and secondly, how internal auditors identify and evaluate risks within organisations. Data was collected by means of an online survey instrument, directed at chief audit executives. Survey results indicated that internal auditors have a large degree of involvement in providing assurance on risk functions, a moderate degree of involvement in providing consulting activities and a limited degree of involvement in risk management roles. Internal auditors utilise previous experience and various external sources of information, when identifying risks, and consider risk impact in both a qualitative and quantitative manner. Statistical analysis reveals that the internal auditors’ degree of involvement in the various roles differs in the manufacturing and financial services sectors.

 

Internal auditing of model risk within banking institutions

Author: R. Lingenfelder

 Affiliations: 1 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 19 – 31

Keyword(s): Banking institutions, Internal audit, Model lifecycle, Model risk, Models and Risk management

Accreditation: Department of Higher Education and Training (DHET)

Abstract:

Faulty or improper usage of models has contributed significantly to financial and banking institutions’ experience of damage to their reputations and profitability. Since the global financial crisis of 2008, regulators have become increasingly concerned about the soundness of decision-making processes underpinned by, and capital requirements derived from models. Additionally, banking institutions have now recognised that flawed models are a source of significant operational risk and reliance on them can have negative consequences. Based on the importance of and increased use of models, internal audit functions should be equipped to provide assurance and auditing services to such areas within financial institutions.

This research study investigates the broadening of the internal audit function’s ambit to include robust coverage of model risk within banking institutions. A brief literature review on model risk within banking institutions is followed by an investigation into internal auditing expectations and requirements regarding the coverage of model risk. The quantitative research which was performed is described, and conclusions drawn as to the state of risk management, internal audit’s coverage and the skills needed to effectively assess model risk. In addition, the degree to which these have become embedded in these organisations is assessed. 

 

Structuring internal audit functions in multinational

Author: E. Shishkina and K. Barac

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 33 – 45

Keyword(s): Auditing, Geocentric model, Globalization, Internal auditing, Local contexts and Multinational companies

Accreditation: Department of Higher Education and Training (DHET)

Abstract: During the last five decades, the world has witnessed a dramatic proliferation of multinational companies (MNCs) that has evoked strong interest amongst academic researchers. Despite the acknowledged need to expand internal auditing activities to cover MNCs’ diversified operations in multiple countries, only limited research has been performed from an internal auditing perspective. Drawing on institutional theory, this paper aims to add to the existing internal auditing literature by reviewing various international business management frameworks, in order to suggest an appropriate approach for the establishment and management of the internal auditing functions of MNCs. The study looks at the evolution of internal auditing functions in MNCs, examines organizational models described in international business management literature, and concludes that a geocentric approach is appropriate when structuring the internal audit function in a MNC. The argument is presented that geocentricity (which implies careful customization to address local context, while operating within established uniform standards) seems to be an appropriate approach for the organization of the internal auditing function of a MNC.

 

Integrated auditing - an internal audit perspective

Author: L.G. Padayachee and H. De Jager

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 47 – 56

Keyword(s): Application controls, Business auditor, CIA certification, General controls, Integrated auditing and IT audit

Accreditation: Department of Higher Education and Training (DHET)

Abstract: An integrated audit approach entails an intentional audit design process that cohesively combines business process auditing and information technology (IT) auditing into a single, co-ordinated effort. However, due to the continuing influence of longstanding methods of performing audits, the internal auditing fraternity has been slow to evolve, neglecting to train internal auditors who are confidently able to perform audits that combine both the business process audits and IT audits into one seamless audit. This study found that although holders of the Certified Internal Auditor qualification, and other members of the IIA are perceived to have mastered the theoretical knowledge provided by the CIA certification programme and other training courses, the manner in which they perform audits does not demonstrate the practical application of this knowledge.

 

A framework for internal auditors to assess ethics in a national public sector department

Author: J.J. Appel and K. Plant

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 57 – 69

Keyword(s): Ethical culture, Ethics framework, Internal audit function and Public sector

Accreditation: Department of Higher Education and Training (DHET)

Abstract: This study proposes a framework that can be used by the internal audit function to assess the culture of ethical behaviour of South African national government departments. The limited number of published articles on the use of ethics frameworks in government, especially in the South African context, indicated a need for such a framework. A review of the literature on the culture of ethical behaviour, related governance frameworks, and the role of the internal audit function was conducted. Based on the literature, attributes for an ethics framework were identified and tested with three interviewees from one national department. The results of the study indicated that an ethics framework could assist the internal audit function in assessing an organisation’s ethical culture and help management to enhance the organisation’s ethical health.

 

Combined assurance : a systematic process

Author: J. Forte1 and K. Barac

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 71 – 83

Keyword(s): Combined assurance, Combined assurance benefits, Combined assurance features, Combined assurance role players, Corporate governance, Enterprise risk

Accreditation: Department of Higher Education and Training (DHET)

Abstract: There is a clear shift in corporate governance towards understanding and managing the risks that could prevent an organisation from achieving its objectives. This has resulted in enterprise risk management and combined assurance becoming fundamental and integral components of corporate governance. Although enterprise risk management is a well-researched field, limited research is available on the introduction and/or maintenance of combined assurance processes, and how these relate to enterprise risk management. The objectives of the study reported on in this article are twofold. Firstly, it presents the interrelationships between the features of enterprise risk management and the combined assurance processes. Secondly, by conducting a survey of the views of chief audit executives within the private sector it determines how these features were considered and addressed by organisations during the introduction and subsequent maintenance of their organisations’ combined assurance processes. The most significant finding is that there appears to be a dependency on the enterprise risk management process as a prerequisite for the implementation of a combined assurance process. Furthermore, significant differences were found to exist between perceptions from respondents from companies that had already implemented combined assurance / enterprise risk management and those respondents from companies that are currently in the process of implementing combined assurance / enterprise risk management.

 

Dimensions for the assessment of ethical leadership : an internal audit perspective

Author: B. Kgomo and K. Plant

 Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 85 – 94

Keyword(s): Control environment, Corporate governance, Dimensions, Ethical leadership, Internal audit and Internal control

Accreditation: Department of Higher Education and Training (DHET)

Abstract: Ethical leadership is regarded as the key to building trust and sustaining organisations. However, monitoring the effectiveness of organisations in promoting ethical leadership poses a challenge to assurance providers, in particular internal auditors. Although attempts have been made to provide internal auditors with guidelines on how to assess the tone-at-the-top, these efforts are still based on the traditional compliance approach that in the past has fallen short of expectations when applied to questions of ethics. This paper proposes additional dimensions, to be included in a value-based approach to the assessment of ethical leadership. The foundation on which these dimensions are assessed is the Integrated Control Framework prepared by The Committee of Sponsoring Organisations of the Treadway Commission (COSO).

 

Internal audit in state-owned enterprises : perceptions, expectations and challenges

Author: P. Radasi and K. Barac

Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 95 – 106

Keyword(s): Chair of audit committees, Chief audit executive, Emerging risks, Internal audit function, Internal audit skills, Risk management and State-owned enterprises

Accreditation: Department of Higher Education and Training (DHET)

Abstract: State-owned enterprises are critical vehicles for the delivery of goods and services, and can contribute to the sustainable economic growth of developing countries. The business environments in which these state-owned enterprises operate pose risks to the enterprises, which then rely on internal audit, amongst other options, to managing these risks. The objective of this study was to determine the perceptions of, expectations for and challenges experienced by internal audit functions in today’s state-owned enterprises. A qualitative research approach was selected, utilising a case study method, and data was collected through interviews with important role players associated with the internal audit function of three South African state owned enterprises.

The findings of the study revealed that internal audit functions are perceived in a positive light and that participants do place reliance on internal audit. The internal audit functions act as business partners to management, and expect support from the audit committees and management in terms of ensuring the internal audit functions’ independence, and the provision of required resources and skills. The internal audit functions face diverse challenges. These relate to the relative novelty of performance auditing and combined assurance in state-owned enterprises, the differences in methodologies and auditing systems used by outsourced functions, repeat (negative) audit findings, a lack of business knowledge and insight on the part of the entity, and non-compliance with quality assurance and improvement Standards. 

 

The root causes for local government's failure to achieve objectives

Author: M.P. Ramutsheli and J.O. Janse van Rensburg

Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 107 – 118

Keyword(s): Achievement of objectives, Local government organisations and Root causes for non-achievement

Accreditation: Department of Higher Education and Training (DHET)

Abstract: The achievement of public sector service delivery objectives is crucial to citizens, both individually and collectively. While the public depends on local government organisations to deliver mostly essential services (the key services being water, electricity, sewerage, and roads), public sector audit reports, as well numerous and frequently recurring service delivery protests, suggest that local government is failing to achieve its objectives. This study aims to identify the root causes of municipalities’ failure to efficiently and effectively deliver the services they are mandated to deliver. A literature study (academic overview) and a review of key documents (specific reports on local government performance) were conducted to achieve this research objective. The study identified four main themes (root causes) that underlie municipalities’ failure to achieve objectives. These root causes are: inadequate human resources capacity; shortage of skills; unethical organisational culture, and ineffective (or non-existent) performance management systems. Specific root causes and the underlying causative factors linked to these four main themes were also identified. Two all-embracing root causes appear to be connected with most of the identified specific root causes and their underlying factors. These are a lack (or total absence) of leadership commitment, and a management system that is almost completely devoid of consequences for poor performance and wrong-doing. These two all-embracing root causes were identified as fundamental to the majority of the identified failures.  

 

Perceptions on the objectivity of local government internal

Author: M. Marais

Affiliations: 1 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 119 – 130

Keyword(s): Code of Ethics, Institute of Internal Auditors, Internal audit unit, Internal auditor, International Standards for the Professional Practice of Internal Auditing, IPPF, Local government and Objectivity

Accreditation: Department of Higher Education and Training (DHET)

Abstract: Internal auditors in the local government sector in South Africa must adhere to the Institute of Internal Auditors’ Standards and Ethical Code, both of which regard objectivity to be one of the core principles of internal audit behaviour. This article reports on a study that intended to establish whether or not internal auditors employed in local government understand the IIA’s requirements regarding objectivity, and how they perceive and manage their own objectivity. The results show that the majority of internal auditors surveyed do understand the concept, and do realise its importance. Furthermore, perceiving that compromising their objectivity can impact their own effectiveness and that of their internal audit units, they take steps to manage and protect it.  

 

Share incentive schemes for Chief Audit Executives

Author: M. Peter and B. Steyn

Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 131 – 144

Keyword(s): Chief Audit Executive, Incentives, Internal auditors, Objectivity and independence and Share incentive schemes

Accreditation: Department of Higher Education and Training (DHET)

Abstract: The use of share incentive schemes as part of the remuneration structure for the head of internal audit or the Chief Audit Executive (CAE) is one mechanism available to a company to incentivise its senior executives and to ensure they add value to the company they manage. This can however lead to challenges as internal auditors have always had to fulfil two contradictory roles: being an employee in a company and being an objective person involved in rendering independent assurance services for the same company. It is, therefore, important for internal auditors to strike the correct balance that ensures they are perceived as sufficiently independent to achieve their objectives in terms of the annual internal audit plan. Care must also be taken to ensure that the share incentives do not have a negative influence on the level (or perceived level) of independence and objectivity the CAE demonstrates.

This is the first South African study to investigate the use of share incentive schemes for CAEs. This study used structured interviews in a multiple case study approach to identify the views of the chairpersons of audit committees (CACs) on the use of share incentive schemes for their CAEs. The study found that share incentive schemes were used to incentivise CAEs mostly over the medium term. The study also found that although the CACs had little oversight over the remuneration of the CAEs, they nevertheless did consider the use of share incentive schemes to be an acceptable remuneration mechanism.  

 

Stakeholder perceptions on the role of internal audit in risk management : a mining industry perspective

Author: E. Whitehorn and K. Barac

Affiliations: 1 University of Pretoria and 2 University of Pretoria

Source: Southern African Journal of Accountability and Auditing Research, Volume 17, Issue 2, Jan 2015, p. 145 – 158

Keyword(s): ‘Black Swan’, Internal audit, Mining sector, Risk management assurance, Risk-based audit plan and Risk-based auditing

Accreditation: Department of Higher Education and Training (DHET)

Abstract: Organisations are faced with risks that can hinder them from meeting their objectives: these risks are both expected and unexpected and could include ‘black swans’. The internal audit function assists management by providing assurance regarding the effectiveness of its risk management processes. By applying a risk-based audit approach internal auditors could enhance the risk management process. However, the literature indicates that the internal audit function may not be playing the role in risk management that its stakeholders require. Interviews were conducted with four groups of stakeholders in the risk management process in the mining industry to identify the expected role of internal audit. The research found that internal audit was performing in line with expectations, but must in future play a bigger role in determining the organisation’s strategic direction by challenging risk identification and assumptions, thereby promoting sustainability. This requires enhancing their technical skills in understanding operational risks specific to mining.


 

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