ABSTRACT

Performance requires appropriate internal audit practices to enhance efficiency. For the purpose of this study the researcher sought to determine the effect of internal audit on the performance of commercial banks in Bamenda. Internal audit was looked at from the perspective of professional competency, independence of internal audit and integrity. The researcher administered a survey questionnaire to each member of the target sample, namely staff involved in internal control and audits in Commercial banks in Bamenda, since it was the most appropriate tool to gather primary data. The final sample comprised of … commercial banks. Descriptive statistics such as mean, standard deviation and frequency distribution were used in the analysis of data. Data presentation was done by use of tables for ease of understanding and interpretation. Regression analysis using OLS was used as the data analysis technique. From the findings, independence of internal audit, professional competency and integrity had a positive relationship with performance of commercial banks. The study recommends that management in commercial banks in Bamenda should adopt effective internal audit practices such as independence of internal audit, professional competency and integrity to enhance performance of the banks.

Key Words: Internal Audit, Performance, Commercial Banks

CHAPTER ONE

INTRODUCTION

1.1 Background of study

Auditing occupies a pivotal position in every commercial entity. This is particularly true in the banking industry, whose operations are based mostly on trust. Empirical evidence highlights the essential role auditing plays in organizational performance. By improving the objectives and communication across and among organizational departments, internal audits have been shown to have an impact on a company’s value (Raja, 2002). 

In empirical research, the dichotomy has often been made between internal and external auditing. Internal auditing is an objective and independent appraisal service within an organization on risk management, control and governance by measuring and evaluating their effectiveness in achieving the organization‘s agreed objectives. Pickett (1976) defines internal auditing as “an independent, objective assurance and consulting activity designed to add value and improve an organization‘s operations. Such audits, the author argues, help an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. This definition actually seeks to demonstrate the depth and breadth of the internal audit activity within an institution.

This view sharply contrasts with a previous depiction of internal auditing, as essentially being a process of reviewing payment transactions (Robertson, 1976). The service applies the professional skills of internal audit through systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organization‘s objectives, and through recommendations for improvement (Dumitrescu, 2004). External auditing on the other hand relates to a financial review that is conducted by a party not associated with the company or department that is voluntarily under audit.

Internal audit findings are beneficial to the board of directors and line management in the audited areas. Internal audit is a part of the repetitive monitoring of the internal control systems of the bank and its procedures for evaluating internal capital. As such, it assists management and the board of directors in the effective performance of their responsibility (Gramling, 1997). For most of its history, internal audit has served as a simple administrative procedure comprised mainly of checking documents, counting assets and reporting to Board of Directors, management, or external auditors. In recent times, however, a combination of different forces has led to a quiet revolution of the profession. Organizations have to demonstrate accountability in the use of shareholders money and efficiency in the delivery of services. Organizations now demand great competency and professionalism from internal audit and scarce resources must be deployed more efficiently to minimize and manage risk. Technological advancement makes it possible to track and analyze data with continually increasing speed thus making it essential for organization to be well advised by the internal audit department. Internal audit varies from one organization to the other, and making change to modern internal audit can be a substantial undertaking. As Ramamoorti (2003) posits, the transition from merely ensuring compliance with rules and regulations to truly delivering added value requires more than just organizational changes.

Internal audit has several aims and principles which it must adhere to. It is the  board of directors of every organization, however, which bears final responsibility that the organization’s management applies an appropriate and effective system of internal audit, a system of evaluating operating activity and risks concerning capital, appropriate methods of monitoring compliance with laws, measures and internal procedures. Likewise, the organization’s management is responsible for drawing up procedures which identify measure, monitor and control the risks that the organization faces.

As earlier indicated, internal auditing is of prime importance in the banking industry due to the industry’s dependence on trust, and economic role of intermediation, the banking industry in Cameroon is governed by the companies act, the banking act, and the various prudential guidelines issued by the Central Bank. Commercial banks, as defined by Cameroon law are institutions which accept deposits, make business loans and offers related services. They also allow for a variety of deposits accounts, such as checking, savings and time deposit. These institutions are run to make profits. Commercial banks are licensed and regulated by the central banks of their jurisdiction (countries) in which they operate within the CEMAC zone. In Cameroon, the central bank supervises and regulates commercial banks as mandated under the banking act. Over the last few years, the banking sector in Cameroon has continued to growth in assets, deposits, profitability and products offering. The growth has been mainly underpinned by, an industry-wide branch network expansion strategy both in Cameroon and in the East African community region and automation of a large number of services and a move towards emphasis on the complex customer needs rather than traditional off-the-shelf‘ banking products. This has led to an increased need for internal audit in banks to enhance asset management, control of risks and management controls. Players in this sector have experienced increased competition over the last few years resulting from increased innovations among the players and new entrants into the market. Currently there are 15 licensed commercial banks in Cameroon.

Although the need for objectivity and impartiality is of particular importance for the internal audit department in a banking institution, this does not exclude the possibility that this department, too, may contribute to advisory and consultancy activity, if the independence of analyses and evaluations is ensured. Some banks have also introduced a system of evaluating their activities, which does not replace, but supplements the function of the bank‘s internal audit. This is a formal and documented process whereby management and employees analyze their activities and evaluate the effectiveness of the related internal control procedures (Hawkes, 1994).

1.2 Problem statement

Latest corporate accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to two disparate yet logical outcomes. First, internal auditing skills have become crucial in untangling the complicated accounting maneuvers that have discredited financial statements. Second, public demand for change and subsequent regulatory action has transformed corporate governance. Increasingly, company officers and directors are under ethical and legal examination. Both trends have the common goal of responsibly addressing investors ‘concerns about the financial reporting system. However there has been laxity in implementation of internal audit findings and recommendations.

Internal audit professionals argue that an effective internal audit function correlates with improved financial performance. According to Beyanga (2011), an effective internal audit service can, in particular, help reduce overhead, identify ways to improve efficiency and maximize exposure to possible losses from inadequately safeguarded company assets all of which can have a significant effect on the financial performance of an organization.  He also stated that internal audit is an invaluable tool of management for improving performance. Fadzil et al (2005) also noted that internal auditors help run a company more efficiently and effectively to increase shareholders value. Finally Hermanson and Rittenberg (2005) argued that the existence of an effective internal audit function is associated with superior organizational performance.

At the empirical level, a survey conducted by KPMG (1999) found that the internal audit function in organizations where it exists, contributes substantially to performance improvement and assist in identifying profit evidence in corporate disasters, particularly financial fraud consistently documents an association between weak governance. Thus internal audit by acting as a watchdog could save the organization from malpractices and irregularities thus enabling the organization to achieve its objectives of ensuring high level of productivity and profit.

Cameroon’s banking system has not been without crises. The shortcomings of the country’s banking sector prior to the banking crisis of the late 1980s, and then the effect of the measures subsequently introduced by banks give an indication of just how fragile the industry has been. Prior to government-instituted reforms, banks could be established by any investor almost at will; shareholders and directors escaped any vetting procedure; the roles of external auditors were poorly defined; and due diligence and banking supervision were inadequate. These shortcomings led to what Karugor Gatamah of the Centre for Corporate Governance, based in Nairobi describes as “imprudent lending practices, excessive investment in fixed assets and inadequate systems to measure, identify and control risk”.   This research will be different from all the above mentioned as it will specifically look at internal audit as a factor affecting performance of commercial banks. The above researchers concentrated on management of risks and corporate governance. This study will have a look at the internal audit function in banks, the role they play in the organization, internal audit and asset management and how they affect financial performance

1.3 Research questions

1.3.1 Main Question

The main research question to be answered in this study is:

What is the effect of internal audit on the performance of commercial banks?

1.3.2     Specific Questions

The following specific research questions will equally be answered in this study:

• What is the effect of professional competence of the internal auditor on the performance of commercial banks?
• What is the effect of independence of the internal auditor on the performance of commercial banks?
• What is the effect of integrity of the internal auditor on the performance of commercial banks?

1.4 Research Objective

1.4.1 Main research objective

The main objective of this study is to examine the effect of internal audit on the performance of commercial banks.

1.4.2 Specific research objectives

To meet the main objective above, the following specific objectives will be pursued, namely:

• To assess the effect of professional competence of the internal auditor on the performance of commercial banks
• To assess the effect of independence of the internal auditor on the performance of commercial banks
• To assess the effect of integrity of the internal auditor on the performance of commercial banks.