Review of trends in Ethiopia, Morocco, Argentina, Taiwan, Finland, Israel, France, and South Africa
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- THE INTERNATIONAL SCENE
- Government Type: Federal Republic
- Gov. Type: Constitutional Monarchy
- Government Type: Republic
- Practical Application: Moderate
- Taiwan
- Practical Application: High
- Lines of Command: High Practical Application: High
- EFR 2.50 (mostly free) Source of Authority: Moderate
| INTERNAL AUDITING:
AN INTERNATIONAL PERSPECTIVE (Including a review of trends in Ethiopia, Morocco, Argentina, Taiwan, Finland, Israel, France, and South Africa) Elizabeth Folsom March 18, 1999 WHAT IS INTERNAL AUDITING? Internal Auditing is one of the world’s fastest growing but most misunderstood professions. There are many definitions of the profession. For the Institute of Internal Auditors (IIA) "Internal Auditing is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. The objective of Internal Auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, Internal Auditing furnishes them with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed. The audit objective includes promoting effective control at reasonable cost."1 In order to fulfil these obligations, internal auditors review the reliability and integrity of financial and operating information; the systems established to ensure compliance with these policies, plans, procedures, laws and regulations; the means of safeguarding assets; the economy and efficiency with which resources are employed; and ascertain whether results of operations or programs are carried out as planned. Internal Auditing is a rapidly developing function, which is becoming increasingly professionalized in many countries, both in the public and private sectors. Parallel to this development has been the recognition, at various levels of government, of the need to establish this function. In terms of institutionalization, the professional is still young and its rate of development has not been uniform. Internal audit began in the United States in the early 40’s. The initial period was characterized by rapid and multi-faceted growth in both the public and private sectors, accompanied by failures, difficulties, and problems in many areas of management, particularly supervision and control. Today the International Institute of Internal Auditors (IIA) governs the profession and provides a framework, standards, and guidelines for its activities. The IIA has 58,000 members in over 120 countries around the world. The largest representation in the IIA is in the U.S. (29,500), UK (3,700), Canada (2,500), Australia (2,000), and India (1,900).2 PURPOSE OF PAPERIn a general sense, auditing is done for the same reasons in all countries. External audits are done to ascertain the validity and reliability of the financial statements prepared by companies based on specific auditing standards. In the same broad vein, internal audits are done to see whether management’s operating and financial controls are being followed and whether or not they are effective. Yet despite these general similarities, actual auditing practices vary considerably from country to country. In some countries, an audit is seldom performed, or it is performed in a manner that is unacceptable to the auditors of other countries. Such difference in auditing practices pose problems for international investors and creditors, and or course, for multinational firms. This paper will examine some of the major similarities and differences in internal auditing throughout the world, the problems encountered, and some of the steps being taken to mitigate those problems. In addition, we will examine the effectiveness of the internal audit profession in various countries. In order to identify the role and characteristics of internal audit in the management framework and assess its effectiveness, experts have suggested a number of criteria such as: source of authority, degree of independence, line of command, and practical application3. Source of authority refers to the level from which the internal audit mandate arises as well as the level of respect the internal audit function has in the organization. Degree of independence is self-explanatory – to what degree is internal auditing allowed to examine any activity, system, process, or transaction and. Line of command refers to the level in the organization that internal auditing reports to (the higher the better) and the level of authority that internal auditing has in getting recommended changes implemented. Practical application encompasses the relevance and modern tools used by internal auditing. To round out the analysis, details are also given on each countries type of government, population, literacy rate, gross domestic product (GDP), Corruption Perception Index (CPI) by Transparency International4, and Economic Freedom Ranking (EFR) by The Heritage Foundation.5 THE INTERNATIONAL SCENEA recent study on the profession shows some interesting international trends. Conducted by the French Institute of Internal Auditors and Consultants, IFACI (Institute Francais des Auditeirs Consultants Internes), in conjunction with Arthur Andersen, some 600 companies covering all fields, were consulted in ten countries; the United States, United Kingdom, Canada, France, Japan, Germany, Spain, Argentina, Belgium and Morocco. The findings revealed that the internal audit function was performed in 98% of the companies surveyed and the companies surveyed together employed 22,900 auditors.6 The reasons which bring about its creation vary from sector to sector but the strong influence of regulations is a dominant factor. In addition, although areas of focus for internal auditing are still close to the initial objectives, they are tending to expand to include diverse functions and the company’s operational problems. The function is based on established methodology and computer tools, but the profile of internal auditors depends on the company’s recruiting and career development policies. Although well represented by women (26%), the function remains dominated by men. All ages are evenly represented but the average auditor is about 40 years old. Fifty-seven percent (57%) have received a general or accounting university education (74% higher education), while only 8% are self-taught.7 ETHIOPIAGovernment Type: Federal RepublicPopulation: 58,390,351 Literacy: 35.5%GDP: $29B CPI 2.90 (very poor) EFR: 2.90 (mostly free) Scope of Authority: Low Degree of Independence: Low Lines of Command: Low Practical Application: Low BACKGROUNDInternal Auditing's importance in Ethiopia was formally recognized in the early 1930s by the country's first Constitution. This document referred to the proper collection of state revenue and the necessity for procedures to control expenditures. In 1944, another milestone occurred when a proclamation established the Commission for Audit, charged with auditing the Ministry of Finance accounts. The development of state budget practices, an emphasis on fraud deterrence, and growth in trade and industry subsequently added impetus to the growth of the profession. More recently, the "Government Internal Audit Manual," published by the Council of Ministers in 1985, motivated many state authorities to strengthen internal auditing. The Manual suggests that "Although it is the responsibility of the management of each enterprise to set up and run an effective audit department, the situation at present is unsatisfactory and those units that do exist are virtually defunct.” 8 CURRENT PRACTICE The reality is that internal auditing today still focuses on traditional activities, such as financial and compliance auditing. Less attention is given to operational audits or the application of modern techniques like flowcharting, statistical sampling, and computer auditing. They spend most of their time ensuring that accounting records are properly maintained and reliable; that company assets are adequately safeguarded and properly maintained; and that the organization is in compliance with established policies and procedures. The majority of internal audit departments do not have a written audit charter. Therefore, the objectives, authority, scope, and responsibilities of internal auditing are not spelled out in most organizations, and no measures exist to ensure that the internal audit department is recognized as acting with the authority and support of senior management. Internal auditing also is handicapped by a critical shortage of appropriately trained and skilled work force, inadequate organizational status, and a lack of professional independence. The essential qualification is still accountancy-based, which constrains the role and scope of internal auditors. A 1991 study found that approximately 71% of surveyed internal audit staff held diplomas and degrees in accounting; none had the requisite professional qualification in internal auditing9. THE FUTURE If we focus only on the increase in the number of internal audit units and in the number of auditors employed, we can certainly say that internal auditing in Ethiopia has come a long way. However, in terms of skilled and qualified labor; properly delineated authority and responsibilities; and a reporting status that permits the maintenance of integrity, objectivity, and professional independence, internal auditing has far to go. The inadequacies in professional education and the lack of a coordinated comprehensive training program are critical obstacles to strengthening internal auditing in Ethiopia. The government, public enterprises, and private organizations must attend to these areas to realize the full value of effective internal auditing. MOROCCOGov. Type: Constitutional MonarchyPopulation: 29,114,4997 Literacy: 43.7%GDP: $107BCPI 3.70 (poor)EFR 2.95 (mostly free)Scope of Authority: High Degree of Independence: Moderate Lines of Command: Moderate Practical Application: Moderate BACKGROUNDA relatively new profession in Morocco, internal auditing was introduced in the early 1980s by multinational companies. As these organizations began to set up shop in Morocco, they brought with them traditional business practices that included internal auditing. At first, few Moroccan organizations followed suit. Local companies that did employ internal auditors charged them simply with financial and accounting responsibilities. Internal Auditing’s status changed in 1993 when a letter from King Hassan II of Morocco asked that all of Morocco's ministries and public enterprises be audited. The announcement specifically requests external, managerial, and internal audits. According to the letter, internal audits are vital for verifying that the organization's central policies and procedures conform to the applicable laws and politics of the country.10 In 1996 a law was passed that requires all companies classified as "limited" to establish an internal audit department CURRENT PRACTICEToday, Morocco's internal auditing practitioners must be university graduates with four-year degrees in some related field, such as accounting, management, or audit. Internal auditors provide assurance in numerous areas, primarily through operational and data processing audits. Management generally regards internal audit departments with respect and provides them with appropriate support. The internal audit function is often positioned at the highest levels of the organization, which ensures smooth work processes and auditor independence. As a direct result of the King's letter, internal auditing has become mandatory in all government offices. Public sector companies that have dealings with the various governmental ministries must also conduct internal audits. THE FUTUREIn spite of their strong position, Morocco's internal auditors still face three major obstacles: maintaining their independence, competing in the business community, and educating others about internal audit responsibilities. The country' s internal auditors are sometimes perceived as an extension of the external audit organizations rather than as a separate, internal function. Many professionals believe that internal auditors should maintain their independence and distinction from the external auditors, and that the survival of internal auditing in Morocco may be at stake if internal auditors are subsumed by these external auditing organizations.11 Moreover, the increase in competition from European firms is a real concern, Moroccan businesses may be eliminated, and many Moroccan internal auditors may find themselves out of work. Finally, many Moroccan professionals are confused about the duties and differences between the internal audit, total quality, and management control functions. Further efforts to educate the public about internal auditing's distinct qualities are imperative. ARGENTINAGovernment Type: RepublicPopulation: 36,265,463 Literacy: 92.6%GDP: $348 B CPI 3.00 (very poor) EFR 2.50 (mostly free) Scope of Authority: Moderate Degree of Independence: High Lines of Command: Moderate Practical Application: ModerateBACKGROUNDThe concept of internal auditing was first introduced to Argentina in the early 1950s, when multinational companies with internal audit functions established bases in the country. Argentina's first internal auditors generally were employed by these companies, mainly from the U.K. and the U.S. In the early stages, auditors were almost like "policemen" with responsibility for controls over inventories and cash. Later, a second generation of auditors, mostly external auditors who became internal auditors, was primarily involved in the accounting area. CURRENT PRACTICEToday's Argentine auditors, typically university graduates with CPA designations, are much more involved in operational audits and in the overall system of internal control. About 4,300 internal auditors currently practice in Argentina, including 1,000 in the private sector; 1,600 in the public sector; and 1,700 others who perform various control activities.12 Within the private sector, a high percentage of internal auditors are employed in banking, manufacturing, and utilities. Legislation requires internal auditors in the public sector. The national government first established the function of internal audit in Argentina' s public sector in 1993. Consequently, internal audit units for each national government organization and a centralized internal audit unit were created. Law in the banking services sector also requires internal auditing. A new regulation enacted in May 1997 requires each bank to have an Audit Committee with a specific structure, a person responsible for the internal audit function, and an internal auditor in each bank. THE FUTURELooking ahead, the challenges for Argentina's internal auditors revolve around maintaining their position in companies that emphasize meeting competitive challenges over internal controls, helping management understand that internal control is inherent to an organization’s quality, and change their techniques to become more “business oriented” with an increased understanding of how businesses are managed.13 Since the privatization of most state-owned companies and significant external investments in the last five to ten years, internal auditors are faced with following - and sometimes leading - the organization' s change process.
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