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Developing of a Framework to Evaluate the Internal Audit Functions at Municipalities in South Africa

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Developing of a Framework to Evaluate the Internal Audit Functions at Municipalities in South Africa Developing of a framework to evaluate the internal audit functions at municipalities in South Africa LJ MAMAILE orcid.org 0000-0002-8568-0134 Thesis accepted in fulfilment of the requirements for the degree Doctor of Philosophy in Accountancy at the North-West University Promoter: Prof P Lucouw Graduation: October 2018 Student number: 27813339 ABSTRACT This research examines internal audit functions (IAFs) in municipalities in South Africa. Municipalities are established to provide services to the people residing within them, and do so by providing various services such as water and electricity supply, sanitation, roads, etc. It is therefore important for every IAF within municipalities to continuously evaluate their operational plans and best practice business processes to ensure that citizens’ expectations are met. The Auditor-General South Africa (AGSA) continues to express concern about the quality of financial governance in municipalities, as evidenced by the adverse audit opinions issued annually by the auditor-general’s office. This research therefore intends to contribute to the existing body of academic knowledge by pursuing the following objectives: developing a practical framework to effectively add value to municipalities by facilitating their IAFs; identifying the roles and responsibilities of IAFs within municipalities; identifying the challenges that prevent the smooth functioning of IAFs in municipalities; considering and discussing what must be done to ensure that the internal audits are independent; identifying the characteristics of effective IAFs for South African municipalities. To achieve the research objectives, a non-positivist paradigm or constructivist paradigm was applied for objectivity, reliability, and in support of generalisation. The study followed a qualitative and sequential explanatory design to achieve the stated objectives. Data was collected from the auditor-general’s consolidated municipal reports from all existing South African municipalities as at 31 December 2017. It was then condensed to concepts that described the research phenomenon. The research was limited to the use of municipal audit reports for all the municipalities in each of the three types of municipalities, over a period of five years. Using a content analysis approach, 30 auditor-general reports were examined for each of the five years between 2011/2012 – 2015/2016. This produced a set of 150 reports for analysis. Atlas.ti software was used to analyse these reports and the results were translated to develop the framework suggested by this study. Results of the analyses revealed that the IAFs within many South African municipalities do not fulfil their responsibilities, leading to these municipalities obtaining qualified audit opinions, disclaimer opinions, and claims of mismanagement of resources. The lack of progress within the municipalities was often found to be due to inadequate oversight of the IAF, which was not always fully capacitated with skilled, experienced staff trained to perform the necessary oversight. It is apparent that in many municipalities, IAFs do not contribute positively to the audit outcomes, and that senior management fails to take these functions seriously, resulting ii in the same audit opinions and findings by the Auditor-General South Africa (AGSA) year after year. Findings from the analysis corroborated those found in the literature, thus confirming the four stated research objectives. From this analysis, the researcher developed a framework for an effective IAF for municipalities in South Africa. The framework was developed based on the literature gathered, the key findings obtained from the audit reports and the recommendations made by AGSA. This framework contributes to the current body of knowledge on the topic, and constitutes the achievement of the primary objective of the research. Keywords: District municipalities, effectiveness, independence, internal audit functions, internal audit unit, metropolitan municipalities, municipalities, local municipalities, roles and responsibilities, stakeholders, value adding. iii DEDICATION I dedicate this thesis to my late mother Mahlabirwa Magriet Mankge-Mamaile for her inspiration and support since my early age until I obtained my degree. Rest in peace my mom; you will remain special to me and my future generations. iv ACKNOWLEDGEMENTS Firstly, I would like to convey my sincere gratitude and appreciation to Prof. Pierre Lucouw, my promoter, for his supervision, patience and leadership during the conduct of this study, I say to you thank you very much it would not have been possible for me to achieve this without your guidance. It has been a very difficult journey, but you made it easier and manageable. Thank you for your guidance, time and patience. Secondly, I would like to express my humble appreciation to Dr Christo Ackermann for his support during this study, particularly the methodology and constructive inputs that assisted me in making this study a success. I would also like to convey my special thanks to my wife Irene, my sons Thabang and Lancelot, daughters Precious and Mildred, and my family for their support and understanding during this study. I would like to convey my thanks to my friends Mr Kgetjepe Richard Phala and Mr Matolo Kaizer Maabane for their support during this journey. I would further like to thank my language editor Claudia Boffard for her advice and assistance in editing and correcting language mistakes on this thesis. Lastly, I would like to thank almighty God for giving me courage and perseverance during this study and the strength in undertaking this research journey till the end. v LIST OF ACRONYMS AAT (SA) Accounting Technicians South Africa AC Audit Committee AGSA Auditor-General South Africa AICPA American Institute of Certified Public Accountants AO Accounting Officer BSC Balanced Scorecard CAC Chairpersons of Audit Committees CAE Chief Audit Executive CBOK Common Body of Knowledge CPD Continuous Professional Development CFO Chief Financial Officer CIA Certified Internal Auditor CEO Chief Executive Officer COGTA Department of Cooperative Governance and Traditional Affairs COSO The Committee of Sponsoring Organisations of the Treadway Commission DMA District Management Areas ERM ERM - Enterprise Risk Management GAO General Accounting Office GIA General Internal Auditor GRAP Generally Recognised Accounting Practice HOD Head of Department IA Internal auditor IAF IAF IFAC International Federation of Accountants vi IIA Institute of Internal Auditors IIASA Institute of Internal Auditors South Africa IIASPPI Institute of Internal Auditors’ Standards for the Professional Practice INTOSA International Standards of Supreme Audit Institutions IPPF International Professional Practices Framework ISPPIA International Standards for the Professional Practice of Internal Auditing ISSAI International Standards of Supreme Audit Institutions KPI Key Performance Indicators MEC Member of Executive Council MFMA Municipal Finance Management Act MPAC Municipal Public Accounts Committee MSA Municipal Structures Act OCA Operation Clean Audit PAA Public Audit Act PCC President’s Coordinating Council PFMA Public Finance Management Act ROI Return on Investment SALGA South African Local Government Association SOX Sarbanes-Oxley Act VFM Value-for money vii TABLE OF CONTENTS ABSTRACT ….……………………………………………………………………………….…….ii DEDICATION ……………………………………………………………….……………….…….iv ACKNOWLEDGEMENTS ………………………………………………………………….……..v LIST OF ACROMYNS ………………………………………………………………………….…vi INDEX ………………………………………………………………………………………...…..viii LIST OF FIGURES ………………………………………………………………………….….xviii LIST OF TABLES ………………………………………………………………….….………....xix ANNEXURES ………………………………………………………………………….…….……xx INDEX CHAPTER 1 ………………………………………………………………………………………..1 INTRODUCTION AND STUDY BACKROUND …………………………………………….…..1 1.1 INTRODUCTION ……………………………………………………………………………...1 1.2 PROBLEM STATEMENT …………………………………………………………………….2 1.3 OBECTIVES OF THE STUDY ……………………………………………………………….3 1.3.1 Primary objectives ………………………………………………………………………....3 1.3.2 Theoretical objectives ……………………………………………………………………..3 1.3.3 Empirical objectives ……………………………………………….…………………...….4 1.4 RESEARCH DESIGN AND METHODOLOGY ……………………………………………4 1.5 EMPIRICAL STUDY……………………………………………………….…………………..5 1.5.1 Target population ……………………………………………………………….………....5 1.5.2 Sample size …………………………………………………………………………..….…5 1.5.3 Sampling method ………………………………………………………………………….6 1.6 STUDY APPROACH AND DATA COLLECTION METHOD……………….………….….6 viii 1.6.1 Data collection method ………………………………………………………………...….6 1.6.2 Approach followed….. ………………………………………………………………….....7 1.6.3 Statistical analysis …………………………………………………………………..…..…7 1.6.3.1 Trustworthiness and credibility …………………………………………………....…7 1.6.3.2 Descriptive analysis ………………………………………………………………...…7 1.6.3.3 Significance tests ……………………………………………………………….……..7 1.7 LITERATURE REVIEW ………………………………………………………………………8 1.8 ETHICAL CONSIDERATIONS ………………………………………………………………8 1.9 CHAPTER CLASSIFICATION ………………………………………………………….……8 CHAPTER 2 …………………………………………………………………………………...….10 THE ORIGIN OF INTERNAL AUDIT AND ITS VALUE-ADDING ROLE………………..….10 2.1 INTRODUCTION ………………………………………………………………………….....10 2.2 THE ORIGIN AND HISTORY OF INTERNAL AUDITING ………………...………...….11 2.3 THE DEVELOPMENT OF THE INTERNAL AUDIT PROFESSION ………………………….…17 2.4 THE NATURE OF INTERNAL AUDITING ……………………………………………………….…18 2.5 DEVELOPMENT OF INTERNAL AUDITING FUNCTION IN THE PUBLIC SECTOR IN SOUTH AFRICA …………………………………………………………………………….………………..….…..19 2.6 THE ADDING
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