The main functions of internal audit have quickly and successively evolved and this evolution is linked to the occurrence of financial crises and cases of obstruction and collapses of several companies in the various countries of the world. This lead to the necessity of the activation of control in the companies managements by the implementation of the corporate governance concept therein. Consequently, the function of internal audit entered into new phases of development in order to contribute in preventing the financial violations and transgressions until the occurrence of any future crises or collapses is avoided. Today, internal audit evolved into being considered as one of the most significant parties participating in the companies governance.
This thesis is aimed at shedding light upon the role that may be played by internal audit in the Libyan industrial companies enlisted in the Libyan stock market in order to propose the implementation of corporate governance as a key to their future development. With the intention of realizing the objective of the study, the main following hypothesis has been formulated:
The function of internal auditing in the Libyan industrial companies may contribute in activating the implementation of companies governance.
Based on the defined hypothesis, this thesis has been divided into three main chapters, where the first chapter considers the general framework of the study and second chapter treats the theoretical framework of the study, involving two parts; the first part is the framework of the notions of companies governance and the second part is the analysis of internal audit from the aspect of corporate governance. But third chapter has treated the research study involving the general framework of the methodology followed therein by analyzing the data obtained through the questionnaire forms distributed to the respondents. They included managers of the financial administrations, heads of financial departments, directors of the offices of internal auditing and internal auditors of the Libyan industrial companies enlisted in the stock markets. The statistical tests have been made for the study hypotheses in order to gather study results. Based on the results, we have presented the main conclusions and proposed recommendations in this concern.
The following are among the most significant results attained by the author of the thesis:
1. The function of internal auditing in the Libyan industrial companies may undertake the activities related to the evaluation of the system of internal control in such a way to realize governance in such companies.
2. The function of internal auditing in the Libyan industrial companies may undertake the activities that contribute in evaluating the process of risks management in such a way to realize governance in such companies.
3. The function of internal auditing in the Libyan industrial companies may undertake the activities that lead to the formation of good relationships with the remaining parties of governance with the presence of shortages in the following aspects:
A. Presentation of the sufficient and appropriate information to the auditing committee which helps it to accomplish its supervision tasks.
B. Assumption by the internal auditing of the responsibility of activating and following up the process of coordination between the remaining parties of governance.
4. The function of internal auditing in the Libyan industrial companies contributes in activating the implementation of governance.
On the basis of the previous results, researcher proposes some recommendations, the most significant are:
1. Setting up audit committees in all the Libyan industrial companies for their significant role in governance, organization and protection of internal audit and backing independency thereof, as well as the objectivity of its work. In this concern, it is proposed to promote the role of the control committees present in the Libyan industrial companies in order to accomplish the functions of the internal auditing.
2. Give an opportunity to the internal auditing to assume the responsibility of activating and following up the process of coordination between the parties of governance and this shall be in the light of presence of auditing committees or control committees in the Libyan industrial companies to supervise the internal auditing and follow it up.
3. Develop the skills and abilities of internal auditors to face expansion within the scope of their job.
GENERAL LAYOUT OF THE STUDY
In the last ten years, the collapse of several big companies of good reputation in their field of activity, whose reports were audited by the largest auditing firms that issued reports which confirmed that statements showed financial situation and profitability without any reservations; lead to higher focus of all related parties on the reasons of their collapse. The most important tools of control are the functions of internal auditing defined by the Institute of Internal Auditors (IIA) in 1999 as: “Independent confirmation and designed consulting activity to add value and to improve company operations which help the company in achieving its goals by introducing a well-organized systematic method to evaluate and improve the effectiveness of the operations of managing risks, observation and governing of the entity”.
The most important reasons of modern developments in internal auditing can be summarized as follows:
1. Continuous attempts to overcome aspects of deficiency of internal auditor independence as being an employee in the company.
2. The increased need for self-evaluation of internal auditing with the participation of all company workers.
3. The emergence of the concept of company risk management and the need of dealing with these activities.
4. The emergence of the concept of corporate governance and the need of monitoring the company’s internal performance to tighten control inside the company to preserve stability and consistency.
5. The increase of international operations range, tied to sophisticated information technology and to the increase of E- commerce amount.
As a result, the internal auditing adopted new function which is risks evaluation, governing and assuring control systems to assist the company in enhancing its operations and consulting activities through taking a leading role in company governing process and in the field of risk management and observation.
Most professional reports issued by professional organizations in the field accounting and auditing, performed the studies focused on weakened health of companies in many countries. They also studied cheating and manipulating cases in financial reports and observed corporate governance of sampled entities. Those reports have confirmed the following:
A. The need of having internal auditing function in all companies.
B. The internal auditing management has to perform an effective role in governing and evaluating control systems and managing risks.
This role of modern auditing is vague and does not define the functions and responsibilities of the internal auditor clearly towards risk management, observation and governing; so it motivates the researcher to study and reveal the role of internal auditing in Libyan industrial companies.
1.2. Issue of study:
In the last few years, the increase of bankruptcy, insolvency cases and failure in many companies lead to more interest in internal auditing systems and to the urgent need to activate what is known as company governance. Concerns regarding the necessity of improving the role of internal auditor and adding new functions to the auditor to help in avoiding bankruptcy, insolvency and financial trespasses, particularly after the failure of external auditor in early detection of business risks and in issuing unmodified reports. Being all the time inside the company enables the internal auditor to become more aware of the nature of operations and the level of performance, and also to follow all the actions and all aspects of related activities. The internal auditor also performs a regular test around the year in order to include all types of company operations.
So the functions performed by the internal audit of the company have developed. Namely, internal audit become that kind of function which is no longer limited to just testing financial and accounting operations, or even all company operations, it has got the role of testing and evaluating observation systems, and finding and evaluating risks surrounding the activities of the company which reduces related risks in accomplishing the targets of the company. The internal auditing has become a major component of any governing process in the company; it is the function that connects all governing components in the company (management board, auditing committee, external auditor), these various functions have made the internal auditing an activity that adds value.
Most professional reports dealing with these developments have confirmed the role of internal auditing in testing and in evaluating observation systems, and in finding out and evaluating treating these risks and governing them. However, the internal audit function in Libya is still concentrating on exercising its traditional role and carrying out the observational function.
Therefore, the importance of this role is significant and it should be revealed to industrial companies in Libya in order to illustrate how internal auditing can contribute in supporting the management of the entity. The issue can be framed in the following main question: What role can internal auditing have in Libyan industrial companies to activate corporate governance system? To answer this main question, the following sub questions are formulated:
1. To what extent can internal auditing in Libyan industrial companies do the jobs related to evaluation of internal observation system?
2. To what extent can internal auditing in Libyan industrial companies do the jobs which contribute in evaluating the process of risk management?
3. To what extent can internal auditing in Libyan industrial companies do the activities which lead to forming good relations with the other governing parties?
1.3. The Importance of the Study
It includes scientific importance and practical importance as follows:
1.3.1. Scientific Importance
The scientific importance of the research appears in contributing to the research from this field in Libya, which is rare. Also, the contribution lies in clarifying the vital and important role of internal auditors in activating corporate governance in Libyan companies to make it successful and add value to it.
1.3.2. Practical Importance
Through studying the modern role of internal auditing in Libyan industrial companies, the researcher draws the attention of management of these companies regarding the extent of the benefits of internal audit. Namely, this function has an important role in confronting difficulties and crises, and in reducing risks that the company face. Also, the study contributes in promoting the internal audit to a higher strategic level as well as increasing the effectiveness of its activities. The researcher also draws the attention that the role of internal audit which leads to more interest in presenting confirmation and consulting services about observation systems and evaluation of the operation of risk management in addition to forming good relations with the rest of governing parties.
This study also benefits Libyan industrial companies in tightening observation and in developing the performance of the companies, which is positively reflected on the investment in the companies, and on the movement of Libyan financial market which then activates the Libyan economy.
It is relevant to note that adventitious goal of this study which is presented in enhancing the researcher’s scientific and practical skills in the field of the job as internal auditor.
1.4. The Objectives of the Study
This study aims at the following:
1. Showing how important is the application of corporate governance.
2. Demonstrating the role that internal auditing function can have in supporting of corporate governance implementation.
3. Trying to protect the assets of the company from inappropriate and criminal use and from illegal actions.
4. Evaluating the effectiveness of internal observation system.
1.5. Study Presumptions
In this study, we will find out the points of view of the participants about the role that internal auditing can have in Libyan industrial companies which contribute in activating corporate governance where the study is based on the following main presumption:
The function of internal auditing in Libyan industrial companies can contribute in activating corporate governance. This main presumption can be tested through the following sub presumptions:
The first sub presumption:
The function of the internal auditing in Libyan industrial companies can do the activities related to assessment of internal observation system.
The second sub presumption:
The function of the internal auditing in Libyan industrial companies can perform activates that contribute in evaluating the management operating risks.
The third sub presumption:
The function of the internal auditing in Libyan industrial companies can do the activities that lead to forming good relations with the rest of governing parties.
1.6. The Study Approach
We will use both extrapolating and devising methods through the style of theoretical and practical study as follows:
1.6.1. The theoretical study (the theoretical aspect):
In this aspect, the aspects of the study problems shall be examined by relying on some previous studies made in this field. By perusing the references, articles, periodicals and published researches which treated the evolution of the function of internal audit for the purpose of building a theoretical framework for the modern role of internal audit in backing the implementation of governance. We present in the theoretical study, the study of some Libyan industrial companies and through this study, several important points shall be examined in the governance of companies, including:
– The concept of corporate governance,
– The motives of corporate governance,
– The importance of corporate governance,
– The nature of the system of corporate governance,
– The principles of corporate governance,
– The basic determinants of the application of corporate governance,
– The characteristics of good corporate governance,
– Stages of corporate governance.
1.6.2. Practical Study (Practical Side)
A practical study in Libyan industrial companies can be done, regarding the topic of the thesis, to realise the role that can be performed by internal audit function in supporting governing process through testing research presumptions statistically. Questionnaire forms can be distributed to the research sample, answers could be analyzed, and results could be concluded.
1.6.3. Sample of the Study
The society of study consists of Libyan industrial companies enlisted in Libyan financial market. The sample of the study includes all what can be obtained from the study society represented in the following two categories:
1. The category of general financial managers and departments managers.
2. The category of internal auditing office managers and internal auditors.
1.7. The Limits of the Study
The study will only be devoted to the modern role of internal auditing in developing and evaluating the effectiveness of observation operations, risks managements and governing in Libyan industrial companies registered in Libyan financial market.
1.8. Previous Studies
Most of the research papers that tackled these developments highlighted the significance of the role of internal audit in checking and evaluating the control systems and determination and evaluation of the dealing with the risks and governance.
Yet, the function (or occupation) of internal auditing in Libya is still concentrating on the exercise of its traditional role and the playing of the supervision role and a summary of the results of previous studies that treated the topic may be presented by the Libyan environment as per the following:
1. Study of Beshir Mohamed Ashour (1990):
This study aimed at evaluating the role of the internal auditing in the Libyan industrial companies in addition to the presentation of a theoretical base for the internal auditing in terms of its evolution and basic elements. It reached the following results:
A- Unavailability of most of the components of independency required to be provided in the departments of internal auditing in the Libyan industrial companies.
B- Unavailability of most of the basic requirements to secure the efficiency and qualification of internal auditors in most of the departments of the auditing in the Libyan industrial companies.
C- The non-accomplishment by the internal auditors in the Libyan industrial companies of a great deal of tasks they ought to undertake.
2. Study of Abdelaziz Abed Abubakr:
This study was presented to the first conference on the internal control, reality and horizons on 22-24/2/2005 in order to realize the objective of analyzing the reality of the function of internal auditing in the economic units. This study has hence targeted the economic units located within the scope of both Benghazi and Sirte Shaabiats and reached a result to the effect that the departments of internal auditing in the economic units focus only on the accounting auditing and greatly ignore all the other types of auditing.
3. Study of Saleh Miloud Khalat:
This study was presented in the first conference on the internal auditing – reality and horizons on 22-24/2/2005 in order to achieve the objective of identifying the field of services of internal auditing in Libyan industrial companies affiliated to the public sector. It reached a result to the effect that the services of internal auditing in the companies object of the study focus on the services of protection or supervision.
4. Study of Mohamed Mohamed Abu Agrab (2005):
This study treated the factors that influence the performance of internal auditors in the Libyan public industrial companies. The study reached a group of results, including:
1. Unavailability of independency and objectivity for the internal auditors in the Libyan public industrial companies, the matter that raises a doubt about their abilities to perform their works as required.
2. The internal auditors do not carry out a great deal of the tasks they ought to do in the Libyan public industrial companies by adopting the proper manner.
3. Weakness of the management of the departments of internal auditing in the Libyan public industrial companies as required:
A. Necessity of dependency of the department of internal auditing to a neutral entity within the company (auditing committee) in order to increase the degree of independency and objectivity to the internal auditors.
B. Necessity of the presence of a federation (or union) for the internal auditors in order to reduce the pressures of management on the internal auditor in such a way to support his independency.
5. Study of Beshir Mohamed Ashour and Gamil Mohamed Khalat:
This study was presented to the first conference on the internal control, reality and horizons on 22-24/2/2005 in order to realize the objective of identifying the percentage of high managements in the Libyan companies which do not pay attention to the function of internal auditing. This study targeted the Libyan companies under the public sector and reached a result to the effect that most of the high managements (or administrations) in the companies object of the study are not concerned with providing the basic constituents for the function of internal auditing.
6. Study of Osama Saleh Mohamed Ben Yousef (2008):
This study has targeted the identification of the function raised by the thought of auditing and what is required to be undertaking by the internal auditing in the auspices of available circumstances and the reasons that prevent the internal auditor and hinder his accomplishment of such functions taken by him.
The field study in the sector of the Libyan industry indicated that in view of the hugeness and enlargement of the tasks and responsibilities required by the department of internal auditing before the limited abilities and potentialities, it becomes difficult for it to undertake all the new tasks and responsibilities, including (the management and analysis of risks and the operating, functional consulting auditing), which leads to the presence of a gap in expectations in the internal auditing.
The study recommended the necessity to constitute auditing committees in the Libyan economic units in order to guarantee the full independency of the management of internal auditing and establishment of a professional organization for the internal auditors in Libya in addition to training them for the sake of promoting their skills. It also recommended to carry out future studies in the new functions of internal auditing including the function of risks analysis.
7. Study of Abdelmaged Altaeb Shaaban and Emad Ali Sweih:
This study targeted the making of comparison between what is included in the Libyan Law with regards to the control committees with the legislations of other countries concerning the auditing committees. The study has hence indicated that the control committees look alike in their notion with the auditing committees. Yet, there is a great missing space in the specializations of the control committees, the matter that necessitates the expansion of the circle of specialties thereof and their communications lines and relationships with the other parties of governance (internal auditing – external auditing – management).
The study recommended to develop the Libyan Law with regards to the control committees until they supersede the auditing committees considering it to be a better solution than the introduction of a new legislation under the name of the auditing committees.
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