CHALLENGES FACING THE INDEPENDENCE OF INTERNAL AUDITORS

IN TERTIARY INSTITUTIONS IN NAIROBI

RITA TATU TANDASI

MS11/NVS/2/0003/13

A PROJECT PROPOSAL SUBMITTED IN PARTIAL FULFILLMENT FOR

THE AWARD OF BACHELORS DEGREE IN COMMERCE- LAIKIPIA

UNIVERSITY.

MARCH, 2016

DECLARATION

This research proposal is my original work and has not been presented for a degree in any other University or any other award.

Signature ………………….. Date ………………..

Rita Tatu Tandasi

MS11/NVS/2/0003/13

This proposal has been submitted for examination with my approval as the University Supervisor.

Signature ………………….. Date ………………..

Mr. Makena

ii

DEDICATIONThis work is dedicated to my mother, Mrs. Ruth William, my brother, Katuta Tandasi, and well as my friend, Nicodemus Juma.

iii

ACKNOWLEDGEMENT I wish to acknowledge my lecturers at Laikipia University for teaching diverse courses at the university. I also wish to thank my supervisor Mr. Makena for taking me through this project work. Finally, I wish to acknowledge my boss, Chief Inspector Julius Mugambi.

TABLE OF CONTENTS

iv

DECLARATION......................................................................................................................iiDEDICATION.........................................................................................................................iiiACKNOWLEDGEMENT......................................................................................................ivTABLE OF CONTENTS.........................................................................................................vLIST OF FIGURES................................................................................................................viLIST OF TABLES..................................................................................................................viiOPERATIONAL DEFINITION OF TERMS....................................................................viiiACRONYMS & ABBREVIATIONS.....................................................................................ixABSTRACT..............................................................................................................................xCHAPTER ONE: INTRODUCTION....................................................................................1

1.1 Background of the Study.............................................................................................11.2 Research Objectives....................................................................................................81.3 Research Hypothesis...................................................................................................81.4 Significance of the Study............................................................................................91.5 Scope of the Study.....................................................................................................101.6 Limitation of the Study.............................................................................................10

CHAPTER TWO: LITERATURE REVIEW.....................................................................112.1 Introduction...............................................................................................................112.2 Theoretical Review...................................................................................................112.3 Conceptual Review...................................................................................................132.4 Summary of Reviewed Literature.............................................................................182.5 Research Gaps...........................................................................................................18

CHAPTER THREE: RESEARCH METHODOLOGY.....................................................193.1 Introduction...............................................................................................................193.2 Research Design........................................................................................................193.3 Target Population......................................................................................................193.4 Sampling....................................................................................................................193.5 Measuring Instrument...............................................................................................203.6 Data Collection Procedures.......................................................................................213.7 Data Processing and Analysis...................................................................................21

REFERENCES.......................................................................................................................22APPENDIX A: CONSENT STATEMENT.........................................................................26APPENDIX B: QUESTIONNAIRE.....................................................................................27APPENDIX C: RESEARCH TIMELINES ........................................................................29APPENDIX D: RESEARCH BUDGET...............................................................................30RESEARCH BUDGET..........................................................................................................30

LIST OF FIGURESFigure 2:1; Conceptual Framework............................................................................14

v

LIST OF TABLES

vi

OPERATIONAL DEFINITION OF TERMS

Internal Audit: The process by which a competent independent person

accumulates and evaluates evidence about quantifiable

information related to a specific economic entity for the

vii

purpose of determining and reporting on the degree of

correspondence between the quantifiable information

and established criteria

Internal Audit Independence: Freedom from conditions that threaten

objectivity or the appearance of objectivity

ACRONYMS & ABBREVIATIONS

CEO Chief Executive Officer

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CUEA Catholic University of Eastern Africa

EU Egerton University

GLUK Great Lakes University of Kisumu

JKUAT Jomo Kenyatta University of Agriculture and technology

MU Moi University

UoN University of Nairobi

VFM Value for Money

ABSTRACTThe internal audit’s independence is a critical component in a business that has a strategic approach to meet organization’s vision by having an audit function that can

ix

add value to the organization. In addition, according to Diamond (2002) if auditing is conducted in house their objectivity is compromised due to the fact that some officials will be both involved in pre auditing and post auditing. Officials who approve expenditures in the pre-audit will unsurprisingly be less inclined to question personal judgment when making post audit decisions. The audit report and opinion must be free from any bias or influence if the integrity of the audit process is to be valued and recognized for its contribution to the organization’s goals and objectives. Several professional organizations whether they have independence in their assignment or not, should be careful of non-independent situations. Therefore, an independent judgment is very much useful and influential as it deals with key elements that depict risk analysis and it is very important for organizational planning. The fundamental positioning of the role of internal auditors, it is contended, creates a challenge to their ability to function with independence. For instance, the role of internal auditors in providing audit oversight for their organization together with consulting services to management can cause an ongoing conflict. In their audit role, internal auditors must remain independent of management by not subordinating their judgment to management in audit matters. But in their consultative role, they must collaborate with and support management, including accepting the judgment of the audit committee of the board of directors. The structured questionnaire will be used for data collection while data will be analyzed using the SPSS version 21. Both inferential and descriptive statistics will be utilized.

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The background of the study examines the concept of internal audit, the internal audit

independence and the tertiary institutions.

1.1.1 Concept of Internal Audit

There are several definitions of audit. Audit has been defined as the systematic

process of objectively obtaining and evaluating evidence regarding assertions about

economic actions and events to ascertain the degree of correspondence between those

assertions and established criteria and communicating the results to interested parties

(Murimi, 2013).Audit has also been defined as the independent examination and

expression of opinion on the financial statements of an enterprise by an appointed

auditor in pursuance of his appointment and in compliance with the relevant statutory

obligations (Bediako-ahoto, 2011).

Similarly, the term internal audit has received various definitions by different authors.

The internal audit has been defined as the process by which a competent independent

person accumulates and evaluates evidence about quantifiable information related to a

specific economic entity for the purpose of determining and reporting on the degree of

correspondence between the quantifiable information and established criteria

(Beyanga, 2011).On the other hand, Kisoka (2012) simply defines the internal audit as

any audit activities carried out by audit professionals who are employees of the entity

that is being audited. The internal audit has also been defined as an independent

objective assurance and consulting activity designed to add value and improve

organizations operations (Onyango, 2014). It helps an organization accomplish its

1

objectives by bringing a systematic, disciplined approach to evaluate and improve the

effectiveness of risk management, control, and governance (Lenz, 2013).

There are several types of the internal audit including the financial internal audit,

operational internal auditing, management internal audit and value for money internal

audits (Bediako-ahoto, 2011).The financial internal auditing is the embracing of the

conventional tasks of examining records and evidence in order to detect errors and

prevent fraud which includes the reviewing of the routine financial and management

reports looking for trends within the figures thus, being able to identify significant

deviation from the norm (Kisoka, 2012). The operational audit is the comprehensive

examination of an operating unit or complete organization to evaluate its performance

as measured by management objectives which covers the examination of the control

procedures and whether or not they are being adhered to (Beyanga, 2011). On the

other hand, the management internal audit relates to the review and evaluation of the

management structure within the organization and the performance of managers as a

group or individually (Bediako-ahoto, 2011).The purpose is to evaluate the

environment for the exercise of management skills as well as the measurement of

external management performance against established criteria (Onyango,

2014).Finally the Value for Money (VFM) audit focuses on the value for money in

which the audit methodology in which auditors are either required to or exercise

discretionary power to, satisfy themselves, by examination of the accounts and

otherwise, that the organization has made proper arrangements for securing economy,

efficiency and effectiveness (Dawuda, 2010).

2

1.1.2 Independence of Internal Audit

The independence of the internal audit is the freedom from conditions that threaten

objectivity or the appearance of objectivity (Murimi, 2013). Such threats to

objectivity must be managed at the individual auditor, engagement, functional and

organizational levels (Kisoka, 2012). Moreover, Objectivity is defined as an unbiased

mental attitude that allows internal auditors to perform engagements in such a manner

that they have an honest belief in their work product and that no significant quality

compromises are made (Baffour & Wittbom, 2009). Objectivity requires internal

auditors not to subordinate their judgment on audit matters to that of others (Njeru,

2013). Auditor independence has long been seen as a key driver of the audit role.

Infinity emphasis historically was on independence and it related to external audit,

expert agents postulate that internal audit should be independent. Internal auditors are

normally employees of the organization. Their independence is recognized as a

distinctive approach to effectiveness, they execute their responsibilities exonerated

and liberated from interference, managing and preventing conflict of interests; having

undeviating confrontation with the senior management’s prerogative (Roziani, 2011).

Unrestricted permission and admittance to council records, human resources, various

sections and departments should be the attitude of internal audit department (Ongeri,

Okioga, & Okwena, 2005). Above all, the hiring, recruitment and firing or

retrenchment of the internal audit head should not be under managerial jurisdiction.

The internal audit’s independence is a critical component in a business that has a

strategic approach to meet organization’s vision by having an audit function that can

add value to the organization (Njeru, 2013). In addition, according to Alzeban

( 2014), if auditing is conducted in house their objectivity is compromised due to the

3

fact that some officials will be both involved in pre auditing and post auditing.

Officials who approve expenditures in the pre-audit will unsurprisingly be less

inclined to question personal judgment when making post audit decisions. The audit

report and opinion must be free from any bias or influence if the integrity of the audit

process is to be valued and recognized for its contribution to the organization’s goals

and objectives (Njeru, 2013). Several professional organizations whether they have

independence in their assignment or not, should be careful of non-independent

situations. Therefore, an independent judgment is very much useful and influential as

it deals with key elements that depict risk analysis and it is very important for

organizational planning. The fundamental positioning of the role of internal auditors,

it is contended, creates a challenge to their ability to function with independence. For

instance, the role of internal auditors in providing audit oversight for their

organization together with consulting services to management can cause an ongoing

conflict (Roziani, 2011). In their audit role, internal auditors must remain independent

of management by not subordinating their judgment to management in audit matters.

But in their consultative role, they must collaborate with and support management,

including accepting the judgment of the audit committee of the board of directors.

1.1.3 Tertiary Institutions

The higher education sector in Kenya traces its roots to the establishment of the Royal

Technical College of East Africa in 1956. The college was later elevated to University

College of Nairobi in 1963 following the establishment of the University of East

Africa with Makerere, Dar-es-Salaam and Nairobi as constituent colleges. The

university college of Nairobi became a fully-fledged university in 1970 following the

dissolution of the University of East Africa.

4

The period after the 1980s saw the establishment of additional public universities such

as Moi University (1984), Kenyatta University (1985), Egerton University (1987),

Jomo Kenyatta University of Science and Technology (1994), Maseno University

(2000) and Masinde Muliro University of Science and Technology (2007). These

public universities have in the recent past established satellite campuses in different

towns either on their own or in collaboration with established colleges in those towns.

There has been a tendency of the satellite campuses to break off as independent

universities. In this context, other public universities established in this context

include Dedan Kimathi University of Technology (2012), Chuka University (2013),

Technical University of Kenya (2013), Technical University of Mombasa (2013),

Pwani University (2013), Kisii University (2013), University of Eldoret (2013),

Maasai Mara University (2013), Jaramogi Oginga Odinga University of Science and

Technology (2013), Laikipia University (2013), South Eastern Kenya University

( 2013), Meru University of Science and Technology (2013), Multimedia University

of Kenya (2013), University of Kabianga (2013), and Karatina University (2013).In

addition to the fully fledged universities, there are also constituent colleges of the

public universities that operate in a semi-autonomous manner. The constituent

colleges include Murang’a University College (JKUAT)  established in 2011,

Machakos University College (UoN) – 2011, The Co-operative University College of

Kenya (JKUAT) – 2011, Embu University College (UoN) – 2011, Kirinyaga

University College (KU) – 2011, Rongo University College (MU) – 2011, Kibabii

Universtity College (MMUST) – 2011, Garissa University College (EU) – 2011, and

Taita Taveta University College (JKUAT) – 2011.

5

The private sector has not been left behind in rapid expansion for the higher education

sector in Kenya. There are also 17 chartered private universities in Kenya including

University of Eastern Africa, Baraton (established in 1991), Catholic University of

Eastern Africa (CUEA)(1992), Scott Theological College (1992), Daystar University(

1994), United States International University (1999), Africa Nazarene University

(2002), Kenya Methodist University (2006), St. Paul’s University (2007), Pan Africa

Christian University (2008), Strathmore University (2008), Kabarak University

(2008), Mount Kenya University (2011), Africa International University (2011),

Kenya Highlands Evangelical University (2011), Great Lakes University of Kisumu

(GLUK) (2012), KCA University (2013), and Adventist University of Africa

(2013).The constituent colleges of the Catholic University of Eastern Africa include

Hekima University College, Tangaza University College, Marist International

University College, Regina Pacis University College, and Uzima University College.

The other universities with interim letter of authority to operate include Kiriri

Women’s University of Science and Technology, Aga Khan University, Gresta

University, Presbyterian University of East Africa, Inoorero University, The East

Aftican University, GENCO University, Management University of Africa, Riara

University, Pioneer International University, UMMA University, International

Leadership University, and Zetech University.

1.2 Statement of the StudyProblemThe higher education sector in the country continues to exponentially expand through

an increase in the number of students and the number of universities as well as

satellite campuses. For example, the number of students have phenomenally increased

over the years.Available statistics shows rapidly expanding higher education sector

student enrolments levels from 67,558 (2003/2004 academic year), 198,260

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(2011/2012 academic year), 340,550 (2014/2015 academic year), to 769,550

(2015/2016 academic year). The expansion in the higher education sector is also

experienced across the gender lines and across private institutions. For example, the

female student enrollment rose by 30.5% from 80,560 in 2011/2012 to 186,115 in

2012/2013 academic years. On the other hand, the enrollment in private universities

rose by 11.6% from 40,344 in 2011/2012 academic year to 95,023 in the 2013/2014

academic year. The Kenyan higher education sector, the largest within East Africa, is

operating in a hyper competitive environment due to the rising number of the

universities, university colleges and university satellite campuses spread across

different towns.

This rapid expansion of the university student numbers, growth of the parallel degrees

and the increase in number of the universities have placed enormous resources in the

hands of the universities. The internal audit function therefore plays a critical role in

ensuring that these students are prudently utilized. The independence of the internal

auditor is critical in ensuring that the auditors carry an effective check. The leadership

is also involved in the creation of the reporting structure of the internal auditors as

well as the approval of the internal auditors budgets (Lenz, 2013). In the context of

the reporting structure, the internal audit function should have direct access to the

board and senior management by giving it the authority to access any records it deems

fit, by allowing full access to all employees and departments, by placing strict

conditions on the appointment and removal of the head of internal audit, and by not

undertaking non-audit work ( Madi, 2012). Ongeri, Okioga, & Okwena (2005)

observe that the internal auditors are highly influenced by their reporting positions

and hence a reporting structure that includes the senior management is inappropriate

7

but rather the internal auditors should report to the audit committees. Jie (2013)

further observe that where the internal auditors are subject to incentives-based

compensation, which include reported earnings as one measure of performance, their

objectivity and independence may well be hampered.

1.3 Research Objectives

The research objectives were examined in terms of the general and specific research

objectives

1.3.1 General Objective

The general objective of the study is the examination of the challenges facing the

independence of internal auditors in tertiary institutions in Nairobi.

1.3.2 Specific Objectives

The specific research objectives include;

i. To find out the effect of organizational structure on the independence of

internal auditors.

ii. To examine how the independence of internal auditors is affected by the

dominance of the CEO.

iii. Determine how budgetary allocation affects the independence of internal

auditors.

1.4 Research Hypothesis

The study was guided by the following research hypotheses;

H01: There is no significant relationship between organizational structure and the

independence of the internal auditors in tertiary institutions in Nairobi

H02: There is no significant relationship between dominance of the CEO and

independence of internal auditors in tertiary institutions in Nairobi

8

H03: There is no significant relationship between budgetary allocation and the

independence of the internal audit function in tertiary institutions in Nairobi

1.2 Significance of the Study

The study will be of significance to diverse people including the tertiary institutions

management, the internal auditors within these tertiary institutions, and the

researchers in the subject matter. This study will improve on the body of knowledge

relating to the independence of the internal audit function hence will be useful to the

researchers in the subject matter.

The study will examine the influence of the organizational structure on the

independence of the internal function. The study will in this context indicate the best

practices and weaknesses in the organizational structure and how it affects the internal

audit function. This will assist the tertiary institution management and their internal

audit functions improve on their organizational structures to achieve optimum results.

The study also examines the impact of the dominance of the CEO on the

independence of the internal audit function. The study will give parallels of this

phenomenon across diverse institutions across the world hence exposing the best

practices, and trends which will be of importance to the tertiary institutions and their

audit functions.

Finally, the study examines the role of the budget on the independence of the internal

audit function and hence the study will assist ensure on the best balance between

budget limitations and need for effective internal audit committee.

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1.3 Scope of the Study

The geographical scope of the study will be the Nairobi County due to the numerous

tertiary institutions that are based within the county. The time scope of the study will

be the first half of the 2016 academic year while the budget scope will be limited to

Ksh 10,650 as the study is self-funded.

1.4 Limitation of the Study

The study may experience challenges in the context of data collection as the potential

respondents may fear being quoted discussing the institution’s internal audit function.

This will be mitigated through the issuance of the consent letter that details that the

information collected will be for the purposes of an academic paper and ensuring that

the questions remain anonymous in nature.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter will examine the theoretical review, conceptual review, empirical review

and summary of research gaps.

2.2 Theoretical Review

The theoretical framework was based on the agency theory, shareholder’s theory and

the stewardship theory.

2.2.1 Agency Theory

The agency theory was proposed by Ross and Barry (1973) and later developed by

Jensen and Mecklings (1976) demonstrates the fundamental conflicts of interest

between managers and owners of a firm. The theory examines the separation of the

ownership of a firm, control and management motivation (Nteziryayo, 2014). The

theory therefore examines the relationship between a business firm’s owners and its

managers who under the law are agents for the owners (Sakalunda, 2014). The agency

theory argues that the principal who is the business owner passes the authority to an

agent to conduct transactions and make decisions on the behalf of the principal with

an effort to maximize the principal’s utility preferences (Tapiwa, 2014).The agency

relationship is described as a contract (implicit or explicit) in which one or more

persons, the principal(s) engage another person, the agents, to take actions on their

behalf and thus involves delegation of some decision making authority to the agent

(Mawia, 2013). The agents musty have enough motivation and control mechanisms to

always act in a manner that maximizes the profitability of the principal’s business

(Nyabenge, 2009). This theory is applicable in this study as the researcher is

11

interested in examining the ways in which affect the independence of the audit

committee including the agency related challenges.

2.2.2 Stakeholder’s Theory

The stakeholder’s theory was originated by Freeman in 1984 and identifies and

models the groups that are stakeholders of a corporation. The stakeholders are defined

as all the interested parties for whom the firm’s development and good health are of

prime concern (Ranti, 2011). The stakeholders have also been defined as any group or

individual that can affect or be affected by the realization of a company’s objectives.

The stakeholders are divided into the primary and secondary stakeholders. The

primary stakeholders are those actors who entertain a direct and contractually

determined relationship, as the name indicates, with the company and are sometimes

called the contractual stakeholders (Kulundu, 2014).On the other hand, the secondary

stakeholders are those actors who are impacted by a firm’s actions without having any

contractual connection to the firm.

The shareholder’s theory indicates that the shareholders or stakeholders are the

owners of the company, and the firm has a binding fiduciary duty to put their needs

first, and to increase value for them (Mbuchi, 2013).The theory recognizes the

importance of the shareholder or the stakeholder in the management of the firm. The

effective organizations will seek to do what is important for its relationships with its

key stakeholders. In this context, Kulundu (2014) argues that the stakeholder theory

attempts to address the question of which groups of stakeholders deserve and require

management’s attention. The internal audit helps to raise issues in which requires the

management’s action from the operational aspect to the financial integrity of the

systems (Atieno, 2013).

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2.2.3 Stewardship Theory

The stewardship theory in contrast to the agency theory argues that the firm’s

directors have interests that are consistent with those of the shareholders (Noah,

2013).In this context, Ngotho (2014) notes that the organizational role-holders are

conceived as being motivated by a need to achieve and gain intrinsic satisfaction

through successfully performing inherently challenging work, to exercise

responsibility and authority, and thereby to gain recognition from peers and bosses.

Ngenoh (2013) notes that managers carry their duty with a sense of duty. The

stewardship perspective suggests that the attainment of organizational success also

satisfies the personal needs of the steward (Gad, Shane, & Strong, 2010). The steward

identifies greater utility accruing from satisfying organizational goals than through

self- serving behaviour. Stewardship theory recognizes the importance of structures

that empower the steward, offering maximum autonomy built upon trust (Oketch,

2013). The stewardship theory places an emphasis on the role of structures in ensuring

that the firm’s interests are catered for. Therefore, the theory is relevant in this study

as the researcher was interested in finding out on how the organizational structure

affects the independence of the audit committee.

2.3 Conceptual Review

Independent Variable Dependent Variable

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Organizational Structure

Dominance of the CEO

Budgetary Allocations

Independence of internal auditors

Figure 2:1; Conceptual Framework

2.3.1 Effect of organizational structure on the independence of internal

auditors

The organizational structure affects the independence of the internal audit function

through impacting on its ability to access critical departments and documentation, and

remove the conflict of interest (Affum, 2011). The reporting structure, the size of the

internal audit function, and the position of the internal audit function within

organizational structure is critical in its effective functioning and independence

(Gacheru, 2013).

The internal audit is part of the organization and examines the work undertaken by the

organization employees including its management. In cases where the management

have conflict of interest in the performance of their duties, are inefficient or corrupt,

they may influence the outcome of the internal audit reports so that they are not

implicated on those reports (Olioko, 2015). The internal audit function may therefore

be structurally placed at high level within the organizational hierarchy and must report

to an audit committee to enable it be devoid of management influence and to have the

required authority to have unrestricted access to the required offices and functions in

an organization (Wondim, 2015). To provide independence, the chief audit

executives report to the chairperson of the audit committee and should only be

replaced with concurrence of that individual.

The conflict of interest within the internal audit function may be prevented through

the creation of a two tier reporting structure and hence improve on their independence

(Kipngeno, 2011). The two tier reporting structure implies that the internal audit

14

function reports to executive management of the organization for policy direction, and

administrative support. The internal audit function must also report to the highest

organizational oversight committee within an organization for strategic direction,

reinforcement and accountability.

The organizational structure of an organization and internal audit function is also

linked to the size of the internal audit.The size of the internal audit function is of a

critical component to the effectiveness of the internal audit. Staff shortage in the

internal audit function leads to the mismanagement, error and abuse, which can negate

the effect of other controls (Kasiva, 2012). Several studies have demonstrated the

correlation between the size of the internal audit function and the effectiveness of the

function. In this context, Van Staden & Steyn, (2009) indicate that the larger sized

internal audit functions present more opportunities and flexibility to have staff

rotation which influences the internal audit effectiveness by promoting a more healthy

relationship and resulting in more objective audit investigations. The larger internal

audit function is often more likely to be better resourced, including having a broader

work scope, higher organizational status and wider staff talent than a smaller unit

(Othman, Othman, & Jusoff, 2009). Larger internal audit functions on average tend to

have larger proportion of experienced staff compared to smaller units (Tapiwa, 2013).

2.3.2 Effect Of the dominance of the CEO and independence of internal

auditors

Within the context of the management support, the CEO’s dominance is a critical

aspect indicating their overall influence over the audit committee and its functions.

This influence of the CEO is exerted through aspects such as preferential selection of

the audit committee members, sitting within the audit committees, and the overall

15

length of the CEO’s tenure within the board (Wondim, 2015). These CEO’s

influences have an impact on the independence of the audit committee through

impacting on the independence in mind and in appearance.

There are two measures used to measure the degree of the CEO’s dominance; the first

is a dummy variable called CEO’s influence equal to one if the CEO sits on the

board’s committee or if none exist then the whole board acts as a nominating

committee, and zero either wise. The second measure is the amount of time the CEO

has been on the board (CEO’s tenure) with longer tenure being indicative of CEO’s

control(Olioko, 2015).

The CEO duality that is where the person is the CEO and the chair of the board poses

challenges to the independence of the internal audit function. By keeping in mind the

agency theory there are different arguments some researchers says that CEO duality

diminish the monitoring role of board of directors. On the other hand, the stewardship

theory stresses that a unity of command of a CEO leads to an unambiguous leadership

over subordinates to this. Due to this induces the effective decision making (Wakaba,

2014). In this paper CEO/Chairman duality is taken as independent variable. There

are enormous studies in which corporate governance practices dimensions like board

size, board composition, CEO duality and audit committee were taken as independent

variables (Kasiva, 2012). Some researcher suggest that there is no optimal leadership

structure because duality and separation both have related benefits and costs .CEO

duality causes information problems as he determines the agenda and information to

the board (Jensen, 1993). CEO duality has also been linked to other signs of

ineffective governance, such as in the cases of antagonistic takeovers.

16

2.3.3 Effect of the budgetary allocation on the independence of internal

auditors

The independence of the internal audit function is undermined by the budget allocated

to it and it is important for the internal audit unit to have adequate resources at their

disposal (Okwee, 2011). The efficiency and effectiveness of internal audit units

depends on the availability of resources. Inadequate resources will limit the scope of

audit work (Masui, 2013). The scope of the audit work can be limited in the context of

the geographical locations visited, and the sampling of the work to be audited. The

inability to extend the scope of the audit or have sufficient audit scope may lead to

lapse in the organization (Ogechi, 2013).

The Chief Internal Auditor must ensure that internal audit resources are appropriate,

sufficient and effectively deployed to achieve the approved plan. The required

resources needed by the internal audit unit are normally determined at the early stage

of audit plan so that it can be incorporated into the master budget of the organization

(Marete, 2012). Modern auditing demands the use of appropriate technology and

auditing the technology itself as audit area, developing staffs through several cost

effective means like training. The training and professional development of the

internal auditors is critical to their effectiveness as well as independence from the

management (Ogechi, 2013). Sufficiently trained personnel are able to do their work

without unnecessary direction from authorities or their superiors. They are also able to

make sound and independent decisions in regards to the scope of work that they are

examining (Masui, 2013). The luck of funding may also weaken the audit function as

a whole hence limit its effectiveness.

17

The internal auditors reporting relationship in any institutions and organizations

should enhance their organizational independence. Organizational independence is

also facilitated when the Chief Internal Auditor reports functionally to the board and

administratively to the organization’s CEO (Muraguri, 2013). The budget allocation

to the internal audit may be used by the management to control the activities of the

internal audit through the limitation is scope and independence of movement.

2.4 Summary of Reviewed Literature

The reviewed literature suggest that the independence of the internal audit function is

affected by the organizational structure in terms of reporting lines, and the position of

the internal audit function within organizational hierarchy. The literature also notes

that budget affects the internal audit independence by limiting the scope of audit

functions.

2.5 Research Gaps

The research gaps of this study is that the phenomenon of the independence of the

internal audit department within the context of the tertiary institutions in Nairobi have

not been examined.

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CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter will examine the research design of the study, the target population, the

sample size, sampling technique, pretesting of the questionnaire and the data analysis

procedures.

3.2 Research Design

The study will adopt the descriptive research design. This choice of the research

design is informed by the fact that the researcher is interested in describing the factors

that affect the independence of the internal audit functions in the universities without

manipulation of variables. The design also allows the researcher to come up with

descriptive statistics that can assist in explaining the relationship that exists among

variables.

3.3 Target Population

The target population of this study will be the internal auditors in tertiary institutions

as well as the management of the tertiary institutions within Nairobi. The simple

random sampling method will be used for the study.

3.4 Sampling

The simple random sampling method will be used in this study. The simple random

sampling technique is used as it minimizes the sampling error as each element in the

target population is accorded equal (unbiased) probability of being selected (Yogo,

2013). A sample size of 100 respondents will be used in the study. Statistically, in

order for generalization to take place, a sample of at least 30 must exist and the larger

the sample size the lower the chances of errors.

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3.5 Measuring Instrument

The study will use the closed ended questionnaires for the purposes of primary data

collection. The close ended questions were considered appropriate since they

conserved time and they are easy to fill as well as easy to analyse as they are in an

immediate usable form. There are several reasons on why the questionnaire was

chosen as the data collection instrument. According to Wairi (2011) questionnaire are

often used for descriptive research and if worded correctly, they normally require less

skill and sensitivity to administer. The use of the questionnaire is easier to administer

as the respondents are relatively familiar with the concept(Muriuki, 2013). The semi-

structured questions will be used. The questionnaire will be divided into four parts

that is Part A with the background information and parts B, C, and D with the specific

objectives.

3.5.1 Validity of the Questionnaire

The face validity of the questionnaire will carried out by having subject matter experts

from both the teaching fraternity and practicing internal auditors. These individuals

will be chosen based on their experience and authority on the subject of internal

auditing and they will judge the relevance of the various questions in the

questionnaire.

3.5.2 Reliability of the Questionnaire

Reliability refers to a measure of the degree to which research instruments yield

consistent results. In this study, data reliability will be ensured by pre-testing the

questionnaire with a selected sample of the tertiary institutions in Nakuru County.

After analysis the Cronbach alpha coefficients will be used to determine reliability of

the questionnaire. Cronbach’s Alpha ranges in value from 0 to 1. A coefficient equal

to or greater than .6 is considered a minimum acceptable level, although some

20

authorities argue for a stronger standard of at least .70(Albus, 2012). The internal

consistency for this instrument is considered high.\

3.6 Data Collection Procedures

The data will be collected through the drop and pick method. The drop and pick

method involved the dropping of the questionnaire and picking filled questionnaire

later at predetermined time. There are several advantages of this method and these

advantages informed its choice. The method enables the respondents to fill in the

questionnaire at their convenient time and hence provide more quality results (Kandie,

2013). The method is also likely to yield more fully responded results as there is no

demand to fill the questionnaire when it may not be the opportune time for the

respondents.

3.7 Data Processing and Analysis

After all data is collected, the researcher will conduct data cleaning, which involves

identification of incomplete or inaccurate responses, which will then corrected to

improve the quality of the responses. After data cleaning, the data will be coded and

entered into the computer for analysis using the Statistical Package for Social

Sciences (SPSS) version 19. Descriptive analysis shall be done and computation of

frequency distribution, mean and standard deviation, which will be useful in

presenting the study findings.

21

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APPENDIX A CONSENT STATEMENT

Dear Participant,

My name is Rita Tatu, Bachelors in commerce student at Laikipia University. You

have been selected as part of the study entitled “Challenges Facing the

Independence of Internal Auditors in Tertiary Institutions in Nairobi”. I am

inviting you to participate in the research by completing the attached questionnaire.

The questionnaire will not take more than 20 minutes. The information that you will

share with me will not be discussed or accessed by any other person apart from the

researcher and the people directly involved in the project. Your participation is

voluntary and you can withdraw at any time without penalty. Your answers will be

kept confidential. There will be no financial compensation for participating in this

study. The outcome of this research may be used for academic and general purposes

such as research reports, conference papers, or books. By completing the

questionnaire, you indicate that you voluntarily participate in this research.

If you agree to participate in this study, please sign below

Name ( Optional)…………………..Signature………………………Date…………..

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APPENDIX B

CHALLENGES FACING THE INDEPENDENCE OF INTERNAL AUDITORS IN TERTIARY INSTITUTIONS IN NAIROBI

QUESTIONNAIRE

Instructions: Please complete the following questionnaire appropriately.Confidentiality: The responses you provide will be strictly confidential. No reference will be made to any individual(s) in the report of the study. Please tick or answer appropriately for each of the Question provided.PART A: BACKGROUND INFORMATION

1) What is your gender? Male ( )

Female ( )

2) Which of the following best describes your role? Internal Auditor ( )

Finance Officer ( )

Management Staff ( )

3) How long have you worked in the in the institution 0-5 Years ( )

6-10 Years ( )

11-15 Years ( )

Over 15 Years ( )

PART B: EFFECT OF ORGANIZATIONAL STRUCTURE ON INDEPENDENCE OF INTERNAL AUDITORSThe following are items in relation to the effect of organizational structure on the independence of the internal auditors. In a scale of 1-5; where 5= Strongly Agree (SA); 4=Agree (A); 3= Uncertain; 2=Disagree (D) and 1=Strongly disagree (SD), please tick (√) where appropriate, the level that best explains your situation.

SA

A U D SD

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4)

The place/position of the internal audit within the organizational hierarchy affects the independence of internal auditors

5) The reporting structure of the internal audit function within my organization affects the independence of internal auditors

6) The size of the internal audit function affects the independence of the internal audit function

7) The overall organizational structure at my firm influences the independence of internal audit function

8) The structure of the internal audit function affects the independence of the internal audit function

PART C: EFFECT OF DOMINANCE OF CEO ON THE INDEPENDNECE OF INTERNAL AUDITORS

SA

A U D SD

9)

The CEO has an influence on the constitution of the internal audit committee

10) The CEO has an influence on the scope of the internal audit function activities

11) The CEO has an influence on the reports generated by the internal audit function

12) The CEO has an influence on the working terms of the internal auditors

13) The CEO frequently visits the internal audit committees

PART C: EFFECT OF BUDGET ALLOCATION ON THE INDEPENDNECE OF INTERNAL AUDITORS

SA

A U D SD

14)

The budget levels of the internal audit function influences the geographical scope of activities that can be undertaken

15) The budget levels of the internal audit function influences the audit scope of activities to be undertaken

14) The budget levels of the internal audit function influences the daily operations of the department

15) The budget levels of the internal audit function influences the professional competency of the internal audit function

16) The budget levels of the internal audit function influences the efficiency of the department

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APPENDIX C

RESEARCH TIMELINES

Work Description

Mar Ap

r

May Jun Jul

i) Topic Considerations

iii

)

Proposal Development and Approval

v) Data Collection

vi) Data Analysis and Approval

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APPENDIX D

RESEARCH BUDGET

Units Unit Cost

(Ksh)

Total Cost

(Ksh)

i) Airtime 1,000 2 2,000

ii) Internet Bundles 5,000 1 5,000

iii) Printing 250 5 1,250

iv) Binding 5 50 250

v) Transport 3 trips 500 1500

Sub Total 8,650

Contingency 2,000

GRAND TOTAL 10,650

Sources of funds: Self

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