The inadequacy of staffing at the various Ministries/ Departments/Regions, the lack of suitably qualified and trained personnel and the absence of internal audit departments in large ministries continued to militate against an effective system of internal control and have contributed significantly over the years to the deterioration in financial management at both the ministerial and central levels.
2003 Auditor General’s report
Introduction
The recent revelation of alleged irregularities at the National Drainage and Irrigation Authority (NDIA) and the denial by the Ministry of Agriculture leave the public quite confused as to what really happened. What appears evident from the leaked Field Auditor’s report was a serious breakdown in the internal controls of NDIA. In addition, a report commissioned by the President on certain aspects of the operations of the National Communications Network highlighted similar violations that might have facilitated the fraud that was reported. The Auditor General’s reports over the years have also uncovered significant deficiencies in systems and procedures at several Ministries and Departments.
Most frauds and other forms of irregularities can be traced to deficiencies as well as a breakdown in internal controls. Today, we look at how internal audit can assist government departments in ensuring that strong and effective internal controls are in place in order to minimizing the extent to which mismanagement, fraud and other irregularities are likely to take place.
What are internal controls?
Internal controls comprise those systems and procedures, indeed the whole system of controls, including detailed checks and balances, implemented by the management of an organization to assist it in:
* Conducting the organisation’s business in an orderly manner and efficient manner;
* Ensuring adherence to policies and applicable laws, rules and regulations;
* Safeguarding its assets and other resources;
* Assisting in the prevention and detection of errors, fraud and theft; and
* Securing the completeness, accuracy and reliability of accounting and other related records.
Internal controls are in effect methods put in place to ensure the integrity of financial and accounting information. Perhaps, the most important aspect of internal controls relates to segregation of duties. No one person should be involved in a transaction from its initiation stage to its conclusion when the final accounting entries are made. For example, it would be undesirable for the same person to prepare a payment voucher, check it, and certify it. Similarly, a department that needs some equipment must not be involved in purchasing the item, receiving and issuing it, and recording the transaction in the books of account and subsidiary records. Of course, the level of internal controls needed will depend on the nature, size and complexity of operations. In particular, small businesses will have less elaborate systems and procedures, compared with the operations of a government entity or department where State resources are involved.
Internal audit and internal controls
Internal audit is an integral part of the internal control system of an organization. Its primary role is to police the system to ensure that the controls in place are adequate and effective, and are working as intended. Unlike external auditors, internal auditors are full-time employees of an organization who continuously review systems and procedures, identify deficiencies, and make recommendations for improvement. Where “red flags” are uncovered, the internal auditor’s role is to probe further to ascertain whether any irregularities have occurred. In this way, internal auditors provide an essential and necessary service to management.
The Institute of Internal Auditors has provided a more sophisticated definition of internal auditing as follows:
An independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
Internal and external auditing
One of the essential differences between internal and external audits is that the latter looks at historical information in order to express an opinion on the financial statements presented to it for audit. External auditors are not part of the organization and their role is to provide an independent perspective of what has happened in relation to past transactions. They do look at internal controls but only for the purpose of deciding on the extent to which they could place reliance on such controls as a basis for the preparation of the financial statements. If the controls were strong and effective during the period under review, they will restrict their testing of transactions and balances. Otherwise, they will have to carry out more exhaustive testing.
By contrast, internal auditors are more forward looking in their approach. They review the internal controls currently in place and consider how well they are functioning in their attempts “to add value and improve an organisation’s operations”. The work of internal and external auditors complements each other, and there must be a high degree of cooperation and coordination between these two oversight bodies.
External auditors are likely to place reliance on the work of internal auditors if:
* The internal auditors are professionally and technically competent;
* They follow standards of auditing promulgated by the Institute of Internal Auditors;
* Their roles and responsibilities are formalized in an internal audit charter approved by the Audit Committee;
* Their reporting relationship is such that they enjoy a reasonable level of independence from management. Most internal audit departments have a dual reporting relationship: functionally to the Audit Committee; and administratively to the head of agency;
* Their reports are timely and reflective of quality; and
* Appropriate action is taken in respect of their findings and recommendations.
Current situation in Guyana with regard
to internal auditing in government
The quotation at the beginning of this article, extracted from the 2003 Auditor General’s report, was repeated verbatim in the 2004 and 2005 reports. Although the situation has not improved since 2005, for some inexplicable reason, subsequent reports were devoid of any commentary on the need to have in place strong and effective internal audit departments, especially in large ministries and departments. There was therefore no pressure in recent years to have such a fundamental and well-established control mechanism in place to protect State assets and other resources and to minimize the extent of mismanagement, fraud and other forms of irregularities.
The Auditor General is the external auditor of government. As such, he should not be looked upon to render internal audit services. However, because of the absence of strong and effective internal audits, many of the comments of the Auditor General are in the nature of internal audit findings. With limited staffing and time constraints to finalise his report to the National Assembly, this practice dissipates the Audit Office’s efforts to examine in detail more significant issues relating to the public accounts, such as:
* Action the Government could take to ensure that the Auditor General’s opinions on the 13 sets of financial statements comprising the public accounts receive a “clean bill of health”, instead of successive years of qualified opinions and disclaimer of opinion on each of these statements;
* The implementation of internationally recognized accounting standards as a replacement of the outmoded and outdated cash-based system of accounting that has been in existence since Colonial times; and
* The extent to which public revenues are not paid into the Consolidated Fund, and the incurrence of expenditure without Parliamentary approval, as in the case of the Lotto funds and the operations of NICIL.
Section 11(b) of the Fiscal Management and Accountability Act 2003 requires the Head of a budget agency to maintain an effective internal audit capability within the budget agency. However, there is no evidence of compliance with this requirement at most Ministries and Departments. The Georgetown Public Hospital Corporation, as a budget agency, nevertheless does have an internal audit department. A few other Ministries and Departments have a field audit system in place to carry out mainly spot checks in the “field” and report to the Head of agency or the Permanent Secretary. However, this is hardly any substitute for an organized system of internal audit.
Internal auditors take a risk-based approach to auditing and they derive their work programmes after due consultations with management as well as with the external auditors. Consultations with external auditors are necessary to avoid as far as possible duplication of efforts as well as gaps in audit coverage. As in the case of the Georgetown Hospital, internal Auditors should report to an Audit Committee and not the Permanent Secretary whose work they have to evaluate.
The Ministry of Finance is currently trying to put in place a centralized system of internal auditing. This arrangement is similar to the inspectorate system that the Ministry had in place for decades, and which had been evaluated to be of limited effect. The centralized system could nevertheless work for the Ministry of Finance and for smaller ministries/departments. However, there is no reason why large Ministries, such as Public Works, Agriculture, Health and Education, cannot have their own internal audit departments.
Conclusion
Many of the scandals and acts of financial impropriety that are uncovered almost on a daily basis in respect of Government departments, could have been avoided had there been in place strong and effective internal audit departments staffed by professional and competent auditors with appropriate reporting lines. With such a system in place, the Audit Office will also be freed to examine in detail more significant issues relating to public financial management.
It would be unfortunate, indeed penny wise and pound foolish, to ignore the role internal auditors can play in bringing about some degree of respectability in relation of our public finances. The Ministry of Finance’s initiative is therefore encouraging, and one hopes that the effort is not a cosmetic one to appease the international funding agencies that something is being done in relation to this oversight mechanism. The larger Ministries, however, need to get their act going to ensure compliance with the Law.
