INTERNAL AUDIT: ASSESSING ITS SIGNIFICANCE ON THE PRODUCTIVITY OF INSURANCE COMPANIES IN CAMEROON

CHAPTER ONE

INTRODUCTION

Background of the Study

Auditing plays a crucial role in guaranteeing transparency, accountability, and integrity inside organizations. Eze (2018) states that auditing is a mandatory process designed to verify the accuracy and credibility of financial reports and statements issued by accountants and managers inside an organization. Consequently, organizations are required to have distinct and strong departments for internal auditing in order to validate the veracity of these financial reports (Abiola, 2019). Internal auditing is essential for boosting organizational performance by providing value and strengthening the operations of the organization. 

In contemporary organization, internal auditing has experienced significant transformations and has expanded its range of responsibilities in order to make a more substantial impact on the organization's objectives. It is also fulfilling its function in various cultural and legal contexts inside numerous organizations, which range in terms of size, structure, goal, and individuals involved. Walker (2022) mentioned that conducting an internal audit can be beneficial for corporations as it helps in detecting and assessing risks, placing the profession at the forefront of risk management. In addition, Kwan (2019) asserts that inside a corporation, it is crucial to foster a risk-based culture in order to establish a firm commitment to risk management, namely through the creation of an integrated risk management framework. 

Conversely, Alao & Lawal (2018) highlighted that the fundamental tasks of internal audit are reviewing and evaluating an internal control system and assessing the quality of performance in relation to assigned responsibilities. The purpose of assessing the appropriateness of internal auditing is to determine if the established system offers sufficient assurance that the organization's objectives and goals will be efficiently and reasonably achieved. An adequate control is deemed to exist when the administrative management plans and organizes internal controls in a manner that reasonably ensures the efficient and effective achievement of the organization's goals and objectives. The purpose of internal auditing in assessing the efficacy of the internal control system is to determine if the system is operating as planned. 

The internal control system is considered effective when the administrative management directs it in a manner that ensures reasonable assurance of achieving the organization's goals and objectives. The primary objective of an organization's internal control system is to ensure that the financial information is reliable and accurate, that the organisation complies with its policies, procedures, and plans, that its assets are safeguarded from theft and loss, that resources are used efficiently and effectively, and that the recognised goals and objectives for operation are achieved. Therefore, internal auditing centres its attention on the internal control architecture.Therefore, this study aims to assess the significance of internal audit on the productivity of insurance companies in Cameroon.

Statement of the Problem

Over the years, organization has come to terms that viability of any business depends on the implementation of efficient internal audits, which are necessary to deter unethical behavior, such as intentionally withholding crucial information to facilitate fraudulent activities especially in insurance industry.  As pointed by Ajao & Oluwadamilola, (2020), for insurance industry many interplay of data abound and sometimes financial statements are manipulated, leading to scandals that might undermine investors' trust and potentially impair the capital market. Some researcher like Uziso and Kadesh (2023) argue that these scandals happened because the organisation had a weak internal control system. Therefore, strict regulations are needed to improve standards for auditing, accounting, and corporate governance. Internal auditing is a crucial component for the efficient operation of any business, including insurance companies, since it facilitates informed decision-making for the company. It provides the confidence that well-informed decisions have been made, reflecting the facts in financial accounts accurately and ensuring that assets are valued correctly and protected, while all critical responsibilities are carried out comprehensively. 

Apparently, without dependable internal auditing techniques, the strategic processes of goal-setting and communication procedures within organisations may be at risk, while information processes are likely to be compromised (Ajao & Oluwadamilola, 2020). Furthermore, efficient internal audits aid in reducing these problems by offering an impartial evaluation of financial statements, adherence to rules and regulations, and the general effectiveness of insurance businesses.

Contextually, the insurance industry in Cameroon has consistently demonstrated unsatisfactory performance as insurance companies have consistently failed to compensate their clients, often providing weak justifications for their actions. Consequently, the doubtful dependability of their financial report has hindered the industry's potential for expansion, necessitating the implementation of an internal control mechanism. Although existing literature have demonstrated the correlation between the internal audit function and the financial performance of publicly traded companies in both the financial and non-financial sectors. However, only a limited number of these research have specifically examined the insurance industry, in which certain writers have discovered a positive correlation (Mare’L, 2018; Tanja, Julija & Tatjana, 2019; Amoh, 2019). In contrast, certain scholars have identified a negative correlation (Ibrahim & Collins, 2018; Araoye, 2019). In contrast, Ebere and Ibanichuka (2016) failed to establish any correlation. Amidst these controversies, the study seeks to assess the significance of internal audit on the productivity of insurance companies in Cameroon.

 1.3  Objectives of the Study

The main purpose of this study is to assess the significance of internal audit on the productivity of insurance companies in Cameroon. Specifically, the study will;

Find out whether internal audit standards have an effect on the performance of insurance companies in Cameroon.

Assess the impact of internal audit function on the financial performance of insurance companies in Cameroon.

Assess the relationship between internal audit practices and the productivity levels of insurance companies in Cameroon.

Propose best practices for enhancing the effectiveness of internal audits in promoting productivity in insurance companies.

1.4  Research Questions

The following questions have been prepared for the study:

Do internal audit standards have an effect on the performance of insurance companies in Cameroon?

What is the impact of the internal audit function on the financial performance of insurance companies in Cameroon?

What is the relationship between internal audit practices and the productivity levels of insurance companies in Cameroon?

1.5 Research Hypotheses

H0: Internal audit does not have a significant impact on the productivity of insurance companies in Cameroon.

Ha: Internal audit have a significant impact on the productivity of insurance companies in Cameroon.

1.6 Significance of the Study

The results of this study will be helpful to stakeholders, individuals, businesses, and future studies in the area. The study's conclusions and recommendations will be especially helpful to insurance companies, as they will help them understand how crucial internal auditing is to operating a successful business. Given the presentation of the factors required to evaluate the viability and investment worthiness, the study's conclusions will be of significant interest to fund providers and investors in the insurance sector. Furthermore, the study will help the board of directors and management of insurance companies and other related enterprises since it will help them recognise the value of internal audit functions and, as a result, place a certain amount of reliance with a view to improving their financial performance.

1.7 Scope of the study   

The scope of this study is boarded on the significance of internal audit on the productivity of insurance companies in Cameroon. Empirically, the study will find out whether internal audit standards have an effect on the performance of insurance companies, assess the impact of internal audit function on the financial performance of insurance companies, assess the relationship between internal audit practices and the productivity levels of insurance companies and propose best practices for enhancing the effectiveness of internal audits in promoting productivity in insurance companies.

Geographically, the study will be delimited to insurance companies in Cameroon.

1.8 Limitation of the study

In the course of carrying out this study, the researcher experienced some constraints, which included time constraints, financial constraints, language barriers, and the attitude of the respondents. In addition, there was the element of researcher bias. Here, the researcher possessed some biases that may have been reflected in the way the data was collected, the type of people interviewed or sampled, and how the data gathered was interpreted thereafter. The potential for all this to influence the findings and conclusions could not be downplayed. More so, the findings of this study are limited to the sample population in the study area, hence they may not be suitable for use in comparison to other schools, local governments, states, and other countries in the world.

 1.9 Definition of Terms

Auditing:The systematic examination and evaluation of financial records and transactions of an organization to ensure accuracy, reliability, and compliance with established accounting standards and regulations.

Internal Auditing: function within an organization that provides independent assessments of the adequacy and effectiveness of risk management, control, and governance processes.