The effectiveness of audit committee activities in internal controls, financial reporting and information technology.
Lebese, Thapelo
Lebese, Thapelo
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Abstract
Nearly two decades have lapsed since the introduction of the Municipal Finance Management Act 56 of 2003. Despite this, good governance in the South African local government sphere has deteriorated significantly over this period, albeit that there are a few local municipalities that are seeing success and achieving stable and effective governance. The audit committee is a critical formalized structure of governance intended to oversee the financial management activities of the municipality. The audit committee is also intended to advise and provide
recommendations to the municipal manager, senior management and council of the municipality relating to the adequacy, reliability and accuracy of the municipality’s
financial reporting and its non-financial information. However, the effective functioning of audit committees within the Sekhukhune District Municipality and its constituent local municipalities remains a concern. These committees have failed to exercise their oversight role in financial reporting, internal control, and information technology and have demonstrated a lack of essential soft skills necessary to manage the activities of the council. This is according to the Auditor General of South Africa (AGSA) in numerous annual reviews of the South African municipal management environment. The objective of the study was to investigate the perceived effectiveness of audit committee activities in relation to enhancing internal controls, improving financial reporting and the information technology environment in the Sekhukhune District Municipality, and assessing the impact of soft skills and audit committees’ independence in executing these activities. The study was guided by the following objectives: to investigate whether the audit committee is effective in enhancing
internal controls, financial reporting, and information technology governance; and to investigate the influence of audit committee members' soft skills and their independence when reviewing the processes of the municipalities. The study employs a wide literature review concerned mainly with effective governance. The literature presented offers different perspectives on the roles of the audit committee. The literature further highlights sources which explore the origins of good governance, with particular emphasis on local government. These are all discussed in context of effective governance and its benefits to sound financial management in local government. A quantitative research methodology was employed. The study adopted a descriptive research design, involving a population of 99 participants (thus a census type survey) and a sample of 91 participants. The targeted individuals were
members of the audit committees, and municipal management consisting of: chief financial officers, accounting officers, chief audit executives, internal audit managers, directors and heads of divisions. After describing the research methodology followed, the analysis and the results of the study are presented and organised according to the research questions.
Data was ultimately collected from only three of the four local municipalities within the Sekhukhune District Municipality and from the district municipal office itself. A response rate of 52% (47 respondents) was obtained. The non-participation of any individual from Makhuduthamaga Local Municipality (no responses or excuses were received) does pose a limitation in the study’s wider applicability. A survey response rate of 50% or higher is considered excellent in most circumstances and is sufficient for the study to produce valid results. Data were statistically analysed through Stata/SE software, using descriptive factor analysis and inferential statistics. Stata/SE version 16 was used to analyse the statistical data obtained through the completed survey questionnaires. The findings of the study revealed that the audit committee is perceived to be effective in enhancing internal control in all of the identified areas. The results further indicate that the audit committees are effective in fulfilling their financial reporting oversight responsibilities. Thus, the audit committee effectively monitors changes in accounting policies and principles adopted by the municipality. The findings also show that the audit committee is aware of cyber risk exposure, and further indicate participants’ concern with regard to the audit committee’s effectiveness in enhancing oversight of information technology governance. The findings also show that the internal audit function is not adequately resourced or skilled to assist in providing assurance regarding the information technology risks control environment of the municipalities. Further statistical analysis revealed that a statistically significant relationship exists between audit skills and expertise, audit committee interpersonal skills, and key stakeholder relationship management. The study also reveals a statistically significant correlation between the audit committee’s information technology governance, skills, experience, and oversight responsibility. The relationship
between financial reporting, audit committee interpersonal skills and stakeholder relations was found to be positively significant. Based on these research findings, it
was concluded that there is a positive perception that the audit committee provides a positive oversight role over internal control, financial reporting, and information
technology governance: and that audit committee members possess adequate levels of soft skills and independence. The study thus recommends strengthening the position of the audit committee chairperson, thus encouraging them to tackle under-performance from the finance team. This can be achieved through re-appointment and re-organization of key
functions and personnel in the external and internal audit functions. The study also recommends that audit committees reinforce internal controls and risk management
by communicating their 'control culture' requirements to management. Another recommendation is that there should be open communication channels between the audit committee chairperson and the chief audit executive. This will allow the audit committee to understand the controls and processes implemented by management and ensure that financial statements and supporting systems comply with relevant standards and are subject to appropriate management review. The main contribution of this research is to highlight the necessity of building a sound and effective audit committee. The current study aims to contribute to the audit committee and governance literature by providing empirical evidence of the audit committee’s effectiveness in the local government environment. The study contributes to the extensive body of literature on governance by providing up-to date empirical evidence on the effectiveness of audit committees in their oversight of internal control, financial reporting and information technology governance. The study has the potential to benefit municipal governance, financial managers, and auditors of local government, assisting all key stakeholders to understand the roles of audit committees and how they can benefit from their functional responsibilities. The study could also benefit the wider accounting and auditing professions in various sectors to understand that the audit committee has an oversight role over financial reporting, information technology security and operational matters relating to the audit process, internal controls and compliance with laws and regulations.
This significance can be extended to academic researchers and the National School of Government in that its insights could be useful in directing capacity building and
developing interventions to address the training needs of those already employed in local municipal governance.
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Date
2022-12-01
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Tshwane University of Technology
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Keywords
Audit committees, Internal controls, Financial reporting, Information technology, Soft skills, Governance, Local municipalities.