Framework for improving internal audit effectiveness in supply chain management fraud prevension in the Gauteng Provicial Treasury.
Mashaphu, Thabang Shirley Mochelo
Mashaphu, Thabang Shirley Mochelo
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Abstract
Amongst other roles, the internal audit function should provide assurance that the internal controls that are in place are adequate to mitigate fraud risk, and to ensure that the supply chain management goals in the public sector are met. However, the role of internal audit as a management control element in the public sector has not been thoroughly researched in current academic literature, and this has motivated the researcher to bridge this knowledge gap. Other studies have looked at the effectiveness of internal audit in the public sector on fraud prevention and detection. Thus, the objective of this study was to examine the extent of internal audit’s effectiveness in curbing supply
chain management fraud in the Gauteng Provincial Treasury. Its second aim was to contribute to the body of academic literature through the development of a framework for monitoring internal audit’s effectiveness in supply chain management fraud prevention in the Gauteng Provincial Treasury.
The study was carried out using a mixed-methods research approach and by following a sequential explanatory design. A survey questionnaire was used to collect both quantitative and qualitative data from the selected participants who were all internal auditors in the Gauteng Provincial Treasury. The study was conducted using a questionnaire, and the questions were a mix of closedended questions and open-ended questions, the open-ended questions being intended to allow respondents the chance to elaborate on their thoughts. The study targeted all 112 internal auditors in the Gauteng Provincial Treasury, but with a response rate of 36.6%, it meant only 41 participants returned completed questionnaires. The quantitative data was analysed using Statistical Package for the Social Science (SPSS), version 27.0. Both descriptive and inferential statistical analyses were carried out to understand whether demographic elements had a bearing on the results as well as perceptions of the role of internal audit in supply chain management fraud prevention in the Gauteng Provincial Treasury. Qualitative data was used to identify themes, and these were manually generated and then analysed. The findings that emerged from the descriptive statistics evaluating the effectiveness of supply chain management systems in the Gauteng Provincial
Treasury, showed that the main contributing factors to fraud risk in supply chain management are associated with greed, bribery, poor controls and monitoring, and weakness in the system. Pressure, in this analysis, is political, and service delivery pressure and the opportunity to commit fraud are the major weaknesses in the system. Upon examining the effectiveness of internal audit in detecting and preventing supply chain management fraud, the results indicate that internal audit is effective in identifying fraud in supply chain management. The results further indicate that participants agree and strongly agree that internal audit assists in the monitoring process for the supply chain management system and provides assurance to management with regard to controls intended to manage fraud risks in supply chain management. Exploratory factor analysis also confirms (with a significance level above 0.5) internal audit’s effectiveness in SCM fraud prevention and detection in the Gauteng Provincial Treasury. These findings show that there is strong evidence to conclude that the majority of participants believe that internal audit is effective in detecting SCM fraud. Further, the Cronbach alpha coefficient also signifies the internal consistency of each of the identified factors (as suggested in the literature), at a level of 0.5 (acceptable). The results of the qualitative phase illustrated strong views that the internal audit function has the capability to detect and prevent fraud risks in supply chain management.
The study contributes to the literature from two perspectives: firstly, this is the first empirical study on the effectiveness of internal audit in minimizing supply chain management fraud in a government treasury department within the South African context. Secondly, the study’s main contribution is the development of a new framework for measuring internal audit effectiveness in
supply chain management fraud prevention. This framework offers a significant and useful tool for use in the public sector, and advances the academic theory underpinning internal audit, thus contributing to understanding of the role of internal audit in fraud prevention. Additionally, making use of the framework can identify improvements in internal audit’s effectiveness in supply chain fraud prevention in the public sector environment, as well as identifying improvements to the framework itself.
As a result of conducting this research, the conclusions drawn and proposals put forward from this study show that SCM custodians should strive to be consistent in the application of regulations and should collaborate with internal audit to identify fraud indicators and thus trigger efforts to prevent fraud. It is worth remembering that the role of internal audit is not to investigate fraud, but to evaluate risks and provide reasonable assurance that the organisation has taken adequate measures with regard to implementing internal controls, and that risks are therefore being mitigated and minimized.
After a close inspection of internal audit and its rules, and engaging with existing literature, plus analysis of questionnaire responses and respondent interviews, it is apparent that internal audit should be providing assistance through regular monitoring of the SCM process. Thus, robust internal audits within the supply chain should address aspects such as fraud investigations, and the evaluation of anti-fraud mechanisms, as well as providing training to the bidding committee members. The detection of fraud is a necessary first step to preventing future occurrences as management, with insights from internal audit, may be able to assess how to prevent the particular fraud in future. And, with successfully implemented preventions, the opportunities for fraud are reduced. The major role of internal audit in the prevention and detection of fraud is to understand the techniques and mechanisms by which fraud is manifested, and then to establish that the entity’s evaluation of the risk of fraud, and its controls in mitigation thereof, are sufficient and performed at the right intensity. It is self-evident that internal audit is an anti-fraud control tool, and for internal audit to be more effective in fraud prevention and detection the entity must start by using common tools such as whistle-blower policies and fraud control policies more effectively and
consistently, as well as maintaining an up-to-date record of already identified fraud risks. Although the study used the Gauteng Provincial Treasury for the analysis, the framework that was developed could be used in all public sector environments. Further research on the framework should be done and the results shared, to increase the knowledge of internal audit’s beneficial
involvement in supply chain management, and thus to improve the practice of public sector auditing. Further studies are needed to expand the role of internal audit in improving the effectiveness of supply chain management systems in the public sector environment. Internal audit is able to provide business leaders with appropriate frameworks to develop an effective supply
chain risk management programme. Additionally, internal audit could assess the likelihood that the risks identified in the supply chain will occur.
One of the limitations of the study relates to the uniqueness of the target population. Further research and replication of this study in a different sector could thus help provide additional evidence in support of, and a beneficial comparison of the results. This would also help develop the framework guiding the role of internal audit in fraud prevention and detection in supply chain management. Existing theoretical frameworks were examined and served as a roadmap for this thesis. In other words, this thesis has grown out of earlier research, and as such, in future it will be necessary to reassess and expand the theory and revise the framework/model to address new theories as they emerge. It is also recommended that future studies address the effects of specific roles of internal audit in relation to new events and the emergence of new fraud risks, using the current study as their starting point. Finally, the study recommends that the internal auditors should be involved in the entire supply chain management process, to work hand in hand with the custodians of the supply chain management process. This recommendation is made despite the fact that, under normal circumstances, the internal audit function would only become involved after management had already set up the operational aspects of the supply chain management process, in order to evaluate the processes for any possible fraud risks.
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Date
2023-11-01
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Tshwane University of Technology
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Keywords
Supply chain management, Internal audit, Fraud risk management, Public sector, Treasury, Fraud prevention and detection