Investigation of the value-added role of internal auditing in the governance of selected South African municipalities

Abstract

The aim of the study was to investigate the value-added role of internal auditing (IA) in the governance of selected South African (SA) municipalities. Legislations and frameworks that formed the theoretical foundation of the study included the Municipal Finance Management Act (MFMA), the King report on corporate governance (King lV Report (2016)), Committee of Sponsoring Organisations (COSO) and the International Standards for the Professional Standards of Internal Audit (ISPPIA). The MFMA makes it mandatory for each municipality to have an Internal Audit Function (IAF). Therefore, this study seeks to ascertain if IAFs in SA municipalities are performing value-adding activities or are established to meet the legislative requirement. Data were collected through documentary reviews of the selected municipalities’ annual reports for the financial period 2014/15 to 2016/17. 2016/17 annual reports were the latest published annual reports at the time of data collection. The collected data were analysed and interpreted qualitatively. Analysis and interpretation of data led to the finding that there are various roles played by the IA to fulfil its value-added mandate in SA municipalities. Such roles are prescribed by the ISPPIA, MFMA and there are some other roles, for example, investigation of fraud, corruption and other irregularities and training deduced from extant research. Empirical findings suggest that much as there are IAFs that are performing these roles towards fulfilling the value-added role, there are some municipalities which have established IAF for the sake of complying with the MFMA. The findings further reveal that it is not mandatory for IA to disclose the work they have performed, and no framework guides the extent of disclosures to be made. These findings lead to the conclusion that IAFs that perform the identified roles are value-adding mechanisms to their municipalities. Further, the study concludes that some municipalities have an IAF established for compliance with the MFMA and are not value-added mechanisms. The value added by IA can be determined through assessing reliance placed by the AGSA on the work performed by IA, the recommendations made by the IAF or performed audit engagements measured against planned audit engagements.