Perception of the Effectiveness of Internal Audit Function in Libya

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Management always is striving to achieve their objectives effectively and protecting assets. Therefore, it needs continually to evaluate the activities of every department of their organisation. Internal audit (IA) has become an important and an integral part to organisation to achieve their objectives and protecting assets. Thus, a study of the role and effectiveness of internal audit function in developing countries such as Libya could enable understanding internal audit practice where there are no local standards on how the effectiveness of those departments can be evaluated. Libya is a developing Arab state located in north central Africa with an area of 1,759,540 square kilometres (1,092,882 square miles) and a- Mediterranean coastline nearly 1,800 kilometres long (1,118 square miles) from Tunisia in the west to Egypt in the east.

Limited prior research has focused on the effectiveness of internal audit (EIA). Also, previous research has no generally agreed approach to determine the effectiveness of internal audit function. Furthermore EIA appears not yet sufficiently explored. Employing institutional theory and Marx's theory of the circuit of industrial capital, this study seeks to explore and interpret the opinions of the participants regarding the role and EIA in Libyan Public Enterprises. It aims to introduce a new perspective for evaluation of internal audit effectiveness by identifying two group of factors that impact on audit effectiveness, i.e., those related to Standards for Professional Practice of Internal Auditing SPPIA (independence, competences, scope of work and work performance) and those related to organization management support (salaries and material and moral incentives).

The study will utilize a qualitative research paradigm to enable understanding whether the internal audit function in Libyan public enterprises is perceived to be effective. Interviews will be used to collect data from managers of administrative affairs, financial controllers, directors of internal audit in public enterprises operating in manufacturing, banking and insurance sectors and external auditors responsible for these enterprises.

THE RESEARCH PROBLEM AND ITS SETTING

Research Setting

Professional practice of IA was born around 1941. Before the 1950s, IA focused on financial audit. It was heavily involved in the review of financial statements. Since 1941 the Institute of Internal Auditors (IIA) has played an important role in development and enhancing the professional stature of internal auditors (Yee et al. 2008). IIA (2004) defined internal auditing as:

----an independent, objective assurance and consulting activity designed to add value and improve an organization'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.

According to this definition internal auditors should play a relevant role in evaluating and improving the effectiveness of the risk management processes. This statement also reflects the Marxist definition of internal auditing that the modern operational auditing aims is increasing the rate of return on capital, it aims to be value adding (Yee et al. 2008). Recently, (IA) has became an important part of the organizations structure as a value adding service to organizations (Al-Twaijry, Brierley & Gwilliam 2003; Arena & Azzone 2009; Bou-Raad 2000; 2005; Coram, Ferguson & Moroney 2008; Enyue 1997; Goodwin 2004; Mihret, D. G. & Woldeyohannis 2008; Yee et al. 2008). Al-Twaijry, Brierley and Gwilliam (2003) explain that there are two benefits in having an internal audit department to organizations. Firstly, it improves the operations and manages risk. Secondly, it helps the organization in the prevention and detection of mistakes or fraud, and the safeguarding of the assets of the organization. Therefore, the objective of IA is examining and evaluating the adequacy and effectiveness of other controls in order to provide the management of an organization with information, analyses and recommendations to assist them in achieving its objectives (Bou-Raad 2000; Brody & Lowe 2000; Goodwin 2004; Yee et al. 2008).

Also IA is an important tool for external audit because the work of internal audit can help external auditor in many respects. For example internal auditor enable external auditor to understand the internal control system before any work is being carried out (Haron et al. 2004). However for external auditor to rely on the work of internal auditors must assess EIA. American Institution of Certified Public Accountants (AICPA) has issued Statement of Auditing Standards SAS No. 65. It has determined EIA in three criteria, competence, objectivity and work performance. Al-Twaijry, Brierley and Gwilliam (2004) point out that the external auditor expressed concern about the independence, scope of work and small size of many internal audit departments in Saudi Arabian companies.

The importance of IA has been confirmed indirectly in some legislation, such as al the Sarbanes Oxley Act (2002) in the USA and the Corporate Law Economic Reform Program Act in Australia (Carey, Subramaniam & Ching 2006). Also the recent corporate collapses and financial scandals also have increased attention on IA as an important part of the organization (Arena, Arnaboldi & Azzone 2006; Coram, Ferguson & Moroney 2008; Schneider 2003).

Although (IA) has become an important part of the organizations structure, academic researchers have largely ignored IA as an organisational control function. Because there is a lack of internal audit research compared to that on external audit (Boyle 1993). According to Mizrahi & Ness-Weisman (2007): "Yet, there is relatively little in the literature about the measurement of auditing effectiveness in the public sector. Currently this should not be ignored as the international market is becoming more and more open. However IA, in order to be a value adding service to organizations, must be effective (Mihret, D. G., James & Mula 2009a). According to Mousa (2005) :

There are two basic reasons why it is important to examine and evaluate EIA. One is that it is an indication of the quality of performance and can describe whether or not the IA function is performing in a satisfactory manner. The second is that the evaluation can serve as a motivator for an individual or an organisation to achieve a better performance.

Mizrahi & Ness-Weisma (2007) have state that in general two important tools for achieving managerial accountability in the policy-making process are evaluation and auditing.

Despite of scholars' attempts to measure and evaluate EIA, there is no generally acknowledged guide or tool for this purpose (Arena & Azzone 2009). For this reason, prior research has differed in determining the effectiveness of internal audit function in three ways. Firstly, previous research has utilized a variety of criteria to determine EIA. For example, Haniffa and Cooke (2002) and Mihret, James and Mula (2009c) studied the influence of environmental factors on internal audit's practice. Al-Twaijry, Brierley and Gwilliam (2003); Mihret, James & Mula (2009b); Mihret, Mula & James (2009d) and Yee et al. (2008) have used the Standards for the Professional Practice of Internal Auditors (SPPIA) as guideline to evaluate EIA. Arena and Azzone (2009); Elliott, Dawson and Edwards (2007) and Mihret and Yismaw (2007) have developed models to evaluate EIA. Secondly, while some prior research has examined EIA from the point of view of the organization (managers, the chief audit executive and internal audit staff) others have depended on external auditors' perceptions. Thirdly, most previous research has focused on mixed sectors (public sector, private sector and government ministries).

The mission of IIA is to provide dynamic leadership for the global profession of internal auditing (IIA 2004)). SPPIA are an effective indication to determine EIA (Al-Twaijry, Brierley & Gwilliam 2003). Mihret, James and Mula (2009b, p. 10) argue that: "The use of SPPIA provides a better proxy measure because it helps to measure internal audit effectiveness by examining internal audit systems and processes". A positive association between compliance with SPPIA and organizational goal achievement could be additional indicator of effective internal audit (Mihret, D. G., James & Mula 2009b) . For internal auditing to be a value-added activity, it is important for internal auditors to comply with SPPIA (Al-Twaijry, Brierley & Gwilliam 2003).

Also internal audit's practice would not be effective without management support. Adams (1994) explained that the interest of management is an important factor to maintain a strong IA. Mihret and Yismaw (2007) highlighted that management support is one of two most important factors influencing audit effectiveness. Management support such as pay rates and material and moral incentives could improve EIA. Mihret, James and Mula (2009c) state that most participants in their study believed that the pay rates and career prospects in public sector were not enough. This could have a potential to limit EIA. Albercht et al (1988) found that there are four factors that the directors of internal audit departments could develop to enhance EIA top management support, an appropriate corporate environment, high quality internal audit work, high quality internal audit staff and an appropriate corporate environment.

Libya is a developing Arab state located in north central Africa with an area of 1,759,540 square kilometres (1,092,882 square miles) and a Mediterranean coastline nearly 1,800 kilometres long (1,118 square miles) from Tunisia in the west to Egypt in the east, for more detail see (Otman & Karlberg 2007). Libyan public enterprises are the most important source of capital formation. In most of these enterprises internal audit departments have been established to evaluate the activities of the organizations. However, there is no rule that tells organizations how to manage their internal audit departments and there are no professional standards and guidelines available to internal auditors in Libya contrary to the West, resulting in organizations having their own internal guidelines on the practice of IA (Almagory 1998).

In line with the new trends of the Libyan society, towards encouragement of domestic and foreign investment, establishment of a stock exchange and adoption of international accounting standards by the banking sector and stock market, there is a need to investigate the conditions of the accounting and auditing profession in the Libyan environment (Alhsadi 2007). As a starting point in this direction, those who follow the reality of financial accounting in the Libyan environment tend to emphasize the weakness of the Libyan experience, especially in the professional field (Al-Kilani 2002; Ashour 2004). Libya's Commercial Law for the year 1953 had put forward an integrated accounting financial accounting model and it required each company to establish an internal audit department (Alhsadi 2007). Moreover, according to proclamation No. 116 of 1973, all the Libyan public organizations, be they industrial, commercial, or services related, are subject to external audit. However, recently all the Libyan public organizations have been required to undergo audit by public auditors (Namely the staff of the Management Control Institution). The public sector still dominates the economy, consistent with socialism. Some of the features of IA documented by Mihret et al. for the time of the communist regime in Ethiopia (1975-1991) may apply in Libya today. Libya is a mired economy with some aspects of emergent capitalism and some aspect of communism.

Research Questions

This research arises cut of the need to evaluate EIA in Libya (Arena, Arnaboldi & Azzone 2006; Arena & Azzone 2009; Christopher, Sarens & Leung 2009; Conor & Jenny 2007; Coram, Ferguson & Moroney 2008; Goodwin 2004; Mihret, D. G. & Yismaw 2007). More specifically Al-Twaijry, Brierley & Gwilliam (2003); Mihret, Admassu and Abdalla (2009e); Mihret, James and Mula (2009c); Mihret, Mula and James (2009d); Mihret and Woldeyohannis (2008); Mihret and Yismaw (2007) and Yee et al.(2008) suggest the need to focus on IA in developing countries. Because IA has become an integral part in modern business and the internal auditor's role is becoming increasingly important to organizations to achieve their objectives. Also the rapid growth of the public sector and serious problems concerning organizational control and supervision, resulted in management need continually to evaluate the activities of every section of their organisations that could assist management in both achieving efficiency and protecting assets (Yee, Sujan & James 2007).

In all Libyan Public Enterprises internal audit departments have been established to evaluate the activities of the organisations as a service to management. Despite the importance of evaluating EIA in various economic activities in Libya, no formal guidelines are provided to support this evaluation. Also some of the previous studies about IA in Libya have concentrated on some activities such as industrial activities (Ashour 2004) the banking sector (Elmasallati 1995). Therefore, it is apparent that there is a need for research to examine and evaluate the effectiveness of the internal audit function within the Libyan context where there are no standards on how the effectiveness of those departments can be evaluated. As a result this study is concerned with EIA in Libyan Public Enterprises. Thus, this study seeks to examine EIA Libyan Public Enterprises. Therefore, the main question underlying this research study is:

Research Question: To what extent is the internal audit function in Libyan Public

Enterprises perceived to be effective?

Thus, to answer the main question underlying this research study, the following eight subsidiary questions are formulated:

RQ1: To what extent is the internal audit function in Libyan Public Enterprises

independent of management?

RQ2: Does the scope of internal auditing actually extend into other types of non-financial

(managerial / operational) areas at all management levels can be identified?

RQ3: To what extent are the internal auditors competent, in terms of knowledge and skills?

RQ4: To what extent is the performance of internal audit effective, in terms of managing

internal audit activity, nature of work, engagement planning, performing the

engagement, communicating results and monitoring progress?

RQ5: Is internal audit in Libya operating under adequate management support in term of

salaries and material and moral incentives?

RQ6: Are organizations in Libyan aware of the social benefit of effective internal auditing?

RQ7 What programs and actions should be implemented to improve EIA?

RQ8: What can be done to attract and nurture skilled and talented young people into internal

auditing in Libya?

Scope of Study

This study will base on six factors which are independence, competences, scope of work and work performance, salaries and material and moral incentives to examine EIA. However, it will not use other factors such as environmental factors. The study will focus on public enterprises, industrial, banks and insurance which are state-owned. On the other hand it will not include private enterprises. Also it does not purpose to study external auditors' reliance on internal audit work. It will explore the external auditors' opinion about EIA in Libyan public enterprises.

Research Objectives

The present study aims to obtain the opinions of the participants regarding the role and EIA in Libyan Public Enterprises. It will introduce a new perspective for evaluation of internal audit effectiveness by identifying two group of factors that impact on audit effectiveness, i.e., those related to SPPIA, issued by IIA (independence, competences, scope of work and work performance) and those related to organization management support( salaries and material and moral incentives). In other words, the answer of questions from one to six, this study will introduce the opinions of the participants regarding the role and EIA in Libyan Public Enterprises. In addition, the answer of questions seven and eight will provide recommendations and suggestions on how EIA could be improved in the future.

Contribution

The following points will explain how the study contributes to knowledge as follow:

First, this research will contribute to the literature relating to EIA. Boyle (1993, p. 227) states that: "compared to that on external audit, the academic literature on IA is limited". Boyle also found 21 articles on the subject of IA during the period from 1975 to 1990 and none of which dealt with how its effectiveness can be evaluated. This lack of research is particularly serious in developing countries. Due to the lack of internal audit research on Middle-Eastern and North African companies, Al-Twaijry, Brierley and Gwilliam (2003); Mihret, Admassu and Abdalla (2009e); Mihret, James and Mula (2009c); Mihret, Mula and James (2009d); Mihret and Woldeyohannis (2008); Mihret and Yismaw (2007) and Yee et al. (2008) this study will provide insights on IA in Libya and whether the internal audit functions in Libyan Public Enterprises is effective. It could be useful for academics by enhancing their understanding of merits and limitations of IA in Libya. Moreover, the contribution of the study is not restricted to the Libyan environment. It extends to the wider field of IA research. It will be especially relevant for communist and ex-communist countries such as Russia, Vietnam, Cuba, china, and the countries of Eastern Europe.

Second, this study is the first one concerning evaluation of internal audit function in public enterprises operating in manufacturing, banking and insurance sectors in developing countries, mainly Libya where there is no rule that tells organizations how to manage their internal audit departments and there are no professional standards and guidelines available to internal auditors in Libya as in the West, resulting in organizations have their own guidelines on the practice of IA.

Third, this study will fill an important gap in the previous research regarding measuring and evaluating the effectiveness of internal audit function. Mihret and Yismaw (2007) used the management support as factors to determine EIA in Ethiopia. However, the management support factors did not include the salaries and material and moral incentives which could affect EIA. Mihret and Yismaw (2007) point out that future research could be welcome to fully understand the level of internal audit effectiveness in the public sector by defining other variables affecting IA. Mihret, Mula and James (2009d, p. 1) highlight that: "Internal audit effectiveness needs to be conceptualized separately in industries and sectors could yield useful insights". Therefore, this study will introduce a new perspective for evaluation of internal audit effectiveness by identifying two group of factors that impact on audit effectiveness, i.e., those related to SPPIA ((independence, competences, scope of work and work performance) and those related to management support (salaries and material and moral incentives). Also the participants in most previous studies were external auditors however this study will use both a view of organization (manager of administrative Affairs, manager of administrative affairs and director of the internal audit) and external auditors responsible for this organization. Furthermore some question of the study will provide recommendations and suggestions to improve and develop EIA.

Fourth, most previous research has used quantitative research to examine IA. It has used questionnaire for data collection. However this study will employ a qualitative research to examine EIA. It will utilise interview method for data collection. As previous research has mentioned, there is no generally acknowledged guide or tool for measuring and evaluation EIA. This study wills contribution to literature knowledge regarding evaluation EIA by using qualitative data because in qualitative research researchers do indeed dig deep to get a complete understanding of the phenomenon (Leedy & Ormrod 2005). This means by the use of quantitative research (interview data collection), this study will be depth investigated to the factors affecting the effectiveness of internal audit function. The benefits of qualitative research for precent study will explain more in research methodology.

Fifth, most previous research has focused on IA in different sectors (private and public sectors). However this study will focuses on public enterprises for several reasons which also will explain in research methodology.

LITERATURE REVIEW

Internal Audit Effectiveness

There has been limited research on internal audit effectiveness. These prior research suggest that internal audit function has evolved from performing traditional IA function to become a value adding to organization (Al-Twaijry, Brierley & Gwilliam 2003; Allegrini et al. 2006; Arena, Arnaboldi & Azzone 2006; Arena & Azzone 2009; Cooper, Leung.P. & Wong 2006; IIA 2004; Mihret, D. G., Mula & James 2009d; Yee et al. 2008)). IIA (2004) define internal auditing as independent, objective and consulting activity designed to add value to organization. Mihret, Mula and James (2009d) explain that it must understand internal audit effectiveness to assess the value adding potential of IA. IA in order to consider as a value adding service to organizations, it must be effective (Mihret, D. G., James & Mula 2009a).

However, prior research has differed in determining the effectiveness of internal audit function. Al-Twaijry, Brierley and Gwilliam (2003) studied the development of IA in Saudi Arabian corporate sector by using institutional theory. They highlighted that it is important for internal auditing to comply with SPPIA to be a value added activity. They used SPPIA in terms of quality internal audit staff, quality internal audit work, an appropriate corporate environment and top management support to evaluate EIA. The results of this study show that IA in Saudi Arabian corporate sector is ineffective and it is not a value adding service to organizations. The study results also highlighted that the managers do not implement the recommendation of IA. They also suggest that future research is necessary to evaluate EIA accurately, because the factors that used in this study may act to reduce the value of IA.

Also Mihret and Yismaw (2007) studied EIA in public sector higher educational institution in Ethiopia. The study identified four factors impacting EIA that internal audit quality, management support, organization setting and auditee attributes. The results indicate that IA is not effective in term of proficiency, planning, recommendations and the limitation scope of work. Also audit quality and management support are the most two important factors influencing audit effectiveness respectively. The authors suggest that the need to future research to fully understand EIA in public sector by identifying other variables affecting internal audit effectiveness.

Yee et al. (2008) have studied the role and effectiveness of internal audit and in Singapore. They examined the perceptions of Singapore senior, middle and junior managers regarding the role and effectiveness of internal audit. In contrast to prior research this study is the first to apply Marxist economic theory on internal audit function. Also unlike in Saudi Arabia (Al-Twaijry, Brierley & Gwilliam) and Ethiopia (Mihret, D. G. & Yismaw 2007) findings, Yee et al. (2008) overall findings that 1) the internal audit function in Singapore is improving and it has became an important part of the organizations structure as a value adding service to organizations 2) In general managers are satisfied with the services internal audit. They also recommend that the need to explore the role and effectiveness of internal audit in Middle-East, because in developing country internal audit function can ensure that capital is not wasted through inefficiency, fraud and corruption.

Mihret, Mula and James (2009d) have studied EIA in three different organization, government ministries, state-owned companies and private companies. Similar to (Al-Twaijry, Brierley & Gwilliam 2003) this study employed institutional theory perspective to examine EIA . They also used major elements of SPPIA to measure EIA. The results of this study suggest that the level of internal audit effectiveness varies between these organizations. Also the internal audit's authority and responsibility, and its link with top management are important factors to enhance EIA. The authors suggest that "internal audit effectiveness needs to be conceptualized separately in industries and sectors could yield useful insights".

Arena and Azzone (2009) state that in the light of recent changes in the role of internal audit function this study attempts to identify the organizational drivers of internal audit effectiveness in Italian companies. They indicate that recently, the role of IA has increased because of its links to the internal control-risk management system. This study defined a model to measure internal audit effectiveness that include EIA as dependent variable and resources and competencies of internal audit team, resources and competencies of internal audit team, the audit processes and activities and the level of interaction between IA and audit committee as independent variables. The results of this study suggest that internal auditors need to create new skills to perform activities that are more closely related to risk management because risk management needs auditors who are able to deal with different sources of risk and to increase the managers' confidence in risks and controls. The results of this study also explain that internal audit effectiveness is influenced by the characteristics of the internal audit, the audit processes and activities and the organizational links. Arena and Azzone (2009) state that:

Internal audit effectiveness increases in particular when the ratio between the number of internal auditors and employees grows, the Chief Audit Executive is affiliated to the Institute of Internal Auditors, the company adopts control risk self-assessment techniques, and the audit committee is involved in the activities of the internal auditors.

The authors highlight that the need to more details analysis about the internal auditor's competent in order to understand which specific skills can influence internal auditors.

Goodwin (2004) has made A comparison between the role of IA in the public sector and those in the private sector in Australia and New Zealand. The author highlight that there is no requirement for private sectors in Australia and New Zealand to establish internal audit department. However, the Australian Stock Exchange encourages large companies to have internal audit department. Regarding the requirement to establish internal audit function in Australian public sector is not clear because it depends on the specific legislation governing them. On the other hand public sector in New Zealand there is no requirement to have an internal audit function. The results have suggested that internal auditors in public sector are less likely to report to the chief of financial Affairs than those in the private sector. Although the two sectors have used outsourcing to achieve some internal audit work, public sector organizations are more likely to use external auditor for these services. Also there are not significant different between internal auditors in the tow sectors in interaction with external auditors.

Summary

Recently, internal audit function has been changing from traditional function to become a value adding to organization but for internal auditing to be a value added, it must be effectiveness. Therefore, prior research suggests that it is important for the organisation to evaluate EIA to ensure that it provides value to the organisation. However, previous research indicates that IA may not always be effective. Also the role of internal audit function is different between private and public sectors. It is appear that there is a gap in previous research regarding examining EIA. It has utilized different criteria to determine EIA. Also it has focused on mixed sectors (public sector, private sector and government ministries). In addition it has used different theories. Most prior research has suggested that the need to future research to examine EIA. Therefore, exploration EIA in developing countries such as Libya could be contributed reducing the gap in literature.

The Theoretical Framework

The study seeks to determine EIA based on six factors independence, competences, scope of work, work performance, salaries and material and moral incentives. Then it will focus on how EIA in public enterprises could be improved in the future. Institutional theory and Marx's theory will be employed in order to achieve research aims. Following is a brief discussion of institutional theory and Marx's theory and the explanation for combining them within this study.

Katz and Kahn [1966] defined the effectiveness "as maximising return to the organisation

Institutional Theory

Prior research has been employed institutional theory to study IA (Al-Twaijry, Brierley & Gwilliam 2003; Arena, Arnaboldi & Azzone 2006; Mihret, D. G., James & Mula 2009b; Mihret, D. G., Mula & James 2009d). Institutional theory focuses on aspects of social structure. It gives an explanation for how institutional patterns, structures and practices are shaped through coercive, mimetic and normative isomorphism (DiMaggio & Powell 1983) . The importance of institutional theory lies in the demonstration that what an organization actually accomplishes and what their structures suggest to the external environment they should accomplish (Fogarty 1996). However, organizations may exhibit to the external environment that they are operating in line with expected by the external environment while in fact they are not (Meyer & Rowan 1977). Institutional theory explains that organizations sometimes engage in decoupling. Al-Twaijry, Brierley & Gwilliam (2003) embraced the isomorphic perspective for investigating the development of internal Audit departments in Saudi Arabia. They state that "we consider that the actual operations of internal audit departments are decoupled from the expectations of how they operate as stated in SPPIA". Institutional theory provided a perspective regarding their results, IA is not well developed. Arena, Arnaboldi and Azzone (2006) also studied the development of internal audit department in Italy by using institutional theory.

Institutional theory is considered suitable for internal audit research for the following reasons. Firstly, the theory is domain encompasses internal audit practices which are a part of all organizational phenomena. Secondly, it helps to explain organizational phenomena without assuming a limited set of organizational goals compared to agency and transaction cost theories which are predicated on the assumption of shareholder wealth maximization. Third, it could support audit research in countries where the market is under development (Mihret, D. G., James & Mula 2009b). Prior research suggests the theory validity in internal audit research both in developing countries, Al-Twaijry, Brierley and Gwilliam (2003); Mihret, Mula and James (2009d) and developed countries (Arena, Arnaboldi & Azzone 2006).

Marx's Theory of the Circuit of Industrial Capital

Katz and Kahn (1966) defined the effectiveness as maximising return to the organisation. Marx's theory indicates that the value is created in the production process, thus the identifying IA as a value adding service to organizations relate to the production process. Yee et al. (2008, p. 151) state that:

The aim of operational auditing is to improve organizational efficiency and effectiveness through constructive criticism. The concept of constructive criticism ties in very well with the traditional Marxist values of growth and improvement through criticism and self-criticism propounded by twentieth-century Marxist scholars such as Louis Althusser.

From the perspective of Marx's theory, IA is an integral part of the labour control process for several reasons. Firstly, IA helps ensure the quality of financial reports. Secondly, it also helps ensure the accuracy of return on capital. Thirdly, the work of IA is still not separate completely from accounting and external audit (Mihret, D. G., James & Mula 2009b; Yee et al. 2008). As Marx's theory, the modern auditing aims to increase the rate of return on capital. Accordingly internal audit function from the perspective of Marx's theory is important to correct situations where the capital is in decline because of inefficiencies, fraud, corruption and the protection of favoured relationships.

As Yee et al (2008) explain, the focus on agency theory western researchers unfortunate effect of focusing only on internal audit's benefits for the organizations short term bottom-line. By contrast, a Marxist perspective allows us to consider the social benefits of IA for the whole social, including raised living standards fraud and corruption reduction, increased employment and poverty alleviation. Therefore, the Marxist perspective is more important for developing countries where competent internal audit services have the capacity to improve the rate of return on capital of business enterprises, in instance, it could contribute to reducing corruption, poverty alleviation. Also it could maximize employment levels and increase wage rate and production level (Yee et al. 2008). Prior research also suggests the theory validity in internal audit research both in developing countries, Mihret, James and Mula (2009b) and developed countries (Yee et al. 2008).

RESEARCH METHODOLOGY

Research Design

The study will employ a qualitative research paradigm to enable understanding whether the internal audit function in Libyan Public Enterprises is perceived to be effective. Bryman (2001) viewed qualitative research as a research strategy that uses words rather than quantification in the process of data collection and analysis. Leedy and Ormrod (2005, p. 133) state that:

To answer some research questions, we cannot skim across the surface. We most dig deep to get a complete understanding of the phenomenon we are studying. In qualitative research we do indeed dig deep.

Maxwell (1996) points out that the purposes of qualitative methodology as conducting formative evaluations, ones that are intended to help improve existing practice rather than simply to assess the value of the programme or product being evaluated. Qualitative research can be used for evaluation research, they provide a means through which a researcher can judge the effectiveness of particular policies, practices, or innovations (Leedy & Ormrod 2005). Taylor and Bogdan (1997) state that qualitative research help researchers to understand how people see things and examine how things look from different vantage points. The nature of the present study apparently requires a qualitative approach in order to gather information, explore and interpret the opinions of the participants regarding the role and effectiveness of IA by identifying relevant concepts. These concepts include independence, competences, scope of work, work performance, salaries and material and moral incentives that impact on audit effectiveness in public enterprises. Institutional theory will be employed to explain the influence of these concepts on internal audit effectiveness (Al-Twaijry, Brierley & Gwilliam 2003; Arena, Arnaboldi & Azzone 2006; Mihret, D. G., James & Mula 2009b; Mihret, D. G., Mula & James 2009d). Marx's theory of the circuit of industrial capital will serve to illuminate the concept of return on capital employed and to provide a perspective on to what extent is the internal audit function fits into the value creation process of enterprises (Mihret, D. & 2009; Yee et al. 2008). This approach arguably enables the researcher to evaluate the IA function and examine how the effectiveness of IA in those companies could be improved. The study required a research approach which provided clarification, insight, discovery and interpretation rather than one suitable for hypothesis testing. As A result the scope of the information required can not be used to evaluate the effectiveness of the IA function in those companies. Taylor and Bogdan (1997) indicate that the goal of qualitative research is to examine how things look from different vantage points. As the present study aims to obtain the opinions of the participants regarding EIA, it seems clear that Taylor and Bogdan's viewpoint supports the selection of the qualitative approach used for the present study.

Population

The target population will be Libyan Public Enterprises operating in manufacturing, banking and insurance sectors. There are several reasons that led the researcher to select Libyan public enterprises. In fact in developing countries there are differences between public and private sector in terms of the laws and regulations especially in Libya where the public sector is dominant on the economy because most enterprises are public. For example, public enterprises in Libya are required by law to establish internal audit departments. Also these enterprises have to be audited by public auditors. On the other hand private enterprises in Libya are not likely to have internal audit internal audit department because of their small sizes and there is no legal requirement to establish internal audit departments (Alhsadi 2007). As a result the researcher expected that most private enterprises would not have established internal audit departments. Also currently, public enterprises are the most important economic activity in Libya because they are a major source of revenue for the government budget (Mousa 2005). Yee et al (2008) have found that the percentage of private companies having an IA is lower than the percentage of listed companies. Also Zakaria & Selvaraj (2006) found that most private institutions of higher education do not have an internal audit function. Goodwin (2004) and Mihret, Mula and James (2009d) state that there are differences in status between IA in public and private sector. For example, internal auditors in public sector reporting to a higher level in the organization more than those in the private sector.

Because of the fact that there are limited public banking and insurance in Libya, the study will include all of them to achieve enough number of responses to be used for interpretation. However purposeful sampling will be used for Libyan Public Enterprises operating in manufacturing based on some factors such as size of employment, size of capital. The fact that most sampling in qualitative research is neither probability sampling nor convenience sampling but falls into a third category: purposeful sampling (Patton 1990, cited in Maxwell, 1996). The numbers of these public enterprises in this study will be 15 (9 industrial, 5 banks and 1 insurance).

Qualitative Data Collection

Data collection in qualitative research usually involves one or more of the following data gathering methods: (1) interviews, (2) questionnaires, (3) observation and (4) documentary analysis. Personal interview as a data collection method will be utilised in the present study to gather a great deal of useful information about EIA. Interviews are one of the most effective data collections methods, because an interviewer can communicate directly with the respondents (Yin 1989). Kumar (1996) has stated that the advantages of the interview are that information can be supplemented, questions can be explained, it is useful for collecting in depth information and it is more appropriate for complex situations. There are three types of interviews used as data collection methods structured, semi-structured and unstructured interviews. Qualitative data collecting method in the current research will be via semi-structured interviews. Semi-structured interviews will be conducted to gain a deeper understanding of the quantitative data gathered and analysed. Semi-structured interviews provide the interviewees the opportunity to speak frankly about what they believe. Also it provide foster flexibility and enhancing reliability in the study (Kumar 1996; Maxwell 1996). May (1997) explains that the interviewer who can seek clarifications during the course of the interview, could record qualitative information about the topic discussed and the questions are specified.

The interviews will include managers of administrative Affairs, financial controllers, directors of the internal audit in Public Enterprises and external auditors responsible for these Enterprises. The researcher will choose those persons because they always are in direct contact with IA function and they are the most influential parties in the IA function. For example, the researcher will interview 1) manager of administrative Affairs whose function is subjected to internal auditor's examination 2) the financial controller whose job is to control financial activities within the enterprises 3) external auditor whose job is to evaluate the IA function 3) director of the internal audit whose function is responsible for the development and execution of internal Audit strategy.

Interview guides will be prepared for use during the interviews. In the interview guide the researcher decided how to phrase question and when to ask them. It reminds the interviewer what and how to ask the participants. An interview guide is especially useful in the evaluation research because it gives sponsors a sense of what the researcher will actually cover with information (Taylor & Bogdan 1997). Different interviews guides will be prepared and used for the interviews with managers of administrative Affairs, financial controllers, directors of the internal audit and external auditors to enhance the reliability of data collection. The questions included in the interview guides will largely be adapted from those used in prior research (mainly. Al-Twaijry, Brierley & Gwilliam 2003; Mihret and Yismaw 2007; Arena and Azzone 2009; Yee et al 2008), IIA's standards for the professional practice of internal audit and International Standards on Auditing (ISA) 610, i.e. Auditor's consideration of the internal audit function (IFAC 2007). Also the questions will be grouped according to the different factors in relation to EIA. The first draft of interview checklist will be formulated in the English language. It will be presented to the supervision team to give their comments as well as other experts (PhD students and PhD holders). Then the second draft of interview checklist will be formulated in the Arabic language. Also it will be presented to other experts such as PhD students and PhD holders.

The researcher will take notes and digitally record the conversations during the interviews, which are estimated to take one hour, on average, with each participant. A tape recorder allows the interviewer to capture more than he/she could by relying on memory . However, digitally recording will not be used with people who do not prefer the interviews to be tape-recorded because it could reduce the quality of data (Taylor & Bogdan 1997). For instance, respondents may not provide genuine responses to some question if the interview were recorded (Mihret, D. G., James & Mula 2009c). For this reason at the commencement of each interview, interviewees will ask if they would allow the interview to be recorded by tape in order to ensure that each interviewee will be relaxed about the use of the tape recorder. The researcher will explain to each participant that the tape recorder will only be used in order to enhance the accuracy of the recording of the interview. Immediately after the interview, the full text of the interview will be written down in Arabic language using these notes and tapes recorder. All the interviews will translate back to English language.

Qualitative Data Analysis and Interpretation

This stage will present the descriptive analysis of the data collected from the interviews in order to evaluate the perceptions of the participants regarding EIA. Data analysis is the most difficult aspect of qualitative research to communicate to others. As a result all researchers develop their own ways of analysing qualitative data (Taylor & Bogdan 1997).

In this study data analysis will be carried out in three stage process of data reduction, data display and extracting conclusions. It is not expected that the participants would use the same terms when they expressed their opinions. This means that the participants may have expressed the same view using different words. It is not expected that they would also express their opinion in the same way as academics. Therefore the researcher will reduce the large number of response. The reduced data will be displayed in tables with rows and columns representing the concepts in the framework. The responses to the questions will be presented in groups, it will be analysed section by section as set out in the interview guide. This strategy will enable the researcher to concentrate on all responses to each section more easily, and to identify specific concepts and ideas. Results will be interpreted by comparing and contrasting categories to identify major patterns of similarities and/or differences to understanding of the degree of agreement/disagreement between the interviewees regarding EIA which will identify in the interview guides (Albercht et al. 1988).

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