Fighting Corruption by Means of Effective Internal Audit Function: Evidence from the Ghanaian Public Sector: Fighting Corruption by Means of Effective Internal Audit Function

Abstract

Using structural equation modelling (SEM) we analysed the link between corruption and effective internal audit function (EIAF) in Ghana through a survey of directors and managers of selected public sector organizations. A decade after the promulgation of the Internal Audit Agency Act (IAAA), 2003 (Act 658) as an instrument to fight administrative corruption in Ghana, there is little empirical evidence to show its impact on corruption, though anecdotal evidence suggests it has played a critical role in maintaining financial discipline and public sector accountability and transparency. We established that full implementation of Act 658, size of the internal audit department and independence of the audit department significantly affect the effectiveness of the internal audit function which negatively impact on corruption. We conclude that strict adherence to and the implementation of regulations and laws as well as independence of the internal audit function will help fight administrative corruption in Ghana.

Full text

Fighting Corruption by Means of Effective Internal Audit Function: Evidence from
the Ghanaian Public Sector
Kofi Fred Asiedu and Eric Worlanyo Deffor
Ghana Institute of Management and Public Administration (GIMPA) Achimota, Accra, Ghana
Using structural equation modelling (SEM) we analysed the link between corruption and effective internal audit
function (EIAF) in Ghana through a survey of directors and managers of selected public sector organizations. A
decade after the promulgation of the Internal Audit Agency Act (IAAA), 2003 (Act 658) as an instrument to fight
administrative corruption in Ghana, there is little empirical evidence to show its impact on corruption, though
anecdotal evidence suggests it has played a critical role in maintaining financial discipline and public sector
accountability and transparency. We established that full implementation of Act 658, size of the internal audit
department and independence of the audit department significantly affect the effectiveness of the internal audit
function which negatively impact on corruption. We conclude that strict adherence to and the implementation of
regulations and laws as well as independence of the internal audit function will help fight administrative corruption
in Ghana.
Key words: Corruption, Ghana, internal audit, structural equation modelling, public sector
1. INTRODUCTION
A complex socio-economic phenomenon that is difficult to
quantify but has drawn much attention in recent years is
corruption. Corruption is often defined as the abuse or
misuse of public office for private gains (World Bank,
1997, 2004). Other authors have expanded this
conventional definition to include any form of dishonest
or unethical conduct by a person entrusted with a position
of authority, often to acquire personal benefit (see
Kaufmann & Vicente, 2005; Svensson, 2005). According to
the literature, corruption harms the economic development
and social stability of nations since it is rooted in the
existence of privileges and incomplete market mechanisms.
It is bad for development because it leads governments to
intervene where they need not, thus undermining their
ability to enact and implement policies in areas in which
its intervention is clearly needed: environmental
regulation, health and safety regulation, social safety nets,
macroeconomic stabilization and contract enforcement
(World Bank, 2005a; Liu & Lin, 2012). Corruption is seen
as a primary impediment to growth (Kaufmann & Kraay,
2002), with serious consequences for the economies of
developing countries (Hamilton & Hudson, 2014). While
the phenomenon of corruption is multifaceted and difficult
to measure, and can be encountered in all sectors of an
economy (see, e.g., World Bank, 1997, 2005a, 2013; Campos
& Syquia, 2005; Senior, 2006; Znoj, 2009), two perspectives
emerge in the current financial literature and official
pronouncements: bribery and extortion.
1
Bribery entails
malfeasance, fraud and embezzlement by a public official
(Myint, 2000; Enu-Kwesi, 2014), whereas extortion refers
to the use of public office orthe use of officialposition, rank
or status by an office holder to extort money or favours for
the individualˈs own personal benefit (see Kaufmann, 2005;
World Bank, 2005a; Heyneman, Anderson & Nuraliyeva,
2008; Enu-Kwesi, 2014).
Other writers challenge the conventional definition of
corruptionby making a distinction between legal and illegal
forms of corruption (see Campante & Ferreira, 2004;
Kaufmann & Vicente, 2005). They discuss legal corruption
to involve collusion between parties both from the public
and private sectors, working together for a common goal
such as legal lobbying by the private sector in exchange for
passage of particular legislation or allocation of
procurement contracts that make use of publicly invested
power at the expense of broader public welfare (Campante
& Ferreira, 2004; Kaufmann & Vicente, 2005). Illegal
corruption, according to the authors, focuses on bribery
or other illegal forms of activities as abuse of public
office for private gains. Illegal corruption is therefore a
symptom of system and institutional failure,
contributing to misallocation of resources, poverty,
inequality, fiscal indiscipline, and erosion of the trust of
the state (see Johnson, Kaufmann & Shleifer, 1997;
Campos, Lien & Pradhan, 1999; Campante & Ferreira,
2004; World Bank, 2005a).
In sub-Saharan Africa, corruption has been substantially
documented in the financial literature as one of the drivers
inhibiting development and fuelling poverty (see, e.g.,
World Bank, 1997, 2005a; Van Gansberghe, 2005; Znoj,
2009; Hamilton, 2013; Hamilton & Hudson, 2014; Pring,
2015). One important aspect of corruption in sub-Saharan
Africa is administrative corruption (Campos & Syquia,
2005; Hamilton & Hudson, 2014). The literature defines
administrative corruption as ‘mis-implementation of a
law or a regulation to accommodate bribes or extract
money’(Campos & Syquia, 2005, p. 15). According to the
authors, administrative corruption ranges from ‘petty
bribes to government officials overlooking the violation of
the law all the way to grand-scale corruption in the
awarding of contracts for huge infrastructure projects’.
The consequence of this is that it creates distortions in
government programmes and retards investment, growth
and poverty reduction (see World Bank, 1997, 2005a,
2013, 2014; Kaufmann 2003, 2005; Campos & Syquia,
2005; Pring, 2015).
In Ghana, corruption is reported to have contributed to
the erosion of trust in various state institutions, which in
turn has weakened the stateˈs ability to fight other mal-
administration in the economy (Fosu & Aryeetey, 2008).
According to the authors, it is unsurprising to note that
corruption provided rent-seeking opportunities for various
officials in government, and indeed Ghana is replete with
Correspondence to: Kofi Fred Asiedu, Ghana Institute of Management and
Public Administration (GIMPA) Achimota, Accra, Ghana. Email:
kasiedu@gimpa.edu.gh
International Journal of Auditing doi: 10.1111/ijau.12082
Int. J. Audit. 21:82–99 (2017)
©2017 John Wiley & Sons Ltd ISSN 1090-6738

cases of corruption in all regimes, both civilian and military
(Fosu & Aryeetey, 2008). As economic incentives, these
rent-seeking opportunities contributed to the prevalence
of elite political instability in Ghana in the late 1970s (Fosu
& Aryeetey, 2008). To reverse the trend, several reforms and
anti-corruption laws have been put in place. They include
the Public Procurement Act, 2003 (Act 663); the Financial
Administration Act, 2003 (Act 654) as amended; the
Internal Audit Agency Act, 2003 (Act 658); the Anti-Money
Laundering Act, 2008 (Act 749); and the Whistle Blowers
Act, 2006 (Act 720). Taking the Ghanaian institutional
setting into consideration, this paper examines the Internal
Audit Agency Act, 2003 (Act 658) as an instrument to fight
administrative fraud and corruption in Ghana. After a
decade of promulgation, there is little empirical evidence
as to its impact on corruption, though anecdotal evidence
suggests that the Act has played a critical role in
maintaining financial discipline and public sector
accountability and transparency (see, e.g., Auditor-
Generalˈs Report, 2011, 2012, 2013, 2014).
Using data from a survey of directors and managers and
staff of selected public organizations in Ghana, we examine
the effects of laws and regulations, specifically, the Internal
Audit Agency Act, 2003 (Act 658) in fighting
administrative corruption in Ghana. We hypothesize that
full implementation of the Act is negatively related to
administrative corruption. Our hypothesis is built on the
intuition that fighting corruption in an institution is
contingent on effective internal audit function (EIAF). The
more effective the internal audit function, the lower the
level of corruption in various institutions. Institutions are
supposed to help stem corruption, thus the lack of quality
and effective institutions,
2
such as internal audit functions,
is often cited as the cause for these system failures.
To provide implications for theory and practice, we also
examine the factors influencing EIAF in Ghana since, all
things being equal, an EIAF will help unearth loopholes
and system failures, which in turn will help stem
corruption. Thus, we present empirical evidence of the link
between EIAF and administrative corruption in Ghana.
Three hundred directors, managers and staff of various
institutions participated in this research, and they were
asked to answer various questions relating to the internal
audit function and corruption in the Ghanaian public
sector. As hypothesized, the findings show that EIAF is
negatively related to administrative corruption. We can
conclude that the enactment of Act 658 has helped the
government to tackle administrative corruption in the
public sector. This study contributes to the literature by
first, empirically establishing the link between Internal
Audit Agency, an element of Act 658, and administrative
corruption in the public sector of Ghana. Second, unlike
other studies on corruption which pay critical attention to
external auditors to detect fraud and corruption, especially
the annual government auditing of metropolitan,
municipal and district assemblies (MMDAs) by staff of
the audit services, this study provides evidence of the role
of internal regulations and law, such as the internal audit
function, in addressing administrative corruption in
institutions.
2. LITERATURE REVIEW
Corruption and internal audit function
There is a growing literature on fraud and corruption
and the internal audit function in developed and
developing economies (see Brierley, El-Nafabi &
Gwilliam, 2001; DˈOnza et al., 2015; Halbouni, 2015). Most
researchers argue that internal audit functions are a value-
adding process which is critical for uncovering and
preventing fraud in institutions (Richards, 2002; Burnaby,
Howe & Muehlmann, 2009; IIA, 2010; Abbott, Parker &
Peter, 2012). Though most researchers (e.g., Thomas &
Clements, 2002; Halbouni, 2015) believe that it is not the
primary objective of internal auditors to oversee fraud
prevention programmes, it is logical that internal auditors
help in the identification of fraud risks in institutions. For
example, in the course of their work, when they discover
certain risk factors for fraudulent financial reporting in
income, questionable bonus plans and restrictive debt
covenants (Church, McMillan & Schneider, 2001), it
behoves internal auditors to report. In an ACFE survey
in 2008, cited in Halbouni (2015), the survey found that
internal auditors were able to initially detect fraudulent
activity in over 19 per cent of fraud cases in their work
(ACFE, 2008). According to ACFE, this 19 per cent
represented a drastic increase compared with the 9 per
cent of fraud cases that were revealed by external auditors
(Halbouni, 2015) in the same work. According to Halbouni
(2015), despite these relatively low percentages, ACFE
(2008, 2010) concluded that internal audit departments
were the most important entities for detecting and limiting
asset misappropriations and corruption schemes. The IIA
(1210.A2, p. 6) requires internal auditors to have sufficient
knowledge to evaluate not only the risk of fraud but also
the manner in which organizations manage that risk.
Despite this, the standard does not mandate internal
auditors to have the same degree of experience as those
mandated to detect and investigate fraud (Halbouni, 2015).
Most theoretical studies on corruption focus on the
micro-models of the phenomenon by studying individual
acts of corruption, while the empirical papers typically
study corruption at the country level (see Rose-
Ackermann, 1978; Kaufmann & Kraay, 2002; Kaufmann &
Vicente, 2005; Vicente, 2005; de Graaf, 2007). In all these
studies, three necessary conditions are established to point
to the existence of corruption: discretionary power,
economic rents and weak institutions (see Adit, 2003; Liu
& Lin, 2012). According to Liu and Lin (2012), while the
arbitrary nature of power makes rent-seeking possible,
the lack of strong institutions make ‘public officers with
authority fearless’in extracting and creating rent because
they would be difficult to catch and prosecute.
Corruption is said to be a huge problem that concerns
many economies as it distorts production (Mauro, 1998;
Wu & Yao, 2008), causes redistribution of income, and
makes non-beneficiaries worse off, thus increasing the
gap between the rich and the poor (Chen & Li, 2010). Most
researchers of corruption believe that the phenomenon
distorts the function of government and market
mechanism by making it difficult to build economic order,
ensure economic development, consequently damaging
social stability (Wu & Yao, 2008; Liu & Lin, 2012; Hamilton
& Hudson, 2014; Pring, 2015). Since corruption results from
systems failure, strong institutions or institutional reform is
a strong counter-strategy to combat the phenomenon.
Strong institutions mean making systems and structures
more effective, including human resource capacity
building in these institutions.
Internal audit function, as part of institutional
governance, is an independent, objective assurance and
consulting activity designed to add value and improve an
organizationˈs operations (see Goodwin & Teck, 2001).
Fighting Corruption by Means of Effective Internal Audit Function 83
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Thus, internal audit is a management-oriented discipline
that addresses the entire range of operating activities
involving a variety of assurance and consulting services
(see, e.g., Spraakman, 1997; IIA, 2002b; Dubois, Dumontier
& Frésard, 2010; Alzeban & Gwilliam, 2014). To the IIA,
the internal audit function helps an organization to
accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance
processes (see also Stern, 1994; Sawyer & Dittenhofer, 1996;
Nagy & Cenker, 2002; Goodwin, 2004). In most developed
economies, the internal audit function is underpinned by
mandatory requirements. In Singapore, for example,
Goodwin and Teck (2001) report that listed companies are
mandated to have their own internal audit function. In the
early 1990s, there was a strong global trend towards
outsourcing internal audit activities to public accounting
firms and other providers (Ritternberg, Moore & Covaleski,
1999). However, by the late 1990s, the IIA had expressed its
preference for in-house internal auditing (IIA, 1999; Martin
& Lavine, 2000). According to Goodwin and Teck (2001),
the Institute argued that an effective internal audit
department is an integral part of corporate governance
and plays an important role in helping management and
the Board of Directors (BoD) to achieve their objectives (see
also Ritternberg et al., 1999; Ridley, 2001).
The importance of internal auditing has also been recently
underpinned by the decision of the New York Stock
Exchange (NYSE) to amend its listing requirements to
mandate that all listed companies in the United States have
an audit committee (NYSE, 2003) to liaise among internal
auditors, external auditors and management to ensure the
independence of the audit function. Three monitoring
mechanisms (external auditing, internal auditing and
presence of board of directors) have been identified in the
corporate governance literature as critical to the success of
institutions (see Anderson, Francis & Stokes, 1993; Blue
Ribbon Committee, 1999). The Institute of Internal Auditors
(IIA) introduced another perspective that explicitly included
a fourth cornerstone of corporate governance: the audit
committee (IIA, 2003a, 2003b). The IIA sees the objective of
internal auditing as both supporting and strengthening the
organizationˈs governance mechanisms and evaluating and
improving the effectiveness of risk management and control
(IIA, 1999).
Despite the increasing importance of internal audit,
studies on the value added of having an internal audit
function in an institution, especially in the public sector of
most developing countries, are limited due to the political
and economic environment of most public sectors and
recent developments in the area (see Schyf, 2000; Brierley
et al., 2001; Gwilliam & El-Nafabi, 2002; Mihret & Yismaw,
2007; Alzeban & Gwilliam, 2014).
Effective internal audit function
In the transition economies, studies provide evidence that
firms with good corporate governance structures and
systems, such as the presence of a board of directors,
are more likely to have an internal audit function (see
Goodwin & Kent, 2004). A limitation of such studies is
that they simply attempt to predict the existence of an
internal audit unit and do not examine the number of
staff, budget, qualifications, strategic focus and its
independence –likely predictors of audit quality or
internal audit effectiveness (Carey, Craswell & Simnett,
2000; Carcello, Hermanson & Raghunandan, 2005; Böhm
et al., 2013). In explaining the importance of internal audit
in institutions, for example, Van Gansberghe (2005) stated
that internal audit effectiveness is measured by the extent
to which it contributes to effective and efficient service
delivery, as this drives the demand for improved internal
audit services.
In the literature, two main approaches are used to describe
internal audit effectiveness (IAE). The first approach, as
advanced by White (1976), explains that IAE is determined
by the fit between the audit and some set of universal
standards extrapolated from the characteristics of the
internal audit function. Further to Whiteˈs(1976)position,
Sawyer (1988) advanced five standards for internal auditing
–interdependence; professional proficiency; the scope of
work; the performance of the audit; and management of
the internal audit department –as the key characteristics of
an effective internal audit. Arena and Azzone (2009) added
to Sawyerˈs position by stating that internal audit
effectiveness should be based on several measures such as
the implementation of internal audit recommendation;
compliance with the IIAˈs International Professional Practice
Framework (IPPF); the nature of internal audit charter and
mission; applicable laws and regulations; and audit
strategies and plans in place of the department (see also
Sutton, 1993; Spraakman, 1997; Dubois et al.,2010).Other
authors have noted that the effectiveness of internalauditing
is not a computable reality, but rather is determined by the
subjective evaluations assigned to this function by
management and other stakeholders (see Ransan, 1955;
Schneider, 1984; Albrecht et al., 1988; Dittenhofer, 2001).
Empirical studies such as Al-Twaijry, Brierley and
Gwilliam (2003) and Arena, Arnaboldi and Azzone (2006)
have used institutional theory framework to identify factors
driving the existence of internal audit effectiveness. For
instance, a study involving 364 Italian companies
established that company peer pressures have a significant
impact on the companiesˈsupport of internal auditing. Their
findings confirmed that the adoption and development of
internal audit were impacted by the coercive, mimetic and
normative pressures (Arena & Azzone, 2007). Internal audit
effectiveness is necessary because it brings perfection to
organizational activities (Ahmad et al.,2009;Unegbu&
Kida, 2011; Ussahawanitchakit & Intakhan, 2011).
A synthesis ofthe literature oninternal audit effectiveness
shows that the role of internal audit in corporate governance
is analysed using the following categories: external auditorsˈ
evaluation of the quality of a clientˈsinternalauditfunction
(IAF); determinants of the IAF reliance decision; extent and
nature of the IAF work relied on by the external auditors;
and other aspects of the external audit affected by the IAF
ˈs involvement (Gramling et al., 2004). Thus, effective
internal auditing is how well auditors detect or prevent
actual errors within an organization and how best they
propose remedial measures to safeguard the resources of
the organization (see Goodwin & Teck, 2001; Goodwin,
2004). In the IIAˈs Global Internal Audit Survey, titled
‘Imperative for Change’, internal auditors are tasked to
sharpen their focus and risk management and governance
processes, since these issues are projected to become the
cornerstone of the internal audit profession (IIA, 2011). In
the series, written purposely for chief audit executives
(CAEs), issues of risk management and governance, key
stakeholder priorities, internal audit resources, and the
leveraging of audit technology and tool were identified as
key imperatives for change for the effectiveness of the
internal audit function (for full discussion of these
imperatives, see IIA, 2011).
84 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

In recent literature, the presence and composition of the
audit committee play a critical role in the IAE. The audit
committee charter, the governance structure and the
composition of the audit committee are equally important,
as the responsibilities of audit committee may include the
review of the qualifications, organization, strategic focus
and resourcing of internal audit as well as the addressing
of the effectiveness of the companyˈs internal control
system (Böhm et al., 2013). Internal auditors are seen as
central forces in uncovering or limiting misappropriation
of assets and corruption schemes (Halbouni, 2015). They
are supposed to be at the forefront of detecting and
preventing fraud in institutions (see Richard, 2002;
Burnaby et al., 2009; Abbott et al., 2012).
Country background
Ghana promulgated the Internal Audit Agency Act, 2003
(Act 658) more than a decade ago, but there is little
empirical evidence on the effectiveness of the Act. Act 658
established an Internal Audit Agency as a central agency
to coordinate, facilitate, monitor and supervise internal
audit activities within ministries, departments and
agencies (MDAs) and MMDAs in order to secure quality
assurance of internal audit within these state institutions.
Management, by law, is mandated to ensure the
establishment of internal audit departments (IADs) and to
give it the needed support to perform its work. Given the
nature and extent of administrative corruption in the
country, it is important that we examine the effectiveness
of this law, as Ghana has had a U-shaped history with
corruption and embezzlement of public funds. In the late
1970s, corruption was rife and cited among the factors
contributing to failed policies in Ghana. After major
reforms in the 1980s to reduce corruption by instituting
severe punishment for offenders, there was a general
consensus among Ghanaians that corruption among
policy-makers and senior government officials had
diminished considerably (Aryeetey & Kanpur, 2008).
Accordingto the authors, there were hardly any allegations
in public about government officials demanding and
taking bribes on government contracts. This was partly
due to the harsh methods that the government instituted
(see Gyimah-Boadi & Jeffries, 2000). In the 1990s,
corruption was said to have reappeared. Allegations at all
levels of public life began to increase. The majority of
Ghanaians saw corruption as a major problem in the
country. Many Ghanaians considered corruption to be
widespread and commonest in the police service and
among customs officials. Many regarded politicians also
to be relatively corrupt (Ayee, 2002).
The Internal Audit Agency Act, 2003 (Act 658) was
enacted to check the abuse of public resources, control
spending, disbursement and procurement of goods and
services. However, evidence abounds in various bulletins,
with the 2011 Auditor-Generalˈs report stating that the
government lost over US$60 million due to violations of
procurement laws, irregularities in contract administration
and management lapses, all pointing to corruption. The
report further stated that in 2010, the value of reported
irregularities in contract administration was significantly
higher as a result of contract management lapses that
occurred particularly at the Ministries of Health, Defence,
Roads and Transport, Education, Employment and Social
Welfare (Auditor-Generalˈs Report, 2011). The 2012
Auditor-Generalˈs report on the financial operations of
MDAs also revealed unhealthy cash management
practices, which resulted in the failure of these institutions
to pay revenues collected into the Consolidated Fund. The
practice of tax irregularities and unauthorized payments,
as well as non-availability of adequate records was most
prevalent. According to the report, such irregularities and
indifference of MDAs in general cost the nation
$246,744.24 in 2011 (see Auditor-Generalˈs Report, 2012).
In recent times, corruption has been described as
systemic and grand as exemplified by the recent revelation
of corruption involving the public sector, legislature and
the judiciary of Ghana (IAR, 2014). In the annual review
of the Auditor-Generalˈs reports by the Public Accounts
Committee (PAC) of Ghanaˈs Parliament in 2014, many
instances of administrative corruption were established,
specifically regarding public spending by MMDAs and
other para-statals. In 2015, for instance, the Afrobarometer
and Transparency International report cited Ghana as the
second most corrupt nation in Africa (Pring, 2015).
According to all these reports, the negative consequences
of these corrupt acts by government officials and MMDAs
find expression in huge budget deficits, high transaction
costs of doing business, low standard of living and poor
economic performance (see CDD, 2000; IAR, 2014). With
the Internal Audit Agency Act, 2003 (Act 658) in place,
many hope that administrative corruption will reduce as
the number and magnitude of irregularities and errors
requiring adjustment by the external auditor have been
found to be substantially lower for entities with an internal
audit department (see Wallace & Kreutzfeldt, 1991). Thus,
after a decade of the promulgation of the Internal Audit
Agency Act, 2003 (Act 658) as an instrument to fight
administrative corruption in Ghana, there is little empirical
evidence as to its impact on corruption, though anecdotal
evidence suggests that the Act has played a critical role in
maintaining financial discipline and public sector
accountability and transparency. The present paper intends
to apply structural equation modelling to provide evidence
of the role of EIAF in fighting corruption in a developing
economy.
3. STRUCTURAL EQUATION MODEL (SEM)
Conceptual model
We examine corruption and effective internal audit
function (EIAF) after a decade of the promulgation of the
Internal Audit Agency Act, 2003 (Act 658) using structural
equation modelling (SEM).
Corruption (Corrpt)andEIAF are represented by a
function as:
Corrpt ¼fEIAFðÞ (1)
We postulate that EIAF will help fight corruption in
institutions. Following Alzeban and Gwilliam (2014), we
assume that the internal audit function can be represented
by a composite internal audit effectiveness function in the
form:
EIAFi ¼EIAF Zi
ðÞ (2)
where EIAF
i
denotes effective internal audit function,
which is a function of a vector of factors Z
i
such as the
relationship between internal and external auditors (REL),
resource and size of the department (SoD), extent of
implementation of Act 568 (LAW), certification and years
in practice (YRPT), competency of internal auditors
(COMP) and independence of internal audit (INDP). The
Fighting Corruption by Means of Effective Internal Audit Function 85
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

relationships between these variables are presented in the
conceptual model presented in Figure 1.
From Figure 1, we derive three composite functions as
presented in equations (3), (4) and (5) respectively. This is
basically our internal audit effectiveness –independence-
competency model (see Figure 1).
EIAFi ¼EIAF YRPT;SoD;LAW;COMP;INDPi

(3)
INDPi ¼INDP LAW;RELðÞ (4)
COMPi ¼COMP LAW;SoD;YRPT;RELðÞ(5)
In the conceptual model of Figure 1, there are three latent
constructs: effective internal audit function (EIAF),
relationship between internal auditors and external auditor
(REL) and competency of internal auditors (COMP). A
latent variable or theoretical construct refers to a pheno-
menon that is supposed to exist but cannot be directly
observed. Examples are intelligence, socio-economic status,
welfare competence, job satisfaction, awareness, etc. How-
ever, a latent variable is given empirical meaning (mea-
sured) by means of corresponding statements that relate it
to a set of observed variables (indicators). For instance,
intelligence is measured by intelligence tests and welfare
by indicators such as income, environmental quality, health
care, safety, etc.
Diamantopoulos, Reifler and Roth (2008), however,
explained that given the nature of the relationships to the
indicators, latent variables can be classified into two main
categories, namely reflective and formative latent variables.
They explained that for a latent variable to be reflective, its
causality flows from the latent variable to its indicators.
Hence a change in the indicators reflects the change of the
latent construct. Conversely, a latent variable is formative
if the causality is from the indicator to the construct. This
distinction is important because, according to
Diamantopoulos et al. (2008) and Coltman et al. (2008), the
nature of the latent construct determines the specification
and the reliability of the measurement model, a a
misspecification of the measurement model leads to biased
estimators and poor model fit.
Endogenous variables
Corruption
Corruption, a symptom of system and institutional failures,
has been identified as one of the drivers inhibiting
development and fuelling poverty in sub-Saharan Africa
(Van Gansberghe, 2005; Znoj, 2009; Hamilton, 2013;
Hamilton & Hudson, 2014; Pring, 2015). The phenomenon
is considered a bad omen for development as it keeps
development in a perpetual reverse gear because
governments are forced to intervene where they need not,
thus undermining their ability to enact and implement
policies in other areas in which its intervention is clearly
needed: environmental regulation, health and safety
regulation, social safety nets, macroeconomic stabilization
and contract enforcement (World Bank, 2014). We expect
corruption to decrease when an effective internal audit
function or internal audit effectiveness improves: an inverse
relationship.
Competency of internal auditors
According to the literature, when an internal audit function
is effective, it becomes an important element in helping an
organization achieve its objectives (MacRae & Van Gils,
2014). These authors conclude that organizations with
internal audit activities are better able to identify business
risks and systems inefficiency, take appropriate corrective
action and ultimately support continuous improvement. In
Ghana, the establishment of Act 568 was supposed to give
the mandate to the public services to establish internal audit
departments with a charter and mission to ensure efficiency
in the service. The competency of a department actually
depends on the charter and mission as well as the education
and skills of the staff. Skilful staff with sufficient resources
enhance the competence of an internal audit department
and its effectiveness. We expect a positive correlation with
EIAF as, all things being equal, such auditors will be able
to unearth corrupt practices; thus in the long run reducing
corruption.
Independence of IAD
The financial literature identifies independence and
objectivity as key elements in ensuring effectiveness of
Figure 1: The conceptual model.
86 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

IAD within public sector organizations (CIPFA, 2003). The
Chairman of the American Institute of Certified Public
Accountants (AICPA) had earlier stated independence as
one of the most precious assets and the main cornerstone
of the accounting profession (Mednick, 1997). Alzeban
and Gwilliam (2014) also confirm that increasing weight
is now being placed on the need for internal auditors to
be independent and objective, even though they are
normally employees of organizations. They stated lack of
independence as the main obstacle to satisfactory internal
audit performance in a number of developing countries
(Alzeban & Gwilliam, 2014). An example includes the case
of the South African public sector, where Schyf (2000) noted
a lack of independence of internal audit as a concern facing
the internal audit activities in that country.
The above evidence therefore suggests the importance of
independence of IAD in ensuring its effectiveness within
public sector organizations. To ensure independence and
thus objectivity of IAD, it is now being recommended that
the IAD should hierarchically not be positioned under
parts of the organization that are themselves subject to
internal audit scrutiny. It is suggested that IAD should have
a reporting line that makes it independent of management
in order to achieve independence (see Schyf, 2000). In
Ghana, the internal audit units/departments within the
MDAs are required to submit reports on their activities to
the audit committee of the board of directors. The
independence of the internal auditor is therefore influenced
by Act 658 (LAW) and the relationship of internal auditors
with external auditors. We therefore hypothesize that the
independence of IAD would have a positive relationship
with EIAF.
Effective internal audit function
The term effectiveness describes ‘the degree (including
quality) to which established objectives are achieved’.For
every internal audit system to be effective, the process
should have established performance metrics with related
measurement criteria appropriate to its environment/
organization (White, 1976). We employ a measure based
on the quality of the audit function (see also Alzeban &
Gwilliam, 2014), as a result of the implementation of the
Internal Audit Act, IAA (Act 658) of Ghana as perceived
by internal auditors and managers of selected public sector
organizations. We measure EIAF by aggregating responses
from directors and managers of institutions on a basis of
survey questions on aspects of Act 658 and other
department-specific questions such as resources,
certification and education (qualifications), charter and
mission of department and relationship with external
auditors. We assume that a competent internal audit
department will be effective. We therefore hypothesize that
the effectiveness of the audit function (EIAF), among
others, will depend on the availability of laws and
regulations; clear and well-presented reports, i.e. the extent
of rigour and accuracy of internal audit reports; extent of
implementation of laws and regulations; size of the
department; staff experience; and relationship with
external auditors.
Exogenous variables
Relationship between internal and external auditors
For a good relationship to exist between internal
auditors and external auditors, the independence of the
internal audit department is critical. More often than
not, external auditors rely on the work of internal
auditors to do their job. The scope of work and
materiality of systems and structures depend on the
efficiency and effectiveness of the internal audit function.
For instance, a poorly deployed internal auditing system
can lead to increased, non-value-added costs, many
hours of wasted resources and eventual breakdown of
the assurance system of the institution. According to
the literature, internal auditing, when effectively
implemented, becomes an important gauge as to the
level of risk in the company or institution (Strauss,
2009). The primary function of IAD through the
continuous monitoring of the institutionˈsquality
assurance system is a good feedback to external auditors
in the task and scope of audit engagement. We expect
the relationship between internal and external auditors
to correlate positively with internal audit effectiveness.
Resources and size of IAD
The number of internal auditing staff is a critical issue in
EIAF. Studies have established that the quality of internal
audit work is likely to be higher when the department is
well resourced and sufficient number of staff is involved
in audit work (Ali et al., 2007; Alzeban & Gwilliam,
2014). The link between a sufficient number of staff and
ability of an IAD to perform its duties is well
documented (see Brierley et al., 2001, 2003; Mulugeta,
2008; Obeid, 2010; Alzeban & Gwilliam, 2014). Since the
number of staff in an IAD most often correlates with
the size of the agency or institution, we expect large
institutions to have a sizeable number of internal audit
staff to engage in internal assurance. The number of staff
affects the scope of work and resources and time
allocation. Thus, we hypothesize that larger internal
audit departments will demonstrate higher EIAF
compared with a smaller department.
Charter and mission: extent of implementation of the
Internal Audit Agency Act 2003 (Act 658)
Laws and regulations are important in setting the mandate
and legitimacy of a department. A formal mandate in the
form of an Act gives a department the power and authority
to execute its mandate. Thus, a good governance process
that ensures establishing and preserving values, setting
goals, monitoring activities and performance, and defining
the measure of accountability is paramount in reducing
organizational inefficiencies. The enactment of the IAA
Act, 2003 (Act 658) was good for Ghana. The extent of
implementation of various tenets and provisions of the
Act is another question and depends on several factors
such as the presence of an audit committee, independence
of the department and management support. A well-
defined charter and mission of the internal audit
department will correlate positively with internal audit
effectiveness.
Certification and years with the IAD
The qualification of the IA staff, especially those that are
certified internal auditors, is also important. Certified
and experienced staff members can have very good
knowledge of the operations and systems of the
institutions, thus helping to reduce risk and to set proper
audit scope of activities. The role of an internal auditor
in an institution is to ensure that the organization
adheres to all financial, personnel, lending, data
processing, and other administrative policies and
Fighting Corruption by Means of Effective Internal Audit Function 87
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

procedures as well as economy, efficiency and
effectiveness with which resources are used (see IIA,
2002a). We hypothesize that qualification based on
certification and years in an enterprise, being a proxy
for experience and skill, will affect EIAF positively.
Experienced and certified auditors will understand the
system better, apply the necessary technology and data-
based analysis, including all administrative policies and
procedures, and will therefore save the institution a lot
of man-hours and resources.
Structural equation model
The conceptual model presented in Figure 1 contains
latent variables (relationship, effectiveness and
competency) and observed variables [Act 658 (law),
resources and department size, certification and years
with department and relationship with external auditors].
Latent variables or theoretical constructs in this paper
refers to those phenomena that are presumed to exist
but cannot be directly observed (Oud & Folmer, 2008).
Typically, SEM allows the handling of latent and observed
variables in their relationships within an integrated
framework (Jöreskog & Sörbom, 2001). An SEM, as
introduced by Jöreskog (1977), consists of two sub-
models: a measurement model and a structural model.
The measurement model specifies the relationships
between the latent variables and the observed indicators,
while the structural model represents the relationships
between the latent exogenous variables and latent
endogenous variables as well as the relationships among
the latent endogenous variables. The following equations
present the measurement models for the endogenous
and exogenous variables, respectively.
y¼Λyηþε(6)
x¼Λxξþδ(7)
where yis a p× 1 vector of endogenous observed
variables, xis a q× 1 vector of exogenous observed
variables, ηis an m× 1 vector of latent endogenous
variables, and ξis an n× 1 vector of exogenous variables.
Λ
y
and Λ
x
are p×mand q×nmatrices of coefficients (or
loadings). Finally, εand δare p× 1 and q× 1 vectors of
measurement errors of yand x, respectively.
The structural model reads as follows:
η¼ΒηþΓξþζ(8)
where ηand ξare defined in equations (6) and (7), B is an
m×mmatrix with β
ij
representing the effect of the jth
endogenous latent variables on the ith endogenous latent
variable. Γis an m×nmatrix with γ
ij
representing the effect
of the jth exogenous latent variables on the ith endogenous
latent variable and ζis an m×mvector of disturbances.
Estimation of the model was performed using the SEM
package in Stata 13.1, though other software packages such
as LISREL, OpenMx (in R) and Amos can be equally used
(for details, see Jöreskog & Sörbom, 2001). Maximum
likelihood (ML) estimation was used. Table 1 presents the
various a priori expectations for each of the variables used
in the study.
Table 1: Hypothesized relationships
Independent variable Measurement Variable
names
Hypothesized influence on:
Effectiveness
(EIAF)
Competency
(COMP)
Independence
(INDP)
Corruption
(CORRPT)
Resource and size of
department
Number of people and
tools of the IA
Department
SoD + +/
Competency Measured by a five-item
scale using a
five-point Likert scale
COMP +
Effectiveness of
internal audit function
Measured by six item scale
using a five
Likert scale
EIAF 
Relationship between
internal and external
auditors
Measured by a four item
scale using a
five point Likert scale
REL + + +
Extent of
implementation
of Internal Audit Act
Measured by the extent of
implementing sections of
the ACT 658
LAW +/+/+/
Qualifications of staff Certification and average
number of
years working in the field
of Auditing
YRPT + +/
Independence Measured by a four-item
scale using a
five-point Likert scale
INDP + +
Corruption Measured by a four-item
scale using a
five-point Likert scale
CORRPT
88 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

The conceptual model in terms of equations is as follows:
Measurement model
CORRPT1
CORRPT2
CORRPT3
EIAF1
:
:
EIAF6
COMP1
:
:
COMP5
INDP1
:
:
INDP7
2
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
5
¼
λ1;100 0
λ2;100 0
λ3;100 0
0λ4;200
:: : :
::: :
0λ9;200
00λ10;30
::::
::::
00λ14;30
000λ15;4
: :::
: :::
0 00λ21;4
2
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
7
5
x
CORRPT
EIAF
COMP
INDP
2
6
6
6
4
3
7
7
7
5
þ
ε1
ε2
ε3
:
:
:
:
ε21
2
6
6
6
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
7
7
7
5
(9)
R1
R2
R3
R4
LAW
SOD
YRPT
2
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
5
¼
λ11 000
λ21 000
λ31 000
λ41 000
0100
0010
0001
2
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
5
x
REL
LAW
SOD
YoP
2
6
6
6
4
3
7
7
7
5
þ
δ1
δ2
δ3
δ4
0
0
0
2
6
6
6
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
7
7
7
5
(10)
Structural model
CORRPT
EIAF
COMP
INDP
2
6
6
6
6
6
4
3
7
7
7
7
7
5
¼
0000
β21 000
0β32 00
0β42 β43 0
2
6
6
6
6
6
6
6
6
4
3
7
7
7
7
7
7
7
7
5
CORRPT
EIAF
COMP
INDP
2
6
6
6
6
6
4
3
7
7
7
7
7
5
þ
0000
γ21 γ22 γ23 γ24
γ31 γ32 γ33 γ34
γ41 γ42 00
2
6
6
6
6
6
4
3
7
7
7
7
7
5
x
REL
LAW
SOD
YRPT
2
6
6
6
6
6
4
3
7
7
7
7
7
5
þ
ζ1
ζ2
ζ3
ζ4
2
6
6
6
6
6
4
3
7
7
7
7
7
5
(11)
4. EMPIRICAL ANAYSIS AND RESULTS
The survey
The study was carried out in the Greater Accra Region of
Ghana, which is the economic and administrative region
of the country. A two-stage sampling frame was used to
identify and select the sample for the study. In the first
stage, purposive sampling was used to select some public
sector organizations, followed by the selection of the
respondents from the departments using a simple random
sampling technique. The data instrument collected data on
the socio-demographic information of the respondents and
their perceptions relating to the various factors influencing
internal audit effectiveness using structured self-
administered questionnaires.
Data type and sampling
The data is obtained from workers of selected public
organizations in Ghana. We examined the effects of laws
and regulations, specifically, the Internal Audit Act
(Act 658) in fighting administrative corruption in
Ghana. We sampled 300 workers consisting of heads of
department (director), managers of various units and
staff of the internal audit departments of public
organizations that have functioning internal audit
departments. Purposive sampling was employed to
select the organizations. Thereafter, a simple random
sampling technique was used to draw the sample for
the study. Hence, a total of 300 respondents was drawn.
The structured questionnaires were self-administered to
the sampled respondents in the selected organizations
that met the criteria above. Each organization received
a total of 30 questionnaires, one each for the head of
the department and the unit head and the rest for staff
of the internal audit department. To facilitate the data
collection process, a key person was tasked within each
of the departments to follow up on the distributed
instrument. After collection and data cleaning,
incomplete and implausible answered questionnaires
were removed from the final dataset. A total of 287
questionnaires were used for the data analyses,
representing a response rate of 96 per cent of the entire
sample. The response rate for each category of
respondents is presented in Table 2 as follows: heads
of departments (directors, managers/heads of unit)
(100%) and staff of internal audit unit (92%).
The designed questionnaire dealt with the effectiveness
of the internal auditing processes, corruption and other
independent variables (see Appendix). Specifically, the
study employed several measures of effective internal
audit function (EIAF). These include the departmentˈs
perceived ability to plan; to improve the organizationˈs
productivity; to assess the consistency of results with
established objectives and goals; to implement internal
audit recommendations; to evaluate and improve risk
Table 2: Sample distribution and actual response rate
Type of respondents Number
per unit
Number of
units/departments
Total sample Actual Response
rate
Department heads/managers 2 10 20 20 100%
Other staff of units/departments 28 10 280 267 92%
Tota l 300 287 96%
Fighting Corruption by Means of Effective Internal Audit Function 89
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

management; to evaluate internal control systems; and to
provide recommendations for improvement. Furthermore,
we explored the perceptions of stakeholders (staff of internal
audit departments) on EIAF using measures of competence
of auditors; size of internal audit department; and
relationship between internal and external auditors. Other
variables measured include independence of internal audit;
number of years with the internal audit department; and
extent of implementation of Act 658. From Table 3, the
respective measures for each variable are presented. These
factors were adapted for this study from Alzeban and
Gwilliam (2014) and from review of existing work from
Africa (Wolderupheal, 1998; Ali et al., 2007; Mihret &
Yismaw, 2007; Adetoso, Oladejo & Akesinro, 2013).
Descriptive statistics
The scores for the six indicators used to measure the
effectiveness of the internal audit function (EIAF) is
presented in Table 4. The results show that about 84 per cent
of the respondents either agree or strongly agree (score of 4
to 5) with the indicator (EIAF1) while 11.8 per cent of the
respondents neither agreed nor disagreed with the indicator
(EIAF1). In addition, close to 4 per cent of the respondents
Table 3: Measure questions for each variable
Statements
Effective internal audit function
The activities of internal audit meet the expectations I have from the internal audit department.
Internal audit is aware of to the organizationˈs needs and operates accordingly.
The evaluation of internal audit reports made by the external auditors is positive.
Internal audit reports are clear and well presented.
Internal audit reports are professional.
The managementˈs decision-making process is strongly affected by the reports and findings of the Internal audit function.
Independence
Internal audit staff members are sufficiently allowed by management to perform their professional obligations and duties.
The head of the internal audit reports to a level within the organization that allows the internal audit to fulfil its responsibilities.
The internal audit has direct contact to the Board of the organization.
Conflict of interest are rarely present in the work of internal auditors.
The board approves the appointment and replacement of the head of the internal audit department.
The internal audit department has direct contact with senior management other than the finance director.
Internal audit staff have free access to all departments and employees in the organization.
Corruption
Internal Audit Agency Act 2003 (Act 658) had made a difference in the fight against corruption.
The internal audit department, as part of corporate governance of your institution, has helped in the fight against corruption.
Given the nature of the internal job, it is difficult for one to avoid encountering incidents of corruption in the course of work.
Competency
The internal audit unit has sufficient skilled internal auditors. Most of them have certification in auditing.
The internal audit staff number and their skill matches the scope of officeˈs/sectorˈs internal operations.
The internal audit staff are able to use modern technology (use computerized data tools and specific IA software).
The audit procedures and evidence collections are completed on time, since enough and skilled internal auditors are available or
employed.
It is possible to audit and review each activity on time, and cover the planned scope of auditing activities.
Relationship
External auditors are friendly and supportive.
External auditors have good attitude towards internal auditors.
External auditors are willing to give internal auditors an opportunity to explain their concerns.
External and internal auditors consult on the timing of work in which they have mutual interest.
Adapted from Alzeban and Gwilliam (2014)
Table 4: Frequency distribution of the scores of the indicators of Effectiveness and Corruption
Indicators Statements Score
12345
EIAF1 The activities of internal audit meet the expectations I have from the
internal audit department
0.0 3.8 11.8 59.6 24.7
EIAF2 Internal audit is aware of to the organizationˈs needs and operates accordingly. 0.3 3.1 13.6 60.8 22.0
EIAF3 The evaluation of internal audit reports made by the external auditors is positive 0.3 2.4 17.5 57.0 22.7
EIAF4 Internal audit reports are clear and well presented 0.3 2.1 17.4 58.5 21.6
EIAF5 Internal audit reports are professional 0.3 1.4 16.1 56.6 25.5
EIAF6 The managementˈs decision making process is strongly affected by the reports and
findings of the internal audit department
0.0 1.0 14.6 55.7 28.6
CORRPT1 Internal Audit Agency Act 2003 (Act 658) had made a difference in the
fight against corruption
0.424.724.042.0 8.8
CORRPT2 The internal audit department, as part of corporate governance of your institution,
has helped in the fight against corruption
47.1 25.7 24.6 2.5
CORRPT3 Given the nature of the internal job, it is difficult for one to avoid encountering
incidents of corruption in the course of work
16.6 26.7 44.0 12.6
90 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

scored the indicator (EIAF1) from 1 to 2 (‘Strongly disagree’
and ‘Disagree’). A lot more of the respondents scored the
effectiveness indicator (EIAF2) from 4 to 5, representing
82.8 per cent of the respondents followed by 13.6 per cent
of the respondents who scored the indicator 3 (‘Uncertain’).
The results also show that majority of the respondents (79.7
per cent) scored the third indicator for effectiveness (EIAF3)
at 4 or higher with a small percentage (2.7 per cent) scoring
lower (2 or lower). The findings suggest that despite a
minority having a different view of internal audit
effectiveness, most of the respondents agree that these
indicators measure the effectiveness of the internal audit
department. These percentages are based on a total of 287
respondents used in the analysis. This put the response rate
at 96 per cent.
To measure the construct ‘corruption’, three statements
adapted from the Transparency International questionnaire
for assessing corruption perception were used. Using a
five-point Likert scale, respondents were required to
indicate their level of agreement or disagreement with the
statements. The results are presented in Table 4. The
findings show that 42 per cent of the respondents agree that
the internal audit law has made a difference in the fight
against corruption, although some 24 per cent of the
respondents neither agree nor disagreed with the indicator
CORRPT1. The second indicator CORRPT2 shows that 47.1
per cent of the respondents disagreed that the level of
corruption had improved over the past five years. See
Table 4 for details.
The respondentsˈsubjective assessment of the construct
competence was tested using five indicators as presented in
Table 5. For each indicator, a five-point Likert scale was
used. From the table, a total of 12.9 per cent of the
respondents scored the first indicator (COMP1) 4 with
about 3 per cent of the respondents scoring it 5, indicating
their strong agreement with the indicator COMP1.
However, about 58 per cent of the respondents disagree
with the indicator COMP1, with some 16 per cent of the
Table 5: Frequency distribution of the scores of the indicators for Competency
Indicator Statements Score
12345
COMP1 The internal audit unit has sufficient skilled internal auditors. Most of them have
certification in auditing
10.8 57.5 16.0 12.9 2.8
COMP2 The internal audit staff number and their skill matches the scope of
officeˈs/sectorˈs internal operations.
16.0 52.6 16.0 12.9 2.4
COMP3 The internal audit staff are able to use modern technology (use computerized data tools
and specific IA software)
14.6 61.3 14.3 9.1 0.7
COMP4 The audit procedures and evidence collections are completed on time, since enough
and skilled internal auditors are available or employed.
16.4 57.1 15.3 10.5 0.7
COMP5 It is possible to audit and review each activity on time, and cover the planned
scope of auditing activities.
13.9 59.9 16.4 8.7 1.0
Table 7: Frequency distribution of the scores of the indicators of Relationship between External and Internal Auditors
Indicators Statements Score
12345
REL1 External auditors are friendly and supportive 8.7 41.5 23.7 24.7 1.4
REL2 External auditors have good attitude towards internal auditors 2.4 23.7 24.4 45.6 3.8
REL3 External auditors are willing to give internal auditors an opportunity
to explain their concerns
12.2 42.2 26.1 16.0 3.5
REL4 External and internal auditors consult on the timing of work in which
they have mutual interest
8.442.920.226.52.1
Table 6: Frequency distribution of the scores of the indicators for Independence
Indicator Statements Score
12 3 45
INDP1 Internal audit staff members are sufficiently allowed by management
to perform their professional obligations and duties
3.8 38.3 38.0 18.5 1.4
INDP2 The head of the internal audit reports to a level within the organization
that allows the internal audit to fulfil its responsibilities
3.8 34.8 33.1 26.5 1.7
INDP3 The internal audit has direct contact to the Board of the organization 5.6 39.4 35.2 17.8 2.1
INDP4 Conflict of interest are rarely present in the work of internal auditors 3.1 26.8 32.1 35.9 2.1
INDP5 The board approves the appointment and replacement of the head of
the internal audit department
3.8 31.0 27.9 35.2 2.1
INDP6 The internal audit department has direct contact with senior management
other than the finance director
3.8 30.0 28.9 34.8 2.4
INDP7 Internal audit staff have free access to all departments and employees in
the organization
3.8 32.1 36.2 25.4 2.4
Fighting Corruption by Means of Effective Internal Audit Function 91
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

respondents neither agreeing nor disagreeing with the
indicator COMP1. In terms of the second indicator
(COMP2), 12.9 per cent and 2.4 per cent of the respondents
scored it 4 and 5 (‘Agree’and ‘Strongly agree’) respectively.
Cumulatively, 68.6 per cent of the respondents disagreed or
strongly disagreed with the indicator COMP2. Further
details are presented in Table 5.
Responses pertaining to the independence of the internal
audit department were measured by seven different
indicators on a five-point Likert scale (Table 6). The results
presented in Table 6 show that 19.9 per cent of the
respondents agreed with the indicator INDP1. The results
show that 42.1 per cent of the respondents scored it between
1and2(‘Strongly disagree’or ‘Disagree’). Quite an
appreciable percentage of the respondents were uncertain
(neither agree nor disagree). In terms of the second indicator,
26.5 per cent of the respondents scored it 4 (‘Agree’)onthe
Likert scale. A small percentage of the respondents (1.5 per
cent)alsoscoredit5(‘Strongly agree’). The third indicator
(INDP3) measures the internal audit contact with the board.
Here, the results show that 39.4 per cent of the respondents
scored the indicator 2 (‘Disagree’), whereas 17.8 per cent
and 2.1 per cent of the respondents scored it between 4
and 5 (‘Strongly agree’or ‘Agree’) respectively, with about
35.2 per cent of them being uncertain (score of 3). See
Table 6.
Another construct measured in this study relates to the
level of relationship the internal audit departments has
with external auditors. A total of four indicators were used
to measure this construct on a five-point Likert scale,
where 1 represented ‘Strongly disagree’and 5 ‘Strongly
agree’. The results are presented in Table 7. The findings
show that about half of the respondents (50.2 per cent)
scored the first indicator (REL1) between 1 and 2. This
means that 50.2 per cent of the respondents either strongly
disagree or disagree that external auditors are friendly and
supportive. On the other hand, a cumulative percentage of
the respondents (26.1 per cent) scored it between 4 and 5.
On the second indicator (REL2), however, about 26.1 per
cent of the respondents scored it between 1 and 2
(‘Strongly disagree’and ‘Disagree’), whereas 45.6 per cent
and 3.8 per cent of the respondents scored it 4 and 5
respectively.
The Estimated SEM
Before presenting and discussing the results of the
measurement and structural models, the goodness of fit
of the SEM results is presented. To establish the goodness
of fit for the SEM model, various measures can be used.
These include the (χ
2
) goodness of fit index (GFI),
adjusted goodness of fit index (AGFI), comparative fit
index (CFI), normed fit index (NFI) and the root mean
squared error of approximation (RMSEA). Others include
Akaikeˈs information criterion (AIC), Bayesian
information criterion (BIC) and coefficient of
Table 8: Overall goodness of fit measures
Fit index Values
Chi-square with 95 degree of freedom 705.09
Root mean square error of approximation (RMSEA) 0.063
Standardized root mean square residual (SRMR) 0.118
Comparative fit index (CFI) 0.921
Tucker-Lewis index (TLI) 0.912
Coefficient of determination (CD) 0.886
Table 9: Measurement model
Latent
variable
Indicator Coefficient Standard
error
R
2
Corruption CORRPT1 0.49 0.07 0.24
CORRPT2 0.78 0.09 0.61
CORRPT3 0.51 0.07 0.26
Independence INDP1 0.66 0.04 0.44
INDP2 0.85 0.02 0.73
INDP3 0.73 0.03 0.54
INDP4 0.78 0.03 0.61
INDP5 0.82 0.02 0.68
INDP6 0.85 0.02 0.72
INDP7 0.66 0.04 0.43
Relationship REL1 0.73 0.04 0.53
REL2 0.77 0.03 0.59
REL3 0.73 0.04 0.52
REL4 0.70 0.04 0.49
Comp COMP1 0.77 0.03 0.60
COMP2 0.86 0.02 0.75
COMP3 0.89 0.02 0.81
COMP4 0.86 0.02 0.76
COMP5 0.85 0.02 0.73
Effectiveness
(EIAF)
EIAF1 0.80 0.02 0.64
EIAF2 0.80 0.02 0.76
EIAF3 0.92 0.01 0.85
EIAF4 0.94 0.01 0.88
EIAF5 0.81 0.02 0.66
EIAF6 0.74 0.28 0.55
Table 10: The final structural model (standardized coefficients)
EIAF COMP INDP CORRPT
Effective internal audit function (EIAF) 0.0098 (0.079)
Independence of IA (INDP) 0.140** (0.702) 0.248*** (0.074)
Competency of IA (COMP) 0.034 (0.053)
Relationship with internal and external auditors (REL) 0.042 (0.059) 0.314*** (0.059) 0.314*** (0.059)
Qualification/Certification (YRPT) 0.0034 (0.0119) 0.0345** (0.0156)
Extent of implementation of IA Act (LAW) 0.316*** (0.054) 0.023 (0.067) 0.233*** (0.055)
Size of IAD (SOD) 0.0852*** (0.057) 0.112*** (0.027)
R
2
0.27 0.22 0.23 9.5e
5
2
Note: Standard errors are in parentheses,
* 10%, ** 5%, *** 1% significance levels.
92 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

determination (CD). From Hooper et al. (2008) there are
no widely acceptable cutoff points for these goodness-
of-fit estimates or indices for structural equation models.
However, the most widely reported include the χ
2
/DF
(DF denoting degrees of freedom), the GFI, the AGFI,
the standardized root mean square residual (SRMR)
and the RMSEA (see Bentler & Bonett, 1980; Jöreskog
& Sörbom, 2001; Tabachnick & Fidell, 2007; Byrne,
2013; Tang, Folmer & Xue, 2013; Li, Folmer & Xue,
2013, 2014). The results presented in Table 8 show that
all the overall goodness-of-fit indices or estimates for
the SEM final model meet their critical values, indicating
that the model has satisfactory fit.
The measurement model
Table 9 presents the results of the measurement model
and the factor loadings as well as their respective
standard error estimates for each of the final
measurement equations. The results show that except
the observed variable corruption (CORRPT1), which
had a low reliability score of 0.24, all the other observed
variables for each of the latent variables had acceptable
levels of reliability scores. This indicates that corruption
is not only explained by an effective internal audit
function. The R
2
or the reliability gives an indication of
the percentage of the variance of the indicator explained
by the underlying latent variable. For effectiveness, the
results show that the most reliable indicator was EIAF4
with an R
2
of 0.88 and the least reliable was EIAF6 with
an R
2
of 0.55. This therefore suggests the effectiveness of
the internal audit department is better measured by
EIAF4 than EIAF6. With respect to competence, the
reliability indicator for COMP3 was 0.81 with COMP1
recording the lowest value. This result indicates that
COMP3 gives a better measure of competence of the
internal audit department. The results presented in
Table 9 show that the coefficients of each indicator are
significant and have satisfactory reliability scores.
The structural model
The estimated coefficients, standard errors and R
2
softhe
final structural model are presented in Table 10. Per the
conceptual model presented in Section 3, we expected a
negative relationship between effective internal audit
function (EIAF) and corruption (CORRPT). Although the
aprioriexpectation was met, the coefficient was not
statistically significant. This finding is supported by the
literature, such as the Institute of Internal Auditors (IIA)
International Standards for the Professional Practice of
Internal Auditing, which does not ‘mandate internal
auditors to have the same degree of experience as a person
whose primary responsibility is detecting and
investigating fraud’(see Halbouni, 2015, p. 119). However,
according to the author, the IIA, 1220.A1, 2120.A2 and
2210.A2 ‘require internal auditors to exercise due
professional care by evaluating the probability of
significant error, fraud or non-compliance and by
indicating how organizational personnel manage these
risks’(Halbouni, 2015, p. 119).
Independence of internal audit function (INDP), which is
a factor of an effective internal audit function (EIAF), was
positive and significant. This finding met the apriori
expectation, being significant at the 5 per cent level. This
points to the importance of the independence of the
internal audit functions from direct management control.
Thus, the more internal auditors and processes become
Table 11: Direct, indirect and total standardized effects (final model)
Variables Direct effect Indirect effect Total effect
INDP COMP EIAF CORRPT INDP COMP EIAF CORRPT INDP COMP EIAF CORRPT
CORRPT
EIAF 0.0098 (0.079) 0.0098 (0.079)
INDP 0.248** (0.074) 0.140** (0.702) 0.0082*** (0.0029) 0.0014** (0.0006) 0.248*** (0.091) 0.015** (0.070) 0.0014** (0.00069)
COMP 0.034 (0.053) 0.00032 (0.0005) 0.033 (0.052) 0.00032 (0.0005)
SOD 0.112*** (0.027) 0.0852*** (0.022) 0.0033 (0.0059) 0.00087 (0.0077) 0.098*** (0.027) 0.088*** (0.021) 0.00087 (0.0077)
REL 0.314*** (0.059) 0.354*** (0.072) 0.042 (0.059) 0.075*** (0.029) 0.054** (0.0279) 0.0009 (0.0077) 0.302*** (0.058) 0.345** (0.071) 0.097* (0.052) 0.0009 (0.0070)
LAW 0.233*** (0.055) 0.023 (0.067) 0.316*** (0.054) 0.059*** (0.025) 0.034* (0.0178) 0.0034 (0.028) 0.236*** (0.055) 0.035** (0.067) 0.349*** (0.054) 0.0034 (0.027)
YRPT 0.0345** (0.0156) 0.0034 (0.0119) 0.0011 (0.0018) 2.2 e-06 (0.00021) 0.033** (0.016) 0.0022 (0.011) 2.2e-06 (0.00021)
Note: Standard errors are in parentheses,
* 10%, ** 5%, *** 1% significance levels.
Fighting Corruption by Means of Effective Internal Audit Function 93
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

independent, the more effective the function is. The
construct competency (COMP) had a positive relationship
with effective internal audit function; it was, however, not
significant at any level. Size of the audit department had a
positive and significant effect on the effectiveness of the
IAD. It was statistically significant at the 1 per cent level.
The findings suggest that resources and size of IAD are
critical for the competency of auditors and effective internal
audit function.
From the findings we also establish that Act 658 had a
positive and significant effect on effective internal audit
function. The passage and subsequent implementation
of Act 658 contributed to the overall effectiveness of
the internal audit department of the institutions. The
Act also has a positive and significant effect on the level
of independence as well as the level of competency of
the IAD.
Indirect and total effect
The direct and indirect effects are presented in Table 11.
Jöreskog and Sörbom (1996) explain that an indirect effect
of a variable in SEM presents the effect of an endogenous
variable through intervening endogenous variables. The
total effect, on the other hand, is the sum of the direct and
indirect effects. The indirect and total standardized effects
of all the variables on the endogenous variables in the final
model are presented in Table 11. The results show that
Law (Act 658) had the largest positive total effect (0.34) on
effective internal audit function, followed by independence
of the internal audit department, with a total effect of 0.14.
Corruption, as indicated in earlier sections, is a complex
and difficult-to-measure phenomenon. With respect to
corruption, the law had the largest total effect with a
negative sign, implying that the more effective the
implementation of the internal audit law within the public
sector of Ghana, the better the fight against administrative
corruption, all things being equal. We also note that the
indirect and total effect of the variable INDP on corruption
was significant at the 5 per cent level (see Tables 10 and
11). This finding gives an indication that the extent to which
internal audit function in public organizations in Ghana is
independent significantly influences the effort to fight
corruption: independence of internal auditors in the public
sector matters.
5. SUMMARY AND CONCLUSIONS
The study examined the link between internal audit
function and corruption by analysing how the
promulgation of the Internal Audit Agency Act, 2003
(Act 658) has helped stem administrative corruption in
Ghana. The Act established the internal audit function or
department in all MMDAs. Using a SEM approach and a
sample of directors, managers and staff of public sector
institutions, our results establish a correlation between
Act 658 and administrative corruption in Ghana.
Specifically, our study finds a strong relationship between
effective internal audit function and reduction in
administrative corruption. This finding points to the
greater importance of internal auditing and suggests that
the passage of the Internal Audit Agency Act, 2003 has
had two important effects. First, it has improved internal
auditing practices in Ghana, making it possible for
auditors to unearth practices that were hitherto not
recognized. Second, it can be inferred that the increase in
reported corruption cases are all due to how effective the
internal audit function has uncovered sleazy practices
and helped external auditors to detect corruption in
various institutions in Ghana.
The study, therefore, has important implications for
government and public sector bodies. It highlights the
organizational significance of internal auditing practices
(Arena & Sarens, 2015) and the importance of the internal
audit function within MDAs in Ghana. In order to secure
quality assurance of internal audit within these state
institutions, Act 658 has provided the instrument for
government to manage fraud and embezzlement by
public officials by mandating all organizations to have
an internal audit function or department. For public
sector bodies, the results can be taken as strong evidence
for them to establish internal audit functions or
departments and for MDAs to employ competent audit
officials (such as certified internal auditors). In terms of
how the internal auditing practices are shaped in MDAs,
allowing internal audit departments the independence to
do their work and providing them with the necessary
logistics are critical to effective departmental functioning.
In addition, for quality control of audit process, it is
important for government and audit managers to
strengthen the supervision and monitoring of internal
audit processes to meet the challenges of todayˈs business
environment (see also IIA, 2011). Specifically, ensuring
compliance with all tenets of the Institute of Internal
Auditors requirements in Ghana (especially independence
of the internal audit function and the establishment of
audit committees on boards) are critical if we want to
fight administrative corruption.
The results also provide legitimacy for the internal
audit function and offer policy makers the important
data needed to strengthen the powers of government
to enforce the establishment of internal audit function
in all governmental organizations and also to internal
audit practitioners in the public sector to demand proper
training and appropriate remuneration to enable them
do their work competently based on the IIAˈsCodeof
Ethics. Our findings show that internal auditing practices
in the Ghanaian public sector are influenced by factors
such as the level of independence of the internal
auditors, the implementation of the Internal Audit
Agency Act, 2003 (Act 658), competency of auditors, as
well as the resources and size of the internal audit
department: these factors are critical for internal auditing
practices.
In conclusion, though the main finding of this paper
is that an effective internal audit function can help fight
administrative corruption, our research does not provide
a panacea to reducing corruption in Ghana. Other
factors not captured by this study may well be
important in fighting corruption. The study also used
only Act 658 to study one aspect of corruption in
Ghana: administrative corruption. It did not consider
other forms of corruption and measures put in place to
address them. Therefore, further research is needed to
look into other legislation implemented to reduce
corruption in Ghana, such as the Public Procurement
Act 2003 (Act 663), Financial Administrative Act, 2003
(Act 654), the Whistle Blowers Act 2006 (Act 720) and
the Anti-Money Laundering Act, 2008 (Act 749). Hence,
for future research, a comprehensive approach, including
all legislation and administrative directives, is needed if
all factors contributing to corruption are to be
unearthed, as each law is part of the whole corruption
jigsaw puzzle.
94 K. F. Asiedu and E. W. Deffor
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

NOTES
1. Earlier research postulated similar perspectives (e.g.,
Borner, Brunetti & Weder, 1994; Mauro, 1995; Keefer &
Knack, 1997; Wei, 1997).
2. Institutions here refer to the ‘agglomeration of rules,
both formal and informal, that underpin the rule of law
and the protection of property rights’,withlawsand
the mechanism for their enforcement, fiduciary care
and due diligence among the most important of these
institutions (see Campos & Syquia, 2005).
APPENDIX
Questionnaire
This questionnaire seeks to gather your views and opinions
as staff of internal audit departments of this institution on
how the implementation of the Internal Audit Act
influences effectiveness of the audit process and the extent
it has help in reducing corruption in public institutions.
Responses provided are purely for academic process hence
anonymity is highly assured.
Questionnaire No.____________
Date of Interview_____________
Part A: Socio-demographic background
Instructions: Please Tick the appropriate respondents to
questions in this section
1. Sex of respondent 1 = Male □2 = Female □
2. Age of Respondent (in years)___________
3. Number of years of education___________
4. Year of practice as an Auditor/Manager____________
5. How many year have you been with your department
_______________
6. What is the size of your audit department
_______________ (no. of employees)
Part B: Relevance of Internal Audit Act (Act 658)
1. Are you aware (heard or read) of the Internal Audit Act
2003 (Act 658)? 1 □=Yes□2=No
2. Have you been trained on the Act? 1 □=Yes□2=No
3. If yes, to what extent has this helped in your line of
duty? 1 = Not at all □2 = A little □3 = Uncertain □
4=Much□5=VeryMuch□
4. To what extent has contents of Act 658 been
implemented in your department? 1 = Not at all
Extensive □2 = A little Extensive □3 = Uncertain □
4=Extensive□5 = Very Extensive
5. In your opinion has the implementation of the internal
audit Act reduced the level of administrative
corruption?
6. 1 = Not at all □2=Alittle□3=Uncertain□
4=Much□5 = Very Much □
Using the following scale, please Tick (√) the appropriate
response to each of the statements below showing the extent
of your agreement or disagreement: Scale: 1 = Strongly
Disagree 2 = Disagree 3 = Uncertain 4 = Agree 5 = Strongly
Agree.
Part C.
STATEMENTS 12345
EFFECTIVENESS
1. The activities of Internal Audit
meet the expectations I have
from the internal audit
department.
2. Internal audit is aware of to
the organizationˈs needs and
operates accordingly.
3. The evaluation of internal
audit reports made by the
external auditors is positive.
4. Internal audit reports are
clear and well presented.
5. Internal audit reports are
professional.
6. The managementˈsdecision
making process is strongly
affected by the reports
and findings of the internal
audit department.
COMPETENCY
1. The internal audit unit has
sufficient skilled internal
auditors. Most of them have
certification in auditing.
2. The internal audit staff number
and their skill matches the
scope of officeˈs/sectorˈs
internal operations.
3. The internal audit staff are able
to use modern technology
(use computerized data tools
and specific IA software).
4. The audit procedures and
evidence collections are
completed on time, since
enough and skilled
internal auditors are
available or employed.
5. It is possible to audit and
review each activity on time,
and cover the planned scope
of auditing activities.
INDEPENDENCE
1. Internal audit staff are sufficiently
allowed by management to
perform their professional
obligations and duties.
2. The head of the internal audit
reports to a level within the
organization that allows the
internal audit to fulfil its
responsibilities.
3. The internal audit has direct
contact to the Board of the
organization.
4. Conflict of interest are rarely
present in the work of
internal auditors.
5. The board approves the
appointment and replacement
of the head of the internal audit
department.
6. The internal audit department
has direct contact with senior
management other than the
finance director.
(Continues)
Fighting Corruption by Means of Effective Internal Audit Function 95
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)

Part D.
D1. Using the Likert scale of 1 to 5 where 1 strongly
disagree and 5 strongly agree, please tell me whether
you agree or disagree with the following statement:
D2. What is the most effective thing that internal audit staff
can do to help combat corruption in this country? Tick
as many as you think apply.
1. Report corruption when you see or experience it
2. Institutions should have sufficient skilled internal
auditors
3. If managementˈs decision making process is strongly
affected by the reports and findings of internal audit
department
4. Internal audit reports are professional and of high
quality
5. Conflict of interest are rarely present in the work of
internal audit staff
6. Internal auditors consult external auditors on the
timing of work in which they have mutual interest
7. Internal audit staff number and their skill match the
scope of officeˈs/sectorˈs internal operations
8. Participate in protest marches or demonstrations
against corruption
9. Sign a petition asking for a stronger fight against
corruption
10. Refuse to accept unprofessional conduct of staff in
the course of their work
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7. Internal audit staff have free
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RELATIONSHIP
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96 K. F. Asiedu and E. W. Deffor
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AUTHOR PROFILES
Dr. Kofi Fred Asiedu is the managing consultant at GIMPA
Consultancy Services with over 20 years management
consulting experience. He holds a PhD in Social Sciences:
Economics, from Wageningen University in the Netherlands.
His research interest spans the spectrum of socialsciences from
policy analysis, finance and economics to management and
leadership.
Eric Worlanyo Deffor is a consultant with GIMPA
Consultancy Services. He holds a BSc in Agriculture
(Economics) and an MPhil in Agriculture (Admin) from the
University of Ghana. His research interests include agricultural
value chain analysis, adoption and impact studies, project
M&E, consumer preference and satisfaction studies.
Fighting Corruption by Means of Effective Internal Audit Function 99
©2017 John Wiley & Sons Ltd Int. J. Audit. 21:82–99 (2017)