AN INVESTIGATION INTO THE IMPACT OF INTERNAL AUDITING ON THE PERFORMANCE OF INSURANCE ORGANIZATIONS IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The viability of every organisation depends on the implementation of efficient internal audits, which are necessary to deter unethical conduct involving intentional omission of crucial information to facilitate fraudulent activities. Typically, financial statements are manipulated, leading to scandals that might harm investors' trust and potentially undermine the capital market (Ajao & Oluwadamilola, 2020). Several instances of accounting scandals have taken place globally, including the Enron scandal in 2001, Cadbury Nigeria crisis in 2006, WorldCom scandal in 2002, AIG scandal in 2005, and the Waste Management scandal in 1998 (Egbadon, 2018). Some argue that the scandals happened because the organisation had a weak internal control system. This calls for strict regulations to improve standards for auditing, accounting, and corporate governance. Internal auditing is a crucial component for ensuring the efficient operation of any organisation, including insurance businesses, by facilitating informed decision-making. The statement ensures that well-informed decisions have been made, aligning with the information shown in financial accounts, indicating that assets are accurately valued and safeguarded while fulfilling important responsibilities comprehensively (Kadiri, 2021). The lack of dependable internal auditing techniques can jeopardise the strategic goal-setting and communication operations of organisations, while also compromising information processes (Ajao & Oluwadamilola, 2020).

The expansion and progress of any economy rely on the financial services offered by insurance companies, specifically through the process of underwriting risks. This enables the accumulation of substantial funds for long-term investment premiums. The capital market plays a crucial role in fostering financial stability and providing economic entities with a certain degree of tranquilly (Sifon, 2020). The insurance sector is widely regarded as a fundamental driver of growth and development in most nations. It is anticipated that the industry's services will facilitate economic expansion and progress (Omoyeni, 2021). Internal auditing plays a crucial role in organisations by conducting impartial and objective assessments of the efficiency of risk management, control, and governance procedures. Internal auditing plays a crucial role in organisational efficiency and effectiveness by assuring compliance with laws and regulations, safeguarding assets, and boosting the credibility of financial reporting. Internal auditing plays a crucial role in the insurance business by ensuring the accuracy of risk assessment and management, hence safeguarding the integrity of operations and financial stability (Sifon, 2020).

Within the realm of corporate affairs, it is customary for every corporation to generate financial statements that must undergo scrutiny by the internal auditor, who then publishes a report. The auditor's primary responsibility is to examine the company's financial statements and ensure that they adhere to the relevant laws and accounting rules, accurately representing the company's financial activities (Okolie, 2017).  The auditor's responsibility does not encompass the preparation of financial statements; instead, it focusses on the examination and authentication of the reports.  The auditor's comprehensive commitment to this function improves the efficiency of communication between the internal audit, external audit, and the board of directors. The audit committee functions as an extension of the board of directors. It is necessary to identify and highlight observations in the audit reports and then deliver presentations to the board members in order to guarantee fairness and openness in the papers (Ibrahim & Collins, 2017).

Internal auditing is essential for the effective management and improvement of organisations in different industries. Internal auditing holds great importance within insurance organisations, primarily because of the intricate regulatory landscape and the need for strong risk management techniques in the business (Sifon, 2020). The insurance sector in Cameroon, similar to that of numerous emerging nations, encounters distinctive obstacles. These factors encompass a comparatively low rate of insurance adoption, pressures from regulations, and the necessity for enhanced risk management procedures. The market comprises a combination of domestic and global insurance firms, all of which must navigate an intricate terrain of economic, regulatory, and operational risks (Tego, 2021). Internal auditing, when done effectively, equips organisations with the necessary resources to improve their performance, assuring compliance with regulations and the attainment of strategic goals.

Undoubtedly, numerous studies in the existing literature have demonstrated the correlation between the internal audit function and the financial performance of publicly traded companies in both the financial and non-financial sectors. However, only a limited number of these research have specifically examined the insurance business. In this context, certain writers have discovered a positive correlation (Mare’L, 2019; Tanja, Julija & Tatjana, 2017; Amoh, 2017).  In contrast, certain scholars have identified a negative correlation (Ibrahim & Collins, 2017; Araoye, 2019). In contrast, Ebere and Ibanichuka (2017) failed to establish any correlation. In light of these issues, the present investigation is being conducted. The objective of this study is to examine the influence of internal auditing on the operational effectiveness of insurance companies in Cameroon.

1.2 Statement of the problem

The efficiency of internal auditing methods is vital in influencing organisational performance in the dynamic and competitive insurance business in Cameroon. Nevertheless, there is a discernible deficiency in comprehending the precise impact of internal auditing on the operational efficiency, financial stability, and overall performance of insurance businesses in this particular area.

Undoubtedly, the recent business failures in the banking and insurance sectors have necessitated reforms that have led to the recapitalisation of operating activity in these businesses. Before the recapitalisation exercises, a significant number of insurance businesses lacked a comprehensive internal audit function, the fundamental principles of corporate governance, and internal control. As a result, many firms were forced to shut down their operations during mergers and acquisitions (Kante, 2021). Several causes were cited as the cause for the rising rate of business failure in the insurance industry in Cameroon. These factors encompass, but are not restricted to, the ownership structure, lack of necessary legislative framework, magnitude of the insurance company, inadequate capital foundation, unhealthy competition, subpar financial performance, and ineffective management (Mathieu, 2019). Essentially, the industry neglected to acknowledge that internal audit functions are obligatory departments that every listed business in Cameroon must have. Occasionally, corrupt senior management personnel exploit the services of an internal auditor, who is typically an employee of the company, to create financial statements infused with fraudulent activities. These actions are intentionally designed to be challenging for external auditors to identify. On some occasions, the top management interferes with the financial reports prepared by the internal auditors or provides guidance, which compromises the independence of the internal auditors (Shoneye et al., 2022).  This situation resulted in the collapse of numerous insurance companies in Cameroon, resulting in significant financial losses. Additionally, a considerable number of individuals were forced into unemployment. These detrimental practices resulted in a decline in financial performance, ultimately causing significant damage to the majority of insurance companies in Cameroon. This is particularly concerning when one takes into account the fact that the monies currently available in the business are being inefficiently utilised, resulting in inadequate financial reporting in Cameroon.

Although internal audits play a crucial role in assuring compliance, risk management, and operational efficiency, there is a lack of empirical research specifically focused on the insurance business in Cameroon. The lack of comprehensive data and analysis creates a substantial gap in our understanding of the relationship between internal auditing systems and key performance metrics in these organisations. This study aims to fill this void by analysing the influence of internal auditing on the performance of insurance companies in Cameroon. The study's main objective is to investigate the impact of internal audit functions on the efficacy, dependability, and transparency of insurance operations, as well as their influence on financial performance, risk management, and organisational success.

Objectives of the study

The primary objective of this study is to critically investigate the impact of internal auditing on the performance of insurance organizations in Cameroon. Specific objectives of this study are to:

To assess the impact of Internal Auditing on the financial performance of insurance organizations in Cameroon

To evaluate the impact of internal auditing on operational efficiency of insurance organizations in Cameroon

To evaluate the impact of internal audits on profitability and cost management of insurance organizations in Cameroon

To evaluate the impact of internal audits in identifying, assessing, and mitigating risks within the insurance sector

To suggest strategies for insurance organizations to better leverage internal audits for improved performance and governance

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the impact of Internal Auditing on the financial performance of insurance organizations in Cameroon?

What is the impact of internal auditing on operational efficiency of insurance organizations in Cameroon?

What is the impact of internal audits on profitability and cost management of insurance organizations in Cameroon?

What is the impact of internal audits in identifying, assessing, and mitigating risks within the insurance sector?

What are the strategies for insurance organizations to better leverage internal audits for improved performance and governance?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: Internal audit has no significant impact on the financial performance of insurance organizations in Cameroon.

Ha: Internal audit has significant impact on the financial performance of insurance organizations in Cameroon.

1.6 Significance of the study

This study will have practical ramifications for insurance organisations in Cameroon, as it will contribute to enhancing internal auditing practices and, ultimately, leading to enhanced organisational performance and governance. The report will provide a fundamental reference point for insurance companies, auditors, politicians, stakeholders, students, and researchers.

This study aims to analyse the impact of internal auditing practices on the performance of insurance organisations in Cameroon, providing useful insights into this relationship. The study will enhance comprehension of the role internal auditing plays in the insurance business by examining how these practices affect operational efficiency, financial performance, and risk management. The results will emphasise the advantages and disadvantages of existing internal auditing methods. Insurance businesses can utilise this information to enhance their auditing procedures, so increasing their efficacy in identifying problems, deterring fraudulent activities, and assuring adherence to legal requirements.

Moreover, the study will provide insurance organisations with practical insights for making strategic decisions by demonstrating the influence of internal auditing on financial and operational performance. Implementing enhanced internal audits can result in superior risk management, more knowledgeable financial decision-making, and enhanced overall organisational performance.

Moreover, the results of the study can provide valuable insights to policymakers and regulatory agencies regarding the efficacy of internal auditing standards and processes within the insurance industry. This data can be utilised to create or improve norms and guidelines in order to bolster internal auditing and increase the industry's overall governance structure.

Moreover, by showcasing the beneficial effects of thorough internal audits, the research can enhance trust among stakeholders, such as investors, consumers, and regulators. Internal audits that are effective contribute to increased transparency and trust within insurance organisations, leading to improved stakeholder relationships and a stronger company reputation.

Ultimately, the research will address a lack of information in the current academic literature surrounding internal auditing in the insurance business, specifically within the context of Cameroon. This will serve as a foundation for more study and scholarly conversations on the topic, so enhancing the wider domain of auditing and insurance studies.

1.7 Scope of the study

Broadly, this study focus is to critically investigate the impact of internal auditing on the performance of insurance organizations in Cameroon. Specifically, this study seeks to assess the impact of Internal Auditing on the financial performance of insurance organizations in Cameroon, evaluate the impact of internal auditing on operational efficiency of insurance organizations in Cameroon and evaluate the impact of internal audits on profitability and cost management of insurance organizations in Cameroon. 

Further, this study will focus on evaluating the impact of internal audits in identifying, assessing, and mitigating risks within the insurance sector and it also seeks to suggest strategies for insurance organizations to better leverage internal audits for improved performance and governance.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As with any human endeavour, the researchers faced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the topic, due to the limited availability of data about the study of how internal auditing affects the performance of insurance organisations in Cameroon. Hence, a significant allocation of time and exertion was necessary to ascertain the appropriate materials, books, or information and amass data. 

Furthermore, this study is constrained by its small sample size and narrow geographic scope, focussing just on Cameroon. Therefore, the conclusions of this study cannot be extended to other situations, thus requiring further investigation. 

Moreover, the researcher's restrictions were primarily due to financial constraints, as they are a student without any source of income to sustain themselves. The exorbitant transportation costs at the research location posed a significant challenge in terms of covering transportation expenses.

Furthermore, the researcher faced a time constraint due to the need to do this research while simultaneously fulfilling the obligations of attending lectures and participating in other educational activities.

1.9 Definition of terms

Audit: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.

Corporate governance: Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance.

Accountability: Accountability is the practice of being held to a certain standard of excellence. It is the idea that an individual is responsible for their actions and, if that individual chooses unfavorable actions, they will face consequences.

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