EFFECT OF INTERNAL AUDIT QUALITY (EXPERIENCE AND QUALIFICATION) AND PROFITABILITY OF PHARMACAUTICAL FIRMS IN NIGERIA
This study is on Effect of internal audit quality (experience and qualification) and profitability of pharmaceutical firms in Nigeria. The total population for the study is 200 staff of selected pharmaceutical firms in Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up medical representatives, administrative staffs, senior staffs and junior staffs was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
- Background of the study
Internal auditing (IA) is an aged function and considered as an effective instrument of management in almost all organizations. It is considered as an important element of organization in both public and private sector. Internal auditing is seen as an overall monitoring and evaluation function with responsibilities to the entire management for the assignment of effective and efficient control mechanism (Kiabel, 2012). The goal of internal auditing is to contribute to organizations for the execution of their responsibilities (Okezie, 2004). A quality internal audit is recognized as a means of assisting board and other management in an organization to focus on its obligation to ensure proper and efficient internal controls are put in place.
Profitability is a concept that has received serious attention all over the globe, this is because the growth and development of any profit-oriented business enterprise depend on its ability to remain profitable at all times, even in the period of the visible current financial crunch of the world economy. Siyanbola and Raji, (2013) stated that profitability has attracted considerable importance in finance and accounting literature. Also, Malik, (2011), have emphasized profitability has been one of the primary objectives of financial management and control which is to maximize the owners’ wealth. Hence, profitability is cardinal determinants of performance for wealth maximization. A business that is not profitable cannot survive in the long run. Furthermore, the current intensity of competition in the business environment has made running a successful business a function of its ability to be profitable and survive. Therefore, the ultimate goal of a business is to earn enough profit to ensure sustainability in prevailing market conditions. (Adebayo and Onyeiwu, 2018). Moreover, the effectiveness and efficiency of a firm’s utilization of resource can be measured by its profitability. Profit is a key factor. This is because the more profit reflects a more effective and efficient utilization of resources and vice versa. Low profitability can slow the rate at which a firm progresses and certain obligations and at times target might not be met (Adebayo and Onyeiwu, 2018).
A sound internal control system helps an organization to prevent frauds, errors and minimize wastage. Custody of assets is strengthened, it provides assurance to the management on the dependability of accounting data eliminates unnecessary suspicion and helps in maintenance of adequate and reliable accounting records. This study therefore attempts to establish the effectiveness of internal control system in pharmaceutical firm in Nigeria (Amudo and Inanga, 2009). Despite the fact that internal control system is expensive to install and maintain, it gradually evolved over the years with the greatest development occurring at the beginning of 1940‟s. Not only have the complexities of the business techniques 2 contributed to this development but also the increased size of firm units which have encouraged the adoption of methods which while increasing efficiency of business, acts as a safeguard against errors and frauds. Mawanda (2008), states that “there is a general perception that institution and enforcement of proper internal control systems will always lead to improved financial performance”. It is also a general belief that properly instituted systems of internal control improve the reporting process and also give rise to reliable reports which enhances the accountability function of management of an entity. Preparing reliable financial information is a key responsibility of the management of every public company. The ability to effectively manage the pharmaceutical firm requires access to timely and accurate information. Moreover, investors must be able to place confidence in a firm’s financial reports if the firm wants to raise capital in the public securities markets. Management’s ability to fulfill its financial reporting responsibilities depends in part on the design and effectiveness of the processes and safeguards it has put in place over accounting and financial reporting. Without such controls, it would be extremely difficult for most business organizations especially those with numerous locations, operations, and processes to prepare timely and reliable financial reports for management, investors, lenders, and other users. While no practical control system can absolutely assure that financial reports will never contain material errors or misstatements, an effective system of internal control over financial reporting can substantially reduce the risk of such misstatements and inaccuracies in a company’s financial statements (Kaplan, 2008; Cunningham, 2004; INTOSAI, 2004). Cunningham (2004) states that internal control systems begin as internal processes with the positive goal of helping a corporation meet its set objectives. Management primarily provides oversight activity; it sets the entity’s objectives and has overall responsibility over the ICS. Internal controls are an integral part of any organization’s financial and business policies and procedures. Internal controls consist of all the measures taken by the organization for the purpose of, protecting its resources against waste, fraud and inefficiency, ensuring accuracy and reliability of accounting and operating data, ensuring compliance with the policies of the organization; evaluating the level of performance in all organizational units of the organization. ICS are applicable to each organization in relation to key risks and are embedded within the operations and not treated as a separate exercise. ICS should be able to respond to changing risks within and outside the company and they are a means to an end, not an end itself. Cunningham (2004), further states that Internal controls are effected by people not merely policy manuals and forms, but people functioning at every level of the institution. Internal control only provides reasonable assurance to the firm’s leaders regarding achievement of operational, financial reporting and compliance objectives; promoting orderly, economical, efficient and effective operations; safeguarding resources against loss due to waste, abuse, mismanagement, errors and fraud. Internal controls lead to the promotion of adherence to laws, regulations, contracts and management directives and the development and maintenance of reliable financial and management data, and accurately present that data in timely reports (Kaplan, 2008; Cunningham, 2004; INTOSAI, 2004). Treba (2003) states that internal control is a tool for ensuring that a firm realizes its mission and objectives.
- STATEMENT OF THE PROBLEM
Effectiveness of internal control on financial performance should be considered most important in every firm because the task of internal controls is to prevent and detect fraud in the firm. This study shall attempt to investigate the persistent poor financial performance of pharmaceutical firms in Nigeria from the perspective of internal controls which has hitherto been ignored. The effectiveness of internal controls on a firm’s financial performance should be a key concern for most firms. Since internal controls help to prevent and detect fraud in an organization, pharmaceutical firms in Nigeria should give much importance to internal audit which is generally a feature of large companies. It’s a function provided either by employees of the entity or it can be sourced from an external organization in order to assist management in achieving corporate objectives. The code of corporate governance highlights the need for a firm to maintain a good system of internal controls in order to manage the risks that the firm is prone to. Internal audit can play a key role in assessing and monitoring internal control policies and procedures. The objective of a pharmaceutical firm to make profit and generate income can be attained through implementation of strong internal controls which contain different components of control such as the control environment, risk assessment, control activities, information and communication and monitoring. The study attempts to answer the following question; What is the relationship between Internal audit and the financial performance of a pharmaceutical firm in Nigeria?
- OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the relationship between internal audit quality and financial performance of pharmaceutical firm in Nigeria
- To assess the effect of internal audit quality on profitability of pharmaceutical firm
- To suggest some measures that will enhance the effectiveness of the use of financial control mechanisms for better profitability performance of the pharmaceutical firms in Nigeria
- RESEARCH HYPOTHESES
For the successful completion of the study, the following research hypotheses were formulated by the researcher;
H0: there is no relationship between internal audit quality and financial performance of pharmaceutical firm in Nigeria
H1: there is relationship between internal audit quality and financial performance of pharmaceutical firm in Nigeria
H02: there is no effect of internal audit quality on profitability of pharmaceutical firm
H2: there is effect of internal audit quality on profitability of pharmaceutical firm
- SIGNIFICANCE OF THE STUDY
This study will be very significant to students and the pharmaceutical firms. The study will give a clear insight on Effect of internal audit quality (experience and qualification) and profitability of pharmaceutical firms in Nigeria. The study will serve as a reference to other researcher that will embark on this topic or related topic
- SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers Effect of internal audit quality (experience and qualification) and profitability of pharmaceutical firms in Nigeria. The researcher encounters some constrain which limited the scope of the study;
- a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
- b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
- c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities
1.7 DEFINITION OF THE STUDY
INTERNAL AUDIT: Internal auditing is an independent, objective assurance and consulting activity designed to add value to and improve an organization’s operations
PROFITABILITY: the degree to which a business or activity yields profit or financial gain.
PHARMACEUTICAL: The pharmaceutical industry discovers, develops, produces, and markets drugs or pharmaceutical drugs for use as medications to be administered to patients, with the aim to cure them, vaccinate them, or alleviate the symptoms. Pharmaceutical companies may deal in generic or brand medications and medical devices
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study