Peter J Baldacchino Head, Department of Accountancy, University of Malta RESEARCH ON INTERNAL AUDITING AT THE UNIVERSITY OF MALTA MALTA FORUM FOR INTERNAL AUDITORS: Emerging Trends in Internal Audit Research Workshop 26 September 2016 EFFECTIVENESS IN INTERNAL AUDITING WORKSHOP EFFECTIVENESS IN INTERNAL AUDITING WORKSHOP:

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 2 1 Intro: Studies on Internal Auditing and Control/1a As in previous years, the Department of Accountancy has finalised a number of research studies in internal auditing and control at MAccty level in These will soon be available in full at the University of Malta library or by appointment at the Department of Accountancy. The best study in this area this year is being separately presented by Ms May Louise Farrugia.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 3 I Intro: Studies on Internal Auditing and Control/1b In addition to the Farrugia study, there have been 5 others on internal auditing and control of which I shall now be giving a brief overview. These relate to internal audit independence, control units in credit institutions, internal control perceptions, the internal audit function in Government authorities, and internal control on record keeping in local councils.

2016 AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 4 2 OVERVIEW/1a : (Briffa Chantel): The Independence of the Internal Auditor in Maltese Companies The first study on the state of independence of the internal auditor (IA), used a mixed methodology, and found that in view of the fact that consulting services by internal auditors are on the increase, more attention needs to be devoted towards ensuring that IA independence is not impaired. that currently, independence does vary and therefore over-relies on the character of the IA.

2016 AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 5 2 OVERVIEW/1b : (Briffa Chantel): The Independence of the Internal Auditor in Maltese Companies Furthermore, the study also found that: safeguards that may and are being commonly taken to strengthen independence are direct reporting to the audit committee (AC), the availability of outsourcing and co-sourcing, and the AC being made responsible for the chief audit executive’s hire and fire. clearly, more effort needs to be done for its further strengthening. Areas for improvement include changing who performs performance appraisals of IAs, increasing general staff awareness of the role of IA’s, and personality traits (e.g. assertiveness) being tested professionally on IA engagement.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 6 2 OVERVIEW/2a : (Borg Glenn): Control Units Within Maltese Credit Institutions and their Consolidation: A Study This study, based on qualitative research (interviewing and case study approaches) tested whether control units such as risk, compliance and internal audit functions could be integrated in one team in Maltese credit institutions It found that those operating within the institutions themselves considered this impossible for independence reasons.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 7 2 OVERVIEW/2b: (Borg Glenn): Control Units Within Maltese Credit Institutions and their Consolidation: A Study In contrast, most interviewees outside these institutions thought the functions are not to be separate as they have much in common. They argued that independence does not depend on physical segregation, and with the integration of the individual units as insiders, there would be more effective control being exercised within the organisation: this could be due, inter alia, to more synergy, tranparency and visibility. The study concludes that in view of risk considerations such integration is feasible, but only in relatively smaller and start-up banks and subject to a shift in institutional mentality to change.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 8 2 OVERVIEW/3 (Azzopardi Gabriella): Perceptions of Internal Controls and Control Components of Maltese listed Companies This study gauged the perceptions of staff and managers in Maltese listed companies with respect to the system of controls. It employed a mixed methodology of interviews and questionnaires with staff and interviews with managers. Similar perceptions were found among the two groups, with differences being more related to level of education, position and years of employment. The study concludes by making the case for training to the level of awareness and understanding of controls, particularly as to their purpose, and for more monitoring to ensure control execution

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 9 2 OVERVIEW/4a (Lapira Emma): The Internal Audit Function Within Maltese Government Authorities: A Qualitative Study This study explored the internal audit function within Maltese regulatory authorities, including its role, sourcing structure, and auditor personality traits expected in such a role. Face- to-face interviewing was carried out with authority representatives.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 10 2 OVERVIEW/4b Lapira Emma: The Internal Audit Function Within Maltese Government Authorities: A Qualitative Study Findings confirm that internal auditing therein leads to enhanced corporate governance and transparency in financial reporting. As for sourcing structures, the three alternatives in place (in/out/co-sourcing) were found acceptable. Similar audit personality traits were expected, mostly involving communication and interaction skills, with an eye for detail and a listening ability. A major study conclusion is that, given the benefits of this function, the Government needs to consider making it mandatory for all regulatory authorities.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 11 2 OVERVIEW/5a (Zammit Thomas): Internal Control on Record Keeping in Maltese Local Councils This study examined the internal control system over accounting records in Maltese Local Councils. Council Executive Secretaries (ES) and relevant officials at the Dept for Local Government and Local Councils were interviewed. The study found that a main deficiency was a lack of accounting knowledge at the ES level. As a result, limited accounting control can be exerted. Another deficiency was the lack of an updated fixed asset register, this hampering control over valuable assets.

RECENT RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 12 2 OVERVIEW/5b (Zammit Thomas): Internal Control on Record Keeping in Maltese Local Councils. The study also found that the communication between the DLLC and the Local Councils themselves was deficient, often limiting central monitoring to the examination of the annual report. In conclusion, the study recommends ways to the strengthen the control of record keeping –this includes more ES training, more specific emphasis of the retention of a fixed register,and the establishment of Regional Monitoring Boards to render monitoring easier.

2016 RESEARCH IN INTERNAL AUDITING AT THE UNIVERSITY OF MALTA Peter J Baldacchino 13 3 CONCLUDING NOTE In conclusion, one common thread in these studies is that while internal auditing is on the rise in Maltese entities, top management needs to believe and invest more in this function if the needed changes are to overcome the expected resistance which they generate, particularly in a small state. Such investment is clearly to go beyond training management in awareness and understanding of the function and in accounting knowledge, but, even more importantly, to that of strengthening the various communication skills (assertiveness, listening etc) of the auditors themselves.

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