AN ASSESSMENT OF THE NEXUS BETWEEN PUBLIC SECTOR AUDIT AND PUBLIC FINANCIAL MANAGEMENT IN CAMEROON

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Public financial management (PFM) is a crucial component of an effective administration, serving as the foundation for all government operations. Public finance refers to the processes involved in the collection, allocation, expenditure, and accountability of public resources (Aba, 2017). PFM processes encompass the entire budget cycle, public procurement, audit practices, and revenue collection. Effective, clear, and responsible public financial management is a fundamental aspect of governance reform and plays a crucial role in delivering high-quality public services to citizens. It is also essential for establishing and sustaining equitable and sustainable economic and social circumstances within a country (Tapang, 2020). PFM encompasses intricate and technical activities and procedures, such as macroeconomic prediction, budget distribution, accounting, and auditing. The intricacy of such processes restricts public examination and presents numerous possibilities for corruption. Corruption levels fluctuate both within and within the several phases of the budgetary process. Corruption mainly appears in the form of illicit financial transactions during the implementation of the budget. However, other stages of the budget process, such as budget planning, budget authorisation, accounting and reporting, or auditing, can also provide opportunities for corruption (Enejo, 2020).

Public financial management (PFM) is essential for the proficient and cost-effective management of public resources. The functioning of the public sector in Cameroon, as well as in several other nations, significantly impacts the overall economic stability and development of the nation. Public sector auditing is a crucial element of Public Financial Management (PFM) as it guarantees openness, accountability, and integrity in the utilisation of public monies (Tapang, 2020). Public sector audit entails the autonomous scrutiny and assessment of government financial statements, adherence to laws and regulations, and the efficiency of public sector operations. The main goals of public sector auditing are to ensure accountability by conducting an impartial evaluation of the management and utilisation of public funds, promote transparency by sharing audit findings with stakeholders, including the public and oversight bodies, enhance efficiency by identifying instances of waste, fraud, and mismanagement and suggesting corrective measures, and facilitate decision-making by providing reliable information for well-informed policy and financial decisions (Taipei et al., 2019).

The prevalence of fraud and theft of funds in numerous government institutions has led to the implementation of various controlling and monitoring mechanisms, such as financial auditing systems (Hazaea, et al 2020). According to Richard (2019), public sector audits are now essential for public sector companies in order to avoid and discover the extent of financial and economic crimes carried out by public sector employees and politicians. The occurrence of such high-level financial and economic crimes has a detrimental impact on the financial performance of government and public sector organisations. Ibiam (2019) asserted that incidents of bribery, embezzlement of public finances, and theft of government assets are prevalent in public sector organisations. According to the writers, public sector audit serves as a means of overseeing and regulating the actions of public sector organisations. 

The Financial Audit Manual (2017) defines public sector audit as the examination of financial statements, policies, programs, and operations of a public sector organisation. This type of audit includes financial, regulatory, and compliance audits. The auditor's objective is to express an opinion on whether the financial statements accurately represent the financial position and results of the entity's operations, in accordance with legal and financial reporting frameworks. Eke (2018) observed that financial audit entails examining evidence to validate the information presented in the accounting records and financial statements provided to management for decision-making purposes. Public sector audit primarily examines transactions and events pertaining to revenue or sales, cash, asset acquisition, expenditure, financial capital receipts and payments, staff and payroll, and external financial reporting. Public sector auditing is a methodical procedure that involves impartially gathering and assessing credible evidence to ascertain if information or real circumstances align with predetermined standards (Chan et al., 2019). Its primary purpose is to furnish information and conduct impartial and unbiased evaluations of the management and effectiveness of government policies, programs, or activities. This is done for the benefit of legislators, oversight bodies, individuals responsible for governance, and the general public.

The necessity for conducting audits of financial statements arose primarily due to the increasing intricacy in the field of business. The division of ownership and management has necessitated the verification and authentication of financial statements produced by management. These statements represent the results of operations and are entrusted to a third party, independent of management, who evaluates their accuracy and fairness (Gupta, 2017). In addition, Munene et al. (2019) stated that a proficient auditing function has the ability to identify and reveal instances of profits manipulation and other forms of misbehaviour carried out by firm managers or controlling shareholders. The primary objective of conducting an audit on a financial statement is to offer an impartial evaluation of the financial statements in conformity with widely accepted accounting principles. Auditing firms must provide independent auditing services despite the need of maintaining a good relationship with the audited company. This is because the financial statements have significant economic implications for stakeholders' decision-making (Gupta, 2017). 

Financial audits not only provide opinions but also identify gaps in the internal control system and instances of non-compliance with laws and regulations. This can serve as a guide for evaluating the effectiveness and efficiency of an organization's financial management. It can also be used to assess how well public sector entities allocate, stabilise, and distribute public funds (Francois et al., 2019). The audit opinion of entities scrutinised by auditors is progressively enhancing, indicating a rise in the transparency of financial statements, the enhancement of the internal control system, and a reduction in instances of non-compliance with regulatory requirements. Consequently, the financial performance of public sector entities is improving (Gupta, 2017).

Munene, et al, (2017) claim that the auditor of public sector companies has the responsibility to assess and appraise the internal control systems maintained by the organisation. A robust internal control system is crucial in preventing significant errors or inaccuracies in the financial statements. An examination of public sector firms can be conducted through a financial audit, which assesses and appraises the internal control system and identifies any inaccuracies in the financial statements. Zinyama (2018) asserted that a public sector audit aims to verify the efficiency and appropriate functioning of accounting and financial control systems, as well as the accurate authorisation and accounting of financial transactions. Kiabel (2017) emphasised that accounting and control techniques are considered essential for the success of corporate entities, as they serve as effective mechanisms to prevent deviations from specified objectives and policies. The author also proposed that implementing a suitable and sufficient accounting control system can lead to superior financial performance for an organisation compared to those that do not have such controls in place. 

Babajide (2019) also mentioned that a well-executed public sector audit helps in decreasing unnecessary expenses, identifying opportunities for enhancing productivity, and minimising potential losses due to insufficient protection of assets, all of which can greatly impact the overall financial performance. Public sector audit is a fundamental aspect of efficient public financial management, guaranteeing the efficient and lawful use of government funds. The interconnection between public sector audit and public finance management in Cameroon is vital for fostering openness, accountability, and effective governance. The objective of this study is to evaluate the correlation between the connection and its influence on the financial management practices in the public sector of Cameroon.

1.2 Statement of the problem

Efficient and transparent allocation and utilisation of public resources heavily rely on effective public financial management (PFM). The efficacy of Public Financial Management (PFM) in Cameroon is closely linked to the methods and standards of public sector auditing. Public sector audits aim to improve accountability, openness, and efficiency in the management of public funds. Nevertheless, despite their significance, certain challenges impede the ideal correlation between auditing and financial management in Cameroon.

The key to being proficient in auditing is having a deep understanding, expertise, and practical experience in the field of auditing (Raphael, 2021). Enhancing capacity can be achieved by the inclusion of supplementary skills such as certification, training, and mentoring programs. Regrettably, Cameroon does not provide any courses or programs to bolster the proficiency of the internal audit profession (Mahmour et al., 2022). Furthermore, the future advancement in the auditing profession depends on the extent to which customer agencies require internal audit services. Similarly, the effectiveness of internal auditors in the public sector is determined by their abilities to supply services that meet the requirements of client agencies. If regular courses or programs were available for the internal audit profession, similar to those offered for accounts, procurement, IT, etc., the problem of competency and career development would not exist, and performance would improve significantly (Raphael, 2021).

Moreover, the lack of professional competence among newly recruited internal auditors has posed significant issues for client agencies and existing internal auditors in Cameroon (Adebayo, 2020). Currently, newly enlisted individuals are solely provided with orientation trainings by their more experienced colleagues. In the absence of a senior internal auditor, both the internal auditor's ability to fulfil their job responsibilities and the client agency's utilisation of the service are compromised. The majority of internal auditors who possess expertise and experience have departed from their positions, either under the guise of pursuing further studies or in search of transfers to other locations (Joffrey et al., 2020). Insufficient enthusiasm, antagonistic work atmosphere, and a restricted pool of candidates are among the factors contributing to the failure to fulfil the authorised staffing levels in the internal audit service (Adebayo, 2020). The elevated turnover rate within the internal audit service can be attributed to the aforementioned concerns and obstacles. 

Essentially, the issue stems from the inadequate correlation between the audit of the public sector and the management of public finances in Cameroon. Inadequacies in auditing procedures, insufficient execution of audit suggestions, structural obstacles, and lack of transparency all lead to poor financial administration and governance. The objective of this study is to thoroughly examine these challenges, evaluate their influence on public financial management, and suggest measures to improve the connection between public sector audit and financial management in Cameroon.

Objectives of the study

The primary objective of this study is to critically assess the nexus between public sector audit and public financial management in Cameroon. Specific objectives of this study are to:

To examine the relationship between public sector auditing and public financial management outcomes in Cameroon

To examine the relationship between public sector audit and financial fraud control in the public sector

To determine the relationship between public sector audit and internal control quality

To investigate the extent to which public sector audit influence financial reporting credibility

To provide recommendations for improving the effectiveness of public sector audits and their impact on financial management.

1.4 Research Questions

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

Is there a relationship between public sector auditing and public financial management outcomes in Cameroon?

Is the any relationship between public sector audit and financial fraud control in the public sector?

Is there any relationship between public sector audit and internal control quality?

To what extent does public sector audit influence financial reporting credibility?

What are the recommendations for improving the effectiveness of public sector audits and their impact on financial management?

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: There is no significant relationship between public sector auditing and public financial management outcomes in Cameroon

Ha: There is significant relationship between public sector auditing and public financial management outcomes in Cameroon.

1.6 Significance of the study

The study's importance lies in its capacity to bolster public financial management, enlighten policy and regulatory frameworks, enhance audit practices, foster good governance, facilitate efficient resource allocation, aid in capacity building, offer empirical evidence for research, and tackle local challenges. The implementation of this comprehensive evaluation has the potential to enhance the efficiency of financial management in the public sector and promote more robust governance practices in Cameroon.

The study examines the correlation between public sector audit and PFM to determine the extent to which audits enhance accountability and transparency in public financial management. Audits that are effective ensure the efficient and planned use of public cash. The study can elucidate the role of auditing processes in detecting vulnerabilities in financial controls and proposing enhancements. As a result, this leads to enhanced internal controls, more effective budgeting, and enhanced expenditure management.

Moreover, the study's findings can provide policymakers with valuable insights into the efficacy of existing Public Financial Management (PFM) systems and audit methods. This data can be utilised to create and execute policy reforms with the goal of enhancing financial management in the public sector. The study aims to evaluate the integration of audits into Public Financial Management (PFM) and suggest potential areas for upgrading regulatory frameworks to enhance compliance and effectiveness.

Moreover, efficient audits enhance openness in the management of public finances by offering precise and dependable data regarding the utilisation of public monies. Transparency is essential in establishing confidence between the government and the public. The study aids in comprehending the role of audits in ensuring the financial accountability of public authorities and fostering good governance practices.

Moreover, the study's results can be used to enhance training and capacity-building initiatives for auditors and financial managers, resulting in enhanced skills and competencies in public financial management and auditing. The study can contribute to the development of more efficient auditing procedures and financial management strategies by offering insights into the correlation between audit and PFM.

In conclusion, this study contributes empirical evidence to the existing academic literature on public sector auditing and financial management. It serves as a foundation for future research and analysis in these areas. The findings can provide a basis for future study on related subjects, such as the influence of audit quality on financial performance or the function of audits in public sector reforms.

1.7 Scope of the study

Broadly, this study focus is to critically examine the relationship between public sector auditing and public financial management outcomes in Cameroon. Specifically, this study seeks to identify responsibilities of external auditors in the context of corporate governance in Cameroon, examine the relationship between public sector audit and financial fraud control in the public sector and determine the relationship between public sector audit and internal control quality. 

Further, this study will focus on investigating the extent to which public sector audit influence financial reporting credibility and it also seeks to provide recommendations for improving the effectiveness of public sector audits and their impact on financial management.

 The study is carried out in Cameroon. 

1.8 Limitations of the study

As with any human endeavour, the researchers experienced many minor constraints during the investigation. The main limitation was the lack of extensive literature on the subject, due to the limited availability of data about the evaluation of the relationship between public sector audit and public financial management 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 geographical scope, focussing solely 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 charges at the research location posed a challenge in covering the expenses for transportation fees.

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

1.9 Definition of terms

External audit: An external audit is a financial review that is conducted by a party not associated with the company or department that is voluntarily or involuntarily under audit. An external audit takes place within a defined set of rules or laws.

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.