1.1 Introduction
Internal auditing is defined as an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by systematically evaluating and improving the effectiveness of risk management, control, and governance processes (Institute of Internal Auditors [IIA], 2017). In the context of insurance organizations, internal auditing is particularly important due to the complex nature of insurance operations, which involve the management of premiums, and regulatory compliance. Effective internal auditing ensures that these processes are conducted efficiently, accurately, and in compliance with established policies and regulations (Owolabi & Obida, 2020).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of terms.
1.2 Background of Study
The practice of internal auditing has a long-standing history that traces back to the early development of organizational management and corporate governance. According to Sawyer (2018), internal auditing emerged as a formalized profession in the early 20th century, initially focusing on verifying financial records and ensuring accuracy in reporting. Over time, the scope of internal auditing expanded beyond mere financial verification to include evaluation of operational efficiency, risk management, and compliance with established policies and regulations. It became a strategic function designed to improve organizational performance and provide management with reliable information for decision-making.
In Nigeria, internal auditing in the insurance sector has evolved alongside the growth of the financial services industry. Akintoye (2017) reported that prior to the 1970s, internal audit activities in Nigerian insurance companies were largely informal, with limited focus on systematic risk assessment or operational control. Most insurance organizations relied on external auditors for financial verification, which left gaps in monitoring day-to-day operations and internal controls. The introduction of regulatory frameworks, such as the Insurance Act of 2003, stated that insurance companies must maintain proper internal control systems and ensure compliance with statutory requirements, effectively mandating stronger internal auditing functions (National Insurance Commission [NAICOM], 2003).
The insurance industry in Nigeria has witnessed significant growth over the past decades, playing a crucial role in providing financial security, managing risks, and contributing to economic stability. According to Adegbite (2019), insurance organizations are essential for safeguarding assets, facilitating investments, and supporting entrepreneurial ventures. However, the sector faces operational and financial challenges, including inefficiencies in internal processes, weak corporate governance, and inadequate risk management practices. These challenges often result in reduced profitability, mismanagement of funds, and low stakeholder confidence.
Internal auditing is recognized as a fundamental mechanism for ensuring transparency, accountability, and organizational efficiency. Owolabi and Obida (2020) reported that internal auditing strengthens internal control systems, enhances decision-making processes, and ensures compliance with regulatory frameworks in financial institutions. Similarly, Eze and Okeke (2021) asserted that organizations with robust internal audit functions experience improved operational performance and reduced incidence of fraud and financial misreporting.
Olusanya (2018) stated that limited skilled personnel, insufficient resources, and poor integration of audit recommendations into management decisions hinder the effectiveness of internal auditing in the sector. On the other hand, some organizations exhibit strong internal audit practices, affirming that consistent auditing activities contribute positively to organizational performance and stakeholder trust (Chukwu, 2020). Furthermore, Nwankwo (2017) contended that the adoption of modern audit techniques, including risk-based auditing and continuous monitoring, significantly enhances the capacity of insurance companies to detect operational lapses and optimize performance (Nwankwo, 2017).
The interplay between effective internal auditing and organizational performance is critical, particularly in the Nigerian insurance sector, where operational complexities and financial risks are prevalent. According to Adeyemi (2019), internal auditing is an indispensable tool for evaluating the efficiency of internal controls, ensuring compliance with statutory requirements, and promoting overall corporate governance. This study is set against the backdrop of examining the significance of internal auditing on the performance of insurance organizations in Nigeria.
1.3 Statement of Problems
Investigation revealed that the prevalence of operational inefficiencies and financial mismanagement within insurance organizations, which often result in reduced profitability, lack of transparency, and diminished stakeholder confidence (Adegbite, 2019). Internal auditing is recognized globally as a pivotal tool for ensuring accountability, monitoring compliance, and enhancing organizational performance, yet many Nigerian insurance companies are yet to fully integrate robust internal audit functions into their operational frameworks (Owolabi & Obida, 2020).
Furthermore, some insurance organizations in Nigeria exhibit weak internal control mechanisms, poor risk assessment practices, and irregular audit procedures, which is detrimental to decision-making and limits the effectiveness of corporate governance (Eze & Okeke, 2021). In addition, the absence of effective internal auditing is often linked with fraudulent activities, misreporting of financial statements, and operational lapses that threaten both the short-term and long-term viability of these organizations. It is against this backdrop that this study seeks to examine the significance of internal auditing on the performance of insurance organizations in Nigeria.
1.4 Aim and Objectives of Study
The aim of this study is to examine the significance of internal auditing on the performance of insurance organizations in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:
- To assess the role of internal auditing in improving financial accountability in insurance organizations.
- To determine the impact of internal auditing on operational efficiency.
- To evaluate how internal auditing enhances compliance with regulatory requirements.
- To identify challenges faced by insurance organizations in implementing effective internal audit systems.
- To recommend strategies for strengthening internal auditing practices in the insurance sector.
1.5 Research Questions
Based on the stated objectives, the research will address the following questions:
- How does internal auditing affect financial accountability in insurance organizations?
- What is the impact of internal auditing on operational efficiency?
- In what ways does internal auditing enhance compliance with regulatory requirements?
- What challenges do insurance organizations face in implementing internal audit systems?
- What strategies can be adopted to strengthen internal auditing practices in insurance companies?
1.6 Research Hypotheses
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
- H0: Internal auditing has no significant impact on the performance of insurance organizations in Nigeria.
- H1: Internal auditing has a significant impact on the performance of insurance organizations in Nigeria.
1.7 Significance of Study
It is believed that at the completion of the study, the findings will also serve as a guide for management in making informed strategic decisions to strengthen organizational performance (Eze & Okeke, 2021). This study will also benefit management teams within insurance organizations by accenting areas where internal audit practices are effective and identifying gaps that require improvement.
Furthermore, regulatory bodies such as the National Insurance Commission (NAICOM) will find the study useful in evaluating compliance with statutory requirements and in promoting standards that ensure accountability and transparency in the insurance sector. The research study will also contribute to the existing body of academic knowledge by providing empirical evidence on the relationship between internal auditing and organizational performance, which will serve as a reference for future research in the field (Eze & Okeke, 2021).
1.8 Scope of Study
The study will focus on the significance of internal auditing on the performance of insurance organizations in Lagos State, with a specific focus on Leadway Assurance Company Limited. The study will cover the evaluation of internal audit practices, their impact on operational efficiency, financial accountability, and compliance with regulatory standards within the organization.
1.9 Limitations of the Study
A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:
- Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
- Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
- Lack of Cooperation: Many of the respondents are usually aggressive on issue that border cooperation among the respondents border.
- Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.
1.10 Definition of Terms
Internal Auditing:
Internal auditing is defined as an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It evaluates and improves the effectiveness of risk management, control, and governance processes (Institute of Internal Auditors [IIA], 2017).
Organizational Performance:
Organizational performance refers to how well an organization achieves its objectives, including financial results, operational efficiency, and stakeholder satisfaction (Owolabi & Obida, 2020).
Insurance Organization:
An insurance organization is a company that provides risk management services through the issuance of insurance policies to protect individuals and businesses against financial loss (Adegbite, 2019).
Internal Control:
Internal control involves processes, policies, and procedures implemented by management to safeguard assets, ensure accuracy in financial reporting, and promote operational efficiency (Eze & Okeke, 2021).
Compliance:
Compliance refers to the adherence to regulatory requirements, laws, and internal policies governing the operations of insurance organizations (Olusanya, 2018).
…
