Internal Audit, Controls and PFM Reforms

Internal Audit, Controls and PFM Reforms

Syllabus tag: KASNEB CPA | Advanced Level | CA35S2 Advanced Public Financial Management

1. Internal audit in the public sector

The PFM Act 2012 requires all national government entities and counties to establish internal audit functions. The Institute of Internal Auditors (IIA) defines internal auditing as "an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations."

Internal audit scope in public entities: financial controls (are payments properly authorised and recorded?); compliance with laws and regulations; operational effectiveness (are programmes delivering intended outcomes?); IT systems and cybersecurity; and risk management.

2. The Audit Committee

Each entity must have an Audit Committee — a subset of the Board or governing body, with a majority of independent members. The Audit Committee provides oversight of: internal audit, external audit, internal controls, risk management, and financial reporting. Internal audit reports to the Audit Committee — not to management — to preserve independence.

3. Internal control frameworks

The COSO framework (adapted for the public sector) provides the conceptual foundation. Five components: control environment; risk assessment; control activities; information and communication; monitoring. A strong control environment requires: committed leadership, defined authorities, accountability, and an ethics policy.

Public sector specific controls: pre-audit of payments (checking before payment); exchequer control (budget releases only to the extent of available funds); stores control (physical counting and valuation of inventory); debt management controls (monitoring guarantees and contingent liabilities).

4. Value for money (VfM) auditing

VfM audits assess: Economy (acquiring resources at the lowest cost for the required quality); Efficiency (the relationship between inputs and outputs — are resources converted into outputs cost-effectively?); Effectiveness (are the outcomes actually achieved — are the intended benefits being realised?). The "3Es" framework.

The Auditor General conducts VfM audits in addition to financial and compliance audits.

5. Kenya's PFM reform agenda

Key reform milestones: introduction of IFMIS (2005, expanded since); adoption of IPSAS accrual standards (in progress); implementation of Programme Based Budgeting (PBB); establishment of PPRA and PPADA 2015; Controller of Budget Office strengthened; County PFM support programmes.

Current challenges: pending bills across government (accrual basis would eliminate end-of-year manipulation); fragmented budget systems (some counties not on IFMIS); capacity gaps in procurement, internal audit, and accounting; audit report backlog at the Auditor General.

6. Technology in PFM

IFMIS, iTax (KRA), G-Pay (government payments), and the Government Payments Gateway (GPG) are transforming public financial management. Digital platforms reduce cash handling, improve transparency, and generate real-time data for decision-making. The audit community is increasingly using data analytics to enhance audit coverage and effectiveness.