Professional Documents
Culture Documents
The Effect of Internal Control and Organizational Culture On The Performance of Public Schools in Malaysia
The Effect of Internal Control and Organizational Culture On The Performance of Public Schools in Malaysia
The Effect of Internal Control and Organizational Culture On The Performance of Public Schools in Malaysia
Faculty of Accountancy
July 2017
CONFIRMATION BY PANEL OF EXAMINERS
I certify that a Panel of Examiners has met on 7th December 2016 to conduct the final
examination of Siti Noorzainah Bt Sahat on her Doctor of Philosophy thesis entitled
“The Effect Of Internal Control And Organizational Culture On The Performance Of
Public Schools In Malaysia” in accordance with Universiti Teknologi MARA Act
1976 (Akta 173). The Panel of Examiners recommends that the student be awarded
the relevant degree. The Panel of Examiners was as follows:
ii
AUTHOR’S DECLARATION
I declare that the work in this study was carried out in accordance with the regulations
of Universiti Teknologi MARA. It is original and is the results of my own work,
unless otherwise indicated or acknowledged as referenced work. This thesis has not
been submitted to any other academic institution or non-academic institution for any
degree or qualification.
I hereby acknowledge that I have been supplied with the Academic Rules and
Regulations for Post Graduate, Universiti Teknologi MARA, regulating the conduct
of my study and research.
iii
ABSTRACT
The main weaknesses in internal control (IC) are reported repetitively in Public
School Consolidated Audit Reports within the period 2008-2013 and the biggest
weakness is failing to provide source documents as evidence to support the collection
and expenses made by public schools management. The weaknesses reported above
shows the ineffectiveness of the IC in managing public money and improper financial
management. This study uses IC guideline for the public sector which is INTOSAI
Gov 9100. Effective IC will provide reasonable assurance that the IC components,
which include control environment, risk assessment, control activities, information
and communication, and monitoring will help Malaysian public schools achieve its
objectives. The usage of organizational culture affects the manner of implementation
of IC in public organization. This study uses three dimensions of organizational
culture - bureaucratic, innovative, and supportive, that exist within the school
structure to support schools’ long term public performance. Thus, the objective of this
study is to examine the effect of IC components on the performance of public schools
in Malaysia and further examine the mediation effect of organizational culture on the
relationship between IC components and organizational performance of public
schools in Malaysia. The performance of public schools in Malaysia is measured
using the ‘3Es’ concept - economic utilization of resources, efficiency of activities,
and effectiveness of operation. A quantitative research methodology using survey
questionnaires was adopted to collect data from public school principals, and out of
685 questionnaires distributed to secondary public schools in Malaysia, 328 were
received providing a response rate of 47.9%. However, only 270 (39.4%) respondents
from secondary school principals were used for further analysis. Secondary public
schools are categorized as the Cost Responsible Centre in managing the large sum of
funds allocated annually, and their respective school principals are responsible for all
aspects of financial management in the public schools. Statistical analysis using
Structural Equation Modeling (AMOS 21.0) was used to test the hypotheses. The
statistical results revealed that IC is crucial and has a positive effect on the
performance of public schools in Malaysia. However, only three components of IC,
which are control environment, control activities, and monitoring have a positive and
significant relationship with the performance of secondary public schools. The ethical
formal structures (control environment), control activities, and monitoring play
important roles in maintaining and strengthening effective IC in public schools in
Malaysia. With further mediation tests, this study show that organizational culture
does have some effect on the implementation of IC and the performance of secondary
public schools in Malaysia. Lastly, this study contributes to the extent of literature in
the area of IC using Guideline for IC for public sector that is INTOSAI Gov 9100 as
IC framework and this is the first study unfolding the relationship between IC and
public schools performance of secondary public schools in the central part of
peninsular Malaysia.
iv
ACKNOWLEDGEMENT
Primarily, I am extremely thankful and grateful for the guidance and assistance I
received from my main supervisor, Associate Professor Dr. Hajah Kalsom Salleh,
who has been a supportive and motivating mentor throughout my research. Most
importantly, she taught and guided me with great patience and enthusiasm. My
heartfelt appreciation goes to my co-supervisor, Associate Professor Dr. Halil Paino
for his dedication and support. His wisdom, expertise and insights have improved the
quality of this study tremendously.
I would like to thank my parents, Encik Sahat Ismail and Puan Jariah Leman for their
support and encouragement throughout my life. My deepest appreciation to my
beloved husband, Azahan Mansor, and my four beloved children, Athirah, Aiman,
Aqeef and Afeefa, for their utmost love, support, patience, encouragement, and
understanding throughout my PhD studies. I would not have been able to complete the
longest and most difficult voyage of my life without their support. I am very grateful
to have them in my life, even though I faced numerous difficulties in juggling
between these commitments. I took these obstacles as a challenge that kept me
focused on my studies, which taught me that “There are moments of frustration in life
for which you must build good relations to support you, and that, one must also learn
to have courage and remain determined in life.” May Allah bless all of us. Thank you
very much.
v
TABLE OF CONTENTS
Page
CONFIRMATION BY PANEL OF EXAMINERS ii
AUTHOR’S DECLARATION iii
ABSTRACT iv
ACKNOWLEDGEMENT v
TABLE OF CONTENTS vi
LIST OF TABLES xi
LIST OF FIGURES xv
LIST OF ABBREVIATIONS xvii
vi
2.4.2 External and Internal Auditor of Public Schools in
Malaysia 32
2.4.3 Audit Findings and Internal Control Problems in
Public Schools in Malaysia 33
2.5 Summary 46
vii
CHAPTER FOUR: CONCEPTUAL FRAMEWORK AND
HYPOTHESES DEVELOPMENT 112
4.1 Theoretical Framework 112
4.1.1 Stewardship Theory 113
4.1.2 Social System Theory 116
4.2 Conceptual Framework of the Study 120
4.3 Independent Variables: Internal Control 125
4.3.1 Control Environment 125
4.3.2 Risk Assessment 134
4.3.3 Control Activities 137
4.3.4 Information and Communication 140
4.3.5 Monitoring 143
4.4 Mediating Variable: Organizational Culture 146
4.4.1 Bureaucratic Organizational Culture 147
4.4.2 Supportive Organizational Culture 149
4.4.3 Innovative Organizational Culture 150
4.5 Summary 153
viii
5.6.1 Reliability 185
5.6.2 Validity 186
5.6.3 Data Screening 188
5.6.4 Structure Equation Modelling (SEM) 192
5.6.5 Test of Mediating Effects 201
5.7 Summary 204
ix
7.1.2 Research Objective 2 274
7.2 Recommendations 276
7.2.1 Internal Control in Public Schools in Malaysia 276
7.2.2 Internal Control, Organizational Culture and
Performance 278
7.3 Contribution of the Study 279
7.3.1 Contribution to the theory 279
7.3.2 Practical Contribution 280
7.4 Limitations of the Study and Suggestions for Future
Research 281
7.5 Conclusion 283
REFERENCES 286
APPENDICES 314
AUTHOR’S PROFILE 394
x
LIST OF TABLES
Table 3.6 Definition and Example of Value for Money (VFM) 101
xi
Table 4.2 Summary of the Hypotheses Proposed in this Study 151
xii
Table 6.3 Response Bias Test Using Chi-Square Test of
Independence of School Profile Information 209
Table 6.11 Comparisons of Study Variables Before and After EFA 221
Table 6.19 Result for the Hypotheses Testing Structural Model 2 249
xiii
Table 6.21 Testing Hypotheses Using Standardized Estimates for
Hypothesized Structural Model 2- Revised 1 254
xiv
LIST OF FIGURES
Figure 3.4 Internal Control Standards for Public Sector (Intosai Gov
9100) 63
xv
Figure 5.1 Overview of Methodology 157
xvi
LIST OF ABBREVIATIONS
Abbreviations
AGFI Adjusted Goodness-of-Fit
AICPA American Institute of Certified Public Accountants
AMOS Analysis of Moment Structure
AVE Average Variance Extracted
CFA Confirmatory Factor Analysis
CFI Comparative Fit Index
CIMA Chartered Institute of Management Accountant
COSO Committee of Sponsoring Organizations of the Treadway
Commission
CR Composite Reliability
Cr Critical Ratio
DF Degrees of Freedom
EFA Exploratory Factor Analysis
GDP Gross Domestic Product
GFI Goodness-of-Fit Index
ICT Information and Communication Technology
INCOSAI International Congress of Supreme Audit Institutions
INTOSAI International Organization of Supreme Audit Institutions
IC Internal Control
ISSAI International Standards of Supreme Audit Institutions
MIA Malaysian Institute of Accountants
ML Maximum Likelihood
MOE Ministry of Education
NFI Normed Fit Index
RMSEA Root Mean Square Error of Approximation
SD Standard Deviation
SE Standard Error
SEM Structural Equation Modeling
SPSS Statistical Package for Social Sciences
xvii
TLI Tucker-Lewis Index
VFM Value for Money
xviii
CHAPTER ONE
INTRODUCTION
This chapter highlights the concept of internal control (IC) and its importance
in the financial management of a public organization. A full understanding about this
concept is necessary for building and analysing its impact on the performance of a
public organization. Furthermore, this chapter provides detailed information
concerning the background of the study and the problem statement, as well as the
objectives, research scope, methodology, expected contribution, and limitations of the
present study.
Neither private nor public sector organization is immune from scandals and
fraud. In the context of a Malaysian public sector organization, evidence includes the
loss in revenue from customs duties, which amounted to an estimated RM2.2 billion
that resulted from false import and export declarations of goods, understatements of
the true value of goods, manipulation of income tax return forms, and the collusion of
the customs staff (Malaysian Anti-Corruption Commission, 2011). In addition, the
case of the National Feedlot Corporation Scandal, which involved the misuse of
government funding amounting to RM250 million, provides an example of poor
internal control (IC) in managing public money, thereby allowing room for corruption,
misuse, and abuse of power (Malaysian Anti-Corruption Commission, 2012).
In the Malaysia Ministry of Education, the financial management cases
highlighted by the Auditor General (2012, 2013) reported that millions of Ringgit
were spent in providing world class education to all primary and secondary schools in
Malaysia. However, projects were unable to achieve their objectives because the
Ministry of Education failed to plan, manage, monitor, and supervise the
implementation of the projects (Auditor General, 2013). One of the cases was the
1BestariNet Service Project (1BestariNet) which has to provide high speed 4G
internet access and a virtual learning platform to primary and secondary school
students all over Malaysia. The project cost RM663 million for a period of two years
1
and six months to provide high speed 4G internet access and a virtual learning
platform to 10,000 schools, nationwide. However, the Internet connections to 4,176
schools were delayed, there was no extension of time, and no late penalty was
imposed. In addition, there was no Project Steering Committee or Project Technical
Committee established to monitor the project, errors in drafting the contract
documents, and failure to study the school requirements. Accordingly, 1BestariNet
access did not cover the entire school area and failed to achieve its objectives (Auditor
General, 2013).
Another serious problem arose in managing the Information and
Communication Technology (ICT) equipment supplied for Teaching Mathematics and
Science in English (ETeMS) from 2002 to 2008. The loss of ICT equipment, totalling
RM22 million, caused a major loss to the government and jeopardized the teaching
and learning process in public schools in Malaysia (Ministry of Education, 2009).
This problem occurred due to the negligence of public school officials whom
unintentionally provide the opportunity for the theft of the ICT equipment because of
lack of adequate physical controls in storing the ICT equipment (Ministry of
Education, 2009).
All the problems listed above show the ineffectiveness of the internal control
(IC) in managing public money and improper financial management. One of the ways
to solve the above financial management problems are by using effective IC. Internal
control is said to be effective when there is reasonable confidence that no major
unpleasant event will occur in the process of achieving the prescribed objectives
(Pfister, 2009). Effective IC will help an organization to assess and reduce risk
(Carolyn & Peter, 2002), deter fraudulent activity (Cendrowski, Martin, & Petro,
2007), reduce mismanagement and error (Mu’azu Saidu & Siti Zabedah, 2013), ensure
the reliability and accuracy of financial reports (Changchit, Holsapple, & Madden,
2001), and monitor potential problems (O’Leary & Gibson, 2008) that could result in
the abuse of power, omissions, misstatements, and losses that further damage an
organization’s reputation (Noorvee, 2006).
This study uses INTOSAI Gov 9100, which is a Guideline for Internal Control
Standards for the Public Sector as s framework to examine the IC practices of public
schools in Malaysia. INTOSAI Gov 9100 defines IC as an integral process that is
affected by the management and its personnel to address risk and provide reasonable
assurance that organizational objectives can be achieved. This study uses INTOSAI
2
Gov 9100 IC standard because there are many aspects of public sector operation
objectives have been added to the definition that related to public sector. The
objectives of the public sector, as stated in INTOSAI Gov 9100, are executing orderly,
ethical, economical, efficient, and effective operations, fulfilling accountability
obligations, complying with rules and regulations, and safeguarding resources
(INTOSAI, 2004a). According to INTOSAI Gov 9100, effective IC must contain five
(5) interrelated components of IC, which are control environment, risk assessment,
control activities, information and communication and monitoring.
Effective IC can help guide an organization towards achieving its objectives
(Hightower, 2009; INTOSAI, 2004a; Kewo, 2017) and creating strong defences
against an organization’s failure as well as becoming an important driver of the
organization’s performance (Rezanee & Reiley, 2010). Accordingly, many studies
agree that effective IC may positively impact the effectiveness of an organization and
further enhance organizational performance (Abraham, 2013; Doyle, Ge, & McVay,
2007b; Elbannan, 2009; Emmanuel, Ajanya, & Audu, 2013; Jokipii, 2010; Kewo,
2017; Mawanda, 2008; Noorvee, 2006; Suyono & Hariyanto, 2012; Wardiwiyono,
2012; Wittayapoom & Limsuwan, 2011).
Internal control provides reasonable assurance about how organizations
achieve their planned objectives (Huefner, 2010; INTOSAI, 2004a; Parveen, 2009). It
ensures that the management carries out the organizational activities in an orderly and
efficient manner. Internal control may provide a reasonable assurance to the
management that the information they use is reliable and accurate (Fellner & Mitchell,
1995; Gauthier, 2006).
The broad objectives of public financial management are to achieve fiscal
discipline, efficient and effective provision of public services, and efficient allocation
of resources to reflect priority needs (Asare, 2009). Effective IC will help an
organization create effective financial management and will enable organizations to
obtain and allocate resources based on their priorities and further able to achieve pre-
defined organizational performance (McKinney, 2004). The definition of
organizational performance use in this study is a set of pre-defined target or objectives
that being accumulated from all the organization’s work processes and activities. This
specific definition derived from the definition of organizational performance provided
by Boddy (2011) and Albrecht (2011).
According to Huefner (2010) in his paper entitled Local Government Fraud:
3
The Rosalyn School District Case, a school that has IC problems will not perform well
because the existence of poor control environment, improper planning in control
activities, inadequate monitoring, inadequate security over information technology
and insufficient assessment on financial management risk. In addition, Huefner (2010)
emphasize that effective IC would provide reasonable assurance that there is no
misuse of public money, no wastages and no misappropriation of assets exists in the
public schools. Therefore, with effective IC, the public resources could be use
effectively and able to help organization achieved its objectives.
Organizational culture also plays an important role in creating better public
school performance. This study uses an organizational culture definition offered by
Pfister (2009) which is as a pattern of basic assumptions which is represented in a
system of shared values that define what is important, appropriate attitudes and
behaviours that guide each individual’s attitudes and behaviour in the organization.
Gunn (2002) stresses organizational culture is important to organization and it
is deeply embedded in organizational policies and procedures that arise from two of
the most influential organizational functions, which are human resources and financial
resources. Past research into organizational culture has suggested that organizational
culture is positive and directly linked with organization success (Xenikou & Simosi,
2006). Denison (1990) found that organizational culture is directly linked to the
performance of an organization and that changes to cultural traits will impact
immediately on the effectiveness and efficiency of an organization (Reginato &
Guerreiro, 2013).
On top of that, previous research in public schools has shown mixed results
concerning the usage of bureaucratic, supportive, and innovative culture (Adler &
Borys, 1996; Sinden, Hoy, & Sweetland, 2004a, 2004b). The role of bureaucratic
culture is popular because effective financial management needs clear lines of
authority, systematic work that is regulated, ordered, and structured, and use written
procedures (Abernethy & Vagnoni, 2004; Goddard, 1997; OReilly & Chatman, 1996;
Pfister, 2009). Furthermore, the usage of supportive culture in public school (Gomez,
2010), such as, the way they work together and motivate each other have been proven
to be the influential factors in better school performance (Mattar, 2012). Innovative
culture encourages organizational members to follow the rules and regulations that
exists in the organization towards the achievement of effectiveness and efficiency of
an organization, and, when appropriate, organizational members could suggest new
4
and better ways to improve the organization performance (Feldman, 1988; Potts &
Kastelle, 2010; Roper, 2009) .
Therefore, bearing all the above statements in mind, the investigation on IC
practices used by public school principals should be done to strengthen the
organizational performance of public schools in Malaysia. Subsequently, public
school principals should enhance IC effectiveness by adopting organizational culture
whether supportive, innovative or bureaucratic cultures to further improve school
performance.
5
rules, practices, values and other activities set by management to govern employee
behaviour. In public schools in Malaysia, there are many rules and regulations govern
how public officials should use and manage public money. Because of that, the
internal auditor starts doing their auditing by looking at the management control of a
public school. The auditing of management control concerns on the existence of an
authority structure, management responsibilities in financial management, the
existence and the function of internal auditing as well as the financial and accounts
committee. The list of weaknesses in management control from 2008 until 2013, as
reported in the Public Schools Consolidated Audit Report (2008, 2009, 2010, 2011,
2012, 2013), is depicted in Table 1.1. The existence of the internal audit and school
financial and accounts committee in monitoring the use of public money in public
schools in Malaysia are crucial factors in determining effective financial management
and creating strong IC in the organization. The establishment of internal audit and
school financial and account committee have been published in Treasury Circular No.
8, 2004 and Treasury Circular No. 9, 2004 (Ministry of Finance, 2004a, 2004b).
However, there are schools that did not have internal audit and school financial and
accounts committee (School Audit Division, 2014).
Table 1.1:
Management Control Weaknesses for 2008-2013
No. Management Control 2008 2009 2010 2011 2012 2013 Total
Weaknesses
1 Authority structure is not up to 6
date
2 No internal audit committee 6
3 Internal audit is not functioning 6
4 School financial and accounts 6
committee does not meet at least
four times a year
5 Lack of competent financial 6
personnel
6 Failure in maintaining accounting 6
records
Sources: School Audit Division (2009, 2010, 2011, 2012, 2013, 2014)
6
send their financial statements before 31st March the following year for auditing
purposes (Ministry of Education, 1996). According to the Education rules (Accounts
and Audit) 1996, and Section 130 of the Education Act 1996 (Act 550) all government
schools, government aided schools that received financial aid, and Islamic Education
Schools are required to produce their annual financial statements for the year ended
31st December to the School Audit Division before 31st March of the following year
for audit purposes (Ministry of Education, 1996). In 2012, one hundred and twenty
eight (128) schools failed to send their financial statements to the School Audit
Division before 31st March 2013. The delay in sending the financial statement varied
from 1 day to 207 days, or a duration of seven months (School Audit Division, 2013).
The second weakness reported in the Public Schools Consolidated Audit
Report was the weaknesses in collection control. Weaknesses such as collection
without source documents and failure in recording collection money in accounting
books can be seen in the management of collection money in public schools in
Malaysia. As shown in Figure 1.1, the biggest problem that occurred concerning the
collection of public money without producing any proof or producing an official
receipt (48%). This constitutes non-compliance with Treasury Instruction 70, which
states that all public officials who are responsible for collecting public money must
produce a two-ply carbonized receipt as evidence with signatory approval (Ministry of
Finance, 2007). Without proof, the money could be embezzled by the collector, and
this is an open opportunity for fraud to happen (Albrecht & Albrecht, 2004;
Goldmann, 2009).
The second biggest problem in collection control is problem with recording
collection money (16%). Under the Malaysia Ministry of Education, all accounting
and financial management procedures of public schools are listed in School Financial
Management and Accounting Procedure (2012). According to the School Financial
Management and Accounting Procedure (2012), all receipts from public citizen must
be given official receipt and must be recorded in accounting book. Albrecht and
Albrecht (2004) stressed that inadequate and improper source documents, faulty
journal entries, and inaccurate ledgers are frequent accounting irregularities found in
many fraud cases.
Occurrences of receivable account (12%), shows lack of IC in collection public
money is the third collection weakness. As stated in the School Financial Management
and Accounting Procedure (2012), paragraph 10.2, the receivable account occurs
7
because failure in collecting from students such as payment for losses of textbooks or
failure of collecting rental money from the canteen or shop books tenant for the
current year. These problems can be solved with proper monitoring of students
register, rental register, official receipt, office collection book and cash book to ensure
no receivable accounts occurs.
Collection by the school administrator without approval (11%) from the head
of the responsible centre is the fourth collection weakness. According to the School
Financial Management and Accounting Procedure (2012), public schools cannot
collect any money from other parties without approval from the State Education
Department.
On top of that, the school administrator should take the problems of managing,
handling and bank-in the collection money seriously, as this could cause a great loss
of public funds. According to School Financial Management and Accounting
Procedure (2012), the money collected from other parties should be handed to the
school principal on the same day of collection, and it must be banked in on the same
day. If the money cannot be deposited in the bank on the same day, the money should
be put in a safe box and properly locked (Account Division, 2012)
Receivable account
12%
Problem in recording
collection money
16%
8
Source: School Audit Division (2014)
The third weakness reported in the Schools Consolidated Audit Report was
weaknesses on expenses and payment control. The pertinent problem with expenses
and payment control was the absence of the source documents (payment without
supporting documents (22%) and procurement without local orders (25%)), which
comprises 47% of the total weaknesses as shown in Figure 1.2. The absence of source
documents, such as request notes, invoices, quotations and local orders, constituted
the biggest problem in the expenses and procurement for public schools. The source
documents are important in accounting as proof of transaction and for recording
purposes (Albrecht & Albrecht, 2004). This is important to ensure that no fake
invoices, counterfeit cheques, or other forged documents are created, no illegal
purchases are created by employees, purchase amounts and quantity are correct and
similar to the actual quantity of the product received, and no purchases are made that
differ from the agreed contract terms (Amrin, 2008; Auditor General, 2012, 2013;
Goldmann, 2009).
The problem in recording assets was 16% of the overall weaknesses, which
shows non-compliance with Treasury Circular No. 5, 2007: Procedure in Managing
Movable Government Assets and Treasury Circular No. 5, 2009: Procedure in
Managing Government Store. Furthermore, problems with account payable (7%),
mistake of payment to government officers (6%), late bill payment (5%), expenses
differ from fund allocation (4%) and other weaknesses happened because no faithful
adherence to existing IC in the public schools. The weaknesses also exists because of
failure to obey long list of expenses and payment procedures as listed in the School
Financial Management and Accounting Procedure (2012) produced by Account
Division, Ministry of Education.
Further analysis of collection and expenses and payment control weaknesses
for the year 2008-2013 could be seen in Table 2.2 and 2.3 (page 40 and 41
respectively) in the next chapter.
9
Late bills Payment using
Expenses differ
payment cash cheque Deficit bank
from fund allocation
5% 2% & account balance
4%
1% Procurement without
local order
25%
Expenses without
approval
6%
Problems with
account payable
6%
Fault in payment
to government
officers Payment without
6% supporting document
Other problems 22%
7% Mistakes in
recording assets
16%
Figure 1.2: Types of Weaknesses in Expenses and Payment Control for 2013
Source: School Audit Division (2014)
The School Audit Division produced a special audit report for more serious
cases involving fraud such as misappropriation of assets, embezzlement and wrongful
use of power (School Audit Division, 2010). Issues reported by the School Audit
Division (2009, 2010, 2011, 2012, 2013, 2014) in the special audit reports are shown
in Table 1.2 and there have been many fraud cases found in financial management of
public schools in Malaysia. The use of effective IC acts as a tool in fraud deterrence
will enable proper action to be taken to prevent fraud before it happens (Cendrowski
et al., 2007).
10
Table 1.2:
Issues of IC Weaknesses Reported in Special Audit Report Produced by School Audit Division
in 2010-2013 Involving Fraud Cases
No. IC Weaknesses 2010 2011 2012 2013 Total
Management Issues
1 Forgery of bank statement, deposit slip, cheques 3
2 Forgery of school principal’s and account clerk’s 4
signature
3 Failure to maintain proper accounting records 3
4 Forgery of School Finance and Account 2
Committee minutes of meeting
5 Forgery of accounting record 1
6 Failure to produce accounting records for auditing 2
Collection Issues
7 Failure to deposit collection money 4
8 Failure to account collection money 3
9 Collection without approval 2
Expenses Issues
10 Forgery payment 3
11 Procurement awarded to suppliers that are a 1
benefactor to the school principal
12 Forgery of procurement document such as 3
payment voucher, invoice
13 Payment done without approval 3
14 Payment done without supporting documents 2
15 Procurement above market price 1
Sources: School Audit Division (2009, 2010, 2011, 2012, 2013, 2014)
11
in section 15A of the Financial Procedure Act 1957 (Act 61) (Ministry of Finance,
2000).
The problems of school financial management begin from the selection of a
school principals who does not have certain expertise, knowledge, or leadership skills
(Shahril, 1993, 2005; Zaidatol, 1990). Instead, school principals are selected because
of their seniority or tenure of working with the Ministry of Education. The lack of
financial management knowledge causes principals to rely on the work of the
accounting clerks (Sazali, 2006). If the accounting clerks are knowledgeable about the
school’s financial management and are efficient in doing their accounting work, the
school accounts will be maintained properly (Mohd Richard, 2013; Noridah, 2003),
and all the accounting procedures governed by the law will be followed. However, if
an accounting clerk does not know how to do his or her work, the school accounts will
be jeopardized. The situation becomes worse when there are not enough accounting
clerks in a school (Shahril, 1993, 2005).
In addition, the reports from the School Audit Division (2014), show that the
IC weaknesses in the public schools in Malaysia happen because of:
1. Lack of monitoring by the top management
2. Poor documentation
3. Not following procedures, laws, or regulations
4. Lack of financial management knowledge
5. Financial and account committees not actively doing their jobs
6. Absence of an internal audit in reviewing financial documents
The problem of IC weaknesses are remaining from year to year (School Audit
Division, 2007, 2008, 2009, 2010, 2011, 2012, 2013). What has been done to reduce
these problems and do these problems still exist today? These questions are not being
adequately research.
The IC principles should be set by the top management to ensure a strong IC in
the organization. If the top management supports a strong IC, the organization as a
whole will most likely practice a high-quality of IC (Gauthier, 2006; INTOSAI,
2004a; Parveen, 2009; Root, 1998). Albrecht & Albrecht (2004) stressed that when
the management shows unacceptable behaviour that is in conflict with the control
procedures of the organization, the effectiveness of IC is eroded, and IC weaknesses
will occur. In the same way, if the individuals in the organization are not
12
conscientious in practices IC when performing their duties, the system of the IC will
not be effective (Gloeck & Jager, 2005).
In term of performance of public school, Nagarajah (2006) shows that financial
management effectiveness has a positive direct effect on service effectiveness, and
service effectiveness has a positive effect on the academic performance and student
quality of public schools in Malaysia. This shows the importance of properly
managing schools, and financial management will lead to efficiency of the work
processes that will further affect school performance (Nagarajah, 2006).
On top of that, when linking IC to performance in public schools, Huefner
(2010) stressed that, in public schools IC will provide reasonable assurance that no
misuse of public money, no wastages and no misappropriation of assets especially
involving cash and valuable assets. Hence, the public resources could be use
effectively and help organization achieved its objectives. Good IC will provide
reasonable assurance in pursuit of the organization’s mission and goals, in particular,
to accomplish the value for money concept through the 3Es of public resource
utilisation (Mihaiu, Opreana, & Cristescu, 2010). Penny (2012) supported that , in
public schools, the concept of value for money that contains “three E’s”concept
which are economy, efficiency, and effectiveness of public resources should be used
together to ensure the effective usage of public funds. Every single process and
operation of a public sector organization would be managed with reasonable IC to
ensure all resources would be used at optimum level, manage to produce high quality
product or services and at lower cost (Noraini & Norhanizah, 2014).
Accordingly, an evaluation of the IC of public schools in Malaysia is critically
important to enhance public school financial management. This evaluation will help
public schools management mitigate three areas of IC weaknesses listed above which
are management, collection and payment control that being reported repetitively for
many years by School Audit Division, Ministry of Education.
Organizational culture affects the manner of implementation of IC in an
organization (Pfister, 2009). Research in public schools found that cultural types
within different school structures contribute to the explanation of higher school
performance, especially in improving academic achievement at the middle school
level (Gomez, 2010; Heck & Marcoulides, 1996). Consequently, three dimensions of
organizational culture - bureaucratic, innovative, and supportive suggested by Wallach
(1983), are used in this study to investigate the effect of organizational culture on the
13
implementation of IC and the performance of secondary public schools in Malaysia.
Bureaucratic culture communicates IC procedures using many rules and
regulations (Ogbonna & Harris, 1998, 2000; Roper, 2009; Sinden et al., 2004a,
2004b), supportive culture relies more on informal communication between the
organizational members, promoting an open and harmonious workplace (Gomez,
2010; Peterson & Deal, 1998b; Roper, 2009; Tumbas & Schmiedel, 2013). In
addition, an innovative culture encourages organizational members to follow the rules
and regulations towards the achievement of high performance, and, if appropriate,
organizational members suggest new and better ways to improve the IC in the
organization (Feldman, 1988; Potts & Kastelle, 2010; Roper, 2009). Thus, public
schools manager could use pre develop and implement IC that could promote the
types of culture that exist in the schools, that further will help to improve public
school performance.
In particular, two specific questions are further posed to provide a guideline for
investigating the main research questions:
1. Do the internal control components affect the performance of public schools in
Malaysia?
2. Does the organizational culture mediate the relationship between IC
components and public school performance?
14
1.4 Research Scope and Methodology of the Study
15
by hand using drop-off and pick-up method in these three conferences to ensure the
availability of the school principals and its ability to increase the response rate (Allred
& Ross-Davis, 2011; Hair et al., 2010).
Fourth, these three states were chosen because of their ability to cover the
cluster sampling according to the type of school as stated in Section 5.5.1. The
purpose of cluster sampling is to sample economically while retaining the
characteristics of a probability sample (Zikmund, Babin, Carr, & Griffin, 2009). The
population was clustered into four groups according to Fully Residential, Regular,
Religious and Government Aided, and Technical and Vocational school types.
Fifth, these three states were also chosen because the total numbers of
secondary schools from these three states are 600 schools, which is more than triple
the minimum sample size, which is 188 needed for the distribution of questionnaires.
Finally, the sixth reason is to demonstrate the total number of secondary
schools in central part of peninsular Malaysia (Kuala Lumpur, Selangor, Putrajaya,
and Perak) are the biggest (which is 26.7%) as compared to the total population of
schools in other part in Malaysia as shown in Table 5.1 on page 159.
The questionnaires were distributed early in the morning during the
registration session by the organizer and collected at the end of the conference. From
the 600 questionnaires distributed, 328 (54.7%) were collected, but only 270
questionnaires (45%) were used for data analysis. This is because only school
principals are considered as the respondents of this study.
Data analysis was done using two statistical techniques, Statistical Package for
the Social Sciences (SPSS) version 21.0 and Structural Equation Modelling using
AMOS version 21.0. SPSS was used for descriptive analysis in coding, identifying the
missing data, the assessment of normality and for factor analysis. Then, SEM was
conducted using the two-stage approach recommended by (Anderson & Gerbing,
1982). The first stage includes the assessment of the measurement model, and the
second stage includes assessment of the structural model. The first stage was to
develop the underlying measures and the second stage for the hypothesis testing of the
structural model.
16
1.5 Expected Contribution of the Study
This is the first study in the area of IC using Guideline for IC for public sector
– INTOSAI Gov 9100 as IC framework. In addition, this is the first study that looking
at the relationship of IC and public schools performance that using secondary schools
in Malaysia as the population of the study.
This study also analyzes the impact of the organizational culture on the
relationship of IC and performance of public schools in Malaysia. Further, it will also
provides empirical evidence to assist school administrators regarding school financial
management and further enhance public schools IC practices.
17
1.6 Outline of Subsequent Chapters
18
Chapter Six: This chapter discusses the descriptive and inferential statistics of
the research. The first part describes the initial results of the survey questionnaire by
highlighting the descriptive statistics of the respondents’ profile and the background
of the respondents and their schools. The second part explains the data cleaning,
screening, and assessment of normality test, followed by the result of factor analysis
and Cronbach’s alpha. Then, the data are analyzed using Structural Equation
Modelling with AMOS because it can explain the pattern of interrelated dependence
simultaneously between a set of observed and unobserved constructs in a model.
Further, it provides an overall test of model fit and individual parameter estimate tests
simultaneously; thus, providing the best model that fits the data adequately. Lastly, the
discussions and interpretations of result are presented in the last part of the chapter.
Chapter Seven: This chapter discusses the summary, recommendation, and
conclusions of the study. It summarizes the investigation through critical evaluation of
the main findings and then lists the contributions, implications, limitations, and
presents a direction for future research.
1.7 Summary
19
CHAPTER TWO
IMPORTANCE OF INTERNAL CONTROL IN THE FINANCIAL
MANAGEMENT OF PUBLIC SCHOOLS IN MALAYSIA
20
accountability (Zietlow et al., 2007). In the public sector, the basic objectives of
effective financial management are to ensure the cost effectiveness of public spending,
increase the financial accountability of public officials (Zietlow et al., 2007), and fulfil
policy, rules, and regulations (McKinney, 2004).
21
7. Enable the organization to make future plans and align its resources with its
objectives,
8. Maximize the income source without diverting from the organizational
priorities, and
9. Collaborate if there is a change in the plan without compromising the core
financial management values.
22
The Association of Chartered Certified Accountants (2010) listed six key
challenges in implementing effective financial management in the public sectors in
developing and emerging economies. These include:
1. Strengthening the systems, processes and infrastructure for public financial
management by updating legislation that supports financial management ,
2. Improving the financial qualifications of the accounting and finance staff,
3. Developing skills that fulfil the basic job requirements of qualified finance
professionals,
4. Developing future public sector accountants and auditors,
5. Improving cooperation between national governments and international
institutions, and
6. Improving competencies through support and development.
23
2.3 Financial Management in Public Sector in Malaysia
24
works from an external source (Hui, Othman, Omar, Rahman, & Haron, 2011). In
2012, more than RM150 billion or twenty-five per cent (25%) of the total value of
goods and services included in the gross domestic product (GDP) produced in
Malaysia was spent on buying government goods, works, and services. If compared to
other neighbouring countries, such as Vietnam, Thailand, and Indonesia, the average
spending pattern for the Malaysian Government is higher than the average of these
three countries, which is 12% of their GDP (Jones, 2013). This shows that the
Malaysian Government purposely spends more to accelerate economic growth, to
achieve socioeconomic and development objectives (Auditor General, 2014).
Procurement should obviously reflect public accountability, yield the best
returns for every Malaysian Ringgit spent, and should offer fair and equitable
opportunities to all parties. Furthermore, all procurement should be processed
according to policies, rules, and regulation (Amrin, 2008; Jones, 2013; Ministry of
Finance, 2010). However, there are many procurement problems listed in the Auditor
General Annual Report from 2008 until 2012. The procurement problems are:
1. Occurrences’ of fraud cases regarding procured goods and services,
2. Works being paid above market price,
3. Payment done without receiving services /goods,
4. Subdividing purchases,
5. Awarding contracts to unqualified bidders, and
6. Incomplete and abandoned projects.
These problems show that government managers did not obey policies, rules,
and regulations that govern the procurement activities (Amrin, 2008). These acts of
incompliance will increase the cases of fraud that further create big losses for the
government and tarnish its reputation (Goldmann, 2009). Failure to deliver goods in
accordance with specifications and repetitive occurrences of incomplete and
abandoned projects were happening due to poor monitoring and ineffective auditing
services (Hui et al., 2011; Jones, 2013).
The audit findings issued by the Auditor General in 2012 and 2013 also
stipulated many IC weaknesses of public procurement arising from insufficient
procurement planning and poor drafting of specifications (Auditor General, 2012,
2013). These weaknesses incurred the loss of millions of Ringgit and involved many
ministries. These problems can be solved by improving transparency in public
25
procurement (Jones, 2013). Jones (2013) suggested five methods for improving the
transparency of Malaysian public procurement, which are:
1. Publicizing laws, regulations and instructions governing procurement,
2. Widely advertising tenders and quotations,
3. Disclosing the budget ceiling,
4. Publicly announcing the method of procurement, and
5. Announcing which company is awarded after a suitable company has been
chosen.
26
to High Performing Schools and Cluster Schools (Bhattacharyya, Sabdin, & Shaari,
2013). The High Performing Schools are schools with ethos, character, and unique
identities, which enable the schools to excel in all aspects of education. These schools
have a strong and excellent work culture and dynamic national human capital for
holistic and continuous development in addition to being able to compete in the
international arena. Furthermore, the Cluster Schools constitute a merit system that
grants high achieving educational institutions autonomy in administration and extra
allocation for the advancement of specific fields like academic, co-curricular, and
sports achievements (Bhattacharyya et al., 2013).
The second stage of decentralization is given to the Trust Schools that are
recognized by the innovative collaboration of school management with the public and
private sectors (Arran, 2014). By the year 2025, the Trust School model will be
expend to 500 schools in all over Malaysia (Ministry of Education, 2013).
The third stage in the decentralization process supported by the Government
Transformation Plan for the educational sector, which is explained further in the
Malaysia Education Blueprint 2013-2025 is the need on having high performing
school principals in every school in Malaysia. The high performing school principals
must be equipped and trained with leadership competency and management
knowledge (Ministry of Education, 2013).
In order to produce high performing school principals in every school in
Malaysia, a new career path for school principals has been created. Previously, the
appointment criterion of a school’s leader was primarily based on their duration of
teaching service in public schools in Malaysia rather than their leadership
competency. However, in terms of the new career path, the selection criterion
according to tenure was changed to selection based on leadership and management
competencies (Ministry of Education, 2013).
Thus, starting 2013, only personnel who have completed their training for the
National Professional Qualification for Educational Leaders (NPQEL) organized by
Aminuddin Baki Institute, which is the training institute for the school leaders, will be
considered for the position. The training includes seven modules, which are:
1. Educational leadership and management,
2. Educational policy,
3. Managing instructional (teaching and learning) performance,
4. Managing change and innovation,
27
5. Managing resources and school operation,
6. Personal relationship, and
7. Self-improvement.
Module managing resources and school operation focuses on public and school
financial management, office administration, assets and physical development,
information and technology, and human resource management (Kamaruzaman,
Sharifah, Gurcharan, et al., 2012). Having financial management knowledge in
managing public school resources will enable school principals to manage the funds
and resources allocated to the schools in an economic, effective and efficient manner
(Ibrahim, 2003; Kamaruzaman et al., 2012; Maszurla et al., 2008; Norasmah &
Kamaruzaman, 2012; Suryanti, 2004). Training in financial management will increase
school principals’ knowledge in managing finances and accounting (Shahril, 2008).
With this knowledge, school leaders will be more aware concerning how to use
allocated funds effectively (Azhar, 2001). Zaidatol (1991) points out that there are
three main objectives in understanding school financial management processes, which
are:
To create a strong control in collection and payment,
To enable the school principal to solve problems regarding financial matters,
and
To ensure financial information is always updated.
28
directions given by the financial authority, control the expenditure authorized under
that purpose and to be the chief accounting officer in respect of all public moneys
collected, received or disbursed and all public stores received, held or disposed of by
or on account of the department or service for which the purpose is provided”.
Section 15A describes the roles and responsibilities of the controlling officers.
The controlling officers are responsible for the effective financial management of the
schools within their remit (Shahril, 2005). The duties of the controlling officer, as
stated in section 15A, Financial Procedure Acts 1957 (Ministry of Finance, 2000), are
to:
1. Ensure appropriate control on expenditure,
2. Take charge of managing public resources from collection to disposal,
3. Supervise the accounting officer and give appropriate direction,
4. Ensure the accuracy of the financial statement , and
5. Report any surcharge action that occurs under his/her management.
29
Financial Procedure Act 1957 Section 18, a surcharge is an amount of money that
should be paid by the person who fails to collect public money, makes improper
payment, fails to maintain proper accounting records, negligent in doing their job, and
causes a loss to the government (Ministry of Finance, 2000). In addition, Treasury
Circular No. 8/2004 states the importance of the establishment of the financial and
account management committee in government departments or agencies (Ministry of
Finance, 2004a). The committee is responsible for budget management, monitoring,
accounting procedures, collection management, asset management, responding to
audit queries, and providing financial as well as accounting training. The committee
also needs to meet at least four times a year and send a quarterly report regarding
school financial management to the head of the responsibility centre (Ministry of
Finance, 2004a).
In public schools, the finance and accounts management committee comprises
senior assistants, administration assistant, internal auditor and the head of department
to assist the school principal (Shahril, 2008). They will act as oversight mechanisms to
ensure the effectiveness of school financial management. Figure 2.1 shows the
organizational chart of the school finances and accounts management committee.
Chairman
Principal/Headmaster
Assistant Chairman
Senior Assistant (Administration)
Secretary
Administrative Assistant (N17)
Head of Head of
Department Subject
Source: Shahril (2006)
30
In addition, the Handbook for Secondary School Staff produced by the School
Inspectorate (2002) stipulates nine duties of the school finances and accounts
management committee:
1. Read and understand the circular/letter that relates to school financial and
accounting management,
2. Produce letter of authorization to teachers, senior assistants, afternoon senior
assistants, heads of department and clerks to collect fees,
3. Order and register all receipt books,
4. Provide receipt books to teachers,
5. Ensure that all collections received are deposited in the bank,
6. Ensure that purchasing/payment is done according to financial regulations with
supporting documents, such as local order, invoice, bills and vouchers,
7. Prepare cash book for government group fund, school group fund, hostel group
fund and petty cash,
8. Check and verify all financial transactions in the cash book, and
9. Ensure that all fees collected have approval from the Head of Responsibility
Centre.
31
by Noridah (2003) on the financial management of secondary schools in Melaka,
found that school principals make purchases without checking the financial status and
without considering the stock level. This action will cause the occurrencse of deficit
accounts and the over piled stocks.
There are two types of auditors responsible as a monitoring mechanism for the
financial management of public schools: external auditors and internal auditors.
Figure 2.2 shows the types of auditor involved in monitoring the financial
management of public schools in Malaysia. The external audit function is performed
by the National Audit Department, headed by an Auditor General, who is appointed
according to Article 106 and 107 of the Federal Constitution and Audit Act 1957
(Ministry of Finance, 2000). The external auditor reports to parliament on issues of
public accountability. The National Audit Department is responsible for the financial
management and performance audit. The financial management audit is done to
evaluate whether the financial management of the Ministries, Departments, and
Agencies of the Federal and State Governments is in accordance with relevant and
current financial laws and regulations. This evaluation covers the elements of the
organizational management, budget, receipts, collection and expenditure of public
money, assets management, investments, and loans. Consecutively, a performance
audit is done to evaluate whether the programmes and activities of the
Ministries/Departments/Agencies have been carried out economically, efficiently, and
effectively to achieve their desired objectives and goals (Auditor General, 2014).
Furthermore, there are two departments that function as an internal auditor for
Ministry of Education, Malaysia, as represented in Figure 2.2. These are the Internal
Audit Department and the School Audit Division, Ministry of Education. The internal
Audit Department reports directly to the Secretary General of the Ministry of
Education and to the Minister of Education, while the School Audit Division reports
its findings to the Deputy Secretary General, Ministry of Education, which is the top
management of public schools in Malaysia (Ministry of Education, 2014). The main
purpose of the establishment of the Internal Audit Department in the Ministry of
Education is to examine and evaluate the IC of financial management in all
32
departments, agencies, and public schools of the Ministry of Education. Beside that,
the internal audit department must ensure an adequate and effective internal audit
procedure exist and examine whether the policies, laws, and regulations are being
followed adequately (Internal Audit Department, 2008). In addition, the School Audit
Division is also an internal auditor to public schools in Malaysia. The division audits
public schools using two audit methods: Financial Statement Audit and Compliance
Audit. Then, every year, as stated in the Education Rules 1996 (Account and Audit)
subsection 8 (1) (c), the School Audit Division needs to produce a Consolidated Audit
Report pertaining to a summary of all the audit certificates and report all issues
involving school financial management (Ministry of Education, 2010).
Types of auditor
33
2.4.3.1 External Audit Finding
One of the functions of the National Audit Department, as the external auditor,
is evaluate IC and perform audits on the management of
programmes/activities/projects to determine whether the programmes/activities/
projects are implemented efficiently and economically and the stated objectives are
achieved (Auditor General, 2012, 2013). In public schools in Malaysia, the National
Audit Department evaluates the performance of the projects and procurement handled
by the Ministry of Education.
The audit findings stated in Procurement And Asset Management Circular
No.1, 2009: Guide for Management, Storage And Handling Equipment For
Information and Communication Technology (ICT), Ministry of Education Malaysia
reported that RM22 million was lost on ICT equipment that was being used as
learning equipment for Teaching Mathematics and Science in English (ETeMS) from
2002 to 2008. This caused a big loss to the government and jeopardized the teaching
and learning process in public schools in Malaysia (Ministry of Education, 2009).
These losses occurred due to the negligence of public officials that enabled the theft of
the ICT equipment. The negligence of public officials cause ICT equipment used
without written approval, had been place in public places without proper physical
control and supervision, inadequate physical controls in storing ICT equipment, and
failure to prove any sign of a break-in from where the ICT equipment was reported
missing (Ministry of Education, 2009).
In addition, the following are the weaknesses of financial management in the
Ministry of Education reported in the Auditor General Report (2012, 2013):
1. Non-compliance with the Government’s rules and procedures,
2. Specifications not being planned and identified properly,
3. Poor project management skills,
4. Late decisions on procurement,
5. Incomplete and not updated information systems,
6. Shortage of funds for asset maintenance,
7. Lack of monitoring and supervision,
8. Insufficient technical expertise and relying completely on
consultants/contractors, and
9. No coordination among agencies involved in ensuring projects could be
34
completed within the prescribed period.
However, the issue of non-compliance with financial rules and regulations can
be seen in the number of qualified audit certificates produced by the School Audit
Division. Four types of audit certificate are issued by the School Audit Division to
measure the financial position of public schools in Malaysia, as shown in Table 2.1.
Table 2.1 shows the types of audit certificate awarded according to the level of
financial management in the public schools in Malaysia for 2008-2013. Improvements
in the level of financial management can be seen in the increase in the number of
schools that receive an unqualified audit certificate and a decrease in the number of
schools that receive a qualified audit certificate.
For an unqualified audit certificate, there are three types of certificate that are
produced according to the public school financial management level: excellent, good
and satisfactory certificates (Engku Ismail et al., 2006; Fatimah et al., 2009). An
excellent unqualified audit certificate will be given when all the financial rules and
regulations have been obeyed by the school management, as stated in section 27,
International Auditing Standard 700. Table 2.1 shows the increase in the number of
schools receiving an excellent unqualified audit certificate from 11 schools in 2008 to
88 schools in 2013. This shows that only 88 out of 9,776 (0.9%) schools had obeyed
all the financial rules and regulations regarding managing public school financial
management for the year 2013.
An unqualified audit certificate is produced for schools that obeyed all the
35
financial rules and regulations with a few mistakes that did not have any significant
effect on the financial statement and all the corrections had been done in the allocated
time. A satisfactory unqualified audit certificate is produced when the school failed to
comply with financial rules and regulations; however, the non-compliance is
immaterial (Engku Ismail et al., 2006; Fatimah et al., 2009). Table 2.1 shows that
8,350 (85.4%) schools were given a good and satisfactory unqualified audit certificate
for the year 2013.
Moreover, two types of qualified audit certificate are produced for schools that
failed to comply with the financial rules and regulations, which are less satisfactory
and non-satisfactory qualified audit certificates. A less satisfactory qualified audit
certificate is given to schools that failed to comply with financial rules and
regulations. Most of the schools that received a less satisfactory audit certificate also
failed to maintain and update accounting books for at least three consecutive years.
This shows that school leaders failed to formulate any corrective action to improve
school financial management, and the same mistakes occurred without preventive
action (Engku Ismail et al., 2006; Omar et al., 2007). Table 2.1 shows that the trend of
schools that received a less satisfactory audit certificate increased from 570 (6.6%)
schools in 2008 to 702 (7.7%) schools in 2010 and then reduced to 229 (2.3%) schools
in 2013.
In addition, non-satisfactory qualified audit certificates were produced for
schools that had an error that seriously impacted the school financial situation, such as
having deficit bank balances, high payable accounts, and high receivable accounts
according to section 37 International Auditing Standard 700 (Engku Ismail et al.,
2006; Omar et al., 2007). Table 2.1 shows that the trend for schools that received a
non-satisfactory audit certificate decreased from 227 (2.6%) schools in 2008 to 97
(1%) schools in 2013.
However, a few schools still received a without an opinion audit certificate. As
depicted in Table 2.1, the number of schools that received a without opinion audit
certificate was quite similar from year to year and the occurrence was the highest in
2010, which was 68 schools and decreased to 12 schools in 2013. An audit certificate
without opinion is produced when the school’s management fails to produce financial
statements for auditing (Engku Ismail et al., 2006; Omar et al., 2007). According to
the School Audit Division (2012, 2013), the schools failed to produce any financial
records because the financial records were damage by accidents such as, fire and
36
flooding. Because of that, the proper protection of financial documents by keeping
them in a safe place is important to ensure the financial records can be evaluated
(School Audit Division, 2014). Furthermore, the transparency of managing public
money is questionable when there are no financial records to be audited by internal
and external parties (Jones, 2013).
Table 2.1:
Types of Audit Certificate Awarded According to the Level of Financial Management in
Public Schools in Malaysia for 2008-2013
No. Of Schools
Types of audit Level of Financial
certificate Management 2008 2009 2010 2011 2012 2013
Excellent 11 17 14 35 59 88
Unqualified
Good 1030 1242 1504 1771 2383 2870
Satisfactory 6780 6368 6679 6772 6590 6480
Less Satisfactory 570 586 702 459 309 229
Qualified
Non Satisfactory 227 307 180 165 101 97
17 19 68 20 22 12
Without opinion (Adverse/Disclaimer)
Total 8635 8539 9147 9222 9464 9776
Sources: School Audit Division (2009, 2010, 2011, 2012, 2013, 2014)
Table 2.2 and Table 2.3 depict the internal audit findings concerning the
weaknesses of collection and expenses and payment control, as repetitively stated in
the Consolidated School Audit Report for the period 2008 until 2013 (School Audit
Division, 2008, 2009, 2010, 2011, 2012, 2013, 2014).
The weaknesses of collection control were highest in 2008, which was RM3
million, and reduced to RM1 million in 2013. Collection done without producing an
official receipt was the highest weakness, costing more than RM5 million. This
constitutes non-compliance with Treasury Instruction 70, which states that all public
officials who are responsible for collecting public money must produce a two-ply
carbonized receipt as evidence with signatory approval. According to the School
Financial Management and Accounting Procedure (2012) section 4.2.1, schools must
produce an official receipt for any collection of public money. Office official receipts
should be produced by the school manager and Student Official Receipts must be
produced by the school teacher or hostel supervisor (School Audit Division, 2013,
2014). The receipts must be produced by Percetakan Nasional Berhad (PNMB), and
37
the process of receiving and distributing the official receipt book to public officials
must be recorded and controlled (Ministry of Education, 2012). Because of the
weaknesses, there was misappropriation of public money. Failure to account for
collection money, failure to hand over the money to the school manager, failure to
bank in collection money, lateness in banking in collection money, and lateness in
handing over the money to the school manager is evidence of misappropriation of
public assets. Furthermore, accounting record discrepancies, missing evidential
material, and incomplete accounting transactions serve as a sign of the occurrence of
fraud (Norman, Welch, Sharp, & Holmes, 2004).
Even though the trend for the amount of weaknesses in collection depicted in
Table 2.2 is declining, the amount is still big, and proper monitoring in receiving
public money is crucial for ensuring the money can be used to buy goods for students.
According to Norman et al., (2004), only one quarter of fraud weaknesses that occur
in government were found by auditors. However, the average fraud schemes went
undetected for almost three years. Most of the fraud problems have arisen because of
weak or no oversight mechanism to monitor the weaknesses of IC (Norman et al.,
2004).
The School Audit Division (2014) suggested that public school managers
should take appropriate action to mitigate the problems in managing collection
weaknesses by:
1. Providing continuous supervision and monitoring on collection management to
ensure the collections are in accordance with the School Financial
Management and Accounting Procedures (2012),
2. Taking appropriate action in solving receivables accounts,
3. Asking approval from the School Registrar before collecting any public
money,
4. Ensuring that all collection records are complete, updated, and being checked
periodically,
5. Strengthening IC in managing the collection of public money,
6. Ensuring that all the collected money is deposited in the bank in accordance
with the allocated time, and
7. Taking appropriate action towards government officers that failed to comply
with financial procedures.
38
In addition, Table 2.3 shows data of weaknesses in expense and payment
control from 2008 to 2013. There were weaknesses in expenses involving larger
amounts of money when compared to weaknesses in receipt control. This is because,
in accordance with the free education policy of the Malaysian Federal Government,
schools cannot collect any money from the public unless there is approval from the
School Registrar, Ministry of Education (Ministry of Education, 2012).
According to the School Audit Division (2008, 2009, 2010, 2011, 2012, 2013,
2014), the weaknesses in expenses and payment control are similar to the period 2008-
2013. The biggest weaknesses are failing to provide source documents as evidence to
support the expenses done by the school management, such as failure to provide a
request note, payment voucher, and invoice as evidence to prove the purchase of
goods. The total amount of weaknesses of payment without source documents,
including lack of supporting documents (RM 19.3 million), payment without
producing a payment voucher (RM 11.1 million), procurement without quotation (RM
1.9 million) and local orders (RM 17.0 million) exceeded RM49 million for a duration
of 6 years. These weaknesses prove that there is non-compliance with the Treasury
Instruction (TI), Treasury Circulars (TC) and School Financial Management and
Accounting Procedures (TPKWS) as shown in Table 2.3.
According to the School Audit Division (2014), the management of expenses
and payment control in public schools could be improved by:
1. Providing financial management training to the officers involved in managing
public money,
2. Ensuring periodic supervision of all accounting records,
3. Implementing spontaneous checks once in six (6) months for checking the
cash deposit box, petty cash fund, and other valuable items,
4. Increase monitoring in schools that received a qualified audit certificate,
5. Active involvement of the Account and Financial Management Committee in
managing school financial management,
6. Take appropriate action in solving audit findings, and
7. Take appropriate action towards government officers that failed to comply
with financial procedures.
39
Table 2.2:
Weaknesses in Collection Control from 2008-2013
Non-compliance Year
No. Weaknesses
with 2008 2009 2010 2011 2012 2013 TOTAL
(RM) (RM) (RM) (RM) (RM) (RM) (RM)
1 Collection without official receipt TPKWS 4.2.1 1,861,248 605,142 1,155,271 681,068 611,591 652,841 5,567,161
2 Failure to account for collection TPKWS 4.2.10 106,618 98,303 209,882 20,338 201,614 22,260 659,015
money
3 Receivable account TPKWS 10.1 614,328 540,220 230,686 215,246 148,948 126,686 1,876,114
4 Failure to hand over the money to TPKWS 4.2.4 23,155 39,441 105,881 54,436 14,756 - 237,669
school principal
5 Collection without approval TPKWS 3.4.2 (a) & 493,483 420,507 866,460 364,900 141,479 102,624 2,389,453
3.5.2 (f)
6 Lateness in banking in collection TPKWS 4.2.9 140,822 97,658 111,737 129,217 75,779 8,511 563,724
money
7 Lateness in handing over the TPKWS 4.2.5 118,133 189,230 145,167 208,437 46,740 27,620 735,327
money to the school principal
8 Failure to bank in collection TPKWS 4.2.9 198,658 109,937 164,091 209,519 34,161 60,387 776,753
money
9 Usage of temporary receipt 15,931 121,165 - 137,096
Sources: School Audit Division (2009, 2010, 2011, 2012, 2013, 2014)
40
Table 2.3:
Weaknesses in Expenses and Payment Control from 2008-2013
Non- Year
No. Weaknesses compliance 2008 2009 2010 2011 2012 2013 Total
with (RM) (RM) (RM) (RM) (RM) (RM) (RM)
1 Payment without supporting documents TPKWS 6,118,555 5,668,214 2,605,334 2,143,315 1,189,497 1,590,079 19,314,994
5.2.1(c) & 5.5.5
2 Account payable TPKWS 9.1 913,138 792,221 541,923 424,844 510,682 262,618 3,445,426
3 Expenses without approval TPKWS 1,356,261 1,220,048 1,074,651 895,730 400,027 290,606 5,237,323
3.4.3(c) &
11.3.3(a)
4 Procurement without local order TPKWS 3,523,010 3,572,580 2,694,365 3,323,812 2,217,251 1,679,313 17,010,331
11.5.1(b)
5 Deficit bank balance - - 47,161 14,035 9,046 6,986 77,228
TPKWS 6.1 &
5.2.1(a)
6 Deficit account balance 313,693 226,082 152,782 45,649 100,569 77,062 915,837
7 Mistakes in recording assets TPKWS 3,344,908 1,574,377 2,093,088 1,753,630 1,447,545 1,071,691 11,285,239
11.5.1(h)
8 Payment using cash check TPKWS 5.9.1 1,215,656 2,110,239 1,366,538 621,238 204,824 324,915 5,843,410
9 Payment without payment voucher TPKWS 5.4.1 1,565,789 1,966,526 3,003,898 2,396,804 781,174 1,386,923 11,101,114
41
Besides the weaknesses in collections and expenses, a special audit report is
produced by the School Audit Division if fraud cases involving irregularity,
misappropriation of assets, embezzlement, or wrongful use of power occur (School
Audit Division, 2010). A copy of the list of school names with the person involved in
this matter is sent to the Financial Department and Human Resource Department for
further action and investigation. Punitive action is taken if the problems happen
because of errors, mistakes, or negligent acts of a public officer. He/she would then be
required to pay back the amount of money involved in the wrongful act. According to
the Financial Procedure Act 1957 Section 18, a surcharge is an amount of money that
should be paid by the person that failed to collect public money, made improper
payment, failed to maintain proper accounting records, or was negligent in doing their
job, causing losses to the government (Ministry Of Finance, 2000). The surcharge
would be deducted from the officer’s salary, and if it is not enough, the balance of the
surcharge is deducted from his/her retirement fund. All the action taken to penalise the
responsible officer is written in their individual public service book, which will affect
their career progress. Furthermore, according to the Education Act 1996 (Account and
Audit Rules), a penalty of not more that RM5,000 or three months imprisonment or
both can be imposed on the officer if proven guilty (Ministry of Finance, 2000).
Table 2.4 lists the special reports produced by the School Audit Division from
2009 to 2012 according to the head of responsibility centre and the school’s name at
the responsibility centre where the fraud occurred. The total amount of losses for 19
cases found by the School Audit Division is more than RM1.5 million.
42
Table 2.4:
Special Audit Report Produced by School Audit Division, Ministry of Education from 2009 - 2012
Head of Responsibility Centre No. Name of Schools Weaknesses Amount
Melaka State Education Department 1 SK Duyong, Melaka Forgery payment RM 23,900.00
2 SK Maulana, Pekan, Pahang Failed to account collection money RM 7,329.50
SK Ringlet, Cameron Highland,
3 Failed to account collection money RM 4,482.50
Pahang State Education Department Pahang
SK Pusat Penyelidikan Pertanian
4 Signatory check forgery and embezzlement of public money RM 11,280.00
Tun Razak, Jerantut, Pahang
Fraud in payment (goods did not receive) RM 4,401.00
Forgery of School Finance and Account Committee minutes
Kuala Lumpur State Education -
5 SK Sentul (2), Kuala Lumpur of meeting
Department
Created amendment in the Parent-Teacher Association annual
-
minutes of the meeting
Failed to produce a payment voucher for auditing RM 82,168.60
Incomplete supporting documents RM 14,970.50
Kedah State Education Department 6 SK Penghulu Hj. Darus, Kedah Failed to maintain proper accounting record – cash book,
receipt register, local order register, cancel cheque -
registration
Problem in collection control and banking in collection RM 2,303.00
Forgery of signatory on payment voucher
Pulau Pinang State Education Forgery of supporting documents
7 SK Ayer Hitam, Pulau Pinang RM 66,948.90
Department Payment without supporting documents
Payment before the bill/invoice produced by the supplier
Problem in procurement and payment of school money RM 4,728.50
Total RM 222,512.50
43
Table 2.4:
Special Audit Report Produced by School Audit Division from 2009 - 2012 (continued)
Head of Responsibility Centre No. Name of Schools Weaknesses Amount
Signatory checks forgery RM 62,979.27
SK Sungai Melut (A), Sepang,
8 Failed to account collection money RM 21,000.00
Selangor
Payment without approval RM 21,000.00
Selangor State Education Department Payment using an open/cash check RM 14,787.30
SJK (T) Ladang Minyak, Batang Incomplete supporting documents RM 21,486.70
9
Berjuntai, Selangor Failed to record asset and inventory RM 11,019.66
Failed to maintain proper accounting record -
Failed to record collection of public money RM 9,042.50
Johor State Education Department 10 SMK Bekok, Segamat, Johor
Failed to produce a payment voucher for auditing RM 37,813.30
Fraud in payment (goods did not receive) RM 4,401.00
Forgery of School Finance and Account Committee minutes
-
11 SK Sentul (2), Kuala Lumpur of meeting
Create amendment in the Parent-Teacher Association annual
-
minutes of the meeting
Kuala Lumpur State Education SK Dato' Abu Bakar, Kuala Incomplete supporting documents RM 35,698.00
12
Department Lumpur Different name stated on payment voucher and in check RM 6,598.00
Forgery payment RM 8,397.69
Withdraw money from Baitulmal fund RM 1,600.00
13 SK (P) Pudu (2) Forgery petty cash recoupment RM 4,266.55
Payment without supporting documentation and payment
RM 7,265.29
voucher
Total RM 267,355.26
44
Table 2.4:
Special Audit Report Produced by School Audit Division from 2009 - 2012 (continued)
45
2.5 Summary
This chapter explains the financial management in general and focuses on the
financial management in the public sector. The explanation goes further to elucidate
the importance of financial management in public schools in Malaysia, which is the
context of the study. Deeper explanation of the accounting personnel that are
responsible for managing public school financial management is also discussed. This
study lists the oversight bodies responsible for monitoring the implementation of IC
and the effectiveness of financial management in public schools in Malaysia. Lastly, a
long list of IC weaknesses from audit findings by external and internal auditors is
discussed to show the importance of the effective use of IC in managing financial
management in public schools in Malaysia.
46
CHAPTER THREE
LITERATURE REVIEW
This chapter aims to review and explain the related literature in relation to the
variables used in the study. The literature pertaining to the definition, effectiveness
and limitation of internal control are explained in section 3.1. In section 3.2 the
discussion about two IC frameworks which is COSO Internal Control Standards for
the private sector and Guideline for Internal Control Standards for the Public Sector
(INTOSAI Gov 9100) had been explained. Then, in section 3.3, the literature review
for five IC components and its elements as stated in INTOSAI Gov 9100 had been
discussed. Furthermore, the definitions and dimensions of organizational performance,
the link between IC and organizational performance of the public sector is further
explained in section 3.4. In addition, the effect of organizational culture on the IC and
organizational performance is explained in section 3.5.
3.1.1 Definition
The concept of IC has gone through a remarkable progression. From the early
1900s to 1936, the function of IC was specifically to protect an organization’s assets,
mainly cash, from misappropriation or theft by an organization’s workers. In 1936, the
American Institute of Certified Public Accountants (AICPA) issued an article titled
Examination of Financial Statements by Public Accountants, which defined IC as
methods adopted within the organization to safeguard the cash and other assets of and
check the clerical accuracy of the bookkeeping (Tipgos, 2002). In 1949, the AICPA
revised its definition of IC to the plan of organization and measures adopted within a
business to safeguard its assets, check the accuracy and reliability of its accounting
data, promote operational efficiency and encourage adherence to prescribed
managerial policies (Hay, 1993; Lakis & Giriūnas, 2012; Noorvee, 2006; Tipgos,
2002). Over time, the definition has continued changing and broaden beyond its usage
in accounting and financial control (Noorvee, 2006).
47
The big audit failures of the 1980s were the important turning point in re-
evaluating the meaning of IC. In 1988, the AICPA replaced the definition of IC with a
new, broader description of IC. This was defined in the Statement on Auditing
Standards No. 55 as “the policies and procedures established to provide reasonable
assurance that specific entity objectives will be achieved” (Hay, 1993).
During the 1990s, according to the International Federation of Accountants
(2006), a number of key IC frameworks were developed preceding the high-profile
accounting scandals that occurred in the 1980s. The key IC frameworks are listed in
Table 3.1.
Table 3.1:
Key IC Frameworks
No. IC Framework Year Issued by
Established
1 Internal Control – Integrated 1992 Committee of Sponsoring
Framework Organizations of the Treadway
Commission (COSO), United
States of America
48
In 1995, the Canadian Institute of Chartered Accountants produced the Criteria
of Control Board Guidance on Control (CoCo), which defines control as comprising
“those elements of an organization (including its resources, systems, processes,
culture and tasks) that, taken together, support people in the achievement of the
organization’s objectives” (International Federation of Accountants, 2006 p.4). CoCo
(1995) defines control and sets out standards that can be used to measure the success
of the implemented control. Control is seen as encircling the entire organization
starting with its smallest unit, an employee, then goes further to top management.
In 1999, Internal Control: Guidance for Directors on the Combined Code,
commonly referred to as the Turnbull Guidance, was issued by the Institute of
Chartered Accountants of England and Wales (ICAEW) at the request of the London
Stock Exchange to provide guidance to the directors of listed companies in
implementing requirements relating to IC. It views IC as a system which encompasses
the policies, processes, tasks, and behaviours to facilitate the effective and efficient
operation to enable organization to respond appropriately to business, operational and
financial risks to achieve the organization’s objectives, help ensure the quality of
internal and external reporting; compliance with applicable laws and regulations
(International Federation of Accountants, 2006).
For the public sector, the International Congress of Supreme Audit Institutions
(INCOSAI) decided to incorporate the COSO 1992 IC framework into the
International Organization of Supreme Audit Institutions (INTOSAI) Gov 9100
document title “Guidelines For Internal Control Standards for the Public Sector” in the
year 2004. According to INTOSAI Gov 9100, “IC is an integrated process that is
affected by an entity’s management and personnel and is designed to address risks
and to provide reasonable assurance that in pursuit of the entity’s objectives, which
are executing orderly, ethical, economic, efficient and effective operations; fulfilling
accountability obligations; complying with applicable laws and regulations and
safeguarding resources against loss, misuse and damage” (INTOSAI, 2004a p.6).
In Malaysia, the definition of IC, as stated in Section 60 of the Internal
Auditing Guideline (Institute of Internal Auditors, 2012), is quite similar to the
INTOSAI Gov 9100 objectives. Section 60 of Internal Auditing Guideline defines IC
as the processes that are designed and implemented to facilitate the achievement of
management objectives, which are:
49
1. To ensure adherence to management policies and directives
2. To be efficient and economical
3. To safeguard assets
4. To secure the relevance, reliability, and integrity of information
5. To ensure the completeness and accuracy of accounting records
6. To ensure compliance with statutory requirements
Figure 3.1 (on page 51) portrays a list of the definitions of IC from 1936 to
2001. All of the definitions of IC are applicable to the private sector except the
definition from INTOSAI Gov 9100.
50
In 1936 -American Institute of Certified of Public Accountants (AICPA)- (US)
Internal control is measures and methods adopted within business to safeguard the cash and
other assets of the company as well as to check the clerical accuracy of the bookkeeping.
Source: Tipgos (2002)
In 1999 -Internal Control: Guidance for Directors on the Combined Code (UK)
Internal control as a system which encompasses the policies, processes, tasks, behaviours and
other aspects of a company that, taken together:
• Facilitate its effective and efficient operation by enabling it to respond appropriately to
significant business, operational, financial, compliance and other risks to achieving the
company’s objectives;
• Help ensure the quality of internal and external reporting; and
• Help ensure compliance with applicable laws and regulations, as well as internal policies
with respect to the conduct of business.
Source: International Federation of Accountants (2006)
In 2001 -INTOSAI GOV 9100- Guideline for Internal Control Framework for Public
Sector
For Public Sector
Internal control is an integral process that is affected by an entity’s management and personnel
and is designed to address risks and to provide reasonable assurance that in pursuit of the
entity’s mission, the following general objectives are being achieved:
Executing orderly, ethical, economical, efficient and effective operations;
Fulfilling accountability obligations;
Complying with applicable laws and regulations;
Safeguarding resources against loss, misuse and damage.
Source: INTOSAI (2004a)
51
In the case of Queensland Health, an amount of money totalling $16.69 million
in a series of 65 fraudulent transactions was paid to a Queensland Health vendor
named Healthy Initiatives and Choices (HIC), a trading name registered to one of its
own employees, Hohepa Morehu-Barlow, who worked as a Financial Officer in
Queensland Health. These fraudulent acts were committed over a four-year period
commencing in October 2007 involving falsifying documents, breach of trust, misuse
of power, and poor IC in payments.
Furthermore, in the case of Roslyn Union Free School District in 2004,
involving fraudulent activities of nine and half years from January 1, 1996 through
June 14, 2004, fraudulent acts involving the collusion of 29 individuals including
school managers, families, and friends are evidence of poor IC (Huefner, 2010;
Rezaee, 2005; Rezanee & Reiley, 2010). Misappropriation of an amount totalling
RM11.3 million of public money resulted from:
1. Direct cash payments to public officials,
2. Payments of personal credit card bills, mortgages, and insurance premiums,
3. Purchase of items for individual use, including computers, vehicles, jewelry,
and food,
4. Extravagant personal travel charged to the district school department, and
5. Contracting with companies owned by employees, family members, or friends.
In these two fraud cases, the organizations were unable to assess and reduce
risk because there was no faithful adherence to the existing IC (Huefner, 2010). The
failure in identifying risk that exists in an organization will increase the possiblity of
fraud occurances (Albrecht & Albrecht, 2004; Cendrowski et al., 2007; Lane, 2010).
Secondly, effective IC is an important tool in fraud deterrence procedures
(Albrecht & Albrecht, 2004; Cendrowski et al., 2007; Lane, 2010; Mu’azu Saidu &
Siti Zabedah, 2013). Fraud deterrence is the action and activities intended to stop or
prevent fraud before it happens. Ziegenfus (2001) lists five (5) factors that can cause
an increase in fraud cases in public organizations: poor management practices,
weakened societal values, economic pressures, people not held responsible for their
actions, and inadequate training for those responsible for fraud prevention and
detection.
In public organizations, fraud can happen in many ways, including employee
fraud or management fraud (Cendrowski et al., 2007). The most common types of
52
employee fraud in public sector organizations, as reported in Gloeck and Jager (2004),
are inventory and asset theft, fruitless and wasteful expenditures, cheque fraud, and
procurement fraud. Furthermore, problems in managing source documents, such as
billing, faulty journal entries, inaccurate ledgers (C. Albrecht & Albrecht, 2004),
errors in accounts receivable, manipulation of disbursements, and payroll frauds
(Cendrowski et al., 2007) are also the examples of employee fraud. This type of fraud
results in a direct gain, through which a perpetrator receives cash or some other asset
of value that satisfies their motive for fraud.
However, management fraud usually involves fraudulent financial reporting in
which the manager intentionally manipulates financial records for the purpose of
misleading financial statement users (Rezanee & Reiley, 2010). Opportunity in
committing fraud occurs due to ineffective IC practices, such as the lack of physical
protection of assets, lack of segregation of duties, lack of maintaining appropriate
documents and records, the absence of independent checks, overriding of existing
controls, and an inadequate accounting system (Albrecht & Albrecht, 2004; Albrecht
et al., 2007; Doyle, Ge, & McVay, 2007; Geiger, Cooper, & Boyle, 2004; Hylas &
Ashton, 1982; Noorvee, 2006). Both employee fraud and management fraud can be
stopped or prevented using effective IC in organizations (C. Albrecht & Albrecht,
2004; Cendrowski et al., 2007).
The possibility of fraud cases occurring in organizations could be reduced with
proper monitoring (O’Leary & Gibson, 2008). Monitoring the implementation of IC is
a must to ensure the implementation of controls matches expectations (Mohammadi,
Ghaffari, Hadavi, & Mohammadi, 2013). If proper monitoring is done, the problems
of mismanagement, improper planning, insufficient control, embezzlement,
misappropriation of assets, or even planning to circumvent controls could be detected
earlier, and appropriate action could be taken to solve or alleviate the problem
(Avellanet, 2009; Hedley & Ben-Chorin, 2011).
Third, the importance of having effective IC is its ability to ensure accurate
and reliable financial data and financial reports (Avellanet, 2009; Liu, 2005). The
primary objective of an organization’s IC is to present organizational management
with reasonable assurances that the financial information is precise and dependable.
Internal control helps to provide reliable data by making sure that information is
recorded in a consistent way to provide reliable financial information (Abraham,
2013). Strong IC practices should lead to more efficient operation and improve the
53
quality of data that management and other stakeholders can rely on in their decision-
making processes (Liu, 2005; Pickett, 2005). Management should implement adequate
and effective IC over financial reporting so that reports presented to stakeholders are
trustworthy and transparent (Aikins, 2011; Elbannan, 2009; Feng, Li, McVay, &
Skaife, 2012).
Lastly, effective IC is important in ensuring the efficiency of operations
because of the ability it provides for safeguarding the organization from failure in
achieving their objectives (Jones, 2008). A well developed and efficient IC contributes
to the success of an organization’s operation. Implementation of IC inside an
organization will improve employees’ understanding of the organization’s goals and
objectives. This will enable them to follow prescribed policies and procedures that
consequently affect operating efficiency as a whole (Liu, 2005).
54
employee who performs an important control acting with another employee, customer,
or supplier to perpetrate or conceal fraud (Novoselov, 2007). Frequently, an
individual's position in the organization determines the degree of an employee's
involvement in the IC. Normally, collusion between employees happens with the
cooperation of the employees is in different hierarchical structures (Novoselov, 2007).
Collusion by more than one person purposely wanting to elude the system can
jeopardize the whole system of the IC in an organization (Huefner, 2010).
The fourth limitation is that management can override the prescribed policies
or procedures for illegal purposes, such as for individual gain or enhanced
presentation of an entity’s financial situation or compliance status. Huefner (2010), in
a case involving Rosalyn schools district in New York, states that having controls but
not following them is worse than not having control at all. Examples of management
fraud include making deliberate misrepresentations to auditors, bankers, lawyers, and
vendors by intentionally issuing false documents, such as modifying or falsifying sales
orders, purchase documents, or invoices (Huefner, 2010; Queensland Crime and
Misconduct Commission, 2013).
Fifth, another limitation in the implementation of effective IC is limited
resources. Accordingly, the benefits of control must be measured in relation to its cost.
Maintaining a cost effective IC that enables an organization to eliminate the risk of
losses is not realistic, as it would probably cost more than what is warranted by the
benefit it may derive. In deciding whether a particular control should be established,
the trade-off between the cost of establishing it and the possibility of risk occurrence
should be considered (INTOSAI, 2004a). The cost of the implementation of IC should
not exceed the benefits that are expected. Because the precise measurement of both
costs and benefits is not usually possible, management must make both quantitative
and qualitative judgements in evaluating the cost-benefit relationship. Usually, a
manager wants to implement a control procedure if the benefit derived from its ability
to prevent or detect errors exceeds its cost (Caplan, 1999; Ogneva, Subramanyam, &
Raghunandan, 2007).
55
3.2 Internal Control Framework
56
operations, reliable financial reporting, and compliance with laws and regulations.
There is a direct relationship between the objectives, which are what an entity strives
to achieve, and components, which represent what is needed to achieve the objectives
(Moeller, 2009; Root, 1998). Each component is applies in all three IC objectives.
Furthermore, IC is relevant to an entire organization or to any of its units or activities
depending on the authority structure.
In 2010, COSO decided to update the 1992 IC Framework, and, with help
from PricewaterHouseCoopers (PwC), a new updated version was produced in 2013
with the title Internal Control Integrated Framework. The definition of IC represented
by the three dimensional cube is still unchanged (Protiviti, 2013). Even though the old
version is widely accepted, the new version was introduced with the explicit principles
of five components of IC.
There are 17 principles representing the five components of IC. Figure 3.3
shows 17 principles for the five components of IC and the points of focus for each
principle. The 1992 IC framework was superseded by the new framework on 15
December 2014.
57
Figure 3.3: List of Principles for Five Components of IC and Number of Points of
Focus
Source: Protiviti (2013)
3.2.2 Guideline for Internal Control Standards for the Public Sector (INTOSAI
Gov 9100)
58
Guidance for Good Governance (INTOSAI Gov). The ISSAIs and INTOSAI GOVs
content are generally recognized principles and shared professional experiences of the
international community of Supreme Audit Institutions. All ISSAIs and INTOSAI
GOVs are established in accordance with the INTOSAI Professional Standards and
released to its members after a decision of final approval by all Supreme Audit
Institutions at INTOSAI’s International Congress of Supreme Audit Institutions
(INCOSAI) (INTOSAI, 2004b).
In October 2001, the 17th International Congress of Supreme Audit
Institutions (INCOSAI), which was held in Seoul, Korea, with delegates from 139
countries, decided to incorporate the COSO 1992 IC framework into the INTOSAI
Gov 9100 document titled Guideline for Internal Control Standards for the Public
Sector (INTOSAI, 2004a). By implementing the COSO model in the guidelines, the
Committee not only aims to update the concept of IC, but also attempts to contribute
to a common understanding of IC among the Supreme Audit Institutions (SAI).
Furthermore, the INTOSAI IC Framework takes into account the characteristics of the
public sector. The draft guidelines were submitted to the Governing Board of
INTOSAI at its 50th meeting in Vienna on October 2002. Then, the draft was
discussed and generally accepted by a committee meeting in Brussels in February
2004. After that, it was sent to all INTOSAI members for final comment. The
comments that were received have been analysed and subsequent changes have been
made. Finally, the guidelines for IC standards for the public sector were presented for
approval by the XVIII INCOSAI in Budapest in 2004. The INTOSAI Gov 9100
documents will be reviewed at least every six years with the second review due in
2016 (INTOSAI, 2004a). INTOSAI defines IC as, “an integral process that is effected
by an entity’s management and personnel and is designed to address risks and to
provide reasonable assurance in pursuit of the entity’s objectives, which are executing
orderly, ethical, economical, efficient and effective operations; fulfilling
accountability obligations; complying with applicable laws and regulations and
safeguarding resources against loss, misuse and damage” (INTOSAI, 2004a p. 6).
IC is geared to the achievement of a separate but interrelated series of general
objectives. Compared to the COSO’s (1992) definition, many aspects of public sector
operation objectives have been added to the definition of IC for the public sector. The
objectives of IC, according to INTOSAI Gov 9100, are divided into four (4) IC
objectives:
59
1. Executing orderly, ethical, economical, efficient, and effective operations,
2. Fulfilling accountability obligations,
3. Complying with applicable laws and regulations, and
4. Safeguarding resources against loss, misuse, and damage.
60
The second objective of IC, as defined by INTOSAI Gov 9100 (INTOSAI,
2004a), is to fulfil accountability obligations. Public officers are accountable for all
decisions and actions concerning their management and stewardship of public
resources. These can be realized by consistently producing reliable and significant
monetary and non-monetary information in a timely manner to internal and external
stakeholders (Mandle, Dierx, & Ilkovitz, 2008). There is a need to reinforce
accountability in the public sector so that public servants understand they are
accountable for the resources they use and the outcomes they produce (Ruzita, Azhar,
& Abu Hassan, 2012).
The third objective of IC, as defined by INTOSAI Gov 9100 (INTOSAI,
2004a), is compliance with applicable laws and regulations. Public organizations are
required to follow many laws and regulations in managing and using public money.
These laws and regulations give guidelines on how the entities should operate
(INTOSAI, 2004a).
Furthermore, the fourth objective of IC is safeguarding resources against loss,
misuse and damage (INTOSAI, 2004a). Public officers, as the stewards of public
assets, need to safeguard public resources to avoid waste, abuse, mismanagement,
errors, fraud, and irregularities that may jeorpadize the IC set in an organization. This
is due to the fact that resources in the public sector generally embody public money,
and their use in the public interest generally requires special care. On top of that,
safeguarding other resources such as information, source documents, and accounting
records is the key to achieving transparency and accountability of government
operations and should be preserved because these records are also in danger of being
stolen, misused, or destroyed (INTOSAI, 2004a).
Table 3.2 provides a comparison between COSO (1992) and the INTOSAI
Gov 9100- Guideline for Internal Control Standards for the Public Sector. The
primary users of COSO (1992) are private sector organizations in the United States;
however, INTOSAI Gov 9100 has been used by the public sector all over the world.
At present, INTOSAI has 192 members, including Malaysia (INTOSAI, 2006). The
main difference between COSO (1992) and the INTOSAI Gov 9100 IC framework are
their objectives. INTOSAI Gov 9100 added objectives that are suitable for the public
sector context, which include executing orderly, ethical, economical, efficient, and
effective operations; fulfilling accountability obligations; complying with applicable
laws and regulations; and safeguarding resources against loss, misuse, and damage.
61
Both frameworks have five IC components, focus on the entire organization, and are
the main responsibility of the management of the organization (INTOSAI, 2004a;
Noorvee, 2006; Root, 1998).
Table 3.2:
Similarity and Differences between COSO and INTOSAI Gov 9100 IC Frameworks
Comparison table COSO INTOSAI Gov 9100
Year of 1992 2001
establishment
Primary audience Private organizations in the US Public sectors all over the world
62
Similar to the COSO IC framework, the IC framework for the public sector,
which is INTOSAI Gov 9100, is designed to provide reasonable assurance that an
entity’s general objectives are being achieved. Proper and effective IC must combine
five interrelated components of IC, which are control environment, risk assessment,
control activities, information and communication, and monitoring (INTOSAI,
2004a).
As shown in the three-dimensional box in Figure 3.4, there are four general
objectives: accountability; compliance with laws and regulations; operating orderly,
ethically, economically, efficiently and effectively; and safeguarding resources. These
are represented by the vertical columns, the five components of IC are represented by
the horizontal rows, and the organization or entity and its departments are depicted by
the third dimension of the box. All the objectives are linked independently to each IC
component and are relevant to the entire organization, as well as to the individual
department (INTOSAI, 2004a).
Figure 3.4: Internal Control Standards for Public Sector (Intosai Gov 9100)
Source: INTOSAI (2004a)
63
3.3 Components of Internal Control According to INTOSAI GOV 9100
64
Components Elements
1. Risk identification
2. Risk evaluation
3. Assessment of the risk appetite
4. Development of responses
1. Ongoing monitoring
2. Separate evaluation
65
From the analysis of past literature, such as in Noorvee (2006), Jokipii (2010),
and Wardiyono (2012), all five components of IC as stated in the COSO (1992) IC
framework were tested as their independent variables. Their studies are briefly explain
in Table 3.3 below. However, these three studies were done in private sector settings,
which is different from this current study. In addition, Mawanda (2008) tested the
relationship between IC and financial performance in an Institution of Higher
Learning in Uganda. However, Mawanda (2008) only used three IC components,
which were the control environment, control activities, and the internal audit function.
This current study looks into the five components of IC in the public sector using
Guideline for Internal Control Standards for the Public Sector (INTOSAI Gov 9100).
Table 3.3 provides the literature review on the use of IC components in public and
private sector organizations.
Table 3.3:
Literature Review on IC Components in Private and Public Sector Organizations
Author(s) Objective Study setting IC components and
elements
Noorvee To evaluate the IC Case study on three Control environment
(2006) practices and link it to Estonian companies using Integrity & ethical value
financial reporting COSO (1992) IC Importance of board of
framework directors
Management philosophy
and operating style
Organization structure
Commitment to financial
reporting deficiencies
Authority &
responsibilities
Human Resource
Risk assessment
Identification and
analysis of financial
reporting risk
Assessment of fraud risk
Control activities
Element of control
activities
Link risk assessment
Selection and
development of control
activities
Information technology
Information and
communication
Information needs
Information control
Upstream communication
66
Author(s) Objective Study setting IC components and
elements
Board communication
Information with outside
parties
Monitoring
Ongoing Monitoring
Separate evaluations
Reporting deficiencies
Control activities
Performance review
Information processing
Physical controls
Segregation of duties
Risk assessment
Risk identification,
analysis and evaluation
Control activities
Preventive detective and
corrective
Information and
communication
Information need,
information flow,
Information control
Monitoring
Ongoing and periodical
evaluations
67
Author(s) Objective Study setting IC components and
elements
2. To comply with the Board
applicable Islamic Proper Selection of
laws and regulations employee
related to financing Education for employees
scheme On leave facilities
3. To achieve the
effectiveness and Risk assessment
efficiency of 5 Cs Consideration
financial operations. NPF allowance
NPF write off
Control activities
Set up targeted financing
Segregation of duties
Pre-numbered documents
Authorization
Information and
communication
Flowchart
Accounting System
Manual,
Communication
Monitoring
Routine Inspection
Spontaneous inspection,
External Auditor
Risk assessment
Risk evaluation,
Risk identification
Control activities
Physical control,
Segregation of duties,
Authorization
Information and
communication
Information needs
Information quality
Monitoring
Ongoing monitoring
Spontaneous monitoring
Separate evaluation
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3.3.1 Control Environment
The control environment sets the overall controls and tone of an organization.
It is the basis and foundation for all other components of the IC (INTOSAI, 2004a;
Leng & Zhang, 2014). The control environment contains actions, policies and
procedures that reflect the overall attitude of the owners of an organization, its top
management, and directors (Alvin & et.al., 2003; Basu, 1992; INTOSAI, 2004a). It
sets and shapes the character of an organization and influences the control
attentiveness of its people. It consists of ethical values, integrity, ability of the people,
operating style and management philosophy (INTOSAI, 2004a; Mawanda, 2008;
Mihret & Yismaw, 2007), the way management assigns authority, an organization’s
human resource policy (such as training, performance appraisal, remuneration, and
compensation), and direction provided by the board of directors (Basu, 1992; Geiger
et al., 2004; INTOSAI, 2004a; Noorvee, 2006; Root, 1998). In addition, the audit
committee (Wen-Wen, 2007) and internal audit (Mawanda, 2008) are also included as
elements of the control environment.
Moreover, the control environment is a critical part of audit planning. Haskins
(1987) listed seven important attributes that must be considered in audit planning. All
seven attributes are motivated to strengthen controls and reduce inherent risk. The
attributes are personal financial management, insisting on reporting a favourable
financial picture, management commitment to competence, risks taking behaviour,
personnel turnover, domination by one or a few individuals, and the role of foreign
workers in managing overseas operations. All of these attributes, should be analysed
to ensure that the risks of material misstatement associated with a particular
organization are covered by the auditor (Haskins, 1987).
A strong control environment is important in reducing fraud (Huefner, 2010;
Ziegenfuss, 2001), and to make sure strong IC is in place, all organizations should
strengthen and reinforce their control environment (Rittenberg, Martens, & Landes,
2007; Ziegenfuss, 2001). This is because IC is the sum of the tools and techniques
used by management to ensure that the objectives of an organization are achieved, and
this is primarily a management concern (Carolyn & Peter, 2002; Gauthier, 2006).
Fraud cases increase when there are poor management practices, weakened societal
values, economic pressure, no action taken to prevent illegal conduct, and when there
69
is inadequate training for those responsible for fraud prevention or detection
(Ziegenfuss, 2001). An effective authority structure and a strong ethical foundation
are essential to ensure that fraudulent acts are not allowed (Cendrowski et al., 2007).
Furthermore, management should set the ethical control environment by showing an
example of ethical behaviour and acting with integrity, setting an ethical code of
conduct, and establishing an independent whistle-blower system to make sure fraud
deterrence can be done effectively (Rezanee & Reiley, 2010), so that the possibility of
error and fraudulence can be reduced to the minimum level (Liu, 2005).
The control environment has a pervasive influence on the actions of an
organization and provides the foundation for the overall system of IC. If this base is
not strong and does not have a positive impact on the organization, the overall IC will
not be as effective as it should be in providing accountability to stakeholders
(Ziegenfuss & Douglas, 2001).
The evaluation of IC practices in 109 departments and agencies under 24
federal ministries by Aziz, Said and Alam (2015), found out that the level of IC in
public sector in Malaysia is on average level. This is because the public sector
departments focuses in obtaining approval from the top management, developing
written policies, and procedures, ensuring proper documentation and reporting based
on the rules and regulations but failed to provide priority in ensuring all personnel
understand their role and their significance in implementation of IC that exist in the
organization. The role of top management in an organization is not just design and
develop the IC policies and procedures in the organization, but they have to ensure the
policies and procedures are understood and use by all members of the organization
towards achievement of organization objectives (Gauthier, 2006; Geiger et al., 2004;
Noraini & Norhanizah, 2014).
There are many studies that used control environment elements such as ethical
values and integrity, management philosophy, authority structure, human resource
policy, audit committee, and internal audit. As shown in Table 3.4, there are many
studies that analysed the elements of the control environment suggested by COSO
(1992) and INTOSAI (2004a).
Haskins (1987) investigated auditors' perceptions of the importance of control
environment attributes in their client’s organizations and used five control
environment elements: ethical values and integrity, management philosophy, authority
structure, human resource policy and the effectiveness of audit committees. Haskins
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(1987) listed the five (5) most important control environment attributes in the
evaluation of IC:
1. Appropriateness of the authority structure
2. Effectiveness of electronic data processing controls
3. Effectiveness of physical safeguards over records and assets policy
4. Appropriateness of internal audits
5. Sufficient knowledge of accounting rules and regulations
Table 3.4:
Summary of Control Environment Elements
Elements Ethical Management Human Organization structure
Audit Internal Authority
values & philosophy resource
committee Audit structure
integrity policy
Haskins (1987) √ √ √ √ √
Ziegenfuss (2001) √ √ √ √
Noorvee (2006) √ √ √ √
Wen-Wen (2007) √ √
Mawanda (2008) √ √ √ √
Agbejule & Jokipii (2009) √ √
Jokipii (2010) √ √ √ √
Wardiwiyono (2012) √ √ √ √
Mohammadi et al., (2013) √ √
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In this study, only five subcomponents of control environment are discussed,
as stated in INTOSAI Gov 9100. These are:
1. Management integrity, ethics and ethical leadership
2. Authority structure
3. Human resource policy
4. Internal audit
5. Audit committee
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May, & Avolio, 2004). They should portray ethical leadership in their daily activities,
which comprises the acts of being honest, full of integrity, and trustworthy. According
to Brown, Trevino and Harrison (2005 p.120), ethical leadership is “the
demonstration of normatively appropriate conduct through personal actions and
interpersonal relationships, and the promotion of such conduct to followers through
two way communication, reinforcement, and decision-making”.
Internal control is effective if the top management who administer and monitor
the control have high integrity, ethical values, and competence in doing their duties
(Bello, 2012; Neumann, 1992). The manager should have a strong desire to do the
right thing by following the organization’s policies, laws, and regulations. An ethical
manager is able to set the ‘tone at the top’ by modelling ethical conduct that will be
followed by their subordinates (Brown et al., 2005; Zhu et al., 2004). Furthermore, the
ethical leadership shown by an ethical manager is a combination of characteristics and
behaviours that include demonstrating integrity and high ethical standards, considerate
and fair treatment of employees, and holding employees accountable for ethical
conduct (Chin, 2013; Meier, Semmer, Elfering, & Jacobshagen, 2008; Walumbwa et
al., 2011; Zhu et al., 2004) .
According to Chin (2013), there are three key building blocks of ethical
leadership, which are treating people fairly, acting as a moral role model that allows
followers to learn appropriate ethical behaviour from their leader, and actively
managing the morality of subordinates. Ethical leaders treat all subordinates fairly in
delegating work, performance evaluation, pay, and promotion, all of which further
increases the productivity of the employees. Employees who perceive the fairness of
the manager and the organization will increase their commitment in doing their jobs
(Sabir et al., 2012).
An ethical leader will develop IC with a code of ethics in the public sector to
ensure public confidence in the integrity of the government, guarantee the
independence and impartiality of elected officials and public employees, make sure
that governmental decisions and policies are followed, and enable public officers to
serve the public with courtesy (Radhika, 2012). According to Radhika (2012), there
are four general core values of ethics listed in the ethics literature: confidence,
transparency, lawfulness, and courteousness. By implementing and enforcing codes of
ethics and policies on ethical behaviour, as well as rewarding ethical behaviour and
punishing unethical behaviour, the management can create an ethical climate that
73
positively influences ethical behaviour in the organization (Hasnah, Ishak, Daing
Nasir, & Na, 2014).
The ethical environment is part of the control environment and is related to the
authority structure. The authority structure is not just a physically written chart with
lines and names, but explains the whole allocation of power in the organization
(Graham, 2008). According to Graham (2008), the control environment needs a strong
and well-organized authority structure.
According to INTOSAI Gov 9100, the authority structure defines an entity’s
key areas of authority and responsibility that are delegated throughout the
organization (INTOSAI, 2004a). In addition, the authority structure refers to the
formal configuration of authority, roles, and procedures, how communication and
information flows from level to level within the organization, and how various work
roles and responsibilities between the manager and their subordinates are delegated,
controlled, and coordinated (Chenhall, 2003; Ranson, Hinings, Greenwood, &
Hindings, 1980; Willem, Buelens, & De Jonghe, 2007). The authority structure should
facilitate personal interactions and support social interactions between the members in
the organization (Kalsom, 2008). Hence, the authority structure could be the formal or
informal patterns of behaviour that emerge in the organization (Diefenbach & Sillince,
2011; Penuel et al., 2010). Because of that, the authority structure is an important
control process with groups of individuals assisting each other to achieve targeted
goals.
According to Chia Ling and Huan-Jung (2011), there are two types of
authority structure; mechanistic and organic structures. Mechanistic organizations
tend to have more organizational levels, higher centralization, more formal rules, a
narrower control range, and a greater reliance on vertical instruction in
communication (Chia-Ling & Huan-Jung, 2011). Normally, the mechanistic authority
structure is applied in a large organization. Haskin (1987) found that large
organization size is positively correlated to the extent of formal control mechanisms.
In contrast, organic structures contain fewer layers in the hierarchy, greater
decentralization, fewer formal rules, a wider control range, and a horizontal mode of
74
communication (Chia-Ling & Huan-Jung, 2011; Haskins, 1987).
In what is called the “traditional view”, there are three focal structural
dimensions, which are formalization, centralization and size (Brass, 1984; Schminke,
Ambrose, & Cropanzano, 2000), then, two more structural dimension were added
which are vertical complexity (Schminke, Cropanzano, & Rupp, 2002) and
specialization (Willem et al., 2007).
Only two structural dimensions are discussed in this study, which are
formalization and centralization. These two structural dimensions are supported by
school literature, whereby schools are usually a bureaucratic organization with high
formalization with lots of written rules and regulations and centralized decision-
making in the hands of its school manager (Hoy, 2003; Sinden et al., 2004a).
Formalization is written rules, regulations, procedures, and policies (Hoy,
2003; Schminke et al., 2002; Sinden et al., 2004a). According to Ferrell and Skinner
(1988), formalization is the standardization of written statements of rules, regulations,
roles and procedures. Codes of ethics in organizations also are part of the written rules
and regulations associated with the formalization of a bureaucracy (Ferrell & Skinner,
1988; Palmer & Dunford, 2002; Schwartz, 2013). Formalization has a positive and
negative impact on an organization and the members thereof. Formalization is
positively related to absenteeism, a tendency to quit, increased level of stress, initiates
low innovation and creates low satisfaction. In addition, employees will feel
powerless and a loose relationship will be created between the members in the
organization (Adler & Borys, 1996; Hoy, 2003; Sinden et al., 2004a). Complementary
to this, formalization reduces vagueness and ambiguity by providing guidance and
clarity of roles and responsibilities in an organization, and, thus, helps employees to
be more efficient (Adler & Borys, 1996). Many researchers have found that
formalization has a positive effect on an organization. One of them suggested that
higher levels of formalization are associated with greater use of new organizational
practice, subsequently confirming the definite importance of formalized procedures
and rules where new organizational practices are used (Palmer & Dunford, 2002). As
stated in Adler and Borys (1996), formalization of work activities are positively
associated with commitment and satisfaction. High formalization is consistent with a
routine system, and, therefore, leads to a greater perception of fairness in the
organization (Schminke et al., 2002).
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Adler and Borys (1996) suggest two types of formalization: coercive, and
enabling formalization. The formalization typology is tabulated in Figure 3.6.
Coercive formalization tends to generate alienation using coercive rules and
procedures. The rules and procedures constrain and even punish subordinates rather
than rewarding unusual and productive practices. Instead of promoting flexibility and
organizational learning, coercive procedures force reluctant subordinates to follow and
comply with formal routines. Low formalization creates an autocratic coercive
structure, and high formalization creates a mechanistic coercive structure. Enabling
formalization helps the organization’s members find solutions to problems. This is
because the rules and procedures are viewed as flexible guidelines that help the
members of an organization deal with all types of problem (Adler & Borys, 1996). For
enabling formalization, low formalization creates an organic (non-bureaucratic)
enabling structure, and high formalization creates an enabling bureaucratic structure.
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sub-components: participation in decision-making and hierarchical authority
(Schminke et al., 2000). Low participation in decision-making and many hierarchical
authorities shows that an organization has a centralized structure. An organization
with high centralization puts the process of decision-making in the hands of its top
management. This means that only a few people are involved in making decisions
about hiring, promotion, rewards, and setting organizational policies. High
centralization reduces the interaction and autonomy in decision-making, and limits
horizontal interaction among organization members, resulting in less communication
and cooperation among employees at the same level (Willem et al., 2007).
In contrast, an organization with low centralization involves many levels of
management in their decision-making process (Hoy, 2003; Sinden et al., 2004b).
Decentralization increases the opportunity for easy access to information and
promotes interaction among organization members. Organizational members are given
more autonomy in decision-making related to their work tasks, and, at the same time,
increase their satisfaction in doing their job (Annick, Marc, & Ives, 2007).
Hoy (2003) listed the negative and positive effects of centralization in
organizations, especially schools. In schools, where teachers, as professionals, use
their own creativity and judgment in doing their jobs, high centralization will prevent
them from being innovative and will force them to follow rules and regulations. Even
though it creates dissatisfaction, alienation, and opposition from teachers, it does not
mean that the school is opposed to direction, coordination and compliance. The school
administrator should use enabling centralization in helping their subordinates to solve
problems in their daily work activities rather than putting the blame on somebody if
things go wrong. Enabling centralization treats procedures, rules, and regulations as
flexible guidance and helps subordinates deal with any problems that may arise (Adler
& Borys, 1996). Problem solving is not improved by obediently following rules and
regulations, but its required flexibility in judgment using applicable rules and
regulations (Sinden et al., 2004a, 2004b).
The authority structure can either hinder or enable the effective operation of an
organization (Sinden et al., 2004a). Generally, employees who are satisfied with their
jobs and are motivated and committed to the organization will do better in their jobs.
Research by Schminke et al. (2002) supports this statement and suggests that
structural features are associated with the perception of fairness in an organization.
However, greater clarity in the rules and procedures through formalization did not
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help to improve satisfaction in different levels of relationship, such as between nurses
and doctors. This is because the psychological distance between nurses and doctors
created through the authority structure does not help solve this problem (Willem et al.,
2007). Furthermore, the rules and procedures dimension that governs employees
shows a positive link to job performance, while the flexibility or autonomy dimension
indicates a negative link to job performance (Lookman & Fred, 2005).
78
subordinates (Mayson & Barrett, 2006). Generally, it controls the transformation
process of work in an organization. To ensure that subordinates follow procedures, top
management must monitor and evaluate subordinates’ actions regularly (Snell, 1992).
In this case, monitoring is used mainly as a remedial tool to correct deviations as soon
as they occur.
Output control systems control end results by setting targets that should be
achieved by the subordinates (Kotey & Slade, 2005). Manager should set targets that
should be achieved by their subordinates before handing over the jobs and tasks.
There will be less control because of the absence of close supervision. Subordinates
can freely do their jobs as long as the end targets can be achieved. Both behaviour
control and output control use performance and appraisal rewards as control
mechanisms (Snell, 1992).
However, input control systems use selection and training as input control
mechanisms. Manager should have proper selection of employees that suits
organization needs. Then, the employees should be given proper training before they
are ready to make much contribution to the organization (Stredwick, 2005). Input
control systems align individuals with the interests of the firm by adjusting individual
performance, such as employees skills, abilities, knowledge, and values, to gain a
competitive advantage (Snell, 1992). But, input control does not guarantee an
organization’s objectives can be achieved because it only focuses on managing
employees’ potential.
The internal audit is the key governmental unit with the expertise for assessing
the effectiveness of IC systems (Noraini & Norhanizah, 2014) and the usage of
financial resources by identifying waste, inefficiencies, fraud in the budget and
making recommendations to enhance the efficiency of operations that will further
improve financial performance (Mawanda, 2008). Internal control plays an important
role in enhancing accountability and transparency in the governance process (Aikins,
2011).
The Institute of Internal Auditors (IIA) defines internal auditing as “an
independent, objective assurance and consulting activity designed to add value and
79
improve an organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes” (Institute of
Internal Auditors, 1999).
On top of that, according to the Malaysian Institute of Accountants (MIA) in
their online paper titled, Guidance to Internal Auditor, an internal auditor is “an
individual who takes responsibility for carrying out internal audit work within an
organization, whether as an employee or as an external agency” (Malaysia Institute
of Accountants, 2005).
Internal audits play a key role in assessing and monitoring financial
management activities (Asare, 2009; Zulkifli, Alagan, & Mohd Serjana, 2014) and
involve investigating and evaluating IC (Baltaci & Yilmaz, 2006). An internal auditor
is normally interested in determining whether a department has a clear understanding
of its operation, ensuring proper use of authority, and checking whether the decision-
making is in compliance with the organization’s policies, procedures, and regulations
to ensure that planned objectives can be achieved (Asare, 2009; Zulkifli et al., 2014).
In addition, internal audits assist government organizations to achieve accountability
and integrity, improve the implementation of government programmes, and develop
confidence among citizens and stakeholders.
For this purpose, the government established an internal audit unit in many
ministries and government agencies. In Malaysia, the establishment of internal
auditing in the Malaysian public sector started in 1970 when the Ministry of Defence
set up its internal audit department (Halimah, Radiah, Rohana, & Kamaruzaman,
2009). However, the function of this internal audit department was limited to a
financial audit. Then, as early as 1979, the Malaysian Government produced Treasury
Circular No. 2: Implementation of Internal Auditing in Federal Government Agencies,
which detailed the importance of the establishment of internal auditing in public sector
entities in Malaysia. Even though Treasury Circular No. 2, 1979 had been long
circulated to federal government agencies, the implementation of the development of
an internal audit department was quite slow. In the Ministry of Education, Malaysia,
the development of an internal audit department only started in 1982 (Ministry of
Education, 2014).
This circular was replaced in October 2004 with Treasury Circular No. 9,
2004: Implementation of Internal Auditing in Federal Ministries and Departments and
80
State Governments (Ali, Sahdan, Saad, et al., 2012). The circular indicates the
requirement for the establishment of an internal audit unit governing the tasks and
responsibility of auditing in the public sector in Malaysia.
Treasury Circular No. 9, 2004 listed nine work scopes of government internal
audit departments/ units:
1. Assess the reliability and effectiveness of organizational financial management
and IC,
2. Assess compliance with existing policies, laws, regulations and directives in
force,
3. Review relevant policies, laws, rules and regulations,
4. Reviewing protection of the organization’s resources from loss, fraud ,and
abuse,
5. Give advice / views on IC, including ICT,
6. Carry out audit functions in Federal Statutory Bodies under the purview of the
Ministry without their own Internal Audit Units in accordance with the
requirements of General Circular No. 3 of 1998,
7. Report to the Head of the Ministry the audit findings and follow up on audit
issues,
8. Prepare the Annual Plan and Annual Internal Audit Report for the approval of
the Chief Executive, and
9. Present Internal Audit Reports in the meeting of the Financial Management
and Accounts Committee.
The present Malaysia Auditor General (AG), Tan Sri Amrin Buang, stressed
the importance of having internal audit units to monitor the weaknesses and
irregularities in financial management in ministries and government agencies (Amrin,
2008). These weaknesses and irregularities in financial management in the Malaysian
public sector may involve false claims of work done or goods purchases, non-delivery
of services, buying goods above market price, or non-compliance with rules and
regulations involving public funds (Amrin, 2008). Thus, there is a need to have an
internal audit to check and review policies and regulations to avoid financial losses
and ensure that the use of public money is efficient and effective (Asare, 2009; Enofe,
Mgbame, Osa-Erhabor, & Ehiorobo, 2013).
81
Zulkifli et al. (2014) list three critical factors that contribute to the
effectiveness of the internal audit function: auditor competency, independence and
management support. The first critical factor is auditor competency. Auditor
competency is important in ensuring effective internal audit function. Auditors must
be competent in doing their jobs, and being competent will increase the ability of the
auditors to implement a systematic and effective audit approach in doing their work.
(Fadzil, Haron, & Jantan, 2005; Mansouri, Pirayesh, & Salehi, 2009). Competency
can relate to the ability of individuals to perform jobs or tasks properly based on their
educational levels, professional experience, and the effort of the staff towards
continuing professional development (Enofe et al., 2013; Mansouri et al., 2009;
Zulkifli et al., 2014). An auditor’s professional proficiency, such as adequate
knowledge, professional membership, and training, determines the competency of the
auditor, and, thus, will create effective auditing in the organization (Fadzil et al.,
2005).
However, the Malaysian Auditor General pointed out that a lot of public
officers who carry out internal auditing in local authorities in Malaysia have
inadequate accounting knowledge and exposure in doing their jobs (Halimah, Radiah,
Rohana, et al., 2009). Furthermore, Halimah et al. (2009) found that an insufficient
number of audit personnel and incompetent auditors are two obvious factors that
contribute to the ineffectiveness of the internal audit function in the public sector in
Malaysia.
Referring to the research done by Emmanuel, Ajanya and Audu (2013) in Kogi
state, Nigeria, from interviews of 81 staff members of the Auditor General’s
Department, found that training in financial management and auditing increases
auditor competencies and ensures the successful operation of auditing work in
government. The internal auditors need to be trained in how to evaluate the IC that
exists in the organization and use it to perform effective audit work.
In addition, Hasnah et al., (2014) stressed that internal auditors should be
qualified and reliable personnel that have strong integrity and ethical values to carry
out their responsibilities. Auditors are required to maintain a high standard of
professional conduct and apply ethical decision-making in doing their auditing work.
However, a study done by Hasnah et al., (2014) found Malaysia auditors, although
they are in government, tend to make unethical judgements in doing their audit work.
Hence, it is important for government and auditing firms to introduce an ethical
82
organizational climate, use strict rules and regulations, establish codes of conduct, and
have good law enforcement to help and enable auditors to do their work ethically.
This is because ethical role modeling of management and supervisors, the capability
of behaving ethically, commitment to behave ethically, openness to discuss ethical
issues, and reinforcement of ethical behaviour in the organization significantly
influence the ethical behaviour of organization members (Kaptein, 2011).
The second critical factor in ensuring the effective internal audit function in the
public sector is the independence of the internal audit (Mawanda, 2008). Internal
auditors should be independent in doing their audit work and free from the influence
of organization management. However, in the public sector, the internal audit is not
independent because of the existence of an employer-employee relationship.
Normally, the organization manager sets the scope of audit work and the internal
auditor needs to report to the manager of the organization about their findings
(Mawanda, 2008; Zulkifli et al., 2014). Users from outside the organization do not
want to rely on information verified by internal auditors because of their lack of
independence.
The third critical factor in ensuring the effective internal audit function in the
public sector is the existence of strong management support. Halimah et al. (2009)
asserted that management support and understanding of the role of internal auditing is
important for the effectiveness of the internal audit function. Management support is
the most influential factor among the factors that contribute to the variation of quality
in the audit work and is obviously a crucial factor for the effectiveness of the internal
audit function (Mansouri et al., 2009; Zulkifli et al., 2014). The support of
management is crucial to the operation and success of the internal audit, especially, in
hiring efficient internal audit staff, developing career paths for internal audit staff, and
providing organizational independence for audit work are all results of decisions made
by top management (Mansouri et al., 2009; Zulkifli et al., 2014).
83
Howard, & Greenidge, 2006; Bédard & Gendron, 2010; Bhasin, 2013; Nest,
Thornhill, & Jager, 2008; Zhang, Zhou, & Zhou, 2007). The audit committee or an
equivalent body in the government department must be designated of oversight of the
process of financial reporting, oversight of the adequacy of IC, and supervision of the
audit activities in the organization (Beasley et al., 2010; Bédard & Gendron, 2010;
Davies, 2009; George, 2005; O’Riordan, 2013; Wen-Wen, 2007).
Audit committees or financial-oversight committees are groups of individuals
who represent “the interests of their organization’s governing body and are
responsible for strengthening the organization’s IC and for ensuring the accuracy of
the organization’s financial reports” (Matkin, 2010, p. 208). The audit committees
are extensions of the governing bodies of the organization and often include
individuals from the governing body in their membership, but they do not set policy or
manage administrative units (Matkin, 2010).
In the public sector, audit committees or financial-oversight committees act as
an advisory role to the management or could be independent structures within
departments which solve issues on behalf of the secretaries general (O’Riordan,
2013). The membership of audit committees is comprised internal and external
members (O’Riordan, 2013) and should have three to six members (Alleyne et al.,
2006; George, 2005). As mentioned in O’Riordan (2013), audit committee members
in Ireland are normally appointed by Secretaries General. Secretaries General appoint
internal members from within an organization or department and invite the
participation of external members from other government departments as well as from
private sector. The audit committee members must have experience, supremacy,
honesty, externality, independent-mindedness, and familiarity with the public sector
operations and activities. On top of that, the election of internal members should come
from senior officials who have a lot of experience and are well versed in the operation
of the organization. The senior official is an expert in the organization and would help
in monitoring and supervisory process (O’Riordan, 2013).
According to Braiotta (2004), there are three basic functions of audit
committees, which are planning, monitoring, and reporting. Audit committees need to
plan their work scope, monitor the area specified in the work scope, and report to the
top management about any significant findings that might affect the achievement of
organization objectives (Braiotta, 2004). Furthermore, George (2005), listed out five
audit committee work scopes in managing IC in public organizations:
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1. Understand how the IC objectives are achieved within the entity,
2. Consider whether the control environment of the organization helps in
achieving the objectives,
3. Review the auditor’s report regarding the weaknesses of IC,
4. Report the material weaknesses and other significant findings, and
5. Take follow-up action to correct the weaknesses in IC and review the
improvement of the action.
85
found to be the same as the members of the finance and performance committees.
O’Riordan (2013) stresses the importance of the independence of audit committees by
appointing internal and external members. Appointing internal members to the
committees from senior officials in their own departments provides the perspective
and experience of officials familiar with the departmental working environment. Thus,
appointing external members to the committees introduces an external perspective,
expertise, and credibility to support the committees’ standing within and outside their
departments and strengthens the position of the internal audit unit.
Secondly, the audit committee must have financial and accounting expertise to
assess and monitor financial statements and financial reporting (Davies, 2009; Wen-
Wen, 2007) and evaluate the ethical environment, regulatory compliance, IC, and
information systems (Alleyne et al., 2006).
Obviously, audit committee members should have the requisite qualifications
and expertise to discharge their responsibilities. A member of the audit committee
should at least have financial and accounting expertise. However, in public sector
organizations, the problem of ineffectiveness starts with failure to identify audit
committee members’ with skills and experience, and some of the officers may be
unwilling to increase their understanding about audit and accounting matters (Davies,
2009; Matkin, 2010).
Third, audit committee should have transparent communication with governing
bodies and internal and external auditors (Davies, 2009; Wen-Wen, 2007).
Transparent communication would benefit all parties and link together the information
that they have towards achieving organization objectives (Davies, 2009; O’Riordan,
2013). Internal auditors should use information from government external auditors as
guidance in doing their jobs. Furthermore, the government external auditor sees
information reported by audit committees as a mechanism to provide an early warning
of issues in their departments (O’Riordan, 2013). For implementation of effective IC,
the audit committee is an important oversight mechanism to protect the organization
from the weaknesses of the IC (Davies, 2009; George, 2005).
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3.3.2 Risk Assessment
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according to INTOSAI Gov 9130 (INTOSAI, 2007) are:
1. Misappropriation of funds through fraud,
2. Inadequate skills or resources to deliver services,
3. Project delays and cost overruns,
4. Failure to evaluate pilot projects properly,
5. Failure to keep pace with changes in technology,
6. Failure to monitor implementation,
7. Failure to measure performance, and
8. Economic changes, such as lower economic growth.
The second stage in risk assessment is risk evaluation. Risk evaluation should
be done to analyse how it will impact the financial performance of the organization.
Risk assessment can be quantitative, semi-quantitative, or qualitative in terms of the
likelihood of occurrence and possible consequences (Collier et al., 2007).
After the risk is identified and evaluated by considering the possibility of the
occurrence and its consequences, the organization needs to decide what to do with the
risk. The decision should be made whether to avoid the risk, to reduce the risk to an
acceptable level, share or transfer the risk by buying insurance, outsource, or even rely
on hedging. An important part of the risk response is on-going monitoring to
determine the effectiveness of the action (Chartered Institute of Management
Accountants, 2008).
The control environment and risk assessment are related to each other. In
evaluating the IC components in government agencies, Geiger et al. (2004) found a
positive correlation between a strong control environment and strong risk assessment.
This means that, if the organization has a strong control environment, the organization
will have a strong risk assessment and vice versa. Strengthening the control
environment of an organization will positively affect the level of risk assessment of
the organization.
In government agencies, the frequent changes in their internal and external
environment increase the need for active risk monitoring and evaluation of
organization IC to address the changing risk. This statement is supported by INTOSAI
(2004a p.22): “Governmental economic, industry, regulatory and operating conditions
are in constant change, risk assessment should be an ongoing iterative process. It
implies identifying and analyzing altered conditions and opportunities and risks (risk
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assessment cycle) and modifying IC to address changing risk”.
In addition, in smaller organizations, the risk assessment process is likely to be
informal and unstructured. It is more effective than big organizations because the
managers have access to more internal information and they have a better
understanding of its implications for the organization. However, the lack of formal
procedures in assessing risk may lead to a lack of knowledge and underestimation of
risk, and will create weak corporate governance (Noorvee, 2006). This proves that risk
assessment is very important to an organization, irrespective of the type of
organization or size.
INTOSAI Gov 9100 define control activities as the “policies and procedures
established and executed to address risks and to achieve the entity’s objectives”
(INTOSAI, 2004a, p. 28).
According to INTOSAI Gov 9100 (INTOSAI, 2004a), control activities in an
organization must:
1. Be appropriate and correspond to the risk involved,
2. Function consistently according to plan throughout the period,
3. Be cost effective whereby the cost should not exceed the benefit derived from
the established control, and
4. Be comprehensive, reasonable, and directly related to the control objectives.
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Segregation of duties will enhance transparency and, indirectly, reduce the possibility
of fraud occurrences (Royce, 1989).
Detective controls are used to identify errors and prevent illegal acts from
happening (INTOSAI, 2004a; Wells, 2001). This can be done by producing a
reconciliation statement of the bank account and doing a physical count of inventory
and assets. Management can also detect budgetary problems by comparing
information about financial performance with budgets or other benchmarks to measure
the extent to which financial goals and objectives are being met (Abbas & Iqbal, 2012;
INTOSAI, 2004a). Corrective controls identify defects in the process and decide the
actions to be taken to correct the problems. Examples of corrective controls are
additional employee training and reassessment of current procedures (Abbas & Iqbal,
2012).
There are five elements control activities in INTOSAI Gov 9100, the first of
which is documentation and records. According to Dinapoli (2007), documentation
involves protecting evidence that will be used to validate a decision, event,
transaction, or system. Documentation should have a clear purpose, be easy to
understand, designed for multiple use and users, be timely, and be maintained in a
practical format that will add to the efficiency and effectiveness of the organization’s
financial information (Royce, 1989; Seppänen-Järvelä, 2005). By recording the
information related to such events, management creates an organizational history that
can serve as justification for subsequent actions, decisions, and also for audit
purposes. According to Shaari (2006), documentation and records serve at least two
purposes: allowing all transactions and activities in the organization to be traced and
as information tools that can be communicated throughout the organization.
In order to ensure the IC is in order, there must be sufficient and relevant types
of document and records to make sure no transactions are left out. According to Shaari
(2006), the following conditions are necessary to contribute to reliable IC structure:
1. The document must be pre-printed with serial numbers to make falsifying
documents difficult and make documents easy to trace,
2. Each document must be complete, but simple,
3. The document must be used as soon as possible after the transaction to prevent
being miss-recorded or forgotten,
4. Where appropriate, the documents must be designed in relation to each other.
For instance, payment vouchers must be related to the cheques used for
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payment, and
5. The entries in the documents and records must be made on the basis of a
manual system and chart of accounts.
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separation of duties, which can help prevent or reduce these risks (Shaari, 2006).
However, in small organizations with a small number of employees it is hard to fully
implement the element of separation of duties because of the limited number of
employees (INTOSAI, 2004a). In such cases, management must be aware of the risks
and compensate with other controls, such as job rotation or giving annual vacations to
employees, which may help reduce the possible risks created by employees. When
employees know that others will take over their duties, they are more likely to
maintain their work with care and follow established procedures (Royce, 1989).
The fifth element of control activities is the safeguarding of assets, which
involves restricting access to resources and information to help reduce the risks of
unauthorized use, loss, or damage (Royce, 1989). Management should protect the
organization’s equipment, information, documents, and other resources that could be
wrongfully used, damaged, or stolen. Management can protect these resources by
limiting access to authorized individuals only. Abbas and Iqbal (2012) explained that
the physical protection of assets is a principle of IC but that must be tempered by cost
and benefit analysis. The management should decide which resources should be
safeguarded and to what extent. Management should make this decision based on the
vulnerability of the items being secured and the likelihood of loss. This will reduce the
risk for wrongful acts, stealing, and losses (Abbas & Iqbal, 2012).
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management can respond to current conditions and must flow down to make sure that
all staff members are aware of the policies and decisions made by the top
management. Information also needs to flow across functional departments to make
sure that the interconnection of processes can function effectively (Root, 1998).
Communication is defined as the interchange of useful information between
and among personnel in an organization to support decisions and organize activities.
Communication is an on-going process whereby the sending and receiving of
information never stops (Dunn & Goodnight, 2008). Information should be
communicated to management and subordinates within a specific time frame that
helps them to carry out their responsibilities.
One of the most critical communication channels is between the management
and their staff. Management must keep up-to-date information on performance,
developments, risks, and the functioning of the IC. Management should communicate
to their staff what information they need and provide feedback and direction
(INTOSAI, 2004a). Management should also provide specific and directed
communication addressing behavioural expectations. This includes a clear statement
of the entity’s IC philosophy and approach, and delegation of authority (Alvin & et
al., 2003).
Communication should raise awareness about the importance and relevance of
effective IC, communicate the entity’s risk appetite and risk tolerances, and make
personnel aware of their roles and responsibilities in supporting the components of the
IC (INTOSAI, 2004a).
Effective communication in an organization is a crucial aspect of fraud
deterrence (Cendrowski et al., 2007; Hooks, Kaplan, Schultz, & Ponemon, 1994;
Rezaee, 2005). Open communication is a crucial component of an effective control
environment. Indeed, it specifically alludes to whistle-blowing (Bhal & Dadhich,
2011; Hooks et al., 1994; Patel, 2003). Improving communication related to
wrongdoing will exercise a favourable effect on the commission and detection of
fraud because fraud relies on concealment. One of the ways to improve
communication in reporting illegal acts is by the establishment of a whistle-blowing
policy (Hooks et al., 1994). Whistle-blowing is defined as the revelation by
organization members about illegal, immoral, or illegitimate conducts under the
control of their employers, to persons or organizations that may be able to effect
action. Whistle-blowing is important because it contributes to improvements in IC in
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the organization (Hooks et al., 1994). Moreover, whistle-blowing can improve long-
term organizational effectiveness because whistle-blowers may suggest solutions for
organizational problems (Bhal & Dadhich, 2011; Hooks et al., 1994; Patel, 2003)
3.3.5 Monitoring
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Organization need to prioritize the monitoring procedure according to risk that exist in
the organization (Avellanet, 2009). Then, organization should identify the key control
that can be use to mitigate the risk that might materially affect the organization’s
objectives. Identifying the key controls help organization’s devotes its monitoring
resources to the crucial area. The monitoring is executed after organization choose the
monitoring approach to mitigate the risk.
There are three types of monitoring approach could be choose by the
organization, which are ongoing monitoring, separate evaluation (INTOSAI, 2004a)
and spontaneous monitoring (Account Division, 2012; Ministry Of Education, 2009).
Ongoing monitoring of IC is use to monitor regular and recurring operating activities
of an organization. Ongoing monitoring activities cover each of the IC components
and involve action against irregular, unethical, uneconomical, inefficient and
ineffective IC (INTOSAI, 2004a; Mohammadi et al., 2013). Ongoing monitoring
normally use by the top management to monitor the work of their subordinates
(INTOSAI, 2004a). If there is any discrepencies in their work, the correction can be
done in timely basis. Because of ongoing monitoring is done in real time basis, this
approach able to provide first opportunity in identifying and correct control
deficiencies (Avellanet, 2009).
Separate monitoring may be performed by external or internal auditors that
independent from organization management (INTOSAI, 2004a). Separate evaluation
are designed to evaluate control periodically and not ingrained in the daily operation
of the organization (Avellanet, 2009). The scope and frequency of separate
evaluations should depend primarily on the assessment of risks and the effectiveness
of ongoing monitoring procedures.When making that determination, the organization
should consider the nature and degree of changes, from both internal and external
events, and their associated risks.
Spontaneous monitoring is done any time without any scheduling to detect any
possibilities of fraud normally on cash and valuable assets. According to Malaysia
Treasury Instruction 309, spontaneous monitoring should be done to check the safe
box, petty cash fund and valuable assets at least once in six month (Ministry of
Finance, 2007). Spontaneous monitoring will help organization detect any accounting
irregularity and will promote the atmosphere of cautiousness in managing
organization’s valuable assets.
After choosing the suitable approach, the monitoring is execute and the third
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monitoring process is use to assess and report the monitoring results to the top
management (INTOSAI, 2004a). The corrective action could be made to enhance the
existence control and to prepare organization to face any possible risk that might
occur in the future.
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This study uses combination of Boddy (2011) and Albrecht (2011) as the
definition of organizational performance. The definition of organizational
performance use in this study is a set of pre-defined target or objectives that being
accumulated from all the organization’s work processes and activities.
Table 3.5:
Summary of the Performance Dimension
Performance Dimensions Literature Source
Financial and non-financial Nagarajah (2006), Kewo (2017), Ilias, Abdulatiff, &
Mohamed (2016), Lagat, Okelo, & Terer (2016)
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Performance Dimensions Literature Source
Efficiency and effectiveness Andrew (2000), Al-Hiyasat (2014), Short (2009),
Daujotaite (2013), Penny (2012). Mandle et al., (2008),
Fatimah et al., (2009), Parker (2013)
Cost Effectiveness
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The economic use of resources is reducing the cost of resources without
compromising their quality (Penny, 2012). The term “resources” must be understood
in a wide sense: it includes material and immaterial items. Barney (1991) defines
resources as “assets, capabilities, organizational processes, firm attributes,
information, and knowledge, controlled by a firm that enable the firm to conceive of
and implement strategies”. Practitioners and researchers have accepted the notion that
the individual performance of employees may have an impact on economic and
financial results.
Efficiency is measured by comparing the output to the input (Mandle et al.,
2008). The more output for input, the more efficient the organization. Normally, input
is measured in units of currency, whereas output can be measured in either monetary
amounts or physical units for public sector organizations. If the organization is
efficient, it means that it has achieved its objectives at a satisfactory cost (Al-Hiyasat,
2014; Fatimah et al., 2009). Efficiency definitions include cost efficiency, technical
efficiency, input-output efficiency, managerial efficiency, and staffing efficiency
(Parker, 2013). Efficiency is defined as “producing the maximum output for any given
set of resource inputs or using the minimum inputs for the required quantity and
quality of service provided” (Andrew, 2000 p.9). In addition, efficiency is getting the
maximum possible performance for any given expenditure of resources (Hanushek,
1996), and using the specific input that leads to achievement of specified results such
as on expenses, time and effort (Al-Hiyasat, 2014).
An organization cannot be described as efficient if the money spent on
resources to produce the finished product is cost more than the product itself (Audit-
Commission, 2008). Schools are efficient if the available resources have been used in
the best way to support pupil outcomes (Department of Education (UK), 2013). The
most efficient schools should:
1. Use their workforce effectively by focusing on teacher developments in
teaching and learning,
2. Provide more training to teaching staff than educational support staff,
3. Employ a skilled school business manager,
4. Use benchmarking data or other schools to compare the school’s spending
decisions,
5. Make use of sharing expertise, experience, or data from other schools, and
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6. Establish a strong governing body that challenges and monitors the school’s
spending.
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culture. Activities that indicate teacher and student commitment, trust, and morale are
included within the expressive dimensions of school life (Uline et al., 1998). The
expressive indicators of organizational effectiveness are not only tangible but also less
frequently examined.
Table 3.6 provides definitions and example’s of the value for money concepts,
which are economy, efficiency, and effectiveness. The examples given refer to the
context of this study, which is the education sector.
Table 3.6:
Definition and Example of Value for Money (VFM)
VFM Definition Examples
Economy Minimizing the costs of Buying teaching and
resources used in the public learning supplies, purchase
sector without jeopardizing of specified quality and
quality best price
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resources — staff, buildings and equipment — to the best effect and avoiding waste
and effectiveness is ensuring all activities focus on achieving the organization’s goals
(Mihaiu, et al., 2010). Good IC will provide reasonable assurance in pursuit of the
organization’s mission and goals, in particular, to accomplish the value for money
concept through the 3Es of public resource utilisation (Mihaiu, et al., 2010). On top of
that, IC could be used to accommodate and serve the stakeholders of public sector
with efficiency by reducing the complexity of public sector’s operation and at the
same time offer sufficient protection to safeguard public resources (Aziz et al., 2015).
Every single process and operation of a public sector organization would be managed
with reasonable IC to ensure all resources would be used at optimum level, manage to
produce high quality product or services and at lower cost (Noraini & Norhanizah, 2014).
However, Hanushek (1996) outlines in his research how the money for school
education was being spent in hiring more teachers, reducing class size, financing
individualized programmes for special needs and low performing students, paying
higher teacher salaries, and expanding special education services has no impact on
student performance. His research was debatable by many researchers and in
contradiction, Bracey (1997) stressed that schools with insufficient funds will have a
negative effect on students’ achievement because the schools are unable to provide
adequate instructional materials and facilities such as books and teaching aids.
Greenwald, Hedges, & Laine (1996) reported that the educational sector should have
sufficient funds to provide higher expenses for instructional activities, more classes,
more schools, and more experienced and educated teachers because it was empirically
found that all these five variables are positively related to student achievement. On top
of that, the money spent in funding development on schools infrastructure has positive
effect on students achievement (Crampton, 2009; Flaherty, 2013). In public schools,
the most commonly used method in measuring school performance is the relationship
between financial input and student academic performance as the output (Woods,
2006).
The research done by Nagarajah (2006) on 140 public schools in Sarawak,
involving 700 school administrators, 1,600 teachers, and 2,800 students, supported
that financial management of public money has an effect on school performance. He
used the performance determinant based on the balanced scorecard principle, which
comprises four elements — customer orientation, learning and growth, internal
processes, and financial management for academic performance and student quality.
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He did not find any direct effect of managing effective financial management on
academic performance and student quality. However, the financial management
effectiveness has a positive direct effect on service effectiveness, and service
effectiveness has a positive effect on the academic performance and student quality of
public schools in Malaysia. Nagarajah (2006) further asserted that in order to achieve
high performance in public schools, the following aspects need to be emphasized:
1. Managing the financial resources well,
2. Creating an environment that promotes learning and growth,
3. Enhancing the efficiency of the work process, which is directly associated with
healthy financial management, and enhanced human capital and technology,
and
4. Being customer focused.
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Government, Kenya, found out that three from five IC components of COSO IC
frameworks, which are control environment, control activities and monitoring had a
significant positive relationship with public sector financial management in Kenya but
information and communication did not has a significant relationship to financial
management of public sector in Kenya.
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adaptation concerns the way an organization, as a group of people, deals with change,
addresses risk and uncertainty, explores new possibilities, and approaches new and
challenging situations. Schein (2004) listed five steps in managing external
adaptation:
1. There must be a shared understanding of the organization’s mission, task, and
functions,
2. An organization must reach a consensus on achieving goals derived from the
organization’s mission set earlier,
3. An organization must reach a consensus on how to achieve the goals,
4. An organization must reach a consensus on the criteria in measuring how well
the plan in achieving goals is being accomplished using the control system,
and
5. An organization must reach a consensus on ways to correct or repair activities
that are not aligned with the organization’s goals.
Internal integration deals with how people form a group (Pfister, 2009).
According to Pfister (2009), groups must develop clear assumptions about acceptable
norms in the organizational culture, in order to coordinate activities that complement
each other and form the group as a whole. Group members need to create a common
language to use as a communicating tool, create a group identity, and set group
boundaries. The group must assign power to a specific member and create criteria and
rules for how members get, maintain, and lose power. There must be a consensus in
the distribution of power to prevent dissatisfaction among group members. Then, the
social structures, hierarchies, and relationships are defined and what is acceptable or
unacceptable behaviour to deal with unpredictable events is clearly stated (Reginato &
Guerreiro, 2013; Schein, 2004).
Shared values are idea or beliefs about the desirable behaviours, rise in specific
situations and guide behaviour or events according to its importance. (Pfister, 2009).
There are two concepts of values: control values and flexibility values (Cameron,
2006; Jean-Francois, 2006). Control values predict ability, stability, formality,
rigidity, and conformity. Control values are associated with tight planning and control,
vertical integration, conformity, and stability. Thus, control value firms may
emphasize financial measures that encourage a conservative attitude (Otley & Berry,
1980; Reginato & Guerreiro, 2013). The emphasis on financial information may be
106
consistent with the importance placed on conformity and stability within control value
firms.
In contrast, loose and informal controls, as well as lateral channels of
communication, are at the centre of the flexibility values whereby top management
values adaptation and change. Described as actionable, traceable to strategic priorities
and timely signals, non-financial measures guide managerial action instead of
controlling it and reflect cross-functional processes (Cameron, 2006; Jean-Francois,
2006). Flexibility value firms may use various non-financial measures to complement
financial measures in order to focus organizational attention and foster internal
communication (Jean-Francois, 2006).
Wallach (1983) defined culture as the mutual understanding of an
organization’s employees and labelled three separate organizational culture types as
bureaucratic, innovative, and supportive, as shown in Table 3.7. In Wallach’s view, a
bureaucratic culture is hierarchical and departmentalized with clear lines of
responsibility and authority; an innovative culture refers to a creative, results-oriented,
challenging work environment; and a supportive culture exhibits teamwork and a
people-oriented, friendly, encouraging, and trusting work environment (Roper, 2009;
Wallach, 1983). This study uses these three dimensions in investigating culture in
public schools in Malaysia.
An organization with a bureaucratic culture is stable, caring, mature, power-
oriented, cautious, established, systematic, solid, regulated, ordered, structured, and
uses many procedures (Roper, 2009; Wallach, 1983). According to Meador (2010),
there are six dimension of organization that have bureaucratic organization culture.
There are specialization of task, well defined hierarchy of authority, many rules and
regulation, procedures for dealing with work situation, impersonality of interpersonal
relationship and promotion and selection based on technical competencies. The
specialization of tasks place the organization members according to their role. In
Malaysia secondary public schools, there are division of task potrayed on school
organization chart and for financial management the division of task is shown in
Figure 2.1 (page 30).
This culture works best in an organization with a stable environment (Ogbonna
& Harris, 1998, 2000). Creative or ambitious people usually do not thrive in this
environment, but well-trained staff that follow procedures will succeed (Roper, 2009).
The government sector has always used bureaucratic culture in managing its
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employees, using many written rules and regulations. Bureaucratic organization
normally has high formalization with lots of written rules and regulations and
centralized decision-making in the hands of its managers (Roper, 2009; Sinden et al.,
2004a; Sweetland & Hoy, 2000).
Innovative cultures are organizational cultures that are exciting and dynamic,
and, as a result, entrepreneurial and ambitious people thrive in this environment.
Innovative organizations are risk taking, focus on the future market, ask why
something is done a certain way and then develop a better way to do it if needed, and
understand that innovation is a culture, not a one-time event (Feldman, 1988; Potts &
Kastelle, 2010; Roper, 2009). There are creative places to work filled with challenge,
risk, and stimulation. However, burnout and stress are common due to the pressure to
achieve high performance. Since innovation is not just about producing new ideas but
more about applying an idea to obtain value, an innovative culture can best be
described as the action of altering the established way of doing things and the
capability to change knowledge into value and connect creative new ideas to life
(Roper 2009).
A supportive culture is a cosy place to work, people are friendly, there is
always teamwork in managing activities and existence of helpful subordinates
(Gomez, 2010). A supportive culture is an open, harmonious environment like an
extended family. The organizations that fit this mould are usually trusting, safe,
sociable, encouraging, open, relationship-oriented, and collaborative (Peterson &
Deal, 1998; Roper, 2009; Tumbas & Schmiedel, 2013). Table 3.7, below, shows the
characteristics of bureaucratic, innovative, and supportive organizational cultures as
provided by Wallach (1983).
Table 3.7:
Characteristics of Bureaucratic, Innovative and Supportive Organizational Culture
Bureaucratic Innovative Supportive
Hierarchical Exciting Friendly, fair and helpful people
Compartmentalized Dynamic Open, harmonious environments
Clear lines of responsibility Entrepreneurial Trusting
Organized and systematic Ambitious people Safe
Based on control and power Challenge and risk Equitable
Stable and mature Stimulating work Sociable
Power-oriented Creative Encouraging
Cautious Open
Regulated, procedural Relationship-oriented
Ordered Collaborative
Structured
Well- trained staff
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Efficient system and
procedures
Not likely to retain creative
and ambitious people
Source: Wallach (1983)
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3.5.2 Linking Organizational Culture and Internal Control with Organizational
Performance
110
resilient workplace.
In implementation of IC, an innovative organizational culture encourages
organizational members to follow the rules and regulations towards the achievement
of high performance, and, if appropriate, organizational members suggest new and
better ways to improve the IC in the organization (Feldman, 1988; Potts & Kastelle,
2010; Roper, 2009). Constructive debate between various hierarchical levels in an
organization and outside of the organization will help managers to justify their
behaviour to others in the organization (Pfister, 2009). Subordinates can give
suggestions on how to improve them and with these suggestions and constructive
comments, the weaknesses of IC can be solved and ensure continuous evaluation is
made in the organization.
3.6 Summary
111
CHAPTER FOUR
CONCEPTUAL FRAMEWORK AND HYPOTHESES
DEVELOPMENT
112
Stewardship Theory
Internal Organizational
control Performance
Organizational
culture
113
been entrusted to them by the public sector’s stakeholders such as tax payers and
citizens of the country. Managers use IC, to provide reasonable assurance that the
objectives of the organization can be achieved (Caldwell, Hayes, Bernal, & Karri,
2008).
A manager under stewardship theory shows pro-organizational behaviour and
uses a collective or cooperative management style (Caldwell et al., 2008). A manager
will always work together with other individuals in the organization towards
achieving an organization’s objectives. This is because, they perceive greater utility or
satisfaction in cooperative behaviour (Davis et al., 1997).
The manager, under this theory, wants to do a good job and to be a good
steward of the organization’s assets, thus, stewardship theory holds that there is no
problem of lack motivation in doing the responsibilities assign to them. Furthermore,
managers prefer non-financial motivators, such as gaining intrinsic satisfaction in
performing challenging tasks, exercising full responsibility in performing the duties
entrusted to them and gaining recognition from other individuals in the organization.
Individuals who have intrinsic behaviour are more likely to become stewards,
according to stewardship theory, than individuals with extrinsic needs (Davis et al.,
1997; Donaldson & Davis, 1991). Repeated and reinforced teaching of selfless values
within an organization will lead to a supportive and encouraging atmosphere for
managers to exhibit steward-like behaviour in their organizations (Krick, 2007).
However, the action of stewardship does not mean a manager does not want
his or her salary. Managers must have income to support their lives, but they realize
the important trade-off between personal needs and organizational objectives. They
believe that by working towards the organizational objectives, their personal needs
will also be fulfilled (Donaldson & Davis, 1991; Wan, 2015). This notion supported
by Min, Ryoul, & Chen (2016) that found out pay-for-performance only enhances
worker happiness in the private sector, not the public sector. They found pay-for-
performance negatively related to organizational effectiveness in the public sector.
The stewardship theory rejects the use of control by the principal to govern all
the activities of the agent and argues that control does not necessarily improve the
performance of the organization and does not align the goal between the agent and the
principal (Sundaramurthy & Lewis, 2003). The control should be handed over to the
management in the organization because they have:
114
1. In-depth knowledge regarding the operation of the organization,
2. Easy access to current information,
3. Technical expertise, and
4. Strong commitment to the organization.
115
4.1.2 Social System Theory
116
which specific behaviour is acceptable in the organization and the external
environment cannot easily influence the culture of the organization. For instance, a
closed system will keep the unacceptable behaviour, such as untimely, inaccurate
reporting, or the bribing culture, outside the organization that enables the organization
to maintain a culture of an effective IC (Pfister, 2009). As shown in Figure 4.2, closed
system boundaries protect an organization from the external and internal environment
that could jeopardize acceptable values that influence the organizational culture. The
organizational culture acts as a filter to prevent the unacceptable behaviour from
entering and affecting the organizational culture. This closed system is essential for
survival of the organization in complex environments (Mayrhofer, 2004).
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factors, such as shareholders, stakeholders, laws and regulations, changes in
technology, and cultural traits (La Cour, Vallentin, Hojlund, Thyssen, & Rennison,
2007), and internal factors, such as employees’ backgrounds, interests and needs, are
able to influence the organizational culture of the organization (Pfister, 2009). The
open system starts when a leader has faith in their employees’ ability to absorb and
process information. Hence, the leader is more willing to accept ideas and suggestions
from employees (Houghteling, 2006). In addition, Houghtelling (2006) stressed that a
leader in the social system believes that self-organization is the key to effective
leadership through developing systems that allowing the free flow of information.
This will leads to a richer, healthier and more resilient workplace. Because of that, the
information from the external and internal environments will be a great help for
enabling an organization to achieve its objectives.
The main elements of culture as the social system are the communicative
interactions and values shared between people within the culture. Keyton (2005 p.3)
explains that “communication is complex and a continuous process through which
organizational members maintain, change, and create in the organization”. Thus,
organizational culture is constructed to be communicative and it is both a product and
the process of interactions (Pfister, 2009).
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The link of organizational culture to IC starts by defining communications as
the essential and basic element of the organizational culture. It has been seen that
communication is an essential component of IC. Moreover, not enough
communication was recognized as being the typical root of the failures in control
(Pfister, 2009). Thus, the basic element of culture, which is communication, not only
links culture with the social system, but also forms a link to the IC (Pfister, 2009).
Figure 4.4 shows the framework for culture and control developed by Pfister
(2009). The framework for culture and control combines three elements which are
closing drivers, opening drivers, and reinforcing drivers. All three elements should be
use together in an organization to build a strong relationship between IC and
organizational culture.
The first element in Pfister’s culture and control framework is closing drivers.
Closing drivers is used to establish how controls should be perform and set clear
restrictions for the organizational members (Pfister, 2009). Closing drivers close the
organization culture to specific unacceptable behaviour. Closing drivers have many
advantages:
1. Provide guidelines to organizational members on how controls need to be
performed,
2. Establish consistency in controlling behaviour through culture, and
3. Establish what behaviour in a culture is unacceptable.
The second element is opening driver. Opening drivers give members the
freedom to perform controls that enable evaluation of culture and control by external
and internal parties (Pfister, 2009). The third element is reinforcing driver.
Reinforcing drivers, disperse the culture through the leadership, selection, and
socializing process (La Cour et al., 2007).
These three elements are explained further in the context of IC implementation
in the organization. In implementing IC in an organization, for instance, in the process
of managing public money, the mix between closing and opening drivers will help
organizations to effectively spend public money and enable them to get the most value
for money in the spending (Pfister, 2009). In managing public money, the
organization needs to spend some time in developing IC and communicate the system
of IC to all the employees in the organization. The full comprehension of the IC will
help organizations reduce the risk of being unable to achieve the objectives of the
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public spending, which is getting more value for money than is being spent. Because
of that, a constructive discussion on how to spend the money should be undertaken. A
constructive discussion with employees and other stakeholders is the opening driver
and the transparency of choosing or awarding the contract to suitable contractors is the
reinforcing driver towards effective public spending (Mayrhofer, 2004; Pfister, 2009).
Defining cultural
dimensions for
control
Mix
Closing drivers Opening drivers
This study uses the INTOSAI Gov 9100-Guideline for Internal Control for the
Public Sector as a source to develop the conceptual framework. INTOSAI Gov 9100
defines IC as an integrated process undertaken by an organization member to address
risk and provide reasonable assurance that the organization’s objectives will be
achieved. The objectives of the IC, as stated in INTOSAI Gov 9100, are executing
orderly, ethical, economical, efficient, and effective operations; fulfilling
accountability obligations; complying with applicable laws and regulations; and
safeguarding resources against loss, misuse, and damage (INTOSAI, 2004a).
There are five IC components according to Guideline for Internal Control
Standards for the Public Sector (INTOSAI Gov 9100, which are the control
environment, control activities, risk assessment, information and communication, and
monitoring (INTOSAI, 2004a; Noorvee, 2006; Root, 1998). Research about IC should
120
include all five components of IC, but only a few researchers have studied this
relationship (Geiger et al., 2004; Klamm & Watson, 2009).
The stewardship theory was used to link the how management of the public
sector who act as stewards in conducting, supervising, or managing the public sector
resources that have been entrusted to them with public sector’s performance. In the
public sector, a manager who is a public official uses organizational resources, and
implemented IC, to provide reasonable assurance that the objectives of the
organization can be achieved.
Internal control will help an organization to assess and reduce risk, deter fraud
(Caplan, 1999; Carolyn & Peter, 2002; Mihaela & Iulian, 2012), prevent and detect
fraudulent activity (Cendrowski et al., 2007; Mu’azu Saidu & Siti Zabedah, 2013),
reduce mismanagement and error (Mu’azu Saidu & Siti Zabedah, 2013; Wittayapoom
& Limsuwan, 2011), ensure reliability and accuracy of financial reports (Abraham,
2013; Changchit et al., 2001), monitor potential problems (Hedley & Ben-Chorin,
2011; Masli et al., 2010; O’Leary & Gibson, 2008), help the organization achieve its
objectives (INTOSAI, 2004a; Leng & Zhang, 2014), and create a strong defence
against organizational failures (International Federation of Accountants, 2006).
Without effective IC, mismanagement, error, fraud, and many other financial
management problems will occur, and the organization will fail to achieve its
objectives.
The control and culture framework used by Pfister (2009) to link IC,
organizational culture, and performance is tested empirically in this study. From the
perspective of social system theory, the mix between closing, opening, and reinforcing
drivers that are used in the control and culture framework can be applied in public
sector organizations. The use of a closing driver clearly defines the specific behaviour
that is acceptable to an organization.
In implementation of IC in the organization, a closing driver acts as a
monitoring mechanism, a filter to stop unacceptable behaviour such as fraud,
inaccurate reporting, and bribery from outside of the organization from influencing the
organization’s daily activities, especially in financial management. Unacceptable
behaviour that does not comply with rules and regulations should be sanctioned to
prevent it from influencing the culture of the organization. In order to keep the
unacceptable behaviour outside the organization, managers should start by employing
ethical employees and portray examples of acceptable behaviour in their daily work.
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The use of an opening driver in terms of constructive debate between various
hierarchical levels in an organization and outside of the organization will help
managers to justify their behaviour to others in the organization. The manager needs
to convince their subordinates about their plans and actions so that subordinates can
give suggestions on how to improve them. With these suggestions and constructive
comments, the weaknesses of IC can be solved and ensure continuous evaluation is
made in the organization.
With constructive comments, managers should apply changes where needed.
Then, as the reinforcing driver, the manager should then ‘lead by example’ to
demonstrate the application of the new changes. The new changes in IC are then
dispersed and communicated throughout the organization. The reinforcing driver that
embedded in the organizational culture should able to influence and promote the
closing as well as opening drivers used by the management of the organization.
This study identified five IC components stated in INTOSAI Gov 9100 as the
independent variables (IV) of the study that help the organization achieve its
objectives. The five independent variables include the control environment, control
activities, risk assessment, information and communication, and monitoring. If all the
IC components are managed effectively, the objectives of public schools could be
achieved.
Since the performance of public schools could not be measured using financial
data, the measurement of the dependent variables (DVs) in public schools was based
on the concept of the value for money, which is prominent in the literature of financial
management in the public sector. The Value for money (VFM) concept is about
striking the best balance between the “three Es” performance measures which are
economy, efficiency and effectiveness of public resources (Penny, 2012). The
schematic diagram of the conceptual framework of this study is shown in Figure 4.5
and Figure 4.6.
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Independent Variables Dependent Variables
Efficiency of
Risk Assessment
activities
Effectiveness of
Control activities operations
Monitoring
Mediating Variable
Organizational culture
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Independent Variables Dependent Variables
Organizational
Internal Control (56 items) Performance
(10 items)
Control Environment (23 items)
Ethical leadership (6 items)
Authority structure (4 items)
H1a- H1e
Human resource policy (4 items)
Internal audit (5 items)
Audit committee (4 items) Economic use of
resources (3 items)
Monitoring (9 items)
Ongoing monitoring (3 items) H5a- H5c
Spontaneous evaluation (3 items)
Separate evaluation (3 items)
Mediating Variables
Organizational culture (9 items)
Bureaucratic (3 items), (H6a-H6e)
Supportive (3 items), (H7a-H7e)
Innovative (3 items), (H8a-H8e)
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4.3 Independent Variables: Internal Control
125
regulations but failed to provide priority in ensuring all personnel understand their role
and their significance in implementation of IC that exist in the organization. The role
of top management in an organization is not just design and develop the IC policies
and procedures in the organization, but they have to ensure the policies and
procedures are understood and use by all members of the organization towards
achievement of organization objectives (Gauthier, 2006; Geiger et al., 2004; Noraini
& Norhanizah, 2014).
In addition, Mawanda (2008) tested the relationship between control
environment and financial performance in an Institution of Higher Learning in
Uganda. She found that there is a significant positive relationship between control
environment and financial performance, which is measured by liquidity,
accountability, and reporting. She stressed that, to make sure a strong IC is in place;
all organizations should strengthen and reinforce their control environment. This is
because IC is the sum of the tools and techniques used by management to ensure that
objectives are being achieved, which is primarily a management concern (Carolyn &
Peter, 2002; Gauthier, 2006).
Internal control weaknesses increase when there are poor management
practices, weakened societal values, occurrences of economic pressure, no action
taken to prevent illegal conduct, and when there is inadequate training for those
responsible for fraud prevention or detection (Ziegenfuss & Douglas, 2001). Effective
control structures and a strong ethical foundation are essential for ensuring that
fraudulent acts are not allowed (Cendrowski, Martin, & Petro, 2007). On top of that,
according to Lagat, Okelo, Terer (2016), a good control environment have well
elaborate organization structure, contain well-documented and defined policies and
procedures as well as embrace systems that are able to detect and correct errors.
Furthermore, a well-established code of conduct that exist in a good control
environment will lead to effective financial management of public sector organization.
As supported by Kewo (2017), the managerial role in developing good control
environment will enhance organizational IC by affecting organization financial
accountability, minimize errors in the presentation of financial statements, and
minimize differences in budget realization. Good control environment able to help
achievement of targeted programs and activities.
126
Hence, the following hypothesis is proposed:
H1 There is a positive relationship between control environment and
organizational performance.
127
accountable for ethical conduct. Ethical leaders treat all subordinates fairly in
delegating work, performance evaluations, pay and promotions, which further
increases the productivity of the employees. Employees who perceive the fairness of
the manager and the organization will increase their commitment in doing their jobs
(Sabir et al., 2012).
Ethical leadership is of great importance in handling moral incidents and
fostering employees’ ethical behaviours in organizations, given that good leaders are
obliged to set a moral example for their followers (Brown et al., 2005; Zhu et al.,
2004). There have been studies that found that ethical leadership is significantly
associated with employees’ pro-social behaviour, counterproductive behaviour, job
satisfaction, and organizational commitment (Brown & Treviño, 2006; Neubert, Wu,
& Roberts, 2013). According to Engelbrecht et al., (2017), the importance of ethical
leadership as an important path to leadership success and encourages organisational
leaders to improve the performance of their followers and their organisations by
making ethics a precedence through modelling moral behaviour, and demonstrating
caring for employees. Behaving ethically is not only the appropriate thing to do in the
organization. It can additionally improve an organisation’s productivity and ultimately
increase organization effectiveness and increase profitability (Johnson, Shelton, &
Yates, 2012).
128
(Otley & Berry, 1980).
This study uses two dimensions of authority structure, which are formalization
and centralization. This is supported by research in schools, in that schools are usually
a bureaucratic organization with high formalization, lots of written rules and
regulations, and centralized decision-making in the hands of the school manager
(Sinden, Hoy, & Sweetland, 2004; Hoy, 2003).
Many researchers have found a positive effect of formalization. One of them
suggested that higher levels of formalization are associated with a greater use of new
organizational practice, subsequently confirming the importance of formalized
procedures and rules where new organizational practices are used (Palmer & Dunford,
2002). As stated in Adler & Borys (1996), formalization of work activities is
positively associated with commitment and satisfaction. High formalization is
consistent and has a routine system. Therefore, it leads to a greater perception of
fairness in the organization (Schminke et al., 2002).
The authority structure can either hinder or enable the effective operation of an
organization (Sinden et al., 2004; Sinden, Hoy, & Sweetland, 2004). Generally,
employees who are satisfied with their jobs and are motivated and committed to the
organization will do better on the job. Furthermore, the rules and procedures
dimension that governs employees shows a positive link to job performance, while the
flexibility or autonomy dimension indicates a negative link to job performance
(Lookman & Fred, 2005). On top of that, Noorvee (2006) stressed the importance of
appropriate and well developed authority structures in defining authority and
responsibility, especially in areas related to financial reporting, would be a great help
in maintaining effective IC towards the achievement of organization’s objectives..
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management needs to have proper procedures in hiring, training, promoting, and
compensating employees (INTOSAI, 2004a). All of these procedures have a
significant effect on organizational effectiveness (Whittington & Pany, 2004).
The effectiveness of IC is affected by the characteristics of the organization’s
personnel (INTOSAI, 2004a; Musika & Upping, 2013; Widener, 2004).
Knowledgeable, proficient, and trustworthy personnel are necessary to provide
effective implementation of IC (INTOSAI, 2004a). In the Malaysian civil service, the
process of managing an organization’s personnel starts from recruitment and the
selection of public officials of the Public Service Department (Roslan, 2009). If the
recruitment processes are weak, this will lead to a mismatch between the recruited
personnel and the job requirements. Such mismatches will seriously hinder the
efficient functioning of the organization. Appointments normally fill Malaysian civil
service posts on permanent and pensionable terms. The public officers will normally
stay in their service, regardless of their performance, unless they have committed very
serious misconduct and disciplinary action has been imposed on them (Roslan, 2009).
After they are accepted as government workers, they will be properly trained
according to their function or job (Emmanuel et al., 2013). In the public school
setting, school principals are experienced teachers with training from an education
institution according to the subject they will be teaching in school. They are elected to
principalship posts because of seniority in the school. Because of that, they do not
have any formal financial management education (Ministry of Education, 2013;
Zaidatol, 1990). Lack of financial management knowledge causes principals to rely on
their experience and the work of the accounting clerk in their school (Noridah, 2003).
Training in financial management will increase school principals' knowledge
in managing finances and accounting (Shahril, 2008). With this knowledge, the
schools’ principals will be more aware of how to use allocated funds effectively
(Azhar, 2001). Training activities in the civil service are guided by a training policy as
spelt out in the Service Circular No. 6/1984 with the following main objectives:
1. To develop capable and qualified employees
2. To ensure enhancement of skills, efficiency, and productivity
3. To enable the provision of high quality results
4. To develop employees who are able to produce output of high quality
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Another issue in managing human resources, is the issue of performance
appraisals and promotions (Rae & Subramaniam, 2008). The perception of fairness in
giving promotions and appraisals will enable the management of human resources to
minimize and lessen the occurrence of fraud cases. The use of two-way
communication between employers and employees regarding their performance
appraisals will increase the perception of employees in terms of fairness and will
increase job satisfaction (Willem et al., 2007). Properly managing and setting human
resource policies in the organization will be a great help in reducing staff turnover,
absenteeism, and grievances, encourage the commitment of employees towards
achieving high performance, and create loyalty to the organization (Stredwick, 2005).
Subsequently, according to Stredwick (2005), human resources practices such as
selection and training will enable organizations to obtain high quality employees in
implementing IC and, consequently, help in achieving organizational objectives.
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through the internal audit function, the better the monitoring aspect of the quality of
IC. This is because the audit work planned by the internal auditor is done according to
a planned schedule that takes into consideration the objectives of the internal audit
department and the organization.
Halimah et al. (2009) further asserts that management support and
understanding of the role of internal audits is important to the effectiveness of the
internal audit function. Management support is the most influential factor among the
factors that contribute to the variation of the quality of audit work and, obviously, is a
crucial factor for the effectiveness of the internal audit function (Ali, Reza, & Mahdi,
2009; Zulkifli, et al., 2014). Strong support from top management is crucial to the
operation and success of the internal audit, especially when hiring efficient internal
audit staff, developing career channels for internal audit staff, and providing
organizational independence for audit work.
An effective internal audit is important in government financial management
and acts as an instrument for improving financial performance (Asare, 2009).
Government auditors also play an important role in ensuring financial accountability
by monitoring the effectiveness of the IC in mitigating fraud, corruption, or misuse of
resources by government officials. Therefore, as part of their financial oversight
contribution, government auditors have to detect and deter corruption, including the
appropriation of funds, inappropriate or abusive acts, and other misuses of power
(Aikins, 2011).
Furthermore, internal audit make a significant contribution to organizational
performance through IC over the financial management process from the
identification of waste and inefficiency of operations (Ali et al., 2012; Dragija,
Vasicek, & Hladika, 2011; Noraini & Norhanizah, 2014). The auditors identify
potential savings and advise management where improvements can be made. Because
of that, the internal auditors should be viewed as important organization members that
are not just looking for mistakes in the organization, but members with the capability
of helping to improve the efficiency and effectiveness of operations, cost savings, and
the overall financial management process (Aikins, 2011).
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4.3.1.5 Audit Committee
133
Hence, the following hypothesis is proposed:
H1e There is a positive relationship between the audit committee and
organizational performance.
Risk assessment is the organized procedure to identify the pertinent risks that
might happen in the organization (Carolyn & Peter, 2002). In an organization, the
acceptable risk level should be set so that the risks could be managed according to the
acceptable risk level.
Risk assessment is a critical aspect of internal audit planning (Daujotaitė,
2013; Ramamoorti, Bailey, & Traver, 1999). The auditor’s assessment of risk in the
organization depends on IC effectiveness, the more effective the IC the lower the risk
will exist in the organization.
Risk assessment embraces internal and external risk that may prevent the
organization from achieving its objectives (Daujotaitė, 2013). In a public sector
organization, the risk of unable to economically use the resources and unable to
prevent from producing effective and efficient operation should be identified and
managed.
According to Daujotaite (2013), the risk that might affect public sector
performance in term of economic use of resources, efficiency and effectiveness of
operation are shown in Table 4.1. Public manager should monitor the risk that might
affect the achievement of public sector performance using proper risk assessment to
identify and analysing the type of risk exist in the organization (Daujotaitė, 2013).
Then, the decision whether to reduce the risk or control it should be made. Three types
of action could be taken, which are managing the risk to an acceptable level, accept
the risk or avoid the risk (Knechel, Salterio, & Brian, 2007).
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Table 4.1:
Risk Factors Related to Public Sector Performance
Public sector performance General risks factors
Efficiency of operation
Objective:
Maximizing the use of 1. Loss of public resources even though the desired
resources to produce most outcome have not been achieved
outcomes 2. The ratio between resources to outcome is lower
than the optimal level, such as low labour efficiency
level
3. Occurrence of unidentified or uncontrolled risk
factor.
Effectiveness of operation
Objective:
Achieving planned objectives 1. Wrongly drawn up a policy because of inadequate
and the established intended evaluation of needs, unclear and inconsistent
impacts objectives
2. Management failures to prioritize certain objectives
Source: Daujotaite (2013)
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4.3.2.1 Risk Identification
In order to decide how to handle risk, it is essential not only to identify type of
risk that exists in the organization, but also to evaluate its significance and assess the
likelihood of the risk will occur (INTOSAI, 2004a). One of the key purposes of risk
evaluation is to inform management about areas of risk where action needs to be
taken. Failure in identifying and evaluating risk that might occur will reduce the
possibility in achieving organization objective and might causes financial losses
(Daujotaitė, 2013) and jeopardized public organization reputation (Pickett, 2005).
136
4.3.3 Control Activities
137
by Lagat, Okelo, Terer (2016) who stressed that active control activities using
approvals, authorizations, verifications, reconciliations, performance reviews,
maintenance of security, and accounting records will lead to effective financial
management in public sector organization.
138
be a separation of duties and division of key tasks and responsibilities among various
employees and sub-units of an organization. By separating key tasks and
responsibilities, such as receiving, recording, depositing, and securing and reconciling
assets, management can reduce the risk of error, waste, or wrongful acts (Dinapoli,
2007).
Critical areas such as the purchasing cycle and receiving cash are the areas
where separation of duties can be used to minimize the risk of inappropriate,
unauthorized, or fraudulent activities. However, in small organizations with a small
number of employees, it is hard to fully implement the element of separation of duties
(INTOSAI, 2004a). The use of job rotation or giving annual vacations for employees
may help reduce the possible risk created by employees. When employees know
others will take over their duties, they are more likely to maintain their work with care
and follow established procedures (Royce, 1989).
Mawanda (2008) has also highlighted that segregation of duties is necessary in
an organization. This is to ensure all accounting procedures are done according to
organization procedures and policies. She found out that segregation of duties is one
of the control activities subcomponents that have significant relationship with
financial reporting in term of public accountability.
139
the authorized person doing the specific duties involving attractive assets should
comply to policies and procedures of the organization (Noorvee, 2006). This is to
ensure the collection money is properly recorded and kept for the use of preparing
accounting records. Any losses or misuses will unable organization to utilize the
money towards achieving organization objective and further will affect financial
reporting of the organization.
140
organization decision towards setting priorities in spending public moneys and the
implementation of organization activities. Because of limited resources exist in the
organization, information about which programmes and activities that have more
impact in achieving organizational objectives need to be selected for funding
purposes.
141
current, accurate and accessible (INTOSAI, 2004a). Reliable and relevant information
should be identified, captured, and communicated in a standard format and in a timely
manner will help organization report its financial information effectively and able to
produce reliable financial reporting (Noorvee, 2006). All the information regarding
operational and financial will facilitate effective organization operation, effective
control and efficiency in decision-making (Lagat, Okelo, Terer, 2016).
142
Hence, the following hypothesis is proposed:
H4b There is a positive relationship between information control and
organizational performance.
4.3.5 Monitoring
INTOSAI Gov 9100 states that the IC being used in an organization should be
monitored to assess the quality of the system from time to time (INTOSAI, 2004a).
However, too little monitoring does not provide enough information to provide fair
judgment, and too much monitoring may set up what they cited as an “atmosphere of
suspicion” (Masli et al., 2010). Hence, monitoring should be done to adequately cover
the risks that might be occurring in organizations (Agbejule & Jokipii, 2009; Hedley
& Ben-Chorin, 2011; Masli et al., 2010; O’Leary & Gibson, 2008).
Internal control weaknesses, as discussed by Huefner (2010) in the case of the
Rosalyn School District are:
1. Circumvention of controls, occurring when employees are able to create
fictitious transactions because of a lack of segregation of duties
2. Inadequate security over information technology systems, such as poor
password protection
3. Lack of adequate confirmation/reconciliation
4. Lack of review of cancelled transactions
5. Lack of review of changes to transactions
6. Inadequate monitoring of employee behaviour
143
segregation of duties could be solved by the existence of job rotation and mandatory
vacation (Royce, 1989). A common theme in many fraud investigations is that the
perpetrator is a staff member who rarely took holidays and frequently worked late.
Human resource records should be monitored for this unusual behaviour
According to David Robison & Santore, (2011) monitoring influences
managerial and employees behaviour and improves organizational performances in
term of financial gain and organizational accountability. On top of that, Lagat, Okelo,
Terer (2016) proved in their study that effective monitoring in public sector have
positive and significant impact on financial performance. This statement supported by
Kewo (2017). Monitoring managerial performance will enable organization improve
financial accountability by minimize errors in the presentation of financial statements,
minimize differences of budget realization, ensure achievement programs and
activities objectives, as well as producing timely reporting (Kewo, 2017).
144
public school in Malaysia, the ongoing monitoring are used by school principals to
monitor all accounting records prepare by the account clerks (Account Division,
2012). According to Kewo (2017), ongoing monitoring will increase managerial
performance that will affect financial accountability, minimize errors in the
presentation of financial statements, minimize differences budget realization,
achievement programs and activities, as well as timely reporting.
Spontaneous monitoring is done any time without any scheduling to detect any
possibilities of fraud normally in cash and valuable assets. According to Malaysia
Treasury Instruction 309, spontaneous monitoring should be done to check the safe
box, petty cash fund and valuable assets at least once in six month (Ministry of
Finance, 2007). Spontaneous monitoring will help organization detect any accounting
irregularity and will promote the atmosphere of cautiousness in managing
organization’s valuable assets. Routine spot check on the petty cash boxes, doing
pysical counting and reconciliation of the monies with the accounting record should
be carried out to ensure the IC procedures have been followed (Pickett, 2005). A
record must be retained for any spot checks that being carried out and these will be
reviewed and signed by the Head of Finance/ Department. The existance of
spontaneous monitoring will ensure there is no misuse of public money, no wastages
and no misappropriation of assets especially involving cash and valuable assets.
Hence, the money could be use to effectively and help organization achieved it
objectives.
145
4.3.5.3 Separate Evaluation
146
immediately on the effectiveness and efficiency of an organization. However, the
results from (Ogbonna & Harris, 2000) provide mixed support for this view. He
found that two forms of culture (bureaucratic and community) are not directly related
to performance. This study used three items of bureaucratic culture adapted from
Ogboono (2000), three items of supportive culture adapted from Gomez (2009), and
three items of innovative culture adapted from Ogboono (2000).
Roper (2009) shows evidence suggests that different cultures that are sensitive
to either external conditions or internal conditions of an organization may have a
different impact on organizational performance. An externally focused culture type
such as innovative culture, will impacts revenue, sales growth and market share. It is a
culture that brings together the elements of mission and adaptability. In an internally
focused culture performance is significantly influenced by the extent to which a leader
is supportive of followers and includes followers in decision-making processes.
Managers must be aware of this and manage both environments effectively in order to
see performance improvements.
147
these may not be sufficiently adopted or followed in everyday management or actual
operations (International Federation of Accountants, 2012). In the Malaysian
Government, IC has been clearly written in the Malaysian Treasury Instruction,
Financial Procedure Act (1957), Education Act (1996), Account and Audit Rules
(2002), and School Financial Management and Accounting Procedure (2012).
Public schools should comply with the prescribed rule and regulation.
However, according to Auditor General Report (2012, 2013), found that the
weaknesses of financial management in the Ministry of Education was due to non-
compliance with the Government’s rules and procedures. Because of that, there are
fraud cases regarding procured goods and services, works being paid above market
price, and payment done without receiving services /goods. Non compliance to rules
and regulation in school financial management causes many fraud cases occurred as
reported in special audit report produce by School Audit Division (2009, 2010, 2011,
2012, 2013). The non-compliance to rules and regulations show the existence of
weaknesses of IC and mismanagement of public resources.
Thus, the existence of bureaucratic organizational culture will help
organization runs it financial management and IC according to rules and regulation,
ensure no wastage on public resources and organization able to operate effectively and
efficiently (Daujotaitė, 2013).
148
4.4.2 Supportive Organizational Culture
149
Hence, the following hypotheses are proposed:
H7: Supportive culture mediates the relationship between IC components
and organizational performance.
H7a Supportive culture mediates the relationship between control
environment and organizational performance.
H7b Supportive culture mediates the relationship between risk assessment
and organizational performance.
H7c Supportive culture mediates the relationship between control activities
and organizational performance.
H7d Supportive culture mediates the relationship between information and
communication and organizational performance.
H7e Supportive culture mediates the relationship between monitoring and
organizational performance.
Innovative cultures are organizational cultures that are exciting and dynamic,
and, as a result, entrepreneurial and ambitious people thrive in this environment.
Innovative organizations are risk taking, focus on the future market, ask why
something is done a certain way and then develop a better way to do it if needed, and
understand that innovation is a culture, not a one-time event (Feldman, 1988; Potts &
Kastelle, 2010; Roper, 2009).
In implementation of IC, an innovative culture encourages organizational
members to follow the rules and regulations towards the achievement of high
performance. Organizational members could suggest new and better ways to improve
the IC in the organization that further improve organizational performance in term
financial performance and financial accountability (Feldman, 1988; Potts & Kastelle,
2010; Roper, 2009).
Table 4.2:
Summary of the Hypotheses Proposed in this Study
No. Original Hypotheses
151
No. Original Hypotheses
H8a Innovative culture mediates the relationship between control environment and
organizational performance.
H8b Innovative culture mediates the relationship between risk assessment and
organizational performance.
H8c Innovative culture mediates the relationship between control activities and
organizational performance.
H8d Innovative culture mediates the relationship between information and
communication and organizational performance.
H8e Innovative culture mediates the relationship between monitoring and
organizational performance.
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4.5 Summary
This chapter explains in detail the literature of IC in relation to the theoretical and
conceptual framework, and previous empirical studies to form the basis for the
hypotheses testing proposed in this study.
This chapter explains in detail the five independent variables of IC
components, which are control environment, risk assessment, control activities,
information and communication, and monitoring. Then, the explanation of the link of
the mediating variables of organizational culture between IC and public school
performance is provided to answer the second research question.
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CHAPTER FIVE
RESEARCH METHODOLOGY
This chapter describes the research methodology used in this study to test the
proposed hypotheses developed for the conceptual framework, which was presented in
the previous chapters. This chapter details the methodology used to examine the
conceptual framework written in Chapter Four and explains the method used to
address the research objectives listed in Chapter One. This chapter is divided into
seven major sections. Following the introduction of the chapter, Section 5.1 discusses
the methodological overview of the study. Section 5.2 explains the method used in
designing this research and gives reasons for why a quantitative survey has been used
in this study. Section 5.3 explains the research population and survey instrument used
in this study. Section 5.4 discusses development of research instrument that further,,
explain the questionnaire content in section 5.4.1. The description of the construct
development used to gather the data is provided in section 5.4.2. Then, the twofold
strategy of back-to-back translation was employed because the questionnaire was
administered in the Malay language (Bahasa Malaysia) in Section 5.4.3. Section 5.4.4
describes the pre-testing procedures. On top of that, Section 5.5 clarifies the data
collection method, including the sampling frame and final survey procedure used in
this study. Section 5.6 explains the statistical procedures that start with the reliability
and validity of the instrument used in this study and then, discusses the preliminary
analysis using SPSS and structural equation modelling (SEM). Lastly, Section 5.7
summarizes the research methodology used in this study.
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A quantitative survey methodology using self-administered questionnaires
were used to collect data about the underlying constructs proposed in the conceptual
framework. Before pre-testing, the questionnaires were divided into five parts:
respondent’s profile, school profile, internal control components, organizational
culture, and organizational performance. A cover letter explaining the purpose of the
study and the letter of consent from the Ministry of Education was attached in front of
the questionnaire.
The survey instrument was given to a panel of three experts in January 2013
for pre-testing purposes. These comprised a lecturer who specializes in auditing and
public sector accounting in the Faculty of Accounting, UiTM Shah Alam, Selangor, a
school internal auditor with job grade W48 in the School Audit Division, Jalan
Kampung Attap, Kuala Lumpur, and a highly experienced school principal in Kuala
Lumpur.
The pilot study was conducted in May 2013 by distributing questionnaires by
hand to 30 secondary schools, according to the different school types, which are daily
school, residential school, religious school and vocational and technical school.
Twenty-seven (90% response rate) out of 30 questionnaires were collected. Secondary
schools were chosen because they are the responsibility centres that have to make
their own decision concerning how the allocated fund will be used.
After the pilot study, the final survey was undertaken using a suggestion from
few school principals. The school principals suggested that the survey questionnaires
should be distributed in the place where all school principals congregate. Because of
that, the researcher contacted the State Education Department of Kuala Lumpur,
Selangor, Putrajaya and Perak to ask about any school principals meeting during
November and December 2013. However, only school principals from Selangor,
Kuala Lumpur, and Perak will be gathered in the three separate conferences during
November and December 2013. All the schools in the three (3) states were chosen to
represent the population of public schools in central part of peninsular Malaysia.
In addition, according to the school principals in the pilot study, sending
survey questionnaires via mail would not enable researcher gets sufficient responds
rate because they are too busy to answer the questionnaires in the school and the
questionnaires might be left unattended or were given to other school’s staff. This
might create the validity issue of incorrect respondents and a low response rate.
Hence, the survey questionnaires were delivered by hand using drop-off and pick-up
155
method at the three conferences to ensure the availability of the school principals and
its ability to increase the response rate (Allred & Ross-Davis, 2011; Hair et al., 2010).
Furthermore, these three states were also chosen because the total numbers of
secondary schools from these three states are 600 schools, which is more than triple
the minimum sample size, which is 188 (explain further in Section 5.5.1) needed for
the distribution of questionnaires. Beside that, the total number of secondary schools
in central part of peninsular Malaysia (Kuala Lumpur, Selangor, Putrajaya, and Perak)
are the biggest (which is 26.7%) as compared to the total population of schools in
other part in Malaysia as shown in Table 5.1 on page 159.
The questionnaires were distributed early in the morning during the
registration session by the organizer and collected at the end of the conference. From
the 600 questionnaires distributed, 328 were collected, but only 270 questionnaires
(45%) were used for data analysis. This is because only school principals are
considered as the respondents of this study.
Data analysis was undertaken using two statistical techniques, Statistical
Package for the Social Sciences (SPSS) version 21.0 and Structural Equation
Modelling (SEM) using AMOS version 21.0. The SPSS was used for descriptive
analysis in coding, identifying the missing data, assessment of normality, and for
factor analysis. Then, this study uses SEM data analysis as a method for analysing the
effects of more than one independent variable on one dependent variable, using the
principal of correlation and regression (Hair et al., 2010). SEM was conducted using
the two-stage approach recommended by (Anderson & Gerbing, 1982). The first stage
included the assessment of the measurement model, and the second stage included
assessment of the structural model. The first stage was to develop the underlying
measures and the second stage for hypothesis testing of the structural model.
156
Specify domain of Conceptualization developed based on literature.
construct (see Chapter 3)
157
5.2 Research Design
This section justifies the quantitative approach used in this study. It further
justifies the use of a survey methodology using self-administered questionnaires as
being appropriate for collecting data from the population sample.
From the existing literature on IC, this study developed a conceptual
framework to test the research objectives identified in Chapter One and the hypotheses
development in Chapter Four. This research uses a quantitative approach to test the
hypotheses and further answer the research questions. The quantitative approach is an
approach that presents numerical values using measurement constructs that are either
directly or indirectly measured, and the values are analysed using mathematical
methods (Muijs, 2011; Zikmund et al., 2009).
According to Muijs (2011), quantitative research is able to provide answers for
four types of question, which are questions that need a numerical answer, for showing
changes in a variable, predicting scores on one variable from scores on one or more
variables, and those for testing the hypotheses.
However, quantitative methodology is unable to generate theory or provide the
in-depth explanations of qualitative inquiry. Muijs (2011) pointed out that quantitative
method could verify the proposed hypotheses and provide strong reliability and
validity of the study variables. In conclusion, quantitative methodology was chosen
and deemed to be appropriate in answering the objectives of this study. This is
because, the objectives of the study are to empirically investigate the causal
relationships among study variables, which are IC components, organizational culture,
and performance proposed in the earlier chapter (Churchill & Iacobucci, 2009; Muijs,
2011; Saunders, Lewis, & Thornhill, 2012; Zikmund et al., 2009).
158
a particular study (Wilcox, 2009).
The population of this study consisted of all secondary public schools in
central part of peninsular Malaysia. As shown in Table 5.1, the list of all secondary
public schools in Malaysia was gathered from the Ministry of Education database for
2013. Malaysian Education Statistics are produced by the Educational Planning and
Research Division (EPRD), Ministry of Education, Malaysia, every year. There are
two types of school, which are primary schools for students aged 6-12 years old and
secondary schools for students aged 13-19 years old. This study used secondary
schools as its research population because they are a cost responsible centre and they
manage a larger amount of funds compared to primary schools. Secondary school
principals have full control over how they spend their allocated funds and how they
design their daily school programme for the benefit of the students. There were 2,277
secondary public schools in Malaysia for 2012, located in 16 states in Malaysia, as
shown in Table 5.1. The biggest part of public secondary schools in Malaysia is the
central part of peninsular Malaysia, which contains 26.7% or 610 public secondary
schools in Malaysia. Because of this reason, the secondary public school in the central
part of peninsular Malaysia was chosen for this study.
Table 5.1:
Number of Secondary Schools According to State and Part of Malaysia in 2012
No. Name of State Part Number of Percentage Percentage (%)
Secondary (%) (according to
Schools part)
1 Selangor 272 11.9%
Central
2 Kuala Lumpur 97 4.3%
Peninsular
3 Perak 231 10.1%
Malaysia
4 Putrajaya 10 0.4% 26.7%
5 Johor South 248 10.9%
6 Negeri Sembilan Peninsular 117 5.1%
7 Melaka Malaysia 76 3.4% 19.4%
8 Pahang East 188 8.3%
9 Kelantan Peninsular 163 7.2%
10 Terengganu Malaysia 137 6.0% 21.5%
11 Pulau Pinang North 125 5.5%
12 Kedah Peninsular 180 7.9%
13 Perlis Malaysia 27 1.2% 14.6%
14 Sarawak 184 8.1%
East
15 Sabah 213 9.3%
Malaysia
16 Labuan 9 0.4% 17.8%
Total 2277 100% 100%
Source: Educational Planning and Research Division (2013)
159
5.3.2 Survey Instrument
The data for this study were collected using a survey-based methodology of a
quantitative research employing self-administered questionnaires. This approach is
important when a causal relationship among the underlying theoretical or conceptual
framework needs to be examined. A survey is defined as a method of collecting
primary data based on communication (written or verbal) with a representative sample
of individuals (Hair, Black, Rabin, & Andersan, 2010; Zikmund et al., 2009).
According to Hair et al., (2010), a survey-based methodology is a
methodology that involves various resources, such as using personal interviews,
telephone interviews and self-administered questionnaires. The methodology used in
this study is self-administered questionnaires. This data collection technique required
the respondents to read the survey questions and record their own responses without
the presence of an interviewer (Hair et al., 2010). Self-administered questionnaires
present a challenge because of the reliance on the clarity of the written word more
than on the skill of the interviewers (Zikmund et al., 2009). However, according to
Zikmund et al., (2009), this method has advantages such as:
1. Having the capability of covering a large number of respondents
2. Being easily administered and distributed quickly with low cost
3. Completion of the questionnaire in the respondent’s own time
4. Possibly reaching a widespread sample in different geographic areas
160
Second, the drop-off and pick-up method can have an increased response rate
compared to mail survey. According to Allred and Ross-Davis (2011), this method
can increase response rates by enabling a guarantee of the availability of a person to
answer the questions (i.e., School principals). Furthermore, the researcher has the
ability to generate interest in the completion of questionnaires using the help of the
conference organizer (i.e., State education staff) whom asking the conference
participants to answer the questionnaire and collect them at the end of the conference.
Questionnaires, which are the most frequently used method of data collection,
were used in this research because of their effectiveness in gathering empirical data
from large, widely spread samples (Saunders et al., 2012). This study used
questionnaires to collect the primary data, and the questionnaires were hand delivered
to the entire population sample proposed in the study at random.
All but one of the questions in the study was closed-ended. On all the closed-
ended questions, the responses were based on a seven-point response format. Closed-
ended questions give respondents specific and limited alternative responses and ask
them to choose the one closest to their own viewpoints (Zikmund et al., 2009). Open-
ended questions allow respondents to answer the questions without any constraints
imposed on them. The last question in Part 5 of the questionnaire is an open-ended
question asking the respondents for comments or suggestions concerning the IC
practice and its challenges in the public schools in Malaysia.
The questionnaire for this study was prepared based on the literature review,
exploratory interviews, and previous empirical evidence that support the research
objectives and conceptual framework presented in this study. The full questionnaire is
shown in Appendix B1 page 323, and the detailed contents of the questionnaire and
the individual question are discussed in the next section.
A good questionnaire should have a well-written cover letter (Saunders et al.,
2012; Singh, 2006). The covering letter from the researcher plus the letter of research
161
approval from the Ministry of Education were attached in front of the questionnaire to
indicate the importance of the questionnaire to the researcher. A page of introduction
was written together with a paragraph on the first page of the questionnaire to explain
the purpose of the study, the definition of IC, and to provide instructions concerning
how to complete the questionnaire. The questionnaire contains two sections. The first
section seeks information about the respondents and their schools. The first part of the
first section seeks general information about the respondent. Such data are crucial to
provide basic information regarding a respondent’s age, experience, academic
qualification, and to evaluate their level of knowledge and awareness in financial
management and IC. The second part of the first section asks about the respondent’s
school profile, which provides basic information regarding their school’s profile, such
as school type, school age, and number of students in the school, student performance,
and level of financial management received for 2012.
The second section contains three parts. The first part of the second section
focuses on IC constructs and sub-constructs. There are fifty-six (56) items used to
measure IC in public schools in Malaysia. A seven-point Likert scale is used and their
level of agreement is measured as follows: score 1 indicates strongly disagree, score 2
indicates disagree, score 3 indicates slightly disagree, score 4 indicates neutral, score 5
indicates slightly agree, score 6 indicates agree, while score 7 indicates strongly agree.
The second part of the second section focuses on organizational culture. There
are nine (9) items measuring this construct. The first part of the second section of the
questionnaire focuses on IC constructs and sub-constructs. According to INTOSAI
Gov 9100, there are five IC Components, which are control environment, risk
assessment, control activities, information and communication, and monitoring
(INTOSAI, 2004a). A seven-point Likert scale is used and their level of agreement is
measured as follows: score 1 indicates strongly disagree, score 2 indicates disagree,
score 3 indicates slightly disagree, score 4 indicates neutral, score 5 indicates slightly
agree, score 6 indicates agree, while score 7 indicates strongly agree.
The third part of the second section focuses on measuring the organizational
performance in term of economic use of resources, efficiency of activities and
effectiveness of operation. There are ten (10) items measuring this construct. A seven-
point Likert scale is used to measure three (3) items of economical use of resources,
three (3) items to measure efficiency of activities and four (4) items to measure
effectiveness of operation. Their level of agreement is measured as follows: score 1
162
indicates strongly disagree, score 2 indicates disagree, score 3 indicates slightly
disagree, score 4 indicates neutral, score 5 indicates slightly agree, score 6 indicates
agree, while score 7 indicates strongly agree.
Table 5.2 shows a summary of the number and source of the items used to test
each construct used in this study. These items are further discussed later in this
section.
Table 5.2:
Constructs and Items Used in this Study
Constructs Number of Sources of Literature
Items
Control Environment (23 items)
Ethical Leadership 6 items Brown et al., (2005); Jordan, Brown, Trevino, and
Finkelstein, (2011); Walumbwa et al., (2011)
163
Constructs Number of Sources of Literature
Items
Willem, Buelens, Jonghe (2009), McCoy (2010),
Jokipii (2010), Kober et al. (2007)
Human resource policy 4 items Giovinazzo (2004), McCoy (2010), Noridah (2003),
Roslan (2009), Treasury Circular No. 8 (2004)
Monitoring (9 items)
On-going Monitoring 3 items
Spontaneous evaluation 3 items Norvee (2006), Jokipii (2009
Separate Evaluation 3 items
Organizational culture (9 items)
Bureaucratic 3 items
Ogboono (2000); Gomez(2010)
Innovative 3 items
Supportive 3 items
Performances (10 items)
Economical use of 3 items Ministry Of Finance (2007), Hoy (2009)
resources
164
Constructs Number of Sources of Literature
Items
Efficiency of activities 3 items Jokipii (2009)
All constructs were measured using seven-point Likert scales. The Likert
scales were selected because they take less time, and are easy to answer (Churchill &
Iacobucci, 2009; Zikmund et al., 2009). Even though the disadvantage of using Likert
scales is their lack of reproducibility, they are highly popular in defining individual
attitudes (Zikmund et al., 2009). Particularly, the seven-point Likert scale is chosen
rather than other scales (such as below five-point Likert scales) because it enables
greater discrimination and better distinction between each respondents (Zikmund et
al., 2009).
The development of multiple items for each construct was done purposely to
provide a comprehensive evaluation and to help the researcher to overcome the
shortcomings of a single-item measure. Multi-item constructs are considered
necessary to achieve valid measurement because of the criticisms of single-item
constructs, such as those by Churchill and Iacobucci (2009), which include:
1. Lack of adequate correlation regarding the measured attribute,
2. Closely related to other attributes,
3. Limited variance of construct, and
4. Unreliable responses.
This study uses five IC components, which are control environment, risk
assessment, control activities, information and communication, and monitoring as
stated in the Internal Control Standards for the Public Sector (INTOSAI Gov 9100).
The INTOSAI Gov 9100 IC framework suggests that the five components are
interrelated and must be used together to enhance the effectiveness of IC in the public
sector (INTOSAI, 2004a).
165
5.4.2.1 (1) Control Environment
Table 5.3:
Control Environment Measurement
Literature Source of
No. Questionnaire Items Adapted Measures
166
Literature Source of
No. Questionnaire Items Adapted Measures
7 Organizational chart clearly defines the lines of management Giovinazzo (2004), McCoy
authority and responsibility. (2010), Account Division
(2012), School Audit Division
(2008)
8. A “rules and procedures manual” exists to guide all Pugh et al. (1968), Schminke
personnel. (2000),
Schminke, Cropanzano &
Ruppc(2002), Cunningham &
Rivera (2001), Willem,
Buelens, Jonghe (2009),
McCoy (2010)
10. Management developed formal job descriptions to define the McCoy (2010)
tasks in a particular job. Pugh et al. (1968), Schminke
(2000),
Schminke, Cropanzano &
Ruppc (2002), Cunningham &
Rivera (2001), Willem,
Buelens, Jonghe (2009),
McCoy (2010)
Jokipii (2010), Kober et al.
(2007)
11. Employees receive periodic evaluations that identify training Giovinazzo (2004), McCoy
needs and opportunities for improvement. (2010)
12. Management ensures compliance with the laws and McCoy (2010)
regulations regarding personnel management.
13. Management ensures that personnel receive adequate training Norvee (2006)
to perform their duties.
.
14. Management and accounting personnel are sufficiently Noridah (2003),
competent to perform their assigned responsibilities. Ministry of Finance (2004)
15. Internal auditor conducts audit works regularly. Mawanda (2000), Account
Division (2012), School Audit
Division (2008)
16. Internal auditor has sufficient financial management Asare (2009); Mohammadi et
knowledge to do his/ her work. al., (2013), Enofe et al., (2013)
167
Literature Source of
No. Questionnaire Items Adapted Measures
19. Internal audit report addresses the weaknesses of IC. Noridah (2003),
Ministry of Finance (2004)
20. School financial committee meets at least four times a year. Noridah (2003),
Account Division (2012),
School Audit Division (2008)
21. The finance committee has sufficient financial management Norvee (2006)
knowledge.
22. Principal should discuss with the financial committee before Account Division (2012),
making any financial decision. Noridah (2003)
23 Principal answers external audit query within 30 days from Account Division (2012),
the query date. School Audit Division (2008)
Risk assessment is used to protect the organization from any potential risk and
prepare organizations to take action to handle the risk. There are two principles of risk
assessment — risk identification and risk evaluation (Collier et al., 2007; Daujotaitė,
2013; HM-Treasury, 2004; INTOSAI, 2004a, 2007). It is compulsory to ensure that all
significant activities are identified, all possible risks are defined, and that risk
identification involves perceiving hazards, failures, and adverse consequences that
could affect an organization and prevent it from achieving its objectives (Collier et al.,
2007). There are seven items measuring the construct of risk assessment. Details of the
constructs and their operational measurements are shown in Table 5.4.
Table 5.4:
Risk Assessment Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
Independent Variable: Risk Identification (3 Items)
1. Management identifies the compensating controls that are in place Giovinazzo (2004)
to mitigate risks.
2. A risk analysis covering the entire organization is done regularly. Jokiipi (2010)
.
168
No. Questionnaire Items Literature Source of
Adapted Measures
3. Those in managerial functions are aware of the risks of their areas Jokiipi (2010)
of responsibility.
4. Management actively evaluates both internal and external risks that Jokiipi (2010)
may likely prevent the achievement of goals.
5. Management put into place the risk assessment mechanisms that Norvee(2006)
involve appropriate levels of management function.
Control activities is one of the components of IC that lists the policies and
procedures that should be followed by all the organization members. There are ten
(10) questions measuring the control activities construct. The questions seek the
information concerning how the three elements of control activities, which are
authorization and approval, segregation of duties, and physical control on assets in the
organization are being used in the organization.
Details of the constructs and their operational measurements of control
activities dimensions are shown in Table 5.5. There are three items measuring
authorization and approval, three items measuring segregation of duties, and four
items measuring the physical security of assets in the organization
Table 5.5:
Control Activities Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
1. There are adequate policies and procedures for authorization and McCoy (2010)
approval of any procurement.
169
No. Questionnaire Items Literature Source of
Adapted Measures
3. Principal always checks and verifies the record in the cash book. Noridah (2003),
School Audit Division
(2008)
4. Responsibilities are segregated so that no single employee controls Noridah (2003), School
all related processes of a transaction. Audit Division (2008),
McCoy (2010)
5. Any person in the school office can receive cash and produce Noridah (2003)
receipts.
8. All financial documents such as receipts and cheque books should Changchit et al. (2001)
be kept in a locked cabinet.
9. Physical balances of assets must be the same as in the asset register McCoy (2010), Noridah
book. (2003),
School Audit Division
(2008)
10. Persons other than storeroom staff are allowed to open the Changchit et al. (2001)
inventory storeroom.
170
Information and communication also helps to provide feedback and direction
using two-way communication between the management and their subordinates
(INTOSAI, 2004a) and raises awareness about the importance and relevance of
effective IC by creating an open communication in the organization (Hooks, Kaplan,
Schultz, & Ponemon, 1993; Patel, 2003).
There are seven (7) items measuring the construct of information and
communication, as shown in Table 5.6.
Table 5.6:
Information and Communication Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
Independent Variable: Information Quality (3 Items)
171
implementation of IC on a continuous basis along with the external parties, which are
the School Audit Division and Internal Audit Division. The School Audit Division
and Internal Audit Division are the internal auditors for the public schools in
Malaysia.
Details of the monitoring constructs and their operational measurements of
control activities dimensions are shown in Table 5.7. There are three (3) items
measuring ongoing monitoring, three (3) items measuring spontaneous monitoring and
three (3) items measuring separate evaluation. These questions are used to seek
information about the effectiveness of monitoring done by management and external
parties.
Table 5.7:
Monitoring Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
1. Principal always checks to verify the work done by accounting Giovinazzo (2004),
personnel. Noridah (2003), School
Audit Division (2008)
2. There is an active control of how personnel obey the operating Jokiipi (2010),
instructions issued, such as punch cards and setting the key Agbejule (2009)
performance indicator
3. All mistakes or missing items will be investigated and recorded. McCoy (2010)
4. Spot checks on inventory should be done at least twice a year. McCoy (2010)
5. There should be a spot check on cash and petty cash at least twice Account Division
a year. (2012), Noridah (2003),
School Audit Division
(2008)
6. Management should do spot checks to ensure that all accounting Account Division
procedures are followed. (2012), Noridah (2003),
School Audit Division
(2008)
8. The feedback given by the School Audit Division, Internal Audit Norvee (2006)
Department or School Inspectorate helps in improving school
operations.
172
No. Questionnaire Items Literature Source of
Adapted Measures
Table 5.8:
Organizational Culture Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
Mediating Variable : Innovative Culture (3 items)
2. There is a culture of always being ready to meet new challenges. Ogboono (2000)
173
No. Questionnaire Items Literature Source of
Adapted Measures
3. There is a culture that emphasizes being first in innovation. Ogboono (2000)
6. There is a culture in which staff helps and support each other. Gomez (2010)
174
are ten (10) questions measuring organizational performance.
Table 5.9:
Organizational Performance Measurement
No. Questionnaire Items Literature Source of
Adapted Measures
Dependent Variable : Effectiveness of Operations (4 items)
1. With existing IC, student academic performance could be Lee (2009), Wobman
improved. (2003)
2. With existing IC, less error, omission, misstatement or fraud Ziegenfuss, (2001),
occurred. Cendrowski et al.,
(2007)
3. With existing IC, the quality of products and services produced is Hoy (2009),
outstanding.
4. With existing IC, the quantity of products and services produced is Hoy (2009)
high.
5. With existing IC, resources are protected against loss, misuse and Hoy (2009)
damage.
6. With existing IC, resources have been used without any waste. Hoy (2009)
7. With existing IC, there are policies to ensure that inventory is not Ministry of Finance
stockpiled or over ordered. (2007)
8. With existing IC, operational decision could be done in a timely Jokipii (2009)
manner.
9. With existing IC, all personal use available resources efficiently. Jokipii (2009)
10. With existing IC, the efficiency of operation could be improved. Jokipii (2009)
176
Table 5.10:
Preliminary Test Procedures
Procedures Target Reasons this Procedure
Was Used
Questionnaire A panel of three experts: 1) Assess the relevance of each
validation by panel of 1. An internal auditor from construct
experts (January 2013) School Audit Division 2) Appraise the suitability of the
2. A school principal terminology to the school
3. A lecturer specializing in management context
auditing and public sector 3) Make further suggestions,
accounting criticism and comments on the
questionnaire
4) Validate the questionnaire
Pilot study (May 2013) 30 questionnaires distributed 1) Modify and refine the
and 27 (90%) collected questionnaire prior to the final
survey
Table 5.11:
Comments and Action Taken as a Result of Questionnaire Pre-Testing
Question No. Comments Action Taken
14 Management, accounting, and information Management and accounting
technology personnel are sufficiently competent personnel are sufficiently competent
to perform their assigned responsibilities. to perform their assigned
Pihak pengurusan, kakitangan kewangan dan responsibilities.
kakitangan teknologi maklumat adalah Pihak pengurusan dan kakitangan
kompeten untuk menjalankan tugas yang kewangan adalah kompeten untuk
dipertanggungjawabkan. menjalankan tugas yang
dipertanggungjawabkan.
177
Question No. Comments Action Taken
15 Internal auditor conducts audit works regularly. Internal auditor conducts audit works
Juruaudit dalam kerap menjalankan kerja-kerja regularly.
audit pemeriksaan secara berkala. Juruaudit dalam menjalankan
pemeriksaan secara berkala.
17 Internal audit reports are produced regularly Internal audit reports are produced
Laporan Juruaudit dalam kerap dikeluarkan regularly
selepas pemeriksaan dibuat. Laporan juruaudit dalam dikeluarkan
selepas pemeriksaan dibuat.
20 School financial committee meets at least four School financial committee meets at
times a year. least four times a year.
Jawatankuasa kewangan sekolah bermesyuarat Jawatankuasa kewangan sekolah
sekurang-kurangnya tiga bulan sekali selepas bermesyuarat sekurang-kurangnya
tamat tempoh setiap suku tahun. empat kali empat kali setahun
setahun.
23 Financial committee answers external audit Principal answers external audit query
query within 30 days from the query date. within 30 days from the query date.
Jawatankuasa kewanganPengurus Sekolah Pengetua hendaklah memberi
hendaklah memberi jawapan kepada sebarang jawapan kepada sebarang pertanyaan
pertanyaan audit luar dalam tempoh 30 hari. audit luar dalam tempoh 30 hari.
Thirdly, after the panel of experts had reviewed the questionnaire and changes
had been made, a pilot study was done by distributing to thirty (30) secondary public
schools in Kuala Lumpur in May 2013 during the public school holidays. A letter of
approval for doing the research in public Schools in Kuala Lumpur was requested
from the Kuala Lumpur State Education Department. The approval letter is shown in
Appendix A. A pilot study is a small-scale research project that collects data from
respondents similar to the full study (Malcolm, 2011; Zikmund et al., 2009). The pilot
study sample of respondents should be similar to the respondents chosen for the actual
survey to ensure that a comparison can be made, and any weaknesses in the design of
the instrument can be identified and addressed (Malcolm, 2011; Oppenheim, 1992).
A cover letter and the research approval letter from the Kuala Lumpur State
Education Department was attached to the questionnaires that were distributed to
thirty (30) schools in Kuala Lumpur. According to the school type, the questionnaires
were distributed to fifteen (15) daily schools, five (5) residential schools, seven (7)
religious schools, and three (3) technical and vocational schools.
All the questionnaires were given by hand to the school principals. Five
questionnaires were collected on the same day and the researcher was able to estimate
the time required to complete the questionnaire and ask about language problems and
the clarity of instructions. Twenty-two (22) questionnaires were collected two to five
days after distribution. The total amount of twenty-seven (27) respondents, which was
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90% of the response rate, were deemed to be an adequate sample for the pilot study as
stated in the literature (Hertzog, 2008; Johanson & Brooks, 2009).
Table 5.12 shows the demographic profile for 27 respondents involved in the
pilot study. To assess the reliability of the measures, the Cronbach’s alpha coefficient
was examined, showing that all the construct items had high alpha scores exceeding
0.70. Following the reliability assessment, the procedure was to assess convergent and
discriminant validity of items by using confirmatory factor analysis. However, it was
not possible to conduct further analysis due to the small sample size (N=27). Hence,
validity assessment was conducted after the final data collection and is discussed as
part of data analysis in the next chapter.
Table 5.12:
Demographic Profile for Pilot Test
Particular Frequency %
Gender
Male 15 55.6
Female 12 44.4
Age (in years)
46-50 7 33.3
51-55 15 52.4
56-60 5 14.3
Education Level
Degree 20 74.7
Masters 7 25.3
Position Held
Principal 27 100.0
Years Holding the Principal Post
<5 years 12 57.1
6-10 years 13 33.3
>10 years 2 9.5
School Type
Daily School 15 55.6
Residential School 5 18.5
Religious School 5 18.5
Vocational & Technical School 2 7.4
School Age (in years)
11-20 years 7 25.3
21-30 years 8 29.3
31-40 years 4 15.1
>41 years 8 29.3
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5.5 Data Collection Procedure
To calculate the sample size for this study, the formula below was used:
n = p% X q% X
Where:
n is the minimum sample size required
p% is the proportion belonging to the unanswered respondent
q% is the proportion not belonging to the answered respondent
z is the z value corresponding to the level of confidence required
e% is the margin of error required.
n = 50 X 50 X
= 2500 X
= 2500 X 0.1089 = 272
180
accuracy. This is called the adjusted minimum sample size. Because the population in
this study is 610 secondary public schools in central part of peninsular Malaysia
(Educational Planning and Research Division, 2013), the minimum sample size is
reduced to 188 respondents, as calculated below:
n’=
Where:
n´ is the adjusted minimum sample size
n is the minimum sample size (as calculated above)
N is the total population.
Thus, the adjusted minimum sample size for this study is 188 respondents, using the
formula below.
= 188
After determining the minimum sample size, the cluster sampling technique
was chosen. The purpose of cluster sampling is to sample economically while
retaining the characteristics of a probability sample (Zikmund et al., 2009). The
population is clustered into four groups according to fully residential, regular,
religious and government aided, and technical and vocational school types.
For cluster sampling, the sampling frame is the complete list of clusters rather
than a complete list of individual cases within the population (Saunders et al., 2012;
Zikmund et al., 2009). Table 5.13 shows the population of 610 public secondary
schools in central part of Malaysia. This population is divided into four clusters
according to the four types of school being managed by four heads of responsibility
centres. The minimum sample size was 188 (31%) schools out of the actual population
of 2,277 schools. Then, the calculation of the sample size was done by multiplying
31% of the actual population of each cluster. The minimum sample size of each
cluster according to the type of school is depicted in Table 5.13.
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Table 5.13:
Types of Secondary School – Head Responsibility Centre, Actual Population and
Minimum Sample size
Types of Head of Actual population as at 2012 Total Minimum
schools Responsibility sample
Centre Selangor KL Perak Putrajaya size
Then, following the advice from few of school principals during the pilot
testing, the questionnaires were distributed in the place where all school principals
congregate. Because of that, the researcher contacted the State Education Department
of Kuala Lumpur, Selangor, Putrajaya and Perak to ask about any school principals
meeting during November and December 2013. However, only school principals from
Selangor, Kuala Lumpur, and Perak will gathered in the three separate conferences
during November and December 2013. All the schools in the three (3) states were
chosen to represent the population of secondary public schools in central part of
peninsular Malaysia. Thus, the lists of schools in Selangor, Kuala Lumpur, and Perak
were collected from the Ministry of Education database.
In addition, few school principals did not advise the distribution of survey
questionnaires by mail to schools. This is because the school principals were too busy
to answer the survey questionnaires and the survey questionnaires might be left
unattended or were given to other school’s staff. This might create the validity issues
of incorrect respondents and a low response rate. It is equally important to ensure that
the correct respondents answer the questionnaires and the researcher able to get a
sufficient response rate by using drop-off and pick-up method. The usage of drop-off
and pick-up method able to guarantee the availability of respondents, which is the
182
school principal to answer the survey questionnaires and according to Allred and
Ross-Davis (2011), this method able to generate higher response rates if compare to
mail survey because its promote the interest of the respondents in the completion of
the questionnaire using two-ways interaction with the researcher.
Furthermore, these three states were chosen because the total numbers of
secondary schools from these three states are 600 schools, which is more than triple
the minimum sample size, which is 188 needed for the distribution of questionnaires.
183
principals, which were organized by the State Education Departments. The purpose of
the programmes was to increase the professionalism of school principals in terms of
managerial skills and as a communication channel created by the State Education
Departments to convey new policies and requirements set by the Ministry of
Education (Norasmah & Kamaruzaman, 2012). In each programme, the attendance of
school principals was taken by the District Officers who would call absentees for a
replacement.
The first venue for distributing the questionnaires was at the Professionalism
Improvement Course for School Principals and Head Teachers at Tunku Abdul
Rahman University College in Kampar, Perak on 9 November 2013. Only eighty-two
(82) respondents answered the questionnaires out of the 231 that were distributed. The
response rate was only 36% (82/231).
From that experience, for the second and third distributions of the
questionnaire, the researcher visited the Kuala Lumpur and Selangor State Education
Departments to personally seeks help from the person in charge of the programmes.
The officers who organized the programmes were met and a discussion ensued
concerning how the distribution of the questionnaires would be done.
The questionnaires were distributed by the organizer early in the morning at
the registration table. Before the registration started, the questionnaires were given to
each staff member sitting at the registration counter according to the number of school
principals listed in their pre-printed list. All school principals had to sign the
attendance sheet before entering the seminar hall. The two courses were held from 8
a.m. to 5 p.m. At the end of the courses, the respondents were asked to drop the
questionnaires into the boxes located at the entrance pathway. The organizers also
announced and informed all the school principals about the survey and collected the
questionnaires at the end of the course session. With the help and full support from the
organizers, 77 (79%) questionnaires were collected in the Professionalism
Improvement Course for School Principals at Tan Sri Raffie Auditorium, Kuala
Lumpur State Education Department, 20 November 2013. 169 (62%)questionnaires
were collected at the Professionalism Improvement Course for School Principals of
Selangor at the Grand Blue Wave Hotel, Shah Alam, Selangor, 2 December 2013. The
total number of questionnaires collected was 328; however, only 270 respondents
were school principals. Table 5.14 shows a summary of the questionnaires distributed,
collected, used for data analysis, and details of the usable questionnaires according to
184
school types.
Table 5.14:
Summary of Questionnaires Distribution, Collected, Used and Details of Usable
Questionnaires According to School Type
Venue No. of No. of No. of No. of usable
questionnaires questionnaires questionnaires questionnaires
sent received used for according to school
analysis type
Professionalism 231 82 (36%) 73 (32%) 3 Fully
Improvement Course Residential
for Principals and
63 Regular
Head Teachers in
School
University Tunku
Abdul Rahman 5 Religious &
(UTAR) , Kampar, Government
Perak dated 9 Aided School
November 2013
2 Technical
School
5.6.1 Reliability
185
analysis procedures yield consistent findings (Saunders et al., 2012), which is an
indicator of a measure’s internal consistency. A measure is reliable when different
attempts at measuring something converge on the same result (Zikmund et al., 2009).
Internal consistency represents a measure’s homogeneity (Zikmund et al.,
2009) by correlating the responses to each question in the questionnaire with other
questions in the questionnaire (Saunders et al., 2012). There are two ways to check
internal consistency. One is the split-half method, which takes half the items from a
construct and checks them against the results from the other half. The two construct
halves should produce similar scores and correlate highly. The problem with the split-
half method is determining the two halves (Zikmund et al., 2009).
The coefficient alpha (α) provides a solution to this dilemma, and is the most
commonly applied estimate of reliability of a multiple-item construct (Saunders et al.,
2012). The coefficient represents the internal consistency by computing the average of
all possible split-half reliabilities for a multiple-item construct. The coefficient
demonstrates whether or not the different items converge. Although the coefficient
does not address validity, many researchers use it as the sole indicator of a construct’s
quality. Coefficient alpha ranges in value from 0, meaning no consistency, to 1,
meaning complete consistency (Hair et al., 2010; Zikmund et al., 2009).
Generally, constructs with a coefficient between 0.80 and 0.95 are considered
to have very good reliability. Constructs with a coefficient between 0.70 and 0.80 are
considered to have good reliability and a value between 0.60 and 0.70 indicates fair
reliability. When the coefficient is below 0.6, the construct has poor reliability (Hair et
al., 2010; Zikmund et al., 2009).
5.6.2 Validity
186
5.6.2.1 Content Validity or face validity
187
1999).
In order to analyse the quantitative data gathered from the questionnaires, the
Statistical Package for Social Sciences (SPSS) version 21.0 was used. This software
has largely been used and accepted by researchers as a data analysis instrument
(Zikmund et al., 2009). Therefore, this application was used for coding and screening
the data in this study.
After coding and screening the data for errors and missing data, factor analysis
was conducted using this statistical software. Factor analysis is a statistical method
that can be employed to analyse the interrelationships among a large number of
variables and to explain these variables in terms of their underlying factors (Hair et al.,
2010). In general, factor analysis is categorized into two types, namely, Exploratory
Factor Analysis (EFA) and Confirmatory Factor Analysis (CFA). This study
employed both EFA and CFA.
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5.6.3.1 Data Coding and Editing
Firstly, the researcher needs to ensure that the data were entered and coded
properly in the SPSS dataset. This action must be done properly and cautiously to
ensure the accuracy of a data file. Then, the dataset has to be proofread or analysed to
ensure no omission error, typing error or any human related error. For this matter,
descriptive statistics and graphic representations of the variables can be used to look
for any data input error (Tabachnick & Fidell, 2001).
Coding is interpreting, categorizing, recording, and transferring the
questionnaires into the data storage media, such as SPSS (Saunders et al., 2012).
There are two types of coding, coding before data collection and coding after data
collection. Coding at data collection occurs when there is a limited range of well-
established categories stated on the questionnaire. These are included in the
questionnaires and the person filling in the form selects the correct category. Coding
after data collection is necessary when the number of possible responses in the coding
scheme is unclear (Saunders et al., 2012).
Editing is considered to be a part of the data processing that involves checking
the questionnaires for omissions, legibility, and consistency in classification (Zikmund
et al., 2009). Editing is considered as a part of the data processing and analysis stage
(Zikmund, 2003). Following the recommendation of Sekaran (2006), this study
includes all respondents in the analysis who completed more than 75% of
questionnaire answers; whilst those with more than 25% unanswered questions are
excluded. Luckily, all the questionnaires had been answer more than 75%.
Missing data occurs in many ways that cannot be controlled by the researcher,
such as the respondent is not interested in the topic, fails to answer certain items in the
questionnaire, refuses to answer sensitive items, or there is equipment failure, etc.
(Byrne, 2010; Hair et al., 2010).
In a large sample, a few missing values, which are less than 5% on a single
variable, is not a serious issue, and the problem of missing data can be solved using
any statistical procedure for handling missing data (Kline, 2011; Tabachnick & Fidell,
189
2001). The pattern of missing data must be identified to determine whether it is
random or non-random. According to Tabachnick and Fidell (2001), the pattern of
missing data is more important than the amount of missing data. There are three types
of missing data pattern, which are missing completely at random, missing at random
with ignorable non-response, and missing not at random or is non-ignorable.
In this study, the missing data were less than 5% for all variables and the
missing data were random. Thus, according to Tabachnick and Fidell (2001), 5%
missing data are acceptable, and, hence, there is no requirement to determine the
pattern of the missing data (as shown in Appendix C). The missing data were replaced
using the variable mean. Repeating analyses before and after replacing the missing
data is highly recommended whenever any imputation method is used and the
proportion of missing values is high, especially if the dataset is small (Tabachnick &
Fidell, 2001).
A Paired Sample T-Test was used to test the pairs of variables with missing
data and data with the replacement means. The Paired Sample T-Test is a parametric
test that is used to hypothesise that two variables in the same samples are significantly
different (Palant, 2007). If there are no significant differences, it can be concluded that
the mean replacement did not alter the overall mean and distribution of the variables.
After replacement of the missing data with the replacement mean, the data
were assessed to determine whether they were normally distributed. This is because
the data have to be normally distributed to allow factor analysis, and so that SEM
analysis using Maximum Likelihood can be done (Hair et al., 2010; Kline, 2011;
Tabachnick & Fidell, 2001).
Skew and kurtosis are two ways that a distribution can be non-normal and they
can occur either separately or together in a single variable. Skewness measures the
symmetry of a distribution when it is compared to a normal distribution. A positively
skewed distribution has relatively few large values and tails off to the right, and a
negatively skewed distribution has relatively few small values and tails off to the left
(Hair et al., 2010). According to Hair et al. (2010), skewness values falling outside the
range of -1 to +1 indicate a substantially skewed distribution.
190
Kurtosis measures the peakedness or flatness of a distribution when compared
with a normal distribution. A positive value indicates a relatively peaked distribution,
and a negative value indicates a relatively flat distribution (Hair et al., 2010).
191
theory which requires a construct first be defined (Hair et al., 2010). CFA was done by
checking the factor loading of each item and construct in a measurement model
(Byrne, 2010). CFA was employed to establish the convergent validity and
discriminant validity of the constructs in this study. In fact, the preliminary step in the
analysis of full latent variable models was to test the convergence and discriminant
validity of the measurement model prior to assessing the structural model. Then, the
overall goodness-of-fit indices are checked to suggest acceptance of dimensionality
for each model (Hair et al., 2010). Compared with the EFA, CFA provides a range of
fit indices to evaluate the fit of data set to a theoretical model (Hair et al., 2010).
Following these, this study employed CFA to test the significance of the hypothesised
model with the data collected.
This study uses SEM data analysis as a method for analysing the effects of
more than one independent variable on one dependent variable, using the principal of
correlation and regression (Hair et al., 2010).
The main advantages of SEM are that it can model mediating variables and
show the distinctions between the total, direct, and indirect effects of the variables;
incorporate unobserved variables with multiple indicators (Kline, 2011; Tabachnick &
Fidell, 2001); and explain the pattern of a series of inter-related dependence
simultaneously between a set of latent or unobserved constructs (Hair et al., 2010).
SEM also has the ability to assess the unidimensionality, reliability, and
validity of each individual construct in the model. Further, it provides an overall test
of model fit and individual parameter estimate tests, simultaneously; thus, providing
the best model fits (Hair et al., 2010; Kline, 2011; Tabachnick & Fidell, 2001). In this
study, SEM using confirmatory factor analysis was conducted.
This study employed the structural equation modelling software AMOS
Version 21.0 (Analysis of Moment Structures) to explore the statistical relationships
among the items of each factor and between the independent factors. The details of
SEM terminology and stages of analysis are explained in the next sections.
192
5.6.4.1 SEM Terminology
In this section, the SEM terminology that is utilized in this study is introduced.
Correlated
error
Factor
Correlation
193
In this study, the values of observed variables were collected from the
respondents through the survey questionnaires. The unobserved variables were not
directly observed, but these variables can be determined to exist as a combination of
other observed variables. In this case, the unobservable variables in the hypothesized
model were IC, organizational culture, and performance.
After analysing the measurement model for model fit, normality of the data,
reliability and validity, the structural model is used to define the relationships between
the exogenous and endogenous variables. Figure 5.3 shows the general structural
model.
This study employed two-stage SEM analysis which involves analysing the
measurement model and structural model. The first stage in SEM is developing and
194
analysing the measurement model, or CFA model. The measurement model, or CFA
model, focuses solely on the relationship between the factors and their measured
variables in the SEM framework (Byrne, 2010; Shammout, 2007). The purpose of
analysing a measurement model is to find the unidimensionality of the composite and
latent constructs in the first step. Unidimensionality has been defined as an
assumption underlying the calculation of reliability and is demonstrated when the
indicators of a construct have an acceptable fit on a single-factor (one dimensional)
model (Hair et al., 2010). Anderson and Gerbing (1988) argue that unidimensional
measurement models are more generally useful because they offer more precise tests
of the convergent and discriminant validity of factor measurement.
Hair et al., (2010) emphasized that there are two ways to assess the
measurement model validity: establishing acceptable levels of goodness of fit and
proving evidence of construct validity. Therefore, confirmatory factor analysis (CFA)
was used to determine whether the number of factors and the loadings of measured
indicators (items) had conformed to what was expected based on establish and re-
established research and theory. Items that loaded weakly on the hypothesized factors
were removed from the construct. In using CFA, a factor loading of .50 and above on
a specified factor has been considered acceptable (Hair et al., 2010), and, thus, this
level was used as the cut off value within this study. Then, the reliability and validity
of each construct were measured to ensure the data are reliable and have adequate
construct, convergent and discriminant validity.
The analysis then continues to the second stage, which is evaluating the
structural model. This can be done by assigning and adding single-headed arrows to
represent the hypotheses between the exogenous (independent) variables to the
endogenous (dependent) variables. Each arrow represents the hypotheses tested in the
study (Hair et al., 2010).
The structural model is also called a path model (Hair et al., 2010), which
shows the relationship between the independent and dependent variables. The single-
headed arrows in the diagram represent linear dependencies indicating the extent to
which one variable (construct) is dependent on another (causal paths or relationships).
195
For instance, as shown in Figure 5.4, the arrow connecting IC components with
organizational performance (PERF) represents a direct relationship being
hypothesized between these variables. The absence of arrows linking variables implies
that no direct relationship has been hypothesized.
Two path diagrams are analysed separately to answer research objective 1 and
research objective 2. Figure 5.4 shows path diagram 1 for analysis of hypotheses 1
through hypotheses 5, which shows a direct relationship between the IC components
and the sub-components to the dependent variables. The independent variables —
ethical leadership (EL), authority structure (STRUC), human resource policy (HRP),
internal audit function (IA), audit committee (AC), risk identification (RI), risk
evaluation (RE), physical control (PC), segregation of duties (SD), approval and
authorization (AA), information control (IFC), information quality (IFQ), on-going
monitoring (OM), spontaneous monitoring (SM) and separate evaluation (SE) —
were linked directly to organizational performance (PERF).
H1a-H1e
H2a-H2b
H3a-H3c
H4a-H4b
H5a-H5c
*Notes: CE- control environment, RA- risk assessment, CA- control activities, INFO- information and
communication, MON- monitoring, EL-ethical leadership, STRUC-authority structure, HRP-human resource
policy, IA-internal audit function, AC-audit committee, RI-risk identification, RE-risk evaluation, PC- physical
control, SD-segregation of duties, AA-approval and authorization, IFC-information control,IFQ- information
quality, OM-on-going monitoring, SM-spontaneous monitoring, SE- separate evaluation, PERF-organizational
performance, ECO- economical use of resources, EFF- effectiveness, EFFCY- efficiency
196
Next, further analysis was done to answer research objective 2 of the study.
Figure 5.5 shows path diagram - Model 2, which links the mediating variables
bureaucratic organizational culture (BRTC), supportive organization culture (SUPP)
and innovative organization culture (INNO) with IC components and organizational
performance (PERF). This analysis can only be done after hypothesis 1 has been
supported.
H6a-H6e
H8a-H8e
H7a-H7e
*Notes: CE- control environment, RA- risk assessment, CA- control activities, INFO- information and
communication, MON- monitoring, EL-ethical leadership, STRUC-authority structure, HRP-human resource
policy IA-internal audit function, AC-audit committee, RI-risk identification, RE-risk evaluation, PC- physical
control, SD-segregation of duties, AA-approval and authorization, IFC-information control,IFQ- information
quality, OM-on-going monitoring, SM-spontaneous monitoring, SE- separate evaluation, BRTC- Bureacratic
culture, SUPP- Supportive culture, INNO- innovative culture, PERF-organizational performance, ECO-
economical use of resources, EFF- effectiveness, EFFCY- efficiency
Once the model is specified, the test showing how well the model fit the model data
should be done (Byrne, 2010). The primary task in the model-testing procedure is to
determine the goodness-of-fit between the hypothesized model and the data gathered
197
from the questionnaire distribution. Although many indices are provided by SEM,
there is no agreement among scholars as to which fit indices should be reported. For
example, Kline (1998) recommends at least four indices — GFI, NFI, or CFI, NNFI
and SRMR. Hair et al. (2010) and Holmes-Smith, Coote, and Cunningham, (2006)
recommend the use of at least three fit indices by including one in each of the
categories of model fit: absolute, incremental, and parsimonious. This study used the
recommendation by Hair et al., (2010) and Holmes-Smith et al., (2006) for evaluating
the goodness-of-fit between the hypothesized model and the data gathered from the
questionnaire distribution using one of the fit indices from each of the three categories
of model fit. Table 5.15 shows the level of acceptance of goodness- of- fit used in this
study.
Table 5.15:
Summary of Goodness of Fit Indices
Name of Index Level of Comments
acceptance
Absolute fit Indices
Goodness-of-Fit (GFI) 0.90 or greater A value close to 0 indicates a poor fit, while a
value close to 1 indicates a perfect fit.
Root Mean Square Error of Between 0.050 A value up to 1.0 and less than 0.05 is
Approximation (RMSEA) and 0.80 considered acceptable.
Incremental fit indices
Normed Fit Index (NFI) A value close to 0 indicates a poor fit, while a
0.90 or greater value close to 1 indicates a perfect fit.
Comparative Fit Index (CFI) A value close to 0 indicates a poor fit, while a
0.90 or greater value close to 1 indicates a perfect fit.
Normed Chi-square (x2/df) 1.0 ≤ x/df ≤5 The lower limit is 1.0, upper limit is 3.0 or as
high as 5.
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5.6.4.4 (1) Absolute fit indices
Absolute fit indices provide the most fundamental assessment of how well a
data fits the model (Hair et al., 2010) and demonstrate which proposed model has the
best fit (Hooper, Coughlan, & Mullen, 2008). For this study, the absolute fit indices
applied to evaluate how well the data fits the model include the chi-square statistic
, goodness-of-fit index (GFI), the adjusted goodness-of-fit index (AGFI), and the
root mean square error of approximation (RMSEA).
The chi-square statistic is the fundamental absolute fit index. It is used
when comparing two non-metric measures (Hair et al., 2010). It is used to compare
the magnitude of variation between the sample and the fitted covariance matrices
(Hooper, et al., 2008). If the probability (p) is greater than 0.05, this indicates that the
variation between two matrices is very low (Shammout, 2007). In the SEM literature,
is also known as CMIN. However, because has been criticized for being too
sensitive to sample size, scholars do not solely use the value of chi-square to reject or
accept their models (Byrne, 2010; Hair et al., 2010; Shammout, 2007), but use it
together with other indices to evaluate the overall fit.
The goodness-of-fit index (GFI) and adjusted goodness-of-fit index (AGFI)
test whether the matrix of implied variance and covariance are significantly different
to the matrix of empirical sample variance and covariance (Byrne, 2010).
The fourth measure of absolute fit index used is the Root Mean Square Error
of Approximation (RMSEA). This measure assists in correcting the tendency of the
chi-square to reject specified models. It is a stand-alone index of fit, whereby there is
no baseline model comparison, and a value ranging from 0.05 to 0.08 is commonly
acceptable (Hair et al., 2010).
Incremental fit indices are also named “comparative fit indices,” which
assesses how well a specified model fits relative to the more restricted baseline model
(Hu & Bentler, 1998). The most popular baseline model is the null model in which all
the observed variables are allowed to have variances, but are uncorrelated with each
other (Hair et al., 2010). The incremental fit indices used in this study include the
199
normed fit index (NFI), the comparative fit index (CFI), and the Tucker Lewis index
(TLI).
The Normed Fit Index (NFI) is one of the most popular incremental measures
(Byrne, 2010; Hair et al., 2010; Hu & Bentler, 1999). The NFI reflects the proportion
to which the researchers’ model fits the null model. For example, NFI = .50 means the
researcher’s model improved the fit by 50%. However, this index does not control for
degrees of freedom (Bollen, 1986, 1989).
In order to overcome this shortcoming, the Comparative Fit Index (CFI)
should be used (Hu & Bentler, 1999). The CFI compares the covariance matrix
predicted by the model to the observed covariance matrix. Therefore, both the NFI
and CFI are reported in this study. The NFI and CFI range from 0 (poor fit) to 1
(perfect fit), and .90 or greater is the recommended level (Hair et al., 2010).
Another important incremental measure also used in this study is the Tucker-
Lewis Index (TLI). The TLI is known as a non-normed fit index (NNFI) (Hair et al.,
2010). The TLI combines a parsimonious measure with a comparative index between
the proposed or hypothesized and null models, resulting in values ranging from 0 (not
fit at all) to 1 (perfect fit). Similar to the NFI and CFI, the recommended level is .90 or
greater (Hair et al., 2010).
The parsimonious fit indices test the degree that a model achieves model fit for
each estimated coefficient. This is done by evaluating the fit of the model to the
number of the estimated coefficients required to achieve the level of fit (Hair et al.,
2010). In this category, commonly, the normed chi square (x2/df) is used to evaluate
the appropriateness of the model (Hair et al., 2010). The coefficients should be less
than 2.0 (Bollen, 1986).
Table 5.16 shows the difference of fit indices according to the number of
respondents and number of variables in the study. According to Hair et al., (2010), for
this study, which has a sample size of greater than 250 and has a construct (m)
between 12 and 30, the result of the study must be significant (p-value <0.001 or p-
value <0.05), the CFI, TLI, and RNI must have coefficient greater than 0.92, and the
RMSEA must be equal to or lower than 0.07.
200
Table 5.16:
Difference in Fit Indices According to the Number of Respondents and Number of
Variables
No. of m N>250
m<12 12<m<30 m
Insignificant p-values even Significant p-values Significant p-values
with good fit >.95 expected expected
RNI 0.95 (not used if 0.92 (not used if 0.90 (not used if
N>1000) N>1000) N>1000)
RMSEA <0.07 with CFI 0.97 <0.07 with CFI 0.92 <0.07 with CFI
0.90
Notes: m=number of observe variables N= number of respondents.
Source: Hair et al., (2010)
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Independent Dependent
variables, (X) Path c variables, (Y)
Mediator
Path a Path b
Independent Dependent
variables, (X) Path c’ variables, (Y)
202
significantly smaller but still greater than zero when the mediator is in the equation
(Path c’) rather than without the mediator in the equation (Path c). If the relation
between the independent variable and the dependent variable remains significant and
unchanged when the mediator is added in the model, then mediation is not supported
(Baron & Kenny, 1986).
Although MacKinnon et al. (2002) found that the majority of published studies
did not test the significance of the mediating variable effect, it is important that
researchers examine the significance of the mediating effect. This is because it is more
likely for an independent variable to have a reduced coefficient when predicting the
dependent variable alone than when a mediator is included in the equation but the
larger coefficient is insignificant and the smaller one is significant. In the restatement
of Baron and Kenny’s (1986) guidelines, the significance of the difference between
Paths c and c’ can be examined by testing the significance of the products of Paths a
and b.
The rationale for this estimation is that the difference between the total effect
of the independent variable on the dependent variable (Path c) and the direct effect of
the independent variable on the dependent variable (Path c’) is equal to the product of
the paths from the independent variable to the mediator (Path a), and from the
mediator to the dependent variable (Path b). The product of Path a and b is then
divided by the standard error. Next, the mediated effect divided by its standard error
yields a z value of the mediated effect. The effect is significant at an alpha level of
0.05 if the z value is higher than 1.96.
Note that the z-tests for the significance of ab assume that the values of this ab
product are normally distributed across samples from the same population; it has been
demonstrated empirically that this assumption is incorrect for many values of a and b.
Because of this, many researchers, such as Liew, Ramayah and Yeap (2015),
Mohamad, Ahmad, and Mamat (2014), Preacher and Hayes (2008), and Zainuddin
(2014) recommend bootstrapping methods to obtain confidence intervals for estimates
of a multiply with b in mediation analysis to re-confirm the results of the mediation
tests using the resampling procedure.
A sample is drawn from the population (with replacement), and the values of
a, b, and ab are calculated for this sample. Bootstrapping is the method of sampling
with a replacement whereby the researcher takes samples of size n from the existing
dataset (Liew, Ramayah, & Yeap, 2015; Mohamad, Ahmad, & Mamat, 2014;
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Preacher & Hayes, 2008; Zainudin, 2014).. The number of re-samplings could be as
many as between 500 to 5000 times An algorithm would then compute the mean and
standard error for every sample (Zainudin, 2014). From the re-sampling process, the
algorithm develops a sampling distribution for the estimates.
The value of ab is tabulated across these samples. This provides an empirical
sampling distribution that can be used to derive a value for the standard error of ab.
The results of bootstrapping indicate that the distribution of ab values is often
asymmetrical, and that this asymmetry should be taken into account when setting up
confidence interval (CI) estimates of ab. This CI provides a basis for evaluation of the
single estimate of ab obtained from analysis of the entire data set. Bootstrapped CIs
do not require that the ab statistic have a normal distribution across samples. If this CI
does not include zero, the analyst concludes that there is a statistically significant
mediation (MacKinnon, Fairchild, & Fritz, 2007; Preacher & Hayes, 2008).
5.7 Summary
This chapter describes the research methodology used in this study. Firstly the
the purpose of the research, unit of analysis, type of research, survey method, and
measurement techniques used are discussed. Then, a description of the development
of the survey instruments, operationalization of research constructs, pre-test, and pilot
study is provided. Then, the chapter provides a description of the context of the study
and sampling selection. Subsequently, discussion is provided on the present study’s
statistical data analysis, describing the procedures of data screening, constructs
refinement and validation, exploratory and confirmatory factor analyses, structural
equation modelling, and testing of mediating effects.
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CHAPTER SIX
RESULTS AND DISCUSSION
The previous chapter detailed the research methodology adopted to test the
proposed conceptual framework and answer the research questions of the study. A
survey questionnaire was used as the main research instrument to collect data from
public school principals. The answers to the questions were coded, and the Statistical
Package for the Social Sciences (SPSS) Version 21.0 software was used in processing
the first stage of analysis. Structural Equation Modelling using Analysis of Moment
Structures (AMOS) version 21.0 was employed for analysing the measurement model
and the structural model.
The purpose of this chapter is to test the hypotheses and to present results of
the data analysis. This chapter starts by explaining the distribution and collection of
the data and then the test of response bias is done using ANOVA and Chi Square in
section 6.1 and 6.2. Section 6.3 discusses the preparation of the data, including
editing, coding, and screening prior to conducting analysis. This section also discusses
the treatment of missing data, and then describes the assessment of normality.
Following this, Section 6.4 reports the results of sample characteristics. Then, the
exploratory factor analysis done to gather information about the interrelationships
among a set of variables in Section 6.5 is discussed. Subsequently, the results of
Structural Equation Modelling (SEM) to test the hypotheses arising from the model
using a two-stage analysis of the data in Section 6.6 are discussed. The first stage of
the analysis is the measurement model and the second stage is the structural model.
After that, the model is reviewed to incorporate only significant variables in a model.
Then, section 6.7 discusses and interprets the result of the statistical analysis. Finally,
a summary of the chapter is presented in section 6.8.
The final survey was conducted over a one (1) month period starting 9
November 2013 and ending on 2 December 2013. A total of 600 questionnaires was
distributed and 328 questionnaires were returned. Out of the 54.7% response rate
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(328/600), 36% (82/231) were responses received from the first school principal
professional courses in Perak. The low response rates were because the courses were
held in a large auditorium and no help was received from the organizer. Hence, for
distribution of the second and third questionnaires, assistance from the event
organizers was requested to ensure that a high response rate was received. In the
second Professionalism Course for School Principals held at Tan Sri Abdul Rafie
Auditorium, Kuala Lumpur dated 20 November 2013, a 79% (77/97) response rate
was achieved. Lastly, 62% (169/272) were responses received from the third
Professionalism Course for School Principals of Selangor at Hotel Grand Blue Wave,
Shah Alam, Selangor dated 2 December 2013. However, 58 questionnaires were not
analysed because the respondents were not secondary school principals. Thus, the
final response rate was 45% (270/600), which was used for further data analysis.
Table 6.1 shows the details concerning the distribution and collection of
questionnaires.
Table 6.1:
Distribution and Collection of Questionnaires
Venue No. of No. of No. of
questionnaires questionnaires questionnaires used
sent received for analysis
Professionalism Improvement 231 82 (36%) 73 (32%)
Courses for School Principals and
Head Teachers in UTAR Perak,
Kampar, Perak dated 9 November
2013
Of the 328 respondents, only 270 respondents had been used for further
analysis because only 270 respondents were school principals. Even though the usable
though the usable response rate was only 45% (270/600), the total amount of
respondents was more than the minimum sample size of 188 respondents needed to
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estimate an unknown characteristic of a population of secondary public schools in
Malaysia, based on the formula as on page 180. The response rate (45%) is deem to be
appropriate because it is bigger than the average response rate 33% reported by
previous literature (Baruch, 1999; Watt, Simpson, McKillop, & Nunn, 2002). Baruch
(1999) stated in his finding that average answer rate in academic research involving
top management or organizational representatives are 36.1%.
Furthermore, by looking at Hoelter’s index, the sample response rate of 270
was large enough to conduct SEM analysis. This index focuses directly on the
adequacy of the sample size that should be used in testing the model. Hoelter’s (1983)
index proposed that a value in excess of 200 is indicative of a model that adequately
represents the sample data (Byrne, 2010). As shown in Appendix G, the sample size
for both the 0.05 and 0.01 critical values for the hypothesized model were 173 and
179, respectively. This shows that the response rate of 270 respondents is deemed to
be appropriate for analysis using SEM.
This study test response bias to compare the answers of the respondents from
the three different groups and investigates whether there were significant differences
in responses and to test on demographic homogeneity. The statistical tests used to test
response bias are Chi-Square test for independence of categorical variables and one-
way ANOVA for differences of means for continuous variables (Sivo, Saunders,
Chang, & Jiang, 2006).
The chi-square test was used to test the response bias. Ten (10) questions of
the respondent demographic profiles and five (5) questions in the school profiles.
Questions 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 in Section 1 of the questionnaire ask about the
respondents’ demographic profile in categorical scales. The results of the chi-square
test to examine the differences between three different locations of questionnaires
distribution (Perak, Selangor, and Kuala Lumpur) are shown in Table 6.2. Based on
the results, only the gender (Q1) and race (Q2) of the three groups of respondents are
significantly different. This is because in term of gender differences, more women
school principals answered and returned the questionnaires in groups 2 and 3.
However, in the first venue where the questionnaires were distributed, the number of
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male respondents was more than the female respondents. The races also show
significant differences between the three groups because the number of Malay school
principals was more than the Chinese and Indian in the second groups. This notion is
supported by research done by Noridah (2003). She mentioned that number of women
school principals is more than male principal and the Malay principal is more than
Indian and Chinese principals in Malaysia as well as in Melaka. Other then Question 1
and Question 2, Questions 3, 4, 5, 6, 7, 8, 9 and 10 were not significantly different at
0.01. Again, it could be concluded that all the respondents of the questionnaires were
homogeneous among the research population.
Table 6.2:
Response Bias Test Using Chi-Square Test of Independence of Personnel
Demographics Information
Demographics Information For Respondents: Categorical Variables
Question No. Description Chi-Square d.f. Significance
Q1 Gender 14.037 2 0.001*
Q2 Races 27.840 6 0.000*
Q3 Age 12.097 6 0.060 n.s.
Q4 Education Level 5.128 8 0.310 n.s.
Q5 Position Held 0.658 2 0.720 n.s.
Q6 Experience 3.286 6 0.772 n.s.
Q7 Financial Management 6.016 6 0.421 n.s.
Knowledge
Q8 Training in financial 3.330 2 0.189 n.s.
management
Q9 Level of IC knowledge 10.685 6 0.099 n.s.
For the school profile, there were five (5) questions that were categorical. The
results of the chi-square test of five (5) questions about school profile is shown in
Table 6.3. Based on the results, there were no significant differences in the school
profile for all groups of respondents from conferences in Perak, Kuala Lumpur and
Selangor. These are because the school grades, types, examination results, and level of
financial management are similar throughout Malaysia. Thus, it can be concluded that
the respondents of the questionnaires were representative and homogeneous among
the research population.
208
Table 6.3:
Response Bias Test Using Chi-Square Test of Independence of School Profile
Information
Demographic Information Of Respondents: Categorical Variables
Question No. Description Chi-Square d.f. Significance
Q1 School grade 12.241 8 0.141 n.s.
Q4 School type 11.092 4 0.026 n.s.
Q5 Average school grade 15.610 6 0.016 n.s.
Q6 Number of students 20.998 10 0.031 n.s.
Q7 Audit report status for 2012 9.520 8 0.300 n.s.
Notes: d.f. = degrees of freedom s= significant difference at 0.01 level of confidence, n.s.= not
significant
One-way ANOVA was used to compare the mean differences in two or more
groups. This test examines whether the composite mean score for each of the 75
multiple items of the survey questionnaires based on three different locations (Perak,
Kuala Lumpur, and Selangor) are statistically different from each other. The results of
the ANOVA that examine the differences between three groups of respondents are
shown in Table 6.4. Based on the results of one-way ANOVA for differences of
composite mean scores for 75 continuous items, there were no differences between the
three groups of respondents from the three different locations where the
questionnaires were distributed. All the composite mean score for each of the 75
multiple items of the survey questionnaires were not significantly different at 0.01.
Hence, it is concluded that all the respondents to the survey questionnaires were
representative of the research population.
Table 6.4:
Response Bias Test using ANOVA for Differences of Composite Mean Scores of Study
Variables
Variables (Continuous Data) Composite Mean Score One-way ANOVA
A1-A6 Ethical Leadership 36.75 37.05 36.46 0.559 0.572 270 n.s.
A7-A10 Authority Structure 30.13 30.47 30.13 0.297 0.743 270 n.s.
A11-A14 Human Resource 31.21 31.23 31.47 0.301 0.712 270 n.s.
Policy
A15-A19 Internal Audit 28.06 28.09 28.34 0.134 0.875 270 n.s.
A20-A23 Audit Committee 24.75 24.59 24.64 0.080 0.923 270 n.s.
209
A24-A30 Risk Assessment 39.89 40.78 39.93 0.579 0.561 270 n.s.
A31-A40 Control activities 25.51 26.19 25.91 1.925 0.148 270 n.s.
A41-A47 Information and 30.35 31.75 30.73 2.509 0.081 270 n.s.
Communication
A48-A56 Monitoring 50.24 51.74 50.60 2.016 0.135 270 n.s.
B1-B9 Organizational Culture 53.49 54.14 53.01 0.836 0.435 270 n.s.
C1-C5 Effectiveness of 30.34 31.15 30.66 0.958 0.385 270 n.s.
Operation
C6-C10 Economic Use of 30.88 31.52 30.99 0.785 0.457 270 n.s.
Resources
Notes: d.f. = degrees of freedom, s=significant difference at the 0.01 level of confidence, n.s.= not
significant
After the data had been input into the SPSS, the data needed to be screened for
errors, missing data, outliers, and normality. The first stage of the data analysis is
screening the data by looking at missing data and checking the normality of the data
(Hair et al., 2010; Kline, 2011; Tabachnick & Fidell, 2001).
Missing value analysis was used to analyse the percentage of missing data.
Less than 5% of missing data were reported and the percentage of missing data are
shown in Appendix C. The pattern of missing data was checked to ensure that no
specific pattern exist and the pattern of missing data is low enough to effect the result
of the study (Hair et al., 2010). From the analysis, 22 (23.7%) out of 93 variables had
missing values and only ten (3.70%) cases out of 270 had missing values. The missing
value patterns were random, and, in total, were less than 5%. According to Kline
(2011) and Tabachnick and Fidell (2001), missing values that are less than 5% on a
single variable in a large sample are not serious and the missing data can be solved
using any statistical procedure for handling missing data such as replacing the missing
data using variable means.
Consequently, as only 5% of the data were missing and distributed randomly,
the next step taken was replacing the missing data with the mean responses of each
variable. This was done because it is a method that has been widely used and by using
210
other methods, such as listwise deletion, the number of samples will be reduced for
further analysis (Hair et al., 2010; Shammout, 2007; Tabachnick & Fidell, 2001).
Then, a Paired Sample T-Test was used to test the pairs of variables with
missing data and the data by replacement means. The results show no significant
differences between before and after replacing the missing data. Hence, it can be
concluded that the mean replacement did not alter the overall mean and distribution of
the variables.
Based on the assumption that factor analysis and structural equation modelling
require variables to be normally distributed, it was necessary to check the distribution
of variables to be used in the analysis (Hair et al., 2010; Kline, 2011; Tabachnick &
Fidell, 2001). Skew and kurtosis are two ways that a distribution can be non-normal
and they can occur either separately or together in a single variable. Skewness
measures the symmetry of a distribution when it is compared to a normal distribution.
A positively skewed distribution has relatively few large values and tails off to the
right, and a negatively skewed distribution has relatively few small values and tails off
to the left (Hair et al., 2010). According to Hair et al. (2010) skewness values falling
outside the range of -1 to +1 indicate a substantially skewed distribution.
Kurtosis measures the peakedness or flatness of a distribution when compared
with a normal distribution. A positive value indicates a relatively peaked distribution
and a negative value indicates a relatively flat distribution (Hair et al., 2010).
In addition, the best known standardized measures of these characteristics that
permit comparison of different distributions to the normal curve are the skew index
(SI) and kurtosis index (KI). The ratio of the value of either SI or KI over its standard
error is interpreted in large samples as a z-test of the null hypothesis that there is no
population skew or kurtosis, respectively. These tests may not be helpful in large
samples because even slight departures from normality could be statistically
significant. Variables with absolute values of SI >3.0 are described as “extremely”
skewed. There is less consensus about the KI, however, absolute values from about
8.0 to over 20.0 of this index are described as indicating “extreme” kurtosis. A
211
conservative rule of thumb, then, seems to be that absolute values of KI >10.0 suggest
a problem, and absolute values of KI >20.0 indicate a more serious one (Kline, 2011).
Therefore, using SPSS, an inspection of both skewness and kurtosis indicates
that the absolute values are within the recommended level. According to Table 6.5, all
items are normal and further analysis using parametric tests could be undertaken
(Palant, 2007).
Table 6.5:
Measures of the Constructs and Descriptive Statistics
No Items Mean SD Skewness Kurtosis Normality
Internal Control
A1 Management has established policies 6.03 0.892 -0.439 -0.811 Yes
related to ethical values as acceptable
codes of conduct in the organization.
A2 Management discusses organizational 6.11 0.849 -0.602 -0.289 Yes
values and ethics with employees.
A3 Management takes disciplinary action 5.70 1.060 -0.676 0.235 Yes
against subordinates who violate
ethical standards.
A4 Management sets an example of how 6.35 0.719 -0.839 0.120 Yes
to do things the right way in terms of
ethics.
A5 Management defines success not just 6.17 0.786 -0.582 -0.387 Yes
by results, but also by the way it is
obtained.
A6 Management always considers “what 6.31 0.748 -0.897 0.604 Yes
is the right thing to do” when making
decisions.
A7 Organizational chart clearly defines 6.42 0.763 -1.072 1.917 Yes
the lines of management authority and
responsibility.
A8 A “rules and procedures manual” 6.27 0.824 -1.074 1.181 Yes
exists to guide all personnel.
A9 Management periodically evaluate the 5.69 0.932 -0.449 -0.228 Yes
authority structure.
A10 Management developed formal job 6.29 0.786 -0.861 0.069 Yes
descriptions to define the tasks in a
particular job.
A11 Employees receive periodic 5.53 0.978 -0.644 0.568 Yes
evaluations that identify training
needs and opportunities for
improvement.
A12 Management ensures compliance with 6.17 0.811 -0.626 -0.366 Yes
the laws and regulations regarding
personnel management.
212
No Items Mean SD Skewness Kurtosis Normality
A13 Management ensures that personnel 5.91 0.887 -0.422 -0.475 Yes
receive adequate training to perform
their duties.
A14 Management and accounting 6.13 0.793 -0.619 -0.162 Yes
personnel are sufficiently competent
to perform their assigned
responsibilities.
A15 Internal auditor conducts audit works 5.84 0.964 -0.908 1.547 Yes
regularly.
A16 Internal auditor has sufficient 5.71 1.003 -0.708 0.643 Yes
financial management knowledge to
do his/her work.
A17 Internal audit reports are produced 5.48 1.175 -0.809 1.111 Yes
regularly.
A18 Management discusses internal audit 5.50 1.129 -0.833 1.220 Yes
reports frequently.
A19 Internal audit report addresses the 5.68 1.113 -1.053 2.019 Yes
weaknesses of IC.
A20 School financial committee meets at 6.44 0.809 -1.136 2.231 Yes
least four times a year.
A21 Financial committee has sufficient 5.74 0.894 -0.460 -.115 Yes
financial management knowledge.
A22 Principal should discuss with financial 6.14 0.848 -1.004 1.547 Yes
committee before making any
financial decision.
A23 Principal answers external audit query 6.34 0.786 -1.094 0.944 Yes
within 30 days from the query date.
A24 Management actively evaluates both 5.89 0.889 -0.706 00.665 Yes
internal and external risks that may
likely prevent the achievement of
goals.
A25 A risk analysis covering the entire 5.45 1.179 -0.901 0.958 Yes
organization is done regularly.
A26 Those in managerial functions are 5.90 0.930 -0.688 0.523 Yes
aware of the risks of their areas of
responsibility.
A27 Management identifies the 5.90 0.930 -0.710 0.968 Yes
compensating controls that are in
place to mitigate risks.
A28 Management put into place the risk 5.88 0.907 -0.841 0.978 Yes
assessment mechanisms that involve
appropriate levels of management
function.
A29 Risk assessment used by the 5.52 1.087 -1.022 1.810 Yes
management considers opportunities
to commit fraud.
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No Items Mean SD Skewness Kurtosis Normality
Organizational Culture
OC1 There is a result oriented culture that 6.13 0.810 -0.661 0.061 Yes
drives towards achieving high
performance.
OC2 There is a culture of being always 5.93 .924 -.781 .099 Yes
ready to meet new challenges.
OC3 There is a culture that emphasizes 5.53 1.004 -.574 .238 Yes
being first in innovation.
OC4 There is a culture that creates a safe 6.13 .772 -.433 -.616 Yes
and pleasant place to work.
OC5 There is a collaborating culture in 6.13 0.888 -.982 1.103 Yes
completing tasks.
OC6 There is a culture where staff help and 6.17 0.826 -1.148 1.361 Yes
support each other.
OC7 There is a very formal and structured 5.48 1.061 -0.455 0.591 Yes
culture.
OC8 There is a culture where established 5.91 0.862 -0.555 0.691 Yes
procedures generally govern what
people do.
OC9 There is a culture that focuses on 5.99 0.798 -0.458 -0.067 Yes
consistency, stability, efficiency, and
smooth operations.
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No Items Mean SD Skewness Kurtosis Normality
Organizational Performance
OP1 With existing IC, operation decisions 6.12 0.796 -0.693 0.298 Yes
could be done in a timely manner.
OP2 With existing IC, school academic 6.250 0.770 -0.781 .099 Yes
performance could be improved.
OP3 With existing IC, less error, 6.26 0.818 -1.063 .904 Yes
omission, misstatement, or fraud
occurred.
OP4 With existing IC, the quality of 5.99 0.915 -0.858 0.618 Yes
products and services produced is
outstanding.
OP5 With existing IC, the quantity of 6.08 0.844 -0.716 0.125 Yes
products and services produced is
high.
OP6 With existing IC, resources are 6.19 0.818 -0.814 0.109 Yes
protected against loss, misuse, and
damage.
OP7 With existing IC, resources had been 6.19 0.795 -0.779 0.123 Yes
used without any waste.
OP8 With existing IC, there are policies to 6.20 0.815 -1.390 0.257 Yes
ensure that inventory is not
stockpiled or over ordered.
OP9 With existing IC, the efficiency of 6.26 0.842 -0.078 0.029 Yes
operation could be improved..
OP10 With existing IC, all personnel use 6.26 0.756 0.808 0.267 Yes
available resources efficiently.
Notes: N = 270 for all items. All items were measured using 7-point Likert scale. SD = standard deviation.
Normality : Skewness ≤ 3, Kurtosis -≤ 10
The results shown in Table 6.6 indicate the differences in the demographics of
the respondents, including gender, age, educational qualification and position held. As
can be seen in Table 6.6, the analysis of the final sample profile showed a higher
number of female (195) respondents than male (75), representing a ratio of 72.2% and
27.8%, respectively. Referring to the age of the respondents, 54 (20%) respondents
were between the ages 46 and 50, 120 (44.4%) between the ages of 51 and 55, and 96
(35.6%) between the ages of 56 and 60 years.
215
With respect to education, Table 6.6 shows that most respondents had tertiary
education with 199 (73.7%) having completed an undergraduate education and
another 71 (26.3%) having postgraduate education.
In terms of experience, most of the respondents had experience of holding
their principalship post for more than 5 years. Only 41 (14.2%) respondents had
experience of less than 5 years.
Table 6.6:
Demographic Characteristics of Respondents
Demographic characteristics Frequency Valid
(N=270) Percentage
(%)
Gender
Male 75 27.8
Female 195 72.2
Age (in years)
46-50 54 20.0
51-55 120 44.4
56-60 96 35.6
Education Level
Diploma 18 6.7
Degree 181 67.0
Masters 69 25.6
Doctorate (PhD) 2 0.7
Position Held
Principal 270 100.0
Experience (Duration Holding The Post (in years))
<5 41 15.2
5-10 176 65.2
11-15 53 19.6
There are four types of secondary school in Malaysia, which are daily schools,
residential schools, religious schools, and technical and vocational schools. Table 6.7
shows that there were 242 (89.6%) daily schools, 7 (2.6%) residential schools, 15
(5.6%) religious schools, and 6 (2.2%) technical and vocational schools included in
this study. According to school age, 96 (35.6%) schools were established less than 25
years ago, and 174 (64.4%) schools were established more than 25 years.
216
In terms of school size, this study only included schools that had more than
500 students. This is because the distribution of allocated funds in public schools in
Malaysia is given according to the number of students in the school. Low enrolment
schools which less than 500 students have less numbers of teacher, less school
equipments and less allocated funds. The more students in the school, the greater the
funds allocated to the school (Bhattacharyya et al., 2013; Shahril, 2008). There were
67 (24.8%) schools with less than 1,000 students, 35 (13%) with 1,001 to 1,500
students, 133 (49.3%) with 1,501 to 1,200, and 35 (12.9%) schools with more than
2,000 students.
Table 6.7:
Profile of the Schools
School Demographic Profile Frequency Valid Percentage
(N= 270) (%)
School Type
Residential School 7 2.6
Daily School 242 89.6
Religious School 15 5.6
Technical and Vocational School 6 2.2
Exploratory Factor Analysis (EFA) was used in the early stage of data analysis
to gather information about interrelationships among a set of variables (Palant, 2007).
Firstly, EFA was used to summarize and group the data into a couple of dimensions.
Then, the dimension constituted a group of variables that were highly correlated to
217
each other to represent a single underlying construct. Then, Bartlett’s Test of
Sphericity and Kaiser-Meyer-Olkin (KMO) indices were checked to measure sample
adequacy (Palant, 2007). Bartlett’s Test of Sphericity is a statistical significance test
of all correlations within a correlation matrix (Hair et al., 2010). The coefficient of
Bartlett’s Test of Sphericity should be below 0.05 for it to be significant and the factor
analysis considered to be appropriate. For the KMO index, from 0 to 1 is appropriate
with 0.60 suggested as a minimum level for good factor analysis (Tabachnick &
Fidell, 2001).
From Table 6.8 the KMO index is 0.946, which is more than the minimum
value of 0.60 and Bartlett’s Test of Sphericity showed a significant result at p<0.05.
Thus, the results indicated the appropriateness of using factor analysis in filtering the
data collected for the 270 respondents.
Table 6.8:
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. 0.948
Bartlett's Test of Sphericity Approx. Chi-Square 15316.723
df 2775
Sig. 0.000
218
Table 6.9:
Factor Loading Based on Sample Size
Factor Loading Sample size
(sig. at 0.05)
0.30 350
0.35 250
0.40 200
0.45 150
Source: Hair et al. (2010)
After the numbers of components were determined, the next process was to
determine the number of variables included in each component. The factors were
rotated using orthogonal factor solution using the Varimax Method. According to
Tabachnick and Fidell (2001), the Varimax method is the most commonly used
orthogonal approach, which attempts to minimize the number of variables that have
cross loading. Variables with cross loadings are variables that have more than one
significant loading in different components (Hair et al., 2010). Then, the
communalities of each variable were checked to ensure that the variables have
communalities of less than the accepted level of 0.50 as stated in Hair et al., (2010).
The communalities for each item represent the amount of variance accounted for by
the factor solution. From the inspections, no items have communalities of less than
0.50. This means that all items have sufficient explanatory power.
After obtaining results from the extraction method (Principal Component
Analysis) using the rotation method (Varimax with Kaiser Normalization), those
measured items with a factor loading and cross loading of less than 0.35 were
removed from this study (refer to Appendix F). As a result, items A33, A42 and A31
were dropped due to low item-factor correlation of less than 0.35 (Hair et al., 2010).
Two more items were dropped due to the single factor loading which are items A43
and A44. Table 6.10 shows the detailed description of questionnaires, which were
dropped from further analysis.
219
Table 6.10:
Factor Analysis Results – Items Dropped
Questionnaire items not included for further analysis
Item Description Reasons
A33 Principal always checks and verifies the record in the cash Low factor loading
book. (less 0.35) – Factor 6
A42 Management ensures that effective communications occur Low factor loading
internally. (less 0.35) – Factor 4
A31 There are adequate policies and procedures for authorization Low factor loading
and approval of any procurement. (less 0.35) – Factor 2
A43 There are mechanisms in place for employees to recommend Single item within
improvements. factor – Factor 13
A44 The consequences of improper conduct had been clearly Single item within
communicated to all personnel. factor – Factor 14
Then, all 12 factors were named according to the pattern of the variables that
load in a factor. Variables with higher factor loadings are considered to be more
important and have greater influence on the name selected to present the factor (Hair
et al., 2010). The names derived from the literature were matched to the appropriate
pattern of factor loading.
The next step was evaluating the construct reliability of each factor. It was
found that Factor 8 (A41, A45, A48, 47), Factor 9 (A20, A38, A51), Factor 10 (A21,
A22, A23), Factor 11 ( A34, A36) and Factor 12 (A44, A53) had low reliability with
Cronbach’s Alpha less than 0.70, and they were dropped.
The comparisons of study variables before and after running EFA are given in
Table 6.11. From the EFA results, 37 items from the initial 56 items of independent
variables loaded acceptably well into the conceptual variables of the study. In
addition, 10 items of the dependent variable loaded acceptably well into one variable
named organizational performance. For mediating variable, the number of items is
still the same before and after EFA but loaded only on one variable previously, which
named organizational culture.
220
Table 6.11:
Comparisons of Study Variables Before and After EFA
Original Variables Study Variables after Running Factor Analysis
Variables Items Variables Items
Results
Independent variables (56 items) Independent variables (37 items)
Control Environment (23 items) Control Environment (19 items)
Ethical 6 items
Leadership Factor analysis
generated one
Authority 4 items Factor 2 - Ethical
13 items distinctive factor and
structure Formal Structure
a hypothesis to be
Human Resource 4 items tested.
Policy
Audit 4 items Multi-item construct for this variable The hypothesis from
Committee did not load on the appropriate factor the original
as hypothesized in the original conceptual
conceptual framework. framework was not
tested.
221
Information and communication Information and communication (4 items)
(7 items)
Information 3 items The hypothesis from
quality the original
conceptual
Factor 8 - framework was not
Information and 4 items tested and the multi-
communication item was dropped
Information 4 items
due to the
control
Cronbach’s Alpha
being less than 0.70.
As shown in Appendix F (on page 355), there are seven (7) factors will be
used for further analysis. The first factor contains ten items of dependent variables that
combine the economic use of resources, efficiency of activities and effectiveness of
operations items. This construct defined how well IC affects organizations daily
operations to achieve pre-defined target or objectives, which are economical use of
222
resources, efficient and effective of operation. This factor was labelled as the
organizational performance (PERF) with eigenvalue of 29.297 and Cronbach’s alpha
of 0.944.
Furthermore, five (5) initial variables of the control environment, which are
ethical leadership, authority structure, human resource policy, internal audit function
and audit committee were reduced to two factors, which are ethical formal structure
and internal audit. The factor two with 13 items that had the second highest
eigenvalue of 4.061, and had six items from ethical leadership, four items from
authority structure, and three items from human resource policy that were combined
with the descriptive name of ethical formal structure. Ethical formal structures are
considered to be concrete and direct measures to establish ethical behaviour using a
mission statement, a code of conduct, policy manuals for ethical issues, anonymous
hotlines, ethical standards, managers responsible for ethical issues, training
programmes on ethics, and sanctions for wrongdoing (Morris, 1997). The other
dimensions of IC are internal audit, which contains six items, risk assessment
containing seven items, control activities containing six items, and monitoring with
five items. The information and communication variable was dropped due to the
Cronbach’s Alpha being less than 0.70. For further analysis, only five components of
IC, which are ethical formal structure, internal audit, risk assessment, control
activities, and monitoring were used.
According to the EFA results, three types of organizational culture, as in the
initial framework, loaded onto a single factor containing nine items. All nine items
were named as the organizational culture construct.
Thus, because of the changes in the combination of a few of the constructs or
items from other constructs, the initial hypotheses of the study needed to be revised.
Table 6.12 shows the summary of original and revised hypotheses after EFA analysis.
Thirty two (32) hypotheses out of thirty eight (38) hypotheses were not tested because
of the changes of items and constructs into several factors. As a result, 11 revised
hypotheses were tested. Even though a few hypotheses were not tested, the revised
hypotheses still answer the research questions of the study. Hypotheses H1 – H5
answers the research questions one, which is: Do the IC components affect the
performance of public schools in Malaysia? Hypotheses H6 , H6a, H6b, H6c, H6d and
H6e answer research question two, which is: Does organizational culture mediate the
relationship between IC components and public school performance?
223
Table 6.12:
Summary of Original and Revised Hypotheses
No. Original Hypotheses Revised Hypotheses
H1 There is a positive relationship between There is a positive relationship between
control environment and organizational control environment and organizational
performance. performance.
224
No. Original Hypotheses Revised Hypotheses
H4a There is a positive relationship between Not hypothesized
information quality and organizational
performance.
225
No. Original Hypotheses Revised Hypotheses
H7b Supportive culture mediates the relationship Not hypothesized
between risk assessment and organizational
performance.
226
No. Original Hypotheses Revised Hypotheses
H6e Organizational culture mediates the
relationship between monitoring and
organizational performance.
Figure 6.1 on page 228, shows the original conceptual framework that contains
five IC components, which are control environment, risk assessment, control
activities, monitoring, and information and communication, linking with a mediating
variable, which is organizational culture and organizational performance. Figure 6.2
on page 229 details the constructs in the original conceptual framework with the
number of items used to measure each of the constructs. In total, 56 items were used
to measure the independent variables (five IC components), nine (9) items measured
the mediating variable of organizational culture, and 10 items measured organizational
performance.
After EFA, Figure 6.3 on 230, describes the revised conceptual framework,
which only contains four out of five IC components stated in INTOSAI GOV 9100,
which are control environment, risk assessment, control activities, and monitoring,
one mediating variable (organizational culture), and one construct of organizational
performance (combination of effectiveness of operation and economical use of
resources). The revised conceptual framework, shows only 37 items were used to
measure the independent variables (four IC components), nine (9) items measured
mediating variables (organizational culture), and 10 items measured organizational
performance (economical use of resources, efficiency of activities and effectiveness of
operation), which are used for hypotheses testing in the next section.
227
Independent Variables Dependent Variables
Efficiency of
Risk Assessment
activities
Effectiveness of
Control activities operations
Monitoring
Mediating Variable
Organizational culture
228
Independent Variables Dependent Variables
Organizational
Internal Control (56 items) Performance
(10 items)
Control Environment (23 items)
Ethical leadership (6 items)
Authority structure (4 items)
H1a- H1e
Human resource policy (4 items)
Internal audit (5 items)
Audit committee (4 items) Economic use of
resources (3 items)
Monitoring (9 items)
Ongoing monitoring (3 items) H5a- H5c
Spontaneous evaluation (3 items)
Separate evaluation (3 items)
Mediating Variables
Organizational culture (9 items)
Bureaucratic (3 items), (H6a-H6e)
Supportive (3 items), (H7a-H7e)
Innovative (3 items), (H8a-H8e)
229
Independent Constructs Dependent Constructs
H3
Risk Assessment (7 items)
Monitoring (5 items) H5
Mediating Variables
Organizational Culture
(9 items) (H6a-H6e)
230
6.6 Analysis and Results of Structural Equation Model
231
the measurement model were inspected to ensure they had a high-standardized factor
loading. It was suggested by Hair et al., (2010) that standardized loadings of 0.50 or
greater and the estimated correlation between the constructs should not be greater than
0.85 (Kline, 2011). If the estimated correlation between constructs is greater than
0.85, it shows that the two constructs overlap, and, consequently, they empirically
measure the same thing. Then, the overall goodness-of-fit indices are checked to
suggest acceptance of dimensionality for each model.
The measurement model is revised if the item in the construct has squared
multiple correlations less than 0.40, a low standardized factor loading less than
0.60 and a high modification index (MI >15). This can also be seen when unacceptable
overall goodness-of-fit indices occur. When these three actions had been taken, through
item deletion or through setting the free parameter estimate for redundant items the
values of overall goodness-of-fit indices for the model will increase to acceptable
level (Zainudin, 2014). However, the desire to achieve acceptable overall goodness-
of-fit indices should never compromise the theory being tested (Hair et al., 2010). A
final consideration in confirming each measurement model is the choice of the
parameter estimates to be used. The analysis in this chapter was based on the
Maximum Likelihood (ML) method with no consideration of the multivariate non-
normality of the data, as noted in section 6.3.2.
Figure 6.4 (on page 235) shows the measurement model for IC, organizational
culture and organizational performance. Internal control components were measured
using five constructs — ethical formal structure, internal audit, control activities, risk
assessment, and monitoring. There are 13 items measuring ethical formal structure,
labelled as A1, A2, A3, A4, A5, A6, A7, A8, A9, A10, A11, A12, and A13. Six items
measure the internal audit function, labelled as A14, A15, A16, A17, A18, and A19.
Six items measure control activities, labelled as A32, A35, A37, A39, A40, and A52.
Seven items measure risk assessment, labelled as A24, A25, A26, A27, A28, A29, and
A30, and five items measure monitoring, labelled as A50, A53, A54, A55, and A56.
Because these constructs were considered as exogenous variables, the statistical SEM
model specifies that they are inter-correlated.
On top of that, the double-headed arrow, as shown in Figure 6.4, showed the
correlation between exogenous and exogenous; mediator and endogenous constructs.
Furthermore, organizational culture (OC) was measured using nine (9) items, labelled
as OC1, OC2, OC3, OC4, OC5, OC6, OC7, OC8, and OC9. Ten (10) items were used
232
to measure organizational performance (PERF), labelled as OP1, OP2, OP3, OP4,
OP5, OP6, OP7, OP8, OP9, and OP10.
The SEM statistical technique was used to examine the relations among IC
components and organizational performance, as well as the mediating effect of
organization culture in managing IC and its effect on organizational performance.
Even though the chi-square for this measurement model was significant (x2
=3439.565, df=1463, p=0.001), the results of the goodness-of-fit indices indicated that
the initial measurement model needed to be re-specified (Kline, 2011) because the
GFI=0.686, TLI=0.819 and CFI=0.828 were lower than the acceptable values
233
Notes: EFS- ethical formal structure, IA-internal audit, RA-risk assessment, CA-control activities, MON-monitoring, OC-organizational culture and PERF-organizational
performance
Figure 6.4: Measurement Model: IC Components, Organizational Culture and Organizational Performance
234
Table 6.13 :
IC Components, Organizational Culture and Organizational Performance, Item
Label, Squared Multiple Correlations , and Factor Loading
Construct Items Factor Action
Loading
Ethical Formal A1 0.533 0.730
Structure (EFS)
A2 0.599 0.774
A5 0.600 0.774
A6 0.524 0.706
A7 0.498 0.724
A8 0.469 0.685
A9 0.421 0.648
235
Construct Items Factor Action
Loading
A52 0.305 0.552 Deleted ( <0.4)
As shown in Table 6.14, all the variables in a the re-specification model are significant
at p<0.001. Therefore, the conclusion that can be made is that the convergent validity
of the constructs was supported by all items being statistically significant at p<0.001.
This shows that all items and constructs’ of IC, organizational culture (OC), and
organizational performance (PERF), could be used for further analysis.
236
Table 6.14:
Result of Measurement Model
Construct Item Estimate S.E. C.R. P
A56 1.000
237
Construct Item Estimate S.E. C.R. P
OC8 1.299 0.110 11.831 ***
The re-specified measurement model is presented in Figure 6.5 and shows that
the goodness-of-fit indices of the revised measurement model achieved the required
level. Specifically, the value of X2 (chi square) decreased from 3439.565 to 1328.374,
and RMSEA (root mean square error of approximation) decreased from 0.071 to
0.050. Table 6.15 presents the assessment of fitness for the measurement model. The
result of CFI (comparative-fit-index) increased from 0.828 to 0.937, and TLI (Tucker-
Lewis-index) increased from 0.819 to 0.931. Assessment of fitness for measurement
model is within the required level. As a whole, therefore, the model and observation
data of the research achieved an acceptable goodness-of-fit.
Table 6.15:
Assessment of Fitness for Measurement Model
No. Name of category Name of Level of Index Value
Index Acceptance
Initial Re-specified
measurement measurement
model model
1. Absolute Fit RMSEA 0.05<x<0.08 0.071 0.050
2. Incremental Fit CFI >0.90 0.828 0.937
TLI >0.90 0.819 0.931
3. Parsimonious Fit Chisq/df <5.0 2.351 1.679
238
Notes: EFS- ethical formal structure, IA-internal audit, RA-risk assessment, CA- control activities, MON-monitoring, OC-organizational culture, PERF-organizational
performance
Figure 6.5: Re-specified Measurement Model
239
6.6.2 Reliability and Validity of the Constructs (Step Two)
Table 6.16:
Measurement Evaluation for Model – IC Components, Organizational Culture and
Organizational Performance
Construct Item Factor Cronbach’s Alpha CR AVE
Loading (≥ 0.70) (≥ 0.60) (≥0.50)
Ethical Formal A1 0.693 0.919 0.945 0.582
Structure (EFS)
A2 0.738
A4 0.761
A5 0.750
A6 0.724
A7 0.721
A8 0.703
A9 0.642
A10 0.701
A12 0.755
A13 0.646
A19 0.842
A23 0.761
A51 0.700
A27 0.883
A28 0.796
A29 0.792
241
Construct Item Factor Cronbach’s Alpha CR AVE
Loading (≥ 0.70) (≥ 0.60) (≥0.50)
A30 0.842
A56 0.898
OC4 0.706
OC5 0.701
OC6 0.754
OC7 0.640
OC8 0.810
OC9 0.831
OP3 0.830
OP4 0.799
OP5 0.806
OP6 0.850
OP7 0.813
OP8 0.753
OP10 0.734
Note: CR = Composite Reliability; AVE = Average Variance Extraction.
242
6.6.3 Stage Two: Structural Model (Testing of the Hypotheses)
243
Table 6.17:
Testing Hypotheses Using Standardized Estimates for Hypothesized Structural Model
1 – Direct Effect IC Components to Organizational Performance
Hypothesized path Standardized Critical Ratio p-value Results
estimate
H1: Ethical Formal Structure 0.304 2.427* 0.015 Supported
Organizational performance
H2: Internal Audit 0.058 0.920 0.375 Not supported
Organizational performance
H3: Risk Assessment 0.071 0.773 0.440 Not supported
Organizational performance
H4: Control activities 0.298 1.975* 0.048 Supported
Organizational performance
H5: Monitoring 0.193 3.273*** 0.001 Supported
Organizational performance
Table 6.18 presents the assessment of fitness for the structural model 1. The results for
is CFI (comparative-fit-index) = 0.952 and TLI (Tucker-Lewis-index) = 0.947 are
greater than the recommended value 0.9, RMSEA (root mean square error of
approximation) = 0.049 is between acceptable level of 0.05 and 0.1 as suggested by
Hair et al., (2010) and Kline (2011). As a whole, therefore, the model and observation
data of the Structural Model 1 achieved an acceptable goodness-of-fit.
Table 6.18:
Summary of Assessment of Fitness for Structural Model 1
No. Name of Category Name of Index Level of Index Value for Structural
Acceptance Model 1
1. Absolute Fit RMSEA 0.05<x<0.08 0.049
2. Incremental Fit CFI >0.90 0.952
TLI >0.90 0.947
3. Parsimonious Fit Chisq/df <5.0 1.635
244
*
**
Notes: EFS- ethical formal structure, IA-internal audit, RA-risk assessment, CA- control activities, MON-monitoring, OC-organizational culture, PERF- organizational
performance. Significant ***p<0.001, **p<0.01, *p<0.05
Figure 6.6: Structural Model 1- Direct Effect IC Components to Organizational Performance
245
6.6.3.2 Testing the Relationship Between IC Components, Organizational Culture
and Organizational performance
According to Baron and Kenny (1986), there are four conditions must be
checked before any conclusion about the mediating effect can be made. First, the
independent variable must have a significant relationship (less than 5%) to the
dependent variable. As shown in Figure 6.6 and Table 6.17 (page 245 and page 244
respectively), only three independent variables, which are ethical formal structure
(=0.304, p=0.015<0.05), control activities (=0.298, p=0.048<0.05), and monitoring
(=0.193, p=0.001), have significant relationships with organizational performance.
Two other variables, which are internal audit (=0.058, p=0.375>0.05) and risk
assessment (=0.071, p=0.440>0.05) do not have significant effects on organizational
performance. Hence, hypotheses H6b and H6c were not tested in the mediation test,
and only hypotheses H6a, H6d, and H6e were tested.
Second, the independent variable should have a significant effect on the
mediating variable. Referring to Figure 6.7 and Table 6.19 (on page 248 and 249),
hypotheses H6d, only control activities, has a significant relationship with the
mediating variable, organization culture (=0.718, p<0.001). However, for H6a and
H6e, ethical formal structure (=0.092, p=0.595>0.05) and monitoring (=0.022,
p=0.740>0.05) do not have any significant relationship with organizational culture.
246
Because of that, there is no mediation occurring between ethical formal structure,
monitoring and organizational culture.
Third, the mediating variable should have a significant effect on dependent
variables. For hypotheses H6d, there is a significant relationship between
organizational culture and organizational performance (=0.321, p<0.001). Hence,
hypotheses H6d already fulfilled three of the four steps of Baron and Kenny’s (1986)
approach in analysing the mediating effect.
The final approach that must be checked is the type of mediation occurring in
hypotheses H6d. When, the mediating variable, organizational culture, was included
in the path analysis of control activities and organizational performance, the path was
no longer significant (=0.354, p=0.062>0.05). Furthermore, the path coefficient of
control activities and organizational performance dropped from 0.298 to 0.226. Hence,
full mediation is established when the previously significant relations between the
independent variable, control activities and dependent variable, organizational
performance in Structural Model 1 are insignificant in the Structural Model 2.
From the analysis of Structural Model 2, there is a positive relationship (=0.718,
p<0.001) between path control activities to organizational culture explaining 66.3%
variance. Organizational culture was also positively related (=0.321, p<0.001) to
organizational performance explaining 69.0% variance. This show, the organizational
culture has some effect to the relationship between control activities and
organizational performance. Section 6.6.3.3 (on page 250) will confirm the type of
mediation effect between organizational culture and the relationship of control
activities and organizational performance.
247
Notes: EFS- ethical formal structure, IA-internal audit, RA-risk assessment, CA-control activities,, MON-monitoring, OC-organizational culture, PERF- organizational
performance. Significant ***p<0.001, **p<0.01, *p<0.05
Figure 6.7: Structural Model 2- Linking IC Components, Organizational Culture and Organizational Performance
248
Table 6.19:
Result For the Hypotheses Testing Structural Model 2
Hypothesized path Standardized C.R p- value Result
estimate
H6a: Organizational culture
mediates the relationship between Not supported
ethical formal structure and
organizational performance.
H6a(i): Ethical formal structure Not supported
0.139 1.038 0.299
Organizational performance
H6a(ii): Ethical formal structure 0.092 Not supported
0.532 0.595
Organizational culture
H6a(iii): Organizational culture Supported
0.321 3.429*** 0.001
Organizational performance
249
Table 6.20 presents the comparison of assessment of fitness for the structural model 1
and 2. As a whole, therefore, the model and observation data of the research achieved
an acceptable goodness-of-fit.
Table 6.20:
Summary of Assessment of Fitness for Structural Model 1 and Model 2
No. Name of Category Name of Level of Index Value for
Index Acceptance Structural Model
Model 1 Model 2
1. Absolute Fit RMSEA 0.05<x<0.08 0.049 0.050
2. Incremental Fit CFI >0.90 0.952 0.937
TLI >0.90 0.947 0.931
3. Parsimonious Fit Chisq/df <5.0 1.635 1.657
As shown in Table 6.20, the goodness-of fit indices for model 1 and 2 are
within the acceptable range as suggested by Hair et al., (2010) and Kline (2011).
Eventhough, the goodness-of fit indices for model 1 is the highest if compare to
Model 2, there is still mediation effect of organizational culture on the relationship
between control activities and organizational performance.
The Sobel test was conducted to reconfirm the result of the mediation test as
stated in Liew, Ramayah, and Yeap (2015), Mohamad, Ahmad, & Mamat (2014),
Preacher and Hayes (2008), and Zainuddin (2014). In accordance with work by Baron
and Kenny (1986), which inherited the Sobel (1982) technique, the indirect effect
should be higher than the direct effect to indicate the mediation effect is occurring in a
structural modelling. As presented in Figure 6.8, reconfirmation of the mediation
effect of organizational culture on control activities and organizational performance is
calculated by comparing the product of the indirect effect, which is 0.718X 0.321 =
0.230, to the direct effect of the control activities on the organizational performance.
The results indicate the product of the indirect effect of the path between control
activities and organizational culture is higher than the direct effect of control activities
to the organizational performance (0.230>0.226). Thus, full mediation occurs.
250
Organizational
culture (OC)
=0.718*** =0.321***
H6d(ii) H6d(iii)
The Sobel test has a major flaw. It requires the assumption that the sampling
distribution of the indirect effect is normal. But the sampling distribution of indirect
effect (a*b) tends to be asymmetric, with nonzero skewness and kurtosis (Nevitt &
Hancock, 2001) Thus, the usage of a single test that assume normality of the sampling
distribution should not be use when competing tests are available and does not have
this assumption (Preacher & Hayes, 2008). To overcome this normality issue, a
bootstrapping procedure was used to reconfirm the analysis of the structural model
CA to OC to PERF.
In this study, a bootstrapping procedure with 5000 resamples was run to
generate the t-values using 95% confidence intervals (CI). As shown in Figure 6.8,
there is a positive relationship (β = 0.718, p<0.01) between CA and OC, explaining
66.3% variance. OC was also positively related (β= 0.321, p<0.001) to PERF,
explaining 69.0% variance. Thus H6d(ii) and H6d(iii) were supported. To test the
third hypothesis the Preacher and Hayes (2008) method of bootstrapping the indirect
effect was applied. The bootstrapping analysis showed that the indirect effect β =
0.226 (0.718*0.321) was significant with a t-value of 4.525. Also, as indicated by
Preacher and Hayes (2008) and Liew, Ramayah, and Yeap (2015), the indirect effect
0.226, 95% Boot CI: [Lower Level = 0.096, Upper Level = 0.469] does not contain a
0 value in between the lower and upper level. This indicating there is mediation exist
in the relationship between CA to OC to PERF.
251
6.6.3.4 Reviews of Structural Model 2
252
Notes: EFS- Ethical formal structure, IA-internal audit, RA-risk assessment, CA- control activity, MON-monitoring, OC-organizational culture, PERF- organizational
performance. Significant ***p<0.001, **p<0.01, *p<0.05
Figure 6.9: Structural Model 2 – Revised 1
253
Table 6.21:
Testing Hypotheses Using Standardized Estimates for Hypothesized Structural Model
2 - Revised 1
Hypothesized path Standardized C.R p-value Result
estimate
H5: Monitoring 0.109 1.851 0.064 Not supported
Organizational performance
Further analysis was done to drop one more non-significant hypothesis after
re-examining the results in Table 6.21. Therefore, the hypothesis between the ethical
formal structure (EFS) and organizational culture (H6a) was deleted as there was no
significant effect between EFSOC (=0.029, p=0.848>0.05). Following this, the
model was re-analysed again, and the result is shown in Figure 6.10.
254
Notes: EFS- Ethical formal structure, IA-internal audit, RA-risk assessment, CA-control activity, MON-monitoring, OC-organizational culture, PERF-
Organizational performance. Note: Significant ***p<0.001, **p<0.01, *p<0.05
Figure 6.10: Structural Model 2– Revised 2
255
The results shown in Table 6.22 are for the hypothesized Structural Model 2-
Revised 2, which indicate that hypothesis H6d was supported that organizational
culture mediates the relationship between control activities and organizational
performance.
Table 6.22:
Testing Hypotheses Using Standardized Estimates for Hypothesized Structural
Model 2 - Revised 2
Hypothesized path Standardized C.R p-value Result
estimate
H1: Ethical formal structure 0.128 2.143* 0.037 Supported
Organizational
performance
H5: Monitoring 0.113 1.951* 0.049 Supported
Organizational performance
Table 6.23 presents the assessment of fitness for the initial structural model 2
and the revised structural model 1 and 2. The results for final model – Structural
Model Revised 2 are CFI (comparative-fit-index) = 0.937, TLI (Tucker-Lewis-
index) = 0.932, are greater than the recommended value 0.9, and RMSEA (root
mean square error of approximation) = 0.049 is between 0.05 and 0.1 (Hair et al.,
2010; Kline, 2011). As a whole, therefore, the model and observation data of the
research achieved an acceptable goodness-of-fit.
256
Table 6.23:
Summary of Assessment of Fitness for Structural Model 2
No. Name of Name of Level of Index Value for Structural Model 2
Category Index Acceptance
Initial Revised 1 Revised 2
1. Absolute Fit RMSEA 0.05<x<0.08 0.050 0.049 0.049
2. Incremental Fit CFI >0.90 0.937 0.937 0.937
TLI >0.90 0.931 0.932 0.932
3. Parsimonious Fit Chisq/df <5.0 1.661 1.659 1.657
In summary, it has been empirically found that the best parsimonious model
was achieved after the two paths representing H6a(ii), and H6e(ii) had been deleted
(see Figure 6.10 on page 255). Structural model 2 – Revised 2 was, therefore,
accepted as the final model that examine the mediation effect of organizational
culture on the relationship of IC components and organizational performance. On a
theoretical basis, organizational culture mediates the relationship of only one IC
component which is control activities.
Table 6.24:
Summary of Results for Hypotheses Testing for Research Objective 1
No. Revised Hypotheses Result
H1 There is a positive relationship between ethical formal structure and Supported
organizational performance.
H2 There is a positive relationship between internal audit and Not Supported
organizational performance.
H3 There is a positive relationship between risk assessment and Not Supported
organizational performance.
H4 There is a positive relationship between control activities and Supported
organizational performance.
257
No. Revised Hypotheses Result
H5 There is a positive relationship between monitoring and Supported
organizational performance.
On top of that, there are six (6) hypotheses that were used to answer
Research Objective 2 which is to examine the mediation effect of organizational
culture on the relationship between IC components and performance of public
schools in Malaysia, as shown in Table 6.25. Only one (1) sub-hypothesis is
supported, that is, found out that organizational culture mediates fully the
relationship between control activities and organizational performance, as shown in
hypothesis H6d. Hence, the conclusion could be made is organizational culture
mediates the relationship between IC and organizational performance.
Table 6.25:
Summary of Results for Hypotheses Testing for Research Objective 2
No. Revised Hypotheses Result
H6 Organizational culture mediates the relationship between IC and Supported
organizational performance.
H6a Organizational Culture mediates the relationship between ethical Not Supported
formal structure and organizational performance.
H6b Organizational culture mediates the relationship between internal Not Supported
audit and organizational performance.
H6c Organizational culture mediates the relationship between risk Not Supported
assessment and organizational performance.
H6d Organizational culture mediates the relationship between control Supported
activities and organizational performance.
H6e Organizational culture mediates the relationship between monitoring Not Supported
and organizational performance.
258
6.7.1 Internal Control Components and Organizational Performance
259
H1: There is a positive relationship between ethical formal structure and
organizational performance.
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prescribed IC being follow and further provide reasonable assurance organization
objectives could be achieved.
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H3: There is a positive relationship between risk assessment and organizational
performance.
The research findings in this study indicate that risk assessment (β=0.071,
c.r.= 0.773, p=0.440>0.05) is found to have an insignificant relationship with
organizational performance. Thus, hypothesis H3 is not supported. The result of this
study contradict from Daujotaite (2013), Ramamoorti, Bailey and Traver (1999)
findings, whom stressed the importance of risk assessment in audit planning and
dependency on the effectiveness of IC. Internal auditors should help in identifying
and evaluating risk that might occur in an organization. Because of internal auditors
not functioning adequately in public schools in Malaysia, the risk assessment is also
inadequate.
The reason risk assessment is not a significant IC component because it has
not been done formally in the public schools, but has been used informally in the
daily work of school principals. For instance, setting priorities in managing the
limited school resources and setting a detailed list of control activities, show the
existence of the elements of risk assessment in school financial management
(Muhammad Faizal et al., 2012).
This result is logical and reasonable for this study as it is similar to real
practice, whereby school principals had never used any formal risk assessment
methodology, i.e., risk evaluation and risk identification, in their organizations.
Even not a single word was mentioned about assessing and managing risk formally
written in School Financial Management and Accounting Procedure (2012)
produced by the Accounts Division, Ministry of Education. Specifically, when
looking in the National Professional Qualification for Educational Leaders
(NPQEL) training modules organized by Aminuddin Baki Institute, there is no
specific training in assessing the financial risk and management risk. Most of the
school principals use their own judgment in managing any problems that occur in
the organization, and some of them use their experience as teachers to solve the
problems that they face in their daily management as stated in Kamaruzaman,
Sharifah, Gurcharan, et al., (2012).
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H4: There is a positive relationship between control activities and organizational
performance.
The relationship of control activities and public school performance was
analysed in hypothesis H4. The result of this study indicate that control activities
(β=0.298, c.r.= 1.975, p=0.048<0.05) is found to have a significant and positive
relationship with organizational performance. Hence, the result of this study
supported hypothesis H4.
This result supported by previous studies, such as those by Abbas and Igbal
(2012) and Geiger et al. (2004) that stressed the importance of managing effective
and efficient control activities in implementation of effective IC in organizations. A
long list of control activities were prescribed in detail in the School Financial
Management and Accounting Procedure (2012) produced by the Accounts Division,
Ministry of Education, will guide all public schools in Malaysia on how to manage
their financial resources. Public schools need to follow, closely review, evaluate,
and amend existing policies and procedures to ensure the policy and procedures
listed in the control activities are able to help the schools to prevent and detect any
IC weaknesses that might jeopardize the organization’s performance.
The results of this study are consistent with INTOSAI (2004a) and Danescu,
Prozan, and Danescu (2011) that stressed control activities that established in
organization policies and procedures should be executed to address risks and further,
to achieve the entity’s objectives. Controlling risks involves the implementation of
control activities that would lead either to mitigating the likelihood of identified
risks materializing, or reducing the risk to an acceptable level.
This finding indicates that control activities are important in implementation
of IC in public schools in Malaysia and will further affect the organizational
performance in term of economic use of resources, efficiency of activities and
effectiveness of public schools operation. With the usage of proper control activities
that exist in IC in public schools in Malaysia less error, omission, misstatement or
fraud will occurred that consequently will improved quality and quantity of services
given to all the students in public schools.
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H5: There is a positive relationship between monitoring and organizational
performance.
This study empirically tested using the control and culture framework by
Pfister (2009) to link IC, organizational culture, and performance. The mix between
closing, opening, and reinforcing drivers being used in the control and culture
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framework can be applied in public sector organizations.
In implementation of IC in the organization, the closing driver acts as a
monitoring mechanism, as a filter to unacceptable behaviour, such as fraud,
inaccurate reporting, and bribery from outside of the organization influencing an
organization’s daily activities, especially in financial management. Unacceptable
behaviour that is noncompliant with rules and regulations should be sanctioned
from influencing the culture of an organization. In order to keep unacceptable
behaviour outside the organization, managers should start by employing ethical
employees and portray examples of acceptable behaviour in their daily work.
The use of the opening driver in terms of constructive debate between
various hierarchical levels in an organization and outside the organization will help
managers to justify their behaviour to others in the organization. The manager needs
to convince their subordinates about their plans and actions so that, subordinates can
give suggestions on how to improve them. With these suggestions and constructive
comments, the weaknesses of IC can be solved and continuous evaluation ensured in
the organization.
With constructive comments, managers can apply changes where needed.
Then, as the reinforcing driver, the manager should then ‘lead by example’ to
demonstrate the application of the new changes. The new changes in IC should be
dispersed and communicated throughout the organization. The reinforcing driver
used by the organization should able to influence and promote the closing as well as
opening driver used by the management of the organization.
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organizational culture has some effect on the implementation of control activities in
an organization towards better organizational performance.
The mediation test between IC components, organizational culture, and
organizational performance shows that organizational culture fully mediates the
relationship between control activities and organizational performance. This result
supported Simon (1995), whereby, in managing IC in an organization, formal,
information-based routines and procedures are used to maintain or alter patterns in
organizational activities. This study found that bureaucratic, supportive, and
innovative organization cultures influence the relationship of IC and organizational
performance. According to the result of the study, school principals should develop
and implement IC that promote the existence of bureaucratic, supportive, and
innovative cultures in the school that subsequently, will improve schools’
performance.
6.8 Summary
Firstly, the data collected from the questionnaire were coded using SPSS
21.0. The test of response bias using chi-square test and one-way ANOVA were
done to compare the mean differences in two or more groups of respondents. From
the results, both groups are similar to each other.
The first part of the data analysis was screening the data by looking at
missing data and checking the normality of the data (Hair et al., 2010; Kline, 2011;
Tabachnick & Fidell, 2001). Following this, 270 respondents were used for further
analysis. The demographic characteristics of this sample were described. Then, EFA
was used to reduce a large number of items to a more manageable number for the
purpose of providing an operational definition for an underlying process by using
observed variables. It was found that only six (6) constructs had construct validity
(Cronbach’s alpha) of more than 0.7, and were used in the data analysis using SEM.
The second part of data analysis used SEM, which was conducted in two
stages: the measurement model and the structural model. In the first stage, the fit of
each measurement model was assessed using a CFA of the constructs of interest to
make sure that each one was unidimensional. In this stage, the assessment of the
measurement model was made with reference to the following pattern of results: (1)
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indicators specified to measure a proposed underlying factor all had relatively high
standardized loadings (i.e., >.50) on that factor, (2) the estimated correlations
between the factors were not higher than 0.85, and (3) the overall goodness-of-fit
indices suggested acceptance of the model. These assessments were undertaken in
addition to examining normalized residual and modification indices.
Accordingly, the initial results indicated the Measurement Model (IC- OC-
PERF) of this study needed to be re-specified and tested again in an attempt to
provide a more parsimonious model to be used in the next step of the structural
model. This was done to improve the discriminant validity of the model. The
modified measurement model provided adequate fit for the data, and all the
indicators were highly correlated. Then, the analysis of the structural model was
done to test hypotheses use in this study. As a whole, the results of hypotheses
testing of the models and the observation data of this study achieved an acceptable
goodness-of-fit.
The next chapter presents the summary of the research findings, discussions,
explains the contribution of the research, lists the limitations of the present study
and suggests some recommendations for future research.
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CHAPTER SEVEN
SUMMARY, RECOMMENDATIONS AND CONCLUSION
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will help to improve the financial management in public schools through the most
effective usage of IC and organizational culture:
1. To examine the effect of the internal control components on the
organizational performance of public schools in Malaysia.
2. To examine the mediation effect of organizational culture on the relationship
between internal control components and performance of public schools in
Malaysia
The first objective of this study is to examine the effect of the internal
control components on the organizational performance of public schools in
Malaysia. This study developed and empirically tested a model that leads to a better
understanding of the relationships between IC and organizational performance in
public organizations, especially public schools in Malaysia, using the Guideline for
Internal Control Standards for the Public Sector (INTOSAI Gov 9100). In order to
answer the research objective one, this model extends IC research by investigating
the effects of the IC components and sub-components suggested by INTOSAI Gov
9100. Further, it examines the influence of IC components towards organizational
performance using the 3Es concept, which are the economic use of resources,
efficiency of activities and effectiveness of operation.
Furthermore, INTOSAI Gov 9100 lists five components of IC, which are
control environment, control activities, risk assessment, information and
communication, and monitoring. In measuring the relationship between IC and
organizational performance, as shown in Table 6.17 (on page 244), the empirical
results indicate that only three IC components directly affect the performance of
public schools. These components are control environment, control activities and
monitoring. Only these three factors have a direct relationship with the
organizational performance of secondary public schools in central part of Malaysia.
However, risk assessment, and information, and communication were found to have
no direct relationship with the organizational performance of secondary public
schools in Malaysia. This result shows that in order to have effective IC in
secondary public schools in Malaysia, three IC components should be incorporated
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in the design of the IC of financial management in secondary public schools in
Malaysia.
The importance of the control environment components is that they combine
the sub-components of ethics, authority structure, and human resource policy into a
single construct: the ethical formal structure. This shows that there is a need for a
highly ethical leadership setting in the organization that can be set by the school
principals, as well as a formal authority structure and formalized human resource
policy in managing the financial management in public schools.
School principals should incorporate an ethical leadership style in managing
their organization’s members. Ethical leadership is a combination of characteristics
and behaviours of school principal that include demonstrating integrity and high
ethical standards, consideration, fair treatment of employees, and holding employees
accountable for ethical conduct. According to the result of the study, management
should set examples of how to do the right things the right way in term of ethics in
their daily leadership styles. Ethical practices in the organization will reduce IC
weaknesses that arose from management failure to comply with existing IC in the
public schools. The management issues such as existence of fake invoices,
counterfeit cheques, or other forged documents, illegal purchases, purchase amounts
and quantity are inaccurate and different to the actual quantity of the product
received, and purchases made differ from the agreed contract terms could be solved
when management is ethical and have high integrity.
Besides this, other weaknesses of IC such as collection and expenses
weaknesses could be reduced or eliminated when all the members of the
organization choose to follow the code of ethics that exists in the organization and
comply with rules and regulations. The finding of the study found that, management
needs to discuss the code of ethics, values and ethics openly with their employees.
All the public school’s members should know the procedure they should follow,
what is right and wrong and what action will be taken if they choose not to obey the
rules and regulations that exist in their organization.
The use of formal structures in managing the school’s financial management
is important for guiding and setting a line of authority and responsibility in making
financial decisions. Finding of this study, support the use of organization chart that
clearly define line of management authority structure and responsibility in managing
IC in public school in Malaysia. On top of that, spending on instructional items or
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for other curricular activities should be done according to the rules and regulations.
All organization’s members should comply with the written law and follow the
procurement procedure set by the school principals. They must obtain approval from
the school principals before making any procurement. This is important to ensure
the allocated funds are spent wisely without waste and have a positive impact on the
school’s performance. This is also to prevent the occurrence of deficit accounts
arising because of a lack of monitoring by the school principals.
The use of a formalized human resource policy in recording the performance
of the organizational members, such as recording the work of a teacher in a daily
teaching record book and the punch card or thumb print system for recording the
arrival and check out time, will enhance transparency and fairness in giving
appraisals of and promotions to the employees. The use of a formalized human
resource policy, which is transparent and fair will increase the productivity of the
employees. Employees will be committed in doing their jobs and work in a
satisfying work environment.
All three element of control environment (ethical formal structure, authority
structure and human resource policy) will help reduce IC weaknesses in the
implementation of financial management in secondary public schools in Malaysia
by reducing management, collection and expenses and payment weaknesses that
reported repetitively in the Consolidated Audit Report from 2008-2013. With less IC
weaknesses, public schools will able to use public resources in the cost effective
ways by reducing wastages of public fund and will enable public schools plan their
spending towards the effectiveness of school operation.
The use of control activities in managing public resources is a basic and
traditional way for the implementation of effective IC. Control activities are an
important IC component, and the results of this study support that properly
managing control activities will produce positive effects towards better public
school performance. This study supports the use of two elements of control
activities, which are approval and authorization and physical control, in managing
IC and financial management in public school in Malaysia. The usage of these two
elements of control activities will enable limited public resources being used in an
effective way by getting the maximum results towards supporting students and
school performance.
The finding of this study proved the usage of approval and authorization is
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an important control activities element in secondary public schools in Malaysia.
Proper approval and authorization is a management tool to enable employees to
carry out certain duties. Proper approval and authorization will able to ensure that
the accounting events or transactions are initiated and executed accordingly by those
selected by management and must be designed according to the level of risk of an
activity. Because of that, letter of authorization to collect money should be given to
the money collecter. This will solve IC weaknesses in collecting public money, such
as collection without approval and to ensure the collection money is collected by
authorized personnel. On top of that, the usage of two-ply official receipt as proof of
collection is crucial to avoid any opportunity to commit fraud. All these elements of
approval and authorization in collecting public money had been described in detail
in School Financial and Management Procedure (2012) and should be followed by
the school’s management.
Furthermore, school’s management should clearly document their approval
requirements and ensure that employees obtain approval in all situations for which
management has decided they are necessary. In addition, they should make sure that
the conditions and terms of authorizations are clearly documented and
communicated, and that significant transactions are approved and executed by
persons acting within the scope of their authority.
The usage of physical control is important to protect school’s assets. Public
school’s management should protect the organization's equipment, information,
documents, and other resources that could be wrongfully used, damaged, or stolen
using adequate physical control. Management can protect these resources by
limiting access to authorized individuals, only.
However, in managing effective IC, the usage of long lists of procedures
regarding control activities without continuous monitoring from external and
internal parties is not enough to ensure that no abnormalities occur in the financial
management. Because of that, the third IC component supported by the empirical
findings of this study is monitoring.
Monitoring should be used to check the implementation of IC in the
organization. The importance of monitoring is listed in the School Financial
Management and Accounting Procedure (2012); however, because of too many
responsibilities borne by a school principal, the monitoring is not properly done.
With proper monitoring, opportunity in committing fraud occurs due to ineffective
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IC practices, such as the lack of physical protection of assets, lack of segregation of
duties, lack of maintaining appropriate documents and records, the absence of
independent checks, overriding of existing controls, and an inadequate accounting
system can be reduced or even solved. Two elements of monitoring thats are
important in public school in Malaysia are on-going monitoring and separate
monitoring.
Implementation of control activities will not be effective if there is no
monitoring by the top management. The on-going monitoring by top management
ensures the financial management in an organization is in compliance with policies,
rules, and regulations. In secondary public schools in Malaysia, school principals
should monitor the work done by the account clerks and verify all the accounting
transactions involving allocated funding given to the schools.
Separate monitoring by external bodies in managing IC and financial
management in public schools is an important element of monitoring. Separate
monitoring will help and provide feedback from outside parties, such as from
School Audit Division and Internal Audit Department to check the existence of IC
in the public schools is very beneficial in creating effective financial management of
secondary public schools in Malaysia. Most school principal agrees that the
monitoring from external bodies helps public school identify their IC weaknesses
and they able to improve their IC towards the economical use of public money,
efficiency of activities and further enhance the effectiveness of school operation.
In the context of this study, only three out of five IC components which are
control environment (ethical formal structure), control activities and monitoring, are
the significant determinants to enhance organizational performance of public school
in Malaysia. School principals need to stress the use of three IC components toward
the economical use of resources by minimizing the costs of running the school. This
could be carried out by buying goods and services of the right quality at the lowest
possible price towards the efficiency by avoiding waste and effectiveness of
operation to ensure all activities planned are focus on achieving the public school’s
goals and objectives.
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7.1.2 Research Objective 2
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justify their behaviour to others in the organization. The manager needs to convince
their subordinates about their plans and actions so that subordinates can give
suggestions on how to improve them. With these suggestions and constructive
comments, the weaknesses of IC can be solved and ensure continuous evaluation is
made in the organization.
On top of that, school principals should also use the positive effect of
innovative culture to initiate a culture for improvement and create a result-oriented
culture that drives the organization towards achieving high performance, especially
towards the economic use of resources and organizational performance. In
implementation of IC, an innovative culture encourages organizational members to
follow the rules and regulations towards the achievement of high performance, and,
if appropriate, organizational members could suggest new and better ways to
improve the IC in the organization
Furthermore, implementation of IC in the public school could be improved
using bureaucratic organizational culture. Bureaucratic control is a system of
standardized rules, methods, and verification procedures used to ensure that an
organization achieves its goals. Bureaucracy is directly related to the development
and enforcement of codes of ethics, rules, standards, and systematic procedures
which enable organizational activities to be oriented towards objectives. In many
organizations, the IC exists in written instructions and procedures, but these may not
be sufficiently adopted or followed in everyday management or actual operations
(International Federation of Accountants, 2012). In the Malaysian Government, IC
has been clearly written in the Malaysian Treasury Instruction, Financial Procedure
Act (1957), Education Act (1996), Account and Audit Rules (2002), and School
Financial Management and Accounting Procedure (2012).
Public schools also should comply with the prescribed rules and regulation.
The weaknesses of financial management in the public schools were due to non-
compliance with the Government’s rules and procedures. Non compliance to rules
and regulation in school financial management causes many fraud cases occurred as
reported in special audit report produce by School Audit Division from 2009 to
2013. The non-compliance to rules and regulations show the existence of
weaknesses of IC and mismanagement of public resources. Thus, the existence of
bureaucratic organizational culture help public schools run it financial management
and IC according to rules and regulation, ensure no wastage of public resources and
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organization able to operate efficiently and effectively.
7.2 Recommendations
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effective if the top management who administers and monitors the IC have high
integrity, ethical values, and competence in doing their duties. A manager should
have a strong desire to do the right thing by following the organization’s policies,
laws, and regulations. Ethical leadership is of great importance in handling moral
incidents and fostering employees’ ethical behaviours in organizations, given that
good leaders are obliged to set a moral example for their followers. It is vital that
school principals model their behaviours and action through deeds, not just words.
By doing this, they can influence other employees to imitate them and increase the
inclination of employees to do the right things according to rules and regulation in
managing public resources.
The Ministry of Education should ensure that all the current financial
procedures are followed for all financial records by distributing new circulars
directly to the schools or by making such materials easily accessible by displaying
them on the Ministry of Education (MOE) website. New financial procedures should
be well organized and easily accessible to make sure that no one has a reason for not
knowing them and making mistakes. On top of that, proper documentation of IC
practices in the organization will help many members of the organization understand
their duties and perform their duties systematically according to prescribed
practices. This will also help in managing new staff and answering auditors’ queries.
Equally important, that all school members that involved in financial
management know their duties and their roles to ensure that excellent financial
management is practiced and there is a high level of IC established. Financial
management and IC training should be provided to the all school members that
involved in financial management because, until now, none of the school staffs have
done their jobs with a full understanding of the financial procedures. Without
knowledge of the financial procedures, committees could not do their duties
efficiently and help the school principals effectively.
Lastly, monitoring by external bodies helps public schools to improve IC by
being the oversight mechanism to ensure that the IC policies and procedures are
followed accordingly and are further able to improve organizational performance by
periodically assessing the quality of the IC. The involvement of internal audit
personnel from School Audit Division and Internal Audit Department in providing
feedback, training, guidance, and technical advice for individual public school is
crucial to assure that the level of IC practices is acceptable. The audit personnel who
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have expertise in evaluating IC should help public schools improve their IC
practices.
The research finding of the second objective of this study revealed that
school principals should develop and implement IC that could promote the types of
culture that exist in the schools, whether supportive, innovative or bureaucratic
culture that further will improve school performance. For the purpose to enhance IC
in an organization, especially in secondary public schools in Malaysia, school
principals must work together with their employees in the decision-making process
and use proper communication channels to develop the competitive advantage of
having supportive workers. Hence, school principals should be more willing to
accept the ideas and suggestions from their employees.
It is important to establish the right information channel for management and
employees to share and apply the information regarding IC in the public schools. Thus,
school principals should allow the free flow of information for a richer, healthier, and
more resilient workplace. Because of that, the information from the external and
internal environments will be a great help in enabling an organization to achieve its
objectives.
Top management in the Ministry of Education should encourage multiple
experts such as excellent school principals, excellent accounts clerk and auditors in
managing school’s financial management to be coaches, mentors and facilitators in
creating effective IC practices in public schools. The experts should exhibit
willingness to share their expertise in managing school’s financial management and
IC, and abilities to offer their knowledge freely with other school principals. There
should be benchmarking and collaboration with other schools regarding
implementing effective financial management and IC in secondary public schools in
Malaysia. Schools with effective financial management should be identified and
their practices can be an example to other schools. This kind of social interaction
can provide a climate of openness and a culture of feedback for school members to
continuously learn and search for the new knowledge and idea towards effective
implementation of IC in public schools.
School principals who allocate their time in effectively managing school
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governance, creating a positive school culture, and creating positive collaboration
with many external parties will be able to improve their school performance.
Cooperation between public and private sector organizations should be increased.
Publicly funded but privately operated schools are associated with higher academic
achievement than publicly operated institutions. Trust Schools encourage greater
Public-Private Partnership involvement in transforming student outcomes in public
schools. The private sector delivers training, support, and capacity building for the
members of the schools for greater impact on organizational performance. The
collaboration between the private and public sectors is one of the initiatives taken
towards the decentralization process, and being trusted will enhance the
accountability of the school principals as the managers of the secondary public
schools in Malaysia.
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performance, which are being practiced in the public sector, more specifically public
schools. The use of the stewardship theory in explaining public organization
financial management is deemed to be appropriate because public officers are not
driven by a reward system, and, normally, they will stay in their service irrespective
of their performance unless they commit very serious misconduct or disciplinary
action had been imposed on them (Roslan, 2009). In addition, IC helps managers to
gain desired results through the effective stewardship of resources. The application
of social system theory in linking the IC, organizational culture, and organizational
performance helps organizations strengthen their values and practice IC that is
acceptable within organizational values and norms.
Fifth, there is also a lack of research knowledge about IC in the public sector
from the management point of view, particularly in public schools. This study
provides empirical evidence from the management perspective of the
implementation of IC in a public sector organization.
First, the practical implications of this study’s findings are obvious and
consistent with previous research evidence that has found the use of a properly
designed IC be a great help to the managers of organizations, especially public
schools in Malaysia.
Second, in order to meet the more challenging school-based management
being implemented by the Malaysian Ministry of Education, there is a need for
school principals to educate themselves more in leadership and management skills.
School principals should incorporate both ethics and integrity in doing their work,
and, especially, in financial management. Further, the enrichment of knowledge
regarding financial management and accounting procedures, rules, and regulations
will help them in managing public money and ensure that there is value for money
in public spending.
Third, this study provides empirical evidence to assist the school principals
to manage their finance and to further enhance their IC practices. The proper
implementation of IC that incorporates at least three which are control environment,
control activities and monitoring, from five components of IC will help the
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organizations to achieve their desired objectives, help reduce the risk of failure, and
reduce mismanagement error.
First, the research population for this study was taken from Malaysian public
secondary schools because they are cost responsible centres and they manage a large
amount of funds compared to primary schools. In addition, this study used
secondary public schools located in central parts of Malaysia, which are Perak,
Selangor and Kuala Lumpur as the sample population for the secondary public
schools in Malaysia. It is suggested that, wide coverage of this study using the same
survey instrument to other region in Malaysia or replication to other organizations in
the tertiary education sector, such as matriculation institutions, would be useful in
order to address the question of generalizability.
Second, this study focuses on the IC components of INTOSAI Gov 9100 that
have been used by the public sector all over the world. At present, INTOSAI has
192 members, including Malaysia (INTOSAI, 2006). Many other frameworks or
variables of IC components may be used in evaluating the IC of an organization.
Furthermore, future studies may examine the combination effect of both the internal
as well as the external factors, such as the effect of enforcement from external
agencies in enhancing the effectiveness of IC implementation.
Third, the results of this study are subject to the limitations arising from the
use of self-reported dependent and independent variables (Malcolm, 2011). Despite
being extensively used in management research, the use of objective measures has
several drawbacks. Normally, the use of perceptual measures of self-rating
performance can be a problem when respondents prefer to provide a desirable
response to portray their performance. There might be a possibility of bias in the
self-assessment of the respondents. This must be considered when interpreting the
results of this study. The perception of managers of their organizational performance
might not have captured the actual performance. As such, future studies, may
consider other sources of evidence to measure organizational performance and the
actual expense data from the school financial reports.
Fourth, in this study, a cross-sectional research design was adopted to
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estimate the prevalence of the outcome of interest in a chosen population (public
secondary school in Malaysia), for the purpose of investigating the relationship
between IC, organizational culture, and organizational performance. In a cross-
sectional study, data are collected at a point in time (the year 2012 in this study),
and, inherently, are affected by the conditions at that point of time, which may
change if the data are collected at another time. Hence, a longitudinal study may be
adopted in the future to overcome this limitation.
Fifth, a drawback of this study is the use of single informant, which were
secondary school principal, as a source of information for both the dependent and
independent variables, although the use of single informant remains the primary
research design in most studies (Prieto & Revilla, 2006).
Sixth, the use of multiple data sources, including objective data, would
increase the validity of the findings. The use of actual expenditure per student,
actual instructional and non instructional expenditure, or other financial ratios in
evaluating the effectiveness of school financial management would help explain
how control of spending affects student achievement and the success of the school
as a whole.
Seventh, this study only looks at manual accounting control. Further studies
on the implementation of IC in the electronic accounting system would further
contribute to the effectiveness of financial management in secondary public schools
in Malaysia.
Eighth, the ethical of an organization could be an outcome for IC in public
sector as stated in Guideline for Internal Control in Public Sector (INTOSAI GOV
9100). It is suggested that future study related IC of a public sector organization use
ethical as an outcome of IC practices.
Nineth, the evidence gathered from the Public School Consolidated audit
Report were from 2008-2013 were within the period of data collection. Future
research covering following years from 2014 until now should be done to look at the
trend and performance of financial management of secondary public schools in
Malaysia.
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7.5 Conclusion
This study provides empirical evidence on the effect of the internal control
components on the organizational performance and examine the effect of
organizational culture on the relationship between internal control components and
performance of secondary public schools in Malaysia. The public schools were
selected for this IC study because there are numerous financial management issues
due to the IC weaknesses that demonstrate a lack of understanding of IC principles,
such as issues in documentation forgery, failure to maintain proper accounting
records, embezzlement of school money, and procurement problems.
The effective financial management and IC implementation is crucial,
especially when the school system in Malaysia is in the process of transformation
from a centralized system to a decentralized system. In the transformation process
from a centralized to decentralized system, school principals should equip
themselves with leadership skills and managerial skills. The decentralization process
will enhance the accountability of the school principals as the managers of the
secondary public schools in Malaysia. In a decentralized system, schools will be
responsible for their own operational decision-making in terms of budget allocation
and curriculum implementation. School principals will have full control over how
they spend their allocated funds and how they design their daily school programme
for the achievement of excellent students.
This study examines two research objectives. The first research objective
was used to scrutinize how an organization, especially secondary public school in
Malaysia could use the five IC components to achieve its objectives towards
excellence school performance. The second research objective was used to examine
the mediating effect of organizational culture on the relationship between internal
control components and performance of secondary public schools in Malaysia. The
conceptual framework of this study will help secondary public schools in Malaysia
to look back at their implementation of IC, and, if necessary, strengthen the IC by
incorporating all IC components to create an effective IC system.
This study uses IC definition as defined by Guideline for Internal Control
Standard for Public Sector (INTOSAI Gov 9100). According to INTOSAI Gov
9100, IC is an integral process and should be used by the management of an
283
organization to address risks and to provide reasonable assurance of the entity’s
mission objectives, which are executing orderly, ethical, economical, efficient, and
effective operations; fulfilling accountability obligations; complying with applicable
laws and regulations; and safeguarding resources against loss, misuse and damage.
Internal control comprises five IC components which are control environment, risk
assessment, control activities, information and communication, and monitoring.
Based on the results of Structural Equation Modelling, three IC components
were empirically found to have a positive relationship with organizational
performance. The use of significant IC components which are control environment
(ethical formal structure), control activities, and monitoring will improve the
financial management of secondary public schools in Malaysia. Secondary public
school principals are required to exhibit ethical leadership, by providing a good role
model, having strong knowledge of financial rules and regulations, designing proper
control activities to reduce the possibility of not achieving organizational objectives,
and continuously monitoring the implementation of IC.
This study supports previous literature by confirming that organizational
culture has some impact on the implementation of IC towards achieving
organizational objectives. It is important to understand the school culture before
implementing any IC in a public school. School principals should take advantage of
school culture to understand the type of culture that exists in the school and how the
culture adapts externally and integrates internally within the organization to create
effective IC. The effect of organizational culture can be seen in the implementation
of control activities in the organization. Management should design their control
activities that are consistent with the organizational culture that exist in the
organization.
Three types of organizational culture, which are supportive, innovative, and
bureaucratic cultures, as stated in Wallach (1984), are the dimensions of
organizational culture used in this study. The IC that exists in the organization needs
to be communicated to all employees in the organization and should be practiced by
all. The school principals could use supportive culture that is relationship-oriented,
and collaborative that exist in the organization to communicate the IC that
prescribed by the management to all organization members using formal and non
formal communication channel. Supportive organizational culture starts when a top
manager has faith in their employees’ ability to absorb and process information. The
284
manager needs to convince their subordinates about their plans and actions in
implementing the IC so that subordinates can give suggestions on how to improve
them. With suggestions and beneficial comments, the weaknesses of IC can be
solved and continuous evaluation of the organization assured.
The existence of innovative organizational culture in suiting the prescribed
IC and the various programmes planned by an organization will enable the
organization to achieve its objectives in an economic, effective, and efficient way.
Innovative organizations are risk taking, focus on the future, ask why something is
done a certain way, and then develop a better way to do it if needed.
With the implementation of IC, bureaucratic culture will help public schools
convey the prescribed IC through clear lines of authority and many written
procedures, rules, and regulations. Bureaucratic organizations normally have a high
formalization with lots of written rules and regulations and centralized decision-
making in the hands of their managers. In conclusion, effective implementation of
IC together with organizational culture will provide reasonable assurance that
organizational objectives will be achieved.
This study makes a contribution to the extant literature by incorporating the
practice of IC in public schools using the Guideline for Internal Control Standards
for the Public Sector (INTOSAI Gov 9100). It is hoped that the empirical findings
of this study can provide valuable insights to the Ministry of Education, relevant
authorities, and school principals, as well as other stakeholders regarding the
positive and significant relationship of IC, organizational culture, and performance
in secondary public schools in Malaysia.
285
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APPENDICES
314
APPENDIX A
APPROVAL LETTER FROM MINISTRY OF EDUCATION MALAYSIA
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316
317
318
319
320
321
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APPENDIX B1
SURVEY QUESTIONNAIRE
SOAL SELIDIK
KAWALAN DALAMAN DI SEKOLAH-SEKOLAH AWAM DI MALAYSIA
Tuan/Puan
Objektif utama kajian ini adalah untuk mengenalpasti hubungan antara kawalan
dalaman dan prestasi sekolah-sekolah awam di Malaysia.
Kawalan dalaman ditakrifkan sebagai satu proses bersepadu yang dihasilkan oleh
pihak pengurusan sesebuah organisasi dan kakitangannya. Kawalan dalaman
dirangka khusus bagi mengenalpasti dan menangani risiko serta memberi jaminan
yang munasabah bahawa misi dan matlamat organisasi dapat dicapai dengan
jayanya. Kawalan dalaman yang baik dapat dilaksanakan melalui operasi yang
beretika, ekonomikal, cekap dan berkesan, memenuhi akauntabiliti, mematuhi
undang-undang serta peraturan dan melindungi sumber-sumber daripada kehilangan,
penyalahgunaan dan kerosakan. (Para 1, halaman 6, International Organization of
Supreme Audit Institutions (INTOSAI) Gov 9100).
Soal selidik ini dibahagikan kepada empat bahagian. Bahagian pertama dan kedua
mengandungi soal selidik berkaitan dengan profil responden dan sekolah. Bahagian
ketiga memberi tumpuan kepada rangka kerja kawalan dalaman & budaya
organisasi. Bahagian keempat memberi tumpuan kepada kesan rangka kerja kawalan
dalaman & budaya organisasi terhadap prestasi organisasi.
Terima kasih kerana sudi menjawab soal selidik ini. Segala maklumat yang
diberikan akan dirahsiakan dan hanya akan digunakan untuk tujuan penyelidikan ini
sahaja.
Diselia oleh:
PROFESOR MADYA DR HJH KALSOM SALLEH
Fakulti Perakaunan
Level 12, Menara SAAS
UiTM Shah Alam, Selangor
323
SURVEY QUESTIONNAIRE
INTERNAL CONTROL IN PUBLIC SCHOOLS IN MALAYSIA
Dear Sir/Madam,
The main objective of this research is to determine the relationship between the
internal control and performance of public schools in Malaysia.
This questionnaire is divided into four sections. The first and second sections
contain questions relating to the respondent’s and school’s profile. Section three
focuses on the internal control and organizational culture framework. Section four
focuses on the effect of the internal control and organizational culture framework on
organizational performance.
It would be a great help if you could please answer this survey questionnaire. Please
be assured that all information will be treated with the strictest confidentiality.
Thank you for your valuable assistance in participating in the survey.
324
SECTION 1 BAHAGIAN 1
RESPONDENT PROFILE LATARBELAKANG RESPONDEN
DIRECTION ARAHAN
Please tick (√) for questions (1-8) in the respective boxes.
Sila tandakan (√) untuk soalan (1-8 ) di kotak yang bersesuaian.
1. Gender Jantina
325
8. Have you ever attended any training in financial management? Pernahkah
anda menghadiri kursus pengurusan kewangan.
Yes Ya No Tidak
9. What is your level of knowledge on internal control? Apakah tahap
pengetahuan kawalan dalaman anda?
Yes Ya No Tidak
SECTION 2 BAHAGIAN 2
SCHOOL PROFILE MAKLUMAT SEKOLAH
DIRECTION ARAHAN
Please tick (√) or fill in the respective boxes.
Sila tandakan (√) atau isikan tempat kosong di kotak yang sesuai.
326
6. Number of students (for the year 2012)
Bilangan pelajar (bagi tahun 2012) : ........................
7. Audit report status for the year 2012. Status laporan audit bagi tahun 2012.
Unqualified Certificate Sijil Tanpa Teguran Qualified Certificate Sijil Berteguran
Less Satisfactory
Excellent Amat Baik
Kurang memuaskan
Satisfactory Memuaskan
SECTION 3 (BAHAGIAN 3)
CONTROL FRAMEWORK RANGKA KERJA KAWALAN
Kawalan dalaman merupakan satu proses untuk memantau aktiviti kewangan dan
bukan kewangan untuk memastikan matlamat tercapai serta membetulkan sebarang
perbezaan (selisihan) yang berlaku. Tanggungjawab untuk mewujudkan dan
menyelenggarakan kawalan dalaman adalah terletak di bawah kuasa pihak
pengurusan. Objektifnya adalah untuk memastikan polisi, peraturan dan undang-
undang dipatuhi, serta menghalang kesilapan, penipuan, pembaziran dan
penyelewengan. (Gupta, 2009; Root, 1998)
327
Direction Arahan :
The following are statements that relate to internal control in an organization. Please
mark your sincere response by circling one number only for each row of descriptive
statement based on your level of agreement from the scale of 1 to 7 as follows:
Berikut adalah pernyataan-pernyataan mengenai kawalan dalaman organisasi. Sila
tandakan secara jujur dengan membulatkan hanya satu nombor dari 1 hingga 7:
1 2 3 4 5 6 7
Strongly Disagree Slightly Neutral Slightly Agree Strongly
disagree disagree agree agree
Sangat Tidak Agak Neutral Agak Bersetuju Sangat
tidak bersetuju tidak bersetuju bersetuju
bersetuju bersetuju
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
1 Management has established policies related to ethical values as
acceptable codes of conduct in the organization.
Pihak pengurusan mewujudkan polisi berkaitan nilai-nilai etika
1 2 3 4 5 6 7
sebagai amalan tingkah laku yang diterima pakai di dalam
organisasi.
328
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
7 Organizational chart clearly defines the lines of management
authority and responsibility.
Carta organisasi menunjukkan dengan jelas kuasa dan 1 2 3 4 5 6 7
tanggungjawab pihak pengurusan.
329
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
19 Internal audit report addresses the weaknesses of internal
control.
Laporan audit dalam dapat mengnalpasti kelemahan kawalan 1 2 3 4 5 6 7
dalaman.
330
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
29 Risk assessment used by the management considers
opportunities to commit fraud.
Penilaian risiko yang digunakan oleh pihak pengurusan 1 2 3 4 5 6 7
mengambil kira kemungkinan sesuatu penyelewengan berlaku.
35 Any person in the school office can receive cash and produce
receipt.
1 2 3 4 5 6 7
Semua kakitangan pejabat sekolah boleh menerima wang dan
mengeluarkan resit.
36 There is segregation of duties in managing cash
Pengasingan tugas wujud di dalam pengurusan urusniaga tunai. 1 2 3 4 5 6 7
331
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
41 The personnel have no problems in obtaining information
pertaining to their own work tasks.
Kakitangan tidak mempunyai masalah mendapatkan maklumat 1 2 3 4 5 6 7
berkaitan tugasan mereka.
332
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
Pemeriksaan mengejut ke atas tunai runcit dan tunai sepatutnya
dilakukan sekurang-kurangnya dua kali setahun.
333
B. EVALUATION OF ORGANIZATIONAL CULTURE (PENILAIAN
TERHADAP BUDAYA ORGANISASI)
Direction Arahan :
1 2 3 4 5 6 7
Strongly Disagree Slightly Neutral Slightly Agree Strongly
disagree disagree agree agree
Sangat Tidak Agak Neutral Agak Bersetuju Sangat
tidak bersetuju tidak bersetuju bersetuju
bersetuju bersetuju
334
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
1 There is a result oriented culture that drives towards achieving
high performance.
Wujud budaya yang berorientasikan pencapaian dan berusaha 1 2 3 4 5 6 7
ke arah mencapai prestasi yang lebih tinggi.
335
SECTION 4 (BAHAGIAN 4)
Public sector performance can be measured using the ‘Three Es’ concept, which are
economy, efficiency and effectiveness. Economy means minimising the costs of
running the organization, including buying goods and services of the right quality at
the lowest possible price, efficiency is getting the most out of every cent spent;
using all resources – staff, buildings and equipment – to the best effect and avoiding
waste. Effectiveness is ensuring that all activities are focused on achieving the
organizations’ goals. Good internal control will provide reasonable assurance in
pursuit of the organization’s mission and goal. (Mihaiu, Opreana & Cristescu, 2010)
Prestasi sektor awam boleh diukur menggunakan konsep 'Tiga E' iaitu ekonomikal,
efisien dan efektif. Ekonomikal bermakna meminimakan kos operasi organisasi,
termasuk membeli barang-barang dan perkhidmatan yang berkualiti pada harga
yang paling rendah, efisien adalah untuk mendapatkan yang terbaik daripada
setiap sen yang dibelanjakan; menggunakan semua sumber - kakitangan, bangunan
dan peralatan - untuk hasil yang terbaik dan mengelakkan pembaziran. Efektif pula
adalah untuk memastikan segala aktiviti yang dilaksanakan memberi tumpuan
kepada pencapaian matlamat organisasi. Kawalan dalaman yang berkesan akan
memberi jaminan misi dan matlamat organisasi dapat dicapai. (Mihaiu, Opreana &
Cristescu, 2010)
Direction Arahan :
The following are statements that relate to the affect of internal control to
organizational performance in an organization. Please mark your sincere response
by circling one number only for each row of descriptive statement based on your
level of agreement from the scale of 1 to 7 as follows: Berikut adalah pernyataan-
pernyataan mengenai kesan pelaksanaan kawalan dalaman terhadap prestasi
organisasi. Sila tandakan secara jujur dengan membulatkan hanya satu nombor
dari 1 hingga 7:
1 2 3 4 5 6 7
Strongly Disagree Slightly Neutral Slightly Agree Strongly
disagree disagree agree agree
Sangat Tidak Agak Neutral Agak Bersetuju Sangat
tidak bersetuju tidak bersetuju bersetuju
bersetuju bersetuju
336
LEVEL OF AGREEMENT
NO. STATEMENT PERNYATAAN
TAHAP PERSETUJUAN
1 With existing internal control, operation decision could be
done in a timely manner.
Dengan kawalan dalaman yang ada, keputusan operasi 1 2 3 4 5 6 7
dapat dibuat di dalam masa yang tepat.
337
Please provide any comments or suggestions concerning the internal control practice
and its challenges in your organization.
Sila berikan sebarang komen atau cadangan tentang kawalan dalaman organisasi
anda.
.......................................................................................................................................
.......................................................................................................................................
.......................................................................................................................................
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338
APPENDIX B2
EVIDENCES OF SURVEY QUESTIONNAIRES DISTRIBUTED TO
RESPONDENTS AT THREE CONFERENCES VENUE BY THE
RESPECTIVE CONFERENCE ORGANISERS
339
340
341
342
343
344
345
APPENDIX C
NUMBER OF MISSING DATA
Missing
Questions N Mean Std. Deviation
Count Percent
S1-1 270 1.67 .471 0 .0
S1-2 269 1.32 .715 1 .4
S1-3 269 3.19 .818 1 .4
S1-4 269 2.23 .602 1 .4
S1-5 269 1.28 .449 1 .4
S1-6 270 2.30 .819 0 .0
S1-7 269 2.18 .651 1 .4
S1-8 269 1.26 .440 1 .4
S1-9 268 2.18 .656 2 .7
S1-10 268 1.62 .486 2 .7
S2-1 268 3.72 .450 2 .7
S2-2 270 2.00 1.189 0 .0
S2-3 269 1.23 .567 1 .4
S2-4 268 2.54 .649 2 .7
S2-5 270 3.00 1.149 0 .0
S2-6 266 3.27 .605 4 1.5
S2-7 270 1.67 .471 0 .0
S2-8 269 1.32 .715 1 .4
A1 268 6.07 .880 2 .7
A2 265 6.18 .799 5 1.9
A3 270 5.76 1.016 0 .0
A4 270 6.41 .683 0 .0
A5 270 6.24 .745 0 .0
A6 270 6.37 .723 0 .0
A7 270 6.46 .719 0 .0
A8 269 6.34 .749 1 .4
A9 269 5.77 .866 1 .4
A10 270 6.31 .746 0 .0
A11 270 5.61 .904 0 .0
A12 270 6.22 .773 0 .0
A13 270 5.98 .866 0 .0
A14 270 6.18 .750 0 .0
A15 270 5.90 .937 0 .0
A16 270 5.78 .976 0 .0
A17 270 5.56 1.155 0 .0
A18 270 5.57 1.101 0 .0
A19 269 5.72 1.121 1 .4
346
Missing
Questions N Mean Std. Deviation
Count Percent
A20 270 6.47 .774 0 .0
A21 270 5.82 .867 0 .0
A22 270 6.23 .779 0 .0
A23 270 6.42 .715 0 .0
A24 270 5.95 .850 0 .0
A25 270 5.56 1.112 0 .0
A26 269 5.97 .897 1 .4
A27 270 5.96 .882 0 .0
A28 269 5.59 1.070 1 .4
A29 270 5.77 1.011 0 .0
A30 270 5.90 .933 0 .0
A31 270 6.14 .818 0 .0
A32 270 6.66 .605 0 .0
A33 270 6.61 .611 0 .0
A34 270 6.24 .998 0 .0
A35 270 6.52 .779 0 .0
A36 270 5.50 1.387 0 .0
A37 270 5.53 1.310 0 .0
A38 270 6.60 .665 0 .0
A39 270 6.30 1.061 0 .0
A40 270 6.13 .957 0 .0
A41 270 5.99 .964 0 .0
A42 270 6.41 .704 0 .0
A43 269 6.16 .806 1 .4
A44 269 5.30 1.651 1 .4
A45 270 6.10 .823 0 .0
A46 270 6.20 .798 0 .0
A47 270 6.41 .745 0 .0
A48 270 6.52 .672 0 .0
A49 270 6.21 .741 0 .0
A50 270 6.37 .739 0 .0
A51 270 6.29 .877 0 .0
A52 270 6.28 .929 0 .0
A53 270 6.37 .714 0 .0
A54 270 6.53 .688 0 .0
A55 270 6.51 .672 0 .0
A56 270 6.52 .699 0 .0
B1 270 6.19 .766 0 .0
B2 270 6.01 .881 0 .0
B3 270 5.58 .994 0 .0
347
Missing
Questions N Mean Std. Deviation
Count Percent
B4 270 6.20 .750 0 .0
B5 270 6.19 .872 0 .0
B6 270 6.21 .825 0 .0
B7 270 5.61 .929 0 .0
B8 270 5.99 .827 0 .0
B9 270 6.06 .762 0 .0
C1 270 6.20 .753 0 .0
C2 270 6.32 .714 0 .0
C3 270 6.31 .781 0 .0
C4 270 6.06 .875 0 .0
C5 270 6.14 .803 0 .0
C6 270 6.26 .776 0 .0
C7 270 6.23 .779 0 .0
C8 270 6.24 .784 0 .0
C9 270 6.30 .842 0 .0
C10 270 6.30 .747 0 .0
348
APPENDIX D
FACTOR ANALYSIS – FACTORS EXTRACTION
Total Variance Explained with Eigenvalues Guideline
349
36 .461 .615 88.258
37 .452 .603 88.861
38 .422 .562 89.424
350
APPENDIX E
FACTOR LOADING WITH ROTATED COMPONENT MATRIX
351
A27_ Management identifies the compensating
controls that are in place to mitigate risks. .674
A30_ Management provides appropriate
corrective action, based on the significance and
.645
likelihood of occurrence of the risks.
A26_ Those in managerial functions are aware
of the risks of their areas of responsibility. .632
A24_ Management actively evaluate both
internal and external risks that may likely
.571
prevent the achievement of goals.
FACTOR 4: ORGANIZATIONAL CULTURE (SCALE α=0.915)
OC5_ There is a collaborating culture in
completing tasks .769
OC6_ There is a culture where staff helps
and supports each other. .759
OC2_ There is a culture of always ready to
meet new challenges. .723
OC1_ There is a result oriented culture that
drives towards achieving high performance. .623
OC3_ There is a culture that emphasizes on
being first in innovation. .377 .568
OC9_ There is a culture that focuses on
consistency, stability, efficiency and smooth
.562
operations.
OC4_ There is a culture that creates a safe
and pleasant place to work. .525
OC8_ There is a culture where established
procedures generally govern what people do. .363 .476
OC7_ There is a very formal and structured
culture. .438
A42_ Management ensures that effective
communications occur internally.
FACTOR 5: MONITORING (SCALE α=0.883)
A55_ The feedbacks given by School Audit
Division, Internal Audit Department or School
Inspectorate helps in improving school .812
operations.
A56_ Evaluations performed by School Audit
Division, Internal Audit Department or School
Inspectorate can provide an objective review of .805
the school.
A54_ Inspections from School Audit Division,
Internal Audit Department or School
Inspectorate help in improving quality of .754
internal control.
A50_ All mistakes or missing items will be
investigated and recorded. .490
A49_ There is an active control of how the
personnel obeys operating instructions issued
such as punch card and setting the key .415
performance indicator (KPI).
FACTOR 6: INTERNAL AUDIT (SCALE α=0.833)
A17_ Internal audit reports are produced
regularly .806
A16_ Internal auditor has sufficient financial
management knowledge to do his/ her work. .762
A15_ Internal auditor conducts audit works
regularly. .705 .377
A19_ Internal audit report addresses the
weaknesses of internal control. .352 .713
A18_ Management discusses internal audit
reports frequently. .374 .670
A14_ Management and accounting personnel
are sufficiently competent to perform their
.441
assigned responsibilities.
FACTOR 7: CONTROL ACTIVITIES (SCALE α=0.809)
352
FACTOR 8: INFORMATION AND COMMUNICATION (SCALE α=0.684)
A41_ The personnel have no problems in
obtaining information pertaining to their own
.376 .761
work tasks.
A45_ Information used in controlling
activities will lead to reliable financial
.364 .463
reporting.
A48_ Principal always checks to verify the
work done by accounting personnel. .379
A47_ Data involving financial statements is
always updated. .371
FACTOR 9: FINANCIAL COMMITTEE (SCALE α=0.573)
353
Components
Components/ Factor F1 F2 F3 F4 F5 F6 F7 F8 F9 F10 F11 F12 F13 F14
Kaiser-Meyer-Olkin Measure
0.948
of Sampling Adequacy.
Bartlett's Test of Sphericity Approx. Chi-Square= 15316.723, df. = 2775 and Sig. = 0.000
Percentage Variance Explained 38.901 5.394 3.585 2.673 2.484 2.302 2.105 2.000 1.772 1.709 1.613 1.491 1.383 1.369
Cumulative Percentage 38.901 44.295 47.880 50.553 53.637 55.339 57.445 59.445 61.217 62.926 64.538 66.030 67.413 68.782
Variance Explained
Eigenvalues 29.176 4.046 2.689 2.005 1.863 1.727 1.579 1.500 1.329 1.282 1.209 1.118 1.037 1.027
Cronbach’s Alpha 0.944 0.922 0.930 0.915 0.883 0.883 0.809 0.684 0.573 0.434 0.321 0.313
No. of items 10 15 6 9 6 5 6 4 3 3 2 2 1 1
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 14 iterations.
354
APPENDIX F
FACTOR ANALYSIS RESULTS
Factor Analysis Results for Study variables and Measures
Items Extracted Factors Factor
Loading
355
Items Extracted Factors Factor
Loading
FACTOR 5: MONITORING
356
Items Extracted Factors Factor
Loading
357
Items Extracted Factors Factor
Loading
2 A20_ School financial comittee meets at least four times a year 0.671
3 A38_ All financial documents such as receipt and cheque books should be
kept in a locked cabinet. 0.421
Percentage Variance Explained
1.709
Eigenvalues
1.282
Cronbach’s Alpha
0.434*
358
Items Extracted Factors Factor
Loading
Cronbach’s Alpha
0.313*
Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser
Normalization.
A42, A33 and A31 were dropped due to low item-factor correlation less than 0.35
* Factor 2 (A1, A2, A3,A4, A5, A6, A7, A8, A9, A10, A11, A12,A13, A49) was
changed to ethical formal structures
* Factor 8 (A41, A45, A48, 47), Factor 9 (A20, A38, A51), Factor 10 (A21, A22, A23),
Factor 11 ( A34, A36) and Factor 12 ( A44, A53) were dropped due to low reliability
with Cronbach’s Alpha less than 0.70.
* Factor 13 (A43) and Factor 14 (A44) were dropped because of single-item within
factor.
359
APPENDIX G
MODEL FIT SUMMARY
CMIN
Model NPAR CMIN DF P CMIN/DF
Default model 106 1347.723 797 .000 1.691
Saturated model 903 .000 0
Independence model 42 9330.037 861 .000 10.836
RMR, GFI
Model RMR GFI AGFI PGFI
Default mode .034 .807 .781 .712
Saturated model .000 1.000
Independence model .305 .111 .068 .106
Baseline Comparisons
NFI RFI IFI TLI
Model CFI
Delta1 rho1 Delta2 rho2
Default model .856 .844 .935 .930 .935
Saturated model 1.000 1.000 1.000
Independence model .000 .000 .000 .000 .000
Parsimony-Adjusted Measures
Model PRATIO PNFI PCFI
Default model .926 .792 .865
Saturated model .000 .000 .000
Independence model 1.000 .000 .000
NCP
Model NCP LO 90 HI 90
Default model 550.723 453.273 656.040
Saturated model .000 .000 .000
Independence model 8469.037 8161.946 8782.612
360
FMIN
Model FMIN F0 LO 90 HI 90
Default model 5.010 2.047 1.685 2.439
Saturated model .000 .000 .000 .000
Independence model 34.684 31.483 30.342 32.649
RMSEA
Model RMSEA LO 90 HI 90 PCLOSE
Default model .051 .046 .055 .400
Independence model .191 .188 .195 .000
AIC
Model AIC BCC BIC CAIC
Default model 1559.723 1600.059 1941.156 2047.156
Saturated model 1806.000 2149.619 5055.375 5958.375
Independence
9414.037 9430.019 9565.170 9607.170
model
ECVI
Model ECVI LO 90 HI 90 MECVI
Default model 5.798 5.436 6.190 5.948
Saturated model 6.714 6.714 6.714 7.991
Independence
34.996 33.855 36.162 35.056
model
HOELTER
HOELTER HOELTER
Model
.05 .01
Default model 173 179
Independence
27 28
model
361
APPENDIX H
AUDIT REPORT 2008 – 2013
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
380
381
382
383
384
385
386
387
388
389
390
391
392
393
AUTHORS PROFILE
Proceedings/Paper Presented
Doctoral Colloquium
394
2. Internal Control in Malaysian Public Schools: A Preliminary Analysis.
National Postgraduate Colloquium (NAPAC) 2012. 15 – 16th December
2012 UiTM Shah Alam, Selangor.
395