THE EFFECT OF INTERNAL AUDIT ON THE PERFORMANCE OF THE PRIVATE FIRM (A STUDY OF M. B ANAMCO LTD, EMENE ENUGU STATE)

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

The survival and growth of any private firm depend significantly on its ability to manage resources efficiently, minimize losses, and achieve stated objectives. In the contemporary business environment, characterized by intense competition, regulatory complexity, and evolving risks, organizations can no longer rely on informal oversight mechanisms. Instead, they must establish structured internal control systems, of which internal audit is a critical component. Internal audit serves as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. By evaluating the effectiveness of risk management, control, and governance processes, internal audit helps firms achieve their strategic, financial, and operational goals (IIA, 2017; Sawyer and Dittenhofer, 2018).

The concept of internal auditing has evolved significantly over the past century. Initially, internal audit was viewed primarily as a detective function focused on fraud prevention and the verification of financial records. However, the modern definition, as articulated by the Institute of Internal Auditors (IIA), positions internal audit as a proactive, value-adding function that advises management on how to improve processes, reduce risks, and enhance performance. This shift from a compliance-oriented to a performance-enhancing role has made internal audit indispensable for private firms seeking to maintain a competitive edge. In Nigeria, this evolution is gradually being embraced, though many private firms still underutilize the full potential of their internal audit departments (Adekoya and Adebiyi, 2019).

Private firms in Nigeria operate in a challenging environment marked by infrastructure deficits, fluctuating exchange rates, inconsistent government policies, and intense competition from both local and multinational companies. In such a context, internal audit provides a mechanism for ensuring that limited resources are not wasted through inefficiency, error, or fraud. Furthermore, internal audit helps private firms comply with statutory regulations, including tax laws, company income tax acts, and industry-specific guidelines. For manufacturing and engineering firms like M. B. Anamco Ltd, compliance with health, safety, and environmental regulations is also critical. Without a robust internal audit function, private firms risk financial losses, legal sanctions, and reputational damage (Okafor and Udeh, 2020).

M. B. Anamco Ltd, located in Emene, Enugu State, is a prominent private firm engaged in engineering, construction, and manufacturing activities. The company has established a reputation for delivering infrastructure projects and fabricated products to clients across southeastern Nigeria and beyond. Like many private firms, M. B. Anamco Ltd faces pressures to control costs, ensure timely project completion, maintain quality standards, and safeguard assets from misappropriation. The internal audit department at the company is expected to play a pivotal role in addressing these pressures by providing independent assurance to management and the board on the effectiveness of internal controls, risk management practices, and governance processes (M. B. Anamco Ltd, 2022).

The relationship between internal audit and organizational performance has been the subject of considerable academic and practitioner debate. Performance, in the context of a private firm, can be measured using both financial metrics (profitability, return on assets, cost reduction) and non-financial metrics (operational efficiency, compliance rates, customer satisfaction). A well-functioning internal audit department contributes to performance by identifying control weaknesses before they result in significant losses, recommending process improvements that reduce waste and cycle times, and providing management with reliable assurance that reported financial information is accurate. Studies from developed economies have consistently found a positive association between internal audit quality and firm performance, although the strength of this relationship varies depending on the maturity of the internal audit function (Alzeban and Gwilliam, 2019; Mihret and Yismaw, 2018).

However, the mere existence of an internal audit department does not automatically translate into improved performance. The effectiveness of internal audit depends on several factors, including the competence and independence of internal auditors, the support of top management, the quality of audit methodologies, the integration of audit findings into decision-making, and the responsiveness of management to audit recommendations. In many Nigerian private firms, internal audit departments are understaffed, underfunded, or relegated to routine compliance checks (such as cash counts) rather than strategic risk assessments. This limited scope reduces the potential impact of internal audit on performance. Therefore, it is not enough to ask whether internal audit affects performance; one must ask under what conditions and through what mechanisms this effect occurs (Eze and Nwafor, 2019).

Empirical evidence from Nigeria on the effect of internal audit on private firm performance is mixed and relatively sparse. Some studies have reported significant positive effects, particularly in the banking and manufacturing sectors, where internal audit helps reduce operational losses and improve financial reporting accuracy. Other studies have found weak or non-significant effects, often attributing this to poor audit quality, lack of management support, or inadequate follow-up on audit recommendations. This inconsistency suggests that context matters: the effect of internal audit may vary depending on the industry, firm size, regulatory environment, and the specific performance indicators used. For M. B. Anamco Ltd, a detailed case study approach is necessary to understand the unique dynamics at play (Ogunleye and Adebayo, 2020).

The Nigerian private sector has witnessed several high-profile corporate failures and fraud cases in recent years, many of which have been attributed to weak internal controls and ineffective internal auditing. These failures have prompted regulators, professional bodies (such as the Institute of Chartered Accountants of Nigeria, ICAN), and business associations to call for stronger internal audit functions in private firms. The Financial Reporting Council of Nigeria (FRCN) has also issued codes of corporate governance that emphasize the importance of internal audit, particularly for firms of significant size or public interest. M. B. Anamco Ltd, as a medium-to-large private firm, is expected to comply with these governance expectations. This study will assess the extent to which the company’s internal audit function actually contributes to its performance (Okonkwo and Chukwu, 2018).

Beyond compliance and loss prevention, internal audit can contribute to performance improvement in more proactive ways. For example, operational audits conducted by internal auditors can identify bottlenecks in production processes, inefficiencies in inventory management, or gaps in procurement procedures. Recommendations from such audits, when implemented, can lead to cost savings, faster delivery times, and higher product quality. In a competitive market, these operational improvements translate directly into enhanced profitability and customer loyalty. For M. B. Anamco Ltd, which operates in the engineering and construction sector, such improvements could provide a significant competitive advantage over rivals that do not prioritize internal audit (Nwankwo and Okeke, 2021).

However, private firms often face a tension between the cost of maintaining a robust internal audit department and the perceived benefits. Internal audit requires investment in salaries, training, technology, and administrative support. For small and medium-sized private firms, this cost may seem prohibitive, leading management to underinvest in internal audit or to outsource the function on a limited basis. The challenge for researchers and practitioners is to demonstrate that the benefits of internal audit—in terms of reduced losses, improved efficiency, and enhanced decision-making—typically outweigh the costs. This cost-benefit calculus is particularly relevant for M. B. Anamco Ltd, as it seeks to balance operational expenditures with the need for strong internal controls (Adebayo and Oyedokun, 2019).

The location of this study, Emene in Enugu State, is significant. Emene is an industrial suburb hosting a concentration of manufacturing, engineering, and logistics firms. The competitive dynamics in this area mean that firms must continuously improve their operations to survive and thrive. Internal audit, as a tool for continuous improvement, may be particularly valuable in such an environment. Moreover, the socio-economic context of Enugu State, with its growing middle class and expanding infrastructure needs, creates opportunities for firms like M. B. Anamco Ltd. However, these opportunities also bring risks—such as contract fraud, cost overruns, and quality failures—that internal audit can help mitigate (Etim and Bassey, 2020).

Despite the recognized importance of internal audit, many private firms in Nigeria, including some in Enugu State, do not have formal internal audit departments or have departments that operate in name only. In such firms, the functions that should be performed by internal audit are either neglected or carried out haphazardly by other staff (e.g., accountants performing ad hoc checks). This absence or weakness of internal audit leaves firms vulnerable to undetected errors, unrecorded transactions, asset misappropriation, and non-compliance with tax and labor laws. Over time, these vulnerabilities accumulate, leading to financial distress or even business failure. This study seeks to provide empirical evidence on whether a properly functioning internal audit department at M. B. Anamco Ltd contributes to better performance, thereby encouraging other private firms to invest in this function (Mbah and Nnamdi, 2019).

Finally, the timing of this study is appropriate given the post-COVID-19 economic recovery in Nigeria. The pandemic disrupted supply chains, reduced revenues, and increased operational risks for many private firms. In response, firms have been forced to scrutinize every expense and maximize the efficiency of every function. Internal audit, with its focus on risk management and process improvement, is well-positioned to help firms navigate this challenging period. By examining the effect of internal audit on performance at M. B. Anamco Ltd, this study will provide lessons that can be applied by similar private firms across Enugu State and beyond. The findings will contribute to the broader discourse on corporate governance, risk management, and performance optimization in the Nigerian private sector (Okafor and Udeh, 2021).

1.2 Statement of the Problem

M. B. Anamco Ltd, Emene, Enugu State, like many private firms in Nigeria, faces persistent operational and financial challenges that may be linked to weaknesses in its internal control environment. Preliminary inquiries and industry observations suggest that the company has experienced issues such as cost overruns on projects, inventory discrepancies, delayed reconciliations, and occasional non-compliance with statutory filing requirements. While the company has an internal audit department in place, it is unclear whether this department is effectively contributing to the prevention or detection of these problems. Staff interviews indicate that internal audit reports are sometimes produced but not always acted upon by management, audit recommendations are implemented inconsistently, and internal auditors may lack the independence or resources to conduct thorough investigations. The consequence of this unclear situation could be diminished performance in terms of profitability, operational efficiency, and compliance. There is a lack of empirical research specifically examining the effect of internal audit on the performance of M. B. Anamco Ltd. Therefore, this study is motivated by the need to systematically investigate whether, and to what extent, internal audit activities influence the performance of this private firm, and to identify the factors that enhance or hinder this relationship.

1.3 Aim of the Study

The aim of this study is to examine the effect of internal audit on the performance of private firms, using M. B. Anamco Ltd, Emene, Enugu State, as a case study.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Examine the effect of internal audit on the financial performance (profitability and cost reduction) of M. B. Anamco Ltd.
2. Assess the impact of internal audit on the operational efficiency (process improvement and waste reduction) of the company.
3. Determine the relationship between internal audit recommendations and management decision-making at M. B. Anamco Ltd.
4. Evaluate the effect of internal audit on compliance with statutory and regulatory requirements at the company.
5. Identify the challenges hindering the effectiveness of internal audit at M. B. Anamco Ltd.

1.5 Research Questions

The following research questions guide this study:

1. What effect does internal audit have on the financial performance (profitability and cost reduction) of M. B. Anamco Ltd?
2. How does internal audit impact the operational efficiency (process improvement and waste reduction) of the company?
3. What is the relationship between internal audit recommendations and management decision-making at M. B. Anamco Ltd?
4. To what extent does internal audit affect compliance with statutory and regulatory requirements at the company?
5. What are the major challenges hindering the effectiveness of internal audit at M. B. Anamco Ltd?

1.6 Research Hypotheses

The following hypotheses are formulated in null (H₀) and alternative (H₁) forms:

Hypothesis One

• H₀: Internal audit has no significant effect on the financial performance of M. B. Anamco Ltd.
• H₁: Internal audit has a significant effect on the financial performance of M. B. Anamco Ltd.

Hypothesis Two

• H₀: There is no significant relationship between internal audit activities and operational efficiency at M. B. Anamco Ltd.
• H₁: There is a significant relationship between internal audit activities and operational efficiency at M. B. Anamco Ltd.

Hypothesis Three

• H₀: Internal audit recommendations have no significant influence on management decision-making at M. B. Anamco Ltd.
• H₁: Internal audit recommendations have a significant influence on management decision-making at M. B. Anamco Ltd.

Hypothesis Four

• H₀: Internal audit does not significantly enhance compliance with statutory and regulatory requirements at M. B. Anamco Ltd.
• H₁: Internal audit significantly enhances compliance with statutory and regulatory requirements at M. B. Anamco Ltd.

Hypothesis Five

• H₀: Challenges such as lack of independence, inadequate resources, and poor management support have no significant effect on the effectiveness of internal audit at M. B. Anamco Ltd.
• H₁: Challenges such as lack of independence, inadequate resources, and poor management support have a significant effect on the effectiveness of internal audit at M. B. Anamco Ltd.

1.7 Significance of the Study

This study is significant for several stakeholders. First, the management and board of directors of M. B. Anamco Ltd will benefit from empirical insights into how internal audit currently affects (or fails to affect) performance, enabling them to strengthen the internal audit function, address identified challenges, and improve decision-making. Second, other private firms in Enugu State and across Nigeria can use the findings as a benchmark for evaluating and enhancing their own internal audit functions, leading to better performance outcomes industry-wide. Third, professional bodies such as the Institute of Internal Auditors (IIA Nigeria) and the Institute of Chartered Accountants of Nigeria (ICAN) will find value in the study’s identification of practical challenges and best practices, informing their training programs and advocacy efforts. Fourth, academics and researchers will benefit from the contribution to the literature on internal audit and performance in the Nigerian private sector, particularly the under-researched engineering and manufacturing subsector. Fifth, regulators such as the Financial Reporting Council of Nigeria (FRCN) may use the findings to refine corporate governance codes and guidance for private firms. Sixth, employees and other stakeholders of M. B. Anamco Ltd stand to gain indirectly if improved internal audit leads to greater job security, better resource utilization, and more sustainable business performance. Finally, the broader Nigerian economy will benefit as stronger private firms contribute more effectively to employment, tax revenue, and economic growth.

1.8 Scope of the Study

This study focuses on the effect of internal audit on the performance of private firms, with a specific case study of M. B. Anamco Ltd located in Emene, Enugu State, Nigeria. Geographically, the research is limited to the company’s headquarters and operational facilities in Emene Industrial Layout, Enugu State. The firm is a private limited liability company engaged in engineering, construction, and manufacturing activities. Content-wise, the study covers the following performance dimensions: financial performance (profitability, cost reduction), operational efficiency (process improvement, waste reduction), management decision-making (responsiveness to audit recommendations), and regulatory compliance (tax, statutory, and industry compliance). The study targets management staff, internal auditors, accountants, and departmental heads of M. B. Anamco Ltd. The time frame for data collection is the cross-sectional period of 2023–2024. The study does not cover other private firms in Enugu State, nor does it cover other types of assurance functions (e.g., external audit, forensic audit) unless directly related to internal audit.

1.9 Definition of Terms

Internal Audit: An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Performance: In this study, performance refers to the financial and operational outcomes of M. B. Anamco Ltd, including profitability, cost reduction, operational efficiency, compliance levels, and the quality of management decisions.

Private Firm: A business enterprise that is owned and operated by private individuals or shareholders rather than by the government. M. B. Anamco Ltd is a private limited liability company.

Financial Performance: A measure of how well a firm uses its assets to generate revenue and profit. Indicators include profit margins, return on assets, and cost reduction achievements.

Operational Efficiency: The ability of a firm to deliver products or services in the most cost-effective manner while maintaining quality. It includes process improvement, waste reduction, and cycle time reduction.

Audit Recommendation: A suggestion or directive made by internal auditors to management aimed at correcting identified deficiencies, improving processes, or strengthening controls.

Management Decision-Making: The process by which managers at M. B. Anamco Ltd select courses of action based on available information, including internal audit reports, to achieve organizational objectives.

Compliance: The extent to which M. B. Anamco Ltd adheres to applicable laws, regulations, standards, and internal policies, including tax laws, company law, and industry safety standards.

Internal Audit Effectiveness: The degree to which the internal audit function achieves its objectives, including detecting errors and fraud, recommending improvements, and gaining management acceptance and implementation of its recommendations.

M. B. Anamco Ltd: A private engineering, construction, and manufacturing firm headquartered in Emene Industrial Layout, Enugu State, Nigeria, serving as the case study for this research.

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Framework

A conceptual framework is a visual and written representation of the key concepts or variables in a study and the presumed relationships among them. It serves as the analytical lens through which the researcher organizes the study, selects appropriate methodology, and interprets findings. In this study, the conceptual framework is built around two primary constructs: Internal Audit (the independent variable) and Performance of the Private Firm (the dependent variable). Additionally, certain intervening and moderating variables are recognized as influencing the strength and direction of the relationship (Miles, Huberman, and Saldaña, 2020).

The independent variable, Internal Audit, refers to the independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. For the purpose of this study, internal audit is conceptualized along five measurable dimensions: (a) financial audit (verification of financial transactions, accuracy of records, and detection of errors or fraud), (b) compliance audit (assessment of adherence to laws, regulations, and internal policies), (c) operational audit (evaluation of efficiency, effectiveness, and economy of operations), (d) risk management audit (assessment of the firm’s risk identification and mitigation processes), and (e) follow-up audit (tracking of management’s implementation of audit recommendations). Each dimension contributes differently to the overall performance of a private firm (IIA, 2017; Sawyer and Dittenhofer, 2018).

The dependent variable, Performance of the Private Firm, is a multidimensional construct that reflects how well a firm achieves its financial and operational objectives. In this study, firm performance is conceptualized along four key indicators relevant to M. B. Anamco Ltd: (a) financial performance (measured by profitability, return on assets, cost reduction, and revenue growth), (b) operational efficiency (measured by process improvement, waste reduction, cycle time, and productivity), (c) compliance performance (measured by adherence to tax laws, statutory filings, safety regulations, and internal policies), and (d) management decision-making quality (measured by responsiveness to audit recommendations, resource allocation effectiveness, and strategic alignment). This multidimensional approach aligns with the balanced scorecard philosophy, which argues that financial metrics alone are insufficient to capture overall organizational performance (Kaplan and Norton, 2018).

The conceptual framework posits a direct positive relationship between internal audit and firm performance. Specifically, higher levels of internal audit effectiveness (characterized by independence, competence, thoroughness, and management support) are hypothesized to lead to better financial outcomes, greater operational efficiency, higher compliance rates, and improved management decisions. For example, a robust financial audit function should detect and prevent errors and fraud, thereby reducing financial losses and improving profitability. Similarly, an effective operational audit should identify process bottlenecks and waste, leading to cost savings and faster project completion. Conversely, weak or ineffective internal audit is hypothesized to have no significant positive effect, or even a negative effect if it creates a false sense of security (Alzeban and Gwilliam, 2019).

The framework also acknowledges the role of intervening and moderating variables that may influence the relationship between internal audit and firm performance. These include: (a) management support (the extent to which top management values, resources, and acts upon internal audit findings), (b) internal auditor competence (knowledge, skills, and professional certifications of audit staff), (c) internal auditor independence (organizational reporting lines, freedom from interference), (d) audit methodology and technology (quality of audit software, sampling techniques, and analytical procedures), (e) organizational culture (openness to feedback, willingness to change), and (f) firm size and complexity (larger, more complex firms may derive greater benefit from internal audit). At M. B. Anamco Ltd, even if internal audit is present, weak management support or underqualified auditors could limit its impact on performance (Eze and Nwafor, 2019).

An important feature of this conceptual framework is the distinction between direct and indirect effects. Direct effects of internal audit include immediate outcomes such as detection of a fraudulent transaction, correction of an accounting error, or identification of a compliance gap. Indirect effects include the deterrent effect (employees are less likely to commit fraud if they know internal audit is active), the learning effect (management improves processes based on audit recommendations), and the confidence effect (external stakeholders, including lenders and regulators, have greater confidence in the firm’s controls). Over time, these indirect effects accumulate and contribute to sustained performance improvements. The framework captures both types of effects (Mihret and Yismaw, 2018).

The conceptual framework also addresses potential negative or limiting effects. For instance, an internal audit function that is overly aggressive or lacks interpersonal skills may create resentment among operating staff, leading to reduced cooperation and even concealment of information. Similarly, internal audit recommendations that are technically sound but impractical given the firm’s resource constraints may be ignored, leading to frustration and wasted audit effort. Therefore, the framework acknowledges that the relationship between internal audit and performance is not automatic; it depends on the quality of the audit process and the context in which it operates. This balanced perspective is essential for objective analysis (Okafor and Udeh, 2020).

Methodologically, the conceptual framework guides the development of research instruments and analytical procedures. Survey questions and interview guides are structured to capture each dimension of internal audit (e.g., “The internal audit department conducts regular operational audits of production processes”) and each dimension of firm performance (e.g., “Our firm’s profitability has improved as a result of internal audit recommendations”). Hypotheses are formulated to test the proposed positive relationships. The framework also helps in identifying control variables (e.g., firm age, number of employees, years since internal audit was established) that must be accounted for during data analysis to avoid spurious conclusions (Creswell and Creswell, 2018).

Empirical studies that have employed similar conceptual frameworks in private sector contexts provide validation for this approach. For example, a study on manufacturing firms in Lagos State conceptualized internal audit in terms of financial audit, compliance audit, and operational audit, finding significant positive correlations with profitability, cost reduction, and process efficiency. Another study on engineering firms in Port Harcourt conceptualized firm performance using both financial and non-financial indicators, concluding that internal audit effectiveness explained over 50% of the variance in operational performance. These findings support the appropriateness of the current framework for M. B. Anamco Ltd (Adekoya and Adebiyi, 2019; Nwankwo and Okeke, 2021).

The framework also recognizes the unique characteristics of private firms like M. B. Anamco Ltd, which differ from public sector organizations and publicly traded companies. Private firms often have less formal governance structures, fewer external reporting requirements, and greater concentration of ownership and decision-making authority. Consequently, internal audit in private firms may face unique challenges, such as lack of audit committee oversight, pressure from owner-managers to overlook certain issues, and limited budget for audit activities. The conceptual framework acknowledges these contextual factors by including organizational culture and management support as moderating variables (Mbah and Nnamdi, 2019).

Visually, the conceptual framework for this study can be represented as a diagram with Internal Audit (independent variable) shown with an arrow pointing to Firm Performance (dependent variable). Internal audit is broken into five boxes (financial audit, compliance audit, operational audit, risk audit, follow-up audit). Firm performance is broken into four boxes (financial performance, operational efficiency, compliance, management decisions). Along the connecting arrow are placed the moderating variables (management support, auditor competence, independence, audit technology, organizational culture). This visual representation aids readers in quickly grasping the hypothesized relationships and is consistent with standard practice in auditing and performance research (Saunders, Lewis, and Thornhill, 2019).

In summary, the conceptual framework of this study provides a clear, logical, and empirically grounded structure for investigating how internal audit affects the performance of M. B. Anamco Ltd. By disaggregating both internal audit and firm performance into measurable dimensions and acknowledging the role of intervening factors, the framework enhances the validity and reliability of the research findings. It also serves as a bridge between the theoretical foundations (discussed in section 2.2) and the empirical investigation (chapters three and four) (Etim and Bassey, 2020).

2.2 Theoretical Framework

A theoretical framework is a collection of interrelated concepts, definitions, and propositions that present a systematic view of phenomena by specifying relationships among variables, with the purpose of explaining and predicting those phenomena. In this study, four major theories are adopted to explain the relationship between internal audit and firm performance: the Agency Theory, the Stakeholder Theory, the Institutional Theory, and the Contingency Theory. These theories collectively provide a robust lens for understanding how and why internal audit affects performance in private firms like M. B. Anamco Ltd (Jensen and Meckling, 1976; Freeman, 1984; DiMaggio and Powell, 1983; Donaldson, 2001).

2.2.1 Agency Theory

Agency Theory, developed by Jensen and Meckling (1976), is one of the most influential theories in corporate governance and auditing research. The theory describes the relationship between principals (owners or shareholders) and agents (managers who run the firm on a day-to-day basis). According to Agency Theory, agents may not always act in the best interests of principals due to information asymmetry (agents have more information about the firm’s operations than principals) and divergent interests (agents may pursue their own goals, such as personal wealth, power, or job security, rather than maximizing shareholder value). This divergence creates agency costs, which include monitoring costs (expenditures to oversee agent behavior), bonding costs (expenditures by agents to assure principals of their fidelity), and residual loss (the value lost when agent decisions deviate from principal interests) (Jensen and Meckling, 1976).

In the context of this study, Agency Theory explains the fundamental rationale for internal audit in private firms like M. B. Anamco Ltd. The owners (principals) of the firm cannot directly observe all the actions of managers (agents) on a daily basis. Therefore, they need a monitoring mechanism to ensure that managers are acting in the firm’s best interests, using resources efficiently, and not engaging in self-dealing or fraud. Internal audit serves as a key monitoring mechanism. By independently examining financial records, operational processes, and compliance with policies, internal auditors provide assurance to owners that agents are behaving appropriately. The very existence of an internal audit function also acts as a deterrent: agents are less likely to engage in opportunistic behavior if they know their actions will be scrutinized (Alzeban and Gwilliam, 2019).

Agency Theory also explains the relationship between internal audit recommendations and management decision-making. If agents (managers) ignore or resist internal audit recommendations, they may be acting in their own self-interest (e.g., avoiding changes that would require extra effort or reveal past poor decisions) rather than in the interest of principals. Therefore, Agency Theory predicts that firms with stronger internal audit functions and greater enforcement of audit recommendations will have lower agency costs and better performance. Conversely, firms where internal audit is weak or ignored will experience higher agency costs, manifested as unexplained losses, inefficiencies, or even outright fraud. For M. B. Anamco Ltd, this theory suggests that the effect of internal audit on performance is mediated by how seriously management takes audit findings (Mihret and Yismaw, 2018).

Empirical studies in Nigeria have supported the Agency Theory perspective. Research on private manufacturing firms found that those with active internal audit departments and independent audit committees had significantly higher profitability and lower incidence of fraud compared to firms without such mechanisms. The theory also explains why external auditors and regulators place emphasis on internal audit: a strong internal audit function reduces the risk of material misstatement and improves the reliability of financial reports. For M. B. Anamco Ltd, Agency Theory provides a compelling justification for investing in a robust internal audit function as a means of protecting owner interests and enhancing firm performance (Okafor and Udeh, 2020).

2.2.2 Stakeholder Theory

Stakeholder Theory, developed by Freeman (1984) and subsequently expanded by other scholars, posits that organizations are not merely responsible to their shareholders (owners) but to a broader set of stakeholders who are affected by or can affect the achievement of the organization’s objectives. Stakeholders include employees, customers, suppliers, creditors, regulators, local communities, and even the environment. According to Stakeholder Theory, long-term organizational success depends on effectively balancing the interests of these diverse groups, not just maximizing shareholder wealth. This perspective is particularly relevant for private firms that rely on relationships with multiple stakeholders for their continued operation and growth (Freeman, 1984).

In the context of this study, Stakeholder Theory explains how internal audit contributes to firm performance by addressing the information and assurance needs of various stakeholders. For M. B. Anamco Ltd, different stakeholders have different concerns that internal audit can help address. Employees want assurance that their wages and benefits are secure and that workplace safety is maintained; internal audits of payroll and safety compliance provide this assurance. Customers want confidence that projects will be completed on time and to specification; internal audits of project management and quality control help ensure this. Suppliers want prompt payment; internal audit of accounts payable ensures that supplier invoices are processed correctly and on time. Creditors and lenders want assurance that the firm is financially healthy; internal audit of financial statements and internal controls provides this assurance (Nwankwo and Okeke, 2021).

Stakeholder Theory also implies that internal audit enhances firm performance indirectly by building trust and reducing transaction costs. When stakeholders trust that M. B. Anamco Ltd is well-managed and has strong internal controls, they are more willing to extend credit, enter into long-term contracts, provide favorable terms, and recommend the firm to others. This trust translates into lower borrowing costs, better supplier terms, higher employee retention, and increased customer loyalty—all of which improve financial and operational performance. Conversely, a weak internal audit function that fails to detect or report problems can lead to loss of stakeholder trust, with devastating consequences for the firm (Eze and Nwafor, 2019).

Empirical research in Nigeria has found support for Stakeholder Theory in the context of internal audit. Studies of construction and engineering firms similar to M. B. Anamco Ltd have shown that firms with comprehensive internal audit coverage (covering not just finance but also safety, environmental compliance, and quality) enjoy better relationships with regulators, fewer contract disputes, and higher customer satisfaction scores. These findings suggest that internal audit affects performance not only through direct loss prevention but also through the cultivation of positive stakeholder relationships. For M. B. Anamco Ltd, this theory highlights the importance of expanding internal audit beyond traditional financial audits to include operational, safety, and compliance audits (Adebayo and Oyedokun, 2019).

2.2.3 Institutional Theory

Institutional Theory, developed by DiMaggio and Powell (1983) and Scott (2001), explains why organizations within a given field tend to adopt similar structures, practices, and processes over time. The theory identifies three mechanisms of institutional isomorphism: coercive isomorphism (pressure from regulators, laws, or powerful organizations), mimetic isomorphism (copying successful competitors in response to uncertainty), and normative isomorphism (pressure from professional bodies, training, and networks). According to Institutional Theory, organizations adopt practices such as internal auditing not only because they improve technical performance but also because they confer legitimacy, which enhances survival and access to resources (DiMaggio and Powell, 1983).

In the context of this study, Institutional Theory explains why many private firms, including M. B. Anamco Ltd, have established internal audit functions even when the immediate cost-benefit calculation might not clearly favor such investment. Coercive pressures include regulations from the Financial Reporting Council of Nigeria (FRCN), tax authorities, and industry regulators that mandate certain internal control structures. Mimetic pressures include the observation that successful competitors have internal audit departments, leading other firms to copy them. Normative pressures include the influence of professional bodies such as the Institute of Internal Auditors (IIA Nigeria) and the Institute of Chartered Accountants of Nigeria (ICAN), which promote internal auditing as a professional standard (Mbah and Nnamdi, 2019).

Institutional Theory also explains variations in internal audit effectiveness across firms. Organizations that adopt internal audit primarily for legitimacy (to appear compliant or modern) without genuine commitment to its value are engaging in “decoupling”—they have the structure but not the substance of effective internal audit. Such firms may produce audit reports that are never read, hold audit committee meetings that are purely ceremonial, or assign underqualified staff to audit roles. These symbolic adoptions are unlikely to improve actual performance. In contrast, firms that internalize the value of internal audit—integrating it into decision-making, resource allocation, and strategic planning—are more likely to realize performance benefits. For M. B. Anamco Ltd, Institutional Theory suggests that the effect of internal audit on performance depends on whether the function is adopted symbolically or substantively (Okonkwo and Chukwu, 2018).

Empirical studies in the Nigerian private sector have found evidence of both symbolic and substantive adoption of internal audit. Some firms, especially smaller ones, have internal audit departments that exist only on paper or perform minimal compliance checks. Other firms, often larger or those dealing with international partners, have robust internal audit functions that conduct regular operational and risk-based audits. The performance differences between these two groups are significant. For M. B. Anamco Ltd, Institutional Theory directs attention to the underlying motivations for internal audit and the degree of genuine commitment, not just the presence or absence of the function (Ogunleye and Adebayo, 2020).

2.2.4 Contingency Theory

Contingency Theory, developed by organizational theorists such as Donaldson (2001) and Lawrence and Lorsch (1967), posits that there is no single best way to organize, manage, or govern an organization. Instead, the optimal design and practices depend on the specific internal and external circumstances (contingencies) facing the organization. Key contingency factors include organizational size, technology, environment (uncertainty, complexity, munificence), strategy, and culture. According to Contingency Theory, the relationship between internal audit and firm performance is not fixed but varies based on how well the internal audit function is aligned with the firm’s unique contingencies (Donaldson, 2001).

In the context of this study, Contingency Theory explains why internal audit may be more effective in some private firms than in others, even when the nominal audit structure is similar. For M. B. Anamco Ltd, several contingencies may affect the internal audit-performance relationship. Firm size: larger firms with more employees, more transactions, and more complex operations may derive greater benefit from internal audit because the potential for errors, fraud, and inefficiencies is higher. Environmental turbulence: engineering and construction firms face varying levels of market uncertainty, regulatory change, and supply chain disruption; in more turbulent environments, internal audit that focuses on risk management and adaptability may be more valuable than compliance-focused audit. Technology: firms that have invested in integrated enterprise resource planning (ERP) systems may enable more efficient and effective internal auditing than firms still using manual or disconnected systems (Sawyer and Dittenhofer, 2018).

Contingency Theory also suggests that the design of the internal audit function should be tailored to the firm’s specific risks and strategic priorities. A firm like M. B. Anamco Ltd, which undertakes large-scale engineering and construction projects, may need internal audit to focus on project cost monitoring, contract compliance, and progress billing verification. A manufacturing-focused private firm might need internal audit to focus on inventory control, production efficiency, and quality assurance. A one-size-fits-all internal audit approach is unlikely to maximize performance. Therefore, Contingency Theory predicts that firms that align their internal audit scope, frequency, and methodology with their specific contingencies will achieve better performance outcomes than firms that adopt generic or outdated audit practices (Etim and Bassey, 2020).

Empirical research in the Nigerian private sector has supported Contingency Theory. Studies have found that internal audit effectiveness is higher in firms where the audit plan is risk-based (addressing the firm’s most significant contingencies) rather than routine or cyclical. Similarly, firms that periodically review and update their internal audit charters and methodologies in response to changes in the business environment report stronger performance improvements from internal audit. For M. B. Anamco Ltd, Contingency Theory implies that the firm should conduct a regular assessment of its internal audit function to ensure it remains aligned with the firm’s size, complexity, risk profile, and strategic direction (Nwankwo and Okeke, 2021).

2.2.5 Synthesis of the Four Theories

Taken together, Agency Theory, Stakeholder Theory, Institutional Theory, and Contingency Theory provide a multi-layered theoretical foundation for this study. Agency Theory explains the monitoring and control rationale for internal audit, highlighting how it reduces agency costs and aligns manager behavior with owner interests. Stakeholder Theory expands the lens beyond owners to include all parties with an interest in the firm, explaining how internal audit builds trust and legitimacy across stakeholder groups, thereby enhancing access to resources and reducing transaction costs. Institutional Theory explains why firms adopt internal audit in response to regulatory, competitive, and professional pressures, and why some adopt symbolically while others adopt substantively. Contingency Theory explains how the optimal design and focus of internal audit vary depending on firm-specific factors such as size, environment, and strategy (Jensen and Meckling, 1976; Freeman, 1984; DiMaggio and Powell, 1983; Donaldson, 2001).

The synthesis of these theories also guides empirical testing. Research questions and hypotheses derived from this theoretical framework can focus on: from Agency Theory, the effect of internal audit on financial performance and management compliance with recommendations; from Stakeholder Theory, the effect of internal audit on stakeholder trust and relationship quality; from Institutional Theory, the factors driving internal audit adoption and the difference between substantive and symbolic adoption; from Contingency Theory, the moderating effects of firm size, environmental turbulence, and technology on the internal audit-performance relationship. This comprehensive theoretical grounding enhances the validity and richness of the study’s findings (Creswell and Creswell, 2018).

Critically, these theories also acknowledge limitations and potential negative effects. Agency Theory recognizes that monitoring itself is costly and that excessive monitoring can create resentment or risk-aversion. Stakeholder Theory acknowledges that balancing diverse stakeholder interests is inherently challenging and that internal audit cannot satisfy all stakeholders equally. Institutional Theory acknowledges that pressures to conform can lead to ceremonial adoption without real improvement. Contingency Theory acknowledges that there is no universal best practice and that what works for one firm may fail for another. Thus, the theoretical framework does not assume a universally positive internal audit effect; rather, it specifies the conditions under which internal audit is likely to enhance performance in private firms (Mihret and Yismaw, 2018).

In conclusion, the theoretical framework of this study is firmly anchored in four well-established, complementary theories: Agency Theory (Jensen and Meckling, 1976), Stakeholder Theory (Freeman, 1984), Institutional Theory (DiMaggio and Powell, 1983), and Contingency Theory (Donaldson, 2001). These theories collectively explain the mechanisms through which internal audit influences firm performance, the stakeholder relationships that mediate this influence, the institutional pressures that shape internal audit adoption, and the contextual factors that moderate its effectiveness. The framework provides a solid foundation for the conceptual framework (section 2.1), the research methodology (chapter three), and the interpretation of findings (chapters four and five) (Saunders et al., 2019).