Exploring the effect of internal audit quality on fraud management: the mediating role of ethical behaviour in public sector institutions

Abstract

Purpose To investigate the mediating role of ethical behaviour in the relationship between internal audit quality and fraud management in the Ugandan public sector institutions. Design/methodology/approach This is a quantitative study. Data were collected using a questionnaire from 168 public sector institutions in Uganda. Partial Least Squares Structural Equation Modelling technique was used to analyse the hypotheses, which were developed in line with the Foucauldian governmentality and ethical notions. Findings Fraud management is significantly influenced by both internal audit quality and ethical behaviour. Importantly, internal audit quality also affects fraud management indirectly through ethical behaviour, revealing a mediating mechanism. Practical implications There is a need for the government to foster collaboration between the Directorate of Ethics and Integrity (DEI) and internal audit functions. Such collaboration would strengthen the enforcement of national ethical standards among public servants and improve fraud management. Furthermore, the Public Finance Management Act (2015) and the Local Government Act (1997) should be amended to explicitly designate ethical reviews as a core responsibility of the internal audit function. Originality/value This study applies the Foucauldian theoretical notions of governmentality – which involve shaping individuals to govern themselves – and ethics to enhance the understanding of fraud management. It demonstrates that ethical behaviours among public servants, crucial for effective fraud management, are shaped both through self-transformation and by a high-quality internal audit function, a governmentality technique. The findings extend existing literature and reaffirm that ethics serves as a central policy instrument within governance systems.