Aug 15, 2016 - managing currency exchange rate risks as well as assessing the role of market research ..... The internal audit control unit is responsible for the.
Measuring the Effectiveness of Internal Control Systems in Managing Currency Rate Risk A study on Yemen’s Private Corporations
August 15, 2016 Submitted by: Sami Fuad Al-Ashabi Student ID: 0714033 Supervised by: Ms. Laura Ipacs Masters of Business Administration Thesis
This paper was submitted in partial fulfillment of the requirements for the Masters of Business Administration (MBA) degree at the Maastricht School of Management (MSM), Maastricht, The Netherlands, August 2016.
i|Page
Acknowledgements I would like first to thank my thesis supervisor Ms. Laura Ipacs at Maastricht School of Management. She offered guidance whenever I ran into trouble or had questions about my research. Offering feedbacks, she steered me into the right direction whenever she though I needed it. I am also grateful to Professor David Dingli and Professor Stuart Dixon along with Tumaini Lawrence and Ian Silungwee for spending time reading the thesis and providing useful suggestions. Special thanks to all the admin team especially, Karen Tromp and Maud Jeukens for their assistance throughout my study, they made the impossible, possible. I would also like to thank the CBA Yemen Team and professors for their valuable knowledge given and quality of information. During the period of studies, I was lucky to share knowledge along with experience from wonderful classmates and friends, our moments together will be cherished. Finally, I must express my gratitude to my mother and family for providing me with the support and continuous encouragement throughout my years of study. This achievement would not have been possible without them. Thank you,
Thank you very much, everyone,
Sami
ii | P a g e
Abstract Most of the businesses today are faced with more and frequent challenges due to the changes in technology, society, legalities, culture and economy. Challenges increase the complexity of reviewing of the daily firm’s operations such as assessing the accuracy of all employee tasks by managers as well as stakeholders having difficulties in reviewing the policy of abidance of managers, commonly causing risks to be unnoticed for an extended time period. The majority of businesses are faced with fraud challenges arising from the auditing section as well as top officials in the management. Besides, with the changing and movement of currency markets, businesses are faced with losses of asset values arising from exchange rate risks. This calls for effective implementation of internal control systems in most businesses which mitigates the occurrences of exchange rate risks. The occurrences of increased exchange rate risks lead to the study of the effectiveness of internal control system in mitigating and managing currency exchange rate risks. The research study addressed the research objectives of assessing the impact of market currency fluctuations on exchange rate risks, assessing the effectiveness of the components of internal control system in managing currency exchange rate risks as well as assessing the role of market research in managing exchange rate risks among private corporations in Yemen. The study will use a quantitative research design to conduct the study. Simple random sampling will be used to obtain the sample where a sample of 90 to 100 employees and staffs of private corporations within Yemen will be used to make inferences. The study will use web-based questionnaire administered via Survey Monkey to collect data. Data analysis will be conducted by use of SPSS. Regression analyses will be used to establish the contribution of the components of internal control system in managing exchange rate risks while correlation analyses will be used to establish the relationship between dependent and independent variables. The results of the study indicated that most of the staffs were at their senior and middle management levels. The findings from ordinal regression indicate that the components of internal control system significantly contribute to the management of exchange rate risks. The significant component was monitoring. Market research was found to be relevant in mitigating exchange rate risks. The market currency fluctuations negatively influence exchange rate risks. The study concluded that management should integrate risk assessment strategies, market research methods and predicting of future fluctuations in market currency exposure iii | P a g e
which aids in mitigating currency exchange rate risks. The private corporations in Yemen were advised to integrate key strategies such as hedging, options, swaps, future and forward contracts in managing exchange rate risks
iv | P a g e
Table of Contents Acknowledgements ........................................................................................................ii Abstract ........................................................................................................................ iii 1
2
Chapter One: Introduction .................................................................................. 1 1.1
Rationale of the study...................................................................................... 1
1.2
Problem Statement .......................................................................................... 2
1.3
Research Objective .......................................................................................... 4
1.3.1
General Objective .................................................................................... 4
1.3.2
Specific Objective .................................................................................... 4
1.4
Research Questions ......................................................................................... 5
1.5
Hypothesis ....................................................................................................... 5
1.5.1
Hypothesis 1: ........................................................................................... 5
1.5.2
Hypothesis 2: ........................................................................................... 5
1.5.3
Hypothesis 3: ........................................................................................... 5
1.5.4
Hypothesis 4: ........................................................................................... 6
1.6
Significance of the study ................................................................................. 6
1.7
Research Approach ......................................................................................... 6
1.8
Scope of the study ........................................................................................... 6
1.9
Outline of the document .................................................................................. 7
Chapter Two: Theoretical Background ............................................................. 9 2.1
Literature Review ............................................................................................ 9
2.1.1
Introduction .............................................................................................. 9
2.1.2
Internal Control Systems.......................................................................... 9
2.1.3
Systems Theory...................................................................................... 11
2.1.4
Control Environment ............................................................................. 12
2.1.5
Information and communication system ................................................ 13
2.1.6
Monitoring ............................................................................................. 13
2.1.7
Control Activities ................................................................................... 14
2.1.8
Risk Assessment .................................................................................... 14
2.1.9
Market Research in Managing Risks ..................................................... 15
2.1.10
Currency Fluctuation and Foreign Exchange Exposure ........................ 17
2.1.11
Exchange Rate Risks.............................................................................. 18
2.1.12
Hedging .................................................................................................. 19
2.1.13
Future, Forwards, Swaps and Options ................................................... 21
2.2
Conceptual Model ......................................................................................... 22 v|Page
3
4
Chapter Three: Methodology ............................................................................ 24 3.1
Introduction ................................................................................................... 24
3.2
Research Design ............................................................................................ 24
3.3
Research setting............................................................................................. 25
3.4
Population...................................................................................................... 25
3.5
Sampling........................................................................................................ 26
3.6
Technique ...................................................................................................... 27
3.7
Data sources, data collection and data processing ........................................ 27
3.8
Data Analysis ................................................................................................ 27
3.9
Validity, reliability, reflexivity and Measurement Instrument ...................... 28
3.10
Ethical Considerations................................................................................... 29
3.11
Feasibility of the study .................................................................................. 29
Chapter Four: Analysis and Findings .............................................................. 31 4.1
Introduction ................................................................................................... 31
4.2
Response Rate ............................................................................................... 31
4.3
Cronbach’s Alpha: Reliability Testing .......................................................... 31
4.4
Descriptive Statistics ..................................................................................... 32
4.5
Research Study and Findings ........................................................................ 35
4.5.1 Investigating the effectiveness of the components of internal control system in managing currency exchange rate risks................................................ 36 4.5.2
Control Environment ............................................................................. 36
4.5.3
Monitoring ............................................................................................. 37
4.5.4
Control Activities ................................................................................... 38
4.5.5
Information and Communication ........................................................... 39
4.5.6
Risk Assessment .................................................................................... 40
4.5.7
Exchange Rate Risks.............................................................................. 41
4.5.8 Assessing the Importance of Market Research in Managing Exchange Rate Risk among Private Companies in Yemen ................................................... 43 4.5.9 Establishing the Key Strategies Employed by Management in Managing Exchange Rate Risks among Private Companies in Yemen. ............................... 46 4.5.10 Exploring the Effect of Market Currency Fluctuations on Exchange Rate Risks among Private Companies in Yemen ......................................................... 49 5
Chapter Five: Discussion and Conclusion ........................................................ 53 5.1
Introduction ................................................................................................... 53
5.2
Summary of main findings ............................................................................ 53
5.3
Implications for theory .................................................................................. 55 vi | P a g e
6
5.4
Implications for practice................................................................................ 57
5.5
Limitation of the Study ................................................................................. 58
5.6
Conclusion..................................................................................................... 58
5.7
Recommendations ......................................................................................... 60
References ............................................................................................................ 61
Glossary of Terms and Acronyms ............................................................................... 67 Appendices ................................................................................................................... 68 Appendix A: Draft Research Instrument .................................................................. 68 Appendix B: Questionnaire ...................................................................................... 69 Appendix C: Parameter Estimates............................................................................ 76
vii | P a g e
1 Chapter One: Introduction 1.1 Rationale of the study Within today’s world, most businesses are confronted with more challenges than ever before. These challenges are caused by changes in technology, the economy, society, culture, and legalities. As a result, these factors result in most challenges being frequent, interdependent and pronounce. Moreover, many corporations are prompted to decentralize business operational processes and give managers more freedom to cope with changes to the business’s overall strategy brought by these challenges. This means that challenges increase the complexity of reviewing the accuracy of all employee tasks by managers. At the same time, shareholders may experience difficulties in reviewing the policy of abidance of managers, commonly causing risks to be unnoticed for an extended time period, as well as prompting early warning signs to be ignored. As a result, it is necessary for organizations to maintain an effective internal control system in order to pinpoint risks such as currency rate risks before losses happen and develop key strategies to mitigate or avoid it in order to enable the organization to continue thriving. Furthermore, the ICS should be able to measure how the key strategies impacted the results and improve the strategies based on market changes. Additionally, most of the employees in the financial and accounting section regularly engage in planning and controlling of activities in the finance department such as maintaining of financial books and record of plans and ensuring complete and accurate compilation of reports. The planning and accurate recording of reports help in managing and keeping track of errors as they are inevitable. Fraud losses are among the errors that face employees in the finance section as well as top management. It is therefore and always advisable to integrate effective internal control within an organization. The internal control helps in the management of the reliability of financial statements within an organization, ensuring files are complete and safe and minimizing the risks of asset losses. The management is therefore entitled to enhance segregation of duties to its employees through the provision of policies and procedures which help in the management of any occurrence of uncertainties. The increasing rise of scandals in the most firms has led to the attention of audit control unit of major firms. The internal audit control unit is responsible for the effective control governance of financial reporting through the enhancement of 1|Page
ensuring standard compliance. The assertion of the value and accuracy of financial reports is a major concern of major firms which is evaluated by the internal control system. Focusing on the reliability of effective internal control system is necessary as it will enhance integrity in firms operations as well as improvement in government ministries (Badara & Saidin, 2013). The firms and enterprises should also be aware of the existence of risks associated with daily operations. Risks contribute to major financial losses, collapsing of investment projects and a decrease in performance of firms. The assessment and management of risks are becoming increasingly important. The decisions made at present have their effects on future occurrences (Junkes, Tereso, & Afonso, 2015). Firms must be therefore aware of any uncertainties arising in their daily operations. As such, the research objective of this study is to assess whether or not the internal control systems in Yemen Private Corporations are effective in managing currency rate risk, as well as provide a structure and requirements of implementing new internal control system measures that are satisfactory to minimizing anomalies and losses.
1.2 Problem Statement All enterprises, regardless of the size of the enterprise, in operation within the world today can attest to the importance of internal control systems (Giriūnienė & Giriūnas, 2012). According to (KPMG, 1999), internal control and risk management are the means to maximize business opportunities and reduce unwanted events and potential losses. Hence, it’s imperative for any successful corporation to have a fully functional and reliable internal control system to assist it achieve its goals safely and avoid losses. The private sector in Yemen contributes to about 53.7% of the GDP and 75% of the gross investment (Ministry of Planning & International Cooperation, 2016). In addition, since the political instability that started in 2011, private corporations have faced continuous risks that have led to a decline in investment and profits, especially in currency fluctuation. Unfortunately, against this risk, are the corporations depending fully on pure accounting aspects and financial statements, while only few private corporations in Yemen has operational Internal Control Systems that is reliable and can predict currency rate risk. Therefore, at the end of 2015 and beginning of 2016, numerous corporations faced losses due to official currency rate fluctuations which reached YER250:USD1 (Central Bank of Yemen, 2016) compared to the previous year’s stable 2|Page
rate of YER215:USD1. Therefore, this translates into 17% devaluation. However, due to the unavailability of US Dollar liquidity, both the central bank and commercial banks weren’t able to provide US dollars to clients and corporations. As a result, a secondary market abused this opportunity and offered YER270:USD1 (Ministry of Planning & International Cooperation, 2016). Recently, it reached YER295:USD1 which translates 37% devaluation and keeps on changing frequently causing turmoil and panic for the population in general. Moreover, the devaluation affects corporations particularly the ones required to pay their international suppliers in US dollars and those that receive from clients in Yemeni Royals (Ministry of Planning & International Cooperation, 2016).
(Ministry of Planning & International Cooperation, 2016) The exchange rates fluctuation or stability is a major contributor to the direction of foreign trade and commerce as it affects the volume of international trade and the import & export operations. The fluctuation involves the risks arising from unforeseen movements in the exchange rate which is similarly affected by inflation rates within a country. Central banks tend to increase the lending rates in an effort to minimize the money supply and control inflation. Inflation in Yemen has been increasing exponentially during the past years for example between 2002 to 2007, the annual inflation rate amounted to 11% (Almounsor, 2010). However, after 2011 political instability, the already weak financial and economic system received a shock, hence, 3|Page
fuelled spike inflation and currency fluctuations threatening the macroeconomic and social stability of the country as well as contributing to the volatility of asset values. Therefore, its essential to evaluate and forecast financial data putting in mind the importance of interest rates and exchange rates which aid in managerial decision making (Patel, Patel, & Patel, 2014). Furthermore, effective Internal Control Systems would have noticed the gradual official and secondary market increase in the currency rate risk and would have implemented key strategies to either avoid the risks or mitigate it. Henceforth, the theoretical perspective of this study is measuring the effectiveness of the internal control system in managing currency rate risk and will involve the measurement of several different elements, including independent and dependent variables, identified within a questionnaire. The questionnaire will be beneficial because it will provide standardized data, which will allow for easy comparisons of the results and thus, give more insight on the relation of an effective internal control with minimizing risks and achieving the corporation’s goals.
1.3 Research Objective
1.3.1 General Objective Based on the importance of internal control systems, the main research objective is to evaluate the effectiveness of Internal Control System and risk management in mitigating exchange rate risk among private companies in Yemen.
1.3.2 Specific Objective 1. To assess the importance of market research in managing exchange rate risk among private companies in Yemen. 2. To explore the effect of market currency fluctuations on exchange rate risks among private companies in Yemen. 3. To establish the key strategies employed by management in managing exchange rate risks among private companies in Yemen. 4. To assess the role of the components of Internal Control System in managing exchange rate risk among private companies in Yemen. 4|Page
1.4 Research Questions 1. What is the importance of market research in managing exchange rate risks among private companies in Yemen? 2. What key strategies are employed by the management in managing exchange rate risks among private companies in Yemen? 3. What effect does market currency fluctuation have on exchange rate risks among private companies in Yemen? 4. How do the components of Internal Control System help in managing exchange rate risk among private companies in Yemen?
1.5 Hypothesis
1.5.1 Hypothesis 1: H0: Well managed components of internal control systems do not help in reducing and managing exchange rate risks H1: Well managed components of internal control systems helps in reducing and managing exchange rate risks
1.5.2 Hypothesis 2: H0: Efficient market research on currency rates does not help in reducing and managing exchange rate risks H1: Efficient market research on currency rates helps in reducing and managing exchange rate risks
1.5.3 Hypothesis 3: H0: Efficient key strategies such as hedging do not help in reducing and managing exchange rate risks. H1: Efficient key strategies such as hedging helps in reducing and managing exchange rate risks.
5|Page
1.5.4 Hypothesis 4: H0: Existence of market currency fluctuations has no effect on exchange rate risks H1: Existence of market currency fluctuations has an effect on exchange rate risks
1.6
Significance of the study The study is significant in a variety of ways. For instance, the study will serve to
show the viability of an effective internal control systems and risk management in assisting corporations achieve their goals and minimize risks. Since internal control systems are crucial to the success of all organizations, it is necessary to explore the capability of improving these systems from their current levels in order to ensure that all organizations are performing at their most optimal level (Feng, Li, McVay, & Skaife, 2014). Furthermore, it will provide information about how companies can use ICS to improve their returns and achieve their targets. The study is also important in the academic field by contributing to knowledge where the literature review in the study can be applied by other researchers for conducting similar studies. Furthermore, the structure of the research study will enable other researchers to replicate it and be a reference in developing their data.
1.7
Research Approach The study will be conducted using a numeric quantitative approach. Therefore,
within the questionnaire (see Appendix B), questions are provided that allow the participant to give his/her opinion regarding the topic of the effectiveness of internal control systems and risk management especially in currency rate risk. As a result, answers can be compared, allowing for a better opinion regarding the effectiveness of internal control systems. This is important on many levels, as it will allow for more opportunities for recommendations to be offered in relation to internal control systems and risk management.
1.8
Scope of the study The scope of the study involves the measurement of the effectiveness of internal
control systems in Yemen’s private sector corporations to manage currency rate risk. The research will attempt to establish the components of internal control systems in 6|Page
managing exchange rate risks. The components will include the monitoring, control environment, control activities, information and communication and risk assessment. The research will evaluate the application of each component in managing exchange rate risks. Each component is crucial as they are initiated and implemented by the management. Therefore, the management plays a role in influencing the management of exchange rate risks. The research study will seek to establish the contribution of market currency fluctuations on exchange rate risks. The research will establish the increase and decrease the effect of currency fluctuations on exchange rate risks. The currency fluctuations will be assessed based on their impact to organization’s performance. The research study will also assess the importance of marketing research in managing exchange currency rate risk. The study will assess whether sufficient market research on foreign exchange currencies helps in managing exchange rate risks. The study will then seek to establish key strategies employed by management in managing exchange rate risks. The common strategy employed is the hedging process. The main variables will be obtained from the participant’s responses captured in the survey questionnaire. Through this information, it will be possible to assess how effective are internal control systems in private sector corporations in managing exchange rate risks. The information will also provide an understanding of the requirements and structure of implementing upgraded internal control systems that are consistent with worldwide standards. Consequently, the study will be able to pinpoint the existing weaknesses, if found, and provide measures to overcome them and improve the system.
1.9
Outline of the document The first part of the research study is the introduction of the document that is
designed to introduce the basic purpose of the topic which is establishing the effectiveness of internal control systems in managing currency rate risks. The introduction of the research constitutes of developing a rationale of the study as well as a problem statement. The research objectives are then developed to specify key aspects of the study. The introduction also entails significance and scope of the study. The next section of the introduction entails the research approach. The second part of the document entails the literature review of the study. The literature review gives a description of previously researched topics. The information from the introduction and 7|Page
literature review leads to the development of the conceptual model. The conceptual model indicates the relationship between the variables and how the variables will be measured. The third section of the document constitutes of the methodology. The methodology describes in details the research design to be employed. Next, the research setting is discussed, which is important for the following section discussing the population of interest. The study then describes the sampling processes of the study. The study describes the reliability, validity, reflexivity and measurement instrument used in data collection. The following section discusses data sources, data collection, and data processing. The data analysis descriptions are indicated as well as the feasibility of the study. Finally, the discussion and conclusions are discussed along with a summary of the findings, implications on theory and practice and recommendations for corporations.
8|Page
2 2.1
Chapter Two: Theoretical Background Literature Review
2.1.1 Introduction The literature review is designed to provide relevant research conducted on Internal Control Systems and currency rate risk. The first part involves providing an overview of internal control systems and their main role in enabling a company to achieve its main objectives. The components of internal control systems are described as well as market research in managing risks. The impact of market fluctuations on the exchange rate is discussed comprehensively along with key strategies employed by management in mitigating exchange rate risks. The key strategies include hedging and options among others. The theoretical information helps to the development of the conceptual model which is discussed in the last section of the literature review.
2.1.2 Internal Control Systems Internal Control Systems have different purposes. However, the internal control system is commonly defined as a system that is shaped and implemented by a company through its own unique responsibilities. The internal control system encompasses distinct resources, behaviours, procedures, and actions that may be individually adapted to the different companies as needed. The focus is to allow the company the opportunity to contribute to how the activities are controlled within the operational process, as well as operational efficiency and the efficient use of resources that are held by the company. At the same time, internal control systems are beneficial because they enable the company the opportunity to assess significant operational, financial, and compliance risks appropriately. Therefore, a primary benefit of internal control systems is to assess risks that are expected by the company based on their unique operations and products and/or services offered (Autorite Des Marches Financiers, 2010). (Autorite Des Marches Financiers - AMF, 2010)
It is also noted that internal control is an integral process that is beneficial to the success of the company as a whole. As such, the internal control system is specifically designed to address risks faced by the organization, as well as provide reasonable assurances that 9|Page
certain objectives are met in conjunction with the missions of the organization. Specifically, internal control systems focus on ensuring that all operations are efficient, effective, ethical, and economical. At the same time, these systems are necessary for accountability obligations. Moreover, internal control systems are crucial for ensuring that the companies are complying with the applicable laws and regulations that are associated with their industries and nations. Finally, internal control systems are important because they allow resources to be protected and used appropriately. (International Organization of Supreme Audit Institutions, 2004) Internal control systems are incredibly important to the success of the organization. For example, these systems are beneficial for reducing asset losses. Therefore, other risks are also reduced, such as resource waste. Through the establishment of internal control systems, financial statements can be completed in an accurate manner and are reliable (Putra, 2009). Perhaps most importantly, the use of internal control systems ensures that business operations are completed in compliance with existing regulations and laws based on the company’s industry and host nation. Through effective internal control, it can be assumed that financial objectives and strategic goals are being met in an honest and accurate manner (International Organization of Supreme Audit Institutions, 2004). This is because internal control systems focus on four processes: (1) design, (2) dialogue, (3) documentation, and (4) disclosure (Putra, 2009). Therefore, internal control systems focus on ensuring that flow of data and information within the company is reliable, ensuring that all restrictions (including regulations, laws, and company policies) are followed in business operations, assets are effectively protected, resources are efficiently used in an economical manner, and company-specified goals along with objectives are met in an effective manner (Feng, Li, McVay, & Skaife, 2014).
Furthermore, internal control system applied effectively, minimizes the risk of loss in assets, and helps in ensuring that information is reliable, financial statements are accurate, and the plan’s operations are conducted according to the applicable laws and regulations. When internal control is active, an individual has a reasonable assurance of achieving the financial reporting objectives. However, when the internal control system is not effective, an individual have a slight or no assurance. (AICPA American Institute of CPAs, 2014)
10 | P a g e
Internal control primary objectives are focused on achieving and ensuring the integrity and reliability of the data and information, further to abiding policies, plans, programs, labour law and other regulations, and other restrictions, using resources economically and efficiently, safeguarding assets and realization of the goals and objectives (Kapić).
According to (Brewer & List, 2004) an effective ICS would find out immediately if an anomaly occurs and will take appropriate action within short time. Furthermore, as per (COSO, 2007) effective ICS allows management of substantial risks and monitor the reliability of financial and operational information. It makes the audit committee acts as a powerful and proactive agent for corporate self-regulation.
Moreover, based on (KPMG, 1999), risk is derived from the italian risicare, and companies manage risk that hinders them from achieving their strategic and business objectives. Internal control and risk management supplement entrepreneurship. Normally, shareholder value is increased as a reward for successful risk-taking, therefore, the role of internal control is to manage risk appropriately instead of eliminating it.
2.1.3 Systems Theory A system is an association and connection between interdependent and interrelated entities that interact in a manner to achieve set goals. The internal control system is a process that involves the integration of components to achieve end outcomes. The board of directors, managers and other financial technicians team up to generate reasonable achievements of objectives of financial reporting efficiency as well as compliance with laws and regulations (Ayagre, Appiah-Gyamerah, & Nartey, 2014). The components of the system are crucial and interdependent, and the failure of one component can lead to the failure of the whole system. A system is made up of various entities which require control in order to be effective and successful. An internal control system requires management oversight, control and monitoring in order for it to be effective. A system entails the relationship indistinct objects that are rationally connected to produce a specific and desiring result. The interactions and relationships between parts of a system help in understanding the functions and outcomes of an organization (Mele, Pels, & Polese, 2010). Effective utilization of systems leads to 11 | P a g e
increased knowledge on organization’s operations, firm’s value as well as the quality of services provided. The internal control system is effective through the association of various components, principles and attributes. The internal control system is made up of components that ensure its effectiveness which are; control activities, information and communication, monitoring, risk assessment and control environment (Ayagre, Appiah-Gyamerah, & Nartey, 2014). An effective internal control system must be able to correct deficiencies. An effective internal control is a measure of the achievement of organizations objectives and management efficiency in its operations. The effective internal control system must conform to technological advancement in order to ensure authorization, recording, initiation and processing of transactions (Badara & Saidin, 2013).
2.1.4 Control Environment This is the main aspect emphasized in an organization as it entails the reflection of the attitudes and policies of management with respect to the importance of internal audit in an economic unit. The control environment plays a major role influencing organization’s goals achievement. The control environment provides a basis for the other components of the internal control system (Badara & Saidin, 2013). The control environment plays the role of mitigating most fraudulent activities within an organization’s operations as well as ensuring the quality of an organization’s internal control system. In addition, (Florin & Carmen, 2013) stated that the control environment as a component of the internal control system is managed by both the employees and management. The control environment provides structure and basis deemed necessary to carry out other components on internal control system. The control environment provides a medium where the management and board of directors declare their awareness and actions which are considered important in their entities (Gamage, Lock, & Fernando, 2014). The control environment is influenced by the factors such as organization structure, responsibility and human resource policies, integrity and ethical values, management philosophy and operating methodology, board of directors or audit committee and organization’s commitment to competence.
12 | P a g e
2.1.5 Information and communication system The main aspect of information and communication system in an internal control system is to ensure the nature and quality of information necessary of effective control of systems within an entity. The development of information is enhanced as well ensuring developing of reports for effective communication. The information and communication system ensures that information is available at all levels of the organization so that the management would be able to control the company’s objectives (Gamage, Lock, & Fernando, 2014). Efficient transfer of information from top to bottom level within an organization is emphasized and carried out within a timeframe which allows for effective handling of responsibilities. The system ensures transfer of information internally and externally. The efficient identification and handling of internal and external communication within an organization results in improved decision-making processes, successful organization’s plans, controlled risks, increased performance and minimized the dependence of employees participating in detection and prevention of frauds (Gamage, Lock, & Fernando, 2014). Information and communication system is crucial in the internal control system as it influences working relationships of employees at all levels. Communication systems ensure that objectives of financial and accounting reports are achieved on time (Badara & Saidin, 2013).
2.1.6 Monitoring Monitoring is important in internal control systems as operations are evaluated to assess the quality and effectiveness of systems’ performance with time. Monitoring ensures that findings of the audit are well carried out and processed as well ensuring the effectiveness of internal control system (Badara & Saidin, 2013). In addition, monitoring ensures procedures and policies as designed by the management are well observed by the employees. The auditors responsible in internal control system should observe the processes of developing financial reports and efficiently supervise the assistants present. The determination of procedures and risk assessment must be carried out as well as testing entity-level control in order to conclude on the effectiveness of organization’s internal control system (Ionescu, 2011). Evaluating the period of developing financial reports is important to the auditor who takes the role of giving opinions on financial statements. The auditor is responsible for observing the changes in financial reporting, identifying weaknesses and communicating the results to the 13 | P a g e
management. It is the role of the management to collaborate with the auditors to monitor the performance of an organization from time to time by constantly checking the balances in financial reports and establishing existing deficiencies (Ionescu, 2011). The management should be effective at responding to findings and recommendations from audit reviews.
2.1.7 Control Activities Control activities are the automated and manual tools which aids in reducing and minimizing risks which hinder the achievement of organization’s objectives and mission. The control activities are the processes and policies which ensure right and diligent actions are taken to address risks that hinder achievement of company’s objectives (Gamage, Lock, & Fernando, 2014). The most relevant control activities in the audit sector of an organization are the performance review, information processing, segregation of duties and physical control. The management is challenged with the duty of establishing effective control activities that lead to the realization of company’s objectives. The management should employ the aspect of maximizing benefit and lowest cost possible when designing and developing control activities (Gyebi & Quain, 2013). Suppose a risk occurs, the cost of control activity should not exceed the cost incurred by the organization. The management should integrate control activities during the phases of designing processes and systems and not adding control activities after designing processes as it would be more costly. As such, allocation of resources to control activities should align with the likelihood of risk being prevented.
2.1.8 Risk Assessment Risks are the outcomes that hinder the achievement of company’s objectives as well as accomplishing the mission within an organization. The risk assessment process involves the activity of finding, detecting and evaluating how to succeed the existence of risks within an organization. The risk assessment identifies both the internal and external risks that could hinder the accomplishment of an organization’s objectives (Gamage, Lock, & Fernando, 2014). Since risks are sometimes unavoidable, the management should take the opportunity of determining whether to accept risks, minimize risks to acceptable levels or avoiding the risks all together. The risk assessment strategies help in decision making within a company. In addition, they are 14 | P a g e
integrated into the planning of activities and revision of company’s operation by the management (Florin & Carmen, 2013). The management helps in managing the risks such as economic, industry, operational and regulatory risks that hinder the achievement of company’s objectives. The effective risk assessment practices establish strong control activities that help in reducing existing risks (Klamm & Watson, 2009). The risk assessments are often used in audit sector to plan annual audits at the macro or micro level. The risk assessment practices help in the evaluation of business control risk. The internal auditors are permitted to understand business processes efficiently and able to dwell wholly on high-risk processes. The auditors are able to use risk assessment criteria to identify riskier areas and developing high-quality assurance in auditing judgments (Issa & Kogan, 2014). The auditors should also engage in the assessment of fraud activities at the top management. The management may have the opportunity of distorting reported financial results and results of operations. The management has access to stock options where they can create pressure to financial statements. The auditors should take the responsibility of detecting and reacting on financial reporting irregularities. The auditors should, therefore, be aware of any connections dealing with finances between management and clients (Lightle, Baker, & Castellano, 2015).
2.1.9 Market Research in Managing Risks The success of a business and market as whole depends on the flow of information. Information is considered as power. Market research involves the aspect of collecting and gathering of information. The role of market research is to provide decision makers in any business setting with information deemed necessary to find solutions to business problems. Market research helps in dealing with changes that face daily business operations which include technological changes, inflation, economic recessions, materials and energy shortages (Smith & Albaum, 2012). The commercial and non-commercial organizations are obliged to have the right information that helps in decision making. In marketing research, the most important individual to a company is the client. The organization is concerned with collecting information on client’s requirements which may be used for future need. Organizations offer goods and services through commercial transaction services where most companies operate in both micro-environments and macro-environments (Kent, 2007). The micro-economic 15 | P a g e
environments constitute of customers, suppliers, distributors, shareholders or stakeholders, competitors as well as other stakeholders of a company. The macroenvironment consists largely of general economic players such financial institutions, factors such as trends in the economy as well as the development of e-commerce among others. The changes in technology, increasing international trade and investment, growing wealth and changes in consumer tastes compel the business to change and adapt new strategies. As the companies become global, they are required to add more effort in conducting marketing research that links the management and customer expectations (Young & Javalgi, 2007). The market research helps organizations to keep pace with the ever-changing diverse economy. The organizations will as well be able to adapt to the shifts in customer preferences. The marketing information system is an interacting structure consisting of individuals, equipment and procedures that are designed to collect, analyse, sort and evaluate accurately and time information which aids in decision making. The marketing research originates from and ends with managers, internal and external partners and the other parties that are interested in marketing information (Ismail, 2011). The marketing information is designed to help in decision-making process. The decision-making process encompasses risks as it involves assessing of future costs and revenues, outcomes and events. Relevant information reduces uncertainty and helps managers in overseeing unlikely happenings. The market research must identify the underlying problem at hand (Ismail, 2011). Marketing research helps in minimizing risky decision-making processes. The effectiveness of marketing research is measured using the inputs and outputs which as well dictate the financial performance of an organization. A company is also able to identify its pricing power based on the information from marketing research (Tarka, 2012). The measuring and management of a company’s exchange rate risk exposure is, therefore, crucial as it helps in reducing the major vulnerabilities approaching an organization which greatly affects profit margins and value of assets. The exchange rate risk management guides an organization on firm’s decision regarding foreign currency exposure. The strategies used in minimizing the exchange rate risks entail hedging which encompasses how risks affect economic agents and techniques of managing risk implications (Papaioannou, 2006).
16 | P a g e
One of the aspects present in mitigating exchange rate risks is hedging. Unfortunately, little research is done to investigate hedging strategies employed by major banks in reducing foreign exchange rates. Most institutions ought to be aware of changes in currencies especially foreign currencies. The institutions must come up with methods that monitor the changes in currency rate risk. The methods identified include the optimal futures (Kyung-Chun, 2014). The hedging in a business model is used to derive the optimal futures that develop functions of estimating the organization’s earnings and foreign exchange rate. In addition, the foreign exchange has had a great impact on investment of major investor’s. The main existing risk in financial markets is the foreign exchange risk which is an outcome of international diversification. It is, therefore, important to evaluate the international investments including currency fluctuations (Mishra, 2016). The currency forecast is crucial in managing the currency fluctuations. The institutions should be well equipped with hedging principles that should guide organizations during currency fluctuations. The institutions should employ key strategies such economic indicators such as inflation rates, level of borrowing rates that measure meaningful currency forecasts (Bhaskaran & Priyan, 2015). The organizations should employ different strategies other than hedging in establishing the fluctuations of currencies. The success of a business is determined by its ability to handle information appropriately. Market research provides managers with adequate information that can lead to decision-making process. Notably, an organization is able to utilize information collected from competing firms to develop better business strategies. Continuous dialogue between decision makers and the management helps in managing problems. Market research helps managers to generate ideas especially in the export market settings (Ganeshasundaram & Henley, 2006).
2.1.10 Currency Fluctuation and Foreign Exchange Exposure Since the replacement of fixed exchange rate systems with floating rates systems in 1973, currency exchange rate movements has been a big concern for shareholders, managers, analysts and investors as price of currencies is determined by supply and demand. As supply and demand is frequently changing due to numerous external factors its cause currency fluctuation (El-Masry & Abdel-Salam, 2007). Furthermore, markets and economies are globalizing and as a result, they are more exposed to foreign exchange rate fluctuation and risks. 17 | P a g e
According to (Adler & Dumas, 1984), foreign exchange exposure is the sensitivity of future, real domestic-currency value of assets to random variations in future domestic purchasing power of these currency value. It can be harnessed to measure the potential for the firm’s profitability, cash flow and market value to change (Moffett, Stonehill, & Eiteman, 2009). Financial managers of firms are frequently challenged to understand and measure the exposure to exchange rate fluctuations which will give them ability to protect their firms from occurrence of exchange rate risks as foreign exchange rate movements have been a primary source of risk for financial institutions (Ahmed, 2015). Failure to control foreign exchange losses significantly strains the organization’s profitability causing failure in objectives.
2.1.11 Exchange Rate Risks Generally, corporations are exposed to unexpected exchange rate changes causing a direct loss, as a consequence of an un-hedged exposure, or indirect loss in the firm’s cash flows, assets and liabilities due to three main types of exchange rate risk: Translation risk, is balance sheet exchange rate risk and deals with valuation of foreign subsidiary operations and its translation into the parent company’s balance sheet. Economic risk, is the risk to the firm’s present value of future cash flow from exchange rate movements (Papaioannou, 2006). Transactional risk, is company’s cash flow exposure from contractual obligations with effect of exchange rate movement related to receivables (export deals), payables (import deals) or dividend denominated in foreign currency. According to the empirical study conducted by (Belk & Glaum, 1990) on how UK multinational corporations try to manage their foreign exchange exposure, majority of the respondents feels transaction exposure management was seen as a centrepiece of their foreign exchange risk management. The study found that a majority of companies were inclined to manage their accounting exposure actively and a lower degree of centralization.
(Kedia & Mozumdar, 1999) Examined the portion of foreign currency denominated debt in a sample of US large firms in relation to the firm’s risk management activities. They found strong relationship between foreign currencies dominated debt and exposure of foreign currency. It is also holds at individual currency level. They found that liquidity of the debt market in currencies considerably effects the choice of foreign 18 | P a g e
currency denominated debt, hence, firms are more likely to denominate debt in currencies with liquid debt markets.
Based on the survey conducted by (Loderer & Pichler, 2000) in risk management policies of industrial firms to analyse currency exposure consciousness, less than 40% of firms were able to quantify their risks due to the firm’s misconception that their exposure is small or it’s difficult to measure the risk. They focused on hedging transactional exposure while paying less attention to translation and economic exposures.
In addition, according to (Howton & Perfect, 1998), they examined the use of derivatives in a sample of 451 fortune 500 / S&P 500 (FSP) firms and 461 randomly selected firms operating in the US. Based on secondary data available in company’s annual reports, they found 61% of the FSP firms and 36% of the random firms used derivatives especially forwards and futures currency contracts. Additionally, (Marshall, 1999), conducted a survey of foreign exchange risk management practices of large US, UK and Asia Pacific MNC. The result show that majority placed transaction risk as significantly important across regions and company size.
2.1.12 Hedging Hedging is one of the standard methods used in offsetting risks primarily transaction exchange rate risks of most firms. As today’s businesses engage in large business settings, they are often faced with risks and uncertainties. The role of the financial manager is thus becoming more sophisticated and is confronted with the role of managing the firm’s risks and uncertainties. The financial managers often employ hedging instruments to offset risk in order to match the accounting effect of profit and loss in a firm (Bunea-Bontas, 2009). The hedging strategy is employed after different types of exchange rate risks have been identified. The transaction exchange rate risk is hedged strategically or tactically to preserve cash flows and earnings. The tactical hedging strategy is used to manage shortterm receivable payable transactions while strategic hedging is used to manage exchange rate risks for longer transactions (Papaioannou, 2006). The translation exchange rate risk is often hedged infrequently and non-systematically which aims to minimize the abrupt currency changes on the firm’s net assets. The management is 19 | P a g e
offset in dealing with translation exchange rate risk as it affects mainly the balance sheet of the firm rather than the income statement. The standard rate exposures involving net assets are hedged in the balance sheet as they might be affected by adverse changes in exchange rates. A firm can minimize the loss of its earnings by using an optimization model to develop an average hedging strategy to manage currency exchange rate risks (Papaioannou, 2006). Hedging of economic exchange rate risk is a huge task as there are uncertainties of cash flow. This can lead to under hedging or over hedging of cash-flows which is the partially covering of exchange rate risks. However, the economic risk can greatly be reduced by employing operational hedging (Dohring, 2008). Additionally, as per (Ito, Koibuchi, Sato, & Shimizu, 2013), the use of both hedging strategies combines can lead to achievement of appealing results.
The main methods of hedging financial exchange rate risks are operational and financial hedging.
2.1.12.1 Operational hedging Operational hedging entails managing exchange rate risks based on the firm’s international operations between head office and foreign subsidiaries (Ito, Koibuchi, Sato, & Shimizu, 2013). It includes changing the localisation of production facilities so that costs will correspond to the same currency as the income. Other strategies can include getting a loan in the same currency as the foreign rate exposed assets to neutralize the risk or in the same day of the transaction make a budget in the same currency of the exposed asset to neutralize the risk. Another operational strategy is raising the invoice to clients in the company’s own currency, hence, transferring the exchange risk to the other party.
2.1.12.2 Financial hedging The financial hedging strategies mainly involve the use of currency derivatives and is included in a currency swap, forward transactions and currency options among others (Ito, Koibuchi, Sato, & Shimizu, 2013). The derivative method of hedging involves obtaining values from other financial settings which include firm’s asset, stock
20 | P a g e
price, interest rate or exchange rate among others and allows firms to hedge positions that are exposed to foreign exchange rate risks.
2.1.13 Future, Forwards, Swaps and Options The firm uses financial derivatives as key hedging strategy in mitigating exchange rate risks. The main methods employing the derivative of currency include the future, swaps, options, and forwards. The forward is an agreement reached upon by two parties to buy or sell a specific amount of currency at a specified rate on a particular date in future. The firm can hedge by the purchase of a currency risk forward if the risk of currency appreciates while the firm can hedge by selling a currency risk forward if the risk of the currency depreciates. The use of forward hedging strategy can lead to the obtaining of the exact hedge (Ahmed, 2015). The forward hedging strategy involves the aspect of borrowing and lending of foreign exchange currency. The forward hedging strategy involves the situation where buyers and sellers freely choose amounts and maturities to engage in a transaction (Dohring, 2008). The future hedging strategy is similar to forward, but it is more liquid and traded in the futures market. The options give firms or persons the right to buy a specific quantity of one foreign currency in exchange for another currency at specified price. The nature of the fixed price reduces the existence of exchange rate risks as the losses are minimized in the event of currency fluctuations. The options hedging strategy gives priority to a firm by allowing it to selectively exploit currency movement to its advantage. Similarly, the options help firms to evade from exchange rate exposure that would significantly affect the firm’s value. In such case, the exchange rates exposure can be avoided, changing the production methods, sourcing and sales across currency borders (Chiang & Lin, 2008). The options are efficient as they contribute asymmetric risk distribution. As such options are associated with buying of premiums. Swaps involve the event at which two parties which is the buyer and seller exchange equal amounts of an initial principal amount of different currencies through a term of agreed contract. The swap mechanism helps in managing the exchange rate risk simultaneously and floating interest rate risk (Ahmed, 2015).
21 | P a g e
2.2 Conceptual Model A conceptual framework is a collection of interrelated concepts that provide a complete understanding of the phenomena. The construct of the concepts is designed in such a way that each concept provides an integral role. Conceptual framework provides an understanding of the relationship between the identified concepts (Jabareen, 2009). The conceptual model in this research study will involve describing the interrelationships between the dependent and independent variables. The dependent variable in this study is the exchange rate risk. The exchange rate risk will be assessed by establishing the deviation of corporation’s value from the existing foreign exchange currencies. The exchange rate risks arise from the exposure of unexpected exchange rate movements causing a direct loss in firm’s cash flow. The exchange rate risk is measured from the risks of exposure facing a firm’s net inflows and outflows (Papaioannou, 2006). The measurement will involve assessing the change in local currency with respect to foreign currency. The firm will, therefore, be able to establish the correlation between currencies and the impact of the association on its direct transactions. The independent variables will be the; components of internal control systems which will be measured by how the management, audit committee, and risk committee monitors audit reports, enhance efficient communication and transfer of information, provides a control environment and activities as well as regularly assessing of risks. Hence, it will be assessed by risk assessment practices conducted in an organization, sharing and communication of information, ensuring rules and policies are set as well as ensuring the staffs abide by the rules and providing internal budgetary controls for managing exchange rate risks (Ayagre, Appiah-Gyamerah, & Nartey, 2014); (Badara & Saidin, 2013); (Gamage, Lock, & Fernando, 2014). The other independent variable will be market research which will be assessed by how the management regularly conducts research on changes in currencies in the market and provides projections to its direct transactions. The independent variable of market fluctuation will be assessed by understanding how the fluctuations of currencies in the market affect the operations of the corporations (Mishra, 2016). The independent variable of key strategies employed by the management will be assessed by how often the management employs the hedging and option strategy in managing the exchange rate risks. In addition, the corporations of Yemen will be assessed whether they use swap, options and future contracts to manage currency exchange rate risks. This will be measured by the effectiveness of the stated key strategies (Ahmed, 2015). There is a 22 | P a g e
direct relationship between the dependent and independent variables. A positive outcome of the independent variable will result in a positive outcome of the dependent variable. An illustration involves the process where successful utilization of key strategies such as hedging results to the management and reduction of exchange rate risks (Papaioannou, 2006). Finally, through the identification of these variables, it will be possible to see where there are shortcomings within the organization or industry as a whole in terms of Managing risk. The figure below illustrates the relationship between independent and dependent variables.
Independent Variables Components of Internal Control Systems
Control environment Control activities Monitoring Information and Communication Risk Assessment
Dependent Variable Continuous enhancement of Key strategies in managing exchange rate risks
Hedging Options Swap Futures and Forward Contracts
Successful management of currency exchange rate risk
Market Research
Fluctuations of Market Currency Figure 1: The Conceptual Model 23 | P a g e
3
Chapter Three: Methodology
3.1 Introduction The methodology section illustrates the procedure to be followed while conducting data collection and data analysis. The research design to be followed is described comprehensively. The research design employed in this research study is the quantitative research design. The research design is appropriate as it enables collection and measuring of numerical data. Moreover, the data is quantified, and the relationships between variables developed are established. The quantitative research design allows the researcher to establish the relationship between independent and dependent variables through the use of statistical analyses approach. The dependent variables of the study will be effective management of exchange rate risks of Yemen private corporations. The independent variables will be the components of internal control system, the key strategies employed by the management in mitigating exchange rate risks, integrating market research and the impact of currency fluctuations. The population of the research study will involve private corporations in Yemen where the employees engaging in financial and accounting activities will be selected. The research study will employ simple random sampling to obtain its data. The power analysis will be used to find the sample of the study. Due to the increase in internet usage, the information will be obtained by allocating of questionnaires via the internet platform. As such, web-based questionnaires will be used to collect the data. Assistant researchers might be employed to provide assistance in case of any queries. In addition, the reliability and validity of the questionnaire are illustrated to enhance the collection of actual and accurate information. The research study will use Excel as a tool for data screening and cleaning and the SPSS for analysis of data. The inferential statistics will be employed to test the validity of the hypothesis. The regression analysis, as well as correlation test, will be used to conduct inferential data analysis.
3.2 Research Design The research design employed in this research study is quantitative research design. The Quantitative methods involve the use of numerical data in the data analysis. The quantitative research method entails the collection of data so that information may be quantifiable and subjected to statistical mechanisms so that meaningful of data can 24 | P a g e
be obtained (Williams, 2007). Researchers using quantitative methodology often use mathematical models to perform data analysis. In addition, this approach requires the setting of research questions which requires numerical data. The quantitative methodology seeks explanations and predictions that lead to generalization of information which contributes to theory. The quantitative methodology entails the procedure of identifying a statement problem, building of research hypotheses, developing literature review and leading to the numerical data analysis section (Williams, 2007). The variables are measured and their relationships are established. In addition, quantitative research design focuses on the reliability and generalization of information. The main idea is establishing the relationships of variables through a collection of a sample. The researcher is able to give a meaningful description of the characteristics of the sample collected (Delice, 2010). The variables in this research study contain the independent and dependent variables. The quantitative analysis will be derived from the table containing the statements for Agree/not Agree and Likert Scale. This information is important because it provides the information necessary for a statistical analysis that can be used to generalize the results for the population, rather than just the sample. The dependent variable of the research study is management and reduction of exchange rate risk. The independent variables of the research study are the; market research, market currency fluctuations, components of internal control systems and key strategies employed by the management.
3.3 Research setting Research settings are where the data is collected (Creswell, 2013). Due to the increase of the internet, the research setting can be online, allowing researchers to get results from anywhere in the world for a particular location. However, in some cases, face-to-face interactions are more beneficial for the most effective research results. For this study, the research setting will be through web-based interactions with representatives of Yemen enterprises.
3.4 Population The population for this study includes Private Yemeni corporations. The population will include the company’s board of directors, top management levels, middle management levels and employees in the field of finance and accounting. The employees to be included will be the auditors, financial analysts and accountants since 25 | P a g e
they are aware of the financial proceedings of their company. However, as it would be impossible to obtain responses from all companies, even if all companies were willing, within a reasonable time period, a sample will be used instead. Therefore, a sample will be selected based on specific requirements, which will be beneficial to ensuring that the study is most appropriately conducted.
3.5 Sampling Sampling is the process of selecting a representative part of a population in order to establish and identify the main characteristics or parameters of the whole population. The effectiveness of inferential statistics is established through the existence of large sample sizes. Large sample sizes ensure that results are protected from the effect of random error (Emerson, 2015). In order to reduce uncontrolled factors, random sampling is used. The study will employ a simple random sample to carry out its sampling process. Simple random sampling is a sampling process where each and every participant has an equal chance of being selected. It is an unrestricted sampling method where distinct individuals are selected from a large population (Jeelani, et al., 2014). In order for the participants to be included for participation, certain criteria must be met by the corporation. The criteria are; the corporation must be based in Yemen and the corporation must have Yemen-based managers and owners. The power analysis will be used to conduct the sampling process. The power analysis makes use of the power of the test, confidence level and effect size. The power of the test is the probability of rejecting the null hypothesis (McCrum-Gardner, 2010). The desired power of the test will be 0.9, an effect size of 0.322 and a confidence level of 0.05. The effect size is used to indicate the difference between two or more groups. According to (Cunningham & McCrum-Gardner, 2007), the effect sizes are grouped as small, medium and large. The medium effect sizes for chi-squares are 0.3. In addition, the researcher adjusts the values of the effect sizes to determine the required sample size. The effect size is also not set too high as it leads to small sample sizes. The sample size was calculated using G*Power software. This gives a sample size of 93 participants. The sample size will be a representative of the private corporations matching the sampling criteria. Particular companies were selected from the Chamber of Commerce within Yemen and once the corporation agreed to participate in the study, random sampling was conducted to obtain results from different employees. Random sampling is simple and cost26 | P a g e
effective. That is, it is easy to establish the eligibility of participating companies which is then used to obtain the number of individual participants.
3.6 Technique Utilizing information from the Chamber of Commerce, different Yemeni enterprises will be selected for participation within the study in different enterprises. It is estimated that each enterprise will have at least 3 managers and/or owners willing to participate within the study. Therefore, there will be an estimated of 93 individual participants. A minimum of 15 different corporations will be used in this study; hence, the maximum number of participants for this study will be six people from each corporation. Therefore, the range of individual participants may be 90 to 100. Once the individual corporation is assured of anonymity, requests from volunteers will be made to begin with the participation process. These participants will also be assured of anonymity, which is important for the success of the study as a whole. In order to participate in the study, the following criteria must be met; the participant must be over 19 years of age, minimum of 3 years of experience and must be a manager/owner, financial analyst, auditor or an accountant.
3.7 Data sources, data collection and data processing The data for this study will be collected from individual people, assuming they meet the criteria, from companies that exist within Yemen. Meetings might also be conducted if needed for additional data collection or if further clarification is needed by participants in the survey. Since the results will be collected using online questionnaire, SurveyMonkey will be used, allowing quantitative data to be entered. For data cleaning and screening, data will be scrutinized through Microsoft Excel and simplified as per the needs and specific requirements of this research.
3.8 Data Analysis Statistical analyses will be used to analyse the data. The Statistical Package for Social Sciences (SPSS) will be used to carry out the data analysis. The results will be represented using both the descriptive statistics and inferential statistics. The Descriptive statistics will include the frequencies, median, means and confidence intervals. The inferential statistics will be used to establish the relationship between 27 | P a g e
independent and dependent variables. Regression analysis will be used to establish the effectiveness of the components of internal control system in managing exchange currency rate risks. In addition, correlation analysis will be used to establish the relationships between the independent and dependent variables. The correlation analysis is used to examine whether the relationship among variables changes together or separately (Odiase & Ogbonmwan, 2007). Similarly, correlation is a statistical test used to assess the linear relationship between two continuous variables (Mukaka, 2012).
3.9 Validity, reliability, reflexivity and Measurement Instrument The validity of a research instrument is the ability of the instrument to measure what it is intended to measure in the research study. The validity of the instrument includes internal validity which involves extent to which the research study quantifies variables and external validity indicates the extent to which the measures obtained from the study sample selected best describes the population (Bolarinwa, 2015). The questionnaire was developed from previously researched articles as well as published documents that were used by (Badara & Saidin, 2013), (Gamage, Lock, & Fernando, 2014), (Papaioannou, 2006), (Ahmed, 2015), (El-Ibrahim, 2005) and others included in the literature, further to some questions developed based on statements given in literature which describe the variable of the study. The validity of the questionnaire was assessed by giving the drafted questionnaire to a set of experts to establish its effectiveness in collecting data. Cronbach’s Alpha was also measured to confirm the internal consistency of questionnaire. Additionally, all the elements and variables in the proposal are captured in the questionnaire in order to ensure that the reference population is well described. The instrument to be used in the data collection process will be the web-based questionnaire. The questionnaire will be delivered through the survey monkey tool. The first portion of the questionnaire involves demographic information. This information is important because it shows differences in insights, based on industry, experience level, age, gender, position, salary, and education. It is predicted that this may lead to different results due to these differing factors. The second portion of the questionnaire involves answering questions based on internal control systems. This involves the use of a Likert Scale, ranging from 1 to 4 ranging from strongly agree to strongly disagree. According to (Boone & Boone, 2012) the 28 | P a g e
commonly used Likert scales is the 5-point Likert scale. However, according to researcher’s variations, the neutral variable can be deleted to form a 4-point Likert scale. The Likert scale ranges from 4 or more points of measurement. The researcher is interested in testing if it right or wrong. Through the use of the questionnaire results, as well as the generalized belief of the scale’s rank, it is possible to ascertain an overall viewpoint regarding the effectiveness of internal control systems, as well as determine this effectiveness based on industries. The questionnaire will be medium in size in order to minimize errors and maintain the attention of the participant. In addition, the questionnaire was developed in a manner that emphasizes readability, clarity and comprehensiveness of questions included. It is also noted that surveys that take longer to complete may represent outliers and may be eliminated based on analytical methods, such as weighting or deep analysis.
3.10 Ethical Considerations The anonymity of participants will be observed to maintain their confidentiality. This will be achieved by minimizing the access of the questionnaires to external sources. Furthermore, this questionnaire will not in any way be the cause of any harm to the respondents. The ethical issue of non-plagiarism policy will be maintained. This will be achieved by solely depending on individual contribution to the research as well as the reference to non-individual materials.
3.11 Feasibility of the study The data for this study will be collected from different sources using a designed web-based questionnaire as the study is quantitative in nature. Meetings might also be conducted if needed for additional data collection or if further clarification is needed by respondents. The sample is restricted to owners or entrepreneurial owners, managers and employees in the field of auditing, finance and accounting with a minimum of 3 years’ experience. The sample size will be approximately 93 participants who will be randomly selected from Yemeni entities under the chamber of commerce from different sectors. The data will be screened and cleaned using Microsoft Excel and simplified as per the needs and specific requirements of this research. Then a Statistical Package for Social Analysis will be used to run statistical tests to perform data analysis. The correlation analyses will be used to measure strength and relation between variables. In 29 | P a g e
addition, the regression analysis will be used to establish the effect of independent variables on the dependent variable. In establishing the reflexivity and reliability of the study instrument, the questionnaire will have many different questions not directly focusing on one element to minimize errors and encourage honest answers. Furthermore, respondents returning surveys sometimes represent extremes of the population and will be eliminated using various analytical methods such as weighting or deep analysis. Ethical issues, as the survey participants’ anonymity is of great importance to their privacy protection, the confidentiality of their responses will be ascertained in the questionnaires.
30 | P a g e
4 Chapter Four: Analysis and Findings 4.1 Introduction This section gives the results and findings of the research study. The results of the findings are given in different parts. The first part is designed to give the results of descriptive statistics. The descriptive statistics is designed to indicate the findings of the demographic characteristics of the respondents. The results are presented using frequency tables as well as graphs. The second part indicates the description of findings in relation to the research objectives. The statistical analyses conducted will be used to assess the validity of the stated hypothesis. The last section will include the summary of data analysis section.
4.2 Response Rate After sending out the initial survey and later a reminder to our sample selection of 93 participants, we did receive a few responses stating that they were not the right person or not qualified to answer the survey, who then referred us to more competent participants. We then sent the survey to around 40 more participants to reach our sample size requirement and we finally ended up with a total of 93 responses, giving us a 100% response rate. This is a satisfying response rate especially that a lot of resources and time were used to find contact information of best survey participants.
4.3 Cronbach’s Alpha: Reliability Testing The internal consistency of a research instrument is measured using Cronbach’s alpha. It measures the reliability and internal consistency whether the questionnaire performs its intended function. The value of Cronbach’s alpha varies between one to zero. A good internal consistency of the items in the questionnaire is measured by how close the value of Cronbach’s alpha is to one (Tavakol & Dennick, 2011). Table A and B below indicates the value of the Cronbach’s alpha for internal consistency of the tested questionnaire questions. The value of Cronbach’s alpha was 0.862 which is close to 1. The scale statistics indicate that the mean of Cronbach’s alpha is 65.80. As such, the items in the questionnaire show internal consistency.
31 | P a g e
Table A Cronbach alpha test Reliability Statistics Cronbach's Alpha
N of Items
.862
31
Table B Scale statistics of the Cronbach alpha test Scale Statistics Mean 65.80
Variance
Std. Deviation
96.773
9.837
N of Items 31
4.4 Descriptive Statistics The results and findings are presented using frequency tables and graphs. The research study assessed the gender of the respondents who participated in the research study. The figure 1 below illustrates the gender distribution of the respondents. It is evident that most of the respondents (76.34%) were males while few of the respondents (23.66%) were females.
Figure 2. Gender of the respondents
32 | P a g e
The study sought to establish the age distribution of the respondents. A frequency table was used to present the findings as indicated in table 1 below. From the table, majority of the respondents (54.8%) are employees aged 19 to 29 years while 39.8% of the employees had the age of 30 to 39 years. Few of the employees (5.4%) and staffs had the age of 40 to 49 years. From the findings, none of the employees had more than 49 years.
Table 1. Age distribution of the respondents Age of the Respondents
Frequency
Percentage
19-29 years
37
39.8
30-39 years
51
54.8
40-49 years
5
5.4
Total
93
100
It was necessary to investigate the job level of employees and the staffs in the corporations they worked on. The results were presented in a frequency descriptive as shown in the table 2 below. It is evident that most corporations constituted of middle level managers as represented by 35.5% followed by senior level of management (25%). A number of the respondents (20.4%) and (11.8%) were owners or entrepreneurs or executives of the corporations and financial managers respectively. Few (5.4%) were auditors.
Table 2. Current job positions of the staffs The job level of the
Frequency
Percentage
respondents Owner/Executive/Entrepreneur 19
20.4
Senior Management
25
26.9
Middle Management
33
35.5
Financial Management
11
11.8
Auditor
5
5.4
Total
93
100
33 | P a g e
The employees and staffs of the private corporations in Yemen were asked to indicate their period of engaging in their current job positions. The table 3 below illustrates the period in which the staffs various private corporations in Yemen worked in their current job positions. Majority of the respondents (67.7%) indicated that they worked in their current job positions for 3 to 6 years while a number of the respondents (17.2%) and (10.8%) responded that they had been working in the position for a period of 7 to 9 years and 10 to 15 years respectively. Similarly, few of the respondents (2.2%) indicated that they have worked in the current position for over 20 years and between 16 to 20 years each.
Table 3. Period at which the staffs have been working in their current job positions Period working in the
Frequency
Percentage
3-6 years
63
67.7
7-9 years
16
17.2
10-15 years
10
10.8
16-20 years
2
2.2
Over 20 years
2
2.2
Total
93
100
current job position
The study was conducted to understand the type of corporations that the staffs participating in the study engage in. The figure 2 below illustrates the type of industry their corporations operates. The figure indicates that most of the respondents (11.76%) operate in utilities, energy and extraction industries followed by 9.24% who responded that they work in business support logistics and education respectively. A number of the respondents (8.24%) indicated that they work in finance and financial services and healthcare and pharmaceuticals industries respectively while (7.06%) of the respondents work in non- profit and retail and consumers industries respectively. Few of the respondents (1.8%) indicated that they work in agriculture, automotive, construction, machinery and homes, entertainment and leisure, insurance and real estate industries respectively. However, 1.8% of the participants did not respond to the question.
34 | P a g e
Figure 3. The period at which the respondents have been working in their current job positions
4.5 Research Study and Findings The research study attempts to achieve the research objectives as stated earlier through assessing the validity of hypotheses generated. The research attempts to answer the research objectives; the role of effective components of internal control system in managing exchange rate risks, the impact of market currency fluctuations in managing exchange rate risks, the importance of conducting market research in managing exchange rate risks and identifying key strategies in managing exchange rate risks. The validity of hypotheses will be achieved by conducting various statistical tests.
35 | P a g e
4.5.1 Investigating the effectiveness of the components of internal control system in managing currency exchange rate risks The research objective attempted to analyze the impact of the components of internal control system in managing exchange rate risks among private corporations in Yemen. Among the components of internal control system analyzed were the; control activities, risk assessment, control environment, information and communication and monitoring.
4.5.2 Control Environment A control environment is built of auditing function, risk assessment committee, executives’ as well as defined rules and policies. The entities of control environment will be achieved from the responses of the participants. The table 4 below indicates whether risk assessment committee as well as auditing function exist in the corporations. It is evident that the most contributing factor of control environment as component of internal control system is that the corporation has a risk assessment committee with a mean of 2.28. Majority (63.4%) of the respondents agreed (47.3%) and strongly agreed (16.1%) that their corporations had risk assessment committee while few (36.6%) disagreed (29.0%) and strongly disagreed (7.6%) that their corporations had risk assessment committee for managing risks. The factor that the corporation has well established written policies and working practices followed with a mean of 2.18. Most of the respondents (64.5%) agreed (43.0%) and strongly agreed (21.5%) that their corporations have established written policies and working practices for currency transactions and risks while few (35.5%) disagreed (31.2%) and strongly disagreed (4.3%) that their corporations have established and written policies and working practices. The least factor contributing to control environment is that the corporation has an audit function that audits and monitors financial transactions with a mean of 2.04. Majority of the participants (74.2%) agreed (47.3%) and strongly agreed (26.9%) that their corporations had audit functions responsible for auditing financial transactions. Similarly, few (25.8%) disagreed (20.4%) and strongly disagreed (5.4%) that their corporations had audit functions.
36 | P a g e
Table 4. Control environment as a component of internal control system Control Environment
Mean Strongly Agree Disagree Strongly Rank Agree Disagree % N % N % N % N 2.18 21.5 20 43.0 40 31.2 29 4.3 4 2
The corporation has established written policies and working practices for currency transactions and risks. The corporation has an 2.04 internal audit function which audits and monitors financial transactions including currency exchange transactions. The corporation has a 2.28 risk assessment committee Total 2.167
26.9 25
47.3 44
20.4 19
5.4 5
3
16.1 15
47.3 44
29.0 27
7.6 7
1
4.5.3 Monitoring Monitoring as well contributes to the components of internal control system. Monitoring ensures that the audit function conducts processes effectively as well as ensuring employees abides by rules and policies to enhance effective internal control system. Monitoring was achieved by assessing the role of management in developing rules as well as assessing whether the staffs complies with established rules and regulations. The research findings are presented in table 5 below. It is evident that the most contributing entity to monitoring is that the management develops and provides policies and ensures every employee is aware and abides with the corporation’s policies with a mean of 1.89. The results illustrates that most of the participants (91.4%) agreed (71.0%) and strongly agreed (20.4%) that the management develops and provides policies. Few (8.6%) agreed (7.5%) and (1.1%) disagreed that the management develops and provides policies. The other contributing element to monitoring is that staffs efficiently comply with rules and regulations within the organization with a mean of 1.86. The findings show that majority (87.1%) agreed (59.1%) and strongly disagreed (28.0%) staffs comply with rules and regulations. Similarly, few (12.9%) disagreed (11.8%) and strongly disagreed (1.1%) that staffs comply with rules and regulations. 37 | P a g e
Table 5 Monitoring as a component of internal control system Monitoring
Mean Strongly Agree Disagree Strongly Rank Agree Disagree % N % N % N % N Staffs efficiently comply 1.86 28.0 26 59.1 55 11.8 11 1.1 1 2 with rules and regulations within the organization The management 1.89 20.4 19 71.0 66 7.5 7 1.1 1 1 develops and provides policies and ensures every employee is aware and abides with the corporation’s policies Total 1.875
4.5.4 Control Activities Controlling activities are the tools applied by management in reducing risks. These are the policies put forward to ensure right processes are followed. The tools may be performance review. The tools used to identify control activities in this research study are whether the corporation arranges for up-to-date market reports of significant information to be provided to its management and the board of directors on a regular basis, the corporation sets Internal Control budgeting systems to handle currency risk projections and whether the corporation regularly conducts performance review and encourages segregation of duties to its employees. The findings are presented in table 6 below. The results show that the most contributing factor to control activities is that corporation sets internal control budgeting systems with a mean of 2.31. The results also show that most of the participants (60.2%) agree (46.2%) and strongly agree (14.0%) that their corporations sets internal control budgeting systems to handle currency risks while few (39.8%) disagreed (34.4%) and strongly disagreed (5.4%) with the statement. The element ranked second that contributes to control activities is that corporations arranges for up-to-date market reports of significant information to be provided to its management and the board of directors on a regular basis with a mean of 2.04. The findings indicate that majority (79.5%) agreed (63.4%) and strongly agreed (16.1%) that corporations arrange for up-to-date market reports while few disagreed (20.4%) with the statement. The least element contributing to control activities is that corporations regularly conducts performance review and encourages segregation of duties to its employees. The results show that majority (88.2%) agreed (75.3%) and 38 | P a g e
strongly agreed (12.9%) that their corporations regularly conduct performance review while few disagreed (11.8%) with the statement.
Table 6. Control activities as a component of internal control system Control Activities
Mean Strongly Agree Disagree Strongly Rank Agree Disagree % N % N % N % N The corporation arranges 2.04 16.1 15 63.4 59 20.4 19 2 for up-to-date market reports of significant information to be provided to its management and the board of directors on a regular basis The corporation sets 2.31 14.0 13 46.2 43 34.4 32 5.4 5 1 Internal Control budgeting systems to handle currency risk projections The corporation 1.99 12.9 12 75.3 70 11.8 11 3 regularly conducts performance review and encourages segregation of duties to its employees Total 2.113
4.5.5 Information and Communication Information and communication in an organization is essential as it ensures that information is efficiently conveyed to all levels of the organization for effective control of company’s objectives. The tools used to assess information and communications are the ability of management to efficiently transfer information internally and externally. The tools applied in the research study to measure information and communications are whether the corporation efficiently communicates company’s objectives and mission, whether the management successfully communicates financial and auditing reports to the organization and whether the information produced by the internal control system is reliable in successfully managing exchange rate risk. The results are presented in the table 7 below. It is evident that the most contributing factor to the information and communication is information produced by the internal control system is reliable in successfully managing exchange rate risk with a mean of 2.22. Most of the participants 39 | P a g e
(66.7%) agreed (53.8%) and strongly agreed (12.9%) that information produced by internal control system is reliable while few (33.3%) disagreed (32.2%) and strongly disagreed (1.1%) with the statement. The second ranked element is that the management successfully communicates financial and auditing reports to the organization with a mean of 2.03. It is evident that majority (76.4%) agreed (53.8%) and strongly agreed (22.6%) that the management successfully communicates financial and auditing reports to the organization while few (23.6%) disagreed (21.4%) and strongly disagreed (2.2%) with the statement. The least component is that corporation efficiently communicates company’s objectives and mission with a mean of 1.78. The findings show that most of the respondents (93.5%) agreed (65.5%) and strongly agreed (22.6%) that corporation efficiently communicates company’s objectives and mission while few (6.5%) disagreed with the statement.
Table 7 Information and communication as a component of internal control system Information and Communication
Mean Strongly Agree Disagree Agree % N % N % N 1.78 28.0 26 65.5 61 6.5 6
The corporation efficiently communicates company’s objectives and mission The management 2.03 successfully communicates financial and auditing reports to the organization The information 2.22 produced by the internal control system is reliable in successfully managing exchange rate risk Total 2.01
Rank
Strongly Disagree % N 3
22.6 21
53.8 50
21.4 20
2.2 2
2
12.9 12
53.8 50
32.2 30
1.1 1
1
4.5.6 Risk Assessment Risks hinder achievement of company’s objectives. Risk assessment is therefore essential in detecting and managing risks. Risk assessment is measured by ability of auditors to assess upcoming risks arising from daily business operations. Risk assessment in this research study will be measured by observing whether the corporation regularly carries out risk assessments on changes in exchange rates. The 40 | P a g e
findings are presented in the table 8 below. The results show that most of the respondents (66.7%) agreed (55.9%) and strongly agreed (10.8%) that the corporation regularly carries out risk assessments on changes in exchange rates whereas few (33.3%) disagreed (30.1%) and strongly disagreed (3.2%) with the statement.
Table 8. Risk assessment as a component of internal control system Risk Assessment
The corporation regularly carries out risk assessments on changes in exchange rates
Strongly Agree
Agree
Disagree
Strongly Disagree
%
%
N
%
%
55.9 52
30.1
10.8
N 10
N 28
3.2
N 3
4.5.7 Exchange Rate Risks Exchange rate risk is the exposure of firms’ value, assets and liabilities due to exchange rate movements. It is caused by transaction, translation and economic risk and arises due to unpredictable changes in foreign currencies. The exchange rate variable in this research study will be measured by the tool “the corporation’s net inflows and outflows are at risk of exposure due to changes in currencies” which is the transaction exchange rate risk. The findings are presented in table 9 below. The findings shows that majority of the participants (86.0%) agreed (55.9%) and strongly agreed (10.8%) that their corporation’s net inflows and outflows are at risk of exposure due to changes in currencies while few of the participants (14.0%) disagreed with the statement.
Table 9. Exchange rate risk as the dependent variable Risk Assessment
Strongly Agree % N
The corporation’s net inflows 34.4
32
Agree
Disagree
Strongly
N
%
Disagree % N
51.6 48
14.0
%
N 13
and outflows are at risk of exposure due to changes in currencies
41 | P a g e
In order to assess the research objective, investigating the effectiveness of the components of internal control system in managing currency exchange rate risks, a research hypothesis was developed as follows:
4.5.7.1 Hypothesis 1: H0: Well managed components of internal control systems do not help in reducing and managing exchange rate risks H1: Well managed components of internal control systems helps in reducing and managing exchange rate risks
The validity of the research hypothesis was measured by conducting an ordered logistic regression. The findings begin by describing the goodness of fit of the model where the results are presented in the table below. It is evident that the value of the Pearson chi-square statistic is 145.447 with a p-value of 0.427. The p-value is greater than ∝= 0.05 level of significance which leads to the conclusion that the model is a good fit for the values.
Table 10. Goodness of fit of the model Goodness-of-Fit Chi-Square df
Sig.
145.447
143
.427
Deviance 129.353
143
.787
Pearson
Link function: Logit.
Table 11 indicates the validity of the final model to establish the relationship between dependent and independent variables. The results show that value of the chisquare statistic is 48.034 with a p-value of 0.044. The p-value of the model is less than ∝= 0.05 which leads to the rejection of the null hypothesis. This therefore, leads to the conclusion that well managed components of internal control systems helps in reducing and managing exchange rate risks.
42 | P a g e
Table 11. Overall model fitting Model Fitting Information -2 Log Model
Likelihood
Chi-Square df
Sig.
48.034
.044
Intercept Only 180.160 Final
132.126
33
Link function: Logit.
In order to establish which components of the internal control system contributed to the management of exchange rate risks, a parameter estimates model consisting of parameter estimates was used to show the results (See Appendix C). The findings indicate that the significant element in managing exchange rate risks was the statement “Staffs efficiently comply with rules and regulations within the organization” which had a p-value of 0.000 less than ∝= 0.05 level of significance. Therefore, the respondents strongly agreed that efficiently monitoring of corporation’s operations manages the exchange rate risks.
4.5.8 Assessing the Importance of Market Research in Managing Exchange Rate Risk among Private Companies in Yemen The research objective was developed in order to understand the relevance of conducting market research towards mitigating exchange rate risks among private companies in Yemen. Market research is an important initiative which helps to understand the movements in currency exchange. Descriptive statistics were first developed to describe the nature of the market research variable. The tools that were used to measure the market research variable were; “The Corporation regularly conducts market research on changes in exchange rates”, “The Corporation acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts” and “The corporation predicts market currency fluctuations using reliable and leading financial methods”. The findings of the study are presented in table 12 below. The results indicate most relevant element in measuring the relevance of market research is whether the corporation acquires exchange rate forecasts from the foreign exchange advisory services to make its own forecasts with a mean of 2.35. The results 43 | P a g e
also shows that majority (54.9%) agreed (44.1%) and strongly (10.8%) agreed that their corporations acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts while few (45.1%) disagreed (44.1%) and strongly disagreed (1.1%) strongly disagreed with the statement. The second ranked element was whether the corporation predicts market currency fluctuations using reliable and leading financial methods with a mean of 2.27. The results indicated that most of the respondents (60.2%) agreed (44.1%) and strongly agreed (16.1%)
that their
corporations predicts market currency fluctuations using whereas few (39.8%) disagreed (36.6%) and strongly disagreed (3.2%) strongly disagreed with the statement. The least ranked element was whether the corporation regularly conducts market research on changes in exchange rates with a mean of 1.96. Majority (75.3%) agreed (43.0%) and strongly agreed (32.3%) that their corporations regularly conduct market research whereas few (24.7%) disagreed (21.5%) and strongly disagreed (3.2%) strongly disagreed with the statement.
Table 12 Importance of market research on foreign exchange currencies Strongly
Relevance of market
Mean
research
Agree
Disagree
Agree %
N
Strongly
Rank
Disagree %
N
%
N
%
N
The Corporation regularly conducts market research on
1.96
32.3
30 43.0 40
21.5
20
3.2
3
3
2.35
10.8
10 44.1 41
44.1
41
1.1
1
1
2.27
16.1
15 44.1 41
36.6
34
3.2
3
2
changes in exchange rates The Corporation acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts The corporation predicts market currency fluctuations using reliable and leading financial methods Total
2.193
A hypothesis was developed in an attempt to achieve the research objective. The hypothesis is stated as follows; 44 | P a g e
4.5.8.1 Hypothesis 2: H0: Efficient market research on currency rates does not help in reducing and managing exchange rate risks H1: Efficient market research on currency rates helps in reducing and managing exchange rate risks Testing of the hypothesis was achieved through conducting correlation analysis. The correlation analysis was used to assess the relationship between market research and the exchange rate risk. The assumptions of normality were first checked before proceeding with the correlation tests. The results are presented in the table 13 below. Shapiro-Wilk test was used to assess normality. The p-values of the elements are 0.000 which leads to the conclusion that the data sets are not normally distributed. A spearman rank correlation test is therefore applied Table 13 Test for normality Tests of Normality Kolmogorov-Smirnova Statistic
df
Shapiro-Wilk
Sig.
Statistic
df
Sig.
The corporation’s net inflows and outflows are at risk of exposure due to
.276
93
.000
.788
93
.000
.232
93
.000
.840
93
.000
.278
93
.000
.799
93
.000
.239
93
.000
.847
93
.000
changes in currencies The corporation regularly conducts market research on changes in exchange rates The corporation acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts The corporation predicts market currency fluctuations using reliable and leading financial methods a. Lilliefors Significance Correction
45 | P a g e
The results of the spearman rank correlation tests are presented in table 14 below. The study findings indicate that correlation exists between market research and exchange rate risks. However, the only significant element was the statement “The corporation acquires exchange rate forecasts from the foreign exchange advisory services to make its own forecasts” with a correlation coefficient of 0.393 and a p-value (0.000) that is less than ∝= 0.05 level of significance. Therefore, most participants agreed that forecasting of exchange rates for the purpose of advisory services significantly manages exchange rate risks.
Table 14. Correlation tests between market research and exchange rate risks The corporation’s net inflows and outflows are at risk of exposure due to changes in currencies
Market research Correlation
Significance
N
0.116
0.268
93
0.393
0.000
93
-0.001
0.992
93
coefficient The corporation regularly conducts market research on changes in exchange rates The corporation acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts The corporation predicts market currency fluctuations using reliable and leading financial methods
4.5.9 Establishing the Key Strategies Employed by Management in Managing Exchange Rate Risks among Private Companies in Yemen. The research objective attempted to identify the key strategies used in mitigating exchange rate risks. Key strategies are necessary as they help in minimizing exposures to currency rate fluctuations. The key strategies were assessed by responding to the questions; the corporation hedges against currency rate risk, the corporation uses forward contracts to manage currency rate risk, the corporation uses swaps to manage 46 | P a g e
currency rate risk, and the corporation uses options to manage currency rate risk. Descriptive statistics were used to describe the nature of the variables. The results are presented as table 15 below. The results indicates that majority of respondents (60.2%) agreed (41.9%) and strongly agreed (18.3%) that their corporations hedges against currency rate risk whereas few (39.8%) disagreed (33.3%) and strongly disagreed (6.5%) that their corporations hedges against currency rate risk. Similarly, most of the respondents (55.9%) agreed (46.2%) and strongly agreed (9.7%) that their corporations use forward contracts to manage currency rate risk while few (44.1%) disagreed (32.3%) and strongly disagreed (11.8%) with the statement. The findings also illustrated that most participants (58.1%) disagreed (44.1%) and strongly disagreed (14.0%) that their corporations uses swaps to manage currency rate risk whereas few (41.9%) agreed (30.1%) and strongly agreed (11.8%) with the statement. In addition, most respondents (52.7%) disagreed (39.8%) and strongly disagreed (12.9%) that their corporation uses options to manage currency rate risk while few (47.3%) agreed (39.8%) and strongly agreed (7.5%) with the statement.
Table 15. Key Strategies in managing exchange rate risks Key Strategies in managing exchange rate risks The corporation hedges against currency rate risk
Strongly Mean
Agree % N
Agree %
Disagree
N
%
Strongly
Rank
Disagree N % N
2.28
18.3
17 41.9 39
33.3
31 6.5
6
4
2.46
9.7
9 46.2 43
32.3
30 11.8
11
3
2.60
11.8
11 30.1 28
44.1
41 14.0
13
1
2.58
7.5
7 39.8 37
39.8
37 12.9
12
2
The corporation uses forward contracts to manage currency rate risk The corporation uses swaps to manage currency rate risk The corporation uses options to manage currency rate risk Total
2.48
47 | P a g e
In order to assess whether the key strategies minimizes exchange rate risks, a hypothesis was developed in order to answer the research objective. Correlation analysis was used to test the validity of the research hypothesis. The assumptions of normality were first checked before proceeding with the analysis. The table 16 below presents the results of normality tests. The findings indicate that all the data variables are not normally distributed since their p-values (0.000) are less than ∝= 0.05 level of significance. As such, spearman rank correlation coefficient is used.
Table 16 Normality tests for key strategies in managing exchange rate risks Tests of Normality Kolmogorov-Smirnova Statistic The corporation hedges against currency rate risk
df
Shapiro-Wilk
Sig.
Statistic
df
Sig.
.233
93
.000
.867
93
.000
.271
93
.000
.860
93
.000
The corporation uses forward contracts to manage currency rate risk a. Lilliefors Significance Correction
The hypothesis to be tested is;
4.5.9.1 Hypothesis 3: H0: Efficient key strategies such as hedging do not help in reducing and managing exchange rate risks. H1: Efficient key strategies such as hedging helps in reducing and managing exchange rate risks.
Table 17 below indicates the results of the correlation tests. The results indicate that there is no relationship between key strategies and exchange rate risks since the pvalues of the variables are greater than ∝= 0.05 level of significance. As such, key strategies such as hedging do not help in managing exchange rate risks.
48 | P a g e
Table 17 Correlation analysis between key strategies exchange rate risks The corporation’s net inflows and outflows are at Key Strategies in mitigating exchange rate risks
risk of exposure due to changes in currencies Correlation
Significance
N
0.059
0.575
93
-0.013
0.898
93
coefficient The corporation hedges against currency rate risk The corporation uses forward contracts to manage currency rate risk
4.5.10 Exploring the Effect of Market Currency Fluctuations on Exchange Rate Risks among Private Companies in Yemen The research question sought to explore the effect of market currency fluctuations on exchange rate risks. It is frequently important to measure the exposure to exchange rate fluctuations as it helps managers to protect their firms from the occurrence of exchange rate risks. The market currency fluctuations were assessed using the following tools as measured by the survey monkey questionnaire; the fluctuation of the exchange rates in relation to Yemen currency affects corporation performance, the corporation minimizes exposure to currency rate risk through early payments of foreign currencies before they are due and Inflation of Yemen’s economy raises the exchange rate risks within the corporation. The descriptive statistics were used to describe the nature of measurement tools. The results are presented in table 18 below. The results indicate that the most contributing element to market currency fluctuation is the statement “The Corporation minimizes exposure to currency rate risk through early payments of foreign currencies before they are due” with a mean of 2.32. Majority (62.4%) of the participants agreed (51.6%) and strongly agreed (10.8%) that the corporations takes the initiative of minimizing exposure to currency rate risk whereas few of the participants (37.6%) disagreed (32.2%) and strongly disagreed (5.4%) with the statement. The second ranked tool was the statement “The Inflation of Yemen’s economy raises the exchange rate risks within the corporation” with a mean of 1.70. Most (91.4%) of the respondents strongly agreed (52.7%) and agreed (38.7%) 49 | P a g e
that inflation of Yemen’s economy raises the exchange rate risks within the corporation while few of the participants disagreed (8.6%) with the statement. The least ranked tool was the statement “The fluctuation of the exchange rates in relation to Yemen currency affects corporation performance” with a mean of 1.58. The results show that majority (92.4%) agreed (41.9%) and strongly agreed (50.5%) that the fluctuations of the exchange rates in relation to Yemen currency affects corporation performance while few (7.6%) disagreed (6.5%) and strongly disagreed (1.1%) with the statement.
Table 18 Effect of market currency fluctuations on exchange rate risks Market currency fluctuations
Strongly Mean
Agree % N
Agree %
N
Disagree Strongly Disagree % N % N
Rank
The fluctuation of the exchange rates in relation to Yemen currency affects
1.58
50.5
47 41.9 39
6.5
6
1.1
1
3
2.32
10.8
10 51.6 48
32.3
30 5.4
5
1
1.70
38.7
36 52.7 49
8.6
8
corporation performance The corporation minimizes exposure to currency rate risk through early payments of foreign currencies before they are due The Inflation of Yemen’s economy raises the exchange rate risks within
2
the corporation Total
1.867
In order to assess the effect of market currency fluctuations on exchange rate risks among private corporations in Yemen, a hypothesis was developed to assess the assumption. Correlation analysis was used to estimate the relationship between market fluctuations and exchange rate risk. The assumptions of normality were first assessed before the analysis was conducted. The results are presented in table 19 below. The results indicates that the p-values (0.000) of Shapiro-Wilk tests for all the tools are less 50 | P a g e
than ∝= 0.05 level of significance which leads to conclusion that data are not normally distributed. As such, alternative spearman rank correlation co-efficient is used.
Table 19 Tests for normality Tests of Normality Kolmogorov-Smirnova Statistic
df
Shapiro-Wilk
Sig.
Statistic
df
Sig.
The fluctuation of the exchange rates in relation to Yemen currency affects
.314
93
.000
.743
93
.000
.292
93
.000
.840
93
.000
.299
93
.000
.762
93
.000
corporation performance The corporation minimizes exposure to currency rate risk through early payments of foreign currencies before they are due. Inflation of Yemen’s economy raises the exchange rate risks within the corporation a. Lilliefors Significance Correction
The hypothesis used to assess the relationship between market currency exposures is as shown below.
4.5.10.1 Hypothesis 4: H0: Existence of market currency fluctuations has no effect on exchange rate risks H1: Existence of market currency fluctuations has an effect on exchange rate risks The correlation tests were achieved through the use of spearman correlation test. The table below represents the results of the correlation analysis. The results indicate that two elements are significant which leads to the confirmation of the hypothesis that existences of market currency fluctuations have a negative effect on exchange rate risks. The significant statements contributing to the market currency fluctuations are the statements; the fluctuation of the exchange rates in relation to Yemen currency affects corporation performance whose correlation coefficient is 0.397 with a p-value of 0.000. Therefore, the participants strongly agreed that increase in currency fluctuations causes 51 | P a g e
the exchange rate risks to increase as well. In addition, the statement “The Inflation of Yemen’s economy raises the exchange rate risks within the corporation” was significance with a correlation coefficient of 0.348 and a p-value of 0.001. Thus, the respondents strongly agreed that increase in the inflation of Yemen’s economy raises the exchange rate risks within the corporation.
Table 20 Correlation between market currency fluctuations and exchange rate risks The corporation’s net inflows and outflows are Market Currency fluctuations
at risk of exposure due to changes in currencies Correlation
Significance
N
0.397
0.000
93
0.166
0.111
93
0.348
0.001
93
coefficient The fluctuation of the exchange rates in relation to Yemen currency affects corporation performance The corporation minimizes exposure to currency rate risk through early payments of foreign currencies before they are due The Inflation of Yemen’s economy raises the exchange rate risks within the corporation
52 | P a g e
5 Chapter Five: Discussion and Conclusion 5.1 Introduction The chapter entails discussion of the results in relation to research objectives. Internal control system is observed to be an important tool which measures the organization’s performance. It helps the organization to control the operations and performance as well as managing existing compliance risks. The organization is able to identify the challenges facing the financial section which contributes to major risks such as fraud. The chapter gives the summary of research findings, implications for theory and practice as well as recommendations.
5.2 Summary of main findings The research study was conducted in Yemen where the main targets were private corporations. The reliability of the questionnaire instrument was measured and showed internal consistency. The descriptive statistics were used to give a description of the industries from where the participants were surveyed. They were used to help in meaningful interpretation of hypotheses once they were achieved. The findings of the study indicated that majority of the respondents were males and the large part of the respondents were participants aged 30 to 39 years. In addition, majority of the respondents were at their middle level and senior level management. Most of the respondents had been working in their current job positions for the period of 3 to 6 years and most of the corporations assessed engaged in utilities, energy and extraction industries kind of business operations. The main purpose of the research study was to establish the effectiveness of internal control systems in managing currency exchange rate risks. There were specific objectives which were used to investigate the effectiveness of internal control systems in managing the exchange rate risks.
5.2.1.1 Research Objective One: Investigating the effectiveness of the components of internal control system in managing currency exchange rate risks The first research objective developed included assessing the components of internal control systems in managing exchange rate risks. The main components of the internal control systems were information and communication, monitoring, risk assessment, control activities and the control environment. A research hypothesis was 53 | P a g e
developed in order to analyze information and assess the achievement of the research objectives. Ordered logistic regression was used to conduct the analysis. The dependent variable was the exchange rate risk which was measured using the statement “The Corporation’s net inflows and outflows are at risk of exposure due to changes in currencies”. Majority of the respondents (86.0%) agreed and strongly agreed with the statement.
The
independent
variables
were;
monitoring,
information
and
communication, control activities, control environment and risk assessment. The results of the ordered logistic regression indicated that the significant variable in predicting exchange rate risks outcome was monitoring. The significant statement used to measure monitoring variable was “Staffs efficiently comply with rules and regulations within the organization”. In addition, majority of the respondents (87.1%) agreed and strongly agreed that the staffs in the corporation efficiently comply with rules and regulations within the organization. The results concluded that increase of monitoring the corporation’s operations significantly manages exchange rate risks.
5.2.1.2 Research Objective Two: To Assess the Importance of Market Research in Managing Exchange Rate Risk among Private Companies in Yemen The main purpose of the research objective was to assess the role of market research in managing currency exchange rate risk. A research hypothesis was developed which explored the effect of market research on exchange rate risks. Correlation analysis was used to conduct the analysis. The findings indicated that market research contributed to the management of exchange rate risks among the private corporations in Yemen. The most significant statement measuring market research variable was “The Corporation acquires exchange rate forecasts from the foreign exchange advisory services to make its own forecasts” which had a correlation coefficient of 0.393 and a p-value of 0.000. In addition, majority of the respondents (54.9%) agreed and strongly agreed that their corporations acquire exchange rate forecasts from the foreign exchange advisory services to make its own forecasts.
5.2.1.3 Research Objective Three: Establishing the Key Strategies Employed by Management in Managing Exchange Rate Risks among Private Companies in Yemen. The main purpose of the research objective was to establish the key strategies used by the management in mitigating the exchange rate risks. In addition, the 54 | P a g e
effectiveness of the exchange rate risks was assessed in minimizing exchange rate risks. Research hypothesis was developed which was analyzed using correlation analysis. The findings of the study indicated that there was no relationship between key strategies such as hedging and exchange rate risks. Therefore, key strategies such as hedging do not help in managing exchange rate risks among private companies in Yemen. In addition, majority indicated that they do not use options (52.7%) and swap (58.1%) strategies at managing exchange rate risks.
5.2.1.4 Research Objective Four: Exploring the Effect of Market Currency Fluctuations on Exchange Rate Risks among Private Companies in Yemen The research objective was developed to explore the effect of market fluctuations on exchange rate risks among private companies in Yemen. A hypothesis was used to validate the research objective where correlation tests were used. The findings of the research study indicated that market fluctuations significantly contribute to exchange rate risks. The results show that the significant statements contributing market fluctuations were; “The Inflation of Yemen’s economy raises the exchange rate risks within the corporation” which had a correlation coefficient of 0.348 and a p-value of 0.001. The statement “the fluctuation of the exchange rates in relation to Yemen currency affects corporation performance” was also significant with a correlation coefficient of 0.397 and a p-value of 0.000. In addition, majority of the respondents (91.4%) agreed and strongly agreed that the Inflation of Yemen’s economy raises the exchange rate risks within the corporation. Similarly, most of the respondents (92.4%) indicated that the fluctuation of the exchange rates in relation to Yemen currency affects corporation performances.
5.3 Implications for theory The research study was developed with an aim to establish the effectiveness of the internal control system in managing exchange rate risks. The study indicated that major businesses today are faced with the challenge of managing their operations thus leading the businesses to decentralize their operations in order to manage the challenges. Challenges in a business leads to slowdown of operations as managers are unable to review the accuracy of employees in completing tasks. In addition, shareholders are unable to measure the policy abidance by managers and, employees in the finance department are relied on to maintain work ethics in compiling financial 55 | P a g e
reports. The employees must engage in planning and control activities that ensure fraud risks are managed. The engagement of effective internal control system in a business helps in managing finance report errors as well as mitigating occurrence of frauds in the finance section. The effective internal control systems measures the accuracy of financial reports ensuring risks contributing to financial losses are minimized (Badara & Saidin, 2013). Effective internal control must be able to address these issues. The research study was conducted to show the effectiveness of internal control system. Quantitative research design was employed to conduct the analyses. The findings imply that internal control system is an integral tool in managing exchange rate risks. The ordinal logistic regression indicates that components of internal control system are important managing exchange rate risks. Monitoring is important as it provides auditors in finance management with the abilities to observe changes in financial statements and reporting as well as identifying weaknesses and communicating weaknesses to the management (Ionescu, 2011). The respondents indicated that staffs must comply with rules and regulations within the company. The management develops policies and rules within an organization and expects the employees to follow the rules and regulations. Monitoring an organization helps the management to ensure that all the rules are followed (Badara & Saidin, 2013). This is achievable through the use of effective internal control system. The study made a pre-assumption that consistent engagement of market research significantly mitigates the occurrences of exchange rate risks. The assumption was confirmed using a correlation analysis which indicated that constant engagement of market research minimizes the exchange rate risks. The respondents significantly indicated that corporations should obtain foreign exchange forecasts from financial advisories to make its forecasts. Market research entails the flow of information which helps the management to make decisions. Efficient market research strategies help in dealing with changes in an economic recession, inflation as well as technology (Smith & Albaum, 2012). The study confirmed that market fluctuations on foreign exchange rate risks significantly increase the occurrence of exchange rate risks. In addition, the respondent indicated that fluctuation of exchange rates affects the corporation performance. According to (Ahmed, 2015), fluctuation of exchange rate movements has been a major 56 | P a g e
source of risks for most financial institutions. The management has the obligation of constantly measuring exposure to exchange rate movements. The most common exposure affecting corporations and businesses is the transaction exposure which arises to changes in firm’s cash inflow and outflow of net sales (Harris & Kaur, 2013). The respondents strongly agreed that their corporation’s net inflows and outflows are at risk of exposure due to changes in currencies. Most corporations are faced with unexpected changes in exchange rates which cause direct losses.
5.4 Implications for practice The research study has indicated that markets are faced with unpredictable changes and movements in foreign exchange rates and currencies. The management must be aware that firm is at risk of being faced with exchange rate risks. In addition, the management should be aware that foreign exchange rate risks exist in most corporations. The corporations that face exchange rate risks are often challenged to develop strategies to mitigate the occurrences of foreign exchange rates risks. The management, therefore, is encouraged to manage their corporate exchange rate risks in order to avoid losses in currency markets. The firms as well as corporate are encouraged to obtain information on the existence of foreign currency exposures. The foreign currency exposures pave way for the occurrence of exchange rate risks. The management should, therefore, employ key strategies to minimize movements in foreign exchange rates. The key strategies that would be of help are contractual hedging as well as engaging in options, although it’s not yet fully active in Yemen. In addition, regularly conducting of market research is essential as it helps in making decisions involving future costs and revenues. The management should, therefore, measure the exchange rate risk exposure which helps in reducing major vulnerabilities facing the organization as they affect organization’s profit as well as the firm’s asset value (Papaioannou, 2006). Furthermore, internal control system helps in managing exchange rate risks. The effective internal control system can find out abnormalities in business operations within short time (Brewer & List, 2004). It can justify the reliability financial and operational information and ensures that business activities are completed in compliance with policy. The organizations should be able to employ effective internal control systems such as monitoring to ensure that set rules and policies are followed. The management 57 | P a g e
should ensure that the employees do not engage in risky behaviour which might cost the organization such as fraud activities or unauthorized risk taking. The auditors in an organization should ensure that employees in the finance department are often supervised and the auditors should as well observe the processes of developing financial reports. The management should adopt efficient internal control measures to ensure ethics are observed in an organization.
5.5 Limitation of the Study Limitations of the study include the use of web-based questionnaire as the only data collection tool which will be a limitation to this research study. Furthermore, the use of close ended questions to construct the questionnaire due to the nature of variables which would have been difficult to measure limits the extent to which participants would have given details and explanations.
5.6 Conclusion Exchange rate risks are the exposure of the firm’s current value and assets due to exchange rate movement. The study indicates that the firm’s net inflows and outflows are at risk of exposure due to changes in currencies. The management should therefore input effort in managing the exchange rate risks. One of the efforts in managing exchange rate risks is through enhancing an effective control internal system. Internal control system ensures efficient utilization of resources. Effective internal control system foresees that the company’s objectives are met and ensuring that the organization’s operations are ethical and economical. The components of internal control system help in minimizing exchange rate risks. Furthermore, providing a good control environment is an important factor for the success of an organization. The control environment is considered to be the most important aspect of an organization for an effective internal control system to take place. It provides the basis for the other components of an internal control system to take place. The management must provide an environment that encourages conducting of operations ethically where most fraudulent activities are mitigated. Rules and policies ensure ethical operations are followed by an entity. The study indicates that monitoring as a component of the internal control system is an important factor to consider when managing exchange rate risks. The staffs should comply with rules and policies which help in minimizing 58 | P a g e
exposure to exchange rate risks. The management should as well work closely with the auditors to monitor the performance of an organization from time to time by constantly checking the balances in financial reports and establishing existing deficiencies. The private corporations in Yemen rarely involve their employees in the decision-making process. Information and communication are an integral entity for the success of the organization. The flow of information within an organization ensures that problems and unpredicted uncertainties are discovered on time. Most corporations in Yemen rarely engage risk assessment strategies in their organizations. The risk assessment processes are important as they enable the organization to assess its performance about the organization’s mission and objectives. Risk assessments are necessary as they help in the planning of activities and influences revision of company’s operations. The management should identify both internal and external risks affecting the organization. The management should, therefore, minimize risks at accepted levels or avoid the risks altogether. Besides, market fluctuations are among the factors that influence the occurrence of exchange rate risks. The market currency fluctuations are evaluated through predicting of fluctuations of currency exchange rates. The common exposure to market currency fluctuations is the transaction exposure which leads to the occurrence of transaction exchange rate risks. The transaction exchange rate risks affect the company’s profit as well as the value of inflows and outflows. Effective strategies should be employed to manage transaction risks exposures which in turn lead to the reduction in exchange rate risks. The economy of Yemen is constantly faced with inflation rates. The participants indicated that inflation rates in Yemen affect the performance of their organizations as the firm’s profit is decreased. Inflation weakens the firm’s financial and economy systems which pave a way for the exposure of currency exchange rates. Also, the fluctuations of exchange rate risks are assessed through constant engagement of market research. The study found out that majority of Yemen’s corporation acquires exchange rate forecasts from the foreign exchange advisory services to make their own forecasts. Market research strategies help in making decisions involving future costs and revenues.
Efficient engagement of market research aids in reducing the major
vulnerabilities approaching an organization which greatly affects profit margins and value of assets. The management should obtain forecasts to manage the movements in foreign exchange currencies. 59 | P a g e
Most of the private corporations in Yemen do not engage in options, swaps, forward and future contracts in managing their exchange rate risks. However, few respondents indicated that they engage in basic operation hedging techniques to manage their exchange rate risks. Hedging against currency exchange rate risks helps in managing currency exchange rate risks. Hedging mostly helps in managing transaction exchange rate risks. The hedging strategies help in preserving cash flows and earnings as well as manage short-term payable transactions. In ensuring that most of the exchange rate risks are minimized, the corporation should employ both the operational and financing hedging strategies. The operational hedging strategies minimize exchange rate risks that arise due to international operations. Similarly, financial hedging strategies entail of altering currency derivatives by using currency options and swaps.
5.7 Recommendations Several suggestions would be given to the management of most corporations in Yemen to manage the operations of their firms as well as engage in activities that will lead to increased performance. The recommendations were given on the basis that majority of private corporations in Yemen do not engage their employees in decisionmaking process
The management of corporations in Yemen should employ key strategies in managing exchange rate risks. Key strategies such as hedging, swaps, options, future and forward contracts help in managing exchange rate risks.
The management should create a specific budget to be used in managing occurrences of exchange rate risks. Since market currency fluctuations are unpredictable, the management should ensure that the budget set aside caters for any uncertainties arising.
The management should activate different aspects of risk assessment practices and enhance the flow of information in different level of organization.
The management should continuously improve its internal control system and policies to be able to manage or avoid risks.
60 | P a g e
6 References Adler, M., & Dumas, B. (1984). Exposure to Currency Risk: Definition and Measurement. FInancial Management , 41-50. Ahmed, L. (2015). The Effect of Foreign Exchange Exposure on the Financial Performance of Commercial Banks in Kenya. International Journal of Scientific and Research Publications, 5(11), 115-120. AICPA American Institute of CPAs. (2014). AICPA. Retrieved from EmployeeBenefitPlanAuditQuality - Plan Advisory: http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Resour ces/PlanAdvisories/DownloadableDocuments/Plan_AdvisoryInternalControlhires.pdf AICPA American Institute of CPAs. (2014). The Importance of Internal Control in Financial Reporting and Safeguarding Plan Assets. AICPA Employee Benefit Audit Quality Plan Advisory, 1. Almounsor, A. (2010). Inflation Dynamics in Yemen: An Empirical Analysis. International Monetary Fund Working Paper. Autorite Des Marches Financiers - AMF. (2010). Risk management and internal. Reference Framework. France. Ayagre, P., Appiah-Gyamerah, I., & Nartey, J. (2014). The effectiveness of internal control systems of banks: The case of Ghanaian banks. International Journal of Accounting and Financial Reporting, 377-389. Badara, M. S., & Saidin, S. Z. (2013). Impact of the effective internal control system on the internal audit effectiveness at local government level. Journal of Social and Development Sciences, 4(1), 16-23. Belk, P. A., & Glaum, M. (1990). The Management of Foreign Exchange Risk in UK Multinationals: An Empirical Investigation. Accounting and Business REsearch, 21, 3-13. Bhaskaran, P. B., & Priyan, P. K. (2015). Strategies of Indian firms in coping with forex risk management: an inquiry through case-research method. SDMIMD Journal of Management, 13-23. Bolarinwa, O. (2015). Principles and methods of validity and reliability testing of questionnaires used in social and health science researches. Nigeria Postgraduate Medical Journal, 22(4), 195-201. Boone, H., & Boone, D. (2012). Analyzing likert data. Journal of Extension, 50(2), 15. Brewer, D. D., & List, W. (2004). Gamma Secure Systems Limited . Retrieved from Measuring the effectiveness of an internal control system: http://www.gammassl.co.uk/research/time040317.pdf
61 | P a g e
Bunea-Bontas, C. A. (2009). Basic Principles of Hedge Accounting. Pitesti, Romania: The Faculty of Management Marketing in Economic Business. Central Bank of Yemen. (2016, July). Central Bank of Yemen. Retrieved from Official Fx for Central Bank of Yemen : http://centralbank.gov.ye/ReportExchange.aspx?keyid=50&pid=46&lang=1& cattype=6 Chiang, Y.-C., & Lin, Y.-C. (2008). Exchange rate exposures of Taiwanese firms. Investment Management and Financial Innovations, 5(4), 178-185. COSO. (2007, March 29). CyTrap Labs. (Internal Control — Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission, 1993) Retrieved from Standards that matter – COSO – Checklist for achieving a better system of internal controls: http://blog.cytrap.eu/?p=189 Creswell, J. W. (2013). Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. Los Angeles: Sage Publications, Inc. Cunningham, J. B., & McCrum-Gardner, E. (2007). Power, effect and sample size using GPower: practical issues for researchers and members of research ethics committees. Evidence Based Midwifery, 132-136. Delice, A. (2010). The Sampling issues in quantitative research. Educational Sciences: Theory and Practice, 1-18. Dohring, B. (2008). Hedging and invoicing strategies to reduce exchange rate exposure: a euro-area perspective. Brussels: European Commission . Dr. David Brewer and William List, C. H. (n.d.). Measuring the effectiveness of an internal control system. 28. El-Ibrahim, E. M. (2005). Measuring the Effectiveness of Internal Control Systems in Kuwait. Kuwait Maastricht Business School. El-Masry, A., & Abdel-Salam, O. (2007). Exchange rate exposure: do size and foreign operations matter? Managerial Finance, 33(9), 741-765. Emerson, R. W. (2015). Convenience sampling, random sampling, and snowball sampling: How does sampling affect the validity of research? Journal of Visual Impairment and Blindness, 164-168. Feng, M., Li, C., McVay, S., & Skaife, H. (2014). Does Ineffective Internal Control over Financial Reporting affect a Firm’s Operations? Evidence from Firms’ Inventory Management . The Accounting Review. Florin, B., & Carmen, B. (2013). Management control systems: a review of their components and their underlying independence. Annals of the University of Oradea, Economic Science Series, 1424-1433. Gamage, C., Lock, K., & Fernando, A. (2014). A proposed research framework: effectiveness of internal control system in state commercial banks in Sri 62 | P a g e
Lanka. International Journal of Scientific Research and Innovative Technology, 25-44. Ganeshasundaram, R., & Henley, N. (2006). The prevalence and usefulness of market research: An empirical investigation into 'background' versus 'decision' research. International Journal of Market Research, 525-550. Giriūnienė, G., & Giriūnas, L. (2012). Assessment of Internal Control System in Lithuania. Economics and Management. Lithuania: Kaunas University of Technology. Groebner, D. F., Shannon, P. W., Fry, P. C., & Smith, K. D. (2011). Business Statistics A Decision-Making Approach. New Jersey: Pearson Education, Inc. Gyebi, F., & Quain, S. (2013). Internal control on cash collection. A case of the electricity company of Ghana ltd, Accra east region. International Journal of Business and Social Science, 217-233. Harris, P., & Kaur, S. (2013). An Overview of Foreign Currency Exposure. Asian Journal of Empirical Research, 957-961. Howton, S. D., & Perfect, S. B. (1998). Currency and Interest-Rate Derivatives Use in US Firms. Financial Management, 27(4), 111-121. Idowu Abiola, A. T. (2013). Internal Control System on Fraud Detection: Nigeria Experience. Journal of Accounting and Finance, vol. 13(5). International Organization of Supreme Audit Institutions. (2004). Guidelines for Internal Control Standards for the Public Sector. INTOSAI GOV 9100. Ionescu, L. (2011). Monitoring as a component of internal control systems. Economics, Management & Financial Markets, 800-804. Ismail, S. (2011). The role of marketing information system on decision making "an applied study on Royal Jordanian Air lines (RJA). International Journal of Business and Social Science, 175-185. Issa, H., & Kogan, A. (2014). A Predictive Ordered Logistic Regression Model as a Tool for Quality Review of Control Risk Assessments. Journal Of Information Systems, 209-229. Ito, T., Koibuchi, S., Sato, K., & Shimizu, J. (2013). Exchange Rate Exposure and Exchange Rate Risk Management: The case of Japanese exporting firms. Japan: The Research Institute of Economy, Trade and Industry. Jabareen, Y. (2009). Building a conceptual framework: Philosophy, definitions, and procedure. International Journal of Qualitative methods, 49-62. Jeelani, M. I., Nazir, N., Mir, S. A., Jeelani, F., Dar, N. A., Haq, S., . . . wani, S. (2014). Application of Simple Random Sampling in Agriculture using Rsoftware. Indian Journal of Science and Technology, 706-709.
63 | P a g e
Jones, S., Wahba, K., & Heijden, B. v. (2007). How to Write Your MBA Thesis. Meyer & Meyer Ltd. Junkes, M. B., Tereso, A. P., & Afonso, P. S. (2015). The Importance of Risk Assessment in the Context of Investment Project Management: a Case Study. Procedia Computer Science, 64, 902-910. Kapić, A. p. (n.d.). Internal Supervision, Internal Control and Internal Audit. Business Consultant, 63. Kedia, S., & Mozumdar, A. (1999). Is Foreign Currency Denominated Debt a Hedging Instrument. Retrieved from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=155568 Kenerson, B. &. (2009, 10 9). Outsourcing Law. Retrieved from http://www.outsourcing-law.com/2009/10/internal-controls-and-corporategovernance-under-sarbanes-oxley-planning-and-audit-processes-inoutsourcing/ Kent, R. (2007). Marketing research approaches, methods and applications in Europe. London, UK: Thompson Learning. Klamm, B. K., & Watson, M. W. (2009). SOX 404 reported internal control weaknesses: A test of COSO framework components and information technology. Journal of Information Systems, 1-23. KPMG. (1999, October). European Corporate Governance Institute. Retrieved from The KPMG Review - Internal Control: A Practical Guide: http://www.ecgi.org/codes/documents/kpmg_internal_control_practical_guide. pdf Kyung-Chun, M. (2014). Managing bank market risk in futures markets. Academy of Business Journal, 24-47. Lightle, S. S., Baker, B., & Castellano, J. F. (2015). Assessment of Tone at the Top The Psychology of Control Risk Assessment. CPA Journal, 50-55. Loderer, C., & Pichler, K. (2000). Firms, do you know your currency risk exposure? Survey results. Bern: Institut für Finanzmanagement, Universität Bern. Marshall, A. P. (1999). Foreign Exchange Risk Management in UK, USA and Asia Pacific Multinational Companies. Journal of Multinational FInancial Management, 185-211. McCrum-Gardner, E. (2010). Sample size and power calculations made simple. International Journal of Therapy and Rehabilitation, 10-14. Mele, C., Pels, J., & Polese, F. (2010). A Brief Review of Systems Theories and Their Managerial Applications. Service Science, 126-135. Retrieved from http://pubsonline.informs.org/doi/pdf/10.1287/serv.2.1_2.126 Ministry of Planning & International Cooperation. (2016). Exchange Rate Crisis: Causes, Implications, Priorities (Translated from Arabic). Economic and 64 | P a g e
social developments in Yemen,, Economic Studies & Forcasting Sector. Sanaa: Ministry of Planning and International Cooperation. Ministry of Planning & International Cooperation. (2016). Yemen’s Private Sector In Search of a Lifeline. (E. S. Sector, Ed.) Yemen Socio-Economic Update(11), 1. Retrieved from http://files.ctctcdn.com/9fcbc1c9401/a4cf249f-68b8-4529b111-39bc7ef9b80c.pdf?ver=1455930652000 Mishra, S. (2016). The quantile regression approach to analysis of dynamic interaction between exchange rate and stock returns in emerging markets: Case of BRIC nations. IUP Journal of Financial Risk Management, 7-27. Moffett, M., Stonehill, A., & Eiteman, D. (2009). Multinational FInance. Pearson Prentice Hall. Mukaka, M. (2012). A guide to appropriate use of correlation coefficient in medical research. Malawi Medical Journal: The Journal of Medical Association of Malawi, 69-71. Odiase, J., & Ogbonmwan, S. (2007). Correlation analysis: exact permutation paradigm. Matematicki Vesnik, 161-170. Office of the New York State Comptroller. (2010). Management’s Responsibility for Internal Controls. LOCAL GOVERNMENT MANAGEMENT GUIDE, 2. Papaioannou, M. (2006). Exchange Rate Risk Measurement and Management: Issues and Approaches for Firms. International Monetary Fund Working Paper. Patel, P. P., Patel, D. J., & Patel, D. R. (2014). Factors affecting Currency Exchange Rate, Economical Formulas and Prediction Models. International Journal of Application or Innovation in Engineering & Management (IJAIEM), 3(3), 5356. Putra, L. D. (2009, April). Effective Internal Control for Small Medium Business. Retrieved from http://accounting-financial-tax.com/: http://accountingfinancial-tax.com/2009/04/effective-internal-control-for-small-mediumbusiness/ Siayor, A. D. (2010). Risk Management and Internal Control Systems in the Financial Sector of the Norwegian Economy: A case study of DnB NOR ASA. Master Thesis in Economics and Business Administration. University of Tromso. Smith, S. M., & Albaum, G. S. (2012). Basic Marketing Research: Volume 1. Qualtric Labs, Inc. Tarka, P. (2012). Key determinants of marketing research effectiveness. Poznań University Of Economics Review, 40-50. Tavakol, M., & Dennick, R. (2011). Making sense of Cronbach's Alpha. International Journal of Medical Education, 53-55.
65 | P a g e
Verovska, L. (2012). Internal Control System as Continuous Basis of Efficient and Stable Company Development. Regional Formation and Development Studies,, 3(8). Williams, C. (2007). Research methods. Journal of Business & Economic Research, 65-72. Young, R., & Javalgi, R. (2007). International marketing research: A global project management perspective. Business Horizons, 113-122.
66 | P a g e
Glossary of Terms and Acronyms The following is a list of acronyms and abbreviations that are in the document Acronym AMF COSO FSP GDP IC ICS MBA MNC SPSS UK US USD YER
Term Autorite Des Marches Financiers Committee of Sponsoring Organizations of the Treadway Commission Fortune 500 / S&P 500 Gross Domestic Product Internal Control Internal Control Systems Masters of Business Administration Multinational Corporations Statistical Package for the Social Science United Kingdom United States of America US Dollars Yemeni Riyals (official currency)
67 | P a g e
Appendices Appendix A: Draft Research Instrument
Covering Letter
68 | P a g e
Appendix B: Questionnaire
69 | P a g e
70 | P a g e
71 | P a g e
72 | P a g e
73 | P a g e
74 | P a g e
75 | P a g e
Appendix C: Parameter Estimates Parameter Estimates 95% Confidence Interval
Std. Estimate
Error
Wald
df
Sig.
Lower Bound
Upper Bound
Threshol [The corporation’s net inflows and d
out flows are at risk of exposure=
19.420
5.981
10.543
1
.001
7.698
31.143
23.143
5.999
14.883
1
.000
11.385
34.900
1.033
1.229
.706
1
.401
-1.377
3.442
.445
1.124
.157
1
.692
-1.757
2.647
0a
.
.
0
.
.
.
.543
1.819
.089
1
.765
-3.023
4.108
1.769
1.663
1.131
1
.287
-1.491
5.029
2.470
1.597
2.393
1
.122
-.660
5.600
0a
.
.
0
.
.
.
-2.311
1.804
1.642
1
.200
-5.847
1.224
-1.604
1.692
.899
1
.343
-4.921
1.713
.246
1.659
.022
1
.882
-3.006
3.498
0a
.
.
0
.
.
.
1.718
2.285
.565
1
.452
-2.761
6.198
-.446
2.345
.036
1
.849
-5.043
4.150
-1.332
2.520
.279
1
.597
-6.272
3.607
0a
.
.
0
.
.
.
1] [Thecorporation’snetinflowsandou tflowsareatriskofexposu = 2] Location
[Thecorporationefficientlycommun icatescompany’sobjectivesan=1] [Thecorporationefficientlycommun icatescompany’sobjectivesan=2] [Thecorporationefficientlycommun icatescompany’sobjectivesan=3] [Thecorporationhasestablishedwri ttenpoliciesandworkingpra=1] [Thecorporationhasestablishedwri ttenpoliciesandworkingpra=2] [Thecorporationhasestablishedwri ttenpoliciesandworkingpra=3] [Thecorporationhasestablishedwri ttenpoliciesandworkingpra=4] [Thecorporationhasaninternalaudit functionwhichauditsand=1] [Thecorporationhasaninternalaudit functionwhichauditsand=2] [Thecorporationhasaninternalaudit functionwhichauditsand=3] [Thecorporationhasaninternalaudit functionwhichauditsand=4] [Themanagementsuccessfullycom municatesfinancialandauditing=1] [Themanagementsuccessfullycom municatesfinancialandauditing=2] [Themanagementsuccessfullycom municatesfinancialandauditing=3] [Themanagementsuccessfullycom municatesfinancialandauditing=4]
76 | P a g e
[Theinformationproducedbytheinte rnalcontrolsystemisrelia=1] [Theinformationproducedbytheinte rnalcontrolsystemisrelia=2] [Theinformationproducedbytheinte rnalcontrolsystemisrelia=3] [Theinformationproducedbytheinte rnalcontrolsystemisrelia=4] [Thecorporationarrangesforuptoda temarketreportsofsignif=1] [Thecorporationarrangesforuptoda temarketreportsofsignif=2] [Thecorporationarrangesforuptoda temarketreportsofsignif=3] [ThecorporationsetsInternalContro lbudgetingsystemstohandl=1] [ThecorporationsetsInternalContro lbudgetingsystemstohandl=2] [ThecorporationsetsInternalContro lbudgetingsystemstohandl=3] [ThecorporationsetsInternalContro lbudgetingsystemstohandl=4] [Staffsefficientlycomplywithrulesa ndregulationswithinthe=1] [Staffsefficientlycomplywithrulesa ndregulationswithinthe=2] [Staffsefficientlycomplywithrulesa ndregulationswithinthe=3] [Staffsefficientlycomplywithrulesa ndregulationswithinthe=4] [Thecorporationhasariskassessm entcommittee=1] [Thecorporationhasariskassessm entcommittee=2] [Thecorporationhasariskassessm entcommittee=3] [Thecorporationhasariskassessm entcommittee=4] [Thecorporationregularlycarriesou triskassessmentsonchange=1]
-1.079
3.073
.123
1
.725
-7.103
4.944
-.489
3.045
.026
1
.873
-6.458
5.480
-.560
2.933
.037
1
.848
-6.308
5.187
0a
.
.
0
.
.
.
-1.034
1.168
.783
1
.376
-3.324
1.256
-1.010
.925
1.193
1
.275
-2.822
.802
0a
.
.
0
.
.
.
-1.669
1.518
1.210
1
.271
-4.645
1.306
.394
1.309
.091
1
.763
-2.172
2.960
.654
1.339
.239
1
.625
-1.970
3.278
0a
.
.
0
.
.
.
16.723
.995 282.528
1
.000
14.773
18.673
18.258
.824 491.360
1
.000
16.643
19.872
18.938
.000
.
1
.
18.938
18.938
0a
.
.
0
.
.
.
2.981
1.991
2.242
1
.134
-.921
6.883
2.270
1.775
1.635
1
.201
-1.210
5.749
.245
1.762
.019
1
.889
-3.207
3.698
0a
.
.
0
.
.
.
.507
2.706
.035
1
.852
-4.798
5.811
77 | P a g e
[Thecorporationregularlycarriesou triskassessmentsonchange=2] [Thecorporationregularlycarriesou triskassessmentsonchange=3] [Thecorporationregularlycarriesou triskassessmentsonchange=4] [Thecorporationregularlyconducts performancereviewandencour=1] [Thecorporationregularlyconducts performancereviewandencour=2] [Thecorporationregularlyconducts performancereviewandencour=3] [Themanagementdevelopsandpro videspoliciesandensuresevery=1] [Themanagementdevelopsandpro videspoliciesandensuresevery=2] [Themanagementdevelopsandpro videspoliciesandensuresevery=3] [Themanagementdevelopsandpro videspoliciesandensuresevery=4]
1.035
2.584
.160
1
.689
-4.031
6.100
1.680
2.482
.458
1
.499
-3.185
6.544
0a
.
.
0
.
.
.
-.176
1.312
.018
1
.893
-2.747
2.395
-.811
.968
.702
1
.402
-2.709
1.086
0a
.
.
0
.
.
.
2.143
3.415
.394
1
.530
-4.550
8.836
.683
3.328
.042
1
.837
-5.839
7.205
-.497
3.419
.021
1
.884
-7.198
6.203
0a
.
.
0
.
.
.
Link function: Logit. a. This parameter is set to zero because it is redundant.
78 | P a g e
