An exploratory study on internal audit independence in Australia

This study draws on agency and institutional theory to examine the issue of internal audit’s independence through its relationship with components of corporate governance.

The internal audit function is actively considered as one of the four components of corporate governance, along with the board, management and external auditors. It serves this purpose by providing a range of services in its capacity of monitoring and consulting which is actively sought by the other components of corporate governance to satisfy their extended accountability requirements. The integrity of these services is, however, only assured if internal audit maintains its independent status. As such there is a “tension” resulting from the pressure to provide these value added services as perceived by the parties involved and maintaining its independence status.

Based on an extended survey with organisations in the Australian corporate sector, this study critically examines the results of the survey against existing literature and best practice guidelines to determine if internal audit functions operating under this tense environment are operating independently.

The results indicate an interesting analysis. While it indicates a somewhat trend in complying with best practice guidelines for maintaining independence, it also indicates that this is not consistently adhered to as organisations are able to operate in an environment that compromises internal audit independence. A main reason for this appears to be a mix of internal audit structural set ups brought about by a lack of statutory backing to provide for consistency in implementation of best practice guidelines for maintaining independence. This is exacerbated by internal audit being viewed as partner by these parties thus widening the “tension” gap between its advisory role and its independent status. A wider question emerges which questions the ability to maintain this independence concept under a partnership management environment. The concept of internal audit being an independent function as promulgated by the Institute of Internal Auditors through its definition of internal audit is seriously questioned under the totality of this environment.

Quality of internal control procedures : antecedents and moderating effect on organisational justice and employee fraud

Purpose – This study aims to bring together theoretical concepts from the organizational justice, internal control and fraud literature to develop two distinct models relating to employee fraud and the quality of internal control procedures (ICP), respectively.

Design/methodology/approach – Survey data from 64 Australian firms were used to develop the two models. The first model was tested using a logistic regression analysis, and the second model was tested using a multiple regression analysis.

Findings – The first model reveals that the quality of ICP has a moderating effect on the relationship between perceptions of organizational justice and employee fraud. The second model indicates that ICP quality is significantly and positively related to three key organizational factors: the corporate ethical environment, the extent of risk management training of staff, and the internal audit (IA) activity level.

Practical implications – Risk management strategies relating to employee fraud will need to pay greater attention to organizational factors that affect both perceptions of justice at the workplace and ICP quality, including fostering a more ethical and equitable work environment, increasing IA activities and staff training in risk management.

Originality/value – Using the fraud triangle framework, this study extends previous literature by providing empirical evidence on the role of organizational justice and ICP regarding employee fraud.

Internal auditor perceptions on audit committee interactions : a qualitative study in Malaysian public corporations

Audit committees (AC) and the internal audit function (IAF) are two key corporate governance mechanisms. The primary objective of this study is to provide insights into internal auditors' perceptions of their interactions with AC members in Malaysia. The paper thus contributes to the extant literature by providing additional evidence from a South-east Asian country which is recognised as being characterised with a high power distance culture and a developing capital market. The findings are based on in-depth interviews of the heads of the internal audit function (HIAFs) from 11 publicly listed companies. The results indicate infrequent informal communications and limited private meetings between the HIAFs and ACs, and a need for clear reporting lines. Further, ACs are seen to be held in high esteem for their authority and are expected to take on greater leadership in the inquiry of management's decision-making. These findings highlight the importance of the leadership role of ACs in supporting the IAF.

Internal auditors' assessment of their contribution to financial statement audits : the relation with audit committee and internal audit function characteristics

This paper examines the relation between audit committee characteristics, internal audit function characteristics and internal auditors' assessment of their contribution to financial statement audits. Using survey data from chief internal auditors of 76 Malaysian publicly-listed firms, we provide evidence of a positive relationship between internal auditors' assessment of their contribution to financial statement audits and three audit committee characteristics: the proportion of independent audit committee members, their knowledge and experience of accounting and auditing, and the extent of audit committee review of internal audit programmes, budget and coordination proposals. Further, a positive relationship is found between internal auditors' evaluation of their contribution to the financial statement audit and internal audit function characteristics including size, prior experience of staff in auditing, time availability and the closeness of the function's relationship with the external auditor. The results indicate that more effective audit committees and well-resourced internal audit units tend to be positively associated with the internal auditors' assessment of their contribution to the external audit.

The effects of financial constraints on corporate policies in Australia

We jointly study the impact of financial constraints on Australian companies' investment decisions and demand for liquidity. By examining a large sample of Australian firms over the period 1990–2003, we find that financial constraints not only reduce the sensitivity of investment to the availability of internal funds, but also increase the responsiveness of cash holdings to internally generated cash flows. Further analysis shows that the impact of financial constraints varies across different cash flow states; that is, financial constraints have a small effect on corporate investment and cash policies when cash flows are positive. In contrast, the severity of constraints is high in negative cash flow years in which the cost disadvantage of external finance coincides with deteriorating operating performance.

A holistic model of corporate governance - a new research framework

Purpose – The purpose of this paper is to propose a new model of corporate governance that is holistic – incorporating internal and macro perspectives across legal, regulatory, sociological, ethical, human resource management, behavioural and corporate strategic frameworks. Researchers have signalled the need for “new theoretical perspectives and new models of governance” due to a dearth of research that is context-driven, empirical, and encapsulating the full spectrum of reasons and actions contributing to corporate crises.

Design/methodology/approach – The approach consists of theory building by reviewing the literature and examining the gaps and limitations.

Findings – The proposed model is a distinctive contribution to theory and practice in three ways. First, it integrates the firm-specific, micro factors with the country-specific, macro factors to illustrate the holistic nature of corporate governance. Second, shareholders and stakeholders are shown to be only one component of the model. Third, it veers away from singular approaches, to dealing with corporate governance using a multi-disciplinary perspective. The paper argues that such a holistic and integrated view is a necessity for understanding governance systems.

Research limitations/implications – The challenge is to operationalize the model and test it empirically.

Practical implications – The model is instructive and of use for practitioners in attempting to understand, explain and develop governance models that are appropriate to their national and industry settings.

Originality/value – This paper argues that narrow-based models are limited in their approach and in a sound and integrative review of the up-to-date literature contributes to theory-building on corporate governance.

Corporate codes of ethics in Australia, Canada and USA : measurement and structural properties of a cross-cultural model

The objective is to test the consistency of measurement and structural properties in a model of corporate codes of ethics (CCE) on an aggregated level and across multiple samples derived from three countries, namely Australia, Canada and the USA. The properties of four constructs of CCE are described and tested, these being: surveillance/training, internal communication, external communication, and guidance. The conclusion is that the measurement and structural models on an aggregated level have a satisfactory fit, validity and reliability. Furthermore, they are consistent when tested on each of the three samples (i.e. cross-validated). The cross-cultural model makes a contribution in addition to previous mostly descriptive studies and theory in the field using confirmatory factor analysis and structural equation modeling.

A critical analysis of the independence of the internal audit function : evidence from Australia

Purpose – This study aims to critically analyse the independence of the internal audit function through its relationship with management and the audit committee.

Design/methodology/approach – Results are based on a critical comparison of responses from questionnaires sent out to Australian chief audit executives (CAEs) versus existing literature and best practice guidelines.

Findings – With respect to the internal audit function's relationship with management, threats identified include: using the internal audit function as a stepping stone to other positions; having the chief executive officer (CEO) or chief finance officer (CFO) approve the internal audit function's budget and provide input for the internal audit plan; and considering the internal auditor to be a “partner”, especially when combined with other indirect threats. With respect to the relationship with the audit committee, significant threats identified include CAEs not reporting functionally to the audit committee; the audit committee not having sole responsibility for appointing, dismissing and evaluating the CAE; and not having all audit committee members or at least one member qualified in accounting.

Originality/value – This study introduces independence threat scores, thereby generating analysis of the internal audit function's independence taking into account a combination of threats.

Outsourcing of internal audit services in Australian firms : some preliminary evidence

Although internal auditing (IA) services have been traditionally performed in-house, organizations are increasingly outsourcing such services. Using a Transaction Cost Economics (TCE) perspective, this study examined the influence of several organizational-level variables on the decision to outsource or in-house their internal audit function. The study also identified the type of IA services that were likely to be out-sourced rather than in-housed, the extent to which incumbent external financial statement auditors participated in outsourced arrangements and the level of interaction between the internal audit provider and audit committees. The results have implications for auditor independence, corporate governance and organizational performance.

Accountability structures and management relationships of internal audit : an Australian study

Purpose – The purpose of this study is to examine the accountability structures and the management relationships of internal audit. In particular, related issues such as the predominant internal audit objectives and the related functions, the extent to which internal audit addresses any financial reporting risks and the manner in which internal auditors in Australia perform their tasks, are identified. The study also looks at the extent of compliance with the Institute of Internal Auditors (IIA) Standards.
Design/methodology/approach – Based on a survey of the chief audit executives in Australia, the study identifies the reporting mechanisms, functions and relationships of internal audit, including the contributions made towards good corporate governance. There is, however, some misalignment between the aspirations of internal auditors and their relationships with management.
Findings – While internal audit objectives have been established with a focus on controls, risks and governance, the study has highlighted the fact that there is a lack of correlation between the tasks performed by internal auditors and the important internal audit objectives, with the exception of internal control and risks. The results also suggest that internal auditors have been providing an internal consulting and advisory role in matters concerning IT systems, strategic risks and financial issues. If internal auditors are to proactively contribute to good corporate governance, they need to define how, and in what way, this can be done. In regard to corporate governance processes, the results of the research indicate that issues surrounding internal control, risk assessment and management processes are regarded as the key factors for internal audit to contribute to good corporate governance.
Originality/value – This study complements and contributes to the existing literature in providing insights into the evolving role of the internal audit function in terms of accountabilities and relationships with management. It also provides a valuable insight into how the internal audit profession can build upon its inherent strengths and address any apparent areas of concern. This will assist both the profession and policy makers alike, in better understanding and improving the role of the internal audit process.

The development of internal auditing in Ethiopia: the role of institutional norms

Purpose – The purpose of this paper is to examine the extent to which institutional norms determine attributes of internal audit practices and how institutional changes explain the development of these practices.

Design/methodology/approach – The authors employed a qualitative research approach based on archival analysis and interview evidence.

Findings – Findings indicate that regulation-based institutional norms explain the adoption of internal audit and the function's characteristics in Ethiopian organizations. Furthermore, innovative introduction of internal audit practices originate within individual organizations and eventually get institutionalized through diffusion. Such innovations are associated with organizational size, top management characteristics, internal audit advancement in technology, and exogenous input from the external environment. Widely accepted internal audit practices, as institutional norms, are not always taken-for-granted at the level of individual organizations. The institutional change perspective enables explaining how new internal audit approaches are introduced to supplant old ones.

Originality/value – This study theorizes the development of internal audit practices from an institutional change perspective. Being the first study to do so, it contributes to the understanding of key drivers of institutional change that initiate new institutional norms that foster the development of internal audit through introduction and diffusion of new audit practices as old ones are deinstitutionalized.

Factors associated with attributes of internal audit departments : a canonical analysis

This study explores internal audit (IA) practices in selected Ethiopian organizations to identify factors associated with attributes of IA departments. Analytical questionnaire survey responses of 188 IA directors and staff from Ethiopian government ministries, state-owned enterprises and private companies were used. Canonical analysis results show that IA proficiency, scope of IA work and quality of IA planning and execution are higher in organizations where organizational policy authorizing IA is clearly defined, organizational risk exposure is high and internal audit's linkage with external audit is strong. The findings suggest that in organizations that are exposed to high risk, management tends to appreciate IA's assistance in managing risk and thus strengthens IA. Results also suggest the importance of internal and external audit linkages and IA charter (or similar organizational policy) to strengthen IA. The study provides further evidence of differences in IA attributes between public and private sector entities.