Factors that influence the perceived use of the internal audit function's work by executive management and audit committee
Introduction
In order to fulfill its duties as an objective and independent provider of assurance and consulting services, the internal audit function (IAF) reports to both executive management and the audit committee, both of whom need specific information provided by the IAF (Abbott, Parker, & Peters, 2010). However, these two stakeholders differ in their specific duties; thus, their intended uses of IAF-provided information and their requests of the IAF differ. For example, executive management likely depends on the IAF's work to help them minimize the company's risks and to improve the operations of the company; that is, they have a managerial focus. On the other hand, the interests of the audit committee are likely more focused on monitoring; that is, they seek stronger internal controls, regulatory compliance, or quality of financial reporting (e.g., Paape, Scheffe, & Snoep, 2003). The divergent objectives of these two stakeholders present potential confusion and can divide the attention of the IAF.
In recent studies by two Big 4 accounting firms, IAF stakeholders (specifically audit committees, boards of directors, and senior executives) note a decreased satisfaction with their IAFs (KPMG, 2017; PwC, 2017), reporting overall satisfaction at only 44%, the lowest number reported since the measure has been collected. Among those respondents who report some satisfaction with IAF results, more than half still expect more from their IAF (PwC, 2017). Specifically, these stakeholders reported wanting more value in the areas of potential revenue enhancements, cost savings, or smarter capital expenditures. These findings indicate that both executive management and audit committees expect more; however, because both stakeholders have different expectations of IAFs (Lourens & Coetzee, 2018), IAFs might struggle to decide how to satisfy both groups, given their limited resources.
To help internal audit better serve both stakeholders, it is important to understand what each group values about IAF work. Prior research has not examined what factors are associated with greater use of internal audit results by executive management teams and audit committees. To this end, we analyzed questionnaire responses from 683 chief audit executives (CAEs) working in Europe about the use of IAF results by executive management and audit committees.1 Applying the same analysis models to both executive management and audit committees, we compared the factors that influenced their usage of IAF work, as perceived by CAEs.
We group potential factors influencing usage of internal audit results into three categories: (1) the intended use of the IAF's results (efficiency of controls, risk management, and strategic projects), (2) the quality of the IAF (independence and adherence to professional standards,) and (3) the structure of the IAF (use of outsourced internal audit and implementation of quality assurance programs). We find various factors influence the usage of internal audit results by the executive management team and the audit committee.
Our analysis shows that CAEs perceive that both groups use internal audit results more when IAF reports focus on strategic projects. Surprisingly, internal audit perceives that executive management is more likely to use internal audit results that focus on internal controls, whereas the audit committee is more likely to use internal audit results focused on risk management. In terms of internal audit characteristics, respondents perceive that both groups rely more on internal auditors that follow the Institute of Internal Auditors' (IIA) International Professional Practices Framework (IPPF). Interestingly, executive management is perceived as more likely to rely on the IAFs results if the IAF is independent, but no similar effect is noted for the audit committee. Finally, using the IAF as a management training ground or outsourcing of work of the IAF does not influence the perceived usage of internal audit results by either party.
This analysis contributes to recent work on differences between internal audit stakeholders (Abbott et al., 2010; Lourens & Coetzee, 2018) and helps us better understand the interests of and potential conflicts between executive management, the audit committee, and the IAF, sometimes referred to as the “serving two masters” situation. Our results will assist both IAF leaders and researchers in helping increase satisfaction with internal auditors by their various stakeholders.
Our results will also be useful to internal auditors as they make their annual plans. Internal auditors often face budget constraints that limit their ability to satisfy all stakeholders (Anderson, Christ, Johnstone, & Rittenberg, 2012). Understanding what each stakeholder uses most from internal audit work should help CAEs and internal auditors make more informed decisions about where to deploy their scarce resources to more effectively serve their stakeholders.
Section snippets
Prior research and research questions
The IIA considers an effective IAF to be one of the main pillars of high-quality corporate governance, along with the audit committee, executive management, and external auditors (IIA, 2013; Prawitt, Smith, & Wood, 2009). This is true and relevant for both forms of corporate governance systems: the dualistic (or two-tier) model that is prevalent in parts of Europe and the monistic (or one-tier) model that is prevalent in North America (Hermanson & Rittenberg, 2002; Prawitt et al., 2009).
The
Data collection and description of sample
We base our analysis on data collected by an anonymous online questionnaire that was piloted and then distributed by the national IIAs of Austria, Germany, and Switzerland. The questionnaire consisted of 86 open- and closed-response questions, and it sought to identify trends within the internal audit profession and ask respondents about recent developments within internal auditing. The questionnaire was available to 2450 CAEs from November to December 2013 then again from November to December
Results and discussion
The results for the logistic regression for both Model1EM and Model2AC are presented in Table 4. In the following sections we present these results and discuss their significance in relation to the research questions defined above.
Conclusion
We identify and discuss variables which influence the perceived intensity of usage of IAF results by the audit committee and the executive management team, respectively. Identifying influential purpose and quality measures is key for IAF teams in the future both because of recent work suggesting that the different stakeholders measure quality differently (Lourens & Coetzee, 2018) and because it is unlikely that the needs of the two stakeholders will merge and more likely that they will diverge,
Data availability
Please contact the authors. This project was sponsored by a national IIA chapter.
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