Transcript DETERMINANTS OF INTERNAL AUDIT FUNCTION …

DETERMINANTS OF INTERNAL
AUDIT FUNCTION
PERFORMANCE
By
Dr. Douglas E. Ziegenfuss*
Old Dominion University
Dr. Patricia M. Myers
Brock University
Dr. Wayne K. Talley,
Old Dominion University
Dean’s Research Seminar
November 10, 2006
Synopsis
• This study examines the relationship between Internal Audit
Function (IAF) and the following independent variables:
• IAF relative size,
• IAF resources,
• IAF staff quality,
• IAF quality assessment review completion,
• audit committee effectiveness,
• Chief Audit Executive (CAE) reporting relationships,
• IAF interaction with external auditors,
• reporting year, and
• organization demographic variables such as industry and
headquarter country.
Why Is This Research Important?
• Sarbanes-Oxley Act Section 404 requires CEO and CFO
to attest to the adequacy of their organization’s internal
control system.
• In most cases, Executives are relying on IAFs to fulfill
this responsibility.
• Government entities have a similar responsibility under
Generally Accepted Government Auditing Standards
(Yellow Book).
• The organization’s external auditors must perform an
attestation engagement affirming that the organization’s
internal control system is adequate.
• The organization’s external auditor cannot assist the
Executive because the assistance would violate their
independence.
What is Internal Auditing
• Internal auditing is an independent,
objective assurance and consulting activity
designed to add value and improve an
organization's operations. It helps an
organization accomplish its objectives by
bringing a systematic, disciplined
approach to evaluate and improve the
effectiveness of risk management, control,
and governance processes.
Internal Auditing
• Usually located within an organization but may be outsourced.
• BIG 4 and other outsourcers are biggest sponsors of the IIA’s annual
conference.
• Internal Auditing is considered the fourth leg of an organization’s
four legged governance structure:
–
–
–
–
Audit Committee of Board of Directors
External Auditor
Internal Auditor
Management
• Internal Auditing has been “Hot” for he past 4 years.
• Not only in the US but also globally.
• Membership in the IIA has gone from 60,000 in 2000 to 115,000 in
2006.
• Careers have taken off spectacularly!
Internal Audit Research
• The Institute of Internal Auditors Research
Foundation (IIARF) and Academic Relations
Committee (ARC).
• Tries to entice Universities and Colleges to
adopt internal auditing into their curriculums
• Promotes academic research into Internal
Auditing topics through grants.
• For instance, IIARF will fund Doctoral
Dissertations for $10,000 dealing with internal
audit.
Research Opportunities in Internal
Auditing (ROIA)
• Edited by Andrew Bailey, Audrey Gramling, and
Sridhar Ramamorti.
• Leading auditing scholars authored chapters in
ROIA dealing with issues affecting IAFs such as
corporate governance, IAF management, risk
assessment, etc.,
• Each author presented previous literature and
then posed questions for future researchers.
• Prawitt (2003) and Lemon and Tatum (2003)
wrote chapters especially relevant to this study.
IAF Performance Studies
• Lampe and Sutton (1994) developed a method
for IAFs to establish quality measuring systems.
• Gupta and Ray (1992) investigated the role that
IAFs could take in their organization’s total
quality improvement process. Finally, Frigo
(2002) demonstrated how IAFs could implement
a balanced scorecard framework to measure
their performance.
• Ziegenfuss (1998):
– (1) reviewed the Global Internal Auditing Network (GAIN);
– (2) identified seventy-two potential performance measures that IAFs could
use;
– (3) conducted a survey of CAEs to identify those performance measures
actually used; and
– (4) developed an index to measure IAF performance.
• Ziegenfuss (2000a) also proposed an IAF
balanced scorecard and (2000b) published the
results of the CAE survey.
IAF Performance Studies
(Continued)
• Applegate, (1997) described the non-traditional
performance measurement process at the Boeing
Aircraft Corporation.
• Beeler, (1999) examine the factors associated with
internal auditor promotion probabilities.
• Williams (2000) identify the efficiencies associated with
value-added auditing.
• Reding (2000) benchmark the Allstate Insurance
Company’s IAF against the IIARF’s Competency
Framework for Internal Auditing study.
• Brierley (2001) study the factors that prevented the
establishment of an IAF in the Sudanese public sector.
• Nash and Flesher (2001) sampled the middle 400
companies from the Fortune 1000 to identify
performance measures currently being used by IAFs.
IAF Performance Studies
(Continued)
• Felix (2001) research the contribution of internal audit as
a determinant of external audit fees and the factors that
influenced this contribution.
• Lampe and Garcia (2003) present the current state of
professionalism among internal auditors.
• Moeller (2004) describes how to manage an IAF after
SOX.
• Carcello (2005a) investigate the factors associated with
U.S. public companies’ investment in internal auditing.
• Carcello (2005b) study the changes in IAF during the
time of the major U.S. accounting scandals.
• Rittenberg and Anderson (2006) discuss hiring and
inspiring a CAE.
What is lacking?
• An exploratory study to determine what
factors influence IAF performance.
Research Question
• We propose that IAF-PERFORMANCE varies with
• inputs IAF-INPUTS,
• organizational governance ACCHARTER and
ACCOUNTABLE,
• IAF reporting arrangements with management
ADREPORT AND FUNREPORT,
• IAF-Board reporting arrangements QUALCOMM and
FREQUENCY,
• IAF relationship with its organization’s external auditor
COORDINATION,
• organizational characteristics, such as industry PIC,
headquarters country USA, and GAIN reporting year
RYEAR i.e.,
Research Question
(Continued)
• IAF-PERFORMANCE =
• f (IAF-INPUTS, ACCHARTER, ACCOUNTABLE,
ADREPORT, FUNREPORT, QUALCOMM,
FREQUENCY, COORDINATION, PIC, USA,
REPORTING YEAR)(1)
Variable Definition and
Measurements
Dependent Variables:
Measurement (GAIN Question):
Mean:
Std.
Dev:
IAF
PERFORMANCE
Report-Time Average days for all audits that it takes
IAF to issue final report from the end
of field work.
29.43
Addvalue Respondents’ reply to GAIN question
concerning customer satisfaction or
whether auditees felt that, “Overall,
the audit(s) provided added value.”
Respondents answered on a five-point
scale with 0=Average, 1=Good, and
2=Excellent.
1.12
Reportqual Respondents’ reply to GAIN question
concerning customer satisfaction or
whether auditees felt that, “Audit
report findings and recommendations
were significant, or reliable, or
resulted in a beneficial change.”
Respondents answered on a five-point
scale with 0=Average, 1=Good, and
2=Excellent.
1.12
22.44
Independent Variables:
IAF INPUTS
Emp/auditor
Total Employees/Total Audit Positions.
Auditcosts
Education
Total Internal Audit Department
Costs/Total Annual Revenues.
Total Number of Professional Staff with
Master’s Degree/Total Audit Positions.
Experience Average Years Experience in Internal
Auditing for All Auditors.
Training Hours of Training per Auditor.
Qar Quality Assurance Review within Last
Three Years with 1=yes, 0=no.
Certifications
Total Number of Professional Staff with
One or More Certifications/Total Audit
Positions
979.45
937.07
0.00085 0.00155
0.28
0.19
7.47
3.9
69.58
33.27
0.48
0.56
0.25
ACCHARTER
Proxy Report States
Committee Fulfills Its
Charter?
Accharterd1
1=yes, 0=no or exempt.
0.41
1=no, 0=yes or exempt.
0.69
1=exempt, 0-yes or no.
0.2
Accharterd2
Accharterde
ACCOUNTABLE
Committee is Accountable for
Auditor Relations?
Accountabled1
1=yes, 0=no or exempt.
0.63
1=no, 0=yes or exempt.
0.94
1=exempt, 0-yes or no.
0.39
Accountabled2
Accountablede
ADREPORT
CAE administratively reporting
relationship.
Adreportd1 1=to audit committee,
0=not to audit committee.
Adreportd2 1=to Chief Executive Officer,
0.1
0=not to Chief Executive Officer.
0.23
Adreportd3 1=to President,
0=not to President.
0.75
Adreportd4 1=to Chief Financial Officer,
0=not to Chief Financial Officer.
0.44
Adreportd5 1=to Controller,
0=not to Controller.
0.36
Adreportd6 1=to Other
0=not to Other.
0.12
FUNREPORT
CAE functional reporting relationship.
Funreportd1 1=to audit committee,
0=not to audit committee.
Funreportd2 1=to Chief Executive Officer,
0=not to Chief Executive Officer.
0.61
0.12
Funreportd3 1=to President,
0=not to President.
0.34
Funreportd4 1=to Chief Financial Officer,
0=not to Chief Financial Officer.
0.15
Funreportd5 1=to Controller,
0=not to Controller.
0.16
Funreportd6 1=to Other
0=not to Other.
0.72
QUALCOMM
Quality of communications between Audit
Committee and CAE.
Qualcommd1 Is a private session with the CAE a regular
agenda item of the audit committee?
1=yes, 0=no.
Qualcommd2
Qualcommd3
FREQUENCY
Frequencyd1
Frequencyd2
0.65
Is a private session with the CAE available
by request only? 1=yes, 0=no.
0.11
Is a private session with the CAE not
available or allowed? 1=yes, 0=no.
0.16
How Frequently Does the CAE Meet with
the Audit Committee?
1=annually, 0=other than annually.
0.63
1=semiannually, 0=other than semiannually.
0.53
Frequencyd4 1=quarterly, 0=other than quarterly.
0.48
Frequencyd5 1=more frequently than quarterly,
0=quarterly or less frequently.
0.63
COORDINATION Does internal audit department
coordinate audit services with
external auditors? 1=yes,
0=no.
Coordinationd1
Loan Staff to Auditor 1=yes,
0=no.
Coordinationd2 Perform Complete or Partial
0.9
0.28
Audit of Specific Location
1=yes, 0=no.
0.63
Conduct Joint Annual Planning
Sessions 1=yes, 0=no.
0.7
Conduct Joint Risk or Control
Sessions 1=yes, 0=no.
0.38
Coordinationd3
Coordinationd4
PIC
Industry Codes
Pic1300 1=PIC 1300, 0=PIC other than 1300.
Pic2800 1=PIC 2800, 0=PIC other than 2800.
0.23
0.47
Pic3900 1=PIC 3900, 0=PIC other than 3900.
0.14
Pic4700 1=PIC 4700, 0=PIC other than 4700.
Pic4800 1=PIC 4800, 0=PIC other than 4800.
Pic4900 1=PIC 4900, 0=PIC other than 4900.
0.44
0.1
0.19
Pic5000 1=PIC 5000, 0=PIC other than 5000.
0.16
Pic6000 1=PIC 6000, 0=PIC other than 6000.
0.14
Pic6300 1=PIC 6300, 0=PIC other than 6300.
0.83
Pic8200 1=PIC 8200, 0=PIC other than 8200.
0.31
Pic8900 1=PIC 8900, 0=PIC other than 8900.
0.1
USA
Organization headquarters
location
Usa 1=USA, 0=other.
REPORTING
YEAR
0.79
Reporting Year
Ry1999 1=1999, 0=other than 1999.
0.2
Ry2000 1=2000, 0=other than 2000.
0.2
Ry2001 1=2001, 0=other than 2001.
0.2
Ry2002 1=2002, 0=other than 2002.
0.2
Ry2003 1=2003, 0=other than 2003.
0.2
Global Auditing Information Network
(GAIN)
• SAMPLE SELECTION
• The IIA began GAIN in the mid-1990s as a
benchmarking tool for CAEs.
• Initially, few IAFs participated in GAIN due to several
factors:
– (1) CAEs were unfamiliar with it,
– (2) the paper and pen format of the early years was inconvenient
to complete, and
– (3) GAIN’s high annual fee.
• However in 1999, GAIN became internet based and the
IIA dramatically reduced the annual fee.
• Participation greatly increased from 438 respondents in
1998 to 747 in 2003.
• We selected 168 IAFs who responded in each of the five
years being studied.
TABLE 2: REGRESSION RESULTS (Report-Time as dependent variable)
Ordinary Least Squares Regression
Model test: F[ 14, 625] = 9.61, Prob value = .0000 Fit:
R-squared = .159
Variable
R-squared = .177,
Coefficient
Standard Error
Adjusted
b/St. Er.
Constant
35.01427***
2.997199
11.682
Usa
6.719747***
2.269843
2.96
Pic2800
-26.2807***
4.576786
-5.742
Pic3900
-19.627***
3.352465
-5.855
Pic4700
-16.8014***
4.661353
-3.604
Pic4800
-7.70466**
3.581486
-2.151
Pic4900
-7.78607**
3.127084
-2.49
Pic5000
-21.9741***
7.01529
-3.132
Pic6000
-23.2175***
3.33286
-6.966
Pic6300
-12.1905***
3.847183
-3.169
Pic8200
-13.9***
5.301766
-2.622
Pic8900
-6.98672*
3.601033
-1.94
Frequencyd1
6.90457**
3.429834
2.013
Adreportd5
-13.4254***
4.643124
-2.891
Funreportd1
7.605346***
1.998113
3.806
*
= significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level
TABLE 3: PROBIT ANALYSIS RESULTS (Addvalue as dependent variable)
Ordered Probit Model
Iterations completed: 13 Log likelihood function: -449.3665 Restricted log likelihood: -472.0351 Chi-squared: 45.33711
Degrees of freedom: 7 Significance level: .0000 Cell frequencies for outcomes:
Y
Count
Freq
Y
Count
Freq
Y
Count
Freq
0
47
.073
1
469
.732
2
124
.193
Panel B: Ordered Probit Model
Variable
Coefficient
Standard Error
b/St.Er.
Index function of probability
Constant
0.830829***
0.192596
4.314
Emp/Auditors
0.1076E-03*
0.6049E-04
1.778
0.2898E-01**
0.1303E-01
2.225
Pic5000
1.064905**
0.428006
2.488
Pic6300
-0.627954***
0.206990
-3.034
Pic8200
0.685338**
0.324858
2.110
Accharterd1
0.244310**
0.108045
2.261
Certifications
0.511089**
0.223167
2.290
Eeperience
Threshold parameters for
index
Mu( 1)
2.436108443***
* = significant at the .10 level ** = significant at the .05 level
0.94747E-01
25.712
*** = significant at the .01 level
TABLE 4: PROBIT ANALYSIS RESULTS (ReportQual as dependent variable)
Panel A: Ordered Probit Model Satistics
Iterations completed: 17 Log likelihood function: -412.9412 Restricted log likelihood: -443.1573 Chi-squared: 60.43224
Degrees of freedom: 10 Significance level: .0000 Cell frequencies for outcomes:
Y
Count
Freq
Y
Count
Freq
Y
Count
Freq
0
39
.060
1
484
.756
2
117
.182
Panel B: Ordered Probit Model
Variable
Coefficient
Standard Error
b/St.Er.
Index function of probability
Constant
0.882432***
0.187856
4.697
.31287E-01**
0.14410E-01
2.158
Pic5000
0.9317756*
0.568740
1.638
Pic6300
-0.726596***
0.209258
-3.472
Pic8200
0.476167*
0.290710
1.638
-0.272024*
0.139790
-1.946
Adreportd5
0.485296*
0.263133
1.844
Adreportd4
0.280295**
0.11675
2.401
Adreportd3
0.794999***
.255542
3.111
-0.552509*
.30751
-1.795
0.755230***
0.232903
3.243
2.634369071***
.10585268
24.887
Experience
Qualcommd2
Funreportd3
Certifications
Threshold parameters for index
Mu( 1)
*
= significant at the .10 level ** = significant at the .05 level
*** = significant at the .01 level
TABLE 5: TESTS OF SIGNIFICANCE SUMMARY
Regression Analysis
(Report-time as
dependent variable)
Probit Analysis
(Addvalue as dependent
variable)
Probit Analysis
(Reportqaul as
dependent variable)
Significance
Significance
Significance
USA
***
-----
-----
Pic2800
***
-----
-----
Pic3900
***
-----
-----
Pic4700
***
-----
-----
Pic4800
**
-----
-----
Pic4900
**
-----
-----
Pic5000
***
**
*
Pic6000
***
-----
-----
Pic6300
***
***
***
Pic8200
***
**
*
Pic8900
*
-----
-----
Independent
Variables
*
= significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level
TABLE 5: TESTS OF SIGNIFICANCE SUMMARY
Independent Variables
Regression Analysis
(Report-time as dependent
variable)
Probit Analysis
(Addvalue as dependent
variable)
Probit Analysis
(Reportqaul as dependent
variable)
Significance
Significance
Significance
Frequencyd1
**
-----
-----
Adreportd5
***
-----
*
Adreportd4
-----
-----
**
Adreportd3
-----
-----
***
Funreportd1
***
-----
-----
Funreportd3
-----
-----
*
Emp/auditors
-----
*
Experience
-----
**
**
Accharterd1
-----
**
-----
Certifications
-----
**
***
Qualcommd2
-----
-----
*
*
= significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level
Conclusions
We draw the following conclusions:
1. IAFs appear to be benchmarking their performance
within the industry in which their organizations operate,
2. Administrative and to a less extend functional reporting
arrangements appear to influence IAF audit
performance,
3. Experience and professional certification seem to affect
IAF performance particularly with respect to auditee
ratings,
4. SOX did not have a significant influence on IAF
performance,
5. Whether the organization was headquartered in the USA
or elsewhere only marginally influenced IAF
performance, and as did the employee to auditor ratio,
and corporate governance.