Corporate governance and internal audit: an institutional theory perspective

Pages175-190
DOIhttps://doi.org/10.1108/CG-07-2019-0215
Date22 October 2019
Published date22 October 2019
AuthorChristina Vadasi,Michalis Bekiaris,Andreas Andrikopoulos
Subject MatterCorporate governance,Strategy
Corporate governance and internal audit:
an institutional theory perspective
Christina Vadasi, Michalis Bekiaris and Andreas Andrikopoulos
Abstract
Purpose This paper aims to explore internal audit effectiveness through its contribution to corporate
governance.Namely, the authors attempt to investigatethe impact of internal audit professionalizationon
internalaudit’s contribution to corporategovernance.
Design/methodology/approach Using a research framework informed by institutional theory, the
authors predict that internal audit’s contribution to corporate governance is associated with factors
related to internalaudit professionalization. To investigatethe arguments, the authorscombine data from
a survey of 49 listed companies in the Athens Stock Exchange with publicly available information from
annualreports.
Findings Empirical results indicate that internal audit professionalization affects internal audit
effectiveness, as internal audit’s contribution to corporate governance is improved for organizations
where internal audit function complies with internal auditing standards and internal auditors hold
professional certifications. The findings also suggest that internal audit’s contribution to corporate
governance is shaped by some company-specific characteristics, namely, CEO duality and audit
committeequality.
Practical implications The results have implications for internal auditors who wish to increase the
efficiency of their work,corporate governance mechanisms such as the boardof directors and the audit
committee, whichcan use the findings of this study to better respond to their responsibilities concerning
internal audit and regulatorswho can also benefit to strengthen areas with substantial impact on internal
audit’scontribution to corporate governance.
Originality/value This paper contributes to the academic discussion on the role of internal audit in
corporate governance and complements the work of other researchers in the field of internal audit
professionalization. This study tries to fill a gap in the literature on the effect of internal audit
professionalizationelements on internal audit’scontribution to corporate governance.
Keywords Greece, Professionalization, Internal auditing, Institutional theory, Corporate Governance,
Institute of Internal Auditors, Internal audit
Paper type Research paper
1. Introduction
Internal audit (IA) is a fundamental part of corporate governance (CG), as it is one out of
four key players of CG along with the audit committee, external audit and management
(Gramling et al.,2004;(Goodwin-Steward and Kent, 2006). IA’s importance in corporate
governance relies on its role as the only internal monitoring mechanism that operates on a
daily basis (Prawitt et al.,2009;Soh and Martinov-Bennie, 2011). Nevertheless, prior
research on IA effectiveness and its association with CG has been rather limited (Sarens,
2009;Mihret and Grant, 2017;Lenz et al., 2018). Our objective is to explore the effect of
internal audit function (IAF) on IA effectivenessthrough the lens of institutional theory, which
has been attracting increasing attention in the IA literature (Al-Twaijry et al.,2003;Arena
et al., 2006;Arena and Azzone,2007;Mihret et al., 2010). Namely, we use normative
isomorphism (one of three types of isomorphism in institutional theory) to assess the effect
of IA professionalization on IA’s contribution to CG. The guidance of the Institute of Internal
Christina Vadasi,
Michalis Bekiaris and
Andreas Andrikopoulos all
are based at Department of
Business Administration,
University of the Aegean,
Chios, Greece.
Received 19 July 2019
Revised 18 September 2019
20 September 2019
Accepted 22 September 2019
DOI 10.1108/CG-07-2019-0215 VOL. 20 NO. 1 2020, pp. 175-190, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 175
Auditors (IIA) is often considered as a source of normative pressure that leads to IA
professionalization (Arena and Jeppesen,2010;Lenz et al., 2018). Lenz et al. (2018)
concluded that IA identity is still not clear and this hampers IA effectiveness, even though
one would expect that increased normative pressure from IIA would lead to increased IA
effectiveness.
Addressing this research question, we set out to assess the effect of IIA guidance on IA’s
contribution to CG. This paper forms part of a long-standing debate (Al-Twaijry et al.,2003;
Arena and Azzone,2007;Abdolmohammadi, 2009;Arena and Jeppesen,2010;
Abdolmohmmadi and Sarens, 2011; Lenz and Sarens, 2012). We conducted an empirical
survey using questionnaires in listed companies on the Athens Stock Exchange. The
sample included 49 companies and survey data was investigated in conjunction with
publicly available data in annual reports. We explore IA with a country-specific study to
shield the analysis against potential inconsistencies that may arise in the investigation of
diverse institutional environments (Mat Zain et al.,2015). Greece constitutes an interesting
case of CG and IA because of the unprecedented economic crisis that started in 2009
(Nerantzidis and Filos, 2014). In periods of economic crisis CG is important since, even
though it is not the root cause of the crisis, it can assist economic recovery by being a
fundamental pillar of) transparency and accountability, and thereby, an integral part of
value-adding entrepreneurship (Kirkpatrick, 2009). CG in Greece is also interesting
because most companies are family-controlled, thereby aggravating the agency problems
and the principal-principal conflicts (conflict between shareholder groups) that CG and
monitoring mechanisms are trying to mitigate (Chau and Gray, 2010;Lam and Lee, 2012;
Regoliosi and d’Eri, 2014). Those arguments are complemented by Vieira (2018) who found
that the nature of the board of directors in family firms affects their performance in periods
of economic adversity. The results show that IIA guidance -IAF compliance with IIA
standards and auditors with professional certifications- can improve IA’s active involvement
in CG.
The rest of the paper is organized as follows: Section 2 presents the conceptual framework
and the principal arguments on IA and CG. Section 3 describes the methodology, sample
and model. Section 4 presents the results of the empirical analysis while Section 5 lays out
the conclusion, research limitationsand suggestions for future research.
2. Theoretical background and conceptual framework
2.1 Internal audit’s contribution to corporate governance
The major corporate scandals in early 2000, the global economic crisis and the changes in
corporate ownership structure led to the intensive involvement of academics and
professionals with CG. Regulatory interest was oriented toward restoring investor
confidence via increased CG disclosure requirements. At the same time, there was also a
need to strengthen monitoring mechanisms, which led to increased attention to IA
(Leung et al.,2004;Sarens and De Beedle, 2006) and an important change in IA’s role in
CG (Carcello et al.,2005;Cohen et al.,2010;Lenzand Sarens, 2012).
IA has traditionally been a function of assurance, financial audits and compliance
mechanisms. IA’s new role involves the supervision and the improvement of risk
management processes and CG (Lin et al.,2011), with special emphasis being invested in
IA’s added value to an organization (Sarens,2009; IIA, 2017). South African CG code KING
IV (IOD, 2016) states that IA, as provider of assurance services for the company, remains a
decisive factor of CG. Nevertheless, the code recognizes IA’s evolution and suggests that
IA’s role should be one of a reliable advisor, which contributes to all company processes.
IA’s role is further reinforced by the fact that it constitutes a “resource” for the rest of CG
players (Gramling et al.,2004) as it contributes to the accomplishment of their goals and
their effective performance. In this regard, Sarens et al. (2012) argue that IA’s principal
PAGE 176 jCORPORATE GOVERNANCE jVOL. 20 NO. 1 2020

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