Deciding factors in cooperation and trust between internal and external auditors in organizations: An exploratory analysis

• Author: Mário Franco,Georgina Morais
• DOI: http://doi.org/10.1111/ijau.12160
• Published date: 01 July 2019
• Date: 01 July 2019

ORIGINAL ARTICLE

Deciding factors in cooperation and trust between internal and

external auditors in organizations: An exploratory analysis

Georgina Morais

1

|Mário Franco

2

1

ISCAC—Coimbra Business School and PhD

Management at the University of Beira

Interior, Covilhã, Portugal

2

Management and Economics Department,

CEFAGE‐UBI Research Center, University of

Beira Interior, Covilhã, Portugal

Correspondence

Mário Franco, University of Beira Interior,

Management and Economics Department,

CEFAGE‐UBI Research Center, Estrada do

Sineiro, 6200‐209 Covilhã, Portugal.

Email: mfranco@ubi.pt

Funding information

National Funds of the FCT—Portuguese Foun-

dation for Science and Technology

The general aim of this study is to assess the relationships between external and

internal auditors concerning cooperation and trust as resources integrated in organi-

zations' lines of defense, to favor solid, opportune, and transparent decision‐making

in organs of governance. More precisely, the specific aims are: (1) to analyze the rela-

tionship between trust and cooperation; (2) to explore and analyze the categories of

the mutually important factors for trust and cooperation; and (3) to analyze the differ-

ences between internal and external auditors. To achieve these goals, quantitative

and exploratory research was undertaken, with data collection through surveys

directed to the two auditor groups (internal and external) in Portugal. In order to ana-

lyze if there were relations between trust and cooperation, logistic regression was

performed. Based on exploratory factor analysis of principal components, it was pos-

sible to extract three factors for cooperation and trust: (1) work performance, (2)

coordination/collaboration, and (3) competence. A multiple linear regression was also

used to check the differences between internal and external auditors for the three

factors identified. From the two groups involved in this study, it was possible to gain

each group's perception of the professional relationship concerning cooperation and

trust as determinant variables in auditing. It was found that there is still a long way to

go and that each group has slightly different perceptions. This study contributes to

the scientific and professional community regarding the perception of cooperation

and trust between these professionals.

KEYWORDS

cooperation, external auditing, internal auditing, interrelationship, trust

1|INTRODUCTION

The constant and complex change in organizations together with the

greater knowledge and demands of stakeholders means increasingly

solid, opportune, transparent and rapid decisions must be made. To

do so, organizations need internal and external resources that allow

fulfillment of that aspiration through suitable and sufficient

monitoring. To ensure strong governance in organizations, there

must be cooperation between the various components of the

governing system, internal auditors, executive management, finance,

management, board of administrators, shareholders and external

auditors (European Confederation of Institutes of Internal Auditing

[ECIIA], 2005).

Internal and external auditors are therefore the necessary resource

as organizations' lines of defense in the model of governance (ECIIA,

2012). However, these professionals face dilemmas: On the one hand,

they carry out their work with the greatest coverage possible so as to

give an opinion with confidence; and on the other hand, they wish to

reduce costs, be more efficient, and avoid or reduce excesses that cre-

ate dissatisfaction in organizations, limiting efficiency, and they also

aim to minimize the risk of their work. In addition, the speed of tech-

nological and organizational change requires permanent updating,

Received: 4 July 2017 Revised: 9 February 2019 Accepted: 2 April 2019

DOI: 10.1111/ijau.12160

Int J Audit. 2019;23:263–278. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 263

particularly regarding information technology. The relationship

between internal and external auditing should be based on coopera-

tion and coordination, but without sharing responsibilities (Sawyer,

Dittenhofer, & Scheiner, 2003). Cooperation, trust, good communica-

tion, and the creation of networks can contribute to better sharing

of these professionals' knowledge, tools, and methodologies, so that

with confidence, reduced costs, efficiency, and effectiveness they will

help in appropriate, rapid, transparent, and opportune decision‐

making. The literature generally deals only with some factors in isola-

tion (competence, independence, and work performed), such as the

studies by Schneider (1984), Haron, Chambers, Ramsi, and Ismail

(2004), Krishnamoorthy (2002), Gramling, Maletta, Schneider, and

Church (2004), Apostolou, Harper, and Strawser (2007), Suwaidan

and Qasim (2010), Mihret and Admassu (2011) and Ramasawmy and

Ramen (2012), which external auditors consider in the decision to

trust the function of internal auditing, and only through the perception

of external auditors. Given the evolution of organizations, their whole

environment, and future challenges, the few existing studies are

clearly insufficient, and there is a need to explore new situations,

new areas, and new factors. Gray and Hunton (2011) stated that the

external auditor's trust in the function of internal auditing is complex

and does not necessarily depend on a single factor.

In these circumstances, the main objectives of this study are: (1) to

analyze the relationship between trust and cooperation; (2) to explore

and analyze the categories of the mutually important factors for trust

and cooperation; and (3) to analyze the differences between internal

and external auditors.

Analyzing the relationship between trust and cooperation, we con-

clude that internal and external auditors consider different factors as

important for these two dimensions/variables. For internal auditors,

enterprise risk management is the most important factor, whereas

competence is most important for external auditors. Regarding auditor

characteristics, only gender is significantly important for internal audi-

tors, as well as the importance they place on trust.

From factor analysis, the results show three relevant factors in

deciding to cooperate and trust: (1) work performance, (2)

coordination/collaboration, and (3) competence. The first is revealed

as the factor that most explains the decision to cooperate and trust,

followed by coordination/collaboration and lastly competence. The

second is a new factor found in this exploratory study, and the others

are corroborated by previous investigations. We also analyzed if there

were any differences between the types of auditor, external and inter-

nal, for the three factors extracted from factor analysis. Using multiple

linear regression models, the results show that auditor type is signifi-

cantly related to work performance and coordination/collaboration,

and as such influences the trust and cooperation factors.

Therefore, the study intends to make a contribution to the national

and international scientific and professional community regarding the

perception of cooperation and trust between these professionals, as

well as contributing to reflection and discussion of widespread profes-

sional standards whose approval makes them generally accepted and

consequently references of good practices. This study is innovative,

as in Portugal this theme of auditors' cooperation and trust has not

been studied, despite being a current concern and a dilemma in itself,

given society's eagerness to optimize resources, accountability, and

transparency. This study intends to increase and strengthen the posi-

tioning and state‐of‐the‐art of Portugal in the international commu-

nity, and thus be generalized.

Therefore, it begins with a literature review of studies about coop-

eration and trust. This is followed by an empirical study involving both

groups of auditors (internal and external) and using the survey meth-

odology. Finally, the results are presented and discussed, followed

by the conclusions and implications.

2|THEORETICAL DEVELOPMENT

2.1 |Background and motivation

Organizations' complexity and constant change raise problems not

only for managers but also for supervisors, where interest in the orga-

nization's objectives can stimulate, or not, these professionals' cooper-

ation, particularly in auditing. Then again, the growing demands in

relation to the quality of auditing can encourage the necessary coop-

eration and mutual trust, or indeed have the opposite effect.

The current environment of governance has led to increased

emphasis on relationships between internal and external auditors

(Gramling et al., 2004). To ensure strong governance in organizations,

there must be cooperation between the various components of the

governance system, internal auditing, executive management, finance,

management, board of administrators, audit committee,

1

shareholders,

and external auditing (ECIIA, 2005). Collaborative or cooperative rela-

tionships correspond to exchanges that imply a very close sharing of

information and mutual commitments, expecting long‐term benefits

(Marques, 2012, pp. 52, 111).

Relationships between auditors as parties involved in governance

should be trusting ones, allowing strong cooperation and contributing

to strengthening supervision of risk management, internal control, and

governance. A high level of interpersonal trust makes it easier to solve

problems that require collective action (Roth, 2006). The effects of

trust, in general, are positive for the parties involved and are shown

in the increased duration of relationships, increased cooperation, and

reduced risk, and should therefore be considered a principal compo-

nent in the quality of a relationship (Marques, 2012, p. 88).

The first relevant study about the interaction between internal and

external auditing was made by Mautz (1984), and the results showed

that, from the viewpoint of internal auditing, the relationship with

external auditing is only apparently very good.

The relationship between internal and external auditing should be

based on cooperation and coordination, albeit without sharing respon-

sibilities (Brody, 2012; Sawyer et al., 2003). The theory of human rela-

tionships shows the importance of interpersonal relationships in

satisfying individual needs, such as those supposedly formed between

internal and external auditors, as the possible link between

1

The audit committee is an integrated part of the corporate governance model, including

among its goals responsibility for the relationships between internal and external audit.

264 MORAIS AND FRANCO