Factors associated with internal audit's involvement in environmental and social assurance and consulting

• Author: Nonna Martinov‐Bennie,Dominic S.B. Soh
• DOI: http://doi.org/10.1111/ijau.12125
• Published date: 01 November 2018
• Date: 01 November 2018

ORIGINAL ARTICLE

Factors associated with internal audit's involvement in

environmental and social assurance and consulting

Dominic S.B. Soh

1

|Nonna Martinov‐Bennie

2

1

Department of Accounting and Corporate

Governance, Faculty of Business and

Economics, Macquarie University, Sydney,

NSW, Australia

2

Department of Financial Governance,

University of South Africa

Correspondence

Dominic Soh, Department of Accounting and

Corporate Governance, Faculty of Business

and Economics, Macquarie University, Sydney,

NSW, Australia.

Email: dominic.soh@mq.edu.au

Funding information

Accounting and Finance Association of

Australia and New Zealand; Faculty of Busi-

ness and Economics at Macquarie University

Despite evidence of internal audit's expanding role in sustainability matters, there is

limited understanding of factors associated with the extent of internal audit's involve-

ment in these areas. This study examines the impact of governance factors, internal

audit function characteristics, and organizational sustainability practices on the extent

of internal audit's involvement in environmental and social assurance and consulting.

The results suggest that management support and external reporting of sustainability

information are key factors associated with internal audit's involvement in environ-

mental and social assurance and consulting activities. The results also indicate that

the extent of internal audit's involvement in assurance and consulting are not

necessarily driven by a homogeneous set of factors. Future research could take a

more nuanced approach to investigating different aspects of internal audit's roles

both within the sustainability context and more broadly.

KEYWORDS

assurance, corporate governance, internalaudit, sustainability

1|INTRODUCTION

The global business environment has undergone significant change in

the last decade. In the aftermath of major corporate collapses and the

global financial crisis brought about by excessive risk‐taking,

organizations face greater scrutiny by regulators, investors, customers,

and wider stakeholders (Davies, Moxey, & Welch, 2010). This has

contributed to increased emphasis on corporate governance, internal

control, and risk management (Power, 2003, 2007), including greater

accountability demands on organizations to manage their performance

in sustainability areas and to expand their corporate reporting to

encompass these issues (Simnett, Vanstraelen, & Chua, 2009).

Alongside the growing importance of sustainability information

for management operational change and strategic decision‐making

(Adams & Frost, 2008; Cohen & Simnett, 2015; Martinov‐Bennie,

Frost, & Soh, 2012), there is increasing evidence of internal audit's

rising prominence as a key governance and assurance mechanism

and its evolving role and shifting emphasis towards nonfinancial

matters (Allegrini, D'Onza, Melville, Sarens, & Selim, 2011; Darnall,

Seol, & Sarkis, 2009; Jones & Solomon, 2010; Protiviti & The

Institute of Internal Auditors–Australia [IIA–Australia], 2011; Soh &

Martinov‐Bennie, 2011, 2015; Trotman & Trotman, 2015). The unique

position of internal audit within the organization and its transition to

undertaking a more strategic role provides it with the opportunity to

drive better sustainability governance, risk management, and reporting

systems by facilitating organizational change and improvement

(Darnall et al., 2009; Edgley, Jones, & Solomon, 2010) and embedding

sustainability within strategic decision‐making (Ballou, Casey, Grenier,

& Heitger, 2012).

As organizations begin to link sustainability management and

reporting to risk management systems and processes, internal audit

has a role in adding credibility to sustainability information and identi-

fying gaps for improvement (The Institute of Chartered Accountants in

Australia & Kiewa Consulting, 2011). While there is emerging evidence

of internal audit providing assurance on sustainability information

(Darnall et al., 2009; Jones & Solomon, 2010; Peters & Romi, 2015;

Soh & Martinov‐Bennie, 2015; Trotman & Trotman, 2015), there is

limited understanding of organizations' decisions to involve internal

audit in these areas, with prior literature focusing on external sustain-

ability reporting assured by external providers (Mori Junior, Best, &

Cotter, 2014; Moroney, Windsor, & Aw, 2012; Perego & Kolk,

2012), factors associated with the decision to obtain sustainability

assurance, and the type of assurance provider engaged (Casey &

Grenier, 2015; Kolk & Perego, 2010; Perego, 2009).

Received: 14 December 2016 Revised: 23 March 2018 Accepted: 6 May 2018

DOI: 10.1111/ijau.12125

404 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:404–421.wileyonlinelibrary.com/journal/ijau

This exploratory study aims to address the gap in the extant

research by examining factors associated with the internal audit

function's (IAF's) involvement in sustainability

1

assurance and consult-

ing activities. More specifically, using survey data, we examine the

association between governance factors, IAF characteristics, and

organizational sustainability practices and the extent of the IAF's

involvement in undertaking assurance and consulting engagements in

relation to environmental and social issues. In so doing, the paper

responds to calls for greater attention to various types of assurance

mechanisms in sustainability areas (Darnall et al., 2009), and specifi-

cally internal audit's involvement in these areas (Ridley, D'Silva, &

Szombathelyi, 2011; Soh & Martinov‐Bennie, 2015).

This study makes a number of contributions. First, prior studies

examining sustainability assurance have generally either examined

broad conceptions of sustainability reporting without consideration

of the diversity of sustainability issues (e.g., Casey & Grenier, 2015),

or examined discrete aspects of sustainability; for example, workplace

health and safety (Blewett & O'Keeffe, 2011) and greenhouse gas

emissions and energy reporting (Trotman & Trotman, 2015). By

examining environmental and social areas separately, this study

employs a more nuanced approach to investigating whether the

factors associated with internal audit's involvement vary across

categories of sustainability areas.

Second, the focus of prior studies examining sustainability assur-

ance practices is on broad firm and institutional characteristics (Peters

& Romi, 2015). However, extant internal audit research provides evi-

dence of the importance of internal factors in investigating internal

audit's roles and effectiveness (Arena & Azzone, 2009; Cohen &

Sayag, 2010; Gramling, Maletta, Schneider, & Church, 2004; Leung,

Cooper, & Perera, 2011; Sarens, Abdolmohammadi, & Lenz, 2012;

Soh & Martinov‐Bennie, 2011). This study, therefore, focuses on

internal factors by examining governance factors, IAF's characteristics,

and organizational sustainability practices, which in some cases can

only be examined by collecting primary data.

Third, most prior sustainability assurance studies have relied on

publicly available information, typically organizations' sustainability

reports. However, not all organizations that engage sustainability

assurance services publish stand‐alone sustainability reports or

otherwise publicly disclose details of the nature of assurance obtained

on sustainability information (Ballou et al., 2012). There is also

arguably limited incentive to disclose internal audit's involvement in

sustainability assurance (or consulting) activities, particularly in

instances where internal audit's involvement in these activities is not

directly related to external sustainability reporting. By undertaking a

survey approach, consistent with prior internal audit research (Abbott,

Parker, & Peters, 2010; Beasley, Clune, & Hermanson, 2005), this

study is able to specifically examine the extent of internal audit's

involvement in environmental and social areas.

Finally, most prior studies have focused on the assurance aspect

of internal audit's role, with very few directly examining the consulting

aspect of the IAFs' activities. Given increasing emphasis being placed

on the IAF's consulting role (Sarens & De Beelde, 2006a, 2006b;

Soh & Martinov‐Bennie, 2011), this study separately examines the

assurance and consulting roles performed by internal audit in relation

to sustainability areas. This is particularly relevant given that internal

audit can play diverse roles in relation to sustainability areas, not

limited to assurance of sustainability reporting, such as facilitating

management self‐assessments of sustainability controls and results,

and consulting “on project design and implementation for corporate

social responsibility (CSR) programs and reports or serve as an advisor

on CSR governance, risk management and internal controls”(The Insti-

tute of Internal Auditors [IIA], 2010b, p. 7). It has also been suggested

that, as organizations progress through different stages of sustainabil-

ity maturity, the role of the IAF is likely to evolve, with greater

emphasis on assurance (compliance) in the earlier stages and

consulting (value creation) in later stages (Deloitte, 2011; IIA, 2013a).

Current developments in corporate reporting, including integrated

reporting that aims to combine financial and nonfinancial information,

are likely to increase demand for assurance of such reporting and the

need for further research in this area to respond to associated chal-

lenges (Cohen & Simnett, 2015). One of the current challenges relates

to the development of combined assurance models that take into

account assurance provided by various parties, including management,

internal audit, and other external assurance providers (Integrated

Reporting Committee of South Africa, 2011; International Integrated

Reporting Council [IIRC], 2015). This is pertinent in developing appro-

priate audit strategies and approaches in response to diverse risks

faced by organizations (Decaux & Sarens, 2015; Huibers, 2015;

Sarens, Decaux, & Lenz, 2012). To this end, this study provides useful

input for policy‐makers, external assurance providers, and governance

actors in developing combined assurance approaches to improve the

level of comfort provided to various internal and external stakeholders

through potential greater collaboration between different types of

assurance providers (Sarens, De Beelde, & Everaert, 2009). In light of

evidence of internal audit's influential role in diffusing sustainability

assurance (O'Dwyer, Owen, & Unerman, 2011) and integrated

reporting efforts within the organization (Chartered Institute of

Internal Auditors, 2015; Deloitte, 2011; Druckman, 2013; IIA, 2013a;

IIRC, 2015), investigation of the factors associated with the extent

of assurance and consulting work being undertaken by IAFs over

sustainability issues is timely.

The remainder of this paper is structured as follows. Section 2

provides the context for the changing nature of the role and expecta-

tions of internal audit and reviews relevant literature in developing the

study's hypotheses. Section 3 describes the research method under-

taken in this study. Section 4 presents and discusses the results of

the study. Section 5 concludes the paper, outlines limitations of the

study, and suggests potential areas for future research.

2|LITERATURE REVIEW AND

HYPOTHESES DEVELOPMENT

The importance of internal audit's role in organizational governance is

increasingly recognized, with greater reliance being placed on the IAF

by audit committees and management. The widening remit of audit

committees has been accompanied by the IAF's expansion beyond

its traditional predominantly financial reporting role, to areas such as

risk management, operational auditing, and business improvement

(Collier & Zaman, 2005; Martinov‐Bennie, Soh, & Tweedie, 2015;

SOH AND MARTINOV‐BENNIE 405