Internal Auditor Perceptions on Audit Committee Interactions: a qualitative study in Malaysian public corporations

• Published date: 01 September 2007
• Author: Nava Subramaniam,Mazlina Mat Zain
• Date: 01 September 2007
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00620.x

Internal Auditor Perceptions on Audit

Committee Interactions: a qualitative

study in Malaysian public

corporations

Mazlina Mat Zain and Nava Subramaniam*

Audit committees (AC) and the internal audit function (IAF) are two key corporate governance

mechanisms. The primary objective of this study is to provide insights into internal auditors’

perceptions of their interactions with AC members in Malaysia. The paper thus contributes to

the extant literature by providing additional evidence from a South-east Asian country which

is recognised as being characterised with a high power distance culture and a developing

capital market. The f‌indings are based on in-depth interviews of the heads of the internal audit

function (HIAFs) from 11 publicly listed companies. The results indicate infrequent informal

communications and limited private meetings between the HIAFs and ACs, and a need for

clear reporting lines. Further, ACs are seen to be held in high esteem for their authority and are

expected to take on greater leadership in the inquiry of management’s decision-making. These

f‌indings highlight the importance of the leadership role of ACs in supporting the IAF.

Keywords: Internal auditing, audit committees, corporate governance, independent directors

Introduction

Audit committees (ACs) and the internal

audit function (IAF) are two key facets of

the corporate governance mosaic that have

attracted considerable attention in recent

years. Gramling et al. (2004) and Cohen et al.

(2004) in their recent reviews of the gover-

nance role of the IAF and AC within organi-

sations have specif‌ically called for further

research to identify organisational factors and

audit processes thatpromote effective IAF and

AC relationships. Such evidence is critical as

a more productive relationship between the

IAF and ACs is likely to improve the quality of

f‌inancial reporting and related governance

processes within organisations(Gramling et al.,

2004; Turley and Zaman, 2004). Further, it is

argued that “a qualityrelationship between the

IAF and the AC also works towards providing

the IAF with an appropriate environment and

support system for carrying out its own

governance-related activities (e.g. risk assess-

ment, control assurance and compliance

work)” (Gramling et al., 2004, p. 198).

Our literature review indicates that prior

studies examining AC interactions with inter-

nal auditors’effectiveness have largely focused

on the composition of the AC (Goodwin and

Yeo, 2001; Raghunandan et al., 2001; Scar-

brough et al., 1998). In general, much of the

evidence suggests that ACs with greater inde-

pendence and members with f‌inancial exper-

tise interact more extensively with internal

auditors. For example, ACs with greater inde-

pendence tended to hold more frequent,

longer and private meetings with the Heads of

the IAF (HIAFs), as well as undertake more

in-depth reviews of the internal audit pro-

gramme and its results than those ACs with

lower independence (Scarbrough et al., 1998;

Raghunandan et al., 2001; Goodwin and Yeo,

2001). However, much of the evidence in this

area is largely based on questionnaire surveys

undertaken in strong and sophisticated capital

markets, e.g. the USA, Canada and Australia

*Address for correspondence:

Department of Accounting,

Finance and Economics, Grif-

f‌ith University, PMB 50, Gold

Coast Mail Centre, Southport,

QLD 4214, Australia. Tel: 07

5552 8769; Fax: 07 5552 8068;

E-mail: N.Subramaniam@

griff‌ith.edu.au

894 CORPORATE GOVERNANCE

Volume 15 Number 5 September 2007

© 2007 TheAuthors

Journal compilation © 2006 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA