Probing the Discriminatory Power of Characteristics of Internal Audit Functions: Sorting the Wheat from the Chaff

• Date: 01 July 2014
• Author: Kenneth D'Silva,Rainer Lenz,Gerrit Sarens
• DOI: http://doi.org/10.1111/ijau.12017
• Published date: 01 July 2014

Probing the Discriminatory Power of Characteristics of Internal Audit

Functions: Sorting the Wheat from the Chaff

Rainer Lenz,1Gerrit Sarens1and Kenneth D’Silva2

1Université Catholique de Louvain

2London South Bank University

The purpose of this paperis to identify, examine and evaluate characteristics of an internal audit function (IAF) that

help to distinguish between two groups of IAFs with sharply contrasting levels of perceived effectiveness. Based

on survey data from 46 heads of internal audit (chief audit executives, CAEs) in private organizations in Germany,

we differentiate IAFs that indicate varying and contrasting levels of internal auditing (IA) effectiveness. In doing

so, this study plants the seeds for a potential general theory of IA effectiveness – a theory that may also have

relevance in other countries. Extant theory highlights the multi-faceted aspects of IA effectiveness and these are

considered in the study to sort its ‘wheat from the chaff’. We suggest four key dimensions or categorical blocks:

organization, IA resources, IA processes and IA relationships. Within these dimensions, statistically valid

discriminatory characteristics and features identified in the study include: the existence of an IA charter that is

agreed by the board/audit committee (AC); possible career progression after a tenure in IA; some degree of

co-sourcing and outsourcing of IA services; the level of training and professional qualification of IA staff and

CAEs; the use of IA technology and risk-based IA; whether IA makes recommendations for improving the

governance process and rates individual findings and grades the overall report; whether the CAE has appropriate

access to the board/AC; whether the CAE benefits from senior management’s (SM) and the board/AC’s input to

the IA plan; and the CAE’s informal contact with SM. Appropriately employed, a mix of these characteristics

contribute to a theoretical grounding that may help explain IA effectiveness.

Key words: IAF characteristics, discriminatory power, effectiveness, IA professional, self-assessment

1. INTRODUCTION AND

RESEARCH QUESTION

While IA effectiveness continues to be actively debated

in practice (e.g., Ernst & Young, 2006, 2008, 2010,

2012; KPMG, 2009; PwC, 2009, 2010, 2012; Deloitte, 2010),

it still remains an enigma and is largely viewed as

an underexplored ‘black box’ in academic research (e.g.,

Anderson, 2003; Hermanson & Rittenberg, 2003; Prawitt,

2003; Paape, 2008; Arena & Azzone, 2009; Sarens, 2009;

Cohen & Sayag, 2010). This study sheds some light on

that ‘black box’ and enriches the associated body of

knowledge by suggesting possible indicators of IA

effectiveness. In so doing it plants the seeds for a theory

of IA effectiveness. The paper builds on the assumption,

as suggested by literature, that there are different levels

of IAF effectiveness.1

The central research question (RQ) of the paper is:

RQ: To what extent does applying the set of

professional characteristics of IAFs suggested by

practitioners in Germany and academic global research

help differentiate in terms of effectiveness between

IAFs, and point to the ostensibly rather strong and

effective IAF, in contrast to the apparently rather weak

and ineffective IAF?

In order to address the RQ, a questionnaire was sent in

autumn 2010 to 134 CAEs of organizationsheadquartered

in Germany. A total of 46 completed responses were

obtained giving a response rate of 34 percent, which is

comparable to other survey-based studies in the IA

literature. As this survey is exclusively based on the

self-assessment of CAEs, we disregard stakeholders’

perspectives, so output and relational factors are only

considered to some extent and consistently from the

perspective of CAEs.

This paper consolidates various dimensions that can

signal IA effectiveness and makes transparent variations

in practice helped by questions that have discriminatory

power. As the theoretical reasoning implicit in the

questions asked enables differences between IAFs to be

revealed, this paper also provides an IA effectiveness

mosaic and the seeds for a theory of IA effectiveness. The

questions are based on indicators suggested by a

literature review and derived from both academic and

practitioner sources, complemented by some novel

considerations. While most variables employed in the

research are suggested by the literature, this study is

normative as we associate certainIAF characteristics with

comparatively higher or lower IA effectiveness, thereby

disclosing our implied concept of ‘what good looks like’.

The stakeholders’ perspective on the items measured is

consciously not included, so we do not directly measure

IA effectiveness in this paper.

Section 2 sets out our conceptualconsiderations on what

constitutes IA effectiveness and identifies the categorizing

model containing its four building blocks employed

within the questionnaire. Section 3 discusses in detail all

characteristics that underpin the four building blocks

and how they are translated into questions. Section 4

describes the data collection process. Section 5 discusses

the results/findings. Section 6 acknowledges limitations

of this research. Finally, Section 7 summarizes our

conclusions and makes suggestions for further research.

2. CONCEPTUAL CONSIDERATIONS OF

WHAT CONSTITUTES IA EFFECTIVENESS

Effectiveness, particularly IA effectiveness, is not self-

explanatory; it means different things to different people.

Correspondence to: Rainer Lenz, Louvain School of Management,

Université Catholique de Louvain, Place des Doyens 1, 1348

Louvain-la-Neuve, Belgium. Email: rainer.lenz@uclouvain.be

International Journal of Auditing doi:10.1111/ijau.12017

Int. J. Audit. 18: 126–138 (2014)

© 2013 John Wiley & Sons Ltd ISSN 1090-6738