What drives and measures public sector internal audit effectiveness? Dependent and independent variables

• DOI: http://doi.org/10.1111/ijau.12097
• Author: Philna Coetzee,Lourens J. Erasmus
• Published date: 01 November 2017
• Date: 01 November 2017

ORIGINAL ARTICLE

What drives and measures public sector internal audit

effectiveness? Dependent and independent variables

Philna Coetzee

1

|Lourens J. Erasmus

2

1

College of Accounting Sciences, University of

South Africa, Pretoria, South Africa

2

Department Public Sector Finance, Tshwane

University of Technology, Pretoria, South

Africa

Correspondence

Lourens J. Erasmus, Department of Public

Sector Finance, Tshwane University of

Technology, Pretoria, South Africa.

Email: erasmuslj@tut.ac.za

The effectiveness of the internal audit function is important to improve performance in the public

sector. This study provides insight into the drivers and measures of internal audit effectiveness.

The heads of the internal audit function, senior management of public institutions and chairper-

sons of the audit committee, within a South African public sector context, responded to a survey

based on an extensive review of the internal audit function. Exploratory factor analysis was

applied to facilitate the reduction of 92 items into a meaningful number of independent (drivers)

and dependent (measures) variables. The result of the study identifies a refined list of drivers and

measures of internal audit effectiveness that adds to existing knowledge and presents a founda-

tion for further research.

KEYWORDS

Exploratory factoranalysis, internal audit demand‐side,internal audit effectiveness, internal audit

supply‐side, public sector

1|INTRODUCTION

Post‐1994, the South African public sector embarked on a journey to

reform its operational efficiency by following the new public manage-

ment (NPM) approach (Erasmus & Shamsoodeen, 2010). This approach

encourages the conversion of the traditional management style of the

public sector to a closer approximation of private sector practices to

increase efficiency, accountability, and transparency (Cameron, 2009;

Carstens & Thornhill, 2000; Gendron, Cooper, & Townley, 2000; Larbi,

2005; Leeuw, 1996), all of which can be summarized as sound gover-

nance principles. To support this NPM adoption, the Public Finance

Management Act of 1999 required the implementation of an effective

internal audit function (IAF) in all public sector institutions to which the

Act applies (RSA, 2000).

This legislated requirement coincided with a change in the defini-

tion of internal auditing in 1999, which signified a paradigm shift

from an emphasis on accountability about the past, to improving

future outcomes to help organizations operate more efficiently and

effectively (Mihret & Yismaw, 2007). As a result, aligned to the doc-

trine of NPM (Gendron et al., 2000), an effective IAF has increasingly

been seen as an instrument for improving the performance of the

public sector (Arena & Jeppesen, 2016; Diamond, 2002; Van

Gansberghe, 2005). There would thus be certain expectations when

it comes to the role of an effective IAF within a public sector

institution.

With internal auditing being one of the cornerstones of sound

governance (IoD, 2002) and accountability, scholars and related parties

have been trying to establish what is expected of an effective IAF in

general. For guidance on an effective IAF within the public sector,

the governing body of the profession, the Institute of Internal Auditors

(IIA) Global, published the Internal Audit Capability Model in 2009

(IIARF, 2009) as a start. However, the research studies conducted on

internal audit in the public sector (Alzeban & Gwilliam, 2014; Arena

& Jeppesen, 2016; Diamond, 2002; MacRae & Van Gils, 2014; Mihret

& Yismaw, 2007; Onumah & Krah, 2012) focused primarily on the dif-

ferences between the private and the public sectors (Goodwin, 2004;

Van Gansberghe, 2005) or only focused on a single aspect at a time,

such as the public sector audit committees and their relationship with

internal auditing (Van der Nest, 2006) or IAF outsourcing practices

(Subramaniam, Ng, & Carey, 2004).

Recent research in internal auditing is moving towards an under-

standing of internal audit effectiveness, also referred to as the ability

of the function to add value (Lenz & Hahn, 2015), which is the founda-

tion for any IAF to fulfill its mandate in an organization as per the

definition of the profession (IIA, 2013). According to the IIA (n.d.), the

concept of internal audit effectiveness was added to many legislation

and guidance documents across the globe. With the IIA in South Africa

being the largest chapter outside of the United States, understandably,

its formal governance guidance document, namely the King reports on

governance (IoD, 1994, 2002, 2009), also projected the IAF

Received: 8 June 2016 Revised: 3 March 2017 Accepted: 19 April 2017

DOI: 10.1111/ijau.12097

Int J Audit. 2017;21:237–248. © 2017 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/ijau 237