the effectiveness of internal auditing

The Effectiveness of Internal Auditing: An EmpiricalExamination of its Determinants in Israeli Organisations

Aaron Cohen & Gabriel Sayag

I nternal auditing (IA) serves as an importantlink in the business and financial reporting pro-cesses of corporations and not-for-profit providers

(Reynolds 2000). Internal auditors play a key role inmonitoring a company’s risk profile and identifying areasto improve risk management (Goodwin-Stewart andKent 2006). The aim of internal auditing is to improveorganisational efficiency and effectiveness throughconstructive criticism. IA has four main components: (1)verification of written records; (2) analysis of policy; (3)evaluation of the logic and completeness of procedures,internal services and staffing to assure they are efficientand appropriate for the organisation’s policies; and(4) reporting recommendations for improvements tomanagement (Eden and Moriah 1996).

The subject is worthy of attention because internalauditors are important, even crucial, in an economy thatrelies upon independently produced information (VanPeursem 2005). Indeed, IA has become an indispensablemanagement tool for achieving effective control in bothpublic and private organisations (Eden and Moriah1996). Control mechanisms are those processes set upto monitor and to direct, promote or restrain thevarious activities of an enterprise for the purpose ofseeing that enterprise objectives are met (Sawyer 1988;Coram, Ferguson and Moroney 2008). By detectingweaknesses in management operations, IA provides abasis for correcting deficiencies that have eluded thefirst line of defence before these deficiencies becomeuncontrollable or are exposed in the external auditor’sreport (Eden and Moriah 1996). As an example, Coramet al. (2008) found in a sample of 324 Australian andNew Zealand organisations that those with an internalaudit function are more likely to detect and self-reportfraud through misappropriation of assets than those whodo not.

The current study looks at the effectiveness ofIA, an important concept rarely examined in thescientific literature. Of the few studies dealing withIA’s effectiveness, most take as a starting point theperceptions of the external auditor and whether theexternal auditor uses the internal auditor’s work (Edenand Moriah 1996; Coram et al. 2008). While Eden

Internal auditing (IA) has become an indispensablecontrol mechanism in both public and privateorganisations. Yet very few academic studies have beenconducted on the effectiveness of IA. The currentexploratory study aims to build a conceptualunderstanding of the effectiveness of IA in organisations.Towards this end it develops a scale to measure theeffectiveness of IA and a model of its determinants. Onehundred and eight Israeli organisations that employ IAparticipated in the study (a 37% response rate). Data onthe effectiveness of IA were collected from theorganisations’ general managers and data on thedeterminants from their internal auditors. The findingsreveal good psychometric properties for the scaledeveloped in this study. The correlation and regressionanalyses show support from top management to be themain determinant of IA effectiveness, with some effectalso found for the organisational independence of IA. Theeffect of the predictors was consistent between the publicand private sectors. The research model explained a largeamount of variance of IA effectiveness. The findings arediscussed in terms of how they can help guide andencourage the continuation of research on this issue.

CorrespondenceAaron Cohen, School of Political Science, Division of PublicAdministration, University of Haifa, Haifa, 31905, Israel. Tel: (9724)8240 041; fax: (9724) 8257 785; email: [email protected]

doi: 10.1111/j.1835-2561.2010.00092.x

296 Australian Accounting Review No. 54 Vol. 20 Issue 3 2010

A. Cohen & G. Sayag The Effectiveness of Internal Auditing

and Moriah (1996) develop and test an explanatorymodel of IA effectiveness, they are nearly alone indoing so. Moreover, while a number of authors developscales or measures for assessing the effectiveness of IA(for example, White 1976; Glazer and Jaenike 1980;Schneider 1984; Albrecht, Howe, Schueler and Stocks1988; Lampe and Sutton 1994; Dittenhofer 2001), veryfew have examined this question using valid scales forboth dependent and independent variables. This studycontributes to the literature by developing a conceptualunderstanding of IA effectiveness in organisations and bydeveloping and validating a scale with which to measurethat effectiveness.

The current study also contributes to the lit-erature by exploring the determinants of IAeffectiveness. Understanding the factors that determineIA effectiveness is important because effective IA canimprove four important processes in the organisa-tion: learning (teaching members how to do theirjob better), motivation (auditing leads to improvedperformance as deficiencies will have to be explained),deterrence (knowing that an audit is imminent maydiscourage abuse), and process improvements (IA mayincrease the likelihood that the right things are doneand that they are done right) (Eden and Moriah1996).

In this regard, it should be remembered that internalauditors – like other professionals such as accountants,scientists, attorneys and engineers – have two competingloyalties and identities: to their profession and tothe organisation for which they work. This issue ofprofession versus organisation has been an ongoingconcern in organisational theory and the sociologyof professions for a couple of decades. One of themost common conceptualisations of the question wasadvanced by Gouldner (1957, 1958) and is known asthe cosmopolitan–local distinction. In Gouldner’s view,individuals whose identification is local see as their frameof reference the institution in which they work. Theyhave strong loyalty towards their employing organisationand low identification with their profession. By contrast,cosmopolitans are committed to maintaining the skillsand values of the profession to which they belong. Theytend to use external professional groups as their frame ofreference, and are less loyal to the specific organisationthat employs them.

The cosmopolitan–local distinction has been appliedto several professions in a variety of settings, suchas faculties in universities, scientists in non-academicwork settings, police chiefs in large cities andmilitary personnel (see, for example, Larwood, Wright,Desrochers and Dahir 1998). The current study considersthe behaviour of internal auditors in light of thisconstruct. It explores how determinants that representprofessional versus organisational characteristics (andvice versa) are related to the performance of internal

auditors, and how the effectiveness of IA can be informedby these different loyalties.

Considering that IA is among the least scientificallystudied topics in management research, this studyattempts to advance and stimulate more scientificinterest in this important profession. The findings ofthis exploratory study will shed preliminary light onthe effectiveness and functioning of IA in organisations.The study will be a springboard from which to generatefuture research on IA, and will suggest directions forsuch studies.

Conceptual Framework

IA effectiveness

As noted above, only a few academic studies haveexamined the effectiveness of IA, and even fewer havedealt with the issue empirically. In one of the very fewstudies that examined the effect of internal auditingon organisational performance, Eden and Moriah(1996) assigned 224 bank branches to experimentalconditions (audited or not audited) and monitoredtheir performance for a year. Their findings showedthat performance significantly improved during the halfyear following the audit in the experimental branches,while the control branches experienced a decline due topoor general business conditions. It should be reiteratedthat Eden and Moriah are nearly alone in developingand testing an explanatory model of IA effectiveness.While that study offers a useful jumping-off pointfor understanding how good auditing can improve acompany’s performance, it does not go far enough inexplaining when and why IA works, and the conditionsthat facilitate or impede it. Helping to bridge this gapwill be one of the main contributions of this study.

There are two main approaches to the concept ofIA effectiveness. According to the first approach, theeffectiveness of internal auditing is determined by thefit between the audit and some set of universal standardsextrapolated from the characteristics of IA (White 1976).Such an approach was presented by Sawyer (1988),who advanced five standards for internal auditing:interdependence, professional proficiency, the scope ofwork, the performance of the audit and management ofthe internal audit department. This approach was alsofollowed by Anderson (1983) and Glazer and Jaenike(1980).

The second approach, which will be used here, followsthe arguments of Ransan (1955) and Albrecht et al.(1988) that the effectiveness of internal auditing isnot a computable reality, but rather is determined bythe subjective evaluations assigned to this function bymanagement. In other words, the success of any internalaudit can only be measured against the expectations

C© 2010 CPA Australia Australian Accounting Review 297

The Effectiveness of Internal Auditing A. Cohen & G. Sayag

of the relevant stakeholders (Albrecht et al. 1988).This approach requires the development of systematicand generally valid measures by which to gauge IAeffectiveness (Schneider 1984; Dittenhofer 2001). Oneof the early efforts in this regard is that of Hoag(1981), who designed a questionnaire designed to elicitmanagerial feedback for each internal auditing activityin an organisation. The questionnaire covered fourissues: planning and preparation; the quality of theaudit report; the timing of the audit; and the qualityof communication between the relevant actors. Basedon managers’ responses, an average score was calculatedfor the effectiveness of a given auditing task.

Albrecht et al. (1988), in a study sponsored by theInstitute of Internal Auditors (IIA), identified 15 criteriaused by 13 large private organisations to evaluate theeffectiveness of internal auditing. They concluded thateffectiveness is determined mainly by the fit betweenthe auditing work and the goals set by managers,the qualifications of the internal auditor, managementsupport for the internal auditing staff, and severalcharacteristics of the internal auditing department.Lampe and Sutton (1994) identified 15 factors thatcontribute to an effective audit and categorised them intothree stages of the auditing process: planning, fieldwork,and reporting and review. They suggested measurementsthey considered valid and reliable for these factors. Morerecently, Ziegenfuss (2000) developed a questionnairethat includes 84 criteria for effectiveness categorised intofour main areas: the environment of the internal audit,input into the audit, the auditing process and the outputof the audit.

This brief review shows the need for a morecomprehensive study of the issue of internal auditeffectiveness. The papers noted above may deal with theissue qualitatively (White 1976; Glazer and Jaenike 1980),quantitatively (Schneider 1984), or both (Dittenhofer2001). But only Lampe and Sutton (1994) and Albrechtet al. (1988) attempt to design a comprehensive scale thatcan be validated by examining its factor structure andreliability, or by exploring its relationship to conceptualcorrelates. Yet even those studies did not test theirsuggested scales empirically using valid and reliablescales. The current study takes this line of research a stepfurther by designing and testing such a scale. However,before moving on to this goal, we must first present theexplanatory model advanced here.

Determinants of internal audit effectiveness

Sector – private versus public

The first variable considered here is the sector of theorganisation. This study anticipates that the effectivenessof IA will be influenced by whether the organisation

is private or public. This variable will be treated hereas a control variable, but its effect is also conceptual.Therefore, it was necessary to examine the possibilitythat, in addition to its main effect, this variable willinteract with the other conceptual determinants in howit affects the effectiveness of internal auditing.

The categorisation of public versus private sectoris based on the goals of the organisation. Privateorganisations are generally interested in maximisingtheir profits, while public organisations focus onimproving their services. Goodwin (2003, 2004),in two studies dealing with internal auditors inAustralia and New Zealand, identified several importantdifferences between IA in the private versus the publicsector. Goodwin (2004) notes two main points wherepublic and private organisations diverge. First, publicsector agencies operate in a rigid framework wherethe organisation’s activities must be authorised bylegislation. Second, these agencies are service-oriented,and hence attach lower priority to cost factors andissues associated with profitability. In the earlier ofthe two studies, examining the relationship betweenthe audit committee and the internal audit function,Goodwin (2003) found several differences between thepublic and the private sectors, and recommended furtherexamination of sector differences in IA.

Spraakman (1985) argued that internal auditing isboth more common and perceived as more important inpublic organisations than in private ones – a findingsupported by Goodwin (2004), who similarly foundthat public sector IA functions have a higher statusthan their private sector counterparts. However, otherarguments point to the opposite conclusion. There aregrounds for saying that private organisations, in general,have greater need for the control and supervision thatinternal auditing entails. Pfeffer and Leblebici (1973)argued that organisations which operate in a competitivebusiness environment face more pressure than publicones, and one way they react to this pressure is bystrengthening their systems of internal control. Whilethe environment of the 1970s is far different from thatof today, more recent studies offer similar reasoning. Forinstance, Thomas (1996) argues that control systemsplay a more important role in private organisationsbecause of their dynamic and complex environments,which generate more risks for the organisation.Therefore, internal auditing should be both moreimportant and more effective in private than in publicorganisations.

Hypothesis 1: The sector to which an organisation belongs(that is, public versus private) will be relatedto the effectiveness of internal auditing. Thefunction will be more effective in privateorganisations than in public organisations.

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Professional proficiency of internal auditors

Appropriate staffing of an internal audit departmentand good management of that staff are keys tothe effective operation of an internal audit. Anaudit requires a professional staff that collectivelyhas the necessary education, training, experience andprofessional qualifications to conduct the full range ofaudits required by its mandate (Al-Twaijry, Brierley andGwillian 2003). Auditors must comply with minimumcontinuing education requirements and professionalstandards published by their relevant professionalorganisations and the IIA (2008). Bou-Raad (2000)argued that auditors must have a high level of educationin order to be considered a human resource. Thediversity of skills required, according to Bou-Raad,represents a major challenge to professional bodies,tertiary institutions and management.

The few studies that have looked into this issue havefound that the greater the professional qualifications ofthe internal auditors in a given department, defined bythe length of their professional training and educationallevel, the greater the effectiveness of this department(Albrecht et al. 1988; Ratliff 1996). Nanni (1984)found that auditor experience had a positive effect onevaluations of internal accounting control.

Hypothesis 2: Greater professional proficiency on the partof the internal auditors will be related togreater auditing effectiveness.

Quality of audit work

Glazer and Jaenike (1980) argued that performingauditing work according to internal auditing standardscontributes significantly to the effectiveness of auditing.Ridley and D’Silva (1997) found in the UK thatcomplying with professional standards is the mostimportant contributor to IA’s added value.

Standards for audits and audit-related services arepublished by the IIA (2008) and include attribute,performance and implementation standards. In general,formal auditing standards recognise that internalauditors also provide services regarding informationother than financial reports. They require auditors tocarry out their role objectively and in compliance withaccepted criteria for professional practice, such thatinternal audit activity will evaluate and contribute tothe improvement of risk management, control andgovernance using a systematic and disciplined approach.This is important not only for compliance with legalrequirements, but because the scope of an auditor’sduties could involve the evaluation of areas in which ahigh level of judgement is involved, and audit reportsmay have a direct impact on the decisions or thecourse of action adopted by management (Bou-Raad

2000). It can thus be argued that greater quality of IAwork – understood in terms of compliance with formalstandards, as well as a high level of efficiency in theaudit’s planning and execution – will improve the audit’seffectiveness.

Hypothesis 3: Greater quality of the auditing work will berelated to greater auditing effectiveness.

Organisational independence

The role of IA in organisations is complex. Van Peursem(2004) identifies strong potential for confusion in therelationship between internal auditors and management:internal auditors are expected to aid managers in doingtheir jobs, and at the same time to independentlyevaluate management’s effectiveness. Internal auditorsare charged with upholding the best interests oftheir employer, but they may be reluctant to countermanagement, regardless of the consequences.

Bou-Raad (2000) argued that the strength of anIA department must be assessed with respect to thelevel of independence it enjoys from management andfrom operating responsibilities. The IIA, the AmericanInstitute of Certified Public Accountants (AICPA)and others have likewise identified organisationalindependence as crucial to the viability of the internalaudit function (Brown 1983). Auditors should besufficiently independent from those they are requiredto audit that they can both conduct their work withoutinterference, and – equally important – be seen to do so.Coupled with objectivity, organisational independencecontributes to the accuracy of the auditors’ work andgives employers confidence that they can rely on theresults and the report.

Mautz and Sharaf (1964) differentiate among threedimensions of independence: programming inde-pendence, investigative independence and reportingindependence. They found the last of the three to becrucial in the work of internal auditors in municipalitiesin the US. Montondon (1995), Rittenberg (1977)and Chambers, Selim and Vinten (1988) differentiatebetween organisational independence, based on organ-isational support, and individual independence, basedon individual factors. They argue that organisationalindependence is more crucial to the effectiveness ofinternal auditors, as it protects the auditor frompressure or intimidation, and increases the objectivityof the auditing work. Courtemanche (1986) identifiesfour objective and independent auditing factors: accessto information or people, objectivity, freedom andresponsiveness of the system.

Van Peursem (2005), based on interviews with Aus-tralian internal auditors, concluded that independencefrom management is a dominant feature of successfulauditing programs. Those auditors able to set their own



agenda seem to be the most powerful in this respectbecause their selection of what to audit and when theycan include assessments of senior managers as wellas assessments for them. Similarly, Clark, Gibbs andShroeder (1981) found that the independence of theinternal audit department and the level of authority towhich the internal audit staff report are the two mostimportant criteria influencing the objectivity of theirwork.

It can thus be argued that organisational indepen-dence will increase the internal auditor’s effectiveness.This independence both lessens the conflict betweenloyalty to the employer and loyalty to specific managers,and gives auditors a supportive work environment inwhich they can conduct their tasks objectively andwithout pressure.

Hypothesis 4: Greater organisational independence willbe related to greater auditing effectiveness.

Career and advancement

The determinants described so far – especially theprofessional proficiency of the auditors, the quality ofauditing work and the organisational independence ofauditing departments – represent instances where theauditor’s interests are those of the profession, ratherthan the employing organisation. The following twodeterminants represent the opposite case, where theinterests of the organisation take precedence. The first ofthese involves considerations of career and advancement.

Goodwin (2001) argued that, internationally, thepractice of staffing the internal audit department withcareer auditors is becoming less common, with moreorganisations using the function as a training ground forfuture management personnel. This practice is designedto help the organisation train well-rounded seniormanagers. Internal auditors perform a wide varietyof activities across different departments within theorganisation. They thus have opportunities to learn howthese departments function and how they are managed.Furthermore, managers who have had experience ininternal auditing should have a better understandingof the importance of internal control. The ability to useinternal audit roles as a stepping stone to managerialpositions is seen as one of the advantages of having anin-house internal audit function rather than outsourcingIA activities.

The degree to which internal auditing can lead to amanagerial career in the organisation may influence theeffectiveness of internal auditing. This is perhaps moretrue today than in the past, given the trends describedby Goodwin (2001). Over 20 years ago, Albrecht et al.(1988) found that most participants perceived internalauditing as a gateway to either a managerial position,or a career in internal auditing. In Gouldner’s (1957,

1958) framework described above, the former are localin outlook, emphasising the interests of the organisation,while the latter are cosmopolitan, emphasising theinterests of the profession. As noted, career auditorsare becoming less common than generalists who areinterested in management careers (Goodwin 2001), andwho therefore are more likely to take a local thana cosmopolitan point of view. It can be argued thatunder these conditions, internal auditors who operate insettings with more organisational career opportunitieswill invest more effort in their work in order toincrease their promotion opportunities. Those withfewer opportunities for organisational advancement willinvest less effort in their work, resulting in a lowerperformance level. This is likely to be true even if theindividuals working in such settings are cosmopolitanswho place less value on an organisational career, since– given current trends – they have fewer opportunitiesthan in the past for career growth as specialist internalauditors.

Hypothesis 5: More career opportunities for internalauditors in the organisation will be relatedto greater auditing effectiveness.

Top management support

The management literature offers ample evidencefor the key role of top management support inthe success of almost all programs and processeswithin an organisation. Fernandez and Rainey (2006)argued, based on a thorough literature review, thattop management support and commitment to changeplay a crucial role in organisational renewal, as seniormanagers can mobilise the critical mass needed to followthrough on efforts launched by one or two visionarythinkers. A number of empirical studies have found topmanagement support for quality to be a key factor inits improvement (for example, Dale and Duncalf 1985;Ebrahimpour and Lee 1988). Top managers’ attitudesand behaviours have also been found to be related toquality management practices (Flynn, Schroeder andSakakibara 1994). Takeuchi’s (1981) survey of companieswith high-quality performance found that 89% hadCEOs who regularly visited the factory floor, participatedin training programs and attended company-widequality-improvement events.

Given this, it is not surprising that managementacceptance of, and support for, the internal auditfunction has long been seen as critical to the successof that function (Sawyer 1973). Several recent studieshave demonstrated that support for internal auditingby top management is an important determinant ofits effectiveness (Jill 1998; Schwartz, Dunfee and Kline2005). Funding, of course, is an important measure ofsuch support: IA departments must have the resources



needed to hire the right number of high-quality staff,to keep up-to-date in training and development, toacquire and maintain physical resources like computers,and so on. In a survey of Australian internal auditors,Leung, Cooper and Robertson (2004) found that chiefaudit executives are generally very positive about theperformance of IA. They see themselves as a key part ofthe management team, and believe they can influencedecisions; maintain a sufficient level of objectivity,integrity and competence in their jobs; and provide goodsupport for their own staff. More importantly, they viewthe support of upper management as a key factor inensuring the effectiveness of their role. Sarens and DeBeelde (2006) have reported on the development of asimilar attitude in Belgium, where as a consequence ofrecent changes in national and international corporategovernance regulations, the internal audit function nowgets more attention and support from boards andmanagers.

As discussed above, the relationship between theinternal audit staff and the company’s management isclearly important in determining the independence andobjectivity of the internal auditor (Al-Twaijry et al. 2003;IIA 2006). Management support for IA is thus importantboth in the abstract (managers must see the activity ofthe audit department as legitimate) and in ensuring thatIA departments have the resources needed to do theirjobs.

Hypothesis 6: Greater support from top management willbe related to greater auditing effectiveness.

Research Design

The participants

The target population for this study was managersand internal auditors from all Israeli organisations thatconduct internal audits. Questionnaires were mailed to292 organisations that met this criterion, based on alist compiled by the IIA in Israel. Each organisationreceived two questionnaires, one for the general managerand one for the internal auditor. The questionnaire forthe general manager dealt with the effectiveness of thecompany’s internal auditing processes, while that forthe internal auditor covered the independent variables.The data collection process took about nine months,with numerous reminders sent to each of the organ-isations. At the end of the collection process, we had108 organisations whose general manager and internalauditor had both responded to the questionnaires. Thisresponse rate of 37% is typical for a mail survey in generaland quite good for more complex data collection as wasrequested in this study.

Of the 108 organisations that participated in the study,75 were in the public sector and 33 in the private sector.

Twenty-three of the organisations employed up to 100employees, 50 had from 100 to 1000 employees, and therest had more than 1000 employees. Among the internalauditors who participated in the study, 96% were men.Their average age was 53.1, and their average tenure in theorganisation was 7.3 years. About 49% were employedpreviously as internal auditors, and all had an academicdegree.

Measures

Effectiveness of internal auditing

Given the lack of academic work on the effectiveness ofinternal auditing, we found no scales in the literaturethat were validated as well as tested for their reliabilitywhich met the requirements of this study. We thereforedeveloped our own scale. We used the 84 internalauditing effectiveness items advanced by Ziegenfuss(2000) as a starting point. These items are based onthe 1997 GAIN (the IIA’s Global Auditing InformationNetwork) Questionnaire and Sample Report that wassent to 501 CAEs (Certified Association Executives)participating in GAIN. These items can be categorisedinto four audit processes: audit environment, input,process and output. In order to reduce the numberof items and to adjust them to the Israeli auditingenvironment, we conducted structured interviews with10 Israeli business and public sector leaders in topmanagerial positions. Following these interviews, weremoved some items and altered others, based onthe recommendations of the interviewees. We thenpresented the resulting list to a group of Israeli expertsin internal auditing, both academics and practitioners inthe field, and made further reductions and adjustmentsbased on their comments. The final list included 37 items,which comprised the questionnaire sent to the generalmanagers (the items are presented in the appendix).

We subjected these 37 items to exploratory factoranalysis. The findings of the factor analysis revealedthree interpretable factors that explained 50% of thevariance. The first factor included 12 items that explained40% of the variance (numbers 4, 9, 10, 11, 17, 18, 20,21, 23, 29, 31 and 36). The majority of these itemsdealt with the quality of the auditing work; this factorwill be termed ‘audit quality’. The reliability of thisscale was 0.846 (Cronbach’s Alpha). The second factorincluded seven items that explained 5% of the variance(numbers 5, 6, 15, 24, 25, 28 and 33), most of themcovering the evaluation of auditees and IA activities. Thisfactor will be termed ‘auditees’ evaluations’ (Cronbach’sAlpha = 0.925). The third factor included three items(numbers 7, 19, 37) that explained 5% of the varianceand dealt with the added contribution of IA to theorganisation. It will be termed ‘added contribution of



IA’ (Cronbach’s Alpha = 0.772). All the effectivenessitems were measured on a 4-point scale (1 = stronglydisagree, 2 = disagree, 3 = agree, 4 = strongly agree).We used the average score for the questions in each factorfor each participant.

Independent variables

It should be noted that the data for the six independentvariables were collected from the internal auditorin each organisation. Therefore, the independentvariables represent the perceptions of the internalauditors regarding these concepts. All the items forthe independent variables (except the first sector) weremeasured on a 4-point scale (1 = strongly disagree to4 = strongly agree).

• Sector – This variable was measured as a dichotomousvariable (private = 0; public = 1).

• Professional proficiency – Two items measured thisvariable. The internal auditor was asked whethershe or he agreed with the following statements: (1)The organisation allows IA employees to participatein training and development programs in order tomaintain their skills and keep up to date in the field;(2) IA employees have the appropriate and relevanteducation in auditing that allows them to audit allof the organisation’s systems (financial, operational,logistical and computerised) (Cronbach’s Alpha =0.602).

• Quality of audit work – This variable was measuredby six items. The internal auditor was asked whethershe or he agreed with the following statements: (1)The annual audit plan is determined completely bythe internal auditor; (2) The areas audited are verysignificant to the organisation; (3) The IA is ableto cover all organisational units and all issues; (4)The response of auditees to the audit is submittedin writing and is relevant and comprehensive; (5)There is regular follow-up by the IA staff to examineactions taken to correct the problems found; (6) Theinternal auditor also performs other activities such asdeveloping procedures and conducting economic andfinancial audits (Cronbach’s Alpha = 0.783).

• Organisational independence – Eleven items measuredthis variable. (1) I have regular and direct workingrelations with the head of the IA committee; (2)I have regular and direct working relations withthe general manager and the managerial team; (3)Terminating the work of the IA requires the approvalof the IA committee, and/or the board of directors,and/or the Civil Service Commission; (4) The IA staffhas free access to information and data about theorganisation, and unrestricted access to its site; (5)All organisational data pools are accessible to the IA;

(6) All organisational data pools can be downloadedand examined by the IA; (7) Detailed budget proposalsand information on staffing are included in the annualwork plan of the IA; (8) I rotate the IA staff so thatthey all cover a variety of assignments; (9) The IA alsoperforms other activities even if they are not defined asits direct responsibility; (10) The IA sometimes takespart in designing systems in the organisation and indeveloping procedures for regulating their operations;(11) The IA operates totally independently, can auditany issue it considers in need of auditing, and canaccess any necessary information even if it is classified(Cronbach’s Alpha = 0.638).

• Career and advancement – This variable was measuredby three items. (1) IA is one stage in training andpreparing employees in the organisation; (2) IA isone stage in the promotion process of employees inthe organisation; (3) IA is considered a stage in thecareer development of employees in the organisation(Cronbach’s Alpha = 0.918).

• Top management support – Four items measured thisvariable. (1) Top management does not provide mewith the support I expect to have; (2) The numberof employees in IA is limited given the amount ofauditing work planned and needing to be done inthe near future; (3) Management is not sufficientlyaware of the needs of IA, as demonstrated by the smallbudget assigned to this department; (4) Managementdoes not provide enough support and encouragementfor training and developing the IA staff – anotherindication that it does not recognise the importanceof this issue. All items for this variable were reversescored (Cronbach’s Alpha = 0.740).

Data analysis

Correlation analysis was applied first to determine theinterrelationships among the research variables and toexamine the possibility of multicollinearity. Regressionanalysis was used to test the other hypotheses. Thisregression was performed in three steps. In the first step,the dichotomous sector variable was regressed on each ofthe three effectiveness dimensions. In the second step, theother independent variables were added to the equations.Finally, in the third step, cross-products of the sector withthe other independent variables were entered, therebytesting for the differential effects of the independentvariables across the two sectors (public versus private).However, rather than entering the interaction termssimultaneously, step three was repeated five times toaccommodate the separate entry of each term in order tocircumvent the problem of multicollinearity associatedwith multiple interaction terms. Fifteen interactionswere tested for each equation.



Table 1 Basic statistics and correlation matrix (reliabilities in parentheses)

Variables Mean SD 1 2 3 4 5 6 7 8 9

Independent variables1 Sector (1 = public) 0.69 0.462 Professional proficiency 3.07 0.63 0.00 (0.60)3 Quality of audit work 3.09 0.49 0.34∗∗∗ 0.14 (0.78)4 Organisational independence 3.37 0.40 −0.30∗∗ 0.26∗∗ 0.35∗∗∗ (0.64)5 Career and advancement 2.18 0.95 −0.08 0.02 0.11 0.08 (0.92)6 Top management support 2.53 0.76 −0.40∗∗∗ 0.14 0.23∗ 0.50∗∗∗ 0.22∗ (0.74)

Dependent variables7 Auditing quality 2.73 0.55 −0.18 0.06 0.33∗∗ 0.45∗∗∗ 0.04 0.70∗∗∗ (0.85)8 Auditees’ evaluations 3.06 0.47 −0.23∗ 0.10 0.21∗ 0.44∗∗∗ 0.18 0.58∗∗∗ 0.71∗∗∗ (0.93)9 Added contribution of IA 2.85 0.57 −0.23∗ 0.00 0.00 0.15 0.08 0.45∗∗∗ 0.52∗∗∗ 0.53∗∗∗ (0.77)

N = 108∗ p ≤ 0.05 ∗∗ p ≤ 0.01 ∗∗∗ p ≤ 0.001

Table 2 Regression analyses of independent variables on three dimensions of IA effectiveness

Auditing quality Auditees’ evaluations Added contribution of IA

Effectiveness independent variables Step 1 Step 2 Step 1 Step 2 Step 1 Step 2

1 Sector (1 = public) −0.25∗ 0.06 −0.20 0.07 −0.24∗ 0.072 Professional proficiency −0.06 −0.01 −0.043 Quality of audit work 0.05 0.00 −0.104 Organisational independence 0.12 0.25∗ −0.055 Career and advancement −0.10 0.09 −0.016 Top management support 0.69∗∗∗ 0.47∗∗∗ 45∗∗∗

R2 (Adjusted) 0.05(0.04) 0.55(0.52) 0.04(0.03) 0.40(0.36) 0.06(0.05) 0.21(0.15)F 4.87∗ 17.33 3.75 9.68∗∗∗ 5.78∗ 3.76∗∗∗

�R2 0.50 0.36 0.15F for �R2 18.87∗∗∗ 10.42∗∗∗ 3.21∗∗

N = 108∗ p ≤ 0.05 ∗∗ p ≤ 0.01 ∗∗∗ p ≤ 0.001

Findings

Table 1 presents the basic statistics of the variablesand the inter-correlations among them. Results showacceptable reliabilities of the research variables. Thecorrelations among the independent variables werenot high and therefore preclude the possibility ofmulticollinearity. As for the relationships between thedependent (auditing effectiveness) and independentvariables, several findings are worth noting. First, thereare very high correlations between perceptions of topmanagement support and the three dimensions ofauditing effectiveness, providing strong support forhypothesis 6. No significant correlations were foundbetween the variables of professional proficiency andcareer advancement and auditing effectiveness, therebyrejecting hypotheses 2 and 5. Hypotheses 3 and 4were supported by the findings in two out of thethree effectiveness dimensions. Greater quality of theauditing work and greater organisational independencewere positively related to auditing quality and auditees’evaluations. The correlations were stronger in the case oforganisational independence. Hypothesis 1 also received

some support in the correlation analysis. Auditees’evaluations and the added contribution of IA werepositive in the private sector, as expected by hypothesis 1.

The regression analyses, whose results are presentedin Table 2, provide a more comprehensive and accurateexamination of the research hypotheses. The regressionanalysis shows very strong support for hypothesis6. Perceived top management support was the onlyvariable that was strongly and consistently related to thethree auditing effectiveness dimensions. Hypothesis 4 issupported in the case of auditees’ evaluations. Greaterperceptions of organisational independence increasepositive auditees’ evaluations. Partial support was foundfor hypothesis 1. Perceptions of auditing quality and theadded contribution of IA were stronger in the privatesector than in the public sector. However, it should benoted that the sector effect disappears in step 2, whichincludes the other five independent variables. This resultis probably due to the very strong effect of the variabletop management support, which also reduced the effectof the other independent variables. The regressions donot support hypotheses 2, 3 and 5. It should be noted thatthe models here explain 55% of the variance of auditing



quality, 40% of the variance of auditees’ evaluations and21% of the variance of the added contribution of IA.Thus, the models provide relatively good predictions ofthe variances in auditing effectiveness dimensions.

While this was not included in the researchhypotheses, we examined the possibility that the sectorof the organisation (private versus public) might interactwith each of the five independent variables to affectthe relationship with the three effectiveness scales. Thisenables a more thorough examination of the sector as acontrol variable. Of the 15 interactions that were tested,only one was significant. The interaction of the sectorwith top management support was significantly relatedto the effectiveness dimension of the added contributionof IA. The plotting of the interaction reveals that topmanagement support increases the added contributionof IA in the public sector, but has no effect on thisdimension in the private sector.

In order to preclude the possibility of multicollinearityin the regression analyses, we examined the varianceinflation factor (VIF) of the regressions performed here.In no case was the VIF higher than 2. Therefore, there isvery little probability that the findings have been taintedby multicollinearity.

Discussion

The importance of IA is demonstrated in the growingdemand for this service in all organisations and in therapid growth of its professional organisation, the IIA.However, despite the meteoric rise of IA, organisationalresearchers have paid little attention to this function.While its use has not been questioned, its contributionhas not been assessed scientifically (Eden and Moriah1996). The immediate goal of this study was to examineauditing effectiveness in Israeli organisations, but itsprimary goal should be seen as to stimulate moreresearch on this overlooked scientific issue.

Given the surprising lack of research on this issue,we designed a scale for measuring the effectivenessof internal audits. We also advanced conceptualdeterminants and developed scales for measuring them.The psychometric properties of the scales developed herewere found to be acceptable and as such they can serveas the basis for scales that will replicate or revise themin future research. The findings of the factor analysisshowed that IA effectiveness is a multidimensionalconstruct. The quality of the internal auditor’s work, theevaluations of the auditees and the added contributionof IA were found to be the three dimensions thatencompass the concept of IA effectiveness. The logicbehind the factor structure is quite sound and providesacceptable construct validity. Future research shouldnaturally replicate the findings here in order to establishfurther the factor structure, enriching the dimension of

the added contribution of IA with more items in additionto the three included in the present scale.

From a methodological point of view, one ofthe strengths of this study is that the data for theindependent and the dependent variables were collectedfrom different sources. This precludes the possibility ofcommon method error, a problem that often occurswhen all data are collected from the same source. Thedevelopment of a conceptual model and scales for theindependent variables is another contribution ofthis study. The findings support the effect of some of theindependent variables advanced here. Naturally, moreresearch, both conceptual and empirical, is needed tofurther develop and test models for the determinants ofthe effectiveness of IA.

As for the conceptual findings, the results of thisstudy emphasise the importance of perceived topmanagement support for the effectiveness of IA. Theregression analysis (see Table 2) shows a very strongeffect of this variable on the three dimensions of IAeffectiveness. This effect was so strong that it reducedthe effect of the other independent variables thatwere significant in the correlation analysis. Moreover,bringing in the conceptual variables – including topmanagement support – eliminated the effect of ‘sector’,which was significant in step 1 in the regressions. Thesefindings indicate that the effect of top managementsupport is strong and consistent regardless of whetherthe organisation is private or public. It should be notedthat Albrecht et al. (1988) also found that managementsupport was important to the success of IA in theorganisations they examined.

This finding has both conceptual and practicalimplications. Conceptually, using Gouldner’s (1957,1958) typology, this finding shows that managementand organisational considerations (local) are superiorin comparison to professional ones (cosmopolitan) interms of IA effectiveness. Most obviously, the supportof management is almost crucial to the operationand success of IA. It may even be that all the otherdeterminants of IA effectiveness derive from the supportof top management, given that hiring proficient IA staff,developing career channels for IA staff, and providingorganisational independence for IA work are all resultsof decisions made by top management. Future researchmay provide further insights into this possibility. In anycase, it is not surprising that top management supportis key to the effectiveness of IA, as this factor has beenfound to be a crucial element in the success of otherorganisational processes such as organisational change(Fernandez and Rainey 2006) and quality improvement(Dale and Duncalf 1985; Ebrahimpour and Lee 1988;Flynn et al. 1994). Employees behave as they perceivethey are expected to by their supervisors and managers(Wheelwright 1981). When employees at all levelsperceive that top management assigns importance to the



function of IA, they will cooperate and support theseprocesses.

Future research should also, however, consider theother two determinants that were found significant inthe correlation analysis: perceptions of organisationalindependence and the quality of the auditing work.These two variables are related to two dimensions of IAeffectiveness: auditing quality and auditees’ evaluations.Organisational independence was significant in theregression analysis in the case of auditees’ evaluations(see Table 2). The lack of a relationship between IAeffectiveness, career and advancement, and professionalproficiency shows that the effectiveness of IA dependsmore on organisational/managerial characteristics thanon the qualifications and work setting of the IA staff.

It should be noted that the findings of this study arebased on the Israeli work and IA settings. Therefore,any generalisations of the findings here to other settingsshould be treated with caution. It is possible that theresults would be different in other countries, a possibilitythat should be examined in future research.

Despite this limitation, this study shows the impor-tance and relevance of a scientific examination of IA’seffectiveness and its determinants. As Eden and Moriah(1996) argued, internal auditing is a multidisciplinaryturf awaiting exploration. This study is only one modeststep towards a scientific examination of this importantfunction with the hope that it will encourage much moreresearch on this issue.

Aaron Cohen is an associate professor and Gabriel Sayag isa lecturer in the School of Political Science Division of PublicAdministration, University of Haifa, Israel.

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Appendix: Items of Internal AuditingEffectiveness Scale

1. Internal auditing (IA) provides information onproblems in the activity or control systems in theorganisation.

2. The work and activities of IA meet the expectationsI have from this department.

3. When examining the issues that are audited, IA alsocovers issues related to effectiveness, performanceand savings.

4. IA is aware of and sensitive to the organisation’sneeds and operates accordingly.

5. The evaluation of IA reports made by individuals inmanagerial positions who were audited is positive.

6. The evaluation of IA reports made by individuals inoperative positions who were audited is positive.

7. The evaluation of IA reports made by externalauditors and other external authorities is positive.

8. The evaluation of IA reports made by the auditingcommittee is positive.

9. IA identifies risks and properly evaluates controlsystems, thereby becoming a gatekeeper.



10. IA gets the attention of top management and focusesit on issues audited by IA.

11. The issues to be audited are decided afteridentifying risks, quantifying them and determiningappropriate risk levels.

12. All control and auditing activities in the organisationare performed by IA or are coordinated with IA,including external auditing.

13. IA is an autonomous and independent organisa-tional unit.

14. The IA department and its employees are reliableand behave with integrity.

15. The IA department is valued by management andmakes valuable contributions during meetings.

16. The professional qualifications and training of IAemployees are high.

17. IA is a source of valuable data and information forthe decision-makers in the organisation.

18. The information provided by IA is vital toorganisational operations.

19. The costs of IA to the organisation are higher thanthe benefits and savings that result from its work.(Reverse scored.)

20. The organisation invests consistently in the trainingand development of IA employees, who in the futurewill be a source for filling managerial positions inthe organisation.

21. The work of IA is performed with moderntechnology that uses computerised data pools andspecific IA software.

22. All auditing functions that were approved in theauditing plans are performed completely.

23. In addition to the issues determined and approvedfor inclusion in the annual audit, there are requeststo the IA department to audit other issues.

24. The number of complaints about the IA departmentis very low.

25. Those who are audited demonstrate a high level ofsatisfaction with the work of the IA department.

26. The time that passes between completing the auditand submitting the final report is too long. (Reversescored.)

27. The findings of internal audits are very significantfor the organisation.

28. The findings of internal audits are always based ondocuments and reliable data.

29. The recommendations of the IA department can beeasily implemented.

30. The recommendations of the IA department providepractical, cost-benefit solutions for correcting theproblems that were found.

31. Only a small portion of the IA department’s recom-mendations is implemented. (Reverse scored.)

32. The IA reports are rigorous and accurate.33. The IA reports are clear and well presented.34. The IA reports include an introduction, goals,

subjects, conclusions and recommendations.35. The IA reports are professional and of high

quality.36. The management’s decision-making process is

strongly affected by the reports and findings of theIA department.

37. The IA department contributes to the organisationabove and beyond its costs.


the effectiveness of internal auditing

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