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DETERMINANTS OF INTERNAL AUDIT FUNCTION PERFORMANCE By Dr. Douglas E. Ziegenfuss* Old Dominion University Dr. Patricia M. Myers Brock University Dr. Wayne K. Talley, Old Dominion University. Dean’s Research Seminar November 10, 2006. Synopsis.

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Dean s research seminar november 10 2006

DETERMINANTS OF INTERNAL AUDIT FUNCTION PERFORMANCEByDr. Douglas E. Ziegenfuss*Old Dominion UniversityDr. Patricia M. Myers Brock University Dr. Wayne K. Talley, Old Dominion University

Dean’s Research Seminar

November 10, 2006


Synopsis

Synopsis

  • This study examines the relationship between Internal Audit Function (IAF) and the following independent variables:

  • IAF relative size,

  • IAF resources,

  • IAF staff quality,

  • IAF quality assessment review completion,

  • audit committee effectiveness,

  • Chief Audit Executive (CAE) reporting relationships,

  • IAF interaction with external auditors,

  • reporting year, and

  • organization demographic variables such as industry and headquarter country.


Why is this research important

Why Is This Research Important?

  • Sarbanes-Oxley Act Section 404 requires CEO and CFO to attest to the adequacy of their organization’s internal control system.

  • In most cases, Executives are relying on IAFs to fulfill this responsibility.

  • Government entities have a similar responsibility under Generally Accepted Government Auditing Standards (Yellow Book).

  • The organization’s external auditors must perform an attestation engagement affirming that the organization’s internal control system is adequate.

  • The organization’s external auditor cannot assist the Executive because the assistance would violate their independence.


What is internal auditing

What is Internal Auditing

  • Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.


Internal auditing

Internal Auditing

  • Usually located within an organization but may be outsourced.

  • BIG 4 and other outsourcers are biggest sponsors of the IIA’s annual conference.

  • Internal Auditing is considered the fourth leg of an organization’s four legged governance structure:

    • Audit Committee of Board of Directors

    • External Auditor

    • Internal Auditor

    • Management

  • Internal Auditing has been “Hot” for he past 4 years.

  • Not only in the US but also globally.

  • Membership in the IIA has gone from 60,000 in 2000 to 115,000 in 2006.

  • Careers have taken off spectacularly!


Internal audit research

Internal Audit Research

  • The Institute of Internal Auditors Research Foundation (IIARF) and Academic Relations Committee (ARC).

  • Tries to entice Universities and Colleges to adopt internal auditing into their curriculums

  • Promotes academic research into Internal Auditing topics through grants.

  • For instance, IIARF will fund Doctoral Dissertations for $10,000 dealing with internal audit.


Research opportunities in internal auditing roia

Research Opportunities in Internal Auditing (ROIA)

  • Edited by Andrew Bailey, Audrey Gramling, and Sridhar Ramamorti.

  • Leading auditing scholars authored chapters in ROIA dealing with issues affecting IAFs such as corporate governance, IAF management, risk assessment, etc.,

  • Each author presented previous literature and then posed questions for future researchers.

  • Prawitt (2003) and Lemon and Tatum (2003) wrote chapters especially relevant to this study.


Iaf performance studies

IAF Performance Studies

  • Lampe and Sutton (1994) developed a method for IAFs to establish quality measuring systems.

  • Gupta and Ray (1992) investigated the role that IAFs could take in their organization’s total quality improvement process. Finally, Frigo (2002) demonstrated how IAFs could implement a balanced scorecard framework to measure their performance.

  • Ziegenfuss (1998):

    • (1) reviewed the Global Internal Auditing Network (GAIN);

    • (2) identified seventy-two potential performance measures that IAFs could use;

    • (3) conducted a survey of CAEs to identify those performance measures actually used; and

    • (4) developed an index to measure IAF performance.

  • Ziegenfuss (2000a) also proposed an IAF balanced scorecard and (2000b) published the results of the CAE survey.


Iaf performance studies continued

IAF Performance Studies(Continued)

  • Applegate, (1997) described the non-traditional performance measurement process at the Boeing Aircraft Corporation.

  • Beeler, (1999) examine the factors associated with internal auditor promotion probabilities.

  • Williams (2000) identify the efficiencies associated with value-added auditing.

  • Reding (2000) benchmark the Allstate Insurance Company’s IAF against the IIARF’s Competency Framework for Internal Auditing study.

  • Brierley (2001) study the factors that prevented the establishment of an IAF in the Sudanese public sector.

  • Nash and Flesher (2001) sampled the middle 400 companies from the Fortune 1000 to identify performance measures currently being used by IAFs.


Iaf performance studies continued1

IAF Performance Studies(Continued)

  • Felix (2001) research the contribution of internal audit as a determinant of external audit fees and the factors that influenced this contribution.

  • Lampe and Garcia (2003) present the current state of professionalism among internal auditors.

  • Moeller (2004) describes how to manage an IAF after SOX.

  • Carcello (2005a) investigate the factors associated with U.S. public companies’ investment in internal auditing.

  • Carcello (2005b) study the changes in IAF during the time of the major U.S. accounting scandals.

  • Rittenberg and Anderson (2006) discuss hiring and inspiring a CAE.


What is lacking

What is lacking?

  • An exploratory study to determine what factors influence IAF performance.


Research question

Research Question

  • We propose that IAF-PERFORMANCE varies with

  • inputs IAF-INPUTS,

  • organizational governance ACCHARTER and ACCOUNTABLE,

  • IAF reporting arrangements with management ADREPORT AND FUNREPORT,

  • IAF-Board reporting arrangements QUALCOMM and FREQUENCY,

  • IAF relationship with its organization’s external auditor COORDINATION,

  • organizational characteristics, such as industry PIC, headquarters country USA, and GAIN reporting year RYEAR i.e.,


Research question continued

Research Question(Continued)

  • IAF-PERFORMANCE =

  • f (IAF-INPUTS, ACCHARTER, ACCOUNTABLE, ADREPORT, FUNREPORT, QUALCOMM, FREQUENCY, COORDINATION, PIC, USA, REPORTING YEAR)(1)


Variable definition and measurements

Variable Definition and Measurements


Global auditing information network gain

Global Auditing Information Network (GAIN)

  • SAMPLE SELECTION

  • The IIA began GAIN in the mid-1990s as a benchmarking tool for CAEs.

  • Initially, few IAFs participated in GAIN due to several factors:

    • (1) CAEs were unfamiliar with it,

    • (2) the paper and pen format of the early years was inconvenient to complete, and

    • (3) GAIN’s high annual fee.

  • However in 1999, GAIN became internet based and the IIA dramatically reduced the annual fee.

  • Participation greatly increased from 438 respondents in 1998 to 747 in 2003.

  • We selected 168 IAFs who responded in each of the five years being studied.


Table 2 regression results r eport time as dependent variable

TABLE 2: REGRESSION RESULTS (Report-Time as dependent variable)

Ordinary Least Squares Regression

Model test: F[ 14, 625] = 9.61, Prob value = .0000 Fit:R-squared = .177,Adjusted R-squared = .159

* = significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level


Table 3 probit analysis results addvalue as dependent variable

TABLE 3: PROBIT ANALYSIS RESULTS (Addvalue as dependent variable)

Ordered Probit Model

Iterations completed: 13 Log likelihood function: -449.3665 Restricted log likelihood: -472.0351 Chi-squared: 45.33711

Degrees of freedom: 7 Significance level: .0000 Cell frequencies for outcomes:

Panel B: Ordered Probit Model

* = significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level


Table 4 probit analysis results reportqual as dependent variable

TABLE 4: PROBIT ANALYSIS RESULTS (ReportQual as dependent variable)

Panel A: Ordered Probit ModelSatistics

Iterations completed: 17 Log likelihood function: -412.9412 Restricted log likelihood: -443.1573 Chi-squared: 60.43224

Degrees of freedom: 10 Significance level: .0000 Cell frequencies for outcomes:

Panel B: Ordered Probit Model

* = significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level


Table 5 tests of significance summary

TABLE 5: TESTS OF SIGNIFICANCE SUMMARY

* = significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level


Table 5 tests of significance summary1

TABLE 5: TESTS OF SIGNIFICANCE SUMMARY

* = significant at the .10 level ** = significant at the .05 level *** = significant at the .01 level


Conclusions

Conclusions

We draw the following conclusions:

  • IAFs appear to be benchmarking their performance within the industry in which their organizations operate,

  • Administrative and to a less extend functional reporting arrangements appear to influence IAF audit performance,

  • Experience and professional certification seem to affect IAF performance particularly with respect to auditee ratings,

  • SOX did not have a significant influence on IAF performance,

  • Whether the organization was headquartered in the USA or elsewhere only marginally influenced IAF performance, and as did the employee to auditor ratio, and corporate governance.


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