EMISIONES DE OXIDO DE AZUFRE (SOx/SO 2 )

IAF’s quality is an extensively studied area of the internal audit literature (Gramling et al., 2004). The rationale for researchers’ interests in this area can be argued to be inspired by the continuous enhanced roles of strengthening corporate governance in companies expected from the function (IAF). IAF as one of the acclaimed cornerstones of corporate governance (Gramling et al., 2004) is seen theoretically to occupy a vital position in the mechanisms required to ensure corporate social order (Gras-Gil,et al.,2012; Cohen, et al.,2011; Schneider,2009; Savc’uk,2007). Each of the remaining parties saddled with corporate governance responsibility in firm (i.e. External auditor,

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 53 Audit committee and Management) perceive internal audit as a valuable partner. Given this beneficial relationship, Gramling et al. (2004) argue that each of the parties accountable for firm’s corporate governance therefore has some responsibilities for ensuring or at least evaluating the quality of the IAF.

For instance, board and management of corporation who are desirous of confirming that their firm’s internal controls are effective and reliable, ordinarily may want to be concerned with the effectiveness of their firm’s IAF (Gramling and Vandervelde,2006; Omoteso and Obalola,2014). The external auditor who is also desirous of leveraging on the deep knowledge of the IAF about the firm’s business and environment may ordinarily have the tendency to rely substantially on the work already performed by internal auditors for the essence of timely and quality audit. Omoteso and Obalola (2014, p. 138) agree that adequate knowledge of the firm’s business is required for effective auditing of an entity, and they concur that external auditor has limited knowledge of the organisation and its staff. For the external auditor to leverage maximally on the internal auditor’s deep familiarity with the firm in this regard, and in line with the guidance from auditing standards (see SAS 65) the external auditor would be interested in ascertaining the quality of such IAF. As a matter of fact, the external auditor in accordance with the referenced standard is required to make inquiries about appropriateness and management of internal audit personnel on matters such as:

i. organizational status within the entity

ii. application of professional standards (particularly as it relates to objectivity and competence of the internal audit’s personnel)

iii. audit plan, including the nature, timing , and extent of audit work

iv. access to records and whether there are limitations on the scope of their activities.

Paragraph 24 of SAS 65 specifically advises the external auditor to perform procedures to evaluate the quality and effectiveness of the internal auditor’s work. Apart from making use of the internal auditor’s work in performing his assignment (i.e. annual external audit), the external auditor may also require direct assistance of the internal

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 54 auditor in performing some aspects of his work. In doing this, objectivity and competence of the internal auditor shall be subjected to thorough assessment.

‘’when direct assistance is provided, the auditor should assess

the internal auditors’ competence and objectivity…’’ (SAS 65, para 27).

In the same vein, the audit committee who is saddled with the responsibility of ensuring quality financial reporting, effective internal control and risk management, also ordinarily would be interested in monitoring and ensuring quality IAF so as to assure itself of the reliability of assurances it obtains from such function. A close working relationship between the audit committee and internal audit is anticipated, as such is recognized a fundamental principle of corporate governance (Munro and Stewart, 2011:467; Chambers, 2008). Turley and Zaman (2007) argue that audit committee sets the appropriate tone that allows the IAF have a certain degree of influence in the organization. Thus it can be argued that IAF derives its status, independence and relevance from the manner of its coordination with the audit committee.

The more highly competent and objective staffs of an IAF is, and the more detailed their testing, the more likely the external auditor would want to make use of their work. PCAOB (2004) contends that companies should ordinarily be motivated to develop high-quality IAFs given the considerable flexibility that external auditors have in making use of the work of IAF. Whereas it is expected that external auditor would ordinarily want to leverage on IAF of an organisation to avoid duplication of efforts and repetition of work, the independent auditor (external auditor) is however at liberty to determine the extent of such reliance he is willing to put on IAF’s services. Avoidance of duplication of efforts and work on the part of the external auditor connotes some cost saving benefits in times of cost of audit, timely execution of annual audit and reliability of same to organisation. In determining the appropriateness and extent of such reliance however, Reinstein, Lander and Gavin (1994:30) recommend that at a minimum, the external auditor should:

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 55

ii. review how internal auditors allocate their audit resource in response to their risk assessment procedures (e.g. between operating and financial activities)

iii. review their internal audit reports to ascertain their scope of work

Appropriateness of using the IAF to complement their own efforts relates to relevance, reliability and potential cost saving benefits of the function to the external auditor and ultimately to the organisation as well. Reinstein et al.(1994) affirm that once it is ascertained that IAF fails any of these tests of appropriateness (i.e. relevance, reliability, and cost saving potential), the external auditor would not make use of the function, except as a supporting staff on the audit. This aligns with the findings of the Ernst and Young (2007), that upholds the significance of cost benefits (in terms of cost savings and/or revenue enhancements) when it comes to reckoning with the value and relevance of the IAF.

An external auditor desirous of relying on internal auditors activities focuses on the IAF’s independence, internal auditors’ level of objectivity and competence. To determine competence, it is argued by Reinstein et al.(1994) that ‘’the external auditor needs to know the internal auditor’s educational level and professional experience, their professional certification and continuing education, the audit policies, programmes and procedures they operate under; how they are assigned and how they are supervised and reviewed. They should assess the quality of internal auditors’ audit programmes, working paper documentation, reports and recommendations’’.

The authors also go on by saying that “to determine objectivity, the external auditor needs to know the organisational status of the officer to whom the internal auditors report; if the internal auditors have access to audit committee or its equivalent; who hires and fires the auditors; if policies prevent auditors from auditing areas where relatives are employed or where they may themselves be assigned’’.

In addition, Gramling et al.(2004) indicate that the IIA standards require the IAF’s head (i.e. the CAE) to develop and maintain a QAIP that includes periodic internal quality assessments of the IAF and ongoing internal monitoring. Attributes standard 1310 of the IIA standards specifically requires IAF to put in place:

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 56

quality assurance and improvement program capable of both internal and external assessment of the function. The standards require that IAF must maintain a program that will enable it carry out on-going monitoring of the performance of the internal audit activity, and periodic self- assessments or assessments by other persons within the organization with sufficient knowledge of internal audit practices.

According to the standard (IIA 2009), external assessment of the function is also required to be carried out once every five years by a qualified, independent assessor or assessment team from outside the organization.

From the above discussion on the roles played by the IAF to the three other corporate governance mechanisms, one may want to argue that IAF is a resource center and a valuable nexus to the remaining cornerstones. Gramling et al.(2004) however contend that for the function to be deemed as a valuable resource, it must be seen as having an appropriate level of quality, and that the level of such quality determines the level of coordination IAF will have with the other three mechanisms, and consequently predicts the quality of corporate governance.

The above clue notwithstanding, little attention is paid to evaluation of the value- addition of IAF (Soh and Martinov-Bennie, 2011). Academic research also seems not to be highly disposed to this. ‘’Despite increasing attention to the IAF’s role within corporate governance, only limited research has examined the effectiveness of its function’’ (Soh and Martinov-Bennie, 2011, p.608). This concern further validates the focus of this study.

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 57 2.3.3 IAF’s Independence and internal auditors’ Objectivity

‘’Independence’’ can be said to be the foundation upon which internal audit rests. Mousa (2013) indicates that the importance of the attribute is apparent in the definition of internal auditing provided by the IIA (1999).

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 and disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

While Stewart and Subramaniam (2010) observe that independence and objectivity are closely related, authors such as Paape (2007) and Mutchler (2003) maintain the two concepts are not well distinguishly defined. According to the IIA standards, independence is defined as ‘’the freedom from conditions that threaten the ability of the internal audit activity (or function) to carry out internal audit responsibilities in an unbiased manner’’. In order to create a more comprehensive meaning, Mutchler (2003) defines independence as ‘’a desired characteristics of the environment in which the assurance services are performed by the individual or team’’.

The Glossary to the IIA standards however presents a distinguishing distinction between the two concepts in the following way:

• Independence – the freedom from conditions that threaten objectivity or the appearance of objectivity. Such threats to objectivity must be managed at the individual auditor, engagement, functional and organizational levels.

• Objectivity – An unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they have an honest belief in their work product and that no significant quality compromises are made. Objectivity requires internal auditors not to subordinate their judgment on audit matters to that of others.

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 58 Stewart and Subramanian (2010) reflecting on the above definitions further contends that independence can be seen as a ‘’state of affairs’’ while objectivity can be perceived as ‘’state of mind’’. While this position is adopted to direct the literature review made in this study, a more definite and exact description of the two connected concepts is anticipated as it is argued in literature that the line of distinction between the two key concepts is obscured (see Mutchler, 2003; Stewart and Subramaniam, 2010).

The issue of independence of IAF has been a long-standing challenge to internal auditors and the internal auditing profession (Ahmad and Taylor, 2009) particularly within the expanded framework of IAF’s roles to organisations. Aside the issue of organisational positioning of the IAF, the challenge of conflict of interest, the dual and seeming incompatible roles (‘’assurance’’ and ‘’consulting’’) of internal auditing under the enhanced corporate governance framework is posing, same is also inspiring more and more attention on the IAF’s independence (see Sarens, 2009; Lenz and Sarens, 2011; Chambers and Odah, 2015).The traditional role of internal audit is expanding from a watchdog of controls to a value-added business advisor (Ahlawat and Lowe; 2004; Savc’uk, 2007). Providing a guide for research agenda on the issue, areas considered germane by Mutchler (2003) include:

i. understanding the relation between the organizational positioning of the IAF and the overall independence and effectiveness of the organizational governance system

ii. knowing the appropriate control (firewalls) for those internal audit units that provide both consulting and assurance services;

iii. assessing the relation between the organizational positioning of the internal audit unit and the occurrence and detection of fraudulent company’s activities;

iv. evaluating how external auditors make assessment of the work of internal auditors.

Drexler (2003) argues that corporate governance can be impaired by a lack of IAF’s independence.

The Internal Audit Function as a Corporate Governance Mechanism in a Developing Economy: An Empirical Study of the Nigerian Financial Sector Page 59 Another dimension to the evaluation of independence of IAF is by investigating the source of the IAF, whether in house or outsourced, i.e. whether maintained as a department in the organisation or farmed out. James (2003) contends that IAF’s sourcing arrangement is another key factor that distinguishes IAFs. Whereas the issue of outsourcing of internal auditor continues to attract intense criticism by the internal audit profession and practitioners, it is argued that contention for exclusivity of jurisdiction might not be a sound basis for internal audit profession to cast aspersion on outsourcing of the function. TCE theory (extensively discussed in chapter 3 and reflected upon in chapters 6 and 8 of the thesis) may be adopted as a guide to direct decision on internal audit sourcing. Cost benefit analysis is the key tenets of the theory. However, studies have shown that external auditor usually tend to place stronger reliance on the work of IAF when such function is outsourced on the ground that they believe the management may not be able to easily sway the function to their side, and thus an indication of guaranteed independence (Stewart and Subramaniam, 2010).

Another relevant issue on IAF’s independence that has been contentiously discussed in literature is the use of IAF as a training ground in organizations (see Messier et.al, 2011; Christopher et.al, 2008; and Godwin, 2004). However most internal auditing literatures do use this as one of the indicators of internal auditors’ objectivity. The manner most authors do anchor discussions on IAF’s independence and internal auditors’ objectivity as a singular concept is responsible for this interwovenness and seeming haphazard manner of discussing indicators of IAF independence and internal auditors’ objectivity.