There is an increasing need for interactions amongst board of directors, management, internal audit and external audit. Soundness corporate governance assists effective, efficient and entrepreneurial management that can enhance shareholder value in the long run (FRC, 2012).
Contribution of Internal Auditing towards Corporate Governance
IA evaluates and considers the influences of the risk management and control processes through a systematic manner, assumes a front importance within the CG. Mihret and Admassu (2011) stated that organisations can increase CG effectiveness by fostering both coordination of IAs and EAs while DeZoort et al. (2002) propose that both functions facilitate as a resource to BODs could improve effectiveness of audit committee (AC). According to the substitution theory, a dynamic internal audit function (IAF) would encourage EAs' reliance on such a function, lead to the contribution of IA adds value through lowering audit fees (Mihret and Admassu, 2011) and results in a reduction in EAs' audit effort. Therefore, organisations can achieve cost reductions from IAs' contribution and there is an opportunity for savings from issues identified.
The IAs' position in providing both assurance services and consulting activities, enhancing risk assessment, outsourcing of IA activities, and employ as a training ground for managers (Stewart and Subramaniam, 2010). They review the organisation's ICS with the aim to ensure that organisation's risks are effectively managed. Felix et al., (2001) and Mohamed, et al. (2012) stated that IA work as assistants under the direct supervision of EAs or independently performing various audits and reviewing work throughout the audit year on which the EAs may rely. Although the Institute of Internal Auditors (IIA) stated that IAs must accountable with management, but Fraser and Henry (2007) opposite their view that IAs should involve in ERM practices such as embedding of risk.
Furthermore, with sessions on topics from Internal Auditing as an Effective Tool for Corporate Governance (IJEB International Conference on Economic and Business Issues, 2009) signify that the IA's contribution can towards to a high quality of CG. The contribution of IA to CG is represented through demarcating the association between IA and key elements of CG. They perceived that an effective CG leads organisations access to capital markets more easily to boost their capitals. In fact, the BODs is responsible to accomplish the organisation's objectives; meanwhile the IAs'contribution is to providing management a wide range of information sources such as organisation's financial, operational and compliance activities to improve effectiveness, efficiency, and economy of management performance and activities. EAs are enabling to modify the nature and extent of EA procedures (Colbert, 2002).
The existence of an effective ICS can help the management reaching the objectives in the pursuit of value for capital, protect all shareholders' and stakeholders' interests as a whole (Bostan and Grosu, 2010). Rezaee and Lander (1993) agree that IA provides information about any anti-fraud controls would add value to the entire organisation's activity, easing the identification and evaluation of the existing risks on all levels follow by several recommendations on what further actions should take such as reporting their suspicions to management.
Contribution of External Auditing towards Corporate Governance
Besides, EA is also inevitable towards soundness CG. While EAs will not give a total assurance for solving every problem, it will provide a robust structure for issues to be identified and resolved the scale of operations and associated business risk increase beforehand significantly. For instance, where an SME is trading internationally for the first time and doesn't have appropriate procedures in place to recognise and mitigate foreign exchange risk. Accordingly, there is opportunity for frequent and open communication between the auditors and the management during the course of an audit. Therefore, IA develops and manages relationships with its key shareholders.
EAs conduct their tasks in the most independent and reliable manner in preventing and detecting the fraud and errors in FS in order to attract investing public with the level of assurance to make their decisions based on the FS (Davidson, Goodwin-Stewart and Kent, 2005). This was supported by Boţa-Avram (2012) that the EAs' social role and responsibilities is to enhance investors' confidence in the financial markets through auditing the management report to review whether it's consistent with the FS and evaluates the management's ICS (Boţa-Avram, 2012).
While the IAs acts as risk monitors for the management, board and the AC, also assists EAs for substantive testing provided in-house. Whereby EAs make use of IAs' help for control evaluation risks and act as an agent for shareholders and stakeholders diminish the agency problem through controlling the company directly in order to enforce control of board and management. With appropriate accounting policies, the EA could help management accountable to shareholders for its stewardship function; ensure the management's truthful conduct of business and its continuation of the business. Elliott and Korpi (1978) suggest that such assistances contribute by IA result in EA fee reduction. Simultaneous, the EAs assess the risk of material misstatement in the client's FS, reviewing their ICS in order to understanding the nature of client's organisation. Their greater involvement in IAs is likely to save EA's time and work during audit engagement (Elliott and Korpi, 1978; Zain, Subramaniam, and Stewart, 2006).
Barriers to the contributions of both IAs and EAs and its implications.
Auditor's Independence
The ability of IAs as employees of the organisation to exercise true objectivity is questionable. Both IFAC (2010) and Cadbury Report (1992) stated that the financial interest gain from clients, having close relationship with clients or provide NAS to clients constitutes the threats to the EAs' independence and adversely influence their role.
Cadbury Report (1992) propound that to ensure EAs are truly independent, they should be rotated annually and have a gap of 5 years prior to the same auditors are appointed by the organisation and disclosure must be make in order to shun their conflict of interest with shareholders. They should be prohibition to the provision of NAS to clients. This is reported (Financial Times (London, England), 9 September 2012) that to increase the independence of IAs should not report directly to the chief executive, but to the chairman of the AC.
Quality and Competency of IA
The competency of IA staff professional certifications in accounting and experience in auditing attributes to the organisations is questionable and influenced by IA quality (Mohamed et al, 2012). Julien and Rieger (2011) found that the roles of IAs expected by organisations are inconsistent with the definition of 'IA' defined by IIA in reality. As there is no guidance on what are the circumstances the employees possibly transferred to the activities IAs are currently auditing and outcry the social pressure give rise to them (Stewart and Subramaniam, 2010). It may be compromised by outsourcing the IA where the experience obtains from outside specialists and improve the independence of IA work.
Insufficient resources
Limited resources such as time constraints of consulting that could take place between both IAs and EAs. Admittedly, if more human and financial resources had been giving to them, in addition to the retention of audit work performed by them including audit opinion, compliance and control enable them to manage their audit risks more competently (Zammit and Baldacchino, 2012).
Audit expectation gap
Auditor Ernst & Young was claimed to be condemn to their negligent in not detecting the problems in Lehman Brothers. Generally, it's usual to ask who will be condemned when things go wrong where there is always a gap between the perceptive of what an audit will do by public and what auditors do in practice (AccountancyAge, 2010). To eliminate this barrier, auditors must perceive what other consequent issues that will be raise on their work and require a different approach in auditing when there is a different in nature of vast financial institutions.
Ethical code and Bear from excessive regulations
Due to the CG reforms in many jurisdictions, the implementation of the ethical code issued by profession bodies isn't always comply by the auditors in their professional conduct. The code deters the principle of utilitarianism that is doing what is right and acceptable to majority where it simply concerns ethical or unethical actions of auditors. IFAC (2010) suggested that accountancy bodies such as FRC should assess their professional ethical code to emphasise more on action that is morality and right.
Difficulty in fulfilling their responsibilities
They're requiring reporting to senior management and expected to objectively assess management's conduct simultaneously. Therefore, IAs is recommended to report directly to the board and AC rather than to senior management as an effective IAF performs activities are "listening, asking questions, assessing and challenging answers" (KPMG, 2003, pp.4). Despite IA may not be informed to all sources of information throughout the organisation as it is appear as outside the management structure but the board and AC benefit from the information they receive on the internal controls and risk assessment which reflects a true depiction and filtered by organisation in advance (KPMG, 2003).
Audit (client) fee
Auditors' independence would impair from the action in manipulate their audit plans in response to audit fee pressure. This was supported by Gramling (1999) who indicated that the level of audit fee pressure appears to influence the audit managers' decisions to reliance on IAF's work.
Informal communication and language used
However, EAF's unwillingness to utilise data gathered by IAF at the planning stage resulted from the limited cooperation and coordination amongst IAs and EAs. Zammit and Baldacchino (2012) propound that professional judgement and effective communication between them should be strengthen through meeting with senior management periodically which discussions would be helpful in identifies the general issues during the audits. Issue also arises on how far IA can communicate governance issues outsides the organisation such as regulators, EAs and other stakeholders. Julien and Rieger (2011) suggested that a "common governance language" could maintain steady communication amongst them, in addition to AC and board.
Conclusion
The amount of experience and competence are the main differences between IAs and EAs but their intention is to protect investors, both functions' coordination and cooperation may generate synergistic outcomes such as higher quality audits and economic benefits. Overall, there is a significant obstructions faced by auditors and further implications to these is needed in order to maximise their role to the on-going strong governance.
