Gerrit Sarens

Internal auditors' perception about their role in risk management: A comparison between US and Belgian companies

In addition to a number of quantitative studies in this area, this study wants firstly to elaborate in a complementary qualitative way how internal auditors perceive their current role in risk management within the Belgian context where internal auditing is a relatively young profession. Secondly, we want to investigate whether, under the influence of recent changes in corporate governance regulations, a greater financial emphasis in internal auditors’ work can be noticed. Thirdly, we are interested in differences between Belgian companies and Belgian subsidiaries of US companies with relation to internal auditors’ role in risk management. In order to get adequate data, we interviewed 10 Chief Audit Executives and collected relevant documents. The data reveal that the specific content of internal auditors’ role in risk management is very time and country specific. For the Belgian companies, internal auditors’ focus on acute shortcomings in the risk management system creates opportunities to demonstrate their value in the short run. Internal auditors are playing a pioneering role in the creation of a higher level of risk and control awareness and a more formalised, standardised, transparent and documented risk management system. In the Belgian subsidiaries of US companies, internal auditors’ objective evaluations and opinions are a valuable input for the new internal control review and disclosure requirements mentioned in the Sarbanes Oxley Act. Moreover, an enhanced attention for financial controls and the quality of financial reporting was noticed within these companies.

A critical analysis of the independence of the internal audit function : evidence from Australia

Purpose – This study aims to critically analyse the independence of the internal audit function through its relationship with management and the audit committee. Design/methodology/approach – Results are based on a critical comparison of responses from questionnaires sent out to Australian chief audit executives (CAEs) versus existing literature and best practice guidelines. Findings – With respect to the internal audit functions relationship with management, threats identified include: using the internal audit function as a stepping stone to other positions; having the chief executive officer (CEO) or chief finance officer (CFO) approve the internal audit functions budget and provide input for the internal audit plan; and considering the internal auditor to be a “partner”, especially when combined with other indirect threats. With respect to the relationship with the audit committee, significant threats identified include CAEs not reporting functionally to the audit committee; the audit committee not having sole responsibility for appointing, dismissing and evaluating the CAE; and not having all audit committee members or at least one member qualified in accounting. Originality/value – This study introduces independence threat scores, thereby generating analysis of the internal audit functions independence taking into account a combination of threats.

Cost modeling in logistics using time‐driven ABC: Experiences from a wholesaler

Purpose - The purpose of this paper is to describe the experiences of a wholesaler with time-driven activity-based costing (TDABC). Three research questions are addressed: How are complex logistics operations modeled by TDABC? Does TDABC provide more accurate cost information than activity-based costing (ABC)? How is TDABC cost information used? Design/methodology/approach - Case study research was performed at a Belgian wholesaler. Interviews were conducted. The cost and activity database was analyzed. Findings - This case study illustrates that there are logistics operations that cannot be modeled using a single cost driver, as is done with ABC. TDABC uses time equations to estimate the time spent on each activity. The results herein show how the time equations can capture the different complexities, by including different terms or interaction terms in the time equations. The database analysis clearly demonstrates that TDABC provided more accurate cost information than ABC at this case company. ABC oversimplified 64 percent of the activities, and misallocated 55 percent of all indirect costs. Research limitations/implications - This study is one of the first, investigating the experiences with TDABC. The results are derived from analyzing all activities, at a single case company. Practical implications - The study illustrates the technique of TDABC and provides a real company example of time equations in logistics. The users declared the TDABC model very useful for profitability reporting and profit management. The time drivers provided insight into the causes of excessive distribution and logistics costs. Originality/value - This paper complements current discussion on cost drivers and subtasks and logistics costing.

The European literature review on internal auditing

Purpose – By conducting the 2006 global Common Body of Knowledge (CBOK) study, The Institute of Internal Auditors (IIA) attempts to better understand the expanding scope of internal auditing practice throughout the world. The purpose of this review of recent internal auditing literature in Europe is to document how the internal audit function is changing in response to the shifts in global business practices.Design/methodology/approach – The literature in Europe is reviewed with a focus on developments that have implications for the expanded scope of internal auditing and the changing skill sets of internal auditors and their role in enhancing good corporate governance. This focus has implications for CBOK 2006.Findings – The literature indicates changes in the activities performed by internal auditors. The increasing complexity of business transactions, a more dynamic regulatory environment in Europe, and significant advances in information technology have resulted in opportunities and challenges for int...

Monitoring Effects of the Internal Audit Function: Agency Theory versus other Explanatory Variables

This study investigates (1) whether agency variables are associated with the relative size of the internal audit function (IAF); (2) whether the IAF is complementary to other monitoring mechanisms such as independent board members and an active audit committee; and (3) the impact of the control environment on the relative size of the IAF. We use data from a sample of Belgian firms. We find evidence of a monitoring role for the IAF in corporate governance. Specifically, the relative IAF size is positively related to management share ownership. Also, we find evidence for a substitution effect between independent board members and the IAF. Finally, it turns out that a supportive control environment also has a positive impact on the relative size of the IAF. Our results can benefit companies interested in assessing the current size of their IAF and the role that it can play in corporate governance.

Characteristics of target costing : Theoretical and field study perspectives

Purpose – Despite appearing in the literature over 10 years ago as a potentially exciting cost management technique, there is still limited agreement about the nature of target costing. The purpose of this study is to explore the characteristics of target costing, and to test whether these characteristics were adopted in three European companies that used target costing. Design/methodology/approach – This paper draws on case study data, collected at three manufacturing companies (consumer electronics, machinery, and transportation equipment). Findings – The paper identifies eight characteristics of target costing, based on the early Japanese case descriptions. These characteristics are related to the way a target is set and how progress towards that target is measured. The findings of the case studies confirm these characteristics. However, some differences were found regarding the interpretation of the strict rule that “the target cost cannot be exceeded at product launch”. Research limitations/implications – The results indicate that future research on the adoption of target costing cannot be disconnected from its characteristics. Further studies might investigate whether degree of openness to suppliers, leadership position, time pressure and position in the supply chain can explain the noted differences in characteristics among companies. Practical implications – The characteristics identified in this paper provide an aid to researchers and managers considering target costing. Detailed case descriptions provide best practices examples for other companies. Originality/value – This study is the first empirical paper concerned with describing the typical characteristics of target costing. By exploring the characteristics, we hope to inspire others to further explore this interesting phenomenon.

Sourcing strategy of Belgian SMEs: empirical evidence for the accounting services

The primary objective of this paper is to examine the sourcing strategy for one business function (accounting services), by looking at the degree of outsourcing for each task of this function. Three research questions are addressed: (1) What sourcing strategy do SMEs use for accounting services? (2) What are the reasons? (3) Is there a link between sourcing strategy and company characteristics? The research design consisted of a postal survey sent out to 1200 managers of SMEs in Belgium. The main results showed that 53% use selective outsourcing, i.e. combining both an inhouse accountant with an accounting service provider. The results also showed that 35% use total insourcing and 12% prefer total outsourcing. Surprisingly, cost reduction is not the main reason for outsourcing. External expertise is the main reason for selectively outsourcing. SMEs select a total insourcing strategy because they want the accounting information at hand. Finally, larger SMEs decide for a total insourcing strategy and prefer to keep the accounting services internal. The conclusions show that future research should focus on the degree of outsourcing. The practical implication of this study is that accounting service providers should highlight their expertise and overcome the disadvantage of remote data analysis to attract more SME-customers.

Factors associated with the internal audit function's role in corporate governance

Purpose - The purpose of this paper is to investigate several variables that are theoretically associated with the internal audit function (IAF) having an active role in corporate governance. Design/methodology/approach - The paper uses responses from 782 US Chief Audit Executives (CAEs) in the CBOK (2006) database for the investigation. The paper makes the assumption that an IAF has only one CAE, thus the dataset represents 782 US IAFs. Findings - It is found that an IAF having an active role in corporate governance is significantly and positively associated with the use of a risk-based audit plan, existence of a quality assurance and improvement program, and audit committee input to the audit plan. Control variables such as stock exchange listing, firm size, the existence of an internal control framework, and a CAE with an internal auditing qualification also are positively associated with the IAF having an active role in corporate governance. Research limitations/implications - A limitation of this study is that CAE perceptions may deviate from actual practice. Also, the sample is limited to the US CAEs who are also IIA members, thus it may not reflect the views of non-members and the CAEs from other countries. Practical implications - The results have implications for CAEs who wish to increase the chance for their IAFs to play an active role in corporate governance. The IIA may benefit from these results in its supporting role for the internal auditing profession. Originality/value - The study is complementary to the literature on the existence and size of the IAF and reveals several avenues for further research.

Reflections on the internal auditing profession: what might have gone wrong?

Purpose - The purpose of this paper is to investigate and discuss potential reasons why the internal auditing (IA) profession has been marginalized in the governance debate on solutions after the financial crisis that started in 2007, also noting recent studies questioning the value of IAs work. The key aim of this paper is to make readers aware of ambiguities concerning the ultimate customer of IA and its core business, and to stimulate critical reflection thereon. Design/methodology/approach - The conceptual discussion of this paper is based on an objective review of relevant literature, both practitioner and academic. Findings - Positioning IA as agent to the board/audit committee and, at the same time, as partner to management is challenging in practice. The IA function should clarify the customer dimension in its organizational context. Furthermore, this paper argues for a consolidation of internal audit around its core function of providing assurance when seeking to establish IA as a profession. Practical implications - Practitioners will benefit as this paper demands fundamental questions to be addressed in the organizational context, about the ultimate customer and the core business of the IA service rendered. The Institute of Internal Auditors will benefit from this paper and subsequent discussions in academia and practice, supporting its pursuit to gain universal recognition for IA as a profession. Originality/value - This paper may open a new research area in IA that addresses a more critical way of evaluating IA practices.

Are internal auditing practices related to the age of the internal audit function?: Exploratory evidence and directions for future research

Purpose - This study seeks to analyze and explore whether the organizational profile, the size of the internal audit function (IAF) and internal audit (IA) practices are related to the age of the IAF. Design/methodology/approach - This study is based on data collected from the Common Body of Knowledge study conducted by the Institute of Internal Auditors Research Foundation in 2006. In total, 9,366 practitioners completed the questionnaire, representing 92 countries. Findings - This study has identified three clusters of IAF based on their age. The findings show that: the organizational profile is significantly different between these three clusters; the current size of the IAF is related to the age of the IAF; those IAFs that were set up in the early days of the IIA (established in 1941) are more likely to use the IIA Standards and have more internal auditors with internal auditing qualifications; a quality assurance and improvement program is more common within older IAFs; and older IAFs have a more diversified IA agenda and more frequently perform advanced IA activities. Research limitations/implications - This paper does not allow conclusions to be reached on causality: the results in this paper are based only on univariate association tests. Given that age of the IAF is not a proxy for its maturity, a multidimensional measure of the maturity of an IAF could be developed. Practical implications - The results reported in this paper can be useful for practitioners who wish to benchmark their IAF and for the IIA to continue implementing their mission “progress through sharing”. Originality/value - This is the first large-scale study focusing on the age of the IAF. The results of this study have resulted in interesting directions for future research.