the role of internal audit

Role Of Internal Audit

THE ROLE OF INTERNAL AUDIT IN THE APPLICATION OF CORPORATE

GOVERNANCE IN SAUDI

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(24, April, 2010)


Outline

1.0 Introduction and Background Details

2.0 Development of Internal Audit department

3.0 Factors which contributed to audit development

4.0 Corporate Social Responsibility

5.0 Customers willingness to support business

6.0 Research Aims

7.0 Methodology

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The Role of Internal Audit in the Application of Corporate Governance in Saudi

1.0 Introduction and Background Details

Corporate Governance is defined as the set of processes, rules and laws that

have been put in place in businesses to assist in the operations, in regulating, and affect

the way businesses are directed in order to enhance accountability. The management is

responsible to promote good corporate governance by setting structures that are

beneficial to all the stakeholders, (management, shareholders, employees, customers,

suppliers and the government among others). The internal audit department has a role

to play in assisting the board of governors in promoting corporate governance. The

board of governors together with the risk management committee should monitor and

frequently review the effectiveness of the internal audit function as regards to corporate

governance (KPMG, 2003). They should ensure that the internal audit department is

well resourced and has a high level of independence. There should be quick responses

to the internal audit recommendations.

2.0 Development of Internal Audit department

In Saudi Arabia the development of the internal audit department has been slow,

(Abdulrahi Et al. 2010). The slow growth has resulted from little or no encouragement

from the State and there has been no government initiative to develop the internal

department. Getting information on the role of internal auditors have been difficult

because they are not supported by the government. There was no clarity in the

requirements that are stated in the Ministerial resolve. The country’s professional

bodies have not taken any initiative to correct this situation. The research interviews

that were conducted with academics and other professionals, it was found that the

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internal audit department was poorly developed. The departments were inadequately

developed. The personnel were unqualified and there were restrictions to

independence, which is an important ingredient for an efficient internal audit

department. There was a poor relationship between the internal auditors and the

external auditors.

3.0 Factors which contributed to audit development

There are several factors that have contributed to this situation. The hierarchical

structure of the society has made it hard as it is difficult to question ones kin. It is

therefore not easy to hold in-depth investigations, when an error or fraud has been

detected (Steiner, 1975). The Saudi Arabian culture has a great emphasis on personal

relationships, another cause that inhibits independence of the internal auditor.

As a result of all the above stated weaknesses in the internal audit structure in

Saudi Arabia, its role in corporate governance has bee minimal. The State should give

regulations and improve the structures to help develop the internal audit. As recognition

of this weakness, the first forum of Internal Auditing and Corporate Governance was

held in 2009 at Prince Sultan University. Forums have been organized by most

organizations and consultancies with an aim of discussing practices and procedures

which are used in auditing and how they would be improved (Al-Elewi, 2009). In the

forum it was recognized that cooperate governance will help strengthen the economy;

and to enhance interaction between business community and professionals.

4.0 Corporate Social Responsibility

Corporate Social Responsibility (CSR) and corporate governance go hand in

hand. A strong corporate governance structure will take care of most of the CSR issues

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(Belfrage E). The idea of the business entity being socially responsible was first

developed by two Americans Andrew Carnegie and Julius Rosenwald in the twentieth

century. This idea gave birth to two broad principles- The charity principle and the

Steward principle (Fredrick, Post & Davis (1992).

Charity Principles is to be applied by giving voluntary aid to the needy persons in

the society. This is what is now referred to as corporate philanthropy which is the

voluntary actions by corporate organizations to promote social good. Steward Principles

occur when the business, acting as a public trustee considers the interests for everyone

who is affected by business decision and policies. This is what is currently being

observed as businesses acknowledge business and society interdependence. It’s also

applied when businesses balance the interest and needs of many diverse groups in the

society. An example of Stewardship is observed when businesses are more concerned

with optimum long run profits rather than short term.

Recent empirical studies have shown that organization corporate social

performance is positively related to their reputations and attractiveness as an employer.

The result of the studies further suggest that firms that rate higher in corporate social

performance have a more positive reputation and are more attractive as employers than

firms lower in corporate social performance (Turban & Greening, 1997).

A strong association has also been found to exist between corporate citizenship

and customer loyalty (Maignan, 1997). The research done concluded that it likely for

customers to buy from companies which are giving positive image because they are not

implicated on any financial dealing which gives it negative publicity. Companies which

uphold business ethics and have their audit report to be in favor of them by promoting

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social responsibility are respected by their clients and they are loyal to its products or

services. Therefore, good audit report gives the company positive publicly which makes

their customer proud of dealing with them and improves on customer/organization

relations as well as customer satisfaction.

5.0 Customers willingness to support business

Customers plays a major role in the success of the business and they tend to be

more committed to support an organization which has good audit report by buying it

goods and seeking its services (Wright, 1967). This was proved by the trend of

customer behavior between organizations which are socially responsible and those

which are not responsible. It was evident that organizations which are socially

responsible are supported by their loyal clients who always buy/source for their services

(Waddock & Graves, 1997).

From the strategic point of view, business entities have been called upon to

assume social responsibility for enlightened self-interest and a long-term view of

profitability. Firms with this posture are believed to have competitive advantage in the

long-term through greater appeal to customers and lower long-term costs by doing

things right the first time.

Studies have tried to establish the relationship between a firm being socially

responsible and its financial performance (Waddock & Graves, 1997). A kind of positive

relationship was established to exist between the two. Similarly, a growing studies have

also suggested a positive effects of corporate social responsibility on consumer

behaviour (Davids, 1990; Business in the community, 1997) i.e. consumer look

favorably towards a socially responsible company and its product.

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By a company improving on its Internal Audit structure, it enhances strong

corporate governance structure which leads to a responsible CSR.

6.0 Research Aims

The study is intended to meet the following objectives:

(1) Analyzing the role the internal audit has played in Corporate Governance in

Saudi Arabia.

(2) Analyzing the current status of Internal Audit in Saudi Arabia

(3) Assessing the effect of corporate social responsibility on the performance of

the industry.

(4) Examining the role the government should play to improve and encourage the

role of the internal audit in corporate governance in Saudi Arabia.

7.0 Methodology

Since the study is an explorative one, it would be mainly quantitative in

approach. The researcher would make use of both primary and secondary data in

carrying out the investigation. The primary data shall be collected through a

structured questionnaire, containing open ended and Likert scaled questions.

Two sets of questionnaire shall be administered, one on to the audit firms, who

should provide information on the response they to evaluate the response and

pattern of the response and challenges they encounter when they attempt to

conduct an audit in Saudi Arabian firms and the other to the corporate world with

a view to analyze their point of view as relates to their attitude towards improving

the internal audit department.

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In this investigation, studying the whole population would be quite

impossible, due to the numbers of operating firms in the industries, their

geographical locations, financial requirements and the consumers, hence

sampling techniques shall be used in selecting the respondents of the study.

The first set of questionnaire shall be mailed to 100 of the best-ranked

corporate firms in Saudi Arabia while the second set would be administered on a

cross section of Saudi Arabian small and medium sized firms. The data thus

gathered shall be analyzed through statistical software such as SPSS. The tests

would mainly be nonparametric.

The secondary data shall be gathered through relevant journal articles (for

theoretical perspectives and theoretical framework), company’s publications and

magazines, and educational websites.

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References

Abdulrahi M., Brierley, A & Gwillian, R. 2010. An examination of the role of the Audit

Committees in Saudi Arabian Corporate Sector. InterScience. Available at: from

http://www3.interscience.wiley.com/journal/118957831/abstract?

CRETRY=1&SRETRY=0 [Accessed April 26, 2010]

Al-Elewi, A. 2009 . Governance Enhances The Confidence Of Investors It Should Be

Included In The Government Sectors. Prince Sultan University. Available at:

http://www.psu.edu.sa/cgf-ia.html [Accessed April 26, 2010]

KPMG. 2003 Internal Auditors Role in Modern Cooperate Governance. KPMG.

Available at: http://aci.kpmg.com.hk/docs/AC/Internal_audit_role.pdf [Accessed

April 26, 2010]

Steiner, A. 1975. Business and Society. New York, Random House.

Turban, D. & Greening D. 1997. Corporate Social Performance and Organization

Attractiveness to Prospective Employee. Academy of Management Journal.

40(3), pp 658- 672

Waddock, A. 2002. Vision, Values, Value-Added: Integrating Corporate Citizenship into

Operating Practice. New York: McGraw-Hill

Waddock, A & Graves, B. 1997. The Corporate Social Performance-Financial

Performance Link. Strategic Management Journal, 18(4), 303-319

Wright, A. 1967. The Business of Business. New York, McGraw-Hill.

Yarirngton, B. 1972. Corporate Social Responsibility: Ritual or Reality. New York,

Academic Press

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