Internal Auditing: Does the Impact Extend beyond Quantitative Studies?

Harris, Marilyn E., Videtich, Michael, Review of Business Research

ABSTRACT

Internal auditing functions have gained extensive notoriety in recent years. Much of this increased visibility can be attributed to the financial scandals that plagued American businesses beginning in 2001. The business world undergoes a constant metamorphosis as our economy becomes increasingly global in nature. This metamorphosis has been typified by a paradigm shift involving the move from a biological to a sociocultural model. Internal auditing has played a pivotal role in ensuring that businesses are constantly reviewing efficiency and effectiveness. Additionally, internal auditing functions have assisted organizations in strengthening corporate integrity while at the same time ensuring compliance with federal regulations such as the Sarbanes-Oxley Act.

Keywords: Internal Auditing Processes, Impact on bottom line, Auditing Management

1. INTRODUCTION

The subject of internal auditing is now more widely known than ever, due to the many problems companies such as Enron, Worldcom and Tyco experienced beginning in 2001. However, underlying this fact is an interesting piece of information. The topic and field of internal auditing has been around for a number of years. This researcher found articles from as early as 1983 on the subject. However, these articles were few, and far between. It is interesting to note that although this field has been in existence for some time, it has always been a neglected field with very little relevance or attention given. Coupled with the fact that business tends to ignore new concepts until the overall mechanism is broken, it is not a surprise that it has been given little credence. However, with the corporate financial scandals that have occurred, an insurgence of recognition and an organizational notoriety have been bestowed upon the internal auditing function. Internal auditing departments are consistently looked to in today's business world to ensure controls within an organization. They are utilized in many contexts from discovering inconsistencies in basic task functions to working with various departments to analyze processes (Arens, 1991).

The complexity of today's business world, the growing global competition and increased government scrutiny are all factors that are forcing organizations to change. The term "global" epitomizes the competitive pressure and market opportunities from around the world and any firm's need to optimize their market performance on a global basis (Kotabe, 1998). These changes hardly qualify as fads and are permanent changes with which organizations are struggling to cope. They are, in fact, a paradigm shift in the way organizations are conducting business.

Konrath (1993) defines auditing as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the result to interested users. In essence, this definition can generically be applied to both external and internal auditing functions. Internal auditing has continued to gain momentum and importance within organizations to ensure controls. Internal auditing, however, has added another important task to its expanding portfolio of skills. Internal auditing departments, because of their involvement in a variety of organizational operations, have also begun to look at overall processes. They attempt to improve efficiency and effectiveness. Most importantly, they assess process compatibility with organizational goals. Regardless of the type of internal auditing, some sort of information in a verifiable form and standards by which the auditor can evaluate the information must be present (Arens, 1991). In order to more fully understand internal auditing, this article will discuss the framework of internal auditing. These include the effects internal auditing has on the processes it is designed to impact and the composition or organizational make-up. Additionally, the value-added components of internal auditing will be reviewed. These include a management view of internal auditing and the effects of ineffective internal auditing. Internal auditing has taken the business world by storm and shows no signs of disappearing. As such, the future of internal auditing will be reviewed. This will include the automation of the process and what impact this has on the actual human resources: the internal auditor.

In today's world, business has become more complex right down to the basic building blocks. Increasing government scrutiny and the market force demands on accountability of both the executives and the organizations themselves have changed the way that we conduct business today. It requires many changes in the way organizations think and operate. For example, the classical view of social responsibility, followed by most organizations until recently, states that the primary responsibility is to operate the business in the best interests of the stockholders. That single concern is financial return (Robbins, 1996). Given recent events, businesses are being forced to change that view. Additionally, companies no longer have the luxury of learning only from the past. In order to be successful, organizations and their leaders have to develop a new cognitive capability, the capability for sensing and seizing emerging business opportunities (Scharmer, 2000).

Many companies today have experienced a financial pinch not just because of the typical sliding economic indicators, but also because of a paradigm shift in the expectations of an organization. A paradigm shift occurs when we see the world differently (Harris, 2004). The financial scandals at many US corporations have necessitated that organizations, the government and Wall Street rethink the definition of acceptable business practices. Making the paradigm shift more complex still is the fact that a dual paradigm shift is occurring. The first paradigm shift is that organizations are moving from biological to sociocultural models. The sociocultural model views an organization as a voluntary association of purposeful members who manifest a choice of both ends and means (Harris, 2004). In contrast, a biological model can't explain the behavior of a system whose parts display choice. The second paradigm shift involves the change in the nature of inquiry. It involves changing from analytical thinking to systems thinking. Analysis entails separating a system, analyzing it and then trying to put it back together to explain the behavior. In contrast, Ackoff (Harris, 2004) writes that synthesis seeks to identify the larger system that a system belongs to, understand the larger system and disaggregate the understanding of the whole into an understanding of the part by identifying its role in the larger system. In essence, analysis begins with the individual parts while synthesis begins with the whole.

The main difference between the approaches of analytic versus synthetic is how complexity is dealt with. Many modern problems can't be reduced or simplified to a list of singular, independent variables. A holistic view of the system allows the entire system to be viewed where interdependence can more easily be identified. The alternative approach, analysis, can require a massive research phase to determine where the interdependencies lie (Harris, 2004).

These paradigm shifts require a new way of viewing how an organization achieves optimal results. Internal auditing seeks to bridge the gap by conducting audit projects using the new models, thus the reason that the paradigm shifts are increasing visibility for the internal auditing function. Internal auditing is tasked with not only looking at individual task processes, but at the interdependencies with other functions within the organization to obtain the best solution …

Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Internal Auditing: Does the Impact Extend beyond Quantitative Studies?. Contributors: Harris, Marilyn E. - Author, Videtich, Michael - Author. Journal title: Review of Business Research. Volume: 7. Issue: 2 Publication date: March 2007. Page number: 43+. © 2008 International Academy of Business and Economics. COPYRIGHT 2007 Gale Group.

This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.