1aac Asa

Topics: Internal audit, Auditing, Corporate governance Pages: 30 (7029 words) Published: December 20, 2012
Corporate Governance, Internal Control and the Role of Internal Auditors – A Survey of Chinese Managers

Author details:
Dr. Jane J. Zhang
School of Accounting, Economics and Statistics
Edinburgh Napier University Business School
Craiglockhart Campus
Edinburgh EH11 1DJ, UK
Tel: 00-44-131-4554448
Fax: 00-44-131-4554460
Email: ja.zhang@napier.ac.uk

-1-

Corporate Governance, Internal Control and the Role of Internal Auditors – A Survey of Chinese Managers

Abstract
This study investigates the role of internal audit in relation to corporate governance (CG). Despite the fact that the contribution of internal audit has been argued essential for organisations to achieve their business objectives, very little has been known of corporate managers’ perception as to the practical functions of internal audit in the context of CG. This study attempts to bridge the gap by examining the role of internal audit in China’s current CG system via seeking the views of corporate managers. This study finds that the managers view internal audit as an important part of CG and the role of internal auditors has been considered much wider beyond traditional financial control. It reveals that internal audit in China has been greatly influenced by the recent developments of CG and the internal audit function has changed towards more involvement in risk management and internal control. The survey results suggest China’s CG codes do not provide adequate explanations on internal audit. The results also indicate that Chinese companies have recognised the major role that internal audit function plays and have increasingly provided the resources to improve the quality and expertise of their internal auditors.

Key words: China; Corporate Governance; Internal Audit; Internal Control; Risk Management.

-2-

I.

Introduction

This study explores and documents the relationship between corporate governance and internal audit. While prior studies have argued that successful internal audit has a positive impact on a firm’s operational performance (Holm and Laursen, 2007; Arena et al., 2006; Nagy and Cenker, 2002; Bou-Raad, 2000), a relationship between corporate governance and internal audit and to what extent this relationship contributes to business performance are relatively under-researched. Corporate governance is the process on which organisations are managed and controlled (Gao et al., 2008). It recognises “the inherent conflict in objectives between owner shareholders and managers” and thus “establishes institutions, policies, and procedures to protect shareholders’ interests” (McCarthy and Puffer, 2002, p.2). Though there is no single best corporate governance model, good corporate system should have effective organisational management and its approach to achieving the company’s objectives (Holm and Laursen, 2007; Ho, 2005). In the UK, the Combined Code of 2003 on Corporate Governance provides guidance on various issues in relation to board responsibility, accountability, audit committee and relations with shareholders (Sheridan et al., 2006). UK corporate governance stresses the importance of strengthening financial controls and accountability of the boards of directors to shareholders. All listed companies in the UK are now required as part of the listing rules to report the way they complied with the Code in their annual reports. The Combined Code also recommends that non-executive directors should be independent, underlining the important role that the non-executive directors play in contributing to and enhancing corporate governance. Many other countries and regions (such as US, Germany, China, and Hong Kong) have also developed their corporate governance guidance and legislations.

It has been widely recognised that the role of the internal auditor becomes increasingly more important in terms of creating good corporate governance structures (Allegrini et al., 2006; Carcello et al., 2005; Nagy and Cenker, 2002). It is...

References: Allegrini, M., D’Onza, G., Paape, L., Melville, R. & Sarens, G. (2006), ‘The
European literature review on internal auditing,’ Managerial Auditing Journal,
Alleyne, P., Howard, M. & Greenidge, D. (2006), ‘The role of audit committees in
Barbados,’ Corporate Governance, Vol
Al-Twaijry, A.A.M., Brierley, J.A. and Gwilliam, D.R. (2004), ‘An examination of
the relationship between internal and external audit in the Saudi Arabian
Apostolou, B. and Strawser, J. R. (1990), ‘The role of internal auditor communication
with the audit committee,’ Internal Auditing, 6(2) Fall: 35-42.
Arena, M., Arnaboldi, M. and Azzone, G. (2006), ‘Internal audit in Italian
organizations: a multiple case study’ Managerial Auditing Journal, Vol
Bou-Raad, G. (2000), ‘Internal auditors and a value-added approach: the new business
regime,’ Managerial Auditing Journal, Vol
Chen, J., Ke, Q. and Isaac, D. (2007), ‘Board characteristics as corporate governance
mechanisms’, in Chen, J
Economic and Trade Commission, January 7, 2001 (Zhengjianfa No.1 of 2002).
Crawford, M. and Stein, W. (2002), ‘Auditing risk management: fine in theory but
who can do it in practice?’ International Journal of Auditing, Vol
DeZoort, F. T. and Salterio, S. (2001), ‘The effects of corporate governance
experience and financial reporting and audit knowledge on audit committee
Dittenhofer, M. (2001), ‘Internal auditing effectiveness: an expansion of present
methods,’ Managerial Auditing Journal, Vol
European Confederation of Institutes of Internal Auditing, ECIIA (2005) Internal
Auditing
Fraser, I. and Henry, W. (2007), ‘Embedding risk management: structures and
approaches,’ Managerial Auditing Journal, Vol
Gao, S., G., Gao, and Zhang, T.X. (2008), ‘Corporate governance reform and firm
performance: Evidence from China,’ Research in Accounting in Emerging
Goodwin, J. and Yeo, T.Y. (2001), ‘Two factors affecting internal audit independence
and objectivity: evidence from Singapore,’ International Journal of Auditing,
Gramling A. A., Maletta M. J., Schneider A. and Church, B. K. (2004), ‘The role of
the internal audit function in corporate governance: A synthesis of the extant
Ho, C. (2005), ‘Corporate governance and corporate competitiveness: an international
analysis,’ Corporate Governance: An International Review, Vol
Holm, C. and Laursen, P.B. (2007), ‘Risk and control developments in corporate
governance: changing the role of the external auditor?’ Corporate Governance:
Kalbers, L.P., (1992), ‘An examination of the relationship between audit committees
and external auditors,’ The Ohio CPA Journal (USA), Vol
KPMG (2002) Corporate governance in Europe, KPMG Survey 2001/02, [Online]
http://www.kpmg.ch/library/pdf/20050427_Studie_Corporate_Governance_in_
Liu, Q. (2006), ‘Corporate governance in China: current practices, economic effects
and institutional determinants’, Economic Studies, Vol
McCarthy, D. & Puffer, S. (2002), ‘Corporate governance in Russia: towards a
European, US, or Russian model?’ European Management Journal, Vol
McHugh, J., Raghunandan, K. (1994), ‘Hiring and firing the chief internal auditor,’
Internal Auditor, Vol
Mihret, D.G. and Yismaw, A.W. (2007), ‘Internal audit effectiveness: an Ethiopian
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay about asas
  • asas Essay
  • ASAS Essay
  • asas Essay
  • asas Essay
  • Asa Tut8 Essay
  • Asa Bangladesh Essay
  • Synthesis of Asa Essay

Become a StudyMode Member

Sign Up - It's Free