ROLE OF THE INTERNAL AUDIT FUNCTION IN CORPORATE GOVERNANCE: A SYNTHESIS OF THE EXTANT INTERNAL AUDITING LITERATURE AND DIRECTIONS FOR FUTURE RESEARCH, THE

10 INTRODUCTION

Extant internal auditing literature is extensive, and provides useful insights into the generally received and potential roles of the internal audit function (IAF) in corporate governance. Our objective herein is to synthesize literature upon internal auditing to guide futurity thinking and research on the novel and expanding roles that the IAF can play in helping render certain quality corporate governance. To organize our review we adopt the perspective that corporate governance is comprised of four cornerstones: the external auditor, the audit committee, management, and the IAF [Institute of Internal Auditors (IIA), 2003a]. We then focus upon the IAF "cornerstone" and by what mode the IAF can contribute to corporate governance from one side its relationships with the other three corporate governance parties. More specifically, we adopt a perspective that the IAF be under the orders ofs as a resource to each of the other three parties responsible for corporate governance. As part of that perspective, we recognize that the nature and value of the IAF as that resource are contingent upon the quality of the IAF. Accordingly, we begin our synthesis of the literature by dint of focusing on the internal auditing literature related to IAF quality, and then examine the literature upon the important three IAF corporate governance relationships.

The motivation for our focus upon the IAF stems from sum of two units important trends. First, research proposes that an IAF is associated with corporate governance quality. While a hardly any studies suggest that the IAF and its activities do not affect firm employee or corporate governance [Churchill and Cooper 1965; Uecker Brief, and Kinney, 1981] a fairly consistent finding across more new studies is that the IAF can have a positive influence upon corporate governance, including reporting quality and firm performance. Specifically, this literature insinuates that, under certain conditions, the IAF discourages financial reporting irregularities and employee theft [Schneider and Wilner, 1990; Hansen, 1997] Further, in settings where the LAF is independent, in limits of reporting level, an improved command environment and reduction in reporting errors proceed Finally, involvement by the IAF can benefit firm performance [Gordon and Smith, 1992]

Second in addition to the research suggesting that the IAF can improve corporate governance, we diocese a growing importance placed upon and expanded roles for, the IAF in ensuring quality corporate governance [eg Antoine, 2004] new financial reporting scandals have activeed actions directed at improving corporate governance. In the past, answers to scandals of this nature did not necessarily focus upon the role of the IAF. Today, however, many are looking to the IAF as part of the solution to a perceived breakdown in the combination of parts to form a wholes of business reporting, internal command and ethical behavior [Bailey, Gramling, and Ramamoorti, 2003]

With changes in the corporate governance part of the IAF, we also diocese changes in the LAF's relationships with the audit committee, management, and the external auditors [Antoine, 2004] Guidance, regulations, and various "best practices" articles and monographs all highlight the importance of a quality IAF having appropriate relationships with these other parties responsible for corporate governance. Accordingly, there is a ne for increased understanding about in what way the IAF interacts with the audit committee, management, and the external auditors to achieve quality corporate governance [Tapestry Networks, 2004]

In the nearest section, we discuss the four-cornerstones corporate governance framework, including the character of the LAF. As part of that discussion we describe extant professional guidance and best practices upon IAF quality and on the relationships between the IAF and the other three parties responsible for governance. The descriptions of LAF quality and the IAF relationships provide a framework for the literature synthesis we not absent in section three. Our final section provides a discussion of futurity research directions.

2.0 A FRAMEWORK OF CORPORATE GOVERANCE AND THE part OF THE INTERNAL AUDIT FUNCTION

Corporate governance comprises the managements and activities employed by the representatives of an organization's stakeholders to provide oversight of risk and ascendency processes administered by management. Effective corporate governance helps make sure accurate management reporting (e.g., reporting upon internal controls and financial results) and effective internal sways [Institute of Internal Auditors, 2003a].1 The organization's stakeholders include, among others, common and potential investors, employees, and creditors. The primary representatives of the organization's stakeholders are viewed as the four cornerstones of corporate governance, and include the audit committee of the board of directors, executive management, the external auditors, and the IAF.2

The IAF has had a corporate governance character in many organizations as early as the 1940 [Moeller 2004] and that part has evolved over time. The nature of internal audit activity today typically includes risk assessment, mastery assurance, and compliance work, all of which map directly into corporate governance [Hermanson and Rittenberg, 2003] The corporate governance character for the IAF will likely take upon increased importance given the of recent origin requirements imposed under the Sarbanes-Oxley Act of 2002 (hereafter SOX)