The Effectiveness of Internal Auditing: An Empirical Examination of its Determinants in Israeli Organisations

I nternal auditing (IA) serves as an important link in the business and financial reporting processes of corporations and not-for-profit providers (Reynolds 2000). Internal auditors play a key role in monitoring a company’s risk profile and identifying areas to improve risk management (Goodwin-Stewart and Kent 2006). The aim of internal auditing is to improve organisational efficiency and effectiveness through constructive criticism. IA has four main components: (1) verification of written records; (2) analysis of policy; (3) evaluation of the logic and completeness of procedures, internal services and staffing to assure they are efficient and appropriate for the organisation’s policies; and (4) reporting recommendations for improvements to management (Eden and Moriah 1996). The subject is worthy of attention because internal auditors are important, even crucial, in an economy that relies upon independently produced information (Van Peursem 2005). Indeed, IA has become an indispensable management tool for achieving effective control in both public and private organisations (Eden and Moriah 1996). Control mechanisms are those processes set up to monitor and to direct, promote or restrain the various activities of an enterprise for the purpose of seeing that enterprise objectives are met (Sawyer 1988; Coram, Ferguson and Moroney 2008). By detecting weaknesses in management operations, IA provides a basis for correcting deficiencies that have eluded the first line of defence before these deficiencies become uncontrollable or are exposed in the external auditor’s report (Eden and Moriah 1996). As an example, Coram et al. (2008) found in a sample of 324 Australian and New Zealand organisations that those with an internal audit function are more likely to detect and self-report fraud through misappropriation of assets than those who do not. The current study looks at the effectiveness of IA, an important concept rarely examined in the scientific literature. Of the few studies dealing with IA’s effectiveness, most take as a starting point the perceptions of the external auditor and whether the external auditor uses the internal auditor’s work (Eden and Moriah 1996; Coram et al. 2008). While Eden Internal auditing (IA) has become an indispensable control mechanism in both public and private organisations. Yet very few academic studies have been conducted on the effectiveness of IA. The current exploratory study aims to build a conceptual understanding of the effectiveness of IA in organisations. Towards this end it develops a scale to measure the effectiveness of IA and a model of its determinants. One hundred and eight Israeli organisations that employ IA participated in the study (a 37% response rate). Data on the effectiveness of IA were collected from the organisations’ general managers and data on the determinants from their internal auditors. The findings reveal good psychometric properties for the scale developed in this study. The correlation and regression analyses show support from top management to be the main determinant of IA effectiveness, with some effect also found for the organisational independence of IA. The effect of the predictors was consistent between the public and private sectors. The research model explained a large amount of variance of IA effectiveness. The findings are discussed in terms of how they can help guide and encourage the continuation of research on this issue.