Accepted Manuscript

Title: The Impact of Audit Committee Characteristics on the

Implementation of Internal Audit Recommendations

Author: Abdulaziz Alzeban

PII: S1061-9518(15)00009-9
DOI: http://dx.doi.org/doi:10.1016/j.intaccaudtax.2015.02.005
Reference: ACCAUD 200

To appear in: Journal of International Accounting, Auditing and Taxation

Received date: 21-9-2013

Revised date: 24-2-2015
Accepted date: 24-2-2015

Please cite this article as: Alzeban, A.,The Impact of Audit Committee
Characteristics on the Implementation of Internal Audit Recommendations,
Journal of the Chinese Institute of Chemical Engineers (2015),
http://dx.doi.org/10.1016/j.intaccaudtax.2015.02.005

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*Title Page (including author details)

The Impact of Audit Committee Characteristics on the Implementation of Internal Audit

Recommendations

Abdulaziz Alzeban*
King Abdulaziz University
Nedal Sawan

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Liverpool Business School

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*Corresponding Author
Abdulaziz Alzeban

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aziztheban@yahoo.com

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*BLINDED Manuscript (no author details)

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4 The Impact of Audit Committee Characteristics on the Implementation of
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6 Internal Audit Recommendations
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8 ABSTRACT: Regulators and others highlight the importance of the interaction between the
9 audit committee and internal audit. One of the roles of the audit committee is to review and
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monitor managements response to internal audit findings and recommendations. This study
12 provides empirical evidence of the association between audit committee characteristics and

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13 perceptions of implementation of internal audit recommendations. Using data from a survey

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14 of chief internal auditors from UK-listed companies, the study finds that greater perceptions
15 of the implementation of internal audit recommendations are strongly related to the presence
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of independent members of the audit committee and to those members expertise in

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18 accounting and auditing. The results also suggest that perceptions of implementing internal
19 audit recommendations are influenced by frequent meetings between the audit committee and

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20 chief internal auditors.
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23 Keywords: audit committee, internal audit, internal audit recommendations
24

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25 1. INTRODUCTION
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27 The importance of effective internal audit and the existence of an effective audit committee
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(AC), as the foundation of good corporate governance, has been increasingly recognized in the
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31 aftermath of various financial collapses (Bdard and Gendron, 2010). Many such collapses
32 occurred in the early 2000s, causing confidence in capital markets to plummet. Consequently,
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34 more attention has been directed towards the internal audit function (IAF) and the ACs role in
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36 helping the board of directors discharge its financial and fiduciary obligations (Puri et al., 2010).
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38 As a corporate governance mechanism, the AC is charged with scrutinizing company financial
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40 information and with facilitating the work of internal audit and financial accountants. The AC is
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also obligated to monitor the IAF. To execute these duties, the AC must assist the IAF which
43 acts to discharge the committees responsibilities on its behalf. In addition, the AC and the IAF
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45 must be attached to senior management, so they are not undermined by other organizational
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47 functions (Soh and Bennie, 2011).
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51 Substantial archival research shows that AC characteristics influence internal audit (e.g.
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Adel and Maissa, 2013; Abbott et al., 2010; Barua et al., 2010; Callahan and Soileau, 2010;
54 Cahill, 2006; Mat Zain et al., 2006; Stewart and Kent, 2006; Goodwin, 2003). Specifically, the
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56 internal audit budget is associated with the number of AC meetings, suggesting that a diligent
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58 AC is more supportive of the IAF, leading to a higher internal audit budget (Barua et al., 2010).
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4 However, no empirical research examines the impact of such characteristics on perceptions of
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6 the degree of success in implementing internal audit recommendations. This lack of research
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8 motivates the current study, which attempts to fill the void by exploring empirically whether
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10 specific AC characteristics influence the effectiveness of internal audit (EIA). We measure EIA
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12 by the perceptions of Chief Internal Auditors (CIAs) regarding the implementation of internal

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audit recommendations. As a second motivation, we seek to determine the degree of influence of
15 each of the ACs characteristics upon the EIA. Thus, this the results of this study will
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17 complement existing research and point the way to further research opportunities.
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21 The present study also extends prior research by introducing a different measure of the
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23 EIA. It examines the link between AC characteristics, and perceptions regarding the degree of
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implementation of internal audit recommendations, whereas previous studies focused on other
26 indicators, for example, reporting independence and quality assurance review procedures
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28 (Callahan and Soileau, 2010), internal audit budget (Barua et al., 2010; Carcello et al., 2005), and
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30 size of internal audit unit and proportion of staff with audit experience (Mat Zain et al., 2006). It
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32 is argued that the greater the independence of the AC, the higher the perception of successful
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34 implementation of internal audit recommendations. Likewise, there are perceptions that

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implementation of internal audit recommendations is higher when there is greater expertise
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37 among the AC members, and when the AC has frequent meetings. Four AC characteristics
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39 (independence of AC, expertise of AC members, number of meetings, and number of members)

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41 are identified as features affecting EIA. We formulate hypotheses on the impact of these
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43 characteristics on EIA and test these hypotheses via regression models on data collected from
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45 188 CIAs in UK companies listed on the London Stock Exchange. This sample is chosen since
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46 the UK institutional context is mature in terms of internal audit and risk management (Zaman,
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48 2001; Zaman et al., 2011), having reached the stage where the UK Corporate Governance Code
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50 (FRC, 2012b) indicates the responsibility of the board of directors as being to determine the
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52 significant risks a company will accept in order to obtain its strategic objectives. Additionally,
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54 the board is mandated to report to shareholders annually its behavior in this respect.
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4 Our hypotheses result from the assumption that more effective internal audit outcomes arise
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6 from a more independent, competent and interactive AC. Such a committee is predisposed to act
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8 within its span of control, and consequently, internal audit recommendations are more likely to
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10 be implemented, resulting in greater internal audit effectiveness.
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2. PRIOR RESEARCH AND HYPOTHESES DEVELOPMENT
15 The Financial Reporting Council (FRC) Guidance on Audit Committee (2012a) and Corporate
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17 Governance Code (2012b) describe ACs as key to good corporate governance, and obligate them
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19 to monitor and review the effectiveness of the IAF. Additionally, ACs are required to provide

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21 direct access to the board chairman and to the AC for the internal auditor, who must be
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23 accountable to the AC. Furthermore, the AC has responsibility for reviewing and evaluating the
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annual internal audit work plan, for receiving periodic reports on the outcomes of the internal
26 auditors work, and for reviewing and monitoring managerial response to the findings and
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28 recommendations contained within those outcomes. The AC is also obliged to meet with the
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30 head of internal audit at least annually without management being present, and to evaluate the
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32 role and degree of EIA within the companys risk management system. Essentially, the AC is
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34 responsible for monitoring the IAF and for ensuring it is provided sufficient financial resources
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(Carcello et al., 2002 and 2005). In fact, more financial resources have been shown to flow to the
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37 IAF when its annual budget is reviewed by the AC (Carcello et al., 2005).
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41 The AC, and the EIA, have been explored by Callahan and Soileau (2010) in connection
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43 with their influence on the implementation of enterprise risk management (ERM) within
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45 organizations. These researchers discussed the particular AC characteristics of: number of
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46 members, number of meetings, and the percentage of members who are financial experts. In
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48 respect of internal audit, they considered organizational reporting independence and staff
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50 competence. Their findings demonstrated that the number of AC meetings and the percentage of
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52 financial experts among AC members (AC characteristics), and reporting independence and
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54 quality assurance review procedures (internal audit functions), are related to the likelihood that a
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56 firm will implement ERM processes.
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4 The link between AC oversight and the resources directed towards internal control
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6 activities was explored by Abbott et al. (2010). They demonstrated that ACs with greater IAF
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8 oversight generally invest more in the IAF, by underwriting more hours to that activity, and by
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10 the level of implementation of IAF recommendations. Similarly, Mat Zain et al. (2006) showed,
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12 in the Malaysian context, a positive link between internal auditors assessment of their

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contribution to financial statement audits and three particular characteristics of the AC: the
15 proportion of independent AC members, their knowledge and experience of accounting and
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17 auditing, and the extent of AC review of internal audit programs, budget, and co-ordination
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19 proposals. Hence, a link between AC characteristics and the implementation of IAF

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21 recommendations exists in the internal auditors perception of their potential contribution.
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AC traits may support or hinder internal auditors, meaning the AC can be helpful or
26 otherwise in the implementation process. Mihret and Yismaw (2007) highlight the need for
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28 management support in providing the necessary resources to the IAF to enable successful
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30 implementation of recommendations. Adams (1994) used agency theory to explain why it is in
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32 managements interest to maintain a robust internal audit department. Clearly, the aim of audit
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34 effectiveness is logical, but it cannot be realized without management commitment to implement

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internal auditors recommendations (Van Gansberghe, 2005; Sawyer, 1995).
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39 It is important to acknowledge that none of the factors identified is truly independent

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41 since the ACs behavior in one area may be conditional upon its actions in another. Many
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43 researchers (e.g. Mat Zain et al., 2006; Abbott et al., 2004; Goodwin, 2003; Abbott and Parker,
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45 2000) have recognized that the nature of the AC is determined by its level of independence,
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46 member expertise, number of members, number of meetings, and the extent of interaction with
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48 the internal auditor. This study accepts these premises but differs, in particular from that
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50 conducted by Mat Zain et al. (2006) in that it suggests an effective AC is associated with a
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52 higher rate of implementation of internal audit recommendations. Mat Zain et al. (2006) argue
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54 that internal auditors make a greater contribution to financial reporting when the AC is more
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56 independent, and members possess knowledge of accounting and auditing. Therefore, it can be
57 argued that the more effective the AC, the more able are the internal auditors to contribute to
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4 financial reporting, and thus, a higher rate of implementation of recommendations is evident.
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6 Consequently, the study presents hypotheses concerning the influence of these AC characteristics
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8 on the EIA. These are tested using responses from 188 CIAs in UK-listed companies. Figure 1
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10 presents the model of this study.
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Insert Figure 1 Here
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17 Our hypotheses seek to determine the precise relationships between the identified AC
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19 factors and perceptions of whether IAF recommendations are implemented. Although prior

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21 research suggests that AC characteristics are related to interaction with internal audit, fees paid
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23 to the external auditor, auditor selection (e.g., Vermeer et al., 2009; Abbott et al., 2004; Carcello
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et al., 2002; Raghunandan et al., 2001; Abbott et al., 2002), it is still not known how the
26 characteristics of the AC (number of members, expertise of audit committee members,
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28 independence, and number of meetings) are related to the implementation of internal audit
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30 recommendations. Consequently, this study extends the literature, specifically in terms of how
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32 AC characteristics influence audit recommendations.
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2.1 Independence of the Audit Committee
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37 The importance of AC independence is highlighted in the FRC Guidance on Audit Committee
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(2012a), which states: the board should establish an audit committee of at least three, or in the
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41 case of smaller companies two, independent non-executive directors. In smaller companies the
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43 company chairman may be a member of, but not chair, the committee in addition to the
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45 independent non-executive directors, provided he or she was considered independent on
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46 appointment as chairman.
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50 AC independence promotes greater effectiveness in the monitoring of internal controls
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52 and a firms financial reporting (Barua et al., 2010), since members are more likely to want to
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54 preserve their own reputation, less likely to be influenced by the wishes of others whose interests
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56 might be served by partisan reporting, and more likely to require higher audit quality (Abbott and
57 Parker, 2000; Carcello and Neal, 2000). The need to sustain personal reputations and to avoid
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4 risks associated with litigation arising from incorrect reporting, predisposes members who can
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6 act independently to require more assurance, thereby prompting greater investment in the IAF.
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8 Mat Zain et al. (2006) found that a more effective contribution to the external audit is possible
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10 when the AC is independent. Scarbrough et al. (1998) provide evidence of a greater likelihood of
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12 frequent meetings between independent ACs and the chief audit executive, thus supporting and

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facilitating IAFs work, thereby enabling the AC to stay abreast of internal audit findings and

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15 expect greater implementation of its recommendations.
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19 The tendency of independent ACs to demand deeper IAF scrutiny of organizational

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21 procedures enhances the scope of activities, improves internal controls, and makes the IAF more
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23 effective overall. Where AC members are independent, there is less encouragement for them to
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counter any mismanagement that might negatively influence a firms financial performance.

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26 Hence, such ACs are predisposed to implement IAF recommendations. The following hypothesis
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28 is formulated:
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31 H1: There is a positive relationship between independence of the audit committee and
32 perceptions of implementation of internal audit recommendations.
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2.2 Expertise of Audit Committee Members
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38 The FRC (2012a) stipulates that the AC should have appropriate expertise, stating that the
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40 board should satisfy itself that at least one member of the audit committee has recent and
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relevant financial experience. This requirement acknowledges up-to-date financial knowledge
43 as essential for AC membership. Furthermore, the FRC emphasizes the expertise of external
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45 auditors, encouraging ACs to use this expertise whenever possible to improve their appreciation
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47 of the organizations risk management strategies. This requires ACs to take appropriate financial
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49 decisions, and undertake accurate cost-benefit analyses of operational decisions. Many such
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51 judgments are subjective and extensive consultation is useful in minimizing the associated
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pitfalls. Moreover, the AC requires knowledge and expertise for effective communication with
54 internal and external auditors on the issue of controls and how to adequately recognize and
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56 address potential audit risks (McDaniel et al., 2002). Clearly, the ACs responsibility can only be
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4 effectively discharged if its members are capable of liaising with the organizations entire audit
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6 function and ensuring proper implementation of internal and external audit recommendations.
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10 Adel and Maissa (2013) confirm the positive influence on the interaction between the
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12 IAF and the AC in cases where AC members are knowledgeable. Mat Zain et al. (2006) showed

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a significant correlation between internal auditors estimation of their contribution to the

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15 financial statement audit and the degree of accounting and auditing understanding possessed by
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17 AC members. Other researchers also find links between AC members accounting expertise, and
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19 overall IAF effectiveness (including the quality of financial reporting) (e.g., Dhaliwal et al.,

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21 2010; Naiker and Sharma, 2009; Krishnan and Visvanathan, 2008). The frequency of meetings
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23 between the AC and the Certified Internal Auditors (CIA) is found to be an important indicator
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of overall effectiveness by Raghunandan et al. (2001). Goodwin (2003) also finds a positive
26 relationship between the expertise of AC members and their unhindered private access to the
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28 CIA. Hence, we argue that the presence of accounting and auditing expertise will enhance the
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30 implementation of internal audit recommendations. The following hypothesis is formulated:
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34 H2: There is a positive relationship between the knowledge and experience of audit
35 committee members in accounting, auditing and finance, and the perceptions of the
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36 implementation of internal audit recommendations

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39 2.3 Frequent Meetings of the Audit Committee

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The FRC (2012a) stresses the frequency of meetings between the AC and internal auditors as a
43 promoter of good communication. Specifically, the FRC recommends at least three meetings
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45 annually. Bedard et al. (2004) perceive such frequency as an indicator of effectiveness, and
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47 DeZoort et al. (2002) observe the enhanced performance of members in this regard.
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51 Previous research finds that a high frequency of such meetings minimizes opportunities
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for internal control and reporting problems (Naiker and Sharma, 2009; Zhang et al., 2007;
54 Abbott et al., 2004; Archambeault and DeZoort, 2001; DeFond and Francis, 2005), and provides
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56 greater support to the IAF (Raghunandan and Rama, 2007), which Barua et al. (2010) highlight
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58 includes positive outcomes for the IAF budget. Hence, we argue that greater implementation of
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4 internal audit recommendations occurs when the AC meets frequently. The following hypothesis
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6 is formulated:
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10 H3: There is a positive relationship between the frequent meeting of the audit committee
11 and perceptions of the implementation of internal audit recommendations
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15 2.4 Number of Audit Committee Members
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The FRC (2012a) suggests that there should be a minimum of three members on the AC. More

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18 members may bring enhanced diversity and overall expertise that may reduce the need for large
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20 investment in the IAF. However, Barua et al. (2010) did not find a relationship between the
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22 budget for internal audit and the size of the AC. Nor did Abbott et al. (2002) find a relationship
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24 between poor financial reporting and the size of the AC. More recently, Adel and Maissa (2013)

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26 were unable to find a relationship between the size of the AC and its levels of interaction with
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the IAF.
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31 Other researchers argue that increased size prompts more investment in the IAF and
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33 hence, increases the likelihood of IAF recommendations being implemented. Greater AC
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35 effectiveness is found to be associated with the number of members (e.g. Benjamin and
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37 Karrahemi, 2013; Zaman et al., 2011; Callahan and Soileau, 2010; DeZoort et al. 2002). Some
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researchers observe that the status and authority of the AC within the organization is reflected by
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40 the number of members it contains (Kalbers and Fogarty, 1993; Benjamin and Karrahemi, 2013).
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42 Khanchel (2007) notes the positive impact of a large AC on an organizations corporate

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44 governance, and Hamdan et al. (2013) extend this to include overall firm performance. Bigger
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46 ACs engage in quality discussion (DeZoort and Salterio, 2001; Dhaliwal et al., 2010), and
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48 allocate more resources to the IAF, consequently imposing more effective internal controls and
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enjoying more accurate financial reporting (Anderson et al., 2004). Hence, the following
51 hypothesis is formulated:
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55 H4: There is a positive relationship between audit committee size and perceptions of
56 implementation of internal audit recommendations
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4 2.5 Relationship between Internal Audit and the Audit Committee
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6 The FRC Guidance on Audit Committees (2012a) and Corporate Governance Code (2012b)
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8 emphasize an effective working relationship between the AC and the IAF as essential to good
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10 corporate governance. The FRC Guidance on Audit Committees, and the Institute of Internal
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12 Auditors Practice Advisory, Relationship with Audit Committee highlight the role of ACs in

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relation to internal audit, pointing particularly to: meeting with the head of internal audit;
15 involvement in appointing and dismissing the head of internal audit; monitoring and reviewing
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17 the work of the IAF, the adequacy of internal audit resources, and the risk management process.
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19 It is through liaison with the IAF that some AC members accumulate their understanding of risk

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21 management and the degree of effectiveness of internal controls (Arena and Azzone, 2009;
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23 Krishnan, 2005). With such understanding, committee members can establish a power base for
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the IAF within an organization, facilitating its ability to discharge its responsibilities (Beasley et
26 al., 2009; Turley and Zaman, 2007; Gendron and Bedard, 2006). Following previous studies (e.g.
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28 Adel and Maissa, 2013; Arena and Azzone, 2009; Mat Zain et al., 2006; Raghunandan et al.,
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30 2001), this study focuses on three main aspects: 1) frequency of meetings between the AC and
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32 the Chief Internal Auditor (CIA); 2) AC involvement in the appointment and dismissal of the
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34 CIA; and 3) review of internal audit programs and procedures including the internal audit
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budget, and their reports on internal controls, co-ordination of activities with external auditors,
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37 and risk management processes.
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41 2.5.1 Frequent meetings between the audit committee and chief internal auditor
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43 Frequent meetings between the AC and the CIA provide the opportunity for regular and timely
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45 information exchange (Raghunandan et al., 2001). The committee can remain informed and able
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46 to facilitate internal auditors work. Discussions on potential improvements to the financial

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48 reporting system can occur (Mat Zain et al., 2006), thereby enhancing the quality of corporate
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50 governance (DeZoort and Salterio, 2001).
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54 2.5.2 Audit committee involvement in the appointment and dismissal of the chief internal
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56 auditor
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4 Researchers argue that the CIA appointment should be free from senior management influence to
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6 ensure impartiality and remove fear of retaliation felt by internal auditors when they must report
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8 on poor managerial behavior (Christopher et al., 2009; Bailey, (2007). Mat Zain et al. (2006)
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10 note the decreasing influence of general management when the AC is involved in the
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12 appointment and removal of the CIA, and that knowledge of this amongst internal auditors

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increases their confidence in discharging their duties, especially those connected with sensitive
15 matters. Hence, the ACs involvement in major decision-making concerning the CIA results in
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17 increased IAF empowerment, and in greater chance of its recommendations being implemented.
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19 2.5.3 Involvement in reviewing the internal audit program and processes

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21 The AC must review the organizations internal audit program and processes, to earmark
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23 sufficient resources for the IAF to discharge its obligations (FRC, 2012a), and to evaluate
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outcomes from IAF activities. Clearly, the amount of oversight by the AC influences
26 opportunities for identifying the IAF programs strengths and weaknesses, and for ensuring that
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28 internal audit recommendations are properly acted upon.
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32 Earlier research (Goodwin, 2003; Goodwin and Yeo, 2001; Raghunandan et al., 2001)
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34 proposed that the status of the IAF within the organization is enhanced with greater levels of
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interaction between the AC and the IAF, specifically when that interaction relates to the IAFs
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37 involvement in risk management. Abbott et al. (2010) and Carcello et al. (2005) demonstrate that
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39 AC involvement in budgetary matters brings greater investment in the IAF, and more attention to
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41 the work of internal auditors, since the committee can request internal auditors to amend internal
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43 control structures and/or to direct attention to particular areas of perceived high risk activity. The
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45 outcome of such engagement by the AC with the IAF is a stronger likelihood that IAF
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46 recommendations will be implemented. Hence, the fifth hypothesis:

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50 H5: There is a positive relationship between the extent of audit committee interaction with
51 the internal audit function and the perceptions of implementing internal audit
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recommendations
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56 2.5.4 Effectiveness of internal audit
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4 The way in which the effectiveness of the IAF is evaluated is important. Some studies have
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6 focused on the extent to which internal audit complies with the International Standards for the
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8 Professional Practice of Internal Auditing (ISPPIA) (Fadzil et al., 2005; Xiangdong, 1997;
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10 Spraakman, 1997). Some researchers (Cohen and Savag, 2010; Frigo, 2002; Ziegenfuss, 2000;
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12 Barrett, 1986) have concentrated on the IAFs ability to satisfy auditees needs, attempting to

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assess satisfaction levels in a direct way, whereas others (Arena and Azzone, 2009; Mihret and
15 Yismaw, 2007; Van Gansberghe, 2005; Sawyer, 1995) have considered the degree to which IAF
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17 recommendations are endorsed and implemented, thus using an indirect measure.
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21 According to the Institute of Internal Auditors (IIA), internal audit should provide
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23 independent, objective assurance and consulting services designed to add value and improve an
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organizations operations the internal audit activity helps an organization accomplish its

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26 objectives by bringing a systematic, disciplined approach to evaluate and improve the
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28 effectiveness of governance, risk management and control processes. Consequently, the IAF
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30 should assure the AC and senior management that all organizational processes and systems are
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32 appropriately designed to manage risk, and where necessary allow for changes to be introduced
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34 should they be required to meet this overall objective. The EIA is measured in this study as the
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percentage of recommendations suggested by the CIA and actually implemented by the auditees
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37 (see, e.g. Arena and Azzone, 2009; Mihret and Yismaw, 2007; Van Gansberghe, 2005).
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41 3. RESEARCH METHOD
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43 Data was collected via a survey, from which a measure of internal audit recommendations was
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45 identified and regressed against AC characteristics. Consistent with much prior internal audit
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46 research (e.g. Abbott et al., 2010; Mat Zain et al., 2006; Carcello et al., 2005) our survey
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48 questionnaire was mailed to CIAs. A total of 542 questionnaires were sent to CIAs of UK
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50 companies listed on the London Stock Exchange. From this distribution, 188 (34%) responses
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52 were received. This response rate is reasonable when compared with rates achieved by previous
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54 studies. For example, Zaman and Sarens (2013), studying informal interaction between ACs and
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56 the IAF, achieved a response rate of 27.8% from CIAs in UK-listed companies. An Australian
57 study by Leung et al. (2011) focusing on the accountability structures and management
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4 relationships pertaining to the IAF, obtained a response rate of 21.4%. In the current study,
5
6 questionnaires received after a reminder was sent were considered as late respondents, and
7
8 subsequently functioned as a proxy for non-respondents. No significant differences were found
9
10 when comparing the independent and control variables between early and late respondents, thus
11
12 indicating no non-response bias.1

t
13

ip
14
15 In constructing the survey questions, we consulted instruments successfully used in
16

cr
17 previous studies, in keeping with the recommendations concerning research methodology found
18
19 in Bryman and Bell (2007). The questionnaire was designed to obtain the perceptions of internal

us
20
21 audit recommendations and AC characteristics, and comprised five sections. Section A gathered
22
23 general information about respondents and their internal audit departments (academic
24

an
25
qualifications, professional qualifications, work experience, and budgeting). Section (B) assessed
26 AC characteristics. Section (C) focused on the interaction between internal audit and the AC.
27
28 Section (D) concerned perceptions of the implementation of internal audit recommendations, and
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29
30 Section (E) focused on the extent of management support for internal audit.
31
32
33
d

34 3.1 Model
35
Consistent with prior research (e.g. Abbott et al., 2010; Mat Zain et al., 2006; Carcello et al.,
te

36
37 2005), we estimate the following OLS regression equation to examine the association between
38
p

39 AC characteristics and perceptions of implementation of internal audit recommendations:

40
41
ce

42 RECOMMEND = b0 + b1 SUPPORT + b2 TENURE + b3 INDEPENDENCE + b4 EXPERTISE

43 + b5 FREQUENCY+ b6 SIZE+ b7 MEETING+ b8 APPOINT + b9 REVIEW1+ b10
44
45 REVIEW2+ b11 REVIEW3+ ei
Ac

46
47
48 Where:
49 RECOMMEND = Perceptions of implementation of internal audit recommendations. (0 =
50
Internal audit recommendations have never been implemented to 100 =
51
52 Internal audit recommendations are always implemented).
53 SUPPORT = Management support for internal audit (1 = Strongly disagree to 5 =
54 Strongly agree).
55
56 1
Statistical testing was conducted to determine whether there were significant differences between the responses of
57 early and late respondents. The t-tests indicated no significant difference between early (166 respondents) and late
58 (22 respondents) in respect of measures of the variables of the study.
59
60 12
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3
4 TENURE = Number of years the CIA has been in his/her position.
5 INDEPENDENCE = Number of independent members on the audit committee as a percentage
6
7
of total number of members on the committee.
8 EXPERTISE = Audit committee members knowledge-level relating to accounting
9 and auditing (1 = Poor to 5 = Excellent).
10 FREQUENCY = Frequency of audit committee meetings.
11 SIZE = Number of audit committee members.
12 MEETING = Frequency of meetings between the audit committee and CIA.

t
13 APPOINT = Audit committee involvement in appointment and removal of CIA (0 =

ip
14 No, 1 = Yes).
15
REVIEW1 = Audit committee reviews internal audit programme, plans, and budget
16

cr
17 (1 = Strongly disagree to 5 = Strongly agree).
18 REVIEW2 = Audit committee reviews internal audits financial reporting, internal
19 control, and compliance with law and regulations (1 = Strongly disagree
to 5 = Strongly agree).

us
20
21 REVIEW3 = Audit committee reviews internal audit involvement in risk management,
22 and scope restrictions (1 = Strongly disagree to 5 = Strongly agree).
23
24

an
25 Our control variables are based on the results of previous research (Alzeban and Sawan, 2013;
26
27 Alzeban and Gwilliam, 2014; Cohen and Savag, 2010; Mihret and Yismaw, 2007) which finds
28
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29 that management support is positively and significantly related to the implementation of internal
30
31 audit recommendations. We also control for CIA tenure, believed to influence the quality of the
32
33
IAF (see Pizzini et al., 2011; Beasley et al., 2009; Walker et al., 2002). The other nine variables
d

34 in the regression model test the hypotheses as follows: INDEPENDENCE tests H1; EXPERTISE
35
te

36 tests H2; FREQUENCY tests H3; SIZE tests H4; MEETING, APPOINT, REVIEW1,
37
38 REVIEW2, and REVIEW3 test H5.
p

39
40
41
ce

42 4. RESULTS
43
44
4.1 Primary Analysis
45 Table 1 presents descriptive statistics, indicating that 74% of ACs are comprised solely of
Ac

46
47 independent directors, and that all ACs have at least one expert in accounting or auditing (with
48
49 an average of 3.8). Sample ACs meet on average 5.2 times annually, with a minimum of 1 and a
50
51 maximum of 9 meetings. Further, the average size of ACs is 4.1 directors. Sample ACs meet
52
53 with the CIAs on average 3.5 times annually, and are involved in the decision to appoint and
54 dismiss CIAs (.64). Additionally, sample ACs are involved in reviewing internal audit programs,
55
56 planning, and budgeting, and there is internal audit involvement in risk management. However,
57
58
59
60 13
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 1
2
3
4 the average score for the ACs review of the IAFs financial reporting, internal control, and
5
6 compliance with law and regulations, is somewhat low at 2.1.
7
8 Insert Table 1 Here
9
10
11 Table 2 presents the correlation matrix for the dependent, independent, and control
12

t
13 variables included in this study. Our dependent variable RECOMMEND is positively and

ip
14
15 significantly correlated with five variables p < .01 (SUPPORT, INDEPENDENCE,
16
EXPERTISE, TENURE, APPOINT) and p < .05 (MEETING), consistent with prior studies (e.g.

cr
17
18 Barua et al., 2010; Naiker and Sharma, 2009; Raghunandan and Rama, 2007; Zhang et al., 2007;
19

us
20 Abbott et al., 2004; Archambeault and DeZoort, 2001). Three variables are positively correlated
21
22 with RECOMMEND but not significant p > .05 (FREQUENCY, REVIEW3, REVIEW1). Two
23
24 variables have a negative association with RECOMMEND, REVIEW2 and SIZE (p > .05),

an
25
26 consistent with prior studies (e.g. Adel and Maissa, 2013; Barua et al., 2010; Abbott et al., 2002).
27
28
M
29 Insert Table 2 Here
30
31
32
33 Table 3 presents the regression results. The overall model is significant at p < .01, with an
d

34
35 adjusted R2 of .288. Coefficients on the control variables (SUPPORT p < .01 and TENURE p <
te

36
37 .05) are significant. For our test variables, the coefficient on INDEPENDENCE shows a
38
significant positive association (supporting H1) suggesting that the presence of independent AC
p

39
40 members is associated with greater perceptions that internal audit recommendations are actually
41
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42 implemented. Further, the regression results suggest that INDEPENDENCE, among AC

43
44 characteristics, contributed the most to RECOMMEND ( = .306). The regression results also
45
Ac

46 indicate a significant association between perceptions of implementation of internal audit

47
48 recommendations (RECOMMEND) and the extent of AC members knowledge of accounting
49
50
and auditing issues (p < .05), thus supporting H2. A positive coefficient indicates that the
51 stronger the level of AC knowledge, the higher the likelihood that internal audit
52
53 recommendations are implemented.
54
55 Insert Table 3 Here
56
57
58
59
60 14
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64 Page 15 of 29
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 1
2
3
4 The coefficient of FREQUENCY is positive (p > 0.05), but not significant (does not
5
6 support H3). However, the regression results indicate a negative association between the size of
7
8 the AC (SIZE) and RECOMMEND, thus rejecting H4. This result suggests no relation between
9
10 the size of the AC and perceptions of the implementation of internal audit recommendations.
11
12 This negative relation is consistent with prior studies (e.g. Adel and Maissa, 2013; Barua et al.,

t
13

ip
14
2010) who found no association between the size of the AC and interaction with internal audit.
15
16

cr
17 The regression results indicate partial support for H5, since while one dimension
18
19 (MEETING) of AC interaction with internal audit is positively and significantly (p < .01)

us
20
21 associated with RECOMMEND, three dimensions (APPOINT, REVIEW1, REVIEW3) are
22
23 positively but not significantly associated with RECOMMEND, and one dimension has a
24

an
25
negative association (REVIEW2). In detail, the results indicate that frequent meetings between
26 the AC and the CIA are positively and significantly associated with perceptions of
27
28 implementation of internal audit recommendations (RECOMMEND) p < .01. This suggests that
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29
30 the more the AC meets with the CIA, the more that committee will be informed about issues
31
32 facing internal auditors, the more it will engage in discussion concerning the internal audit report
33
d

34 and recommendations, and the more it will review and monitor managements responsiveness to
35
internal auditors findings and recommendations. Moreover, the results indicate that AC
te

36
37 involvement in the appointment and removal of the CIA has a positive association with
38
p

39 RECOMMEND (p = .052) suggesting that this involvement provides greater empowerment of

40
41 the IAF and hence, generates greater perceptions of implementation of internal audit
ce

42
43 recommendations.
44
45
Ac

46 Overall, our findings indicate that independence of the AC, and AC members with
47
48 knowledge of accounting and auditing, significantly influence the implementation of internal
49
50 audit recommendations. These findings provide empirical support to those of Mat Zain et al.
51
52 (2006) who found that internal auditors make a greater contribution to financial reporting when
53
54 the AC is more effective (in terms of independence and auditing experts). Hence, it can be
55
56
57
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59
60 15
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64 Page 16 of 29
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 1
2
3
4 argued that the more effective the AC, the more able are the internal auditors to contribute to
5
6 financial reporting, and more internal audit recommendations are implemented.2,3
7
8
9
10 4.2 Further Analysis
11
12 We examine the sensitivity of our results by including certain demographic variables

t
13

ip
14
(CERTIFICATIONS, TRAINING, SIZEIA, and BUDGET) in the model. The results remain
15 robust when these demographic variables are introduced. The overall model is significant at p <
16

cr
17 .01, with an adjusted R2 of .502. While further analysis indicates significant association at the
18
19 level of p < .01 between perceptions of implementation of internal audit recommendations

us
20
21 (RECOMMEND) and CERTIFICATIONS, the other three variables (TRAINING, SIZEIA,
22
23 BUDGET) are also significant (p < .05). This suggests that these variables play a complementary
24
role in enhancing the implementation of internal audit recommendations.4 Further, this result

an
25
26 indicates that organizations that provide sufficient resources (in terms of size and budget) to the
27
28 IAF may increase the rate of implementing internal audit recommendations. These results
M
29
30 support those of Mat Zain et al. (2006) who found that the larger the size of the internal audit
31
32 unit and the larger the proportion of internal audit staff with accounting and auditing experience,
33
d

34 the greater the internal auditors assessment of their contribution to the external audit. Therefore,
35
it can be argued that the more resources possessed by the IAF, the greater the internal auditors
te

36
37 assessment of their contribution to the external audit, and the higher the number of internal audit
38
p

39 recommendations implemented.
40
41
ce

42
43 The sensitivity of our results is further examined by excluding non-significant variables.
44
45 Results are robust even when excluding these variables. The overall model is significant at p
Ac

46
47
48
2
49 We also test whether the presence of an auditing expert on the AC has more effect on implementation of internal
50 audit recommendations when the AC is independent (EXPERTISE * INDEPENDENCE). We find that the
51 coefficient on the interaction between EXPERTISE and INDEPENDENCE is positive and significant ( = .344, p <
52 0.01). This indicates that when AC members are independent and have auditing expertise, the implementation of
53 internal audit recommendations increases.
3
54 Further, we test whether the presence of AC expertise has more effect on the implementation of internal audit
55 recommendations when there is frequent meeting between the AC and CIA (EXPERTISE * MEETING). We find
56 that the coefficient on the interaction between EXPERTISE and MEETING is significant ( = .282, p < 0.01). This
57 suggests that when the AC members have auditing expertise and meet frequently with the CIA, the implementation
58 of internal audit recommendations increases.
4
59 For brevity, these results are not tabulated, but are available from the authors upon request.
60 16
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64 Page 17 of 29
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 1
2
3
4 <.01 with an adjusted R2 of .433. Thus, all three AC characteristics (INDEPENDENCE,
5
6 EXPERTISE, and MEETING) are significantly associated with RECOMMEND at p <.01.
7
8
9
10 5. CONCLUSION
11
12 This paper explores the impact of AC characteristics on the perceptions of implementation of

t
13

ip
14
internal audit recommendations. Our results provide evidence that the presence of specific
15 characteristics (independence of the AC, expertise of AC members, number of meetings, and size
16

cr
17 of AC) influence perceptions of implementation of internal audit recommendations. Moreover,
18
19 we demonstrate which characteristic contributes the most in this respect, with the presence of

us
20
21 independent members on the AC is the greatest contributor. This suggests that ACs with
22
23 independent members are more supportive of the IAF, and thus, more likely to effect better risk
24

an
25
management within an organization.
26
27 These findings provide support for the results in Barua et al. (2010) showing that the
28
M
29 composition and diligence of the AC are associated with investment in internal auditing.
30
31 Furthermore, our findings provide support for those of Mat Zain et al. (2006) in relation to AC
32
33 characteristics and internal auditors assessment of their contribution to financial statement
d

34
35
audits, which indicated that internal auditors make a greater contribution to the external audit
te

36 when AC members are independent. Consequently, it can be argued that the presence of an
37
38 independent AC promotes a higher incidence of perceptions of implementation of internal audit
p

39
40 recommendations, and thus, a greater contribution from internal auditors to external audit.
41
ce

42
43
44 We also show that CIA tenure is influences perceptions of implementation of internal
45
audit recommendations. CIAs with longer tenure are expected to be more informed about their
Ac

46
47 organizations internal environment and implementation of internal audit recommendations.
48
49
50 This study adds to the extant literature and provides information for regulators
51
52 concerning the need for standards that address aspects of AC and internal audit liaison. An
53
54 important contribution we make to the internal audit literature relates to the tenure of the CIA
55
56
and perceptions of the implementation of internal audit recommendations.
57
58
59
60 17
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64 Page 18 of 29
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2
3
4 This study is subject to certain limitations, which provide opportunities for future
5
6 research. We gathered our data via a survey of CIAs and dealt with the perceptions of these
7
8 personnel regarding the level of implementation of their recommendations by auditees. A survey
9
10 with a sample of auditees might reveal a different picture both in terms of beliefs concerning the
11
12 level of implementation of CIA recommendations, and the reality of the situation as measured by

t
13

ip
14
concrete changes to practice. Likewise, demographic factors such as age and gender, which this
15 study did not attempt to capture, might be influential in terms of respondents (whether CIAs or
16

cr
17 auditees) capacity to generate positive and/or negative perceptions of the efforts made to comply
18
19 with recommendations. Another limitation is the fact that we focused on variables such as

us
20
21 internal audit budget, size of internal audit, and involvement in CIA change, and explored
22
23 whether these correlated with the implementation of internal audit recommendations. In respect
24
of the last variable, whilst this study measured the ACs involvement in the hiring/dismissal of

an
25
26 CIAs, it did not establish whether such change had actually taken place. Such changes might be a
27
28 signal of improved/declining governance.
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29
30
31
32 Opportunities exist for additional research to include a different respondent sample (i.e.
33
d

34 auditees), to reflect their expectations toward the implementation of IAF recommendations, and
35
to explore the same variables as in this study, or to explore the views of CIAs regarding
te

36
37 implementation levels when other variables are considered. At the same time, future studies
38
p

39 could usefully incorporate the demographic variables noted above.

40
41
ce

42
43
44
45
Ac

46
47
48
49
50
51
52
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54
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3
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4 Ziegenfuss, D. (2000). Measuring performance. Internal Auditor, 57(1), 36-40.
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8 internal control weaknesses. Journal of Accounting and Public Policy, 26(3), 300327.
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6 Figure 1: Model of the Research
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4 Table 1: Descriptive Statistics
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7 Variables Minimum Maximum Mean S.D.
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9 RECOMMEND 8 84 38.7 19.1
10 SUPPORT 1 5 3.7 .78
11 TENURE .9 6 2.3 .72
12 INDEPENDENCE 34% 100% 74% 14%

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13 EXPERTISE 1 5 3.8 .81

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FREQUENCY 1 9 5.2 1.2
16 SIZE 2 5 4.1 1.4

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17 MEETING 2 7 3.5 1.1
18 APPOINT 0 1 .64 .4
19 REVIEW1 2 5 3.2 1.1

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20 REVIEW2 1 3 2.1 .53
21 REVIEW3 2 5 3.4 .92
22 _____________________________________________________________________
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4 Table 2: Pearson Correlation Coefficients for the Variables
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7 1 2 3 4 5 6 7 8 9 10 11 12
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10 1 RECOMMEND 1.00
11 2 SUPPORT .55** 1.00
12 3TENURE .43** .59** 1.00

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13 4 INDEPENDENCE .50** .35** .37** 1.00

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14 5 EXPERTISE .44** .43** .33** .53** 1.00
15 6 FREQUENCY .02 -.07 -.23* -.20* -.20* 1.00
16 7 SIZE -.12 -.04 -.15 -.05 -.09 .22* 1.00

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17 8 MEETING .23* .02 -.14 .17 .23* .02 -.06 1.00
18 8 APPOINT .25** .13 .14 .09 .11 .01 -.05 .16 1.00
19 10 REVIEW1 .12 .09 .04 .01 .15 -.01 .03 .11 .33** 1.00
11 REVIEW2 -.16 .01 -.03 -.18 -.17 .21* .05 -.14 -.36** -.26** 1.00

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21 12 REVIEW3 .19 .06 .20 .22* .07 -.05 -.08 .13 .27** .16 -.19 1.00
22 *Correlation is significant at the 0.05 level
23 **Correlation is significant at the 0.01 level
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4 Table 3: Regression Results
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7 Variable Expected Sign .Beta t P-value
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11 Constant 4.596 .000
12 SUPPORT + .351 3.244 .000

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INDEPENDENCE + .306 3.110 .002
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16 EXPERTISE + .207 2.477 .015

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17 FREQUENCY + .040 .406 .685
18 SIZE + -.077 -.989 .325
19 MEETING + .231 2.913 .004

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20 APPOINT + .163 1.966 .052
21 REVIEW1 + .004 .052 .958
22 REVIEW2 + -.119 -1.403 .164
23 REVIEW3 + .147 1.723 .088
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