An Introduction to the Relationship Between Governance and Internal Auditing

This study examines the correlation between corporate governance and internal auditing. The study also examines the value of internal auditing to an organization and if it should be done away with. It is a hypothesis in the study that internal auditing is an independent profession different from external audit. Evidence shows that internal auditing has in the recent past assumed the status of a full-fledged profession that is very distinct from external auditing. Next, we find that auditors charge high fees (our proxy for audit risk) because of the nature of the contemporary environment in which businesses exist.

Extension of auditor’s liability as a factor has contributed to charging high audit fees. Taken together, evidence indicates that internal auditing should not be done away with, as it is indispensable in corporate governance.

Corporate governance refers to the way an organization is controlled and operated. It designates a process whereby shareholders and suppliers of funds assure themselves of efficient utilization of their resources, security of their funds and a return on their investment.

It is usually spearheaded by the management of an organization, board of directors of a company, which act on behalf of its shareholders. This creates the agency theory. Companies participate in corporate governance because of the concept of equity in treatment of all the shareholders, taking care of third parties’ interest in the firm, integrity of the management team and disclosure of relevant information to the public to enable them to make informed decisions.

According to Abdel-Khalik, A.

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R., and I. Solomon, eds (1998: 45) corporate governance leads to the agency problem between the shareholders and management of the company. This includes an internal act committed by one or more persons to misrepresent the financial statement of the company with intent of misleading, and thus resulting in fraud. The fraud can take the form of misappropriation of assets, alteration of records and documents, misappropriation of accounting polices, creative accounting, suppression of the effects of a transaction from the books and engaging in money laundering.

Fraud within an organization can be detected by the implementation of adequate accounting and operation systems. In order to achieve efficient corporate governance, the company should have a board of directors who are appointed by the company’s shareholders during the annual general meeting, the auditors should also be appointed competitively, and the company should have a nonexecutive committee which would be able to look into the activities of the company in a more detached manner from the management and the main board (Ira. H. Jolles 2002).