A Study of the Informal Interactions between Audit

Committees and Internal Auditors in Australia

Gerrit Sarens, Université Catholique de Louvain

Joe Christopher, Curtin University of Technology
Mahbub Zaman, University of Manchester

This paper finds evidence for the growing importance of informal interactions between the internal audit
function and the audit committee (AC) in Australia – a relatively unexplored topic in the literature – using a
survey of Chief Audit Executives (CAEs). It also describes the nature of these informal interactions. The most
innovative elements of this paper are the findings that certain personal characteristics of CAEs, the specific
knowledge and expertise of the AC chair, as well as some of the AC chair’s personal characteristics are associated
with the existence (and increase) of informal interactions.

his paper studies informal interactions between Recommendations. The ASX has played a leading role

T audit committees (AC) and internal audit func-

tions (IAF) in Australia using a survey of Chief
Audit Executives (CAEs). The paper defines informal
in corporate governance in Australia since the release of
its first set of governance principles in 2003, which have
been subsequently updated. The most recent version es-
interactions as all forms of communications outside for- sentially identifies eight core principles for effective gov-
mal AC meetings. More specifically, the paper focuses ernance along with a set of best practice guidelines.
on: The monitoring role of the AC is largely achieved
through the IAF, which performs the operational aspects
1. the importance of informal interactions; of monitoring the financial and operational performance
2. the nature of these informal interactions (who takes of the organisation. The results of these monitoring ac-
the initiative, what kinds of issues are discussed); and tivities are reported back to the AC. The AC, through the
3. what factors are associated with informal interac- supervisory role of the IAF, assists with determining the
tions (characteristics of the IAF, the CAE, the AC activities to be monitored. The AC and the IAF are thus
and the AC chair). interdependent (Sarens et al. 2009). This is also reflected
in the ASX Corporate Governance Council (2010) prin-
This last aspect will be studied in an inductive way, ciple 7.2 in which it is recommended that the IAF and
given the lack of previous studies on this topic, and by the AC have direct access to one another.
consequence clear guidance for hypotheses building. Therefore, it is important to strengthen the inter-
As a result of recent corporate scandals, many coun- action between the AC and the IAF to ensure both
tries are placing a greater emphasis on their corporate are performing effectively (Collier and Zaman 2005;
governance policies and guidelines. An important as- European Parliament and Council of the European
pect of these policies and guidelines is a greater em- Union 2006; FRC 2010; Smith Report 2008). This view
phasis on the monitoring role of the AC in enhancing is supported by prior literature that posits that this in-
governance. With respect to Australia, two major legal teraction is important for the AC to fulfil its oversight
reforms were implemented. The first relates to the Cor- role (Beasley et al. 2009; Turley and Zaman 2007). It has
porate Law Economic Reform Program (Audit Reform and also been argued that a productive relationship between
Corporate Disclosure) Act 2004 (the CLERP 9 Act). It in- the IAF and the AC is likely to improve the quality of
volved amendments made to the Corporation Act 2001
in key areas to improve the accountability of the board
and management, and to enhance the independence of Correspondence: Gerrit Sarens, Louvain School of Management,
the auditor. The second relates to the Australia Securities Université Catholique de Louvain, Place des Doyens 1, 1348
Exchange (ASX) Corporate Governance Council’s Prin- Louvain-la-Neuve, Belgium. Tel: +32 10 47 84 41; fax: +32 10
ciples of Good Corporate Governance and Best Practice 47 83 24; email: gerrit.sarens@uclouvain.be

Australian Accounting Review No. 67 Vol. 23 Issue 4 2013 doi: 10.1111/auar.12024 307
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

financial reporting and the related governance processes Literature Review and Research Questions
within organisations (Gramling et al. 2004; Spira and
Page 2003; Turley and Zaman 2004). Interaction can be The importance of informal interactions
undertaken in two ways. The first is through formal in- to governance
teractions that take place as part of formal scheduled
meetings and reports. It has to be noted that the num- The concept of governance is drawn from agency theory
ber of studies examining factors associated with formal (Berle and Means 1932; Jensen and Meckling 1976). This
interactions between the AC and the IAF remains rather agency-oriented governance concept essentially focuses
limited (cf. Goodwin 2003; Mat Zain and Subramaniam on managing an organisation efficiently and effectively
2007; Raghunandan et al. 2001; Sarens et al. 2009; Scar- by aligning management’s interest with that of the or-
brough et al. 1998). The second is through informal in- ganisation’s shareholders. This is achieved through a set
teractions (Turley and Zaman 2007). It is argued that the of controls, one of which relates to the role of the AC and
AC can function as an effective, independent monitor- the IAF.
ing body through both formal and informal interactions Contemporary debates on governance suggest that the
(Beasley et al. 2009). There is general consensus in the agency-oriented governance paradigm is too narrow and
literature regarding the importance and contribution to does not accommodate a wider set of influencing forces
governance of informal interactions (Forbes and Mil- that affect the governance paradigm of organisations
liken 1999; Huse 2005; Johnson et al. 1996, 2003; Larson (Daily et al. 2003; Aguilera et al. 2008; Filatotchev 2008;
1992; Melcher and Beller 1967). This includes internal Young and Thyil 2008; Christopher 2010). Hence, the
audit as an important component of governance. concept of the extended governance paradigm drawn
Gendron and Bédard (2006) state that the oversight from a multi-theoretical concept has emerged.
of internal audit by the AC is often performed in a fairly The extended governance paradigm concept essen-
informal, sometimes contentious, manner. Turley and tially posits that the governance of an organisation is
Zaman (2007) go further to argue that the AC’s great- influenced by diverse environmental forces that require
est effect sometimes arises through informal processes. some form of reconciliation to be achieved by a set of
Mat Zain and Subramaniam (2007) similarly support controls underpinned by multiple theories (Christopher
the view that private meetings and informal communi- 2010). Embedded within the many levels of an organ-
cations between the AC and the IAF may improve the isation, and complementing the management of such
overall exchange of relevant and reliable information, controls, is a body of knowledge termed ‘organisational
and thus enhance their effectiveness. Overall, the studies knowledge’. This can be regarded as a resource utility
that have examined interactions between the IAF and (Drucker 1994), a strategic asset (Winter 1987) and a
the AC have not differentiated the magnitude of formal source of competitive advantage (Teece et al. 1997). It
and informal interactions, nor have they investigated the exists to enhance governance within an organisation’s
nature of informal interactions. This is the major con- stipulated governance framework.
tribution of the current paper. The effective orchestration of such knowledge, by
In addition to the attributes of the AC and the IAF, motivating and coordinating the knowledge carriers to
the parties that influence this informal interaction are enhance governance, is the nature of knowledge gov-
the AC chair for the AC and the CAE for the IAF. How- ernance. It can involve processes of knowledge use,
ever, there is a level of uncertainty regarding the specific creation, retention, integration and sharing (Grandori
characteristics of the AC chair, the AC, the IAF and the 2001) for the purposes of enhancing governance. Huang
CAE that are associated with informal interactions be- and Newell (2003) describe organisational knowledge
tween the AC and the IAF. This study seeks to address as an ongoing collective process of constructing, artic-
this research gap by identifying which characteristics of ulating and redefining shared beliefs through the social
the AC chair, the AC, the IAF and the CAE are associated interaction of organisational members. This concept of
with informal interactions between the AC and the IAF. knowledge governance and its effect on governance is
It must be noted that this study does not intend to ex- strongly influenced by the multi-level environmental
amine the effect of this informal interaction on factors forces influencing each organisation (Christopher 2010).
such as IAF effectiveness, AC effectiveness or quality of On one side of this knowledge governance spectrum
corporate governance. By building upon the insights of are the formal processes that guide the application of
this study, future research could focus on these areas. such knowledge to ensure the effectiveness of governance
The results of this study are particularly interesting mechanisms and processes to enhance governance. This
from an academic perspective, and are also interest- formal communication process is guided by the plethora
ing for practitioners (both CAEs and AC chairs), as of governance policies and guidelines with which
they show which factors could help develop informal organisations must comply. These essentially define
interactions. the governance structure; control processes, including

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

accountability and authority systems; and create formal roles of enhancing governance as control mechanisms
communication channels through which organisational are further discussed in the next section.
knowledge can be channelled to enhance governance.
On the other side of the spectrum are interpersonal re-
lations embedded within the organisational context that Existing studies on interactions between the IAF
provide informal social ties and interaction within the and the AC
internal network (Nahapiet and Ghoshal 1998; Hansen
1999, 2002; Uzzi and Lancaster 2003). These informal so- Although there is a significant and growing body of lit-
cial ties and interaction are underpinned by the concept erature relating to the AC and the IAF, research evidence
of social capital that is defined as the existence of a certain on the interaction between these two governance mech-
set of informal values or norms shared among members anisms is still limited.
of a group that permit cooperation among them, or the Previous quantitative research on the interaction be-
ability of people to work together for common purposes tween the AC and the IAF has found that AC members,
in groups and organisations (Fukuyama 1995). particularly non-executive members, are confronted
Through these informal networks, informal commu- with an information asymmetry problem. These studies
nication channels are constructed to provide organisa- argue that the information asymmetry between the AC
tional members with information (Cross et al. 2001; Bor- and management is more likely to be reduced when there
gatti and Cross 2003; Uzzi and Lancaster 2003). Such is interaction between the AC and the IAF (Raghunan-
knowledge or information serves to discharge account- dan et al. 2001; Scarbrough et al. 1998).
ability in various tiers of accountability relationships AC members in the qualitative study by Gendron
within an organisation. This may include relationships et al. (2004) relied on the work of the IAF to develop
between organisational members and management, the their own appreciation of the effectiveness of internal
board and management, the board and sharehold- controls (cf. also Krishnan 2005). More specifically, they
ers, and the AC and the IAF. Such knowledge can became comfortable with internal control by assess-
include collaboration and decision making occurring ing the extent to which managers adopted appropri-
constantly among organisational members in informal ate measures to solve deficiencies highlighted in inter-
settings. nal audit reports. In addition, the study by Gendron
This scenario facilitates accessibility to knowledge and Bédard (2006), partially based upon the same qual-
exchange and sharing among organisation members itative data, finds that AC members carry out diverse
(Roberts et al. 2005; Borgatti and Cross 2003). Cross practices in order to become comfortable with their
et al. (2001) assert that the level of knowledge acquired company’s internal controls, and that several of these
through informal interaction is five times that acquired practices deal with internal audit reports. Their intervie-
through formal mechanisms. Others have stated that wees confirmed that internal auditing mattered to them.
it enhances governance by speeding up the process of The authors conclude, therefore, that the IAF appears
searching and transferring knowledge, subsequently in- to play a central role in the development of an account-
fluencing the efficiency and effectiveness of operations ability relationship between corporate management and
(Nahapiet and Ghoshal 1998; Cross et al. 2001; Borgatti the AC.
and Cross 2003). Beasley et al. (2009) find that AC members are de-
The balance between the formal and informal chan- pendent upon both internal and external auditors in
nels of communication within an organisation is de- evaluating the effectiveness of internal control over fi-
termined by the level of trust in the work environ- nancial reporting. In general, the AC in their study met
ment (Cross et al. 2001; Hansen 2002; Borgatti and frequently with the internal auditors. However, their in-
Cross 2003). This is determined by the collective ef- terviews reveal frequent, ongoing substantive commu-
fect of the forces influencing an organisation. It is sug- nications between the AC and internal auditors out-
gested that only when knowledge is communicated on side of scheduled meetings. Similarly, Turley and Za-
the basis of trust, the individual receiver can be con- man (2004) find evidence supporting the importance
fident that the knowledge can be relied upon (Cross of an informal channel of communication between the
et al. 2001; Hansen 2002; Borgatti and Cross 2003). It head of the IAF and the AC chair, through which con-
follows that mutual trust among organisational mem- cerns might be raised. In their specific case, the head of
bers facilitates transparent knowledge flow within an the IAF considered that reporting concerns to the AC
organisation. generally led to improved governance, which confirms
The above theoretical framework informs this study the importance of the relationship between the AC and
on the informal interactions between the AC and the IAF the IAF.
in Australia, and is further illustrated in diagrammatic Sarens et al. (2009) explore this working relationship
form in Figure 1. The relationship and interactions be- by using case studies. They find that the AC seeks com-
tween the AC and the IAF to achieve their respective fort with respect to the control environment and internal


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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Board of Directors

Management Corporate AC/IAF

Governance

External Auditors

Underpinned by

Knowledge
Governance

Formal Informal
Processes Processes

Figure 1 Corporate governance and its components underpinned by knowledge

governance

controls – two areas in which they confront considerable Factors associated with informal interactions
discomfort. The IAF’s traditional assurance role and its between the IAF and the AC
involvement in improving internal controls provided a
significant level of comfort to the AC. Internal auditors’ Given the lack of previous studies on this topic, there are
unique knowledge about risk management and internal not enough arguments to build hypotheses related to the
control, combined with appropriate interpersonal and factors associated with informal interactions. Therefore,
behavioural skills enabled them to provide this comfort. sub-research questions on the factors associated with
Moreover, their internal position, familiarity with the informal interactions will be formulated.
company and closeness to people across the company
were key factors for internal auditors to provide comfort
to the AC. Formal audit reports and presentations, to- The IAF
gether with informal contacts, appeared to be important
ways in which this comfort was provided. Prior research suggests that when the IAF is strong, it
Overall, existing studies find that an effective IAF can tends to be more proactive in creating value-added ser-
be an important resource to the AC in discharging its re- vices, such as risk management. This strength is char-
sponsibilities, thereby enhancing the effectiveness of the acterised by the existence of members with professional
AC. Consequently, they suggest that the AC should have a qualifications who are involved in continuous profes-
strong working relationship with the IAF. However, these sional development and who are supported by an ad-
studies only mention that regular meetings between the equate budget to undertake planned activities (Sarens
AC and the IAF make sure that the AC remains informed and De Beelde 2006; Selim and McNamee 1999; Spira
and knowledgeable about relevant accounting, auditing and Page 2003).
and internal control issues. Some of these studies clearly Similarly, D’Silva and Ridley (2007) find that an IAF
suggest that informal interactions may play a significant that complies with The Institute of Internal Auditors
role in the relationship between the IAF and the AC with- (IIA) Standards is likely to add value to organisations
out providing any further details. This leads to the first and contribute to good governance practices. They sug-
two research questions: gest that adherence to such standards enables internal
RQ1: How important are informal interactions between auditors to follow a systematic and disciplined approach
the IAF and the AC in Australia? when performing audit work, thus increasing their effec-
RQ2: What is the nature of informal interactions between tiveness and value. This leads to the following research
the IAF and the AC in Australia? question:

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

RQ3a: Which IAF characteristics are significantly associ- chair is perceived by those engaged in governance within
ated with informal interactions between the IAF the organisation, including senior management. There-
and the AC in Australia? fore, we expect that more knowledgeable and experi-
enced AC chairs will seek more information from the
The CAE IAF to make the chair and the AC members comfort-
able. This leads to the final sub-research question:
Sarens (2009) suggests that internal audit quality is in-
RQ3d: Which AC chair characteristics are significantly as-
fluenced by the quality of the IAF, as well as the charac-
sociated with informal interactions between the IAF
teristics of its staff. Pforsich et al. (2006, 2008) provide
and the AC in Australia?
evidence of the crucial role that the CAE plays when
managing an IAF. Both formal and informal interac-
tions between the AC and the IAF go via the CAE, who Research Method
represents the IAF. Thus, we expect that, in addition to
the general characteristics of the IAF, specific charac- Data collection
teristics of the CAE are likely to influence the informal
interaction between the AC and the IAF. Therefore, the Owing to the difficulties associated with accessing ACs,
following sub-research question can be formulated: we have relied on a survey of CAEs. We believe they
are an appropriate alternative source for collecting data
RQ3b: Which CAE characteristics are significantly asso- because of their detailed knowledge about the relevant
ciated with informal interactions between the IAF aspects of the organisation, and the level and nature of
and the AC in Australia? interaction with the AC. Admittedly, given that CAEs
completed the survey, this investigation of the informal
The AC interactions between the AC and the IAF is based on
their personal perceptions, which could create a social
Prior research has found that independence, diligence desirability bias. However, this bias is only an issue in
and expertise are important factors that affect the AC’s relation to questions measuring the CAE and AC chair’s
effectiveness (for detailed reviews, see DeZoort et al. personal characteristics given that all other questions ask
2002; Turley and Zaman 2004). On the one hand, we for objective/factual information. In a study of this type,
expect that in organisations in which the AC is inde- such a limitation is not uncommon.
pendent – and thus with more information asymmetry To obtain data for this study, questionnaires were sent
problems – audit committee members are more likely to to 312 CAEs in September and October 2010, with the
seek more information to perform their monitoring re- assistance of the IIA Australia. This number represents
sponsibilities. As stated earlier, informal interaction with the total number of CAEs on IIA Australia’s database
the IAF is an important source of information for the AC at that time. Consequently, Australian CAEs who were
(Sarens et al. 2009). There is preliminary evidence that not members of the IIA Australia did not receive the
the more independent the AC is from executive manage- questionnaire. After follow-ups, 100 responses were ob-
ment, the more active is its approach to internal auditing tained, representing a response rate of 32.05%. All re-
(Scarbrough et al. 1998). sponses were appropriate for data analysis. Those who re-
On the other hand, a more active AC is likely to en- sponded after the second reminder were considered late
counter greater information needs and therefore be more respondents and were thus a proxy for non-respondents.
interested in interacting with the IAF (as one of the in- Comparing all variables between early and late respon-
formation providers). These arguments form the basis dents did not reveal significant differences. Including a
of the third sub-research question: dummy variable in the regression analysis did not change
the results. Thus, non-response bias was not a problem.
RQ3c: Which AC characteristics are significantly associ-
ated with informal interactions between the IAF Measurement
and the AC in Australia?
The survey was mainly based on the existing literature
The AC chair and developed drawing on the authors’ research and
practical experience. A first draft of the survey was pilot
While the general characteristics of the AC are impor- tested with a sample of eight CAEs. The final draft took
tant, Turley and Zaman (2007) provide evidence of the into account their feedback. The survey contained many
AC chair playing a critical role in affecting governance different questions in order to collect a broad set of data.
outcomes. They find that financial reporting, risk man- This was done to enable the collection of as much infor-
agement and control outcomes are influenced by the mation as possible about informal interactions between
background of the AC chair, and the way in which the the IAF and the AC, and the factors associated with this.


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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

The questionnaire had a number of sections. Section ing the size of the organisation, the number of employ-
A contained questions on IAF characteristics and was ees ranges from 35 to 100 000 FTE (average = 7208.8
based on previous empirical studies in the IA field such FTE; median = 1800 FTE), and total assets range from
as those by Abdolmohammadi (2009), Arena and Azzone AUD$293 760 to AUD$88.1 billion (average = AUD$544
(2009), Carcello et al. (2005a, 2005b), Goodwin-Stewart million; median = AUD$117.5 million). Thus, overall,
and Kent (2006), Sarens and De Beelde (2006) and the responding organisations can be classified as large to
Wallace and Kreutzfeldt (1991). Section B of the ques- very large, which is consistent with previous studies on
tionnaire focused on the characteristics of IAF employees internal auditing that have shown a positive relationship
including the CAE and all other staff members. Most of between firm size and the existence of an IAF (Wallace
these questions were based on studies by Pforsich et al. and Kreutzfeldt 1991; Goodwin-Stewart and Kent 2006).
(2006, 2008). The first four CAE personal characteristics
were based on the culturally endorsed implicit leadership
theory (CLT) as used by House et al. (2002). The remain- IAF characteristics
ing characteristics came from research and the practical
experience of the authors. In the analysis, only the CAE According to Panel A of Table 2, the IAFs represented
data are used. All ten CAE personal characteristics had in this study are relatively young, with an average
a high internal consistency (Cronbach’s alpha = .82). age of 8.2 years (ranging from one to 48 years; me-
Section C covered AC and AC chair characteristics. The dian = seven years). The IAFs had, on average, 8.3
questions relating to the objective AC characteristics and FTE staff members (ranging from one to 69 FTE; me-
the formal interactions between the AC and the IAF dian = four FTE). On average, 78.5% of the internal
were based on DeZoort et al. (2002), Goodwin (2003), audit plan in the current financial year was risk-based
Krishnan (2005), Raghunandan et al. (2001) and (ranging from zero to 100%; median = 80%). In average
Scarbrough et al. (1998). The questions measuring the terms, 11.7% of the internal audit plan in the current
informal interactions between the AC and the IAF were financial year was reserved for ad hoc requests coming
inspired by Turley and Zaman (2007) and Sarens et al. from the AC (ranging from zero to 85%; median = 5%),
(2009) and operationalised based on the experience of whereas 15.1% was reserved for senior management re-
the authors given the lack of previous detailed studies on quests (ranging from 3% to 100%; median = 10%).
this topic. The question measuring the topics discussed In terms of audit plan completion, the responding
informally had a high internal consistency (Cronbach’s CAEs expected that, on average, 91.7% of the internal
alpha = .84). To measure the AC chair’s personal char- audit plan was going to be completed (ranging from 50%
acteristics, the same items as in section B (CAE’s per- to 100%; median = 95%). Panel B of Table 2 shows that
sonal characteristics) were used, and completed with a 41% of the IAFs represented in this study have a formal
question on knowledge and experience that was based quality assurance and improvement program in place,
on research and the practical experience of the authors. including internal and external quality assessments. In
The internal consistency of the questions on knowledge 15% of the cases, this program existed in a relatively
and experience of the AC chair and his/her personal informal manner. In 25% of the cases, this program
characteristics was high (Cronbach’s alpha = .90 and was under construction. Almost half of the IAFs have
.81 respectively). The survey ended with some generic been subject to an external quality assessment (47.3%).
questions on organisational characteristics such as age, Slightly less than two thirds of the IAFs fully comply with
industry, listing and size. the IIA Code of Ethics and the IIA Standards (64%),
and 36% partially comply, which is slightly lower than
the results reported by Abdolmohammadi (2009) who
Findings focused on several Anglo-Saxon countries.

Profile of the responding organisations

CAE characteristics
In terms of age, Panel A of Table 1 shows that the
responding organisations are very diverse, with ages According to Panel A of Table 3, 42% of the CAEs rep-
ranging from one to 186 years (average = 32.5 years; resented in this study have at least one IA qualification,
median = 18 years). According to Panel B, almost while 79% of the CAEs had experience in IA before join-
half of the responding organisations operate in the ing their current IAF. Panel B shows the average scores
public sector (47%), 14% are banks and insurance for the different personal characteristics. Most CAEs gave
companies and 15% operate in other service industries. themselves high scores on all personal characteristics
Only a minority is manufacturing companies (9%) or (except ‘self-interest’), which could be a result of the
regulated utility companies (6%). About one fourth of self-assessment (cf. social desirability bias as discussed
the responding organisations are listed (26%). Regard- in the previous section).

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 1 Organisational profile of the responding organisations

Panel A Min. Max. Median Mean St. Dev.
Organisation age 1.00 186.00 18.00 32.48 40.62
Number of employees (FTE) 35.00 100 000.00 1 800.00 7 208.78 16 575.53
Total assets (AUD) 293 760.00 88 128 000 000.00 117 504 000.00 544 000 000.00 1 441 000 000.00

Panel B: Industries (several answers were possible) Percentage

Public sector 47.00

Banks and insurance companies 14.00
Other services 15.00
Regulated utility 6.00
Manufacturing 9.00
Other 22.00

Panel C: Listing Percentage

Listed 26.00

Table 2 IAF characteristics

Panel A Min. Max. Median Mean St. Dev.
IAF age 1.00 48.00 7.00 8.17 7.02
IAF size (FTE) 1.00 69.00 4.00 8.31 11.81
Risk-based audit plan 0.00 100.00 80.00 78.49 22.53
Ad hoc AC requests (%) 0.00 85.00 5.00 11.67 17.30
Ad hoc senior management requests (%) 3.00 100.00 10.00 15.07 17.38
Audit plan completion (%) 50.00 100.00 95.00 91.72 10.62
Panel B: Quality assurance and improvement program Percentage
Formally 41.00
Informally 15.00
Under construction 25.00
Non-existent 19.00
External quality assessment 47.30
Full compliance with IIA Code of Ethics and Standards 64.00
Partial compliance with IIA Code of Ethics and Standards 36.00

Table 3 CAE characteristics

Panel A Percentage
The CAE has at least one IA qualification 42.00
The CAE had experience in IA before joining the current IAF 79.00
Panel B: Personal characteristics Min. Max. Mean St. Dev.
Sensitive (aware of changes in mood of others) 1.00 5.00 3.98 0.80
Motivator (mobilises, activates followers) 2.00 5.00 3.95 0.82
Diplomatic (skilled at interpersonal relations, tactful) 1.00 5.00 4.05 0.72
Self-interested (pursues own best interests) 1.00 5.00 2.39 0.93
Able to identify and communicate relevant oversight questions 2.00 5.00 4.17 0.64
beyond those provided by others
Constructive and proactive attitude (anticipates problems by 2.00 5.00 4.29 0.64
asking questions)
Challenges management regarding governance issues 1.00 5.00 4.11 0.81
Has integrity and ethical values 1.00 5.00 4.76 0.66
Commands respect and is highly regarded by senior 1.00 5.00 4.20 0.83
management
Plays a leading role in setting the tone of corporate governance 2.00 5.00 4.00 0.89

AC characteristics dian = 92.9%), whereas 62.8% are independent (me-

dian = 66.7%). These percentages are slightly lower than
Table 4 shows that the average age of the ACs is 11.1 years what is recommended in the ASX Corporate Governance
(median = ten years), which suggests that this study Council (2010) principle 4 but this can be explained
is mainly concerned with fairly mature ACs. On aver- by the fact that not all organisations in this study are
age, 73.6% of the AC members are non-executive (me- listed. The number of meetings ranges from two to 12

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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Table 4 AC characteristics
Panel A Min. Max. Median Mean St. Dev.
AC age 1.00 50.00 10.00 11.13 8.07
Proportion of non-executive members (%) 0.00 100.00 92.86 73.58 31.22
Proportion of independent members (%) 0.00 100.00 66.67 62.80 33.74
Number of meetings 2.00 12.00 5.00 4.79 1.33
AC chair tenure 1.00 18.00 3.00 3.95 2.96

Percentage

AC chair is non-executive 83.80

AC chair is independent 73.50

Table 5 AC chair characteristics

Panel A: Knowledge and experience Min. Max. Mean St. Dev.
Business in general 2.00 5.00 4.41 0.73
Business-specific risks 2.00 5.00 4.07 0.78
Corporate governance 2.00 5.00 4.21 0.82
Risk management and internal control in general 2.00 5.00 3.96 0.89
Business-specific risk management and internal control 2.00 5.00 3.83 0.86
Accounting and finance 1.00 5.00 4.06 1.04
External auditing 2.00 5.00 3.87 1.01
Internal auditing 1.00 5.00 3.72 0.95

Panel B: Personal characteristics Min. Max. Mean St. Dev.

Sensitive (aware of changes in mood of others) 2.00 5.00 3.41 0.86

Motivator (mobilises, activates followers) 2.00 5.00 3.41 0.93
Diplomatic (skilled at interpersonal relations, tactful) 1.00 5.00 3.82 1.08
Self-interested (pursues own best interests) 1.00 5.00 2.66 1.18
Able to identify and communicate relevant oversight 2.00 5.00 3.93 0.92
questions beyond those provided by others
Constructive and proactive attitude (anticipates 2.00 5.00 4.00 0.91
problems by asking questions)
Challenges management regarding governance issues 1.00 5.00 3.88 1.12
Has integrity and ethical values 1.00 5.00 4.45 0.79
Commands respect and is highly regarded by senior 1.00 5.00 4.07 0.96
management
Plays a leading role in setting the tone of corporate 1.00 5.00 3.75 1.15
governance

(average = 4.8 meetings; median = five meetings). Of this with Panel B of Table 3, this shows that, on average,
the AC chairs represented in this study, 83.8% are non- the CAEs gave lower scores to the AC chairs than they
executive and 73.5% are independent. Again, this is not gave themselves in the self-assessment.
fully in line with the ASX Corporate Governance Coun-
cil (2010) principle 4 that recommends the AC chair to Formal and informal interactions between the IAF
be independent. The average tenure of the AC chairs in and the AC
this study is almost four years (median = three years).
Regarding the formal interactions between the IAF and
AC chair characteristics the AC, Table 6 shows that almost all CAEs attend all
formal AC meetings (average proportion of meetings at-
Panel A in Table 5 shows the average scores the CAEs tended = 96.9%, median = 100%, ranging from 20%
gave their AC chairs regarding knowledge and experi- to 100%). On average, 45.6% of the formal AC time is
ence. The AC chairs score highest in their knowledge and dedicated, on an annual basis, to internal audit issues
experience about business in general (mean = 4.4), and (median = 47.5%; ranging from 5% to 100%). As part
lowest in their knowledge and experience about internal of this formal relationship, almost all ACs approve the
auditing (mean = 3.7), which is an interesting finding. IAF planning (97%), question the CAE during AC meet-
Panel B shows the average score CAEs gave the AC chairs ings (96%) and provide input for IAF planning (95%).
regarding their personal characteristics. By comparing However, only a minority also approves the internal

314 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 6 Formal and informal interactions between the IAF and the AC
Panel A: Formal interactions Min. Max. Median Mean St. Dev.
Proportion of AC meetings attended by the CAE (%) 20.00 100.00 100.00 96.85 13.46
Proportion of formal AC time dedicated to IA issues (%) 5.00 100.00 47.50 45.55 26.28

Panel B: Formal interactions

(several answers were possible) Percentage

The AC approves the internal audit plan 97.00

The AC approves the internal audit budget 37.00
The AC approves the appointment, evaluation and dismissal of the CAE 55.00
The AC provides input for the internal audit plan 95.00
The AC receives a full copy of all full internal audit reports 59.00
The AC receives a summary of all internal audit reports 73.00
The AC questions the CAE during the AC meeting 96.00
Panel C: Informal interactions Percentage
Existence of informal interactions 88.90
Decrease in informal interactions 4.50
Stable informal interactions 46.60
Increase in informal interactions 48.90

audit budget (37%). Slightly more than half of the ACs The two most common ways to facilitate informal
approve the appointment, evaluation and dismissal of contact are via email (71%) and telephone (67%). In
CAEs (55%) and receive a copy of all full internal au- 56% of cases, informal contact takes place at the CAE’s
dit reports (59%). In 73% of cases, the AC receives a office. Only in 28% of the cases do meetings occur at
summary of all internal audit reports. the AC chair’s office or in other AC members’ offices.
The majority of the responding CAEs indicate that In one fifth of cases, meetings are held at restaurants
they have informal meetings with the AC (88.9%). This (20%).
study defines informal interactions as all forms of com- It is interesting to note that in 78.4% of cases, not
munication outside formal AC meetings. This group is all the issues discussed informally were also discussed
the subject of further analysis. A large majority of this during the formal AC meetings. This suggests that both
group indicated that these informal meetings remained parties seem to feel the need to discuss certain issues
stable (46.6%) or increased (48.9%) during the past two without putting them on the agenda of the formal AC
years. Both results confirm the growing importance of meetings. This could be explained by the fact that they do
informal interactions between the IAF and the AC and not want management to be present (as is often the case
provide an answer to research question 1. during formal AC meetings) when discussing certain
issues.
Through analysing the issues discussed informally, we
Informal interactions between the IAF and the AC: find that the most commonly discussed issues are:
Detailed analysis

A detailed analysis of the informal interactions between r risk management and internal control in general
the IAF and the AC answers the second research question (73%);
(see Table 7). The analysis shows that, in the large ma- r corporate governance in general (63%);
jority of cases, the CAE takes the initiative for informal r the internal audit plan or budget (62%);
interaction (81%). In slightly less than half of the cases, r the organisation in general (55%);
the initiative also comes from the AC chair (47%). In r organisation-specific risks and control activities (53%);
only 16% of cases, other AC members take the initiative. r management concerns (52%); and
The number of informal contacts between the CAE and r fraud, suspected fraud or errors (50%).
the AC chair or other AC members ranges from one to
180 times each year (average = 12.4 times; median = six
times). Overall, the CAE and the AC informally interact
relatively often, which again confirms the importance of Overall, the issues that are discussed informally
informal interactions between the IAF and the AC. In between the CAE and the AC are broad. However,
most cases the CAE takes the initiative, and thus seems corporate governance, risk management and internal
to feel the greatest need to discuss issues informally with control – the three areas in which the IAF works – are
the AC. highly ranked.


C 2013 CPA Australia Australian Accounting Review 315
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Table 7 Informal interactions – detailed analysis

Panel A: Who takes the initiative? (several answers were possible) Percentage
AC chair 47.00
Other AC members 16.00
CAE 81.00

Panel B Min. Max. Median Mean St. Dev.

Number of informal interactions per year 1.00 180.00 6.00 12.37 21.70

Panel C: Ways to interact informally

(several answers were possible) Percentage

Over the phone 67.00

By email 71.00
At the CAE’s office/the IAF department 56.00
At the AC chair’s office 28.00
At a restaurant 20.00

Panel D: Issues discussed informally

included on formal AC agenda Percentage

All of them 21.60

Not all of them 78.40
Panel E: Issues discussed informally
(several answers were possible) Percentage
Corporate governance in general 63.00
Risk management and internal control in general 73.00
The organisation in general 55.00
Issues related to the external auditor’s work 31.00
Issues related to collaboration with the external auditor 29.00
Issues related to management 52.00
Issues related to the risk appetite and risk-taking of the 44.00
organisation
Issues related to organisation-specific risks and control activities 53.00
Issues related to (suspected) fraud or errors 50.00
Issues related to the management of the IAF (staffing issues, 39.00
quality assurance and improvement)
Issues related to the internal audit plan or budget 62.00
Issues related to audit tools and techniques (methodology, 21.00
software)

Factors associated with informal interactions pleted (p = 0.024), which provides an answer to research
between the IAF and the AC question 3a. By consequence, a multivariate regression
analysis with all IAF characteristics is not required. The
A correlation analysis was undertaken to identify sig- high correlation between having been subject to an ex-
nificant relationships between the existence of informal ternal quality assessment and having a formal Quality
interactions and all the aforementioned IAF, CAE, AC Assessment and Improvement Program (QAIP) in place
and AC chair characteristics. When several factors from can be explained by the fact that the former is an integral
the same category were found to be significant, a step- part of the latter.
wise logistic regression analysis (independent variables
tested on a descending basis) was performed to exam- CAE characteristics
ine which factors contributed most to the explanation
of the existence of informal interactions, which fits the Based on Table 9, it is interesting to note that the existence
exploratory nature of this study. of informal interactions is significantly, but negatively,
correlated with the CAE, with at least one IA qualifica-
IAF characteristics tion (p = 0.008). Having an IA qualification seems not
to be an element of credibility to convince the AC to have
Table 8 shows that the existence of informal interactions interactions outside formal meetings. However, in most
is significantly and positively correlated with only one cases, it is the CAE who initiates the informal interaction
IAF characteristic – the percentage of the audit plan com- (cf. above). This could mean that a CAE who lacks IA

316 Australian Accounting Review 

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 C

Table 8 Correlation matrix IAF characteristics
Existence_Informal_ IAF_ IAF_ Risk_Based_ Ad_Hoc_ Ad_Hoc_ Audit_Plan_ Formal_ External_Quality_ Full_Compliance_
Interactions Age Size Audit_Plan Requests_AC Request_Mgt Completion QAIP Assessment IPPF

2013 CPA Australia

Existence Informal Interactions 1
IAF Age − .015 1
IAF Size .170 .166 1
Risk Based Audit Plan .058 .111 .141 1
Ad Hoc Requests AC .044 .289∗ − .097 .088 1
Ad Hoc Request Mgt .011 − .099 − .014 − .068 .048 1
G. Sarens, J. Christopher & M. Zaman

Audit Plan Completion .228∗ − .042 .151 .061 − .083 − .322∗∗ 1

Formal QAIP .107 .124 .269∗∗ .038 − .044 .148 − .014 1
External Quality Assessment .090 .322∗∗ .270∗∗ .185 .098 − .158 .020 .547∗∗ 1
Full Compliance IPPF .104 .206∗ .142 .010 − .167 .086 .070 .286∗∗ .134 1
∗p < .05; ∗∗ p < .01

Table 9 Correlation matrix CAE characteristics

Existence_Informal_ CAE_IA_ CAE_ CAE_ CAE_ CAE_ CAE_ CAE_Relevant_ CAE_Constructive_ CAE_ CAE_ CAE_ CAE_Tone_
Interactions Qualification Experience_IA Sensitive Motivator Diplomatic Self_Interested Questions Proactive Challenging Integrity_Ethics Respect Corp_Gov
Existence Informal Interactions 1
CAE IA Qualification − .262∗∗ 1
CAE Experience IA − .103 .339∗∗ 1
CAE Sensitive .327∗∗ − .030 .018 1
CAE Motivator .312∗∗ .028 .273∗∗ .435∗∗ 1
CAE Diplomatic .182 − .004 .141 .547∗∗ .519∗∗ 1
CAE Self Interested − .039 − .008 − .101 − .225∗ − .083 − .136 1
CAE Relevant Questions .206∗ .060 .022 .248∗ .412∗∗ .429∗∗ − .062 1
CAE Constructive Proactive .290∗∗ .026 .119 .531∗∗ .459∗∗ .523∗∗ − .243∗ .497∗∗ 1
CAE Challenging .368∗∗ − .040 .041 .339∗∗ .483∗∗ .329∗∗ − .316∗∗ .437∗∗ .547∗∗ 1
CAE Integrity Ethics .241∗ .006 .110 .519∗∗ .340∗∗ .546∗∗ − .463∗∗ .441∗∗ .412∗∗ .476∗∗ 1
CAE Respect .402∗∗ − .111 .067 .424∗∗ .535∗∗ .497∗∗ − .140 .413∗∗ .498∗∗ .578∗∗ .539∗∗ 1
CAE Tone Corp Gov .392∗∗ − .092 .028 .304∗∗ .486∗∗ .337∗∗ − .233∗ .411∗∗ .516∗∗ .624∗∗ .349∗∗ .673∗∗ 1

Australian Accounting Review

∗p < .05; ∗∗ p < .01

317
Informal Interactions between Audit Committees and Internal Auditors
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

qualification has a greater need to discuss issues more variate regression analysis is not required. All significant
frequently with the AC. An analysis of personal CAE correlations in Table 11 are self-explanatory. For exam-
characteristics shows that the existence of informal in- ple, it is logical that the proportion of non-executive
teractions is significantly and positively correlated with members is highly correlated with the proportion of in-
CAEs who perceive themselves as: dependent members given that the former include the
latter.
1. being sensitive (p = 0.001);
2. being a motivator (p = 0.002); AC chair characteristics
3. being able to identify and communicate relevant
oversight questions beyond those provided by others The correlations analysis (cf. Table 12) shows significant
(p = 0.040); and positive correlations between the existence of in-
4. being constructive and proactive (p = 0.003); formal interactions and the AC chair’s knowledge and
5. being able to challenge management towards gover- experience in the following areas:
nance issues (p = 0.000);
6. having integrity and ethical values (p = 0.016); 1. business in general (p = 0.012);
7. commanding respect and being highly regarded by 2. business-specific risks (p = 0.000);
senior management (p = 0.000); and 3. corporate governance (p = 0.014);
8. playing a leading role in setting the tone of corporate 4. risk management and internal control in general
governance (p = 0.000). (p = 0.004);
5. business-specific risk management and internal con-
Overall, this clearly shows that several personal char- trol (p = 0.001); and
acteristics of the CAE are significantly associated with 6. internal auditing (p = 0.000).
the existence of informal interactions with the AC. The
significant correlations between most of these personal It is clear from this correlation analysis that knowledge
characteristics suggest that most of them are related to and experience about business, corporate governance,
each other, which is logical. For example, a CAE who risk management, internal control and internal auditing
challenges management regarding governance issues is on behalf of the AC chair are significantly associated with
probably also a CAE who plays a leading role in set- informal interactions between the IAF and the AC. Next,
ting the tone of corporate governance (or the other way a multivariate analysis was performed to test which of
around). A multivariate analysis was performed to test these characteristics is most important.
which of these characteristics is most important. The stepwise logistic regression analysis (see Panel B
The results of the stepwise logistic regression analysis1 of Table 10) shows that the existence of informal inter-
are reported in Panel A of Table 10. It has to be noted actions between the IAF and the AC is significantly and
that stepwise regression analysis will not tend to pick up positively associated with the AC chair’s knowledge and
two variables that are collinear (cf. Table 9 shows high experience about business risks (Wald statistic = 4.895;
correlations between the explanatory variables) (Draper p = 0.027) and internal auditing (Wald statistic = 6.493;
and Smith 1981). In other words, multicollinearity is p = 0.011). A significant, but negative, association exists
not a problem. It is shown that, when testing on a multi- between informal interactions and the AC chair’s knowl-
variate basis, only two personal CAE characteristics are edge and experience about accounting and finance (Wald
significantly and positively associated with the existence statistic = 4.217; p = 0.040). This provides a partial an-
of informal interactions, which provides an answer to swer to research question 3d.
research question 3b: When analysing the personal characteristics of the AC
chair, a significant and positive correlation is found (cf.
1. the CAE being able to challenge management re- Table 13) between the existence of the informal interac-
garding governance issues (Wald statistic = 3.840; tions and the AC chair being perceived as:
p = 0.050); and
2. the CAE commanding respect and being highly 1. challenging management regarding governance is-
regarded by senior management (Wald statis- sues (p = 0.043);
tic = 3.153; p = 0.076). 2. commanding respect and being highly regarded by
senior management (p = 0.046); and
AC characteristics 3. playing a leading role in setting the tone of corporate
governance (p = 0.013).
As shown in Table 11 none of the AC characteristics is
significantly correlated with the existence of informal in- It is noted that the first two personal characteristics are
teractions between the IAF and the AC, which provides also important for the CAE. A multivariate analysis was
a negative answer to research question 3c. Thus, a multi- performed to test which of these personal characteristics

318 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 10 Stepwise logistic regression analysis. Dependent variable: Existence of informal interactions
Panel A: CAE personal Panel B: AC chair Panel C: AC chair personal
characteristics knowledge and experience characteristics

Variables A Wald Signif. A Wald Signif. A Wald Signif.

CAE Challenging 0.982 3.840 0.050
CAE Respect 0.792 3.153 0.076
AC Chair Business Risks 1.047 4.895 0.027
AC Chair Accounting Finance −0.807 4.217 0.040
AC Chair Internal Audit 1.119 6.493 0.011
AC Chair Tone 0.659 6.447 0.011
N 93 96 89
Chi2 18.681 (p = 0.000) 21.114 (p = 0.000) 6.826 (p = 0.009)
−2 log likelihood 63.495 65.394 67.191
Classification accuracy 88.2% 86.5% 85.4%
Nagelkerke (pseudo) R2 31.0% 33.2% 13.1%
Number of iterations 9 6 10

Table 11 Correlation matrix AC characteristics

Existence_ Proportion_ Proportion_ Number_ AC_ AC_ AC_
Informal_ AC_ Non_ Independent_ AC_ Chair_ Chair_ Chair_
Interactions Age Executive_Members Members Meetings Tenure Non_Executive Independent
Existence Informal Interactions 1
AC Age -.059 1
Proportion Non Executive Members -.084 .247∗ 1
Proportion Independent Members 125 .349∗∗ .653∗∗ 1
Number AC Meetings .137 .048 .293∗∗ .230∗ 1
AC Chair Tenure .036 .369∗∗ .176 .158 .015 1
AC Chair Non Executive .031 .150 .657∗∗ .434∗∗ .316∗∗ .188 1
AC Chair Independent .194 .193 .406∗∗ .722∗∗ .298∗∗ .177 .610∗∗ 1
∗p < .05; ∗∗ p < .01

Table 12 Correlation matrix AC chair characteristics (knowledge and experience)

Existence_ Business_ RMAN_ RMAN_
Informal_ Business_ Specific_ Corporate_ IC_ IC_Business_ Accounting_ External_ Internal_
Interactions General Risks Governance General Specific Finance Auditing Auditing
Existence Informal Interactions 1
Business General .251∗ 1
Business Specific Risks .363∗∗ .530∗∗ 1
Corporate Governance .247∗ .430∗∗ .508∗∗ 1
RMAN IC General .289∗∗ .419∗∗ .597∗∗ .748∗∗ 1
RMAN IC Business Specific .329∗∗ .493∗∗ .789∗∗ .602∗∗ .685∗∗ 1
Accounting Finance .052 .398∗∗ .404∗∗ .390∗∗ .554∗∗ .505∗∗ 1
External Auditing .135 .261∗∗ .467∗∗ .495∗∗ .580∗∗ .546∗∗ .748∗∗ 1
Internal Auditing .363∗∗ .334∗∗ .544∗∗ .600∗∗ .699∗∗ .567∗∗ .588∗∗ .662∗∗ 1
∗p < .05; ∗∗ p < .01

is most important to explain the existence of informal in the past two years. Therefore, the same kind of
interactions. correlation analysis2 and stepwise logistic regression
A stepwise logistic regression (see Panel C of Table 10) analysis is undertaken to examine which factors are
shows that only one personal characteristic of the AC significantly associated with an increase in informal
chair is significantly and positively associated with the interactions. A dummy variable was created for this
existence of informal interactions between the IAF and analysis (‘1’ for those who indicated that the ex-
the AC – the AC chair playing a leading role in setting tent of interactions outside of formal meetings in-
the tone of corporate governance (Wald statistic = 6.447; creased in the past two years; ‘0’ for those who indi-
p = 0.011). This provides the second part of the answer cated that the informal interactions remained stable or
to research question 3d. decreased).

Additional analysis: Factors associated with an

increase in informal interactions between the IAF and
the AC IAF characteristics

As discussed before, in 48.9% of cases, informal inter- None of the IAF characteristics is significantly correlated
actions between the IAF and the AC have increased with an increase in informal interactions.


C 2013 CPA Australia Australian Accounting Review 319
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Sensitive Motivator DiplomaticSelf_InterestedRelevant_QuestionsConstructive_ProactiveChallengingIntegrity_Ethics Respect Tone_Corp_Gov

CAE characteristics

AC_Chair_ AC_Chair_ AC_Chair_ AC_Chair_

With regard to the CAE characteristics, a significant and

1
negative correlation was found between having at least
one IA qualification and an increase in informal interac-
tions (p = 0.013), which confirms the previous finding.

.761∗∗
1
A correlation analysis of the CAE personal character-
istics shows again that some are significant. The step-
wise logistic regression analysis (see Panel A of Table 14)

.657∗∗
.617∗∗
shows that an increase in informal interactions in the past

1
two years is significantly and positively associated with
CAEs perceiving themselves as sensitive (Wald statistic
= 4.788; p = 0.029) and playing a leading role in setting
.539∗∗
.530∗∗
.747∗∗
the tone of corporate governance (Wald statistic = 2.949;
1

p = 0.086).
AC_Chair_

.680∗∗
.499∗∗
.522∗∗
.622∗∗
1

AC characteristics

An analysis of the formal AC characteristics shows that an

increase in informal interactions in the past two years is
significantly and positively correlated with the AC chair
AC_Chair_

being independent (p = 0.043) and the number of AC

.781∗∗
.639∗∗
.529∗∗
.572∗∗
.660∗∗
1

meetings (p = 0.029). However, an increase in infor-

mal interactions is significantly and negatively correlated
with the AC chair’s tenure (p = 0.010). A stepwise logis-
tic regression analysis (see Panel B of Table 14) confirms
Existence_Informal_AC_Chair_AC_Chair_AC_Chair_ AC_Chair_

− .358∗∗
− .330∗∗
− .304∗∗
− .545∗∗
− .332∗∗
− .430∗∗

that the chance to increase informal interactions in the

1

past two years is significantly higher when the AC chair is

independent (Wald statistic = 5.263; p = 0.22) and when
Table 13 Correlation matrix AC chair characteristics (personal characteristics)

the AC chair’s tenure is shorter (Wald statistic = 6.994;

− .305∗∗ − .319∗∗ − .410∗∗
.581∗∗
.607∗∗
.376∗∗
.464∗∗
.433∗∗
.470∗∗

p = 0.008). These two findings are particularly interest-

1

ing and complementary to our earlier findings about the

AC chair.
.464∗∗

.520∗∗
.637∗∗
.376∗∗
.318∗∗
.505∗∗
.478∗∗
.566∗∗ 1
.690∗∗

.450∗∗
.552∗∗
.372∗∗
.338∗∗
.334∗∗
.325∗∗
1

AC chair characteristics

A correlation analysis of the knowledge and experience of

Interactions

the AC chair again shows interesting significant correla-

.207∗

.207∗
.259∗
-.130
.167
.080
.166

.161
.151

.194

tions. The stepwise logistic regression analysis (see Panel

1

C of Table 14) shows that only the AC chair’s knowledge

and experience about internal auditing is significantly
and positively associated with an increase in informal
AC Chair Constructive Proactive
Existence Informal Interactions

interactions between the IAF and the AC (Wald statis-

AC Chair Relevant Questions

tic = 6.252; p = 0.012).

AC Chair Tone Corp Gov
AC Chair Integrity Ethics
AC Chair Self Interested

A correlation analysis shows again that some personal

AC Chair Challenging
AC Chair Diplomatic
AC Chair Motivator

< .05; ∗∗ p < .01

characteristics of the AC chair are significant. According

AC Chair Sensitive

AC Chair Respect

to the stepwise logistic regression analysis (see Panel D

of Table 14), AC chairs who are perceived as being sen-
sitive are significantly and positively associated with an
increase in informal interactions (Wald statistic = 5.041;
p = 0.025).
∗p

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 14 Stepwise logistic regression analysis. Dependent variable: Increase in informal interactions
Panel A: CAE personal Panel B: AC Panel C: AC chair Panel D: AC chair
characteristics characteristics knowledge and experience personal characteristics

Variables A Wald Sign. A Wald Sign. A Wald Sign. A Wald Sign.

CAE Sensitive .728 4.788 .029
CAE Tone .471 2.949 .086
AC Chair Independent 1.434 5.263 .022
AC Chair Tenure −.260 6.994 .008
AC Chair Internal Audit .605 6.252 .012
AC Chair Sensitive .617 5.041 .025
N 93 95 96 89
Chi2 11.011 (p = .004) 18.483 (p = .001) 6.954 (p = .008) 5.440 (p = .020)
− 2 log likelihood 116.611 111.939 124.081 116.034
Classification accuracy 59.1% 66.3% 57.3% 59.6%
Nagelkerke (pseudo) R2 15.0% 23.7% 9.4% 8.0%
Number of iterations 9 3 8 10

Discussion and Conclusion than half the cases, informal interaction takes place at the
CAE’s office. In more than three quarters of the cases, not
The objective of this paper was to study the informal all the issues discussed informally were also discussed
interactions between the AC and the IAF in Australia, during the formal AC meetings. This shows that both
using a survey of CAEs. More specifically, it studied: parties wish to discuss certain issues without putting
them on the agenda of the formal AC meetings. Fu-
1. the importance of informal interactions; ture, more qualitative research could investigate why cer-
2. the nature of these informal interactions; and tain topics are only discussed informally. The issues that
3. the factors (characteristics of the IAF, the CAE, the are discussed informally between the CAE and the AC
AC and the AC chair) that are associated with infor- are broad. However, corporate governance, risk manage-
mal interactions. ment and internal control – the three areas in which the
IAF works – are highly ranked on the informal agenda.
This study’s results are interesting from an academic With respect to the factors associated with informal
perspective, as they fill an important gap in the literature interactions between the IAF and the AC, seven conclu-
on IAFs and ACs and the interactions between these two sions were reached. First, an IAF that is able to complete
governance parties. Moreover, the results are interesting a large proportion of its audit plan has more chance to
for practitioners (both CAE and AC chairs), as they show successfully build informal interactions with the AC.
factors that might help them in further developing and Given that the AC often provides input for the audit
strengthening informal interactions. plan, it can be assumed that they are appreciative when
With respect to the first two research questions, two the IAF is able to complete most of its planned missions.
conclusions are reached. The first is that the majority of Second, a CAE who is highly respected by senior man-
the responding CAEs indicated that they have informal agement and is able to challenge management when it
meetings with the AC. A large majority of this group comes to governance issues is also more likely to inter-
indicated that these informal meetings remained stable act informally with the AC. These two personal char-
or even increased during the past two years. Both results acteristics imply that these CAEs are more respected
confirm the growing importance of informal interac- within their company and are at the forefront of the
tions between the IAF and the AC in Australia, which corporate governance debate in their company, which
answers research question 1 and confirms the relevance increases the likelihood that they wish to discuss corpo-
of this topic as suggested by Gendron and Bédard (2006), rate governance-related issues informally with the AC.
Turley and Zaman (2007) and Mat Zain and Subrama- Moreover, these kinds of CAEs are probably also per-
niam (2007). ceived by the AC chair to be attractive for discussing cor-
The second conclusion is that, related to research ques- porate governance issues, which will probably increase
tion 2, a detailed analysis of informal interactions shows the chance that the AC chair accepts the invitation for
that the CAE and the AC informally interact relatively of- informal interaction. Overall, these findings confirm the
ten, which again confirms the importance of informal in- importance of the CAE as suggested by Pforsich et al.
teractions. In most cases, the CAE takes the initiative, and (2006, 2008) and Sarens (2009). Future research could
thus seems to feel the greatest need to discuss issues infor- study how the CAE could get this respect from senior
mally with the AC. Email and telephone are the two most management, and the ways in which a CAE can chal-
common ways to facilitate informal interaction. In more lenge management.


C 2013 CPA Australia Australian Accounting Review 321
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Third, contrary to the existence of informal interac- only to have informal interactions, but also to further
tions in general, an increase in informal interactions is develop these informal interactions. An important topic
associated with other personal characteristics of the CAE. for future research is to examine how CAEs ‘educate’ AC
More specifically, a CAE who is sensitive – aware of the chairs about the role and added value of the IAF.
needs of others – and plays a leading role in corporate Finally, AC chairs who are perceived as playing a lead-
governance is more likely to further develop his or her ing role in corporate governance are more associated
informal interactions with the AC. with informal interactions with the IAF. Being perceived
Fourth, mainly independent AC chairs and AC chairs as a leader in corporate governance probably means that
that are relatively new in their position are associated the AC chair is more aware of the importance of gov-
with informal interactions with the IAF. Both character- ernance, risk management and internal control issues,
istics mean that these AC chairs are confronted with large which might stimulate the AC chair to interact infor-
information needs (they have nothing to do with the op- mally with the IAF (which does not say anything about
erational side of the business, given their independence, who initiates the informal interactions). A question that
and they are relatively new in their position). This could is still open for future research is: what makes an AC
explain why they tend to invest more in informal interac- chair a ‘leader’ in corporate governance? This finding is
tions with the IAF (initiated by themselves or the CAE). complementary to the finding that AC chairs who are
This result confirms the important comfort-providing sensitive (aware of the needs of others) probably under-
role of the IAF vis-à-vis independent AC members in an stand the need of the CAE to discuss issues informally,
agency theory perspective (see Scarbrough et al. 1998; and will therefore probably be more open to further de-
Sarens et al. 2009). velop these informal interactions with the IAF. Overall,
Fifth, AC chairs who have a good understanding of the last three conclusions confirm the important role of
business risks seem to feel more comfortable in dis- the AC chair as suggested by Turley and Zaman (2007).
cussing governance and risk-related issues informally This study has four limitations. First, the data were col-
with the CAE (irrespective of who has initiated the in- lected in Australia – a country where ACs have a relatively
formal interaction). This is consistent with the finding long history that goes back to the recommendations pub-
that risk management issues are commonly discussed lished by the Borsch Committee in 1990 (Vanasco 1994)
informally. Their specialised knowledge about business and which is also confirmed by the average age of ACs in
risks enables them to identify potential issues for infor- this study. Therefore, the conclusions could probably not
mal discussion with the CAE. However, future research be extrapolated to countries where ACs are a relatively
could investigate how this knowledge is acquired, given new phenomenon. It would be interesting to study the
that this is still a relatively unexplored area. Moreover, it same informal interactions in a country where ACs are
is worthwhile noting that the more the AC chair knows rather new. Second, the data used reflect the perception
about internal auditing, the greater the likelihood they of the CAEs and do not come directly from the AC chair.
will have informal interactions with the IAF. In other It is certainly a challenge for future research to study the
words, knowing what internal auditing is and how it can same topic by using AC members’ perceptions, or even
add value to the organisation is important for engaging in senior management’s perception, to obtain information,
informal interactions (which does not necessarily mean such as that relating to CAEs’ personal characteristics.
that the AC chair initiates the informal interactions). Third, the use of stepwise regression analysis was appro-
Finally, it is interesting and innovative to see that AC priate given the lack of previous studies on this topic but
chairs with more accounting and finance knowledge and it also has limitations. The final model obtained is not
experience are less associated with informal interactions guaranteed to be optimal in any specified sense, which
with the CAE. This suggests that an AC chair with an ac- means that the procedure yields a single final model,
counting and finance background is less of a partner for although there are often several equally good models
the CAE to discuss issues with informally. This may be (Draper and Smith 1981). Nevertheless, the findings of
because their background makes them more focused on this study could be input for future studies building hy-
accounting and finance issues, and, consequently, makes potheses on the factors associated with informal inter-
them feel more at ease with external auditors compared actions between the IAF and the AC. Finally, this study
with internal auditors. has not examined the effect of this informal interaction
Sixth, AC chairs who know more about internal au- on factors such as IAF effectiveness, AC effectiveness or
diting (in general, or based on personal experience) are quality of corporate governance, which are important
not only more open to informal interactions with the and interesting topics for future research.
IAF, but are also more keen to further develop these in-
formal interactions (again, irrespective of who initiates Notes
the informal interactions). This supports the previous
conclusion and further stresses the importance of AC 1 Stepwise logistic regression is designed to find the most parsi-
chairs having knowledge about internal auditing, not monious set of predictors that are most effective in predicting

322 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

the dependent variable. Stepwise logistic regression is useful in variables have been included or when it is not possible to make
finding relationships that have not been tested before which is the a statistically significant reduction in −2 Log Likelihood using
case in this study. Variables are added to the logistic regression any of the variables not yet included. Once a variable is included,
equation one at a time, using the statistical criterion of reducing its interpretation in stepwise logistic regression is the same as it
the −2 Log Likelihood error for the included variables. After each would be using other methods for including variables (Draper
variable is entered, each of the included variables is tested to see if and Smith 1981).
the model would be better off if the variable were excluded. The 2 Note that the correlation matrices for the additional analyses are
process of adding more variables stops when all of the available not provided.

QuesƟonnaire
“InteracƟon between Internal Audit and the Audit CommiƩee”

This quesƟonnaire is addressed to organizaƟons with an internal audit department and an audit
commiƩee currently in place. If you or your organizaƟon do not have an audit commiƩee currently in
place, please disregard this quesƟonnaire.

IntroducƟon

This study is conducted by [NAMES OF THE RESEARCHERS] supported by the Ins tute of Internal
Auditors Australia. First, this study aims to describe the formal and informal interac on between the
internal audit func on (IAF) and the audit commi ee (AC) in several countries. Second, this study will
iden fy factors that have an impact on the interac on between the IAF and the AC. We intend to
iden fy best prac ce and recommenda ons on how to improve this interac on.

It will take approximately 15 to 20 minutes to complete the ques onnaire. Your responses will be
treated with utmost confidence and anonymously.

In the ques onnaire, we use the following abbrevia ons:

o IAF stands for Internal Audit Func on
o CAE stands for Chief Audit Execu ve (Head of the Internal Audit func on)
o AC stands for Audit Commi ee
o ACC stands for Audit Commi ee Chair
o ACM stands for Audit Commi ee Members

SECTION A: INTERNAL AUDIT FUNCTION

A.1. How long has the IAF existed in its current form? [_____] years or since [_____]

A.2. How many people currently work in the IAF (full Ɵme equivalents)?
[___] internal employees [____] external employees (via co/out-sourcing arrangements)

A.3. What is the IAF budget (personnel and operaƟng costs) for the current financial year
(approximately)? [________] AUD

A.4. What percentage of the internal audit plan in the current financial year is risk-based? [………..] %


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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

A.5. What percentage of the internal audit plan in the current financial year is reserved for ad hoc
requests coming from:
audit commi ee [………...] % senior management [………..] % other management [………..] %

A.6. What percentage of the internal audit plan in the current financial year is going to be completed?
[ …………] %
A.7. Does the IAF have a quality assurance and improvement programme including internal and external
quality assessments? (please Ɵck the relevant one)

Yes, formally [ ] Yes, but rather informally [ ] Currently under construc on [ ] No [ ]

A.8. Has the IAF ever been subject to an external quality assessment?
Yes [ ] go to ques on A9 No [ ] go to ques on A10

A.9. If yes, how long ago?

Less than one year ago [ ] Less than two years ago [ ] Less than three years ago [ ] More than three
years ago [ ]

A.10. Apart from the implicaƟons of your answer to quesƟon A7 and A8, does the IAF conform to the
Code of Ethics and Standards for the Professional PracƟce of Internal AudiƟng issued by the InsƟtute of
Internal Auditors? Fully [ ] Par ally [ ] Not at all [ ]

SECTION B: INTERNAL AUDIT FUNCTION EMPLOYEES

B.1. Please answer the following ques ons in respect of both (a) the CAE and (b) the total number of
internal employees employed in the IAF (excluding the CAE):
CAE IAF team
(Ɵck if yes) (insert
The CAE has / How many of the employees in the IAF have: number)
a. bachelor degree (in any subject)? [ ] [___]
b. masters degree (in any subject)? [ ] [___]
c. membership of the IIA? [ ] [___]
d. at least one internal audi ng qualifica on? [ ] [___]
e. had experience in internal audit before joining the current IAF? [ ] [___]
f. had experience in accoun ng, finance or external audit before joining the [ ] [___]
current IAF?

B.2. In the current financial year how many hours are expected to be spent on conƟnuous professional
development (e.g. training courses, wriƟng, discussion groups,…)?
- by the CAE? [ _____ ] hours
- by the IAF team? [ _____ ] hours per person (on average)

How are the above training hours (on average) expected to be distributed over CAE IAF team
the following areas? (please indicate approximate percentage) % %
a. Internal audi ng tools and techniques (eg. CAATT, CSA, sampling) [ ] [ ]
b. Behavioural skills (eg. Facilita ng, interpersonal skills, team building) [ ] [ ]
c. Technical skills (ex. Forensic skills, interviewing, risk analysis,…) [ ] [ ]
d. Other areas [ ] [ ]
Please specify what the other areas covered are: ____________________________________________

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

B.3. On a scale of 1 (low) to 5 (very high), how would you describe yourself as a CAE : CAE
a. sensi ve (aware of changes in mood of others) [ ]
b. mo vator (mobilizes, ac vates followers) [ ]
c. diploma c (skilled at interpersonal rela ons, tac ul) [ ]
d. self-interested (pursues own best interest) [ ]
e. able to iden fy and communicate relevant oversight ques ons beyond those provided by [ ]
others
f. construc ve and proac ve a tude (an cipate problems by asking ques ons) [ ]
g. challenging management towards governance issues [ ]
h. have integrity and ethical values [ ]
i. command respect and is highly regarded by senior management [ ]
j. play a leading role in se ng the tone of corporate governance [ ]
SECTION C: AUDIT COMMITTEE

C.1. How long has the audit commiƩee existed in your organizaƟon? [_____] years
C.2. How many members are there on your audit commiƩee? [_______]
C.3. How many members of the audit commiƩee are non-execuƟve? [_______]
C.4. How many members of the audit commiƩee are independent? [_______]
C.5. Is the ACC non-execuƟve? [ ] Yes [ ] No
C.6. Is the ACC independent? [ ] Yes [ ] No
C.7. How long has the currentACCserved on the AC? [_____] years
C.8. How many audit commiƩee meeƟngs are scheduled for the current financial year? [________]
C.9. How many of these meeƟngs does the CAEaƩend? [______]

C.10. Does the AC: Yes No

- approve the internal audit plan? [ ] [ ]
- approve the internal audit budget? [ ] [ ]
- approve the appointment, evalua on and dismissal of the CAE? [ ] [ ]
- provide input for the internal audit plan? [ ] [ ]
- receive a full copy of all full internal audit reports? [ ] [ ]
- receive a summary of all internal audit reports? [ ] [ ]
- ques on the CAE during the AC mee ng? [ ] [ ]

C.11. During the past two years, how has the following evolved: Decreased Stable Increased
- AC’s oversight of internal audit ma ers [ ] [ ] [ ]
- number of issues raised with the CAE [ ] [ ] [ ]
- extent of communica on outside of formal mee ngs [ ] [ ] [ ]
- CAE invita on to AC mee ngs [ ] [ ] [ ]
- CAE a endance at AC mee ngs [ ] [ ] [ ]
- opportuni es for CAE to meet the AC without management present [ ] [ ] [ ]
- propor on of AC me spent on risk management and internal control [ ] [ ] [ ]
- AC input into the internal audit plan [ ] [ ] [ ]
C.12. What proporƟon of the formal audit commiƩee Ɵme (formal audit commiƩee meeƟngs) is
dedicated, on an annual basis, to internal audit issues? (approximately) [____] %
C.13. Do you have contact with the ACC and/or ACM outside formal meeƟngs?
[ ] Yes [ ] No (if no, please go to ques on C.20.)

C.14. During the past two years, how has the extent of contact outside of formal meeƟngs evolved?
[ ] Decreased [ ] Stable [ ] Increased


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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

C.15. Who normally iniƟates the informal contact? (several answers possible)
[ ] ACC [ ] Other ACM [ ] CAE [ ] Other IAF staff members [ ] Others

C.16. How oŌen do you have informal contacts with the ACC (or other ACM) (approximately)?
[_______] (insert number) mes a year.

C.17. How and where do you have informal contacts with the ACC (or other ACM)? (several answers
possible)
[ ] over the phone
[ ] by e-mail
[ ] at the CAE’s office / at the IA department / in the company offices
[ ] at the ACC’s (or other ACM’s) office
[ ] at a restaurant (outside the organiza on)
[ ] during my spare me (golf court, concert, recep on,…)
[ ] other [_____________]

C.18. Are the issues you discuss informally with the ACC (or other ACM) also discussed during the formal
AC meeƟngs? [ ] Yes, all of them [ ] Yes, but not all of them [ ] No

C.19. What kind of issues do you discuss informally with the ACC (or other ACM)? (several answers
possible)
[ ] corporate governance in general
[ ] risk management and internal control in general
[ ] the organiza on in general
[ ] issues related to the external auditor’s work
[ ] issues related to the collabora on with the external auditors
[ ] issues related to management
[ ] issues related to the risk appe te and risk-taking of the organiza on
[ ] issues related to organiza on-specific risks and control ac vi es
[ ] issues related to (suspected) fraud or errors
[ ] issues related to the management of the IAF (staffing issues, quality assurance and improvement)
[ ] issues related to the internal audit plan or budget
[ ] issues related to audit tools and techniques (methodology, so ware)
[ ] other [_____________________]

C.20. On a scale of 1 (low) to 5 (very high), what is your assessment of the ACC’s ACC
knowledge and experience in the following areas:
a. business in general [ ]
b. business specific risks [ ]
c. corporate governance [ ]
d. risk management and internal control in general [ ]
e. business specific risk management and internal control [ ]
f. accoun ng and finance [ ]
g. external audi ng [ ]
h. internal audi ng [ ]

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

C.21. On a scale of 1 (low) to 5 (very high), in your opinion, to what extent are the ACC
following an appropriate descripƟon of the ACC:
a. sensi ve (aware of changes in mood of others) [ ]
b. mo vator (mobilizes, ac vates followers) [ ]
c. diploma c (skilled at interpersonal rela ons, tac ul) [ ]
d. self-interested (pursues own best interest) [ ]
e. able to iden fy and communicate relevant oversight ques ons beyond those [ ]
provided by others
f. has a construc ve and proac ve a tude (an cipate problems by asking ques ons) [ ]
g. challenging management towards governance issues [ ]
h. has integrity and ethical values [ ]
i. commands respect and is highly regarded by senior management [ ]
j. plays a leading role in se ng the tone of corporate governance [ ]

SECTION D: ORGANIZATIONAL CHARACTERISTICS

D.1. How long has your organizaƟon existed in its current form? [______] years or since [________]

D.2. In which industry does your organizaƟon operate?

Public sector [ ] Bank and insurance [ ] Other services [ ] Regulated u lity [ ] Manufacturing [ ]
Other (please specify) [ _______________________________________ ]

D.3. Is your organizaƟon listed? Yes [ ] No [ ] If yes, on which stock exchange(s)? [___________]

Please answer the following ques ons with reference to the current financial year:
D.4. What is the size of your organisaƟon (approximately):
In terms of total number of employees? [________] FTE
In terms of total assets (for private sector organisaƟons)? [________] AUD
In terms of policy budget (for public sector organisaƟons)? [________] AUD
In terms of total revenue (for private sector organisaƟons)? [________] AUD
In terms of operaƟng budget (for public sector organisaƟons)? [________] AUD

Thank you for taking your me to complete this ques onnaire. If you would like to receive summary
feedback on this project, please provide your details below:

Name: _______________________________________________________________________________
Company name and address: _____________________________________________________________
_____________________________________________________________________________________
Country: _______________________________________

Email: _________________________________________ Phone: ________________________________

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