Promovendus Jason Watkin

The Impact of Internal Audit on Corporate Governance

Jason Watkin studeerde economie en is werkzaam bij De Nederlandse Bank.

Email: jasonjwatkin@gmail.com

From 2007 onwards, much of the news coverage in Europe and US centred on the financial crisis that wreaked havoc on economies around the world. Although some scholars argue that the use of various financial instruments led to the crisis, another group of scholars believe that the blame should be directed to a similar source—the failure of corporate governance in the financial sector. The Internal Audit Function (IAF) has a crucial role in the corporate governance concept, and various leading international financial organisations—such as the Bank for International Settlements—have urged their stakeholders to accommodate a strong IAF.

If the failure of corporate governance did indeed lead to the financial crisis, the individual components of the corporate governance concept should be investigated. In order to argue that the IAF as a component of corporate governance has been successful at changing corporate policy, it is imperative to examine how effective IAF has been. The effectiveness of the IAF can be measured by a set of criteria that are set prior to its assessment.
Scholars have investigated how to assess the effectiveness of the IAF, and their studies have resulted in a set of uniformly agreed upon criteria regarding the function’s effectiveness. However, the problem with these criteria is that they are based on a common denominated idea of what the IAF is. Some audit functions operate as a compliance function and others execute their tasks based on a risk-based approach. Furthermore, there are functions reporting directly to the board with an escalation mechanism towards the supervisory board, whereas other functions report strictly to line management with no additional escalation lines.

This study argues that the criteria to assess the effectiveness of corporate governance are a direct result of the perceived role it has in the organisation. The relevance of this study lies in gaining an understanding of how the IAF in the recent past has played the role in changing the corporate policy in the organisations linked to the banks. Moreover, this study reassesses the current criteria used for measuring the effectiveness of the functions. This will garner insight into the role the IAF played in the corporate governance concept and whether it has failed in its recent endeavours as argued by scholars.