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Institutional Theory on Internal Audit Effectiveness The Case of India

Article  in  Iranian Journal of Management Studies · March 2021

DOI: 10.22059/IJMS.2021.313778.674303

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Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48
RESEARCH PAPER

The Institutional Theory on the Internal Audit Effectiveness: The

Case of India
Prem Lal Josh1, Golrida Karyawati P2

1. ICSSR Senior Fellow, Western Regional Centre (Institute of ICSSR), Mumbai, India
2. Associate Professor of Accounting, Universitas Pelita Harapan, Indonesia

(Received: November 16, 2020; Revised: January 13, 2021; Accepted: February 22, 2021)

Abstract
The necessity and importance of internal auditing in the Indian listed companies is increasing because
of the strengthening of corporate governance practices by regulatory bodies, and the Indian market
environment is becoming more competitive. This study attempted to determine some of the critical
factors that affect the effectiveness of internal auditing in Indian listed companies. To this end, a
sample of 252 Nifty companies was recruited. We mailed questionnaires to the Head of Internal Audit
Department, Chief of Accounts, and Chief Executive Officers of the companies. The overall response
rate was 29.4%. Companies represented manufacturing, information technology, retail, banking, and
financial services. The results of multiple regression analysis revealed that the factors affecting the
effectiveness of internal auditing are the competency of internal audit staff and the interaction of
internal auditing with audit committee. The study came to the conclusion that institutional theory best
explains the effectiveness of internal auditing in Indian context. It thus encourages auditing
professionals to develop their core competencies for delivering their services efficiently, and informs
them that the continuous interaction with audit committee members will help them to be focused on
the organizational performance by improving the IA effectiveness. At the end, the theoretical and
practical implications of the study along with the directions for the future research are provided.

Keyword: Audit committee, Management support, Independence, Internal competency, Interactions

of internal auditing and audit committee, India, Size.

1. Introduction

There is a plethora of research studies on the effectiveness of internal auditing (IA), but in
general, these studies are not based on a strong theoretical framework. The research
hypotheses of these studies have been built based only on the pragmatic context in which the
research has been conducted. Most of these studies analyze the effectiveness of IA by
referring to the applicable IA practice standards (Dejnaronk et al., 2015; Nurdiono &
Gamayuni., 2018; Setyaningrum & Kuntadi, 2017).
Some studies such as Shamki and Alhajri (2017) and Endaya and Hanefah (2010) suggest
agency theory to analyze the effectiveness of IA. From the viewpoint of agency theory, the IA
is intended to eliminate agency problems between managers and shareholders. The Enron
case that caused severe business trauma suggested an important role for IA in public
companies. Agency theory views the independence of IA as critical in determining the
effectiveness of IA. A study in Greek has shown that IA independence influences the
effectiveness of IA (George et al., 2015).


Corresponding Author Email: prem@acadjoshi.com
36 Lal Josh & Golrida Karyawati

In developing countries, especially those with family business characteristics, IA’s

independence is not considered a critical problem because there is no agency problem
between shareholders and management. Siregar and Utama (2008) stated that although family
business managers make earning management, they do it so efficiently that it actually benefits
the company. Therefore, IA’s goal in family business companies is more focused on
compliance – especially to external regulations – instead of efficiency goals. Research
conducted in Indonesia even proves that the role of the company’s independent
commissioners (Rahardjo et al., 2019) is less than optimal, which may be due to the small
number of independent commissioners according to the rules. However, empirical evidence
collected by Setyaningrum and Kuntadi (2017) in family business companies concluded that
independence has no effect on IA effectiveness. Therefore, stakeholder perspective needs to
be considered in determining the effectiveness of IA. Pertaining to this discussion is the study
by Türetken et al. (2020), which provided mixed results on the influence of audit
independence, objectivity, and management support variables on IA effectiveness due to the
stakeholder perspective.
The effectiveness of IA in developing countries is mostly caused by institutional factors.
Research in developing countries contexts has been carried out by Nurdiono and Gamayuni
(2018), Setyaningrum and Kuntadi (2017), Shamki and Alhajri (2017), Dejnaronk et al.
(2015), Cohen and Sayag (2010), etc. However, these studies by and large lack in one way or
another a theoretical framework regarding the effectiveness of IA.
Dejnaronk et al. (2015) found that factors influencing IA effectiveness include compliance
with the Institute of Internal Auditors (IIA) standards, use of a risk-based audit plan, and
presence of a quality assurance and improvement programs. Nurdiono and Gamayuni (2018)
found that internal auditor (inspectorate) competency significantly affects IA quality. The
research done by Setyaningrum and Kuntadi (2017) shows that competence, communication,
and audit work have positive effects on the effectiveness of IA. Shamki and Alhajri (2017)
found a significant relationship between the effectiveness of IA and the auditors’ experience.
Based on what we said, the present study set out to analyze the factors that influence IA
effectiveness using institutional theory (Dacin et al., 2002) in developing countries with
family business characters. To this end, a case study of Indian companies was carried out.
Institutional factors such as management support, internal audit team, audit committee
interactions, etc., were predicted to influence the effectiveness of IA.

2. Neo-Institutional Theory on Internal Audit Effectiveness

Institutional theory explains the process of institutionalizing a practice in a group or

institution through a systematic, structured institutional change of behavior (Clemens &
Cook, 1999). The process of institutionalization results in the uniformity of desirable practices
(Dacin et al., 2002; Oliver, 1991), and homogeneous group member or institution behavior
can be explained by institutional theory (Fernando & Lawrence, 2014; Meyer & Rowan,
1977).
Neo-institutional theory emphasizes political behavior aspect in the process of
institutionalization (Lang, 2018). This political aspect manages values and norms collectively
for the interests or goals of certain groups or actors (Oliver, 1991). DiMaggio and Powel
(1991) refer to the political process as isomorphism. They decompose three forms of
isomorphism, namely mimetic isomorphism (which is the pressure to imitate an action or
practice carried out by another party), coercive isomorphism (which is coercive pressure that
comes from regulations or powerful figures or parties), and normative isomorphism (which is
Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48 37

pressure to adopt certain systems or methods in order to meet standards in order to obtain
certification from professional institutions).
Neo-institutional theory can be used to explain IA practices, particularly the coercive
isomorphism and normative isomorphism. The issue of IA became a serious discussion in the
USA and other countries following the publication of the Sarbaney Oxley Acts (US Congress,
2002). Various countries issued regulations on corporate governance that require an IA
function on public companies. In India, the issue of corporate governance for listed
companies came into existence based on the recommendations Kumar Mangalam Birla
Committee (2000), which was set up by Securities Exchange Board of India (SEBI). It
suggested the inclusion of a new clause in Companies Act of 2013 (Ministry of Corporate
Affairs, India, 2013), namely Clause 49 which purpose is to enhance good corporate
governance of for public companies, and has provisions regarding the audit committee. The
role of the committee includes reviewing and monitoring auditor independence, the approval
of related party transactions, inter-corporate loans, valuations, etc., in the Listing Agreement
to promote good corporate governance (Deloitte, 2020). Additionally, the new Companies
Act 2013 (Ministry of Corporate Affair India, 2013) provides a formal structure for
corporate governance by enhancing disclosures, reporting, and transparency through enhanced
as well as new compliance norms (Deloitte, 2020).
With the increasing importance of issues regarding IA, the profession of internal auditor is
increasingly highlighted. The Institute of Internal Auditors (IIA) is an international
professional association that has been established in 1941 in the USA, and currently holds a
very important role. Today more than 170 countries are members of IIA. IIA published
International Standards for Professional Practice of Internal Auditing (ISPPIA) to maintain
the high quality of internal audit practices globally. Various certifications such as Certified
Internal Auditor (CIA), Qualification in Internal Audit Leadership (QIAL), and various
training courses are held so that all members of the IA profession achieve the expected quality
standards.

3. Hypothesis Development

Figure 1 below presents the theoretical framework of the study. The effectiveness of IA is
better explained by coercive isomorphism and normative isomorphism (DiMaggio and
Powel, 1991). Based on the coercive isomorphism, the effectiveness of IA in a company is
determined by its powerful IA position in the company. When the IA position is powerful, the
findings of the IA will be immediately followed up for improvement. In a business that
separates the ownership and control, the existence of IA is considered as an agency cost to
eliminate the manager’s moral hazard. Therefore, IA tends to lack support from managers.
Hence, management support is less important in companies in developed countries that tend
to separate control and ownership (Rudhani et al., 2017). The effectiveness of IA in
companies that separate control and ownership relies more on auditor’s independence.
Besides, the strong law enforcement may provide more motivation for IA in carrying out its
functions, which in turn enhances the effectiveness of IA functions.
However, in developing countries characterized by a family business company structure,
IA is also a representation of managers, so there is no conflict between managers and IA. In
India, internal audit is part of the audit committee in which some members are from external
parties. The aim is to protect minority shareholders. However, because the number of
independent parties is small, the independent parties are generally outvoted. A study done by
Setyaningrum and Kuntadi (2017) demonstrates that IA independence does not significantly
affect the effectiveness of IA. Therefore, top management support is important in determining
38 Lal Josh & Golrida Karyawati

IA effectiveness. Previous studies have emphasized the importance of management support

and IA independence in determining the effectiveness of IA (Cohen & Sayag, 2010; George
et al., 2015; Huong, 2018; Musah et al., 2018; Rudhani et al., 2017). Moreover, Ikin (2005)
decomposed independence as independence in appearance and independence in fact. In the
family business of developing countries, even though IA is not independent in appearance, it
is still required to be independent in fact.
Bearing in mind that the existence of IA within the organization is to strengthen corporate
governance, the existence of governance regulations is also important in determining the
effectiveness of IA. Regulation provides support and control given to the auditor and the
internal audit process. In India, capital market authorities – i.e., the Securities Board of India
(SEBI) – monitors IA through the Audit Committee (AC). According to SEBI Clause 49 of
the listing agreement, the establishment of an AC is mandatory for listed companies. The AC
frames rules pertaining to governance, and reviews and monitors the work of IA. Clause 49 of
the listing agreement requires that the audit committee be comprised of at least three directors
as members of the committee, out of which at least two-third members have to be independent
directors. All audit committee have to be financially literate and at least one member has
sufficient accounting or related financial management expertise.
The interactions of AC with IA are a prerequisite for corporate governance implementation
in India. This relationship of AC and IA is also considered to enhance independent behavior
of IA. IA function involves, therefore, frequent meetings with AC. The relationship with AC
strengthens the IA tasks and activities. Abbott et al. (2012) report that AC – which supervises
internal auditing the most – allocates more hours for internal auditing. Boubaker and Taher
(2013) study findings show that the frequency of the meetings of the AC has a positive
influence on the IA function. Gebrayel et al. (2018) found that AC meetings frequency and
the presence of IA function positively affect a company’s financial reporting quality.
Similarly, the cooperation between the IA and the AC is very critical as it has an impact on
the effectiveness of the IA activities through information and data sharing (see Alshbiel,
2017). Based on the foregoing discussion, the following hypotheses are proposed:
H1: Top management support influences IA effectiveness.
H2: Independent behavior influences the IA effectiveness.
H3: The frequency of interactions between IA and AC has a positive and significant
relationship with IA effectiveness.
The increasing practice of IA globally today can be explained by normative isomorphism.
IIA membership in more than 170 countries has consequences for countries implementing IA
practices in line with the International Standards for Professional Practice of Internal Auditing
(ISPPIA) and other standards issued by IIA. Dejnaronk et al. (2015) proved that adherence to
standards issued by IIA increases the effectiveness of IA. IIA also conducts various training
and certifications to harmonize IA practices in line with the standards and regulations issued
by IIA and improve the internal competencies of auditors individually and in teams in order to
increase the effectiveness of IA in all member countries.
The competency and proficiency of internal audit staff or team may play a significant role
in the contributions and effectiveness of IA. Several researchers argued that internal auditors
have to possess the knowledge, skills, and other needed competencies to achieve their
individual responsibilities. In this context, the Institute of Internal Auditors requires internal
auditors to possess the knowledge, skills, and other competencies needed to perform their
individual responsibilities (IIA, 2012). George et al. (2015) posit that internal audit team is
deemed a significant variable that influences the IA effectiveness. Moreover, according to
Mathius (2016), competence includes expertise, knowledge, and experience. A competent IA
Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48 39

has the knowledge, training, certification, skills, and experience sufficient to be able to
perform successfully the audit tasks.
Jachi and Yona (2019) study establishes that IA function competency dimensions of
qualification, experience, and training have a significant positive relationship with
transparency and accountability in Zimbabwe’s context. Furthermore, their study reveals the
need to improve and uphold IA function competency through the creation of an enabling
environment to support IA functions and guarantee their effectiveness in upholding corporate
governance practices. Mousa (2005) reports that proficiency and due professional care in the
form of competence form a significant factor in IA effectiveness. In addition, Cohen and
Sayag (2010) report that the professional efficiency of internal auditors is integral for the
effectiveness of IA. Similarly, Alzeban and Gwilliam (2014) study shows that the increased
IA effectiveness appeared to have an association with higher IA competence. Hailemariam
(2014) also reports that competent IA staff have a significant and positive effect on the
effectiveness of IA. In a more recent study, Novranggi and Sunardi (2019) report that
competence auditor affects the effectiveness of IA.
Based our discussion here, the study formulates the following hypothesis:
H4: Internal audit competence positively and significantly influences IA effectiveness.

IA competency

IA independence

Internal audit
effectiveness
Frequency of
interactions
between IA-AC

Management
support

Figure 1. Research Framework Model

4. Sample

The sample for this study was derived from Nifty500 listed companies. A proportionate
progressive random sampling method was used based on market capitalization as on
December 31, 2018. A total of 252 companies agreed to participate in the study. A copy of
self-designed questionnaire was sent by post and also an online link by email to the Head of
Internal Audit department, Internal Auditors, Chief Accountants, etc. The respondents were
given one and half month time to reply to the questionnaire. The ones who did not return the
40 Lal Josh & Golrida Karyawati

filled questionnaires in the due time were sent another message after three weeks, requesting
them to complete the questionnaire.
The study was conducted during January-April, 2020. In the questionnaire, we sought
information on demography, and included statements related to IA effectiveness on the
independent variables. A Likert scale of 1 to 5 was used to measure the responses. The
questionnaire was pretested with audit practitioners and audit educators and it was further
improved based on feedback.
Finally, we received 74 completed questionnaires (the response rate was 29.4%). Some of
the questionnaires were found to be incomplete and others were removed due to outlier
problem. The final analysis included 66 questionnaires. Listed companies from automobile,
paint, fertilizer and chemical, petrochemical cement, pharmaceutical, steel, consumer goods,
engineering, food and beverages, banking and financial services and other industries
participated in the study. The survey was completed in four months in the early half of 2020.
It needs to be mentioned here that in the Indian context, the average response rate for studies
that collect data through questionnaires from organizations is 13.31, with a standard deviation
of 6.19 (Krishnana & Pouloseb, 2016). That is to say, our response rate is much higher than
the previous industrial survey response rates in India. We tried to improve the response rate
by sending reminders, offering to provide a summary of the findings to them, and strictly
preserving the confidentiality of the responses. Additionally, Indian companies’ managers are
generally conservative and consider their accounting information fairly secretive.

5. Research Variable and Model

This study analyzed the factors that influence the effectiveness of IA in India. The research
model that was tested by regression analysis was as follows:
IAE = β0 + β1 MS + β2 INDEP + β3 INTRCT + β4 COMPT + ε
Where,
IAE : Internal audit effectiveness
MS : Management support
INDEP : Internal auditor independence
INTRCT : Frequency of interaction between IA and AC
COMPT : Internal auditor competency
All research variables were tested for validity and reliability with the Harman Single-
Factor Test (HSFT) as presented in Table 1.
Table 1 shows that all the parameters of conducting scientific research are met by this
research. Firstly, the values of factor loadings for each statement related to independent
variables (i.e., independence, competency, interactions of IA with AC, and management
support) and dependent variable (IA effectiveness) are more than the threshold level of 0.50.
Moreover, Cronbach’s alpha coefficients values are more than 0.70, and so are considered
significant and highly reliable. Therefore, the results show a great internal consistency for the
four independent variables. Lastly, the coefficients of KMO are higher than 0.5, with a
significant Bartlett’s Test (p< 0.01).
Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48 41

Table 1. Results of Factor Analysis

Factor Cronbach’s
Variables Statements KMO
loadings Alpha
IAs has access to audit independently any area in the
INDEP 0.813
organization.
IAs have unrestricted access to all departments and
0.746 0.663 0.805
employees in the organization.
IA reports to the highest level within the business. 0.605
IA unit has the right mix and competencies in specialist
COMPT 0.671
areas such as IT, treasury, and risk management.
IAs are proactive in their approach. 0.670 0.674 0.721
IAs attend educational seminars and training for
0.587
continuous training.
Frequent meetings of AC with IA facilitate the monitoring
INTRCT and reviewing the work of IA functions, resulting in its 0.881
increased effectiveness.
Frequent meetings of AC with IA lead to an enhanced
internal audit function that ultimately increases IA 0.829
effectiveness.
Frequent meetings of AC with IA enable the IA to
implement its recommendations in a timely and 0.783 0.883 0.931
effectively manner.
Frequent meetings of AC with IA help in establishing a
power base for the IA function, thereby enabling it to 0.757
fulfill its obligations.
Frequent meetings of AC with IA minimize the problems
0.684
in financial reporting.
Internal audit department has adequate budget to carry out
MS 0.858
its responsibilities effectively.
Top management provides assistance and encouragement
0.849
for the training and development of internal audit staff.
Internal audit department is large enough to carry out its
0.839
duties effectively.
Senior management is aware of the resources required for
0.819 0.578 0.754
internal audit.
IAE IA improves department’s operational performance. 0.800
IA improves organizational performance. 0.768
IA adds value to the operations. 0.767 0.766 0.757
IA makes proposals for enhancing the internal control
0.743
framework when suitable.
IA assesses the effectiveness of internal controls. 0.722
IA reviews the economical, successful, and effective
0.583
utilization of assets.

6. Findings

Table 2 presents descriptive statistics of all research variables.

Table 2. Descriptive Statistics

Mean Std. Deviation N
IAE 4.534 0.404 66
MS 4.187 0.587 66
COMPT 3.936 0.635 66
Log of total assets (ASSET) 10.982 0.843 66
INDEP 4.515 0.573 66
INTRCT 4.303 0.699 66
42 Lal Josh & Golrida Karyawati

Table 2 shows the mean values and standard deviations for the dependent and independent
variables. It is to be noted that the lowest mean value of 3.936 is related to the competency of
internal auditor, and the mean value is more than four for other independent variables. The
same is the case for IA effectiveness as the dependent variable (M=4.515). The value of the
log of total assets, which is taken as a control variable, is 10.982. Additionally, the value of
SD for all the variables is normal. Following descriptive statistics, the Pearson correlation
matrix is presented in Table 3:

Table 3. Pearson Correlation

IAE MS COMPT ASSET INDEP INTRCT
IAE 1.000 .336 .446 .018 .265 .467
MS .336 1.000 .353 .100 .312 .473
Pearson COMPT .446 .353 1.000 -.030 .351 .359
Correlation ASSET .018 .100 -.030 1.000 -.057 .046
INDEP .265 .312 .351 -.057 1.000 .270
INTRCT .467 .473 .359 .046 .270 1.000

Pearson correlation matrix shows that the correlations among the independent variables are
on the lower side. The maximum correlation observed is 0.473 between management support
and frequent meetings of IA with AC. Table 3 does not show any problem of multicollinearity
among the variables under study. The VIF values in the regression results also confirm this
point.

Table 4. Regression Coefficients

Unstandardized Standardized
Collinearity statistics
coefficients coefficients
Model* t Sig.
Std.
B Beta Tolerance VIF
ERROR
(Constant) 2.608 0.706 3.695 0.000
MS 0.045 0.087 0.065 0.513 0.610 0.708 1.412
COMPT 0.184 0.077 0.289 2.383 0.020 0.776 1.289
LOG. ASSET 0.004 0.052 0.009 0.082 0.935 0.979 1.022
INDEP 0.041 0.083 0.058 0.495 0.623 0.824 1.213
INTRC 0.183 0.072 0.316 2.526 0.014 0.728 1.374
Dependent variable: IAE
R: .561
R square: .314
Adjusted R square: .257
F: 5.503, Sig.: .000
Durbin-Watson: 1.769

Regression coefficients are presented in Table 4. An examination of the results indicates

that there is no multicollinearity problem in the data set as the VIF values are low. Moreover,
the direction of all independent variables tested in this study is positive. However, only two
variables turned out to be significant in explaining the effectiveness of IA which are
frequency of interactions between IA and AC, and IA competence. In other words,
regression results show very strong support for hypotheses 3 and 4. Firstly, IA competency has
a positive and significant (t= 2.383; p<0.05) relationship with IA effectiveness. Hence, the
alternative hypothesis 4 is accepted. The findings support the IIA (2012) argument that the
competence of internal staff is one of the nine core elements for the effective IA. Furthermore,
our finding is congruent with the results of the prior studies (e.g., Albrecht et al., 1988;
Alzeban & Gwilliam, 2014; Bednarek, 2018; Huong, 2018). In this regard, Bou-Raad (2000)
posited that a higher education qualification is necessary for IAs to be considered a human
resource. As IIA (2017, p.6 ) states:
Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48 43

‘The internal auditors must possess the knowledge, skills, and other competencies needed
to perform their individual responsibilities, which is referred to as proficiency. Similarly, ‘the
internal auditors must apply the care and skill expected of a reasonably prudent and
competent internal auditor’, which is referred to as professional care”.
Secondly, it is also found that frequent interactions between IA- AC (t= 2.526; p<0.05) has
a positive and significant effect on the IA effectiveness. Therefore, alternative hypothesis 3
is accepted. From this relationship, an insight is provided by the results that AC considers IA
as an important information provider. Regulatory bodies like SEBI in India require AC to
review and monitor the work and performance of IA, and there should be frequent
interactions between the two. It is worth mentioning here that IIA (2004) suggested that the
head of internal audit function should report to and discuss confidential matters with AC to
strengthen the corporate governance practices. They may also enable the organization to
maintain the organizational independence of IA from management. Our findings are in line
with findings by Alshbiel (2017). The frequent meetings between IA and AC lead to sharing
important information and data about the organization’s operating performance and IA
function.
The reported F value shown on Table 4 is quite high and significant, which implies that the
regression model is significant at 0.01 level. The R value is 56.1 percent and the explanatory
power of the model is 31.4%., indicating that independent variables explain 31.4% of
variation in the dependent variable. The F-ratio turned out to be 5.503 (df. 60:5, p<0.001).
The significance of F ratio supports the significance of the regression model, too.
Figure 1 presents the normal P-P of regression standardized residuals for the dependent
variable.

7. Discussion

The results of the study prove that all independent variables have a positive effect on IAE, but
only auditor’s competency and IA’s interaction with the AC show a significant effect on IAE,
whereas management support and IA independence have no significant effect. The
insignificant influence of IA’s independence can be explained by the characteristics of family
44 Lal Josh & Golrida Karyawati

business companies in India in particular and the developing countries in general, where IA is
part of management representing the majority shareholders (Siregar & Utama, 2008). In other
countries such as Indonesia, government regulations require the existence of an independent
IA, but the number is small, so they still cannot demonstrate their independence because of
the small number of votes (Rahardjo et al., 2019).
An interesting finding is the insignificant influence of management support on IAE – as IA
is part of management – while on the other hand, The interaction between AC and IA has
positive influence on IAE. There are several things that might explain this condition. The first
is the strong role of the government through the SEBI in enforcing corporate governance,
forcing companies to comply with capital market regulations issued. Capital market
regulations require the presence of ACs in companies, whose function is to monitor IA.
Empirical evidence shows that the ‘interaction of IA and AC’ has a significant effect on IAE.
Thus, it is understood that the role of government is significant in the governance practices of
Indian companies.
The second is the magnitude of the influence of international professional associations,
especially IIA in India. Membership in IIA requires companies to implement IA practices that
are in accordance with the framework and standards issued by IIA, especially ISPPIA. The
implementation of ISPPIA requires audit competence in carrying out internal audit
procedures. Therefore, companies participate in various training and certifications to improve
their competence. Empirical evidence shows that IA competence has a significant effect on
IAE. The importance of IA competency was also proven by Nurdiono and Gamayuni (2018)
and Usman (2016) . Dejnaronk et al. (2015) explained that adherence to IIA standards affects
IAE.
The results of this study suggest the importance of auditor competence and good
communication between the IA and the AC in determining the effectiveness of internal audit.
Alzeban and Gwilliam (2014) even argued that IA competence is an important key to the
effectiveness of the internal audit activities. In developing countries where systems and
infrastructure are not as good as the developed countries, auditor competence is a valuable
resource. One of the most important internal auditor competencies is communication skills
(Bailey, 2011; Narkchai & Fadzil, 2017; Sarens, 2009).
Various studies show the importance of coordination between IA and AC (Khelil et al.,
2016; Mahdawi et al., 2018; Sarens et al., 2009). Khelil et al. (2016) found that the
coordination of IA and AC increases the morale of the chief audit executive to act more
ethically, which ultimately increases the effectiveness of internal auditing. Because in most
cases, some AC members are non-executive directors, IA’s competence is increasingly
considered important in communicating the operational aspects of internal auditing and
monitoring (Sarens & De Beelde, 2006).
This research shows the role of institutional theory in the explanation of the effectiveness
of IA that occurs through coercive isomorphism and normative isomorphism. Coercive
isomorphism originates from government pressure through capital market regulation, while
normative isomorphism is caused by the great influence of IIA.

Conclusions and Implications of Findings

This study’s findings report that ‘competency of IA’ and ‘interactions of IA with AC’ are
the key factors in influencing the IA effectiveness in Indian context. It is to be noted that
the competency traits of IA and interactions with AC enable him/her to review and
independently provide assurance on risk management, governance, and internal control
systems. This study contributes to the literature from a fast-developing country, India. Our
Iranian Journal of Management Studies (IJMS) 2021, 15(1): 35-48 45

framework measures the relationships between IA’s competency and interactions of IA with
AC and the effectiveness of IA.
As the establishment of IA department in listed companies is gradually becoming a
necessary requirement, the institutional theory emphasizes its expanding role within the
organization as an important arm of corporate governance role. As a regulatory body, SEBI
should pay more attention to the issue of maintaining an IA function mandatory, the
relationship between the IA function and other governance parties (especially the audit
committee), and the disclosure of more relevant information about the internal audit
department’s characteristics and practices. It needs to be emphasized that the observations and
recommendations made by IA function and actions taken by management should be disclosed
in the annual reports for better transparency and for the benefits of the stakeholders. The
findings of this study encourage auditing professionals to develop their core competencies for
delivering their services efficiently. Moreover, a continuous interaction with audit committee
members will help them be focused on the organizational performance by improving the IA
effectiveness.
Martinov-Bennie and Soh (2009) state that since ACs and IAs have common goals to
achieve, a positive and significant association between them may greatly help each other in
performing their duties and responsibilities. Additionally, the findings may also be of concern
to the board of directors in responding in a better way to their responsibilities related to IA
and AC relationship, which helps improve IA effectiveness. Moreover, regulators such as
SEBI in India can also benefit by strengthening areas with substantial impact on internal
audit’s contribution to corporate governance and in maintaining its independence from
management.
The agenda for future research might include addressing various stakeholders, such as
external auditors and internal auditors in investigating the IA effectiveness. Case studies of
specific industries such as oil and gas, manufacturing, and financial services may also be
investigated. Additionally, audit committee independence and competency may also be
examined in future research. Finally, taking the effects of COVID-19 on internal audit
effectiveness may be another area of interest in this regard.
Dr Prem Lal Joshi is thankful to ICSSR New Delhi India for awarding a Senior Fellowship
which helped in completing this research".
46 Lal Josh & Golrida Karyawati

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