An exploratory study on internal audit independence in Australia

This study draws on agency and institutional theory to examine the issue of internal audit’s independence through its relationship with components of corporate governance.

The internal audit function is actively considered as one of the four components of corporate governance, along with the board, management and external auditors. It serves this purpose by providing a range of services in its capacity of monitoring and consulting which is actively sought by the other components of corporate governance to satisfy their extended accountability requirements. The integrity of these services is, however, only assured if internal audit maintains its independent status. As such there is a “tension” resulting from the pressure to provide these value added services as perceived by the parties involved and maintaining its independence status.

Based on an extended survey with organisations in the Australian corporate sector, this study critically examines the results of the survey against existing literature and best practice guidelines to determine if internal audit functions operating under this tense environment are operating independently.

The results indicate an interesting analysis. While it indicates a somewhat trend in complying with best practice guidelines for maintaining independence, it also indicates that this is not consistently adhered to as organisations are able to operate in an environment that compromises internal audit independence. A main reason for this appears to be a mix of internal audit structural set ups brought about by a lack of statutory backing to provide for consistency in implementation of best practice guidelines for maintaining independence. This is exacerbated by internal audit being viewed as partner by these parties thus widening the “tension” gap between its advisory role and its independent status. A wider question emerges which questions the ability to maintain this independence concept under a partnership management environment. The concept of internal audit being an independent function as promulgated by the Institute of Internal Auditors through its definition of internal audit is seriously questioned under the totality of this environment.