The correlation between perceived internal audit quality and defined corporate governance soundness

Abstract

This paper investigated whether a correlation exists between the perceived quality of an internal audit function and the soundness of its company’s corporate governance structure. Compliance with ten disclosure requirements of the King II report was used to determine a corporate governance score for each participating company. The perceptions of management and audit committee chairs on their companies’ internal audit function quality were used to determine a quality score for each participating internal audit function. These perceptions were based on elements that affect internal audit function quality identified from the literature. The correlation between these scores was then investigated. The sample consisted of thirty large South African companies. Results were based on questionnaires completed by chief audit executives, chief executives and audit committee chairpersons of participating companies. The main finding was that no correlation was found to exist between the defined soundness of the corporate governance structures and the perceived internal audit quality of participating companies. This finding causes doubt about internal audit's role as a corporate governance mechanism in an organisation, and indicates that extensive research should be encouraged into the relevance of internal audit as a true corporate governance mechanism.