THE NEED FOR AN INTERNAL AUDITOR REPORT TO EXTERNAL STAKEHOLDERS TO IMPROVE GOVERNANCE TRANSPARENCY

Topics: Auditing, Internal control, Audit Pages: 6 (943 words) Published: November 13, 2014


Quistions on Academic Research Case
The need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency

Naimah AlBaharnah
Prof. Liotta, Joseph P
AC629, Contemporary Issues In Auditing
June 19, 2014
What is the issue being addressed in the paper? 

Sarbanes Oxley mandates requires all public companies to establish internal controls and procedures for financial reporting. In addition they must document, test and maintain those controls and procedures to ensure their effectiveness. The purposes of SOX are to emphasis on corporate governance and to reduce the possibilities of corporate fraud by increasing the stringency of procedures and requirements for financial reporting. Under Sarbanes Oxley act, management is required to produce an "internal control report" as part of each annual Exchange Act report. This paper discusses the need for an internal auditor report (IAR) to increase governance transparency for external stakeholders. While the internal audit function is an important and distinct governance mechanism, external stakeholders typically lack the direct relevant information about the function that is available to insiders from other governance mechanisms (e.g., management, audit committee, and external auditor). b. What are the findings of the paper?

The paper argues that the discloser of the internal auditor report (IAR) is very important because it provides investors with independent and objective evaluation of the company’s financial and operation activities such as corporate governance and evaluate the operational efficiencies. The research specifies that disclosing a formal internal audit report (IAR) may improve the overall governance transparency, which stakeholders rely on to improve confidence and decision-making, in addition to reduce information asymmetry costs.

c. Why is this paper important to auditors, and what are the implications of this paper for the auditing profession? The paper uses multiple methods to evaluate potential benefit and cost of IAR disclosure and to develop a model report that can serve as a basis. The researchers find that there are many benefits of the IAR disclosure: Firstly, the research highlight the potential for IAR to increase stakeholder understanding of the internal control functions and overall governance in a way that can affect judgments and decision-making. In sequence, this would increase the investor confidence and stock attractiveness. Secondly, Research in psychology and accounting indicate that accountability pressure motivates individual to invest more time and effort on their decision-making. This evidences strength the potential of that IAR disclosure would increase internal auditor accountability and motivation to perform effectively. They propose IAR model which categories five type of information that should be provided to increase the users understanding of the internal audit function: internal audit Composition, Responsibility, Accountability, Activity, and Resources. In term of Composition, the study suggests that the report can include additional detail about internal audit composition whether the internal audit function is in- house, outsourced, or co-sourced. The study also suggests a reasonable starting point regarding the internal audit Responsibility. They should describe the purpose, authority, and responsibilities for internal control; for example, provide more detail` about the prescribed scope and nature of an internal auditor activities. In term of Accountability, the ideal model of internal auditor report should describe the internal auditor reporting relationship and whether the audit function is meeting professional quality standard in order to achieve a clear understanding of the function’s accountability, objectivity and independence within the company. Also, the model proposes that IAR should have an Activity section, which provide shareholders with: information...

Cited: Deborah S. Archambeault, F. T. (2008). The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency . American Accounting Association .
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