Corporate Governance And Internal Audit: Exploring The Relationship And Importance

Theoretical background of corporate governance and internal audit

Corporate governance can be defined as oversight of the organisation’s policies, procedures and practices. This oversight assists the organisation to ensure the operation in best interests of the organisation and its shareholders. In addition, this method of controlling corporate governance is done by the Board of Directors and the management can employ the internal auditors to monitor and test the internal control (Hayes 2017). In this research proposal, the theory of corporate governance and the relationship between corporate governance and internal audit will be explained. The purpose of the research proposal is to explain the adoption, introduction and application of corporate governance code in Libya, mainly in Harouge Oil Operations. Therefore, problem statement, aim and objectives of the study will be identified. In addition, a literature review of the scholarly articles will be done in order to establish a theoretical understanding of the study. In the methodology section, data collection and analysis procedure will be discussed.

Internal audit is an objective assurance, independent and consulting activity and it is designed to provide value and develop a firm’s operations (Abbott et al. 2016). Internal audit assists an organisation to accomplish its goals by creating a systematic as well as disciplined approach to improve and evaluate the risk management, the effectiveness of the control and governance systems. Internal audit can be defined as the catalyst for developing corporate governance by giving recommendations and managerial insights. This analysis is mainly done by assessment of business processes and data. As stated by Lenz and Hahn (2015), with a commitment towards accountability and integrity; internal auditing can share value to senior management as well as governing bodies as an objective source of service that is independent. The authors further argued that within an organisation, the roles of internal auditing are broad and it encompasses with corporate governance, management controls, risk management, the effectiveness of the organisational operations, reliability of management and financial reporting and it also helps the organisation to follow compliance with regulations and laws. As opined by Pizzini et al. (2014), internal auditing is very important in the developing countries where corruption and fraud activities are prevalent as it involves in conducting proactive audits in fraudulent cases through investigating and participating fraud examinations.

Corporate governance can be defined as the practices, rules and processes through which the firms are controlled and directed. As opined by Dodd (2017), corporate governance is involved in balancing the interest of the company’s stakeholders and the stakeholders of the organisations are the management, shareholders, customers, financiers, suppliers and community. Corporate governance gives the organisation a chance to provide a framework towards gaining the company’s objectives and it surrounds the practically every aspect of the management (McCahery et al. 2016). Corporate governance encompasses from internal controls of the performance of the organisation to the actions plan about the performance measurement. According to Tricker (2015), the board of directors are primary stakeholders of the corporate governance and shareholders elect the directors of the organisations. The directors take important decisions about the business. On the other side, as stated by Allen (2017), poor corporate governance can make doubt about the company’s integrity, reliability and obligations towards the shareholders. In recent time, Volkswagen faced the issue of poor corporate governance when it got caught in emission scandal of the organisation.

Importance of Corporate Governance in Harouge Oil Operations

Agency theory involves the issues of the directors that control the company whereas shareholders own the company. Agency theory takes this issue into consideration to prevent it. According to Hoenen and Kostova (2015), the key concept of agency theory is that an agent is recruited by the principle to continue the task on their behalf and the agency is the relationship between the agent and the principle. The authors in the article further stated that agencies costs are given by the principles in controlling the agency behaviour just because of the lack of trust in the belief of the agents. It is needed to undertake the task on behalf of the agent and the agent becomes accountable to that principle. There are three separations of ownership and control; such as principal (shareholders), agents (directors) and task (Managing the company) (Muller 2017). The agency theory helps the company to create the corporate governance and it starts with the companies owned and managed by the same people. In the next stage, it expands the business through required investors and these people could be shareholders and limited liability. In the following stage, it delegates the running of the company and to managers (agents). In the next stage, the company goes towards the separation of the goals. As stated by Bosse and Phillips (2016) separation of ownership in business can lead to the potential issues between directors and shareholders and principal-agent relationship can be dealt with corporate governance codes and that with the firm with the auditors.

Stewardship Theory of corporate governance

Stewardship theory is about the managers who can act as responsible stewards of the principle and assets that they control (Kruitwagen et al. 2017). In addition, stewardship theory is the alternative view of the agency theory where the managers are taken as to act in their own enthusiasm and self-interest. It can be specified that stewardship is a certain mechanism to reduce agency loss. This policy is included the compensation, keeping executive, levels of benefits and managers’ incentives schemes through rewarding the financially and it offers shares through alignment. It offers financial interest to the staffs to motivate them in order to offer better performance. As stated by Allen (2017), the steward is someone who takes care and protects of the needs of others and firms’ executives try to take care of the interest of the shareholders and they make a decision about the firms.

Agency theory and its impact on corporate governance

Internal audit function has an annual budget plan and the corporate governance asks the internal auditors to have a specific strategic plan. As stated by Alless et al. (2018), internal audit strategy should be three to five years plan and roadmap of the organisation will be based on the overall strategy and stakeholders’ expectation from the organisation. A well-aligned strategy has four steps to create an internal-audit specific strategic plan. In African countries and in large organisations; developing formal internal audit strategy needs planning as the corruption is much there. At first, the organisations need to develop or refine the internal audit’s strategic vision and the roles and responsibilities of the stakeholders should be well described. The vision of the internal auditors should be mandated clearly. The organisation needs to accomplish this in long-term period. As stated by Chan and Vasarhelyi (2018), in the next stage of the well-defined plan; the organisations need to recognise and prioritise the key strategic initiatives to mandate the strategic vision of the internal audit and initiatives must be taken to smaller the key business risks of the organisation. In addition, in the next stage, the organisation can design the appropriate KPI for the stakeholders. The shareholders or the board of directors can determine the success of internal audit through key performance indicators against the prioritised initiatives. The organisation can track the value-driven measure and the productivity (Chambers and Odar 2015). Lastly, the organisations need to develop the operating strategy through tracking the activities to gain the strategic initiatives. The internal auditors can determine the key milestones through communicating these to the external stakeholders. In the article named Internal Audits and Its Role in Corporate Governance, Al Jabali et al. (2011) stated that corporate governance has two essential activities, one is crystallises the risk control and other one is audit assurance regarding the regulatory control. Supervisor controls check the effectiveness of submission reports and internal audit standards check the effectiveness of corporate governance. The authors also stated the view that internal auditors need to be fully prepared in order to audit the operations of the organisations and control the accounting system, tactical operations and administrative process.

As opined by Griffiths (2016), corporate governance is the system through which the organisations are controlled and directed; the accurate corporate governance structure has specified the distributions of responsibilities and rights among the various stakeholders and departments within the organisation. The organisations mainly have a multi-layered system through which it controls the overall system of organisations. The first layered of the corporate governance lies within departments where the process of working ensures the controls targeting the errors of misconduct. The CEO of the organisation gets the internal assurance from the internal audit system and board of directors use the internal audit system to ensure that all the stakeholders and departments within the organisation must be trustworthy and accurate. Shareholders can make sure whether their interests and money are well-protected. The various systems within the companies are functioning and sufficient the way it works within the organisation (Chambers and Odar 2015). Therefore, sometimes, external auditors come to evaluate the system to provide recommendations to the owners. The board of directors need to establish the transparent arrangements and formal presentation to apply the risk management, task reporting and internal control principles so that it can maintain a relationship with auditors of the organisation.

Stewardship theory in corporate governance

In the article named Internal audit and its role in improving the corporate governance systems, authors Tabara and Ungureanu (2012) opined that corporate governance implies the cycle that goes from the monitoring role to the steering of the operational and administrative activities. The authors also stated that the objective of the corporate governance is to make a balance between various actors to implement power control instrument and interested parties in the capital of entity. Internal auditors bring the systematic and disciplines aspects towards improvement and evaluate the effectiveness of the organisational system and governance process (Christ et al. 2015). The positive role of internal audit goes beyond the safeguarding and controlling of the corporate assets, enforcing corporate liabilities and regulatory compliance; the role of the internal auditor is to create the value and suggesting the development of the organisational corporate governance. On the other hand, as contradicted by Hayes (2017), internal auditors ensure the effective internal control and adequacy of the control system which ensures the responsible governance. According to Alzeban and Gwilliam (2014), internal audit assists the Board and stakeholders in protecting the reputation, assets, sustainability of the company. The responsibility of the internal audit is just not to extend the financial control and to maintain the surrounding of the non-financial performance as well. 

This research will not be done using primary data; therefore, no human participants will be associated with this research. This research will follow Data Protection Act 1998. The research would follow the ethical standards, rules and norms. The ethics describe that the researcher will not follow any wrong practice while researching. The researcher will not break any ethical norms and the researcher will strictly adhere to the policy of the research. The researcher will complete the ethical checklist and most importantly, the researcher will do the research using secondary data. The researcher will collect the data through books, journals, online articles, government websites, company website and online reports. The researcher will not fabricate or modify any data those would be collected through the secondary sources. The fundamental ethics issues to the secondary data are related to remaining same and with the advent of new technologies; the literature becomes more pressing. The ethics are related to the data sharing, storage, compiling and these are becoming more faster. The researcher is aware of the fact about the data confidentiality and security of the data breaches. The researcher will put in-text citation throughout the write-up. Secondary data do not need permission to take as the researcher will collect the secondary data through archive notes, documentary notes and case notes. It will be assumed that the ethical consideration is less in secondary data as it draws the experience of the collaborative of the research project. Internal audit and corporate governance related information are scarce in literature; therefore, the researcher will collect the information from secondary sources with the purpose of the present study.

Internal audit and its role in corporate governance

Reference List

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Allen, W.T., 2017. Our schizophrenic conception of the business corporation. In Corporate Governance (pp. 79-99). Gower.

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