Perceived effectiveness of the internal audit function in Libya: a qualitative study using institutional and Marxist theories

Perceived effectiveness of the internal audit function in Libya: a qualitative study using institutional and Marxist theories

Internal audit (IA) has become an important and integral function of organizations in achieving their objectives and protecting their assets. Nonetheless, IA effectiveness has received scant attention in the literature, especially in the context of developing countries such as Libya. Such settings offer the potential to enhance the understanding of IA practices where standards for such practices are not formally adopted and the rationale for establishment of IA tends to remain more coercive than normative. This study seeks to examine the perceived effectiveness of the IA function in Libyan public enterprises (state-owned) by employing institutional theory and Marx‘s (1978) theory of the circuit of industrial capital. It addresses the issue of IA effectiveness by identifying seven qualitative factors considered to be important for effective IA, namely, independence, competence, scope of internal auditing work, performance of internal auditing work, coordination and co-operation between the internal and external auditor, management support, and awareness of the benefits of effective internal auditing within organizations. In order to attain the research objectives, this study followed a qualitative research design. Data was gathered through semi-structured interviews with chief executive officers, IA directors, managers of administrative affairs, managers of financial affairs and the general auditors, and was supplemented with analysis of relevant archival evidence.

This study identifies four potential threats to internal auditor independence due to the absence of (1) direct communication with the board of directors; (2) submission of reports to the highest level of management; (3) restrained reporting on IA findings; and (4) full access to all necessary information. Analysis of qualitative data illustrates that there were weaknesses in specific elements relating to the competence of internal auditors in terms of their low level of experience and professional qualifications, and computer technology skills. The results show that the level of IA effectiveness is limited due to the narrow scope of IA work, limited use of career internal audit staff, and lower organizational status of IA departments. It is concluded that lower perceptions of IA effectiveness signifies IA customers‘ expectation of a broader scope of work and internal audit professionalism. The results also suggest that coercive establishment of IA does not necessarily lead to effective IA departments if normative processes of professionalism are absent.

The results of this study indicate that there are weaknesses in specific elements relating to co-operation between the internal and external auditor. Libyan IA directors do not believe external auditors assist them in achieving or improving their activities. In additon, external audit working papers are unavailable to internal auditors. The findings of this study also indicate a general consensus among Libyan participants that there is dissatisfaction regarding top management support to internal audit departments and the extent of top management support to internal audit is considered inadequate in Libyan public enterprises. The interview results also reveal inadequate awareness of the benefits of effective internal auditing within Libyan public enterprises.

Overall, based on the results of this study, it can be argued that internal auditing operates in ways that are decoupled in some important areas from those envisaged by the Institute of Internal Auditors (IIA) and other organizations in the field. Therefore, from the perspective of institutional isomorphism, IA in Libyan public enterprises is not perceived as value-adding or having the capacity to improve an organization‘s operations. Furthermore, IA may not play an important role in assisting organizations to minimize wastage, maximize employment levels and increase wage rates and production levels, and minimize capital devaluation as much as possible under the circumstances. Based on the perspective of Institutional theory and Marx‘s theory, and the results of qualitative data analysis overall, IA in Libyan public enterprises is not perceived as being effective.

The study contributes to the IA literature and practice in several ways. First, it introduces a new perspective for explaining the IA effectiveness by identifying two groups of factors impacting on IA effectiveness. these relate to International Standards for Professional Practice of Internal Auditing (ISPPIA) (independence, competencies, scope of work and work performance) and those related to external factors influencing IA effectiveness (the coordination and co-operation between the internal and external auditor, management support, and awareness of the benefits of effective internal auditing within organizations). Specifically, this study establishes a factor not identified by prior research that may influence IA effectiveness, namely, awareness of the benefits of having internal auditing. Therefore, it will fill an important gap in previous research by proposing different perspectives to explain IA effectiveness. Second, it contributes to knowledge regarding IA effectiveness by using a qualitative research design. Qualitative data analysis allows for a deeper understanding of a phenomenon and, rather than just measuring previously known constructs it allows for the identification of new contextual issues and relationships. Third, it contributes to the limited literature employing Marx‘s theory of the circuit of industrial capital in accounting in general and IA research in particular. Specifically, this study contributes to the literature by establishing a theory-based link between IA effectiveness and an added assurance in relation to production processes. Fourth, it also extends IA research under institutional theory. Specifically, this study contributes to the literature by establishing a theory-based link between IA effectiveness and normative isomorphism which increases proficiency within organizations and arises when institutional changes occur due to an organization‘s recognition of professions. Finally, prior IA research has largely focused on the empirical context of developed economies, whereas the findings of this study may be considered to add valuable additional insights to the literature emanating from the empirical setting of a developing country.