Internal Audit’s Role in the Evaluation of Corporate Governance: Evidence from the Field

• In Event: Understanding the Client: Controls and Information Environment

Abstract

Corporate governance research focuses primarily on the inputs to effective governance, yet we know very little about how companies monitor and evaluate their overall corporate governance systems on an ongoing basis. This evaluation process is important because corporate failures are often tied to weaknesses in governance, whether due to poor tone at the top, insufficient board oversight, misaligned compensation incentives, or lack of consistency in adherence to corporate policies and procedures. To bridge this research gap, we seek to understand whether and how an objective party in the organization is able to assess and interface with the governance system. Specifically, we interview 29 Chief Audit Executives (CAEs)—who report directly to the audit committee and are responsible for internal audit—to learn how they view the key objectives of corporate governance, evaluate corporate governance on an ongoing basis, and report issues and concerns to the board. While CAEs can provide rich examples and best practices for an ideal evaluation of corporate governance that goes beyond the boardroom and C-Suite, our data analysis reveals the use of informal or indirect practices within these CAEs’ publicly listed companies for evaluating corporate governance. We also shed light on potential discomfort that CAEs feel in reporting issues to the board due to tension in their perceived accountability to senior management and the audit committee. Our findings call for additional research on corporate governance evaluations as well as consideration of standard setting to enhance the rigor of companies’ internal practices.

Authors

• Lauren Dreher Cunningham, University of Tennessee

• Christie Hayne, University of Illinois-Urbana-Champaign

• Terry L Neal, University of Tennessee-Knoxville

• Sarah E Stein, Virginia Tech