The strategic objectives of organizations - Dissertation Example

5) CONCLUSION AND RECOMMENDATIONS The aim of this study was to evaluate the contribution of an internal audit to the strategic objectives of organizations. The first objective of this study was to assess the extent to which organizations communicate their business strategy with the internal audit department. Literature review Findings by Fargher, 2014, suggest that internal auditors work under organization’s ethical framework. Furthermore, Katz 2014 posits that internal audits are refined through meetings with management. Likewise, Monga (2015), point to the fact that auditors being influenced by top management. These literature review findings conclusively reveal that the internal audit function does not set the strategy of organizations and it is not involved in the strategy formulation process but implements and performs audits that are based on the strategic goals of organizations. This is proved by a conclusion that was arrived at from primary research results that for most organizations, the internal audit department works on the objectives that have already been set by the strategic department of the organization. Additionally, most interviewees noted that the internal audit departments are updated on any changes or amendments that have been made in the organizations’ strategy . Findings from primary research also indicated that communication between the management and the internal audit function contributed to the objectives of organizations through different ways. The interviewees, in this case, members of the internal audit department, revealed that they held frequent meetings with the board members and the open discussions on risks in such meetings led to the development and execution of an effective annual audit plan for the organization and this enabled the audit department to play its role as an effective supporting tool for the organization’s management.. Literature review findings indicated that internal audit department through its various processes contribute to the overall strategy and objectives of an organization (Venables & Impey, 1988; Ismail, 2012). The second objective of this study was to assess the extent to which internal audits deal with strategic risks. Findings from primary research showed that the internal audit in organizations deal with strategic risks in different ways. Communication was found to be the major way through which the internal audit function deals with strategic risk. The internal audit participates in risk identification in the organization through having an open dialogue with the risk managers and organizations’ managing directors. This then enables the organization to better assess and mitigate the strategic risks. In addition, the internal audit function in organizations identifies strategic risks in an organization through the communication between the chief audit executive and the organizations’ board of directors. This is mainly through the giving of notices to the board of directors in situations where the chief audit executive feels that a manager in the internal audit has created high risks that are above the organizations’ set risk level. This will allow for assessment of the risk and designing of effective ways to deal with it. Overall, the internal audit function through open communication with the risk management department and the strategic department as well as other departments in the organization, control the risk level of the organization and report on impending risks. On many levels, results from primary research agree with results from the literature review which show that the internal audit play specific roles with regard to risk management and these include evaluating risk management processes, evaluating the reporting of key risks, reviewing the management of key risks and giving assurance on the risk management processes and that risks are correctly evaluated (Wieczorek et al. 2002). In these roles of the internal audit from the literature review, communication is cross-cutting. The third objective of this study was to make recommendations for internal audit and strategy professionals regarding potential improvements of the strategic role of the internal audit. A major recommendation based on findings from the literature review is that the strategy of the internal audit department must be well-aligned such its objectives are aligned to the organization, and be characterised by a long-term horizon and road map that is based on the overall strategy of the organization, regulatory requirements, stakeholders and other risk functions roles (Ernst & Young, 2012; Watts, 2014). Another recommendation based on findings from primary research is that the internal audit must ensure good relationship with other employees and the management as well as professionals who are involved in the planning and the formulation of the organization’s strategy. This is mainly because open communication is imperative for internal audit members, and this cannot be achieved in the absence of good relationships with the parties that are to be involved in the open communication. A final recommendation based on findings from both primary research and the literature review ((Rossiter, 2007; Coram et al. 2011;) is that the internal audit should ensure internal control improvements such as improvements in operations of the department, through appraisals and assessments of the internal audit staff and processes, as this will enable the internal audit department to execute its strategic role effectively. 5.1) CONFIRMATION OF H1 H1: Internal audit systems contribute to the strategic objectives of an organization by strengthening certain organizational areas and processes and especially enterprise risk management. According to the information collected by managing directors, internal auditors, risk managers as well as strategy professionals and especially Q5 and Q7 from the questionnaire of the research as well as Q4 from the interview questions, the hypothesis is being confirmed. More specifically, internal audit systems contribute to the strategic objectives of an organization by strengthening certain organizational areas and processes and especially enterprise risk management and the organization’s strategy by imposing various audits. Internal audit evaluates and assures risk management processes as well as risk reporting. This is consistent with the literature review which indicated that the internal audit plays a strategic role to an organization through its six primary roles that can be explained in terms of alignment with organization’s strategic objectives, growth and maturity of the organization, control mechanisms, risk assessment, transparency and integrity and legal issues (Wieczorek et al. 2002; Abbott et al. 2010). Moreover in order to contribute to the strategic objectives of the organization, it is suggested that the chief audit executive should be on a permanent communication with the leaders of the organization’s various departments in order for the internal audit to be better able to evaluate their results and to implement actions for improvements which would also ensure that the internal audit department is well informed on any changes in the organization’s strategic objectives and these are integrated in its overall strategy and plan. Furthermore, it is remarkable that internal audit is most of the times not able to quantify strategic risks by itself, an action which is undertaken by the company’s risk management department. Finally, the collaboration of internal audit together with the risk department is a prerequisite for a successful enterprise risk management function. 5.2) LIMITATIONS AND VALIDITY OF THE RESEARCH The main limitation of this research results from the sensitive nature of some questions which the researcher concluded that created some ambiguity as well as bias. Although the questionnaires of the research were anonymous with the choice of pseudonyms and the interviewees of the research were provided with a consent letter ensuring confidentiality as well as anonymity, it seems that some participants did not answer honestly to questions that they considered sensitive in nature. The researcher assumes that this was a consequence of asking two target groups about their relationship and more specifically if internal auditors amend their results due to pressure imposed by managing directors. In the questionnaire of the research, the majority of managing directors disagree with the case that internal auditors amend their results in order to please executives while the majority of internal auditors answered that they do not know. From a reasonable point of view, it seems that internal auditors did not want to say the truth while answering the questionnaire of the research as it is normally within their era of their duties and their involvement within senior management. The same applies for the managing directors. To avoid and deal with the issue of sensitive questions in future research, the researcher will consider tinkering with the wording of the questions through normalisation of the sensitive issue as well as asking indirect questions. In addition, the researcher will in future make sensitive questions facultative such that the interviewees will choose if they want to answer the sensitive question or not by adding an escape response option “Rather not say”. Nevertheless, in order to ensure the highest possible validity of the research, secondary research as well as the collection of qualitative data through questionnaires and interviews achieved data triangulation regarding the majority of the research questions and more importantly on the objectives and the aims of the research. 5.3) RECOMMENDATIONS FOR FUTURE RESEARCH There is need to study the role and contribution of external auditors to the strategic objectives of an organization. This is for the main reason that these play a role in the corporate governance of an organization and sometimes the internal and external audits work together and cooperate on varying basis. There is also need to investigate the factors that affect the aligning of the internal audit function with the strategic objectives of an organization. As seen, internal audit plays a major role in achieving this alignment mostly through cooperation with board of directors, senior managers and audit committees. While it is important that the internal audit function aligns with the strategic objectives of an organization, there are various obstacles that may hinder this from being achieved. Therefore, it is necessary to study such factors that may hinder the alignment of the internal audit function with an organization’s strategic objectives. For instance, in the latest Volkswagen scandal of cheating about the emissions in their diesel powered cars as described by Morgan (2015), the internal audit of the company can be considered to have contributed to this fraud. This is an issue that the internal audit should have picked up on because its role of examining, monitoring and analysing business activities would have led them to discover the fraud beforehand. In this case, a lack of communication and transparency on the side of Volkswagen’s internal audit contributed to a fraud that has, contrary to the company’s objectives, painted the company in negative light and will have a long-term adverse effect on the company. It is thus assumed that the internal audit department of Volkswagen has failed in its strategic role of contribution to enterprise risk management of the organization since they have deliberately exhibited corrupt practices that have brought to nil their performance in the reputational and operational areas as with regard to enterprise risk management. Moreover, ethical questions such as the pressure imposed on internal auditors from executives require further research, due to the fact that the answers in this survey were textbook mainly as a reaction of the participants who desired to avoid answering honestly such sensitive questions thus formulating bias for the survey. Finally, research should be carried out on the relationship between the internal auditors’ competence and the contribution of internal audit to the strategic objectives of organizations as well as the dealing with organizations’ strategic risks. Different organizations have internal auditors of varying competence. It is thus important to find out whether the level of competence of internal auditors affects the degree to which the internal audit contributes to the strategic objectives of the organization and the way it deals with strategic risks.   Read More