A Study of the Informal Interactions between Audit

Committees and Internal Auditors in Australia

Gerrit Sarens, Université Catholique de Louvain

Joe Christopher, Curtin University of Technology
Mahbub Zaman, University of Manchester

This paper finds evidence for the growing importance of informal interactions between the internal audit
function and the audit committee (AC) in Australia – a relatively unexplored topic in the literature – using a
survey of Chief Audit Executives (CAEs). It also describes the nature of these informal interactions. The most
innovative elements of this paper are the findings that certain personal characteristics of CAEs, the specific
knowledge and expertise of the AC chair, as well as some of the AC chair’s personal characteristics are associated
with the existence (and increase) of informal interactions.

his paper studies informal interactions between Recommendations. The ASX has played a leading role

T audit committees (AC) and internal audit func-

tions (IAF) in Australia using a survey of Chief
Audit Executives (CAEs). The paper defines informal
interactions as all forms of communications outside for-
mal AC meetings. More specifically, the paper focuses
on:
1. the importance of informal interactions;
2. the nature of these informal interactions (who takes
the initiative, what kinds of issues are discussed); and
3. what factors are associated with informal interac-
tions (characteristics of the IAF, the CAE, the AC
and the AC chair).
This last aspect will be studied in an inductive way,
given the lack of previous studies on this topic, and by
consequence clear guidance for hypotheses building.
As a result of recent corporate scandals, many coun-
tries are placing a greater emphasis on their corporate
governance policies and guidelines. An important as-
pect of these policies and guidelines is a greater em-
phasis on the monitoring role of the AC in enhancing
governance. With respect to Australia, two major legal
reforms were implemented. The first relates to the Cor-
porate Law Economic Reform Program (Audit Reform and
Corporate Disclosure) Act 2004 (the CLERP 9 Act). It in-
volved amendments made to the Corporation Act 2001
in key areas to improve the accountability of the board
and management, and to enhance the independence of
the auditor. The second relates to the Australia Securities
Exchange (ASX) Corporate Governance Council’s Prin-
ciples of Good Corporate Governance and Best Practice
in corporate governance in Australia since the release of
its first set of governance principles in 2003, which have
been subsequently updated. The most recent version es-
sentially identifies eight core principles for effective gov-
ernance along with a set of best practice guidelines.
The monitoring role of the AC is largely achieved
through the IAF, which performs the operational aspects
of monitoring the financial and operational performance
of the organisation. The results of these monitoring ac-
tivities are reported back to the AC. The AC, through the
supervisory role of the IAF, assists with determining the
activities to be monitored. The AC and the IAF are thus
interdependent (Sarens et al. 2009). This is also reflected
in the ASX Corporate Governance Council (2010) prin-
ciple 7.2 in which it is recommended that the IAF and
the AC have direct access to one another.
Therefore, it is important to strengthen the inter-
action between the AC and the IAF to ensure both
are performing effectively (Collier and Zaman 2005;
European Parliament and Council of the European
Union 2006; FRC 2010; Smith Report 2008). This view
is supported by prior literature that posits that this in-
teraction is important for the AC to fulfil its oversight
role (Beasley et al. 2009; Turley and Zaman 2007). It has
also been argued that a productive relationship between
the IAF and the AC is likely to improve the quality of
Correspondence: Gerrit Sarens, Louvain School of Management,
Université Catholique de Louvain, Place des Doyens 1, 1348
Louvain-la-Neuve, Belgium. Tel: +32 10 47 84 41; fax: +32 10
47 83 24; email: gerrit.sarens@uclouvain.be

Australian Accounting Review No. 67 Vol. 23 Issue 4 2013 doi: 10.1111/auar.12024 307
Informal Interactions between Audit Committees and Internal Auditors
financial reporting and the related governance processes
within organisations (Gramling et al. 2004; Spira and
Page 2003; Turley and Zaman 2004). Interaction can be
undertaken in two ways. The first is through formal in-
teractions that take place as part of formal scheduled
meetings and reports. It has to be noted that the num-
ber of studies examining factors associated with formal
interactions between the AC and the IAF remains rather
limited (cf. Goodwin 2003; Mat Zain and Subramaniam
2007; Raghunandan et al. 2001; Sarens et al. 2009; Scar-
brough et al. 1998). The second is through informal in-
teractions (Turley and Zaman 2007). It is argued that the
AC can function as an effective, independent monitor-
ing body through both formal and informal interactions
(Beasley et al. 2009). There is general consensus in the
literature regarding the importance and contribution to
governance of informal interactions (Forbes and Mil-
liken 1999; Huse 2005; Johnson et al. 1996, 2003; Larson
1992; Melcher and Beller 1967). This includes internal
audit as an important component of governance.
Gendron and Bédard (2006) state that the oversight
of internal audit by the AC is often performed in a fairly
informal, sometimes contentious, manner. Turley and
Zaman (2007) go further to argue that the AC’s great-
est effect sometimes arises through informal processes.
Mat Zain and Subramaniam (2007) similarly support
the view that private meetings and informal communi-
cations between the AC and the IAF may improve the
overall exchange of relevant and reliable information,
and thus enhance their effectiveness. Overall, the studies
that have examined interactions between the IAF and
the AC have not differentiated the magnitude of formal
and informal interactions, nor have they investigated the
nature of informal interactions. This is the major con-
tribution of the current paper.
In addition to the attributes of the AC and the IAF,
the parties that influence this informal interaction are
the AC chair for the AC and the CAE for the IAF. How-
ever, there is a level of uncertainty regarding the specific
characteristics of the AC chair, the AC, the IAF and the
CAE that are associated with informal interactions be-
tween the AC and the IAF. This study seeks to address
this research gap by identifying which characteristics of
the AC chair, the AC, the IAF and the CAE are associated
with informal interactions between the AC and the IAF.
It must be noted that this study does not intend to ex-
amine the effect of this informal interaction on factors
such as IAF effectiveness, AC effectiveness or quality of
corporate governance. By building upon the insights of
this study, future research could focus on these areas.
The results of this study are particularly interesting
from an academic perspective, and are also interest-
ing for practitioners (both CAEs and AC chairs), as
they show which factors could help develop informal
interactions.
308 Australian Accounting Review
G. Sarens, J. Christopher & M. Zaman
Literature Review and Research Questions
The importance of informal interactions
to governance
The concept of governance is drawn from agency theory
(Berle and Means 1932; Jensen and Meckling 1976). This
agency-oriented governance concept essentially focuses
on managing an organisation efficiently and effectively
by aligning management’s interest with that of the or-
ganisation’s shareholders. This is achieved through a set
of controls, one of which relates to the role of the AC and
the IAF.
Contemporary debates on governance suggest that the
agency-oriented governance paradigm is too narrow and
does not accommodate a wider set of influencing forces
that affect the governance paradigm of organisations
(Daily et al. 2003; Aguilera et al. 2008; Filatotchev 2008;
Young and Thyil 2008; Christopher 2010). Hence, the
concept of the extended governance paradigm drawn
from a multi-theoretical concept has emerged.
The extended governance paradigm concept essen-
tially posits that the governance of an organisation is
influenced by diverse environmental forces that require
some form of reconciliation to be achieved by a set of
controls underpinned by multiple theories (Christopher
2010). Embedded within the many levels of an organ-
isation, and complementing the management of such
controls, is a body of knowledge termed ‘organisational
knowledge’. This can be regarded as a resource utility
(Drucker 1994), a strategic asset (Winter 1987) and a
source of competitive advantage (Teece et al. 1997). It
exists to enhance governance within an organisation’s
stipulated governance framework.
The effective orchestration of such knowledge, by
motivating and coordinating the knowledge carriers to
enhance governance, is the nature of knowledge gov-
ernance. It can involve processes of knowledge use,
creation, retention, integration and sharing (Grandori
2001) for the purposes of enhancing governance. Huang
and Newell (2003) describe organisational knowledge
as an ongoing collective process of constructing, artic-
ulating and redefining shared beliefs through the social
interaction of organisational members. This concept of
knowledge governance and its effect on governance is
strongly influenced by the multi-level environmental
forces influencing each organisation (Christopher 2010).
On one side of this knowledge governance spectrum
are the formal processes that guide the application of
such knowledge to ensure the effectiveness of governance
mechanisms and processes to enhance governance. This
formal communication process is guided by the plethora
of governance policies and guidelines with which
organisations must comply. These essentially define
the governance structure; control processes, including

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G. Sarens, J. Christopher & M. Zaman
accountability and authority systems; and create formal
communication channels through which organisational
knowledge can be channelled to enhance governance.
On the other side of the spectrum are interpersonal re-
lations embedded within the organisational context that
provide informal social ties and interaction within the
internal network (Nahapiet and Ghoshal 1998; Hansen
1999, 2002; Uzzi and Lancaster 2003). These informal so-
cial ties and interaction are underpinned by the concept
of social capital that is defined as the existence of a certain
set of informal values or norms shared among members
of a group that permit cooperation among them, or the
ability of people to work together for common purposes
in groups and organisations (Fukuyama 1995).
Through these informal networks, informal commu-
nication channels are constructed to provide organisa-
tional members with information (Cross et al. 2001; Bor-
gatti and Cross 2003; Uzzi and Lancaster 2003). Such
knowledge or information serves to discharge account-
ability in various tiers of accountability relationships
within an organisation. This may include relationships
between organisational members and management, the
board and management, the board and sharehold-
ers, and the AC and the IAF. Such knowledge can
include collaboration and decision making occurring
constantly among organisational members in informal
settings.
This scenario facilitates accessibility to knowledge
exchange and sharing among organisation members
(Roberts et al. 2005; Borgatti and Cross 2003). Cross
et al. (2001) assert that the level of knowledge acquired
through informal interaction is five times that acquired
through formal mechanisms. Others have stated that
it enhances governance by speeding up the process of
searching and transferring knowledge, subsequently in-
fluencing the efficiency and effectiveness of operations
(Nahapiet and Ghoshal 1998; Cross et al. 2001; Borgatti
and Cross 2003).
The balance between the formal and informal chan-
nels of communication within an organisation is de-
termined by the level of trust in the work environ-
ment (Cross et al. 2001; Hansen 2002; Borgatti and
Cross 2003). This is determined by the collective ef-
fect of the forces influencing an organisation. It is sug-
gested that only when knowledge is communicated on
the basis of trust, the individual receiver can be con-
fident that the knowledge can be relied upon (Cross
et al. 2001; Hansen 2002; Borgatti and Cross 2003). It
follows that mutual trust among organisational mem-
bers facilitates transparent knowledge flow within an
organisation.
The above theoretical framework informs this study
on the informal interactions between the AC and the IAF
in Australia, and is further illustrated in diagrammatic
form in Figure 1. The relationship and interactions be-
tween the AC and the IAF to achieve their respective

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Informal Interactions between Audit Committees and Internal Auditors
roles of enhancing governance as control mechanisms
are further discussed in the next section.
Existing studies on interactions between the IAF
and the AC
Although there is a significant and growing body of lit-
erature relating to the AC and the IAF, research evidence
on the interaction between these two governance mech-
anisms is still limited.
Previous quantitative research on the interaction be-
tween the AC and the IAF has found that AC members,
particularly non-executive members, are confronted
with an information asymmetry problem. These studies
argue that the information asymmetry between the AC
and management is more likely to be reduced when there
is interaction between the AC and the IAF (Raghunan-
dan et al. 2001; Scarbrough et al. 1998).
AC members in the qualitative study by Gendron
et al. (2004) relied on the work of the IAF to develop
their own appreciation of the effectiveness of internal
controls (cf. also Krishnan 2005). More specifically, they
became comfortable with internal control by assess-
ing the extent to which managers adopted appropri-
ate measures to solve deficiencies highlighted in inter-
nal audit reports. In addition, the study by Gendron
and Bédard (2006), partially based upon the same qual-
itative data, finds that AC members carry out diverse
practices in order to become comfortable with their
company’s internal controls, and that several of these
practices deal with internal audit reports. Their intervie-
wees confirmed that internal auditing mattered to them.
The authors conclude, therefore, that the IAF appears
to play a central role in the development of an account-
ability relationship between corporate management and
the AC.
Beasley et al. (2009) find that AC members are de-
pendent upon both internal and external auditors in
evaluating the effectiveness of internal control over fi-
nancial reporting. In general, the AC in their study met
frequently with the internal auditors. However, their in-
terviews reveal frequent, ongoing substantive commu-
nications between the AC and internal auditors out-
side of scheduled meetings. Similarly, Turley and Za-
man (2004) find evidence supporting the importance
of an informal channel of communication between the
head of the IAF and the AC chair, through which con-
cerns might be raised. In their specific case, the head of
the IAF considered that reporting concerns to the AC
generally led to improved governance, which confirms
the importance of the relationship between the AC and
the IAF.
Sarens et al. (2009) explore this working relationship
by using case studies. They find that the AC seeks com-
fort with respect to the control environment and internal
Australian Accounting Review 309
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Board of Directors

Management Corporate AC/IAF

Governance

External Auditors

Underpinned by

Knowledge
Governance

Formal Informal
Processes Processes

Figure 1 Corporate governance and its components underpinned by knowledge

governance

controls – two areas in which they confront considerable
discomfort. The IAF’s traditional assurance role and its
involvement in improving internal controls provided a
significant level of comfort to the AC. Internal auditors’
unique knowledge about risk management and internal
control, combined with appropriate interpersonal and
behavioural skills enabled them to provide this comfort.
Moreover, their internal position, familiarity with the
company and closeness to people across the company
were key factors for internal auditors to provide comfort
to the AC. Formal audit reports and presentations, to-
gether with informal contacts, appeared to be important
ways in which this comfort was provided.
Overall, existing studies find that an effective IAF can
be an important resource to the AC in discharging its re-
sponsibilities, thereby enhancing the effectiveness of the
AC. Consequently, they suggest that the AC should have a
strong working relationship with the IAF. However, these
studies only mention that regular meetings between the
AC and the IAF make sure that the AC remains informed
and knowledgeable about relevant accounting, auditing
and internal control issues. Some of these studies clearly
suggest that informal interactions may play a significant
role in the relationship between the IAF and the AC with-
out providing any further details. This leads to the first
two research questions:
RQ1: How important are informal interactions between
the IAF and the AC in Australia?
RQ2: What is the nature of informal interactions between
the IAF and the AC in Australia?
Factors associated with informal interactions
between the IAF and the AC
Given the lack of previous studies on this topic, there are
not enough arguments to build hypotheses related to the
factors associated with informal interactions. Therefore,
sub-research questions on the factors associated with
informal interactions will be formulated.
The IAF
Prior research suggests that when the IAF is strong, it
tends to be more proactive in creating value-added ser-
vices, such as risk management. This strength is char-
acterised by the existence of members with professional
qualifications who are involved in continuous profes-
sional development and who are supported by an ad-
equate budget to undertake planned activities (Sarens
and De Beelde 2006; Selim and McNamee 1999; Spira
and Page 2003).
Similarly, D’Silva and Ridley (2007) find that an IAF
that complies with The Institute of Internal Auditors
(IIA) Standards is likely to add value to organisations
and contribute to good governance practices. They sug-
gest that adherence to such standards enables internal
auditors to follow a systematic and disciplined approach
when performing audit work, thus increasing their effec-
tiveness and value. This leads to the following research
question:

310 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman
RQ3a: Which IAF characteristics are significantly associ-
ated with informal interactions between the IAF
and the AC in Australia?
The CAE
Sarens (2009) suggests that internal audit quality is in-
fluenced by the quality of the IAF, as well as the charac-
teristics of its staff. Pforsich et al. (2006, 2008) provide
evidence of the crucial role that the CAE plays when
managing an IAF. Both formal and informal interac-
tions between the AC and the IAF go via the CAE, who
represents the IAF. Thus, we expect that, in addition to
the general characteristics of the IAF, specific charac-
teristics of the CAE are likely to influence the informal
interaction between the AC and the IAF. Therefore, the
following sub-research question can be formulated:
RQ3b: Which CAE characteristics are significantly asso-
ciated with informal interactions between the IAF
and the AC in Australia?
The AC
Prior research has found that independence, diligence
and expertise are important factors that affect the AC’s
effectiveness (for detailed reviews, see DeZoort et al.
2002; Turley and Zaman 2004). On the one hand, we
expect that in organisations in which the AC is inde-
pendent – and thus with more information asymmetry
problems – audit committee members are more likely to
seek more information to perform their monitoring re-
sponsibilities. As stated earlier, informal interaction with
the IAF is an important source of information for the AC
(Sarens et al. 2009). There is preliminary evidence that
the more independent the AC is from executive manage-
ment, the more active is its approach to internal auditing
(Scarbrough et al. 1998).
On the other hand, a more active AC is likely to en-
counter greater information needs and therefore be more
interested in interacting with the IAF (as one of the in-
formation providers). These arguments form the basis
of the third sub-research question:
RQ3c: Which AC characteristics are significantly associ-
ated with informal interactions between the IAF
and the AC in Australia?
The AC chair
While the general characteristics of the AC are impor-
tant, Turley and Zaman (2007) provide evidence of the
AC chair playing a critical role in affecting governance
outcomes. They find that financial reporting, risk man-
agement and control outcomes are influenced by the
background of the AC chair, and the way in which the

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Informal Interactions between Audit Committees and Internal Auditors
chair is perceived by those engaged in governance within
the organisation, including senior management. There-
fore, we expect that more knowledgeable and experi-
enced AC chairs will seek more information from the
IAF to make the chair and the AC members comfort-
able. This leads to the final sub-research question:
RQ3d: Which AC chair characteristics are significantly as-
sociated with informal interactions between the IAF
and the AC in Australia?
Research Method
Data collection
Owing to the difficulties associated with accessing ACs,
we have relied on a survey of CAEs. We believe they
are an appropriate alternative source for collecting data
because of their detailed knowledge about the relevant
aspects of the organisation, and the level and nature of
interaction with the AC. Admittedly, given that CAEs
completed the survey, this investigation of the informal
interactions between the AC and the IAF is based on
their personal perceptions, which could create a social
desirability bias. However, this bias is only an issue in
relation to questions measuring the CAE and AC chair’s
personal characteristics given that all other questions ask
for objective/factual information. In a study of this type,
such a limitation is not uncommon.
To obtain data for this study, questionnaires were sent
to 312 CAEs in September and October 2010, with the
assistance of the IIA Australia. This number represents
the total number of CAEs on IIA Australia’s database
at that time. Consequently, Australian CAEs who were
not members of the IIA Australia did not receive the
questionnaire. After follow-ups, 100 responses were ob-
tained, representing a response rate of 32.05%. All re-
sponses were appropriate for data analysis. Those who re-
sponded after the second reminder were considered late
respondents and were thus a proxy for non-respondents.
Comparing all variables between early and late respon-
dents did not reveal significant differences. Including a
dummy variable in the regression analysis did not change
the results. Thus, non-response bias was not a problem.
Measurement
The survey was mainly based on the existing literature
and developed drawing on the authors’ research and
practical experience. A first draft of the survey was pilot
tested with a sample of eight CAEs. The final draft took
into account their feedback. The survey contained many
different questions in order to collect a broad set of data.
This was done to enable the collection of as much infor-
mation as possible about informal interactions between
the IAF and the AC, and the factors associated with this.
Australian Accounting Review 311
Informal Interactions between Audit Committees and Internal Auditors
The questionnaire had a number of sections. Section
A contained questions on IAF characteristics and was
based on previous empirical studies in the IA field such
as those by Abdolmohammadi (2009), Arena and Azzone
(2009), Carcello et al. (2005a, 2005b), Goodwin-Stewart
and Kent (2006), Sarens and De Beelde (2006) and
Wallace and Kreutzfeldt (1991). Section B of the ques-
tionnaire focused on the characteristics of IAF employees
including the CAE and all other staff members. Most of
these questions were based on studies by Pforsich et al.
(2006, 2008). The first four CAE personal characteristics
were based on the culturally endorsed implicit leadership
theory (CLT) as used by House et al. (2002). The remain-
ing characteristics came from research and the practical
experience of the authors. In the analysis, only the CAE
data are used. All ten CAE personal characteristics had
a high internal consistency (Cronbach’s alpha = .82).
Section C covered AC and AC chair characteristics. The
questions relating to the objective AC characteristics and
the formal interactions between the AC and the IAF
were based on DeZoort et al. (2002), Goodwin (2003),
Krishnan (2005), Raghunandan et al. (2001) and
Scarbrough et al. (1998). The questions measuring the
informal interactions between the AC and the IAF were
inspired by Turley and Zaman (2007) and Sarens et al.
(2009) and operationalised based on the experience of
the authors given the lack of previous detailed studies on
this topic. The question measuring the topics discussed
informally had a high internal consistency (Cronbach’s
alpha = .84). To measure the AC chair’s personal char-
acteristics, the same items as in section B (CAE’s per-
sonal characteristics) were used, and completed with a
question on knowledge and experience that was based
on research and the practical experience of the authors.
The internal consistency of the questions on knowledge
and experience of the AC chair and his/her personal
characteristics was high (Cronbach’s alpha = .90 and
.81 respectively). The survey ended with some generic
questions on organisational characteristics such as age,
industry, listing and size.
Findings
Profile of the responding organisations
In terms of age, Panel A of Table 1 shows that the
responding organisations are very diverse, with ages
ranging from one to 186 years (average = 32.5 years;
median = 18 years). According to Panel B, almost
half of the responding organisations operate in the
public sector (47%), 14% are banks and insurance
companies and 15% operate in other service industries.
Only a minority is manufacturing companies (9%) or
regulated utility companies (6%). About one fourth of
the responding organisations are listed (26%). Regard-
312 Australian Accounting Review
G. Sarens, J. Christopher & M. Zaman
ing the size of the organisation, the number of employ-
ees ranges from 35 to 100 000 FTE (average = 7208.8
FTE; median = 1800 FTE), and total assets range from
AUD$293 760 to AUD$88.1 billion (average = AUD$544
million; median = AUD$117.5 million). Thus, overall,
the responding organisations can be classified as large to
very large, which is consistent with previous studies on
internal auditing that have shown a positive relationship
between firm size and the existence of an IAF (Wallace
and Kreutzfeldt 1991; Goodwin-Stewart and Kent 2006).
IAF characteristics
According to Panel A of Table 2, the IAFs represented
in this study are relatively young, with an average
age of 8.2 years (ranging from one to 48 years; me-
dian = seven years). The IAFs had, on average, 8.3
FTE staff members (ranging from one to 69 FTE; me-
dian = four FTE). On average, 78.5% of the internal
audit plan in the current financial year was risk-based
(ranging from zero to 100%; median = 80%). In average
terms, 11.7% of the internal audit plan in the current
financial year was reserved for ad hoc requests coming
from the AC (ranging from zero to 85%; median = 5%),
whereas 15.1% was reserved for senior management re-
quests (ranging from 3% to 100%; median = 10%).
In terms of audit plan completion, the responding
CAEs expected that, on average, 91.7% of the internal
audit plan was going to be completed (ranging from 50%
to 100%; median = 95%). Panel B of Table 2 shows that
41% of the IAFs represented in this study have a formal
quality assurance and improvement program in place,
including internal and external quality assessments. In
15% of the cases, this program existed in a relatively
informal manner. In 25% of the cases, this program
was under construction. Almost half of the IAFs have
been subject to an external quality assessment (47.3%).
Slightly less than two thirds of the IAFs fully comply with
the IIA Code of Ethics and the IIA Standards (64%),
and 36% partially comply, which is slightly lower than
the results reported by Abdolmohammadi (2009) who
focused on several Anglo-Saxon countries.
CAE characteristics
According to Panel A of Table 3, 42% of the CAEs rep-
resented in this study have at least one IA qualification,
while 79% of the CAEs had experience in IA before join-
ing their current IAF. Panel B shows the average scores
for the different personal characteristics. Most CAEs gave
themselves high scores on all personal characteristics
(except ‘self-interest’), which could be a result of the
self-assessment (cf. social desirability bias as discussed
in the previous section).

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 1 Organisational profile of the responding organisations

Panel A Min. Max. Median Mean St. Dev.
Organisation age 1.00 186.00 18.00 32.48 40.62
Number of employees (FTE) 35.00 100 000.00 1 800.00 7 208.78 16 575.53
Total assets (AUD) 293 760.00 88 128 000 000.00 117 504 000.00 544 000 000.00 1 441 000 000.00

Panel B: Industries (several answers were possible) Percentage

Public sector 47.00

Banks and insurance companies 14.00
Other services 15.00
Regulated utility 6.00
Manufacturing 9.00
Other 22.00

Panel C: Listing Percentage

Listed 26.00

Table 2 IAF characteristics

Panel A Min. Max. Median Mean St. Dev.
IAF age 1.00 48.00 7.00 8.17 7.02
IAF size (FTE) 1.00 69.00 4.00 8.31 11.81
Risk-based audit plan 0.00 100.00 80.00 78.49 22.53
Ad hoc AC requests (%) 0.00 85.00 5.00 11.67 17.30
Ad hoc senior management requests (%) 3.00 100.00 10.00 15.07 17.38
Audit plan completion (%) 50.00 100.00 95.00 91.72 10.62
Panel B: Quality assurance and improvement program Percentage
Formally 41.00
Informally 15.00
Under construction 25.00
Non-existent 19.00
External quality assessment 47.30
Full compliance with IIA Code of Ethics and Standards 64.00
Partial compliance with IIA Code of Ethics and Standards 36.00

Table 3 CAE characteristics

Panel A Percentage
The CAE has at least one IA qualification 42.00
The CAE had experience in IA before joining the current IAF 79.00
Panel B: Personal characteristics Min. Max. Mean St. Dev.
Sensitive (aware of changes in mood of others) 1.00 5.00 3.98 0.80
Motivator (mobilises, activates followers) 2.00 5.00 3.95 0.82
Diplomatic (skilled at interpersonal relations, tactful) 1.00 5.00 4.05 0.72
Self-interested (pursues own best interests) 1.00 5.00 2.39 0.93
Able to identify and communicate relevant oversight questions 2.00 5.00 4.17 0.64
beyond those provided by others
Constructive and proactive attitude (anticipates problems by 2.00 5.00 4.29 0.64
asking questions)
Challenges management regarding governance issues 1.00 5.00 4.11 0.81
Has integrity and ethical values 1.00 5.00 4.76 0.66
Commands respect and is highly regarded by senior 1.00 5.00 4.20 0.83
management
Plays a leading role in setting the tone of corporate governance 2.00 5.00 4.00 0.89

AC characteristics dian = 92.9%), whereas 62.8% are independent (me-

Table 4 shows that the average age of the ACs is 11.1 years
(median = ten years), which suggests that this study
is mainly concerned with fairly mature ACs. On aver-
age, 73.6% of the AC members are non-executive (me-

C 2013 CPA Australia
dian = 66.7%). These percentages are slightly lower than
what is recommended in the ASX Corporate Governance
Council (2010) principle 4 but this can be explained
by the fact that not all organisations in this study are
listed. The number of meetings ranges from two to 12
Australian Accounting Review 313
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Table 4 AC characteristics
Panel A Min. Max. Median Mean St. Dev.
AC age 1.00 50.00 10.00 11.13 8.07
Proportion of non-executive members (%) 0.00 100.00 92.86 73.58 31.22
Proportion of independent members (%) 0.00 100.00 66.67 62.80 33.74
Number of meetings 2.00 12.00 5.00 4.79 1.33
AC chair tenure 1.00 18.00 3.00 3.95 2.96

Percentage

AC chair is non-executive 83.80

AC chair is independent 73.50

Table 5 AC chair characteristics

Panel A: Knowledge and experience Min. Max. Mean St. Dev.
Business in general 2.00 5.00 4.41 0.73
Business-specific risks 2.00 5.00 4.07 0.78
Corporate governance 2.00 5.00 4.21 0.82
Risk management and internal control in general 2.00 5.00 3.96 0.89
Business-specific risk management and internal control 2.00 5.00 3.83 0.86
Accounting and finance 1.00 5.00 4.06 1.04
External auditing 2.00 5.00 3.87 1.01
Internal auditing 1.00 5.00 3.72 0.95

Panel B: Personal characteristics Min. Max. Mean St. Dev.

Sensitive (aware of changes in mood of others) 2.00 5.00 3.41 0.86

Motivator (mobilises, activates followers) 2.00 5.00 3.41 0.93
Diplomatic (skilled at interpersonal relations, tactful) 1.00 5.00 3.82 1.08
Self-interested (pursues own best interests) 1.00 5.00 2.66 1.18
Able to identify and communicate relevant oversight 2.00 5.00 3.93 0.92
questions beyond those provided by others
Constructive and proactive attitude (anticipates 2.00 5.00 4.00 0.91
problems by asking questions)
Challenges management regarding governance issues 1.00 5.00 3.88 1.12
Has integrity and ethical values 1.00 5.00 4.45 0.79
Commands respect and is highly regarded by senior 1.00 5.00 4.07 0.96
management
Plays a leading role in setting the tone of corporate 1.00 5.00 3.75 1.15
governance

(average = 4.8 meetings; median = five meetings). Of
the AC chairs represented in this study, 83.8% are non-
executive and 73.5% are independent. Again, this is not
fully in line with the ASX Corporate Governance Coun-
cil (2010) principle 4 that recommends the AC chair to
be independent. The average tenure of the AC chairs in
this study is almost four years (median = three years).
AC chair characteristics
Panel A in Table 5 shows the average scores the CAEs
gave their AC chairs regarding knowledge and experi-
ence. The AC chairs score highest in their knowledge and
experience about business in general (mean = 4.4), and
lowest in their knowledge and experience about internal
auditing (mean = 3.7), which is an interesting finding.
Panel B shows the average score CAEs gave the AC chairs
regarding their personal characteristics. By comparing
this with Panel B of Table 3, this shows that, on average,
the CAEs gave lower scores to the AC chairs than they
gave themselves in the self-assessment.
Formal and informal interactions between the IAF
and the AC
Regarding the formal interactions between the IAF and
the AC, Table 6 shows that almost all CAEs attend all
formal AC meetings (average proportion of meetings at-
tended = 96.9%, median = 100%, ranging from 20%
to 100%). On average, 45.6% of the formal AC time is
dedicated, on an annual basis, to internal audit issues
(median = 47.5%; ranging from 5% to 100%). As part
of this formal relationship, almost all ACs approve the
IAF planning (97%), question the CAE during AC meet-
ings (96%) and provide input for IAF planning (95%).
However, only a minority also approves the internal

314 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 6 Formal and informal interactions between the IAF and the AC
Panel A: Formal interactions Min. Max. Median Mean St. Dev.
Proportion of AC meetings attended by the CAE (%) 20.00 100.00 100.00 96.85 13.46
Proportion of formal AC time dedicated to IA issues (%) 5.00 100.00 47.50 45.55 26.28

Panel B: Formal interactions

(several answers were possible) Percentage

The AC approves the internal audit plan 97.00

The AC approves the internal audit budget 37.00
The AC approves the appointment, evaluation and dismissal of the CAE 55.00
The AC provides input for the internal audit plan 95.00
The AC receives a full copy of all full internal audit reports 59.00
The AC receives a summary of all internal audit reports 73.00
The AC questions the CAE during the AC meeting 96.00
Panel C: Informal interactions Percentage
Existence of informal interactions 88.90
Decrease in informal interactions 4.50
Stable informal interactions 46.60
Increase in informal interactions 48.90

audit budget (37%). Slightly more than half of the ACs
approve the appointment, evaluation and dismissal of
CAEs (55%) and receive a copy of all full internal au-
dit reports (59%). In 73% of cases, the AC receives a
summary of all internal audit reports.
The majority of the responding CAEs indicate that
they have informal meetings with the AC (88.9%). This
study defines informal interactions as all forms of com-
munication outside formal AC meetings. This group is
the subject of further analysis. A large majority of this
group indicated that these informal meetings remained
stable (46.6%) or increased (48.9%) during the past two
years. Both results confirm the growing importance of
informal interactions between the IAF and the AC and
provide an answer to research question 1.
Informal interactions between the IAF and the AC:
Detailed analysis
The two most common ways to facilitate informal
contact are via email (71%) and telephone (67%). In
56% of cases, informal contact takes place at the CAE’s
office. Only in 28% of the cases do meetings occur at
the AC chair’s office or in other AC members’ offices.
In one fifth of cases, meetings are held at restaurants
(20%).
It is interesting to note that in 78.4% of cases, not
all the issues discussed informally were also discussed
during the formal AC meetings. This suggests that both
parties seem to feel the need to discuss certain issues
without putting them on the agenda of the formal AC
meetings. This could be explained by the fact that they do
not want management to be present (as is often the case
during formal AC meetings) when discussing certain
issues.
Through analysing the issues discussed informally, we
find that the most commonly discussed issues are:

A detailed analysis of the informal interactions between
the IAF and the AC answers the second research question
(see Table 7). The analysis shows that, in the large ma-
jority of cases, the CAE takes the initiative for informal
interaction (81%). In slightly less than half of the cases,
the initiative also comes from the AC chair (47%). In
only 16% of cases, other AC members take the initiative.
The number of informal contacts between the CAE and
the AC chair or other AC members ranges from one to
180 times each year (average = 12.4 times; median = six
times). Overall, the CAE and the AC informally interact
relatively often, which again confirms the importance of
informal interactions between the IAF and the AC. In
most cases the CAE takes the initiative, and thus seems
to feel the greatest need to discuss issues informally with
the AC.
r risk management and internal control in general
(73%);
r corporate governance in general (63%);
r the internal audit plan or budget (62%);
r the organisation in general (55%);
r organisation-specific risks and control activities (53%);
r management concerns (52%); and
r fraud, suspected fraud or errors (50%).
Overall, the issues that are discussed informally
between the CAE and the AC are broad. However,
corporate governance, risk management and internal
control – the three areas in which the IAF works – are
highly ranked.


C 2013 CPA Australia Australian Accounting Review 315
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Table 7 Informal interactions – detailed analysis

Panel A: Who takes the initiative? (several answers were possible) Percentage
AC chair 47.00
Other AC members 16.00
CAE 81.00

Panel B Min. Max. Median Mean St. Dev.

Number of informal interactions per year 1.00 180.00 6.00 12.37 21.70

Panel C: Ways to interact informally

(several answers were possible) Percentage

Over the phone 67.00

By email 71.00
At the CAE’s office/the IAF department 56.00
At the AC chair’s office 28.00
At a restaurant 20.00

Panel D: Issues discussed informally

included on formal AC agenda Percentage

All of them 21.60

Not all of them 78.40
Panel E: Issues discussed informally
(several answers were possible) Percentage
Corporate governance in general 63.00
Risk management and internal control in general 73.00
The organisation in general 55.00
Issues related to the external auditor’s work 31.00
Issues related to collaboration with the external auditor 29.00
Issues related to management 52.00
Issues related to the risk appetite and risk-taking of the 44.00
organisation
Issues related to organisation-specific risks and control activities 53.00
Issues related to (suspected) fraud or errors 50.00
Issues related to the management of the IAF (staffing issues, 39.00
quality assurance and improvement)
Issues related to the internal audit plan or budget 62.00
Issues related to audit tools and techniques (methodology, 21.00
software)

Factors associated with informal interactions
between the IAF and the AC
A correlation analysis was undertaken to identify sig-
nificant relationships between the existence of informal
interactions and all the aforementioned IAF, CAE, AC
and AC chair characteristics. When several factors from
the same category were found to be significant, a step-
wise logistic regression analysis (independent variables
tested on a descending basis) was performed to exam-
ine which factors contributed most to the explanation
of the existence of informal interactions, which fits the
exploratory nature of this study.
IAF characteristics
Table 8 shows that the existence of informal interactions
is significantly and positively correlated with only one
IAF characteristic – the percentage of the audit plan com-
pleted (p = 0.024), which provides an answer to research
question 3a. By consequence, a multivariate regression
analysis with all IAF characteristics is not required. The
high correlation between having been subject to an ex-
ternal quality assessment and having a formal Quality
Assessment and Improvement Program (QAIP) in place
can be explained by the fact that the former is an integral
part of the latter.
CAE characteristics
Based on Table 9, it is interesting to note that the existence
of informal interactions is significantly, but negatively,
correlated with the CAE, with at least one IA qualifica-
tion (p = 0.008). Having an IA qualification seems not
to be an element of credibility to convince the AC to have
interactions outside formal meetings. However, in most
cases, it is the CAE who initiates the informal interaction
(cf. above). This could mean that a CAE who lacks IA

316 Australian Accounting Review 

C 2013 CPA Australia
 C

Table 8 Correlation matrix IAF characteristics
Existence_Informal_ IAF_ IAF_ Risk_Based_ Ad_Hoc_ Ad_Hoc_ Audit_Plan_ Formal_ External_Quality_ Full_Compliance_
Interactions Age Size Audit_Plan Requests_AC Request_Mgt Completion QAIP Assessment IPPF

2013 CPA Australia

Existence Informal Interactions 1
IAF Age − .015 1
IAF Size .170 .166 1
Risk Based Audit Plan .058 .111 .141 1
Ad Hoc Requests AC .044 .289∗ − .097 .088 1
Ad Hoc Request Mgt .011 − .099 − .014 − .068 .048 1
G. Sarens, J. Christopher & M. Zaman

Audit Plan Completion .228∗ − .042 .151 .061 − .083 − .322∗∗ 1

Formal QAIP .107 .124 .269∗∗ .038 − .044 .148 − .014 1
External Quality Assessment .090 .322∗∗ .270∗∗ .185 .098 − .158 .020 .547∗∗ 1
Full Compliance IPPF .104 .206∗ .142 .010 − .167 .086 .070 .286∗∗ .134 1
∗p < .05; ∗∗ p < .01

Table 9 Correlation matrix CAE characteristics

Existence_Informal_ CAE_IA_ CAE_ CAE_ CAE_ CAE_ CAE_ CAE_Relevant_ CAE_Constructive_ CAE_ CAE_ CAE_ CAE_Tone_
Interactions Qualification Experience_IA Sensitive Motivator Diplomatic Self_Interested Questions Proactive Challenging Integrity_Ethics Respect Corp_Gov
Existence Informal Interactions 1
CAE IA Qualification − .262∗∗ 1
CAE Experience IA − .103 .339∗∗ 1
CAE Sensitive .327∗∗ − .030 .018 1
CAE Motivator .312∗∗ .028 .273∗∗ .435∗∗ 1
CAE Diplomatic .182 − .004 .141 .547∗∗ .519∗∗ 1
CAE Self Interested − .039 − .008 − .101 − .225∗ − .083 − .136 1
CAE Relevant Questions .206∗ .060 .022 .248∗ .412∗∗ .429∗∗ − .062 1
CAE Constructive Proactive .290∗∗ .026 .119 .531∗∗ .459∗∗ .523∗∗ − .243∗ .497∗∗ 1
CAE Challenging .368∗∗ − .040 .041 .339∗∗ .483∗∗ .329∗∗ − .316∗∗ .437∗∗ .547∗∗ 1
CAE Integrity Ethics .241∗ .006 .110 .519∗∗ .340∗∗ .546∗∗ − .463∗∗ .441∗∗ .412∗∗ .476∗∗ 1
CAE Respect .402∗∗ − .111 .067 .424∗∗ .535∗∗ .497∗∗ − .140 .413∗∗ .498∗∗ .578∗∗ .539∗∗ 1
CAE Tone Corp Gov .392∗∗ − .092 .028 .304∗∗ .486∗∗ .337∗∗ − .233∗ .411∗∗ .516∗∗ .624∗∗ .349∗∗ .673∗∗ 1

Australian Accounting Review

∗p < .05; ∗∗ p < .01

317
Informal Interactions between Audit Committees and Internal Auditors
Informal Interactions between Audit Committees and Internal Auditors
qualification has a greater need to discuss issues more
frequently with the AC. An analysis of personal CAE
characteristics shows that the existence of informal in-
teractions is significantly and positively correlated with
CAEs who perceive themselves as:
1. being sensitive (p = 0.001);
2. being a motivator (p = 0.002);
3. being able to identify and communicate relevant
oversight questions beyond those provided by others
(p = 0.040);
4. being constructive and proactive (p = 0.003);
5. being able to challenge management towards gover-
nance issues (p = 0.000);
6. having integrity and ethical values (p = 0.016);
7. commanding respect and being highly regarded by
senior management (p = 0.000); and
8. playing a leading role in setting the tone of corporate
governance (p = 0.000).
Overall, this clearly shows that several personal char-
acteristics of the CAE are significantly associated with
the existence of informal interactions with the AC. The
significant correlations between most of these personal
characteristics suggest that most of them are related to
each other, which is logical. For example, a CAE who
challenges management regarding governance issues is
probably also a CAE who plays a leading role in set-
ting the tone of corporate governance (or the other way
around). A multivariate analysis was performed to test
which of these characteristics is most important.
The results of the stepwise logistic regression analysis1
are reported in Panel A of Table 10. It has to be noted
that stepwise regression analysis will not tend to pick up
two variables that are collinear (cf. Table 9 shows high
correlations between the explanatory variables) (Draper
and Smith 1981). In other words, multicollinearity is
not a problem. It is shown that, when testing on a multi-
variate basis, only two personal CAE characteristics are
significantly and positively associated with the existence
of informal interactions, which provides an answer to
research question 3b:
1. the CAE being able to challenge management re-
garding governance issues (Wald statistic = 3.840;
p = 0.050); and
2. the CAE commanding respect and being highly
regarded by senior management (Wald statis-
tic = 3.153; p = 0.076).
AC characteristics
As shown in Table 11 none of the AC characteristics is
significantly correlated with the existence of informal in-
teractions between the IAF and the AC, which provides
a negative answer to research question 3c. Thus, a multi-
318 Australian Accounting Review
G. Sarens, J. Christopher & M. Zaman
variate regression analysis is not required. All significant
correlations in Table 11 are self-explanatory. For exam-
ple, it is logical that the proportion of non-executive
members is highly correlated with the proportion of in-
dependent members given that the former include the
latter.
AC chair characteristics
The correlations analysis (cf. Table 12) shows significant
and positive correlations between the existence of in-
formal interactions and the AC chair’s knowledge and
experience in the following areas:
1. business in general (p = 0.012);
2. business-specific risks (p = 0.000);
3. corporate governance (p = 0.014);
4. risk management and internal control in general
(p = 0.004);
5. business-specific risk management and internal con-
trol (p = 0.001); and
6. internal auditing (p = 0.000).
It is clear from this correlation analysis that knowledge
and experience about business, corporate governance,
risk management, internal control and internal auditing
on behalf of the AC chair are significantly associated with
informal interactions between the IAF and the AC. Next,
a multivariate analysis was performed to test which of
these characteristics is most important.
The stepwise logistic regression analysis (see Panel B
of Table 10) shows that the existence of informal inter-
actions between the IAF and the AC is significantly and
positively associated with the AC chair’s knowledge and
experience about business risks (Wald statistic = 4.895;
p = 0.027) and internal auditing (Wald statistic = 6.493;
p = 0.011). A significant, but negative, association exists
between informal interactions and the AC chair’s knowl-
edge and experience about accounting and finance (Wald
statistic = 4.217; p = 0.040). This provides a partial an-
swer to research question 3d.
When analysing the personal characteristics of the AC
chair, a significant and positive correlation is found (cf.
Table 13) between the existence of the informal interac-
tions and the AC chair being perceived as:
1. challenging management regarding governance is-
sues (p = 0.043);
2. commanding respect and being highly regarded by
senior management (p = 0.046); and
3. playing a leading role in setting the tone of corporate
governance (p = 0.013).
It is noted that the first two personal characteristics are
also important for the CAE. A multivariate analysis was
performed to test which of these personal characteristics

C 2013 CPA Australia
G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 10 Stepwise logistic regression analysis. Dependent variable: Existence of informal interactions
Panel A: CAE personal Panel B: AC chair Panel C: AC chair personal
characteristics knowledge and experience characteristics

Variables A Wald Signif. A Wald Signif. A Wald Signif.

CAE Challenging 0.982 3.840 0.050
CAE Respect 0.792 3.153 0.076
AC Chair Business Risks 1.047 4.895 0.027
AC Chair Accounting Finance −0.807 4.217 0.040
AC Chair Internal Audit 1.119 6.493 0.011
AC Chair Tone 0.659 6.447 0.011
N 93 96 89
Chi2 18.681 (p = 0.000) 21.114 (p = 0.000) 6.826 (p = 0.009)
−2 log likelihood 63.495 65.394 67.191
Classification accuracy 88.2% 86.5% 85.4%
Nagelkerke (pseudo) R2 31.0% 33.2% 13.1%
Number of iterations 9 6 10

Table 11 Correlation matrix AC characteristics

Existence_ Proportion_ Proportion_ Number_ AC_ AC_ AC_
Informal_ AC_ Non_ Independent_ AC_ Chair_ Chair_ Chair_
Interactions Age Executive_Members Members Meetings Tenure Non_Executive Independent
Existence Informal Interactions 1
AC Age -.059 1
Proportion Non Executive Members -.084 .247∗ 1
Proportion Independent Members 125 .349∗∗ .653∗∗ 1
Number AC Meetings .137 .048 .293∗∗ .230∗ 1
AC Chair Tenure .036 .369∗∗ .176 .158 .015 1
AC Chair Non Executive .031 .150 .657∗∗ .434∗∗ .316∗∗ .188 1
AC Chair Independent .194 .193 .406∗∗ .722∗∗ .298∗∗ .177 .610∗∗ 1
∗p < .05; ∗∗ p < .01

Table 12 Correlation matrix AC chair characteristics (knowledge and experience)

Existence_ Business_ RMAN_ RMAN_
Informal_ Business_ Specific_ Corporate_ IC_ IC_Business_ Accounting_ External_ Internal_
Interactions General Risks Governance General Specific Finance Auditing Auditing
Existence Informal Interactions 1
Business General .251∗ 1
Business Specific Risks .363∗∗ .530∗∗ 1
Corporate Governance .247∗ .430∗∗ .508∗∗ 1
RMAN IC General .289∗∗ .419∗∗ .597∗∗ .748∗∗ 1
RMAN IC Business Specific .329∗∗ .493∗∗ .789∗∗ .602∗∗ .685∗∗ 1
Accounting Finance .052 .398∗∗ .404∗∗ .390∗∗ .554∗∗ .505∗∗ 1
External Auditing .135 .261∗∗ .467∗∗ .495∗∗ .580∗∗ .546∗∗ .748∗∗ 1
Internal Auditing .363∗∗ .334∗∗ .544∗∗ .600∗∗ .699∗∗ .567∗∗ .588∗∗ .662∗∗ 1
∗p < .05; ∗∗ p < .01

is most important to explain the existence of informal
interactions.
A stepwise logistic regression (see Panel C of Table 10)
shows that only one personal characteristic of the AC
chair is significantly and positively associated with the
existence of informal interactions between the IAF and
the AC – the AC chair playing a leading role in setting
the tone of corporate governance (Wald statistic = 6.447;
p = 0.011). This provides the second part of the answer
to research question 3d.
in the past two years. Therefore, the same kind of
correlation analysis2 and stepwise logistic regression
analysis is undertaken to examine which factors are
significantly associated with an increase in informal
interactions. A dummy variable was created for this
analysis (‘1’ for those who indicated that the ex-
tent of interactions outside of formal meetings in-
creased in the past two years; ‘0’ for those who indi-
cated that the informal interactions remained stable or
decreased).

Additional analysis: Factors associated with an

increase in informal interactions between the IAF and
the AC IAF characteristics

As discussed before, in 48.9% of cases, informal inter- None of the IAF characteristics is significantly correlated
actions between the IAF and the AC have increased with an increase in informal interactions.


C 2013 CPA Australia Australian Accounting Review 319
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

Sensitive Motivator DiplomaticSelf_InterestedRelevant_QuestionsConstructive_ProactiveChallengingIntegrity_Ethics Respect Tone_Corp_Gov

CAE characteristics

AC_Chair_ AC_Chair_ AC_Chair_ AC_Chair_

With regard to the CAE characteristics, a significant and

1
negative correlation was found between having at least
one IA qualification and an increase in informal interac-
tions (p = 0.013), which confirms the previous finding.

.761∗∗
1
A correlation analysis of the CAE personal character-
istics shows again that some are significant. The step-
wise logistic regression analysis (see Panel A of Table 14)

.657∗∗
.617∗∗
shows that an increase in informal interactions in the past

1
two years is significantly and positively associated with
CAEs perceiving themselves as sensitive (Wald statistic
= 4.788; p = 0.029) and playing a leading role in setting
.539∗∗
.530∗∗
.747∗∗
the tone of corporate governance (Wald statistic = 2.949;
1

p = 0.086).
AC_Chair_

.680∗∗
.499∗∗
.522∗∗
.622∗∗
1

AC characteristics

An analysis of the formal AC characteristics shows that an

increase in informal interactions in the past two years is
significantly and positively correlated with the AC chair
AC_Chair_

being independent (p = 0.043) and the number of AC

.781∗∗
.639∗∗
.529∗∗
.572∗∗
.660∗∗
1

meetings (p = 0.029). However, an increase in infor-

mal interactions is significantly and negatively correlated
with the AC chair’s tenure (p = 0.010). A stepwise logis-
tic regression analysis (see Panel B of Table 14) confirms
Existence_Informal_AC_Chair_AC_Chair_AC_Chair_ AC_Chair_

− .358∗∗
− .330∗∗
− .304∗∗
− .545∗∗
− .332∗∗
− .430∗∗

that the chance to increase informal interactions in the

1

past two years is significantly higher when the AC chair is

independent (Wald statistic = 5.263; p = 0.22) and when
Table 13 Correlation matrix AC chair characteristics (personal characteristics)

the AC chair’s tenure is shorter (Wald statistic = 6.994;

− .305∗∗ − .319∗∗ − .410∗∗
.581∗∗
.607∗∗
.376∗∗
.464∗∗
.433∗∗
.470∗∗

p = 0.008). These two findings are particularly interest-

1

ing and complementary to our earlier findings about the

AC chair.
.464∗∗

.520∗∗
.637∗∗
.376∗∗
.318∗∗
.505∗∗
.478∗∗
.566∗∗ 1
.690∗∗

.450∗∗
.552∗∗
.372∗∗
.338∗∗
.334∗∗
.325∗∗
1

AC chair characteristics

A correlation analysis of the knowledge and experience of

Interactions

the AC chair again shows interesting significant correla-

.207∗

.207∗
.259∗
-.130
.167
.080
.166

.161
.151

.194

tions. The stepwise logistic regression analysis (see Panel

1

C of Table 14) shows that only the AC chair’s knowledge

and experience about internal auditing is significantly
and positively associated with an increase in informal
AC Chair Constructive Proactive
Existence Informal Interactions

interactions between the IAF and the AC (Wald statis-

AC Chair Relevant Questions

tic = 6.252; p = 0.012).

AC Chair Tone Corp Gov
AC Chair Integrity Ethics
AC Chair Self Interested

A correlation analysis shows again that some personal

AC Chair Challenging
AC Chair Diplomatic
AC Chair Motivator

< .05; ∗∗ p < .01

characteristics of the AC chair are significant. According

AC Chair Sensitive

AC Chair Respect

to the stepwise logistic regression analysis (see Panel D

of Table 14), AC chairs who are perceived as being sen-
sitive are significantly and positively associated with an
increase in informal interactions (Wald statistic = 5.041;
p = 0.025).
∗p

320 Australian Accounting Review 

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G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

Table 14 Stepwise logistic regression analysis. Dependent variable: Increase in informal interactions
Panel A: CAE personal Panel B: AC Panel C: AC chair Panel D: AC chair
characteristics characteristics knowledge and experience personal characteristics

Variables A Wald Sign. A Wald Sign. A Wald Sign. A Wald Sign.

CAE Sensitive .728 4.788 .029
CAE Tone .471 2.949 .086
AC Chair Independent 1.434 5.263 .022
AC Chair Tenure −.260 6.994 .008
AC Chair Internal Audit .605 6.252 .012
AC Chair Sensitive .617 5.041 .025
N 93 95 96 89
Chi2 11.011 (p = .004) 18.483 (p = .001) 6.954 (p = .008) 5.440 (p = .020)
− 2 log likelihood 116.611 111.939 124.081 116.034
Classification accuracy 59.1% 66.3% 57.3% 59.6%
Nagelkerke (pseudo) R2 15.0% 23.7% 9.4% 8.0%
Number of iterations 9 3 8 10

Discussion and Conclusion
The objective of this paper was to study the informal
interactions between the AC and the IAF in Australia,
using a survey of CAEs. More specifically, it studied:
1. the importance of informal interactions;
2. the nature of these informal interactions; and
3. the factors (characteristics of the IAF, the CAE, the
AC and the AC chair) that are associated with infor-
mal interactions.
This study’s results are interesting from an academic
perspective, as they fill an important gap in the literature
on IAFs and ACs and the interactions between these two
governance parties. Moreover, the results are interesting
for practitioners (both CAE and AC chairs), as they show
factors that might help them in further developing and
strengthening informal interactions.
With respect to the first two research questions, two
conclusions are reached. The first is that the majority of
the responding CAEs indicated that they have informal
meetings with the AC. A large majority of this group
indicated that these informal meetings remained stable
or even increased during the past two years. Both results
confirm the growing importance of informal interac-
tions between the IAF and the AC in Australia, which
answers research question 1 and confirms the relevance
of this topic as suggested by Gendron and Bédard (2006),
Turley and Zaman (2007) and Mat Zain and Subrama-
niam (2007).
The second conclusion is that, related to research ques-
tion 2, a detailed analysis of informal interactions shows
that the CAE and the AC informally interact relatively of-
ten, which again confirms the importance of informal in-
teractions. In most cases, the CAE takes the initiative, and
thus seems to feel the greatest need to discuss issues infor-
mally with the AC. Email and telephone are the two most
common ways to facilitate informal interaction. In more
than half the cases, informal interaction takes place at the
CAE’s office. In more than three quarters of the cases, not
all the issues discussed informally were also discussed
during the formal AC meetings. This shows that both
parties wish to discuss certain issues without putting
them on the agenda of the formal AC meetings. Fu-
ture, more qualitative research could investigate why cer-
tain topics are only discussed informally. The issues that
are discussed informally between the CAE and the AC
are broad. However, corporate governance, risk manage-
ment and internal control – the three areas in which the
IAF works – are highly ranked on the informal agenda.
With respect to the factors associated with informal
interactions between the IAF and the AC, seven conclu-
sions were reached. First, an IAF that is able to complete
a large proportion of its audit plan has more chance to
successfully build informal interactions with the AC.
Given that the AC often provides input for the audit
plan, it can be assumed that they are appreciative when
the IAF is able to complete most of its planned missions.
Second, a CAE who is highly respected by senior man-
agement and is able to challenge management when it
comes to governance issues is also more likely to inter-
act informally with the AC. These two personal char-
acteristics imply that these CAEs are more respected
within their company and are at the forefront of the
corporate governance debate in their company, which
increases the likelihood that they wish to discuss corpo-
rate governance-related issues informally with the AC.
Moreover, these kinds of CAEs are probably also per-
ceived by the AC chair to be attractive for discussing cor-
porate governance issues, which will probably increase
the chance that the AC chair accepts the invitation for
informal interaction. Overall, these findings confirm the
importance of the CAE as suggested by Pforsich et al.
(2006, 2008) and Sarens (2009). Future research could
study how the CAE could get this respect from senior
management, and the ways in which a CAE can chal-
lenge management.


C 2013 CPA Australia Australian Accounting Review 321
Informal Interactions between Audit Committees and Internal Auditors
Third, contrary to the existence of informal interac-
tions in general, an increase in informal interactions is
associated with other personal characteristics of the CAE.
More specifically, a CAE who is sensitive – aware of the
needs of others – and plays a leading role in corporate
governance is more likely to further develop his or her
informal interactions with the AC.
Fourth, mainly independent AC chairs and AC chairs
that are relatively new in their position are associated
with informal interactions with the IAF. Both character-
istics mean that these AC chairs are confronted with large
information needs (they have nothing to do with the op-
erational side of the business, given their independence,
and they are relatively new in their position). This could
explain why they tend to invest more in informal interac-
tions with the IAF (initiated by themselves or the CAE).
This result confirms the important comfort-providing
role of the IAF vis-à-vis independent AC members in an
agency theory perspective (see Scarbrough et al. 1998;
Sarens et al. 2009).
Fifth, AC chairs who have a good understanding of
business risks seem to feel more comfortable in dis-
cussing governance and risk-related issues informally
with the CAE (irrespective of who has initiated the in-
formal interaction). This is consistent with the finding
that risk management issues are commonly discussed
informally. Their specialised knowledge about business
risks enables them to identify potential issues for infor-
mal discussion with the CAE. However, future research
could investigate how this knowledge is acquired, given
that this is still a relatively unexplored area. Moreover, it
is worthwhile noting that the more the AC chair knows
about internal auditing, the greater the likelihood they
will have informal interactions with the IAF. In other
words, knowing what internal auditing is and how it can
add value to the organisation is important for engaging in
informal interactions (which does not necessarily mean
that the AC chair initiates the informal interactions).
Finally, it is interesting and innovative to see that AC
chairs with more accounting and finance knowledge and
experience are less associated with informal interactions
with the CAE. This suggests that an AC chair with an ac-
counting and finance background is less of a partner for
the CAE to discuss issues with informally. This may be
because their background makes them more focused on
accounting and finance issues, and, consequently, makes
them feel more at ease with external auditors compared
with internal auditors.
Sixth, AC chairs who know more about internal au-
diting (in general, or based on personal experience) are
not only more open to informal interactions with the
IAF, but are also more keen to further develop these in-
formal interactions (again, irrespective of who initiates
the informal interactions). This supports the previous
conclusion and further stresses the importance of AC
chairs having knowledge about internal auditing, not
322 Australian Accounting Review
G. Sarens, J. Christopher & M. Zaman
only to have informal interactions, but also to further
develop these informal interactions. An important topic
for future research is to examine how CAEs ‘educate’ AC
chairs about the role and added value of the IAF.
Finally, AC chairs who are perceived as playing a lead-
ing role in corporate governance are more associated
with informal interactions with the IAF. Being perceived
as a leader in corporate governance probably means that
the AC chair is more aware of the importance of gov-
ernance, risk management and internal control issues,
which might stimulate the AC chair to interact infor-
mally with the IAF (which does not say anything about
who initiates the informal interactions). A question that
is still open for future research is: what makes an AC
chair a ‘leader’ in corporate governance? This finding is
complementary to the finding that AC chairs who are
sensitive (aware of the needs of others) probably under-
stand the need of the CAE to discuss issues informally,
and will therefore probably be more open to further de-
velop these informal interactions with the IAF. Overall,
the last three conclusions confirm the important role of
the AC chair as suggested by Turley and Zaman (2007).
This study has four limitations. First, the data were col-
lected in Australia – a country where ACs have a relatively
long history that goes back to the recommendations pub-
lished by the Borsch Committee in 1990 (Vanasco 1994)
and which is also confirmed by the average age of ACs in
this study. Therefore, the conclusions could probably not
be extrapolated to countries where ACs are a relatively
new phenomenon. It would be interesting to study the
same informal interactions in a country where ACs are
rather new. Second, the data used reflect the perception
of the CAEs and do not come directly from the AC chair.
It is certainly a challenge for future research to study the
same topic by using AC members’ perceptions, or even
senior management’s perception, to obtain information,
such as that relating to CAEs’ personal characteristics.
Third, the use of stepwise regression analysis was appro-
priate given the lack of previous studies on this topic but
it also has limitations. The final model obtained is not
guaranteed to be optimal in any specified sense, which
means that the procedure yields a single final model,
although there are often several equally good models
(Draper and Smith 1981). Nevertheless, the findings of
this study could be input for future studies building hy-
potheses on the factors associated with informal inter-
actions between the IAF and the AC. Finally, this study
has not examined the effect of this informal interaction
on factors such as IAF effectiveness, AC effectiveness or
quality of corporate governance, which are important
and interesting topics for future research.
Notes
1 Stepwise logistic regression is designed to find the most parsi-
monious set of predictors that are most effective in predicting

C 2013 CPA Australia
G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

the dependent variable. Stepwise logistic regression is useful in
finding relationships that have not been tested before which is the
case in this study. Variables are added to the logistic regression
equation one at a time, using the statistical criterion of reducing
the −2 Log Likelihood error for the included variables. After each
variable is entered, each of the included variables is tested to see if
the model would be better off if the variable were excluded. The
process of adding more variables stops when all of the available
variables have been included or when it is not possible to make
a statistically significant reduction in −2 Log Likelihood using
any of the variables not yet included. Once a variable is included,
its interpretation in stepwise logistic regression is the same as it
would be using other methods for including variables (Draper
and Smith 1981).
2 Note that the correlation matrices for the additional analyses are
not provided.

QuesƟonnaire
“InteracƟon between Internal Audit and the Audit CommiƩee”

This quesƟonnaire is addressed to organizaƟons with an internal audit department and an audit
commiƩee currently in place. If you or your organizaƟon do not have an audit commiƩee currently in
place, please disregard this quesƟonnaire.

IntroducƟon

This study is conducted by [NAMES OF THE RESEARCHERS] supported by the Ins tute of Internal
Auditors Australia. First, this study aims to describe the formal and informal interac on between the
internal audit func on (IAF) and the audit commi ee (AC) in several countries. Second, this study will
iden fy factors that have an impact on the interac on between the IAF and the AC. We intend to
iden fy best prac ce and recommenda ons on how to improve this interac on.

It will take approximately 15 to 20 minutes to complete the ques onnaire. Your responses will be
treated with utmost confidence and anonymously.

In the ques onnaire, we use the following abbrevia ons:

o IAF stands for Internal Audit Func on
o CAE stands for Chief Audit Execu ve (Head of the Internal Audit func on)
o AC stands for Audit Commi ee
o ACC stands for Audit Commi ee Chair
o ACM stands for Audit Commi ee Members

SECTION A: INTERNAL AUDIT FUNCTION

A.1. How long has the IAF existed in its current form? [_____] years or since [_____]

A.2. How many people currently work in the IAF (full Ɵme equivalents)?
[___] internal employees [____] external employees (via co/out-sourcing arrangements)

A.3. What is the IAF budget (personnel and operaƟng costs) for the current financial year
(approximately)? [________] AUD

A.4. What percentage of the internal audit plan in the current financial year is risk-based? [………..] %


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Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

A.5. What percentage of the internal audit plan in the current financial year is reserved for ad hoc
requests coming from:
audit commi ee [………...] % senior management [………..] % other management [………..] %

A.6. What percentage of the internal audit plan in the current financial year is going to be completed?
[ …………] %
A.7. Does the IAF have a quality assurance and improvement programme including internal and external
quality assessments? (please Ɵck the relevant one)

Yes, formally [ ] Yes, but rather informally [ ] Currently under construc on [ ] No [ ]

A.8. Has the IAF ever been subject to an external quality assessment?
Yes [ ] go to ques on A9 No [ ] go to ques on A10

A.9. If yes, how long ago?

Less than one year ago [ ] Less than two years ago [ ] Less than three years ago [ ] More than three
years ago [ ]

A.10. Apart from the implicaƟons of your answer to quesƟon A7 and A8, does the IAF conform to the
Code of Ethics and Standards for the Professional PracƟce of Internal AudiƟng issued by the InsƟtute of
Internal Auditors? Fully [ ] Par ally [ ] Not at all [ ]

SECTION B: INTERNAL AUDIT FUNCTION EMPLOYEES

B.1. Please answer the following ques ons in respect of both (a) the CAE and (b) the total number of
internal employees employed in the IAF (excluding the CAE):
CAE IAF team
(Ɵck if yes) (insert
The CAE has / How many of the employees in the IAF have: number)
a. bachelor degree (in any subject)? [ ] [___]
b. masters degree (in any subject)? [ ] [___]
c. membership of the IIA? [ ] [___]
d. at least one internal audi ng qualifica on? [ ] [___]
e. had experience in internal audit before joining the current IAF? [ ] [___]
f. had experience in accoun ng, finance or external audit before joining the [ ] [___]
current IAF?

B.2. In the current financial year how many hours are expected to be spent on conƟnuous professional
development (e.g. training courses, wriƟng, discussion groups,…)?
- by the CAE? [ _____ ] hours
- by the IAF team? [ _____ ] hours per person (on average)

How are the above training hours (on average) expected to be distributed over CAE IAF team
the following areas? (please indicate approximate percentage) % %
a. Internal audi ng tools and techniques (eg. CAATT, CSA, sampling) [ ] [ ]
b. Behavioural skills (eg. Facilita ng, interpersonal skills, team building) [ ] [ ]
c. Technical skills (ex. Forensic skills, interviewing, risk analysis,…) [ ] [ ]
d. Other areas [ ] [ ]
Please specify what the other areas covered are: ____________________________________________

324 Australian Accounting Review 

C 2013 CPA Australia
G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

B.3. On a scale of 1 (low) to 5 (very high), how would you describe yourself as a CAE : CAE
a. sensi ve (aware of changes in mood of others) [ ]
b. mo vator (mobilizes, ac vates followers) [ ]
c. diploma c (skilled at interpersonal rela ons, tac ul) [ ]
d. self-interested (pursues own best interest) [ ]
e. able to iden fy and communicate relevant oversight ques ons beyond those provided by [ ]
others
f. construc ve and proac ve a tude (an cipate problems by asking ques ons) [ ]
g. challenging management towards governance issues [ ]
h. have integrity and ethical values [ ]
i. command respect and is highly regarded by senior management [ ]
j. play a leading role in se ng the tone of corporate governance [ ]
SECTION C: AUDIT COMMITTEE

C.1. How long has the audit commiƩee existed in your organizaƟon? [_____] years
C.2. How many members are there on your audit commiƩee? [_______]
C.3. How many members of the audit commiƩee are non-execuƟve? [_______]
C.4. How many members of the audit commiƩee are independent? [_______]
C.5. Is the ACC non-execuƟve? [ ] Yes [ ] No
C.6. Is the ACC independent? [ ] Yes [ ] No
C.7. How long has the currentACCserved on the AC? [_____] years
C.8. How many audit commiƩee meeƟngs are scheduled for the current financial year? [________]
C.9. How many of these meeƟngs does the CAEaƩend? [______]

C.10. Does the AC: Yes No

- approve the internal audit plan? [ ] [ ]
- approve the internal audit budget? [ ] [ ]
- approve the appointment, evalua on and dismissal of the CAE? [ ] [ ]
- provide input for the internal audit plan? [ ] [ ]
- receive a full copy of all full internal audit reports? [ ] [ ]
- receive a summary of all internal audit reports? [ ] [ ]
- ques on the CAE during the AC mee ng? [ ] [ ]

C.11. During the past two years, how has the following evolved: Decreased Stable Increased
- AC’s oversight of internal audit ma ers [ ] [ ] [ ]
- number of issues raised with the CAE [ ] [ ] [ ]
- extent of communica on outside of formal mee ngs [ ] [ ] [ ]
- CAE invita on to AC mee ngs [ ] [ ] [ ]
- CAE a endance at AC mee ngs [ ] [ ] [ ]
- opportuni es for CAE to meet the AC without management present [ ] [ ] [ ]
- propor on of AC me spent on risk management and internal control [ ] [ ] [ ]
- AC input into the internal audit plan [ ] [ ] [ ]
C.12. What proporƟon of the formal audit commiƩee Ɵme (formal audit commiƩee meeƟngs) is
dedicated, on an annual basis, to internal audit issues? (approximately) [____] %
C.13. Do you have contact with the ACC and/or ACM outside formal meeƟngs?
[ ] Yes [ ] No (if no, please go to ques on C.20.)

C.14. During the past two years, how has the extent of contact outside of formal meeƟngs evolved?
[ ] Decreased [ ] Stable [ ] Increased


C 2013 CPA Australia Australian Accounting Review 325
Informal Interactions between Audit Committees and Internal Auditors G. Sarens, J. Christopher & M. Zaman

C.15. Who normally iniƟates the informal contact? (several answers possible)
[ ] ACC [ ] Other ACM [ ] CAE [ ] Other IAF staff members [ ] Others

C.16. How oŌen do you have informal contacts with the ACC (or other ACM) (approximately)?
[_______] (insert number) mes a year.

C.17. How and where do you have informal contacts with the ACC (or other ACM)? (several answers
possible)
[ ] over the phone
[ ] by e-mail
[ ] at the CAE’s office / at the IA department / in the company offices
[ ] at the ACC’s (or other ACM’s) office
[ ] at a restaurant (outside the organiza on)
[ ] during my spare me (golf court, concert, recep on,…)
[ ] other [_____________]

C.18. Are the issues you discuss informally with the ACC (or other ACM) also discussed during the formal
AC meeƟngs? [ ] Yes, all of them [ ] Yes, but not all of them [ ] No

C.19. What kind of issues do you discuss informally with the ACC (or other ACM)? (several answers
possible)
[ ] corporate governance in general
[ ] risk management and internal control in general
[ ] the organiza on in general
[ ] issues related to the external auditor’s work
[ ] issues related to the collabora on with the external auditors
[ ] issues related to management
[ ] issues related to the risk appe te and risk-taking of the organiza on
[ ] issues related to organiza on-specific risks and control ac vi es
[ ] issues related to (suspected) fraud or errors
[ ] issues related to the management of the IAF (staffing issues, quality assurance and improvement)
[ ] issues related to the internal audit plan or budget
[ ] issues related to audit tools and techniques (methodology, so ware)
[ ] other [_____________________]

C.20. On a scale of 1 (low) to 5 (very high), what is your assessment of the ACC’s ACC
knowledge and experience in the following areas:
a. business in general [ ]
b. business specific risks [ ]
c. corporate governance [ ]
d. risk management and internal control in general [ ]
e. business specific risk management and internal control [ ]
f. accoun ng and finance [ ]
g. external audi ng [ ]
h. internal audi ng [ ]

326 Australian Accounting Review 

C 2013 CPA Australia
G. Sarens, J. Christopher & M. Zaman Informal Interactions between Audit Committees and Internal Auditors

C.21. On a scale of 1 (low) to 5 (very high), in your opinion, to what extent are the ACC
following an appropriate descripƟon of the ACC:
a. sensi ve (aware of changes in mood of others) [ ]
b. mo vator (mobilizes, ac vates followers) [ ]
c. diploma c (skilled at interpersonal rela ons, tac ul) [ ]
d. self-interested (pursues own best interest) [ ]
e. able to iden fy and communicate relevant oversight ques ons beyond those [ ]
provided by others
f. has a construc ve and proac ve a tude (an cipate problems by asking ques ons) [ ]
g. challenging management towards governance issues [ ]
h. has integrity and ethical values [ ]
i. commands respect and is highly regarded by senior management [ ]
j. plays a leading role in se ng the tone of corporate governance [ ]

SECTION D: ORGANIZATIONAL CHARACTERISTICS

D.1. How long has your organizaƟon existed in its current form? [______] years or since [________]

D.2. In which industry does your organizaƟon operate?

Public sector [ ] Bank and insurance [ ] Other services [ ] Regulated u lity [ ] Manufacturing [ ]
Other (please specify) [ _______________________________________ ]

D.3. Is your organizaƟon listed? Yes [ ] No [ ] If yes, on which stock exchange(s)? [___________]

Please answer the following ques ons with reference to the current financial year:
D.4. What is the size of your organisaƟon (approximately):
In terms of total number of employees? [________] FTE
In terms of total assets (for private sector organisaƟons)? [________] AUD
In terms of policy budget (for public sector organisaƟons)? [________] AUD
In terms of total revenue (for private sector organisaƟons)? [________] AUD
In terms of operaƟng budget (for public sector organisaƟons)? [________] AUD

Thank you for taking your me to complete this ques onnaire. If you would like to receive summary
feedback on this project, please provide your details below:

Name: _______________________________________________________________________________
Company name and address: _____________________________________________________________
_____________________________________________________________________________________
Country: _______________________________________

Email: _________________________________________ Phone: ________________________________

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