Corporate governance and internal audit:

an institutional theory perspective

Christina Vadasi, Michalis Bekiaris and Andreas Andrikopoulos

Abstract Christina Vadasi,

Purpose – This paper aims to explore internal audit effectiveness through its contribution to corporate Michalis Bekiaris and
governance. Namely, the authors attempt to investigate the impact of internal audit professionalization on Andreas Andrikopoulos all
internal audit’s contribution to corporate governance. are based at Department of
Design/methodology/approach – Using a research framework informed by institutional theory, the Business Administration,
authors predict that internal audit’s contribution to corporate governance is associated with factors University of the Aegean,
related to internal audit professionalization. To investigate the arguments, the authors combine data from
Chios, Greece.
a survey of 49 listed companies in the Athens Stock Exchange with publicly available information from
annual reports.
Findings – Empirical results indicate that internal audit professionalization affects internal audit
effectiveness, as internal audit’s contribution to corporate governance is improved for organizations
where internal audit function complies with internal auditing standards and internal auditors hold
professional certifications. The findings also suggest that internal audit’s contribution to corporate
governance is shaped by some company-specific characteristics, namely, CEO duality and audit
committee quality.
Practical implications – The results have implications for internal auditors who wish to increase the
efficiency of their work, corporate governance mechanisms such as the board of directors and the audit
committee, which can use the findings of this study to better respond to their responsibilities concerning
internal audit and regulators who can also benefit to strengthen areas with substantial impact on internal
audit’s contribution to corporate governance.
Originality/value – This paper contributes to the academic discussion on the role of internal audit in
corporate governance and complements the work of other researchers in the field of internal audit
professionalization. This study tries to fill a gap in the literature on the effect of internal audit
professionalization elements on internal audit’s contribution to corporate governance.
Keywords Greece, Professionalization, Internal auditing, Institutional theory, Corporate Governance,
Institute of Internal Auditors, Internal audit
Paper type Research paper

1. Introduction
Internal audit (IA) is a fundamental part of corporate governance (CG), as it is one out of
four key players of CG along with the audit committee, external audit and management
(Gramling et al., 2004; (Goodwin-Steward and Kent, 2006). IA’s importance in corporate
governance relies on its role as the only internal monitoring mechanism that operates on a
daily basis (Prawitt et al., 2009; Soh and Martinov-Bennie, 2011). Nevertheless, prior
research on IA effectiveness and its association with CG has been rather limited (Sarens,
2009; Mihret and Grant, 2017; Lenz et al., 2018). Our objective is to explore the effect of
internal audit function (IAF) on IA effectiveness through the lens of institutional theory, which
has been attracting increasing attention in the IA literature (Al-Twaijry et al., 2003; Arena
et al., 2006; Arena and Azzone,2007; Mihret et al., 2010). Namely, we use normative Received 19 July 2019
Revised 18 September 2019
isomorphism (one of three types of isomorphism in institutional theory) to assess the effect 20 September 2019
of IA professionalization on IA’s contribution to CG. The guidance of the Institute of Internal Accepted 22 September 2019

DOI 10.1108/CG-07-2019-0215 VOL. 20 NO. 1 2020, pp. 175-190, © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 175
 Auditors (IIA) is often considered as a source of normative pressure that leads to IA
professionalization (Arena and Jeppesen,2010; Lenz et al., 2018). Lenz et al. (2018)
concluded that IA identity is still not clear and this hampers IA effectiveness, even though
one would expect that increased normative pressure from IIA would lead to increased IA
effectiveness.
Addressing this research question, we set out to assess the effect of IIA guidance on IA’s
contribution to CG. This paper forms part of a long-standing debate (Al-Twaijry et al., 2003;
Arena and Azzone,2007; Abdolmohammadi, 2009; Arena and Jeppesen,2010;
Abdolmohmmadi and Sarens, 2011; Lenz and Sarens, 2012). We conducted an empirical
survey using questionnaires in listed companies on the Athens Stock Exchange. The
sample included 49 companies and survey data was investigated in conjunction with
publicly available data in annual reports. We explore IA with a country-specific study to
shield the analysis against potential inconsistencies that may arise in the investigation of
diverse institutional environments (Mat Zain et al., 2015). Greece constitutes an interesting
case of CG and IA because of the unprecedented economic crisis that started in 2009
(Nerantzidis and Filos, 2014). In periods of economic crisis CG is important since, even
though it is not the root cause of the crisis, it can assist economic recovery by being a
fundamental pillar of) transparency and accountability, and thereby, an integral part of
value-adding entrepreneurship (Kirkpatrick, 2009). CG in Greece is also interesting
because most companies are family-controlled, thereby aggravating the agency problems
and the principal-principal conflicts (conflict between shareholder groups) that CG and
monitoring mechanisms are trying to mitigate (Chau and Gray, 2010; Lam and Lee, 2012;
Regoliosi and d’Eri, 2014). Those arguments are complemented by Vieira (2018) who found
that the nature of the board of directors in family firms affects their performance in periods
of economic adversity. The results show that IIA guidance -IAF compliance with IIA
standards and auditors with professional certifications- can improve IA’s active involvement
in CG.
The rest of the paper is organized as follows: Section 2 presents the conceptual framework
and the principal arguments on IA and CG. Section 3 describes the methodology, sample
and model. Section 4 presents the results of the empirical analysis while Section 5 lays out
the conclusion, research limitations and suggestions for future research.

2. Theoretical background and conceptual framework

2.1 Internal audit’s contribution to corporate governance
The major corporate scandals in early 2000, the global economic crisis and the changes in
corporate ownership structure led to the intensive involvement of academics and
professionals with CG. Regulatory interest was oriented toward restoring investor
confidence via increased CG disclosure requirements. At the same time, there was also a
need to strengthen monitoring mechanisms, which led to increased attention to IA
(Leung et al., 2004; Sarens and De Beedle, 2006) and an important change in IA’s role in
CG (Carcello et al., 2005; Cohen et al., 2010; Lenz and Sarens, 2012).
IA has traditionally been a function of assurance, financial audits and compliance
mechanisms. IA’s new role involves the supervision and the improvement of risk
management processes and CG (Lin et al., 2011), with special emphasis being invested in
IA’s added value to an organization (Sarens, 2009; IIA, 2017). South African CG code KING
IV (IOD, 2016) states that IA, as provider of assurance services for the company, remains a
decisive factor of CG. Nevertheless, the code recognizes IA’s evolution and suggests that
IA’s role should be one of a reliable advisor, which contributes to all company processes.
IA’s role is further reinforced by the fact that it constitutes a “resource” for the rest of CG
players (Gramling et al., 2004) as it contributes to the accomplishment of their goals and
their effective performance. In this regard, Sarens et al. (2012) argue that IA’s principal

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contribution to CG emerges through IA’s relationship with the rest of CG players, such as
the audit committee, external audit and management, whereas Cohen et al. (2004) describe
the complex interaction between these mechanisms as a “corporate governance mosaic.”
IA’s role is often discussed in the context of agency theory (Cohen et al., 2002; Paape et al.,
2003; Carcello et al., 2005; Christopher et al., 2009; Sarens and Abdolmohammadi, 2011).
However, there is a growing stream of researchers that apply institutional theory as a
theoretical framework in the context of IA (Al-Twaijry et al., 2003; Arena et al., 2006; Arena
and Azzone, 2007; Mihret et al., 2010), while Lenz et al. (2018) have recently produced a
novel taxonomy of IA research, structured on the new institutional theory.

2.2 Institutional theory

The institutional theory explains the process through which accepted social practices
and institutional standards emerge (Meyer and Rowan, 1977; Tolbert and Zucker, 1983;
Scott, 1987). It suggests that to survive, organizations must comply with social rules that
are considered acceptable behaviors or practices and must not focus solely on
performance and profit. Organizations are subject to institutional rules that they must
follow to obtain legitimacy, access to resources and stability (Meyer and Rowan, 1977).
This theory applies to IA as well. Legitimacy is necessary and one way for IA to obtain
legitimacy is to provide evidence for its effectiveness. However, internal auditors cannot
easily provide such evidence because their work is not directly connected to the
company’s profits (Lenz et al., 2018).
Legitimacy does not necessarily ensure that organizations operate effectively, and
consequently, organizations tend to pursue effectiveness by adopting the characteristics
and behaviors of other organizations in their environment (Al-Twaijry et al., 2003). This is
called isomorphism and it can be coercive, normative or mimetic (Arena et al., 2006).
DiMaggio and Powell (1983) explored what makes organizations so similar and discovered
that isomorphism emerges out of their effort to change as they respond in a similar manner
to three forces: coercive forces, normative forces and mimetic forces. In IA, the three
isomorphism mechanisms are articulated through three different ways of IAF compliance
(Arena and Azzone, 2007; Lenz et al., 2018). Coercive isomorphism is the case of
compliance with texts of mandatory application, like laws and regulations. In normative
isomorphism, there is the requirement for compliance with professional norms like IIA
guidance. Finally, mimetic isomorphism applies in the case where one IAF adopts an IA
process that is used by other IAFs with the objective of improving its effectiveness.
Mihret et al. (2010) used institutional theory to explore IA effectiveness and Arena and
Azzone (2007) analyzed IAF characteristics in a framework that is based on institutional
theory. Furthermore, Al-Twaijry et al. (2003) and Arena et al. (2006) explored the creation of
IA departments in Italy and Saudi Arabia based on coercive isomorphism. Namely,
Al-Twaijry et al. (2003) used institutional theory because it offered a perspective for their
findings on the creation of IA departments and the role of the government in their
establishment in Saudi Arabia, stressing the need for stronger coercive pressure. Moreover,
they concluded that the creation of a local IIA in Saudi Arabia constituted important
normative pressure for the creation of IA departments. Normative isomorphism is
associated with IA professionalization (Arena et al., 2006) and is related with the adoption of
commonly accepted practices and processes that gradually lead to the institutionalization
of IA.
2.2.1 Normative isomorphism. IA’s role is often ambiguous and conflicting customer
demands make its task harder. Lenz and Sarens (2012, p. 533) argue that:
Positioning IA as agent to the board and, at the same time, as partner to management is
challenging in practice, as there are potential tensions between the board and management.

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 The establishment of professional identity helps IA become more consistent with its role.
Professional identity determines rules of behavior and brings homogeneity to organizational
structures and practices (Al-Twaijry et al., 2003). In this way IA can be more effective, via
reinforced professionalization (Abdolmohammadi, 2009; Arena and Azzone, 2009).
According to Alzeban (2015, p. 552) “The effective practice of internal auditing is
dependent upon the presence of certain demographic variables, and in this connection, it is
essential that internal auditors enhance their professionalism.” Normative isomorphism
explains this process and, in the case of IA, this is related to IIA guidance. Lenz et al. (2018,
p. 11) state that “the stronger the normative force of the IIA, the more effective the IAF may
demonstrate itself to be by complying with IIA regulation.” Guidance is based on a common
body of professional knowledge, which is provided by IIA via the International Professional
Practices Framework and many professional certifications.
However, there is a doubt as to the presence of normative isomorphism when IA’s role
remains “fuzzy” and there are many cases of non-compliance with normative guidance in
practice (Lenz et al., 2018). Moreover, according to Abbott’s (1988) theory about the
system of professions, every profession must develop its own jurisdiction, which is
determined by the characteristic of a profession over which it has complete and legally
established control. Nevertheless, there is often inter-professional interaction, and therefore,
competition. In the case of IA, professionalization is affected by inter-professional
competition with the external audit profession, which often prevents IA from obtaining a
distinct jurisdiction of its own (Arena and Jeppesen, 2010). Lenz et al. (2018, p. 13) state
that “the lack of compliance of IA practices with the normative guidance may signal a lack
of professional identity” and argue that IIA may consider hardening the definition of IA so
that IA’s distinct role can be identified and the recognition of IA as a profession can be
wider.
Drawing on this ongoing debate we explore the relationship between IA professionalization
and effectiveness. Namely, we assess the effect of IIA guidance on IA’s contribution to CG.

2.3 Conceptual framework

Relying on prior research, we identified three elements that belong in IIA guidance, reflect
the potential existence of IA professionalization and are expected to be associated with IA’s
contribution to CG. Namely, compliance with IIA standards, IIA membership and
professional certifications.
IIA standards constitute an internationally recognized guide for IA as a profession.
Sarens (2009) included compliance with IIA standards in the fundamental criteria for
the assessment of IAF quality. The Common Body of Knowledge (CBOK) study addresses the
adequacy, use and compliance with IIA standards (IIARF, 2010) as an effective tool of IA. The
same standards include the quality assurance and improvement program (QAIP) (Standard
1300), which is designed to provide an assessment on the degree of IAF compliance with IIA
standards (IIA, 2017). QAIP importance is stressed by both IA academics and professionals
(Sarens et al., 2012; Lenz et al., 2018; IIARF, 2007, 2016). Sarens et al. (2012) found that an
IAF having an active role in CG is significantly and positively associated with the existence of
quality assurance and improvement program. Apart from Standard 1300, the importance of
compliance with standards is also stressed in Standard 2060, which states that the chief audit
executive (CAE) should include, in his reports to management and the Board of Directors
(BoD), an assessment of the degree of IAF compliance with the code of ethics and IIA
standards (IIA, 2017). Lenz et al. (2018, p. 14) stressed the importance of IIA standards and
concluded that “normative isomorphism suggests basing the measurement of IA effectiveness
on the existence of a distinct professional identity in which compliance with the IIA standards
is central.” Finally, prior research has investigated the factors that affect a company’s use of or
compliance with those standards, emphasizing their importance for IA effectiveness
(Abdolmohammadi, 2009; Abdolmohmmadi and Sarens, 2011; Alzeban, 2015). Drawing on

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these arguments, we expect compliance with IIA standards to be positively associated with
IA’s contribution to CG.
IIA membership is an important element in the professionalization of the IA. Burns et al.
(1994) suggested that regulatory groups could consider provisions requiring the
organization to use a CAE who is either a Certified Internal Auditor (CIA) or at least a
member of the IIA. Abdolmohammadi (2009) used IIA membership as an important factor of
IA professionalization. Al-Twaijry et al. (2004) and Arena and Azzone (2009) included IIA
membership in the factors that they use to assess internal auditors’ competence. Coetzee
et al. (2015) found that the increase in IIA membership could affect internal audit quality.
Prior studies have found that the length of CAE’s membership in the IIA affects the use of
and compliance with IIA standards (Abdolmohammadi, 2009; Abdolmohmmadi and
Sarens, 2011). In a similar vein, Alzeban (2015) suggests that IIA membership plays a key
role in promoting internal audit conformance with IIA standards. Finally, CAE’s membership
in the IIA bears a positive impact on the percentage of internal auditors’ recommendations
that are implemented by the auditees (Arena and Azzone, 2009). Therefore, we expect
CAE’s membership in IIA to be positively associated with IA’s contribution to CG.
Professional certifications are very important in the IA profession. The Institute of Internal
Auditors is the principal source of IA professional certifications, CIA being the most
widespread across IA professionals. Abdolmohammadi (2009) refers to professional
certifications as an important factor of IA professionalization. Many studies have used
professional certifications as evidence of internal auditors’ competence (Al-Twaijry et al.,
2004; Hutchinson et al., 2009; Sarens, 2009; Lin et al., 2011; Pizzini et al., 2015; Endaya and
Hanefah, 2016), which affects IA effectiveness. External auditors have suggested that
internal auditors’ competence is an important factor affecting their decision to rely on IA
work (Al-Twaijry et al., 2004). Moreover, internal auditors’ professional certifications
contribute substantially to IAF compliance with IIA standards (Abdolmohmmadi and Sarens,
2011), to the quality of financial statements (Prawitt et al., 2009), to the implementation of IA
recommendations (Alzeban and Sawan, 2015) and to IA’s active role in CG (Sarens et al.,
2012). Based on these arguments, we expect professional certifications to be positively
associated with IA’s contribution to CG.
Figure 1 summarizes the hypothesized associations between IA’s contribution to CG and
variables that reflect IIA guidance.

3. Research method
The purpose of this study is to test the proposition that IIA guidance is positively associated
with IA’s contribution to CG. We combined non-publicly available information with
information from the companies’ annual reports (Mat Zain et al., 2015; Pizzini et al., 2015).
For the collection of non-publicly available information, we conducted a questionnaire
survey in the CAEs of the companies in the sample (Johl et al., 2013; Zaman and Sarens,
2013; Abbott et al., 2016). We opted to send the questionnaire to CAEs because of their
central role in IA processes and IA’s contribution to CG. We constructed the questionnaire
based on discussions with IA professionals and academics, as well as on a pilot
implementation to four companies in the sample. The final form of the questionnaire
included 20 questions that were grouped in three sections: IAF characteristics, audit
committee information and respondents’ demographic characteristics.
The sample consists of listed companies on the Athens Stock Exchange. There were 201
listed companies in the Athens Stock Exchange as at year-end 2016. We excluded 8
financial institutions because of their distinct regulatory framework on IA and CG
(Regoliosi and d’Eri, 2014). From the remaining companies, 19 were deleted because they
had paused operations, were under surveillance status, had no IAF or contact details were
not obtainable. We sent the questionnaire via email to the CAEs of the 174 remaining

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 Figure 1 Conceptual framework

Conceptual framework

IIA Guidance

IIA standards
compliance

(+)

IIA IA's
membership (+) contribution to
CG

(+)
IIA professional
certifications

companies and we received 54 (31.03 per cent) responses, of which 49 (28.16 per cent)
were complete and processable. This response rate was adequate when compared with
similar studies in Malaysia and UK where 20.03 per cent and 34 per cent of CAE’s
responded, respectively (Mat Zain et al., 2006; Alzeban and Sawan, 2015). To avoid the
possibility of non-response bias, we tested for differences between early and late
respondents (25 and 24, respectively), with the results indicating that there is no evidence
of response bias. Table I provides professional demographics for the survey respondents.

3.1 Model specification

We model the probability that IA contributes to CG as a function of IIA guidance factors and
a set of control variables (all model variables are defined in Table II):

IACG ¼ b 0 þ b 1 COMP þ b 2 IIAMEMB þ b 3 CERT þ b 4 FIRMSIZE þ b 5 LEV þ b 6 CEOdual

þ b 7 ACqual

where IACG equals one if IA actively contributes to CG, and zero otherwise. Due to the binary
form of the dependent variable, we estimate this model using a binary logistic regression.
We assessed the linearity of the continuous variables with respect to the logarithm of the
dependent variable via the Box-Tidwell (1962) procedure; all continuous independent
variables were found to be linearly related to the logit of the dependent variable. To convert
CERT ; ACINDEP & ACmeet in a binary form, we dichotomize each one based on the sample
median. If a variable’s value is above the median of the sample, it equals one and zero if it is
below the sample median (Prawitt et al., 2009; Al-Jaifi et al., 2019). Finally, we applied a
logarithmic transformation to enhance the reliability of FIRMSIZE and reduce collinearity
problems in regression analysis (Mat Zain et al., 2006).
Prior research has often assessed IA’s contribution to CG based on CAEs’ or other IA
stakeholders’ perceptions. Pizzini et al. (2015) used CAEs’ perceptions and Mat Zain et al.
(2015) used external auditors’ perceptions to determine IA’s contribution to financial
statement audits, Sarens et al. (2012) used CAEs “perceptions to define IA’s active role in
CG, Alzeban and Gwilliam (2014) used senior managers” perceptions to estimate the
effectiveness of the IA, while Erasmus and Coetzee (2018) combined CAE’s responses with
IA stakeholders’ perceptions, like audit committee and senior management. To capture

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 Table I Professional demographics for survey respondents
Items N (%)

Education
Bachelor’s degree 17 34.7
Master’s degree 29 59.2
Doctorate diploma 3 06.1
Other 0 00.0
Work experience
<3 years 9 18.4
3-7 years 6 12.2
7-10 years 11 22.5
10-15 years 15 30.6
More than 15 years 8 16.3
IIA membership
Yes 28 57.1
No 21 42.9
Professional certification
None 23 46.9
CIA 15 30.6
Other 11 22.5
Annual training hours
No training 0 0.00
<20 20 40.8
21-40 19 38.8
41-60 5 10.2
61-80 2 04.1
More than 80 3 06.1
Number of internal auditors in IAF
1-3 40 81.6
4-6 5 10.3
7-10 1 02.0
11-15 0 00.0
16-20 1 02.0
More than 20 2 04.1

whether IA actively contributes to CG we used CAE’s responses to the following question:

“In your opinion, is the IAF actively contributing to CG today, will it contribute in 3 years or
will it never contribute?” (IIARF, 2007). For those who responded “today,” the variable takes
the value one, while in the other two cases it equals zero, resulting in the binary form of the
dependent variable (Hazami-Ammar, 2019).
The model combines IIA guidance factors (predictor variables) with company
characteristics (control variables). Predictor variables ðCOMP; IIAMEMB & CERT Þ test the
arguments that were outlined in Section 2. Control variables are based on the literature and
involve company-specific factors that can potentially affect IA’s contribution to CG.

3.2 Selection of the control variables

Company size (FIRMSIZE ) has been extensively studied in prior research (Arena and
Azzone, 2009; Sarens and Abdolmohammadi, 2011; Sarens et al., 2012; Johl et al., 2013;
Regoliosi and d’Eri, 2014). Larger company size is associated with larger corporate
investments in IAF (Carcello et al., 2005), as bigger companies require stronger monitoring
mechanisms. In this respect, the size of the company is expected to be positively
associated with IA’s contribution to CG. The next control variable is financial leverage (LEV )

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 Table II Variables definitions
Variable Definition and measurement Data source

IA’s contribution to CG
IACG IA’s contribution to CG. A binary variable that equals one if Survey
respondents choose the response “today” to the statement
“your IA activity contributes to CG”, and zero otherwise
IIA guidance
COMP IAF’s compliance with IIA standards. A binary variable that Survey
equals one if IAF complies with the IIA standards in whole,
and zero otherwise
IIAMEMB CAE’s membership in the IIA. A binary variable that equals Survey
one if CAE is a member of the IIA, and zero otherwise
CERT percentage of internal auditors with one or more professional Survey
certifications. A binary variable that equals one if the
percentage is above the sample median, and zero otherwise
Control variables
FIRMSIZE the logarithm of the total number of employees Annual report
LEV ratio of total liabilities to equity Annual report
CEOdual CEO and chairman of the BoD are the same person. A binary Annual report
variable that equals one if CEO duality exists, and zero
otherwise
ACqual A composite score measuring the quality of the audit
committee and ranging between 0 and 1, with 0 indicating
lowest quality and 1 indicating highest quality. The score is
an average of four factors coded 0/1
ACINDEP ratio of independent audit committee members to the total Annual report
number of audit committee members. A binary variable that
equals one if the ratio is above the sample median, and zero
otherwise
ACmeet number of audit committee meetings on a yearly basis. A Annual report
binary variable that equals one if the value is above the
sample median, and zero otherwise
IApart percentage of audit committee meetings with the Survey
participation of IA on a yearly basis. A binary variable that
equals one if IA participates in 100% of audit committee
meetings, and zero otherwise
ACexpert there is at least one independent member of the audit Annual
committee with accounting and auditing expertise (1 = yes; report/survey
0 = no)

(Sarens and Abdolmohammadi, 2011; Regoliosi and d’Eri, 2014). European economies
operate based on a bank-centric system of corporate financing, and hence, the agency
conflict between creditors and owners is important and effective monitoring mechanisms
are necessary in cases of high financial leverage (Carcello et al., 2005). Therefore, we
expect a positive relationship between a company’s leverage and IA’s contribution to CG.
The two remaining control variables (CEOdual & ACqual) involve CG factors. Chief
executive officer (CEO) duality refers to the situation when the CEO is also the chairman of
the BoD. CG codes and principles suggest the separation of the two roles (HCGC, 2013;
ICGN, 2014; IOD, 2016), as the chairman’s tasks include the supervision of managers like
the CEO. Moreover, Ehikioya (2009) found that CEO duality is negatively associated with
firm performance, suggesting that the position of the CEO should be separate from the
chairperson so that the board remains independent and makes decisions that optimize firm
performance. Likewise, Kao et al. (2019) concluded that when there is no CEO duality the
firm performance is stronger and Assenga et al. (2018) found that there is a significantly
negative relationship between a firm’s financial performance (ROA and ROE) and CEO

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duality. In contrast, Merendino and Melville (2019) concluded that the effect of CEO duality
on performance varies with respect to the unique characteristics of each company. In line
with the core findings in the literature, we expect that in cases where the same person holds
both positions, increased control mechanisms are required, and consequently, greater IA’s
contribution to CG is anticipated. Finally, we included the variable ACqual, which reflects
the quality of the audit committee. The audit committee is a fundamental monitoring
mechanism whose primary responsibility is to monitor IAF (Cohen et al., 2004) and,
consequently, its effect on IAF effectiveness is important (Gramling et al., 2004; Mat Zain
et al., 2006; Prawitt et al., 2009; Lenz and Hahn, 2015). An effective audit committee can
strengthen IAF’s position in the company, providing CAE with the necessary support to
achieve his objectives (Ruud, 2003; Soh and Martinov-Bennie, 2011). Consequently, we
expect that audit committee quality is positively associated with IA’s contribution to CG.
Drawing on previous studies, we construct a composite measure of audit committee quality,
which incorporates four variables: the independence of its members, the frequency of its
meetings, the frequency of meetings with IA and the expertise of its members in accounting
and auditing. Audit committee independence is a primary CG guideline for the resolution of
agency problems (Cohen et al., 2002). Several studies have used audit-committee
independence as a proxy of its effectiveness (Prawitt et al., 2009; Lin et al., 2011; Pizzini
et al., 2015; Al-Jaifi et al., 2019). The ACINDEP variable is measured with the percentage of
independent members over the total number of audit committee members. Another
important factor of audit committee quality is the frequency of its meetings (ACmeet)
(Paape et al., 2003; Regoliosi and d’Eri, 2014), as it signifies its active role. Moreover, there
is evidence that the number of audit committee meetings bears a positive impact on IAF
size (Goodwin-Steward and Kent, 2006), which is associated with IAF’s ability to respond to
its complex task. Apart from the frequency of the meetings, IA’s participation in these
meetings is also important[1] (IApart), as it has been found to boost IA effectiveness (Arena
and Azzone, 2009) and reduce earnings management (Alzoubi, 2019). Finally, another
factor that is often used in assessing the quality of the audit committee is the expertise of its
members (Mat Zain et al., 2006; Lin et al., 2011; Pizzini et al., 2015; Al-Jaifi et al, 2019).
Audit committee expertise in accounting or auditing (ACexpert) can contribute to better
comprehension and support of IA by the audit committee. Mat Zain et al. (2006) concluded
that audit committee expertise contributes positively to IA’s participation in financial
statement audits. The estimation of audit committee quality (ACqual) is based on the
combination of its four determinants (Table II). Our objective in combining audit committee
characteristics is to create a comprehensive measure that captures the quality of the audit
committee better than individual measures (DeFond et al., 2005).

4. Results
Table III presents descriptive statistics on the dependent variable (IACG ), all independent
variables in the model, predictor and control ones and the determinants of AC quality.
The average value of the binary dependent variable (IACG ) is 0.59, which means that
according to CAEs’ opinion, IA actively contributes to CG in 59 per cent of the companies in
the sample. With respect to IIA guidance variables, we found that in 47 per cent of the
companies in the sample IAFs follow the IIA standards in a whole. This percentage changes
when it comes to compliance with IIA standards in whole or in part, where the percentage of
companies complying reaches 87 per cent. This result is in accordance with European
evidence of CBOK 2006, where about 80 per cent of CAEs stated that IAF complies
(in whole or in part) with IIA standards (Allegrini et al., 2009). Furthermore, 57 per cent of
CAEs are members of the IIA, a percentage which is close to European evidence. E.g.
Arena and Azzone (2009) report CAE’s membership in the Italian chapter of the IIA at 64.7
per cent of Italian companies in their sample. Finally, in 43 per cent of the companies in the
sample the percentage of internal auditors with professional certification is above the

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 Table III Descriptive statistics
Variables Mean S.D. Minimum Q1 Median Q3 Maximum

Dependent variable
IACG 0.59 0.497 0.00 0.00 1.00 1.00 1.00
Independent variables
Predictor variables
COMP 0.47 0.504 0.00 0.00 0.00 1.00 1.00
IIAMEMB 0.57 0.500 0.00 0.00 1.00 1.00 1.00
CERT 0.43 0.500 0.00 0.00 0.00 1.00 1.00
Control variables
FIRMSIZE 5.63 1.924 1.10 4.48 5.48 7.16 9.85
LEV 1.07 2.690 9.28 0.10 0.72 1.69 9.90
CEOdual 0.37 0.487 0.00 0.00 0.00 1.00 1.00
ACqual 0.57 0.264 0.00 0.50 0.50 0.75 1.00
AC quality determinants
ACINDEP 0.33 0.474 0 0 0 1 1
ACmeet 0.29 0.456 0 0 0 1 1
IApart 0.73 0.446 0 0 1 1 1
ACexpert 0.92 0.277 0 1 1 1 1
Notes: IACG : IA’s contribution to CG (YES/NO); COMP : IAF’s compliance with IIA standards (YES/
NO); IIAMEMB : CAE’s membership in the IIA (YES/NO); CERT : ratio of internal auditors with
professional certifications to the total number of internal auditors (1 = ratio above sample median, 0 =
otherwise); FIRMSIZE : natural logarithm of the number of employees; LEV : ratio of total liabilities to
equity; CEOdual: CEO and chairman of the BoD are the same person (YES/NO); ACqual: the quality
of the audit committee; ACINDEP : ratio of independent audit committee members to the total number
of audit committee members (1 = ratio above sample median, 0 = otherwise); ACmeet: number of
audit committee meetings on a yearly basis (1 = value above sample median, 0 = otherwise); IApart:
percentage of audit committee meetings with the participation of IA on a yearly basis (1 = 100%
participation, 0 = otherwise); ACexpert: there is at least one independent member of the audit
committee with accounting and auditing expertise (YES/NO)

sample median. Taking a close look at data on internal auditors’ certifications, we see that in
30.6 per cent of the companies there is no internal auditor with professional certification.
However, the percentage of internal auditors with one or more professional certifications
within IA department is 51.6 per cent (mean), higher than the equivalent in Belgium that was
33 per cent (IIA, 2006). Overall, it seems that the professionalization of IA is rather low in
Greece, when the academic community debates vigorously on the importance of IIA
guidance.
Table IV presents the correlation matrix for all variables of the model.

Table IV Correlation coefficients for the variables

IACG COMP IIAMEMB CERT FIRMSIZE LEV CEOdual ACqual

IACG 1.000
COMP 0.282 1.000
IIAMEMB 0.120 0.236 1.000
CERT 0.120 0.260 0.083 1.000
FIRMSIZE 0.086 0.117 0.393  0.141 1.000
LEV 0.124 0.105 0.060 0.055 0.001 1.000
CEOdual 0.315 0.123 0.196 0.061 0.029 0.085 1.000
ACqual 0.107 0.192 0.378 0.180 0.415 0.123 0.031 1.000
Notes:  ;  ;  correlation is significant at the 0.01, 0.05 and 0.10 level respectively (two tailed);
Variables are defined in Table III

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Correlation evidence shows that IA’s contribution to CG has a negative correlation with
CEO duality. Additionally, we find the predictor variable COMP to have a positive
correlation with IA’s contribution to CG, corroborating our theoretical argument. Table IV
also shows that some independent variables are significantly correlated with each other
(IIAMEMB ; FIRMSIZE & ACqualÞ: Finally, despite the significant correlation between some
variables, no correlation coefficient reaches the critical value of 0.50, implying that there
are no multicollinearity problems in the data set.
Table V presents the results of a binary logistic regression about the effects of IIA guidance
on IA’s contribution to CG.
The model has significant explanatory power (79.6 per cent classification accuracy and a
pseudo R2 of 42 per cent). We find that two predictor variables (COMP & CERT ) are
significant at 0.05 level of statistical significance, a result that was anticipated by our
theoretical framework. Specifically, we find that compliance with IIA standards is
significantly (p = 0.015) associated with the probability of IA contributing to CG, a result,
which is in accordance with the findings of Sarens et al. (2012). Furthermore, we found a
positive relationship between IA’s contribution to CG and internal auditors’ certifications
(p = 0.042), corroborating previous findings in the literature (Abdolmohammadi, 2009;
Prawitt et al., 2009; Sarens et al., 2012).
Regarding the control variables, Table V indicates that the chance for IA to contribute to CG
is significantly and negatively associated with CEO duality (p = 0.042), which is consistent
with our expectations and corroborates previous findings in the literature (Goodwin-Steward
and Kent, 2006). Furthermore, the chance for IA to contribute to CG is significantly but also
negatively associated with AC quality (p = 0.023), a result that was not anticipated in our
theoretical framework. This result corroborates the findings of Hutchinson and Mat Zain
(2009) who found that the relationship between IA quality and company performance is
stronger for companies with better growth opportunities, even though this relationship
weakens when the audit committee becomes more independent. The authors argued that
this latter finding casts doubt on the suitability of CG recommendations that determine the
independence of the audit committee and it also demonstrates a conflict between IA quality
and the audit committee. Likewise, Goodwin-Steward and Kent (2006) concluded on a
negative association between audit committee expertise and the use of IA, a result which
they attributed to the possibility of substitution of IA by experienced members of the audit
committee.
Overall, the results of the logistic regression indicate that there is a connection between IA
professionalization and IA effectiveness. Specifically, we suggest that IIA guidance affects

Table V Regression results

Variables Expected sign. B Wald Significant

COMP þ 2.520 5.949 0.015

IIAMEMB þ 0.510 0.309 0.578
CERT þ 1.900 4.136 0.042
FIRMSIZE 0.131 0.360 0.549
LEV 0.205 1.933 0.164
CEOdual 1.631 4.117 0.042
ACqual 4.398 5.149 0.023
Constant 2.112 2.001 0.157
x 2 = 11.196 (p = 0.011)
Classification accuracy = 79.6%
Nagelkerke (pseudo) R2 = 0.42
Notes:  Indicate statistical significance at the p-value  0.05; Variables are defined in Table III

VOL. 20 NO. 1 2020 j CORPORATE GOVERNANCE j PAGE 185

 IA’s contribution to CG, as we come up with significant results for two out of three factors
that determine IIA guidance.

5. Conclusions
In this paper, we explored the effect of internal audit (IA) professionalization on IA
effectiveness. Based on one aspect of institutional theory, normative isomorphism, we
assessed the effect of IIA guidance on IA’s contribution to corporate governance (CG). The
findings on 49 listed companies in the Athens Stock Exchange suggest that IIA guidance
bears a substantial impact on IA’s contribution to CG; compliance with IIA standards and
possession of professional certifications by internal auditors leads to increased contribution.
Moreover, IA’s contribution to CG is affected by some company-specific characteristics,
such as CEO duality and audit committee quality.
The paper’s contribution is threefold, addressing academics, IA practitioners and
regulators. We contribute to the academic discussion on the role of IA in CG (Gramling
et al., 2004; Leung et al., 2004; Sarens et al., 2012; Regoliosi and d’Eri, 2014; Mihret and
Grant, 2017) and complement the work of other researchers in the field of IA
professionalization (Arena and Azzone, 2007; Nagy and Cenker, 2007; Abdolmohammadi,
2009; Abdolmohmmadi and Sarens, 2011; Lenz and Sarens, 2012; Arena and Jeppesen,
2010). This paper is a contribution to the literature as there has been no prior study on the
effect of IIA guidance elements on IA’s contribution to CG. Moreover, we use a theory,
which has attracted increasing academic attention in the context of IA (Arena et al., 2006;
Arena and Azzone, 2007; Mihret et al., 2010; Lenz et al., 2018).
The results of this study have implications for CAEs and internal auditors who wish to
increase the efficiency of their work. Recognizing the elements of IA professionalization
that affect IA effectiveness, helps CAEs and internal auditors identify areas of
improvement to reach their objectives. Moreover, BoD and audit committees can use
our findings to better respond to their responsibilities concerning an internal audit, such
as the appointment of the CAE, the staffing of the IA department, the oversight of the IA
function and the assurance of its competence. Apart from inside stakeholders,
regulators can also benefit from our findings. The results of this paper are useful for IIA
as they recognize the elements of IIA guidance that have and also the elements that do
not have an impact on IA effectiveness. Based on this argument, it is possible to
strengthen areas with substantial impact on IA effectiveness, like IIA standards and
professional certifications and moreover to reshape factors with a weak impact, like IIA
membership.
A limitation of our study is the source of empirical research. CAEs are an appropriate source
of information in this field because they are highly experienced and competent with internal
audit issues. However, they present a limitation because of the subjectivity that may be
inevitable in perceptual data. Another limitation has to do with the fact that our data comes
from responses from CAEs of Greek companies, which operate in an environment with
specific social and economic characteristics. For this reason, generalization needs caution.
Future research could set out to resolve the limitations of this study and pursue interesting
results on the impact of IA professionalization on IA effectiveness. Namely, our approach
can be implemented in other national contexts to assess the robustness of our results in
diverse socio-economic environments. Furthermore, future studies could incorporate the
viewpoints of other CG stakeholders, such as audit committee, external audit and
management. Finally, the expansion of this study through other aspects of institutional
theory will shed light on other IAF characteristics that originate in coercive and mimetic
forces and is likely to have an impact on IA effectiveness.

PAGE 186 j CORPORATE GOVERNANCE j VOL. 20 NO. 1 2020

Note
1. Myers and Ziegenfuss (2006) investigated the efforts of 296 audit committees to improve their
effectiveness and reported that almost all (99.6 per cent) meet with the CAE.

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Corresponding author
Andreas Andrikopoulos can be contacted at: apa@aegean.gr

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