How do internal auditors adjust
audits to fit national culture?
Mr. Drs. G. Hendrix Amsterdam, 21-10-2014
Supervisor: Drs. S.C.J. Huibers EMIA RO CRMA Universiteit van Amsterdam Business School Executive Internal Audit Programme
2 FOREWORD ... 3 EXECUTIVE SUMMARY ... 4 CHAPTER 1 - INTRODUCTION ... 7 1.1 - Research background ... 7 1.2 - Research questions ... 8 1.3 - Methodology ... 9 1.4 - Outline of Research ... 9
CHAPTER 2 – STUDY OF LITERATURE ... 11
2.1 – Internal Audits ... 11
2.2 – National Culture ... 13
2.3 – Internal Audit & National Culture ... 16
2.4 – Conclusion ... 17 CHAPTER 3 - METHODOLOGY ... 19 3.1 - Approach ... 19 3.2 - Interviewees... 20 3.3 - Interview protocol ... 21 3.4 - Data Analysis ... 23
3.5 - Reliability & Validity ... 26
3.6 - Conclusion ... 27
CHAPTER 4 – ANALYSIS ... 28
4.1 - Audit Methodology ... 28
4.2 – Engagement Planning ... 30
4.3 - Performing the Engagement ... 32
4.4 - Communicating Results ... 36
4.5 - Conclusions ... 39
CHAPTER 5 – CONCLUSIONS AND RECOMMENDATIONS ... 41
5.1 – Conclusions ... 41
5.2 – Recommendations ... 41
APPENDIX 1 – LITERATURE USED ... 47
APPENDIX 2 – INTERVIEW PROTOCOL ... 50
APPENDIX 3 – COUNTRY CODES PER INTERVIEW ... 53
APPENDIX 4 - AUDIT PHASE CODES PER INTERVIEW ... 55
3
Foreword
‘This is the third time; I hope good luck lies in odd numbers. Away I go.’
Shakespeare, The Merry Wives of Windsor1
This document is my thesis for the Executive Internal Audit Programme at the Amsterdam Business School of the University of Amsterdam. It is the third time I have written a thesis, and it has proven again to be a challenging process.
However, I am proud of the result that lies in front of you.
There are a couple of persons I would like to thank. Without their support and cooperation I would not have been able to finish this journey. First of all I would like to thank my supervisor, Sam Huibers, for his support throughout the entire project, for his feedback and for his help in reaching out to auditors. Secondly I would like to thank the interviewees; without their collaboration there would have been no research. Finally I want to thank my employer, for allowing me to
participate in the EIAP programme.
The topic of my thesis is in the field of cross-cultural auditing. During the last years I have worked together with many international auditors, and have been involved in audits in different foreign countries. These experiences have triggered me to choose this topic as the subject of this thesis. I hope that the reader shares my enthusiasm for this topic and finds inspiration for use in further research and in practice.
4
Executive Summary
Internal auditing is a global activity performed in many companies across many national cultures. The IIA Standards provide a standard set of guidelines applicable to auditors across the globe. National cultures however differ a lot, demonstrated by a wide body of scientific research. In this study the two topics are brought together in the answering of the following research question:
How do differences in national culture affect the way internal audit functions of multinational organizations execute internal audits?
The theme of national culture has been studied widely. The most famous and
broadly used research was conducted by Hofstede. His work is also used within this study. Specific internal auditing research related to culture is however nearly non-existing.
Because of the nascent state of research an inductive approach has been taken in this study. Interviews were held using an interview protocol that was created in line with the IIA Standards. A total of nine interviews were conducted with internal auditors across four diverse companies. The interviews have been transcribed and analyzed using a technique called coding.
The four internal audit functions of the multinational organizations studied all use an audit methodology in line with the IIA Standards, there is a high level of
similarity found across the design of the audit methodologies of the companies. The strong amount of harmonization also has to do with the fact that internal audit departments consolidate audits performed worldwide and report them in coherent fashion to the board or audit committee.
Internal auditors do not adjust the formal internal audit process to fit national culture. However, differences were observed in the informal internal audit process, in how the audits are performed while remaining compliant with the framework of the IIA Standards. This study shows that differences in internal audits occur between countries. For some of these differences a clear link between the noted behavior and a Hofstede dimension was found, providing a verification that national culture is involved. For some of the differences no link between the discussed
behavior and a Hofstede dimension was found, suggesting the behavior is not directly linked to one of the dimensions of national culture and possibly linked to multiple factors occurring intertwined. It also might be possible that other factors are involved (for example the personality of persons involved ). The following table (0.1) provides a summarized overview of the findings:
5 Subject Differences between countries? Differences Audit Function Planning No N/A
Work Program No N/A
PBC Yes Responses to information requests
differ per country.
Teams No N/A
Contact Person No N/A
Opening Meeting Yes The amount of persons involved in,
and the length of, the opening meeting differ per country.
Requesting
Information Yes Some countries are more flexible in their response to information requests.
Communication Yes Both verbal as non-verbal
communication differs greatly per country.
Findings No N/A
Response Auditee /
Closing Meeting Yes Some auditees provide a large amount of pushback; others provide almost no pushback
Report Yes Wording is adjusted to wording used
by auditee.
Follow up No N/A
Table 0.1
Based on the results of the study several recommendations are made. The work performed provides many opportunities for further research. The scope can be extended to other areas of the world, to include more data or to include other research methodologies.
Next to theoretical recommendations, practical recommendations are made. Audit Executives are recommended to involve culture in the management of the audit function, in the hiring and training of auditors. Certain cultures require different qualities of a person. It is advised to match the personality and skill set (i.e. language skills) of an auditor to the country in which audits are performed. Several recommendations are made within the actual execution of audits. It is advised that internal auditors adjust aspects of their audits to the national culture. A key element is communication, which greatly differs amongst countries. The research also shows that persons react differently in opening and closing meetings. By adjusting informal elements of the audit process, an internal auditor can
6 increase the efficiency and effectiveness of the audit. Table 0.2 provides a
summarized overview of the recommendations. # Audit Phase Recommendation
AM1 Audit Function
Planning To hire and develop auditors keeping cultural differences in mind (i.e. language skills, personality).
EP1 PBC To put more effort in PBC requests in countries with a low score on the Power Distance dimension (monitor responses and chase auditee if needed).
EP2 Teams To select a team that is able to work in line with the auditee’s culture and speaks the language (i.e. use French speaking persons in French speaking
countries).
PtE2 Opening
Meeting To keep Hofstede’s IDV dimension in mind when planning an opening meeting; invite more people in collectivist countries.
PtE3 Requesting
Information To schedule interviews and on-site visits in line with the country country’s culture; countries that are less flexible require the internal auditor to put in effort more in advance of the on-site visit.
PtE4 Communication To adapt communication to fit culture of the auditee; communicate more masculine in countries with a more masculine culture and more feminine in more feminine countries. In a masculine culture
communication can be more direct, whereas in a feminine culture more subtlety is needed (provide more context, address feelings and emotions noted).
CR1 Findings N/A CR2 / CR3 Response Auditee / Closing Meeting
To take the attitude of auditee in account. Encourage less vocal auditees to respond, reserve extra time for the comments of vocal auditees. Organize pre-closing meetings in countries with more pushback.
CR4 Report To report using a tone that fits the culture of the auditee. For example: be careful with pinpointing failed controls to specific persons in a collectivist country. Use words and phrasing used by the auditee. Table 0.2
7
Chapter 1 - Introduction
1.1 - Research background
Internal auditing is a global discipline, practiced in all countries and cultures.
Globally the profession is organized in the form of the Institute of Internal Auditors (IIA). The mission of the IIA is “to provide dynamic leadership for the global
profession of internal auditing”. In order to reach this mission the IIA performs several activities. Perhaps the most important activity is the development of
standards and other professional practice guidance.2 Central in this approach is the
development of the ‘International Standards for the Professional Practice of Internal Auditing’, the ‘Standards’3.
The concept of national culture is an interesting topic, both in theory as in practice. Everyday businesses face and deal with differences in national culture. A
tremendous body of research on the topic of national cultures exists. One of the most well-known pieces of research in this field, though not specifically business-related, was performed by Hofstede. His book has become a bestseller, with over 10000 citations in academic literature (Hofstede 2001). Hofstede analyzed a dataset of IBM employees across many countries and grouped his results per country and initially distinguished four dimensions of national culture.
Recently the topics of Internal Auditing and national culture were brought together. Abdolmohammadi and Sarens (2011) performed a research on the topic of cultural differences in the perceived use of, and the compliance with, IIA Standards. Based on a rich dataset, the study provided evidence of significant differences between national cultures in perceived use of and compliance with the IIA Standards. Perceived use of the Standards is low in Eastern Europe, but high in Germanic Europe. The perceived compliance with Standards is quite low in a lot of countries, but especially in Eastern Europe. A high score on the perceived compliance was found in the Anglo-Saxon cluster of countries. Both from an academic perspective as from a practical point of view these findings opened the way for many interesting research paths.
However, since the publication of the 2011 article (Abdolmohammadi & Sarens, 2011) no further research has been conducted on the topic of internal audit and culture, leaving many interesting opportunities for research on the table. This research aims to build on this work by looking if companies adjust the execution of
2 https://global.theiia.org/about/about-the-iia/Pages/About-The-Institute-of-Internal-Auditors.aspx 3 https://global.theiia.org/standards-guidance/Pages/Standards-and-Guidance-IPPF.aspx
8 internal audits to align with local culture, thereby adding insights to both theory as practice.
1.2 - Research questions
The aim of this study is to provide insight in how companies perform internal audits in different national cultures and in case these exist to explain possible differences. The main research question answered in this study is:
How do differences in national culture affect the way internal audit functions of multinational organizations execute internal audits?
In order to answer the main research question the following sub-research questions are answered:
1. How are internal audits performed?
a. Do the IIA Standards take differences in national culture into account? 2. What is national culture and how do national cultures differ?
3. How do internal audit functions of multinational organizations execute internal audits?
4. Do internal audit functions of multinational organizations adapt the execution of internal audits to fit national culture? If so:
a. How is the execution of internal audits adapted? b. Why is the execution of internal audits adapted?
5. If internal audit functions of multinational organizations do not adapt the execution of internal audits to fit national culture, why not?
The first and second research question are studied in the second chapter of this research as part of a review of literature. The answers to these questions aim to provide the reader insight in the IIA Standards and into the body of research on the topic of national culture. The two concepts are brought together at the end of
Chapter 2 and translated into several research questions that govern the non-theoretical part of this research. Using the research methodology explained in paragraph 1.3 the 3rd, 4th and 5th research question are answered.
Key element in this research is the concept of internal auditing. There are many elements to an internal audit and without a clear definition of the concept of internal audit this research lacks direction and focus. To prevent this from
happening the IIA Performance Standards are used to split the concept of internal audit into elements:
Managing the Internal Audit Activity
Engagement Planning
9
Communicating Results
The four elements are used in answering the research question and sub-questions.
1.3 - Methodology
1.3.1 - Research design
The research strategy selected for this research is the Case Study. There are several advantages to this methodology, for example the case study allows for the collection of detailed information. In comparison to other research designs, for example the survey, the case study collects richer information that is of more depth. Besides these advantages the case study has several restraints in
comparison to other research designs as the information gathered is based on a small sample size thereby lowering the external validity. Therefore the
generalization to a wider population is difficult. The goal of this research is not to result in universally applicable results but to provide insight into how internal auditors deal with national culture within internal audit. Therefore the
disadvantages are deemed acceptable.
In order to achieve this goal multiple (four) organizations are studied. The
organizations selected all have a global audit function and perform internal audits in many countries. By selecting multiple organizations operating in many countries the effects of corporate cultures are mitigated.
1.3.2 - Research instrument
This study uses the research instrument of the interview, these were conducted with Internal Auditors. The goal of the interviews is to provide in depth knowledge of how internal auditors perform internal audits and possibly adjust the execution thereof to national culture. The interview fits the exploratory research question as it is an open and flexible research instrument.
1.4 - Outline of Research
This research consists of multiple chapters. Figure 1.1 contains a graphical rendition of the phases of this study. Chapter 2 of this study consists of an overview and analysis of relevant literature on the fields of culture and internal auditing. Based on the literature review several research questions are formulated.
The research methodology and gathering of data are the key elements of the third chapter. The instrument used in conducting the research is further explained. Additionally limitations and advantages are discussed.
10 Chapter 4 contains the analysis of the data gathered in the case study. The fifth chapter extends on the contributions of this research from a theoretical point of view. Next to that, it also provides recommendations for internal audit functions of multinational companies based on the research.
Figure 1.1
Chapter 2
•Literature •IIA Standards • Culture •Research questionsChapter 3
•Research Methodology •Data Gathering •Reliability and ValidityChapter 4
•Analysis of data •Conclusions
Chapter 5
•Conclusions
•Opportunities for further research •Recommendations
11
Chapter 2 – Study of Literature
This chapter contains an extensive study of literature on the topics of Internal Auditing and National Culture. In the first chapter two research question were introduced as guidance for the literature study. The questions are repeated below:
1. How are internal audits performed?
a. Do the IIA Standards take differences in national culture into account? 2. What is national culture and how do national cultures differ?
This chapter provides answers to the question formulated above. The first question in answered in paragraph 2.1 and subsequent sub-paragraphs. The second
questions is answered in paragraph 2.2 and sub-paragraphs. In paragraph 2.3 the two topics are combined.
2.1 – Internal Audits
The first research question searches for insights in the topic of internal audits, and on how these audits are performed. To answer this question first a short
introduction to the field of internal auditing is provided. Afterwards the professional norms are studied.
The Institute of Internal Auditors (IIA) is the professional association of Internal Auditors worldwide. Internal Auditing is defined as:
‘Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.’4
The IIA globally has over 180.000 members5. The mission of the IIA consists of
several elements. One of them is to provide standards and other professional practice guidance to practitioners worldwide. The guidance provided by the IIA can be split into mandatory guidance and strongly recommended guidance. The
mandatory guidance is compulsory for all IIA members.
The mandatory guidance consists of three elements: the definition of internal auditing, the code of ethics and the International Standards for the Professional
4 https://global.theiia.org/standards-guidance/mandatory-guidance/Pages/Definition-of-Internal-Auditing.aspx
12 Practice of Internal Auditing (Standards)6. The Standards are continuously
evaluated and adjusted based on input from stakeholders worldwide. The Standards apply to both individual auditors as Internal Audit organizations.
Standard 1312 states that an External Assessment of the Internal Audit function must take place every five years. A strong focus in this assessment is compliance with the Standards. Hereby stressing the importance of the Standards
(Abdolmohammadi & Sarens, 2011).
The Standards open with a short introduction explaining Internal Auditing is conducted within diverse ‘cultural environments’. Thereupon the text continues stating that ‘while differences may affect the practice of internal auditing in each environment, conformance with The IIA’s International Standards for the
Professional Practice of Internal Auditing (Standards) is essential in meeting the responsibilities of internal auditors and the internal audit activity’. The only exception is in place for laws and regulations prohibiting the conformance with certain parts of the Standards. However in that case conformance with all other Standards is needed.
The Standards are principle-based and consist of basic requirements for the professional practice of internal auditing and for evaluating the effectiveness of performance. As the Standards are principle-based, there is room for differences in the execution of the Standards between cultures.
There are two types of Standards, Attribute and Performance Standards. The Attribute Standards contain the attributes of organizations and individuals. It
provides principles regarding the positioning of both the Internal Audit Function and the individual Internal Auditor within the organization. It also regards certain
personal attributes an Internal Auditor should encompass to function properly. The Performance Standards describe the nature of Internal Auditing. They provide guidance on how the Internal Audit function should be managed and on how Internal Audits should be conducted.
Table 2.1 provides an overview of the main Standards, including both the attribute as the performance standards.
13 Table 2.1
The mandatory guidance is universally applicable for all auditors within all cultures worldwide. All Standards are mandatory, no exceptions are granted based on culture. A selection of national member organization of the IIA have been researched7, no local adjustments to the Standards were found.
2.2 – National Culture
In everyday language the term culture is used frequently with many different meanings. It is hard to find a clear and comprehensive definition of the concept of culture in the social sciences. The concept is studied by many fields of research (Koltko-Rivera, 2004) including sociology (G. J. Hofstede, Hofstede, & Minkov, 2010), psychology (Bond, 2014; Jahoda, 1984) and anthropology (Kuper, 1999). Already in the 1950’s many different definitions were present. Kroeber and
Kluckhohn (1952) listed over 150 definitions, and in the sixty years since the research has exponentially grown. In his recent study of definitions of culture Jahoda (2012) concludes that ‘the most striking feature of these definitions is their diversity’.
Within this research Hofstede & Minkov's (2010) definition of culture is used: ‘The collective programming of the mind that distinguishes the members of one group or category of people from others.’
In a recent book Hofstede introduces culture as part of mental programming, as the software of the mind. Figure 2.1 shows that mental programming consists of three levels; personality, culture and human nature. Human nature is universal,
applicable for all human beings and present in our genes. It consists of our basic functions as fear, anger and love. How we act upon these signals is determined by culture. As figure 2.1 shows, culture is specific to a group or category. In contrary to human nature, culture is learned. Personality is an unique feature of each
7 Germany, France, UK, USA, China and The Netherlands Type Standard Content
Attribute Standards
1000 Purpose, Authority and Responsibility 1100 Independence and Objectivity
1200 Proficiency and Due Professional Care 1300 Quality Assurance and Improvement
Program
Performance Standards
2000 Managing the Internal Audit Activity 2100 Nature of Work
2200 Engagement Planning
2300 Performing the Engagement 2400 Communicating Results
14 individual and is both inherited as influenced by culture (G. J. Hofstede et al.,
2010).
Figure 2.1
Culture manifests itself in multiple forms. Easily distinguishable forms are symbols, heroes and practices. Symbols are images, words or objects that express
something culture related. Heroes are both real as imaginary characters that express characteristics valued by a specific culture. Practices are habits that are important to a culture. It includes the way people greet each other, but also include discourse: the way language is used. (G. J. Hofstede et al., 2010)
National Culture
Culture is measured at different levels. This study focuses on culture at a national level. Criticism has been raised to the use of the nation as a unit of analysis: there are a some aspects of culture that exist across cultures (Au, 1999), and differences between sub-cultures (i.e. differences within a country) are not taken into account (Huo & Randall, 1991). However, there are multiple reasons the national level is selected within this study as the level of analysis. The topic of national culture has been researched a lot, providing a solid theoretical ground that has been replicated and confirmed many times (G Hofstede, 1990; G. Hofstede, 2002; Merkin, 2006;
15 Minkov & Hofstede, 2011). Often the nation is the only kind of unit available for research (G. Hofstede, 2002), allowing a comparison to take place. The national level is also often a differentiator within organizations as most organizations distinguish between business units or other organizational divisions on a country base. The use of the nation as a level of analysis allows for a better fit between theory and practice, providing better research opportunities and more relevant practical outcomes of the study as the outcomes align with organizational views (Venaik & Brewer, 2013).
The field of national culture research saw a great development with the work of Hofstede. His work has become a dominant paradigm in cross-cultural research ever since (Minkov & Hofstede, 2011; Taras, Kirkman, & Steel, 2010; Taras, Rowney, & Steel, 2009). In a 2009 study of 121 research instruments used to measure culture over 97% of dimensions used in the instruments contain some dimensions that are similar to Hofstede’s dimensions (Taras et al., 2009), providing evidence for the dominance of Hofstede’s findings.
The basic concepts of Hofstede’s work on the topic of national culture are described in the following paragraphs and are used in this research. Important to note is the fact that Hofstede’s national culture dimensions are calculated based on answers by individuals and form a score for the entire country. This cumulated score can
consist of individuals that score completely the opposite of the nation’s average. It might also be the case that for one dimension 50% of the respondents scores on the extreme end of the scale, and the other 50% scores on the other extreme end of the scale. The results will show a moderate score for the country, in the middle of the scale. The applicability of the cultural dimensions for individuals is therefore limited. This study however does not apply national dimension on individuals. The research aims to find out if, and if so how, multinational companies adjust their audit approach to fit a specific country.
2.2.1 – Hofstede’s research
In the 1970’s Geert Hofstede performed research on the topic of national culture, based on a large body of survey data collected within a large multinational
organization (IBM). The information was collected by survey from over 100.000 IBM employees, working in subsidiaries all over the globe. The respondents of the
survey had a lot in common: all having achieved a medium to high level of
education, all working worked within the same field of business and within the same organization. The respondents thus provided a rather homogenous group. One major difference between respondents was present: nationality. The questionnaire consisted of questions on the values of persons. Hofstede was given access to the data and performed a detailed statistical analysis. He found correlations between groups of questions, and formed the groups into four dimensions. Countries clearly scored differently on the dimensions. In later research two other dimensions were
16 introduced, resulting in a total of six dimensions. In figure 2.2 the six dimensions are presented. Appendix 5 provides a more extensive view of the dimensions. (G. J. Hofstede et al., 2010)
Figure 2.2
2.3 – Internal Audit & National Culture
In the previous two paragraphs both Internal Audit and National Culture have been introduced. The first paragraph introduced the Internal Audit Standards. The
Standards do not take National Culture into account, and are a set of universal principles for all auditors worldwide.
The second paragraph has introduced the concept of National Culture, more
specifically the differences in National Cultures. This was done mostly by the work of Hofstede. Several cultural dimensions were introduced and explained. National culture is important to many aspects of (business) life, it for example influences organizational culture (Javidan & House, 2002). National culture also influences
17 strategic decision-making processes (Dimitratos, Petrou, Plakoyiannaki, & Johnson, 2010). The question left unanswered so far is how national culture influences
internal auditing. Prior research has been conducted on the topic of the Standards and National Culture (Abdolmohammadi & Sarens, 2011). More specifically the goal of this research was to ‘investigate the relationship between cultural dimensions in various countries and the use/compliance with Standards’. The authors have used data gathered by the IIA in the Common Body of Knowledge Study (CBOK)8. The
nine cultural dimensions of the GLOBE Project were used to describe National Culture. The results of the study show that perceived use of, and compliance with, the Standards significantly differ between clusters of countries investigated. The highest compliance was found in the Anglo-American cluster. Low compliance was found in the Eastern-European cluster. The results are very interesting and relevant for the field of internal auditing. In the closing sections of the article the authors mention limitations of their study and opportunities for other research:
‘While there is recognition that awareness of cultural dimensions can play a role in the practice of internal auditing worldwide, further research is needed to investigate the nature of the effect of various cultural dimensions on the practice of internal auditing.’
The research cited above found a link between cultures and the field of internal auditing. The quote refers to a lack of scientific knowledge on how cultural
dimensions effect internal auditing. Therefore this research aims to build upon the prior research and provide insights in the relation between cultural dimensions and the practice of internal auditing. It attempts to do so by studying international audit functions of global companies, these functions have a global perspective and
perform audits in many national cultures. The aim of the study is to provide
detailed insights in how internal auditors adjust their way of working to fit national culture. The intention of the research is explicitly not to quantify these results to the entire population of internal auditors. Chapter 3 explains why the methodology used suits this purpose.
2.4 – Conclusion
Two research questions were answered in this chapter: 1. How are internal audits performed?
2. What is national culture and how do national cultures differ?
The first question has been answered in paragraph 2.1 by taking the IIA Standards into account. The standards are created by the IIA and contain mandatory guidance
18 for internal auditors worldwide, providing an overview of the internal audit process and all the relevant norms to take into account.
The second question has been answered in paragraph 2.2 and subsequent sub-sections by presenting the work of Hofstede regarding national culture. Six dimensions have been introduced as topics in which national cultures differ; the power distance dimension, individualism vs collectivism, uncertainty avoidance, masculinity vs femininity, long-term vs short-term and the indulgence vs restraint dimension.
19
Chapter 3 - Methodology
The following paragraphs elaborate on the methodology used in this research. This study takes an inductive approach using interviews, which are transcribed and coded. This chapter extends on the approach, how the interviewees were selected, how the data was processed and analyzed. The reliability and validity of the
research method used in this study are discussed.
3.1 - Approach
Research approaches can be classified as either deductive or inductive. A deductive approach uses literature to identify theories that are tested using data. An inductive approach uses data to develop theories that are subsequently related to literature (Saunders, Lewis, & Thornhill, 2009). This study follows an inductive approach which is appropriate for several reasons. It allows for an understanding of meanings that people attach to events (Saunders et al., 2009). When theory is in a relatively nascent state, an inductive approach allows for the search of patterns to match the data found (Edmondson & McManus, 2007). The topic of this study, cross cultural internal auditing, is an undeveloped area of research. As explained in Chapter 2, there is limited research available on this subject.
There are several instruments to do inductive research (Saunders et al., 2009), such as interviews, questionnaires and observations (Vennix, 2007). The
instrument used in this research is the interview. Interviews provide rich information and allow to dive deeper into a topic, rather than simply verifying topics. The goal of this study is to provide insight in how differences in national cultures affect internal auditors. The instrument of the interview allows for a deep dive into the topic.
Multiple kinds of interviews exist. Saunders et al. (2009) distinguish three different types of interviews; the face-to-face interview, the telephone interview and the internet and intranet-mediated (electronic) interview. There are advantages and disadvantages associated with each of the three types of interview.
In this study both the method of the face-to-face interview as the interview by telephone were used. There are disadvantages to telephone interviews when compared with face-to-face interviews, or even with electronic interviews
(supported by video images). Non-vocal signs cannot be taken into account. This is a disadvantage as facial expressions and gestures can add or remove a lot of
meaning to a message, and these are not present in a telephone (Saunders et al., 2009). Therefore face-to-face interviews were preferred over telephone interviews. However, this research has a cross-cultural nature, in which interviewees from
20 geographically distant countries were selected and questioned. This was the case for interviewees located in Singapore and Vienna. The amount of temporal and financial resources available prohibited the sole use of face-to-face interviews. Thus the method of telephone interview was a pragmatic option. Conditions for these interviews were good, in each interview both interviewer as interviewee(s) were in isolated rooms with enough time available. Also the telephone connection was of high quality and all of the interviewees are used to work with telephones on a frequent basis. Despite the aforecited disadvantages, some prior research has shown that telephone interviews produce data of similar quality as face-to-face interviews (Carr & Worth, 2001).
This study looks at national culture through the lens of Hofstede, as described in chapter 2. Applications of this theory have often been quantitative, where this study is qualitative. According to Hofstede (2001) qualitative applications of his model can ‘serve to explain and to help us understand observed similarities and differences between matched phenomena in different countries’, like the goals of this research. He lists a minimum amount of 2 countries that need to be selected for qualitative research. For this research multiple countries were selected, please see the section below for more information.
3.2 - Interviewees
In total 9 persons have been interviewed, 6 males and 3 females. Several criteria were used to select interviewees:
Interviewee needs to be (or recently have been) involved in internal audits in multiple countries;
Interviewee needs to work (or recently have worked) for an internal audit department of a multinational company;
The interviewees need to work for different companies;
Selected companies need to be in different industries;
The interviewees need to have experience in countries across the globe, not limited to one area.
The following interviewees were selected. The interviewees all meet the standards set above:
Company Industry # interviewees
Financial Institution (FI) 2
Food & Beverages 4
Oil & Gas 1
Retail 2
21 The companies were selected for a reason, to avoid the influence of corporate
culture. As described in chapter 2, corporate culture might interfere with national culture to change the behavior of persons. By selecting multiple companies the influence of corporate culture can be flagged. If certain behavior in a country is very specific to one company the behavior should not be found in the other companies as well. Similarly, if certain behavior is found in one country across multiple companies the studied phenomenon is not based on corporate culture. For one company four interviewees were selected. Within this company all interviewees work in regional teams, therefor this selection allows for the inclusion of many countries in the research. From the Oil & Gas company only one interviewee was selected, albeit as the interviewee works in a team covering the entire world. The companies selected were operating in different industries. They include a
financial institution, a retail company, an oil & gas company and a food & beverages company. By selecting multiple sectors, any biases on a sector are avoided. In comparison to other sectors the financial services sector is strictly regulated. In contrary to other industries the regulations for the financial sector often include the obligation to have an internal audit department. Regulators play an important role for internal audit departments within financial institutions; this differs from other sectors.
3.3 - Interview protocol
To make sure the information received from interviews is consistent and relevant an interview protocol was developed prior to conducting the interviews (please see Appendix 2 for the protocol). The interviews were semi-structured; the interview protocol was not a list of pre-defined question that needed to be answered
chronologically, but rather a list of topics that needed to be discussed during the interviews. In the interviews themselves the order of topics sometimes differed from the protocol, however the topics were discussed during all the interviews, allowing for a more natural flow of the conversation while still ensuring that all relevant topics were discussed.
The main objective of this study was to find out if internal auditors adjust audits to national culture. In order to measure any differences the interview protocol needed to make sure that the entire process of internal auditing was topic of discussion. There are several ways to classify the internal auditing process, some authors use 3 steps, others use 6 steps (Driessen & Molenkamp, 2008). The interviews were conducted with interviewees from different backgrounds and different nationalities. Therefore the interview protocol was created based on the IIA Standards, by using several elements of the audit process that are present in the Standards. The IIA Standards were also discussed in chapter 2, please see section 2.1 for more detail. The IIA Performance Standards were used. Four phases of auditing were selected.
22 First of all the general planning and methodology of the audit function were
discussed. Questions in this section were in line with Standard 2000 and several sub-Standards. Questions were asked regarding the audit methodology in the firm and on the way the methodology is created. Also the planning of audits and how this is communicated was part of the protocol.
Next to the general planning, the planning of a specific audit was discussed, based on Standard 2200. The way of planning, the selection of a team and communication was discussed with all interviewees. The planning phase leads to the fieldwork phase, multiple questions were asked on this phase. From the research interviews used to the communication of findings, all based on Standard 2300 (sometimes also on Standard 2400). The final step in the interview protocol was the communication of results (Standard 2400). This includes questions on the closing meeting, the report and the reaction of the auditee.
Based on the first interview several alterations have been made. Some questions that were not clear to the interviewee were made clearer. A few questions were removed from the protocol, some questions were added. During the first interview the questions were explained to the interviewee and answers of good quality were received. Therefore the first interview is not excluded from the data.
At the end of each phase the interviewee was asked if there are any differences in audits between countries that were not yet discussed during the interview. The question was asked to make sure every relevant element was discussed. Literature on qualitative research clearly indicates that research questions should not be asked directly to interviewees. This could cause a bias in their answers, and also can lead to ‘lazy’ research as the research will only consist of reporting back what respondents say (Silverman, 2013). The closing question of each phase was asked after discussing all elements of the phase, thereby avoiding causing any bias in respondents’ answers. When, during the interviews, an interviewee noted that something was country specific, additional questions were asked to determine the cause of this. The responses to these questions were taken into account in the analysis of data to make sure that only culture specific elements were taken into account, and not differences caused by, for example, the organization or other non-cultural factors.
The questions in the interview protocol are mainly open question. This fits the exploratory nature of this research. The goal of the interviews is to find out if, and if so how, auditors adapt audits to national culture. Asking closed question really steers the interview towards a certain direction, this contradicts the exploratory nature of the research.
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3.4 - Data Analysis
All of the interviews were recorded, the recordings were transcribed. The transcriptions of the interviews are added to this study as a separate file. After transcribing all of the interviews the documents were analyzed using a technique called coding. Coding is ‘a process of labeling and categorizing data as a first step in the analysis’ (Flick, 2014). It is a technique to order data and allow for comparison and analysis. It is the disaggregation of data into several units (Saunders et al., 2009). Pieces of text that were on a similar subject were given a ‘code’. As a starting point different IIA Standards used to create the interview protocol were used (i.e. Audit Methodology or Performing the Engagement). This provided several codes, each attached to multiple excerpts. Using these codes allowed to easily compare relevant pieces of information relating certain phases in the audit process from all interviewees (Hendrix, 2011).
To illustrate the coding process an excerpt has been added below, the interviewee is talking about communication:
It really depends on the country that you are in. Some prefer a more soft and friendly environment in terms of communication. I am thinking about Hungary for example. It is a very soft and friendly environment, whereas for example Poland or Russia are much more direct communication. They don’t like talk around, they want to come to the point. Then if I take Greece into account, that is totally different. It is really based on relationship. You might end up in a meeting talking an hour about how bad the situation in Greece is before you really start doing your interviews and the audit. This is very much relationship related. Every country has specifics.
The piece cited above was labeled ‘Communication’, ‘Greece’, ‘Poland’, ‘Russia’ and ‘Hungary’. When analyzing the topic of communication was selected and all
excerpts that were labeled with the code ‘Communication’ were shown. When looking at the communication of for example Russia the code ‘Russia’ was selected alongside the ‘Communication’ code. Via the combination of codes the analysis was performed.
The codes were selected and adapted during the process of coding all of the transcriptions. Initially for the first couple of interviews a lot of new codes were needed. In order to keep the amount of codes on a workable level the interviews were coded again, now with codes that were specific enough to exactly label the excerpt of text to which they were attached, but also general enough so that the code could be applied in (most of) the other interviews as well. In the end the codes displayed below were selected:
24 - Audit Function Planning
- Work Program Engagement Planning - Announcement - Communication - PBC - Team
Performing the engagement - Communication - Contact Person - Findings - Hierarchy - Opening Meeting - Planning Fieldwork - Requesting Information - Research Instruments Communicating Results - Audit Report - Closing Meeting - Follow Up - Response Auditee Geography - Africa Nigeria North Africa Rwanda - South America - Europe Austria Belgium Bulgaria Czech France Greece Hungary Italy Netherlands Norway Poland Russia Scandinavia - North America
25 - Asia China Hong Kong Indonesia New Zealand Saudi Arabia Singapore Vietnam
The overview of codes contains a hierarchy. There are several main themes, such as the ‘Audit Methodology’ and the ‘Engagement Planning’. Within these broad topics more specific sub themes have been added based on the coding process (i.e. ‘Communicating Results’ consists of amongst others ‘Audit Report’ and ‘Response Auditee’). Next to specific topics also countries have been labeled. This allowed for an easier analysis per country or area.
To help perform the analysis, computer assisted qualitative data analysis software called dedoose9 was used. This cloud computing software is similar to other
software like NVivo and ATLAS.ti, with the exception of its price, and the fact that it is web-based which makes it easy to use at multiple locations. The software
contains all of the transcribed interviews and was used to create excerpts and to attach codes to them. (Hendrix, 2011).
After the coding process was done, an analysis was performed per code. The
outcome of this analysis is presented in Chapter 4. The interview transcripts contain a lot of information and codes. To provide insight in the codes per interview
Appendix 3 and Appendix 4 have been added. Appendix 3 shows the country codes used per interview, and the amount of times an excerpt has been tagged with the specific code. This shows the spread of the countries per interview and provides insight on a per country base on how many interviewees discussed a country. Appendix 4 shows how many times the codes of different phases of the audit process have been used in the interviews. The overview shows that nearly all phases were discussed in each interview.
Appendix 3 and 4 provide the reader a summary of which codes were used, the frequency with which the codes were used and the spread of the countries. The reader can link the analysis in Chapter 4 and the raw coded data more easily; less effort is needed and more transparency is provided.
The interviews were all transcribed in the language in which the interviews have been held. Most of the interviews were held in Dutch, as both the interviewee as the interviewer are Dutch. The language of the transcription was not changed to
26 avoid any losses in translation. In Chapter 4 citations of the transcripts are used which have been carefully translated, in order to keep using the English language throughout the entire document.
3.5 - Reliability & Validity
The reliability refers to the extent to which data collection techniques or analysis procedures will yield consistent findings. Validity is concerned with what the
findings represent. It regards whether the object measured is what is supposed to be measured. (Saunders et al., 2009).
To make sure the interviews were both reliable and valid a structured approach has been used in both the gathering as analysis of data. The interviews conducted were recorded, transcribed and analyzed (as described in the previous paragraphs). Hereby limiting the amount of interpretation of the author. The transcriptions are a word-by-word documentation of the interviews. The transcriptions have not been validated by the interviewees; this would have limited effect as the transcriptions do not contain any interpretation. And, as noted by (Mero-Jaffe, 2011): “In conclusion, transference of transcripts to interviewees raises methodological problems, ethical problems, and problems of research credibility”. To guarantee a maximum amount of validity the interviews were conducted primarily through face-to-face interviews, and in a surrounding that allowed full attention to the interview.
3.5.1 - Internal Validity
The internal validity of a study regards the reproducibility of the work. Or in other words, the “extent to which findings can be attributed to interventions rather than any flaws in [...] research design” (Saunders et al., 2009).
A factor influencing the results of this study might be a subject or participant bias: the interviewees are aware of the questions raised by the researcher. Their answers are influenced by this bias. However the researcher needed to provide the
interviewee with a short introduction on the study in order to arrange the interview. An additional benefit is that the interviewee was aware of the context of the study, and provided more relevant answers. Thereby the researcher ensured that answers were given in the correct context and with the topic of national culture in mind. Because many factors differ between audits it was important to set the context of the interview so the interviewees were aligned to speak on the intended topic. Another bias that might have influenced this research is an observer bias. The researcher of this research is also influenced by his national culture. The author is born and raised in The Netherlands. This influences the entire research, from the interviews to the data analysis and this bias is impossible to solve. To counter its effects, the author has performed this research following certain standards and the
27 results are presented transparently. The entire research has been analyzed with this bias in mind.
3.5.2 - External Validity
The external validity regards to “the extent to which the research results from a particular study are generalizable to all relevant contexts” (Saunders et al., 2009). The aim of this study was to provide insight in the phenomenon of national culture and internal auditing, not to conclude on an entire population.
The internal auditors with whom interviews were conducted work for a diverse range of companies, thereby covering many industries and a large section of the economy. What the companies however all have in common is that they are all Dutch companies. The findings and results of this study need to be seen with this in mind as this aspect might influence the external validity of the research results. Another factor influencing the external validity is the amount of people interviewed. In total nine persons were selected as interviewees. As this study is purely
qualitative there are no fixed rules on the amount of interviewees needed in order to conclude on anything. The nine interviews provided information that was both large in quantity as quality. However the inclusion of more interviewees in further research might provide interesting additional information.
3.6 - Conclusion
In this chapter an overview of the used methodology is presented. As this is an exploratory study in the field of internal auditing and national culture, with a nascent state of literature an inductive approach has been selected. Interviews were used to gather data from 4 different companies across different sectors. An interview protocol was developed based on the IIA standards and used throughout all the interviews. The collected data has been analyzed using a technique called coding in which text excerpts have been given a specific code. The codes have been used to analyze the data in a structural and scientific fashion.
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Chapter 4 – Analysis
This chapter consists of the analysis of the data gathered. In chapter 3 it is
explained how the data is gathered and analyzed, the actual analysis is present in this chapter. Patterns were analyzed in a structured fashion and matched with the theory presented in chapter 2 on national culture to verify whether the studied phenomenon is related to national culture. This chapter solely consists of the analysis of the information, chapter 5 contains the conclusions and limitations of the study. Quotes from the interviews are presented as evidence for the analysis. Two of the research questions posed in chapter 1 are answered in this chapter:
3. How do internal audit functions of multinational organizations execute internal audits?
4. Do internal audit functions of multinational organizations adapt the execution of internal audits to fit national culture? If so, how and why? If not, why not? The questions are answered along the different phases of the internal audit process. The different paragraphs in this chapter are based on several phases found in the IIA Standards. The phases are consistently used in this research, for example in chapter 3 to create and structure an interview protocol, and again in chapter 3 to define codes.
4.1 - Audit Methodology
# Topic Results
AM1 Audit Function Planning Planning is a uniform process across countries, no differences found
AM2 Work Programme Work Programme is tailored to the audit, not to a culture.
In terms of audit methodology all interviewees provided a similar answer. All firms have a global audit methodology based on the IIA Standards containing different elements of the audit. The audit methodology is primarily maintained by a sub department usually called professional practice. Within the Oil & Gas company this was not the case due to the small size of the audit department.
In none of the companies the audit methodology differs between countries. It truly is a global methodology. Interviewees provided multiple reasons why the audit methodology does not differ between countries. The first reason is that the
methodology is relatively straightforward and high over and does not allow for the inclusion of small details, it is principle based rather than rule based. Secondly, the
29 companies operate on a global level but report to corporate leadership. The IAF wants to report in a coherent fashion. Often this is also enforced by the use of audit tooling, in which strict steps are defined that need to be followed. This includes a preparation phase in which planning and risk assessment are performed. The preparation phase is followed by fieldwork, in which data is collected and analyzed and on-site visits are performed where needed. The outcome of the fieldwork phase is documented during the reporting phase. Eventually the audit is finished during the closing phase.
Or, as one of the interviewees mentioned: “We are a global team, a corporate function. We are paid by Corporate. We report to the audit committee, and want to do so in a coherent fashion. So, if we want to combine our audit reports into a quarterly report to the audit committee, you will need to have 1 methodology. Otherwise you will not be able to do so.”
As all the audit methodologies are based on the IIA Standards the content of the methodologies is similar. The same phases are distinguished and the internal audit departments follow a similar steps.
4.1.1 - Audit Function Planning
The audit function planning process is similar across the four firms in scope of this research. Planning consists of a yearly process that also includes roll-forwards and periodical updates. The planning is performed risk-based.
The planning is performed on a global level and does not take national culture into account as a separate factor. In the planning of an audit differences between countries occur. These differences are however not always culture related. For example a topic that was mentioned by several interviewees is the level of
corruption in a country. The interviewees note that within Western Europe and the USA corruption is generally not seen as a risk that occurs often. However in other parts of the world the risk of corruption is higher. This element can be taken into account in the planning of audits and the selection of audit objects. Although certain countries face a higher level of corruption this is not an element that is qualified as culture.
4.1.2 - Work Program
The work program, and the creation process thereof, is tailored to the specific audit. This is consistent across the four firms according to all of the interviewees. It is deemed quite difficult to compare work programs content wise, and to draw conclusions based on cultural aspects, as they apply to different processes and scopes. Testing procedures are adapted to the country, for example one of the interviewees noted that in a certain African country all transactions are cash only,
30 where in Europa a lot of payments are performed via wire transfer10. This affects
the work program, but is not directly culture related.
4.2 – Engagement Planning
# Topic Results
EP1 PBC Countries with a low score on Hofstede’s Power Distance dimension require more effort of the auditor in order to receive responses to PBC requests than countries with a high score on the dimension
EP2 Team selection Teams are selected based on the ability of an auditor to speak the local language and also based on the skills of the auditor
The planning of an engagement again is similar across firms. All the firms use some kind of announcement letter to announce the audit which is often followed by a phone call to discuss the audit in more detail.
What does differ between the companies is the amount in which the audit
department interacts with the business. Two of the firms explicitly refer to ‘account management’ tasks that entail continuous contact with business units and process owners. Not all of the firms explicitly do this.
The announcement of the audit is similar across the four firms studied. According to the interviewees the documentation used (i.e. the announcement letter) is identical and does not differ. Multiple interviewees express that the announcement process of an audit is often more formalized in foreign countries when compared to an audit in the country they are located in. In comparison with local audits the interviewee is contacted more frequently early in the process to arrange matters before the
fieldwork phase commences. This is however not culture related but due the practical aspects: a foreign audit needs the arrangement of a flight and hotel and does not allow a simple follow up the next week: “Especially in Asia we often need to travel. Book a hotel, book a flight. You will need to start planning further in advance.” 11
4.2.1 - PBC
The interviewees all expressed to send out an information request before an on-site visit to an auditee. Between the four firms no major differences were present in the way information is requested.
10 Food & Beverages
31 However, interviewees noted a big difference in how the PBC request was followed up by the auditee and the amount of effort needed by the auditor to receive the information. Interviewees of three of the companies explicitly stated that Asian countries are very thorough and complete in delivering the data, especially in comparison with the Netherlands:
“In Asia they are more thorough in delivering information than in for example the Netherlands. Here [GH: in the Netherlands], if you request for example A1 till A4 you will receive A1 and for A2 till A4 they will direct you to A1.”12
Two of the interviewees also referred to Austria as a country that does not deliver the data complete and as thorough as other countries. In the words of one of the interviewees: “Austria, we received most of the information, but not very far in advance”.13 Other countries mentioned by the interviewees to provide data
complete and thorough are Russia, Poland and Belgium. According to the
interviewees the issue is not caused by specific persons but experienced throughout the organization. When asked whether this might be influenced by foreign people two interviewees mentioned the behavior difference was noted in the behavior of native persons.
When compared, the two extreme groups of countries (the one group that does provide thorough and complete information and the group that does not) align along the lines of Hofstede’s Power Distance dimension. The Power Distance dimension, as explained in chapter 2, is about dependence relationships. In more Power Distant countries people are more dependent on their superiors. Asian countries (Vietnam, China, Hong Kong, Singapore), Russia, Poland and Belgium all score high on the dimension. On the other hand Austria and the Netherlands all score very low on the dimension. The way countries respond to a PBC request seems to be in line with the Power Distance dimension. From a theoretical perspective this makes sense. Internal Audit often reports to a member of the board or the audit committee, or at least a person very high in the organization. Although Internal Audit is not the superior of any auditee, a high level of
hierarchical distance is involved, or at least perceived by the auditees. This seems to align with the power distance dimension. In countries as Russia or Vietnam the boss is in charge and orders need to be followed. In for example the Netherlands orders from a superior are more easily and openly questioned.
4.2.2 – Teams selection
In the companies researched the selection of an audit team is mostly based on skills (especially language skills) and also by experience. Especially language skills are deemed to be very important, however this is more important in certain
12 Oil & Gas
32 countries than in others. All the interviewees (5) with experience in France or
French speaking countries (i.e. Northern African countries) note that an audit is very hard to perform if the local language is not spoken. For Eastern European countries (like Russia, Poland, Romania) the situation is similar. One of the interviewees even used stronger language to stress the importance of language skills: “We are not sending people who do not speak French to Algeria or Kinshasa, because it is impossible”14.
With regards to why language skills are important one interviewee provided an explanation. This interviewee noted that when two non-native speakers use a language (often English) it is harder to express emotions when compared to one’s native language. This makes it harder to address sensitive topics as the
unfamiliarity with the language makes it more difficult to express oneself clearly.
4.3 - Performing the Engagement
# Topic Results
PtE1 Contact Persons Contact persons are of a similar level worldwide. No differences found between cultures.
PtE2 Opening Meeting Auditors adapt the opening meeting to a country in accordance with Hofstede’s IDV dimension. In more collectivist countries more persons are invited than in more individualistic countries.
PtE3 Requesting Information
In some countries auditors schedule on-site interviews earlier than in other countries, as the flexibility of auditees differs.
PtE4 Communication Auditors adapt communication to fit a country, differences arise in both verbal as non-verbal communication. In verbal communication the auditor adjusts the level of boldness used. In terms of non-verbal communication the auditor for example makes sure not to use gestures that cause offense to the auditee.
In general the audit functions studied in this research all perform engagements in a similar fashion in line with the IIA Standards, albeit adjusted to the specific audit. The engagement starts with contacting the auditee, holding an opening meeting, requesting information and performing the fieldwork. This also includes the testing of controls, the test procedures differ between audits to match the controls in scope.
14 Food & Beverages
33
4.3.1 - Contact person(s)
In terms of the person within the audited object responsible for contact with the auditor there is not much difference between the four companies. Usually the initial contact is between the auditor and a member of the management team of the audited company. During the on-site visit most of the time a subordinate of the initial contact person takes over the daily contact. The hierarchical position of the contact person also differs based on characteristics of the operating company being audited (i.e. the size of the company) and the scope of the audit (contact person has a function relating to the object in scope).
4.3.2 - Opening meeting
All of the internal audit departments start off their audits (the fieldwork phase) with an opening meeting. In this meeting an introduction of the audit is presented
followed by elaboration on how the audit will be executed. The way in which the meeting is held is also very similar across the firms. It is a physical meeting at the location of the auditee.
The interviewees mention several differences that occur between countries in terms of the opening meeting. One interviewee explicitly stated that the length of the opening meeting differs between countries: “In Greece it is longer. Where in Russia and Poland it takes 15 to 20 minutes in Greece it can take up to an hour. It is longer and much more relaxed, you are having a coffee.”. Other interviewees did not notice such a difference, despite explicit questions on the topic. Therefore this does not seem to be influenced by national culture, but rather by the applicable individuals. When asked whether culture influenced the opening meeting one of the interviewees explicitly stated this was not the case.
In terms of the persons involved in the opening meeting differences between countries are found. Two interviewees with audit experience in Asia note that in Asia always more persons are available during an opening meeting in comparison with ‘Western’ countries. The same was said by other interviewees of Eastern European countries, with the exception of Russia. During an opening meeting in for example the Netherlands usually only a few people are present. Mostly the contact person of the auditor and one or multiple managers. In Asian and Eastern European countries it is more common to invite an entire team to the opening meeting. When asked why this is happening one interviewee noted the following: “I think it has to do with showing the audit is important, showing respect, and following the boss’ orders. And making sure everyone is aligned before the start of the audit.” When comparing the two extremes with Hofstede’s work a correlation with the country scores on the IDV dimension is found. The Netherlands and other Western countries rank at the top end of the scale. Asian countries such as Indonesia, Vietnam,
