Literature Review and Development of Research Questions

Transcription

1 The (Mis)Match between the Profile of Internal Auditors and the Internal Audit Activities and the Relationship with Co-sourcing/Outsourcing and Turnover Gerrit Sarens Université Catholique de Louvain Louvain School of Management Place des Doyens Louvain-la-Neuve Phone: gerrit.sarens@uclouvain.be Rita Lamboglia University of Pisa Department of Business Administration Via C. Ridolfi , Pisa- Italy Phone: rlamboglia@ec.unipi.it Draft: 16 March

2 The (Mis)Match between the Profile of Internal Auditors and the Internal Audit Activities and the Relationship with Co-sourcing/Outsourcing and Turnover Abstract The first objective of this study is to investigate whether there is a match between the profile of the internal auditors working in an internal audit department (IAD) and the activities of the IAD. We also want to find out what type of internal auditors match with what type of IA activities. The second and third objective of this study is to investigate whether this (mis)match is related to the outsourcing/co-sourcing of internal audit activities and the turnover within the IAD. These three research questions are based upon the Open Systems Theory. Until now, Strategic Human Resource Management (SHRM) in internal auditing is an explored research area. Moreover, for practitioners, it is interesting to understand how human resources can be managed in a way that they support the internal audit activities which is highly relevant nowadays in the discussion on the effectiveness of the IAD. The results of this study are based on a questionnaire completed by 280 members of the Institute of Internal Auditors Belgium. The findings show that: (1) there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD; (2) certain characteristics of internal auditors match well with certain types of IA activities; (3) a mismatch between the profile of the internal auditors and the activities of the IAD is a driver for IAD to cosource/outsource parts of its internal audit activities which is consistent with previous studies in this area; and (4) turnover in an IAD can be partially linked to a mismatch between the profile of the internal auditors and the activities of the IAD. Keywords: internal audit, Strategic Human Resource Management, co-sourcing, outsourcing, turnover 2

3 The (Mis)Match between the Profile of Internal Auditors and the Internal Audit Activities and the Relationship with Co-sourcing/Outsourcing and Turnover Introduction Recent literature has shown that the quality of the work performed by the internal audit department (IAD) is an important determinant of internal audit (IA) effectiveness (Mihret and Yismaw, 2007; Arena and Azzone, 2009; Cohen and Sayag, 2010). According to the Institute of Internal Auditors (IIA, 2010), IA effectiveness can be defined as the degree of achievement of objectives for which the IA activity is established. Basic measures of effectiveness include, for example, client satisfaction ratings, percentage of recommendations implemented and number of unsatisfactory internal audit opinions. However, IA effectiveness came under pressure in the aftermath of the recent financial and economic crisis (Baker 2010, Swanson 2010, IIARF, 2011). Recent studies clearly suggest that the quality of the work of the IAD is determined by the people who perform this work, but even more important, the match between the people and the type of work they do (Pforsich et al., 2006; 2008; Sarens, 2009). An analysis of the internal auditing literature shows a lot of variation in internal audit activities based on factors such as the type of industry, type of risks, requests from management and the audit committee to name but a few (cf. Brody and Lowe, 2000; Spira and Page, 2003; Cahill, 2006; Sarens and De Beelde, 2006; Christopher et al., 2009; Davis, 2009; Abbott et al., 2010). The challenge for the Chief Audit Executive (CAE) is to find the right people to perform these IA activities, in other words, to match the workforce with the type of internal audit activities. Until now, Strategic Human Resource Management (SHRM) in internal auditing is an explored research area. More specifically, the literature remains silent on this match, and on what type of people match with what type of IA activities. Therefore, the first objective of this study is to investigate whether there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD. Moreover, we also want to find out what type of internal auditors match with what type of IA activities. Indirectly, the outsourcing/co-sourcing literature refers to this match. In this part of the internal auditing literature it is argued that an IAD mainly outsource/co-source IA activities because of the lack of knowledge and expertise in-house (Selim and Yannakas, 2000; Barac and Motubatse, 2009). Based on these studies, we can assume that an IAD outsource/co-source IA activities when there is a mismatch (or not a perfect match) between the people working in the IAD and the type of 3

4 IA activities. Hence, the second objective of this study is to investigate whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the outsourcing/co-sourcing of IA activities. Finally, the existing internal auditing literature has shown that there are basically two types of IAD: (1) IAD characterized by a high turnover meaning that people stay only a couple of years in the IAD before moving on to other (management) functions (the IAD as the so-called stepping stone to other functions); and (2) IAD with a low turnover where people stay for a longer period to build a career in IA (cf. Rasch and Harrel, 1990; Burns et al, 1994; Apostolou B., Pasewark W.R., J., 1993; Flesher and Zanzig, 2000; Prawitt, 2003; Van Peursem, 2005). Until now, the literature on the determinants of the turnover within an IAD shows mixed results. Therefore, the third objective of this study is to test whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the turnover within the IAD. This part of the study is based on Rasch and Harrell (1990) who have investigated the turnover behavior of accounting professionals. Human resource management in internal auditing is interesting to analyze for two reasons. First, from an academic perspective, to advance the academic literature on internal auditing, in other words, to fill the existing gap. Second, from a practitioner s perspective, to understand how human resources can be managed in a way that they support the internal audit activities which is highly relevant nowadays in the discussion on the effectiveness of the IAD. The empirical part of this paper is based on the answers to an online questionnaire that was sent out in April 2011 to the 1,620 members of IIA Belgium. 280 completed questionnaires were used for analysis, representing a response rate of percent. We have found that there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD. Moreover, evidence is found that certain internal auditor characteristics fit better with certain types of IA activities. Besides, the results confirm that a mismatch between the internal auditors and the type of IA activities is associated with co-sourcing/outsourcing of IA activities. Finally, partial evidence is found that a match between the profile of the internal auditors and the type of IA activities is associated with a lower turnover within the IAD. 4

5 The paper is structured as follows. The next section contains the literature review as a basis for the research questions. The following section presents the research methodology, the variables and how to measure them. Then the results are presented, and in the final section the conclusions of this study and their implications are discussed. Literature Review and Development of Research Questions Human Resource Management and Internal Auditing The human resource topics that have been addressed in the internal auditing literature are rare. For example, some authors have focused on a general analysis of the internal auditors characteristics (for e.g. Dezoort, 1998; Arena and Azzone, 2009; Bryant et al., 2009; Jokipii, 2009), whereas others have focused on the relationship between internal auditors and other people involved in the internal audit process (Sarens and De Beelde, 2006; Sarens et al., 2009). Overall, in the existing literature on internal auditing, the concept of human resource management is still untouched. Lengnick-Hall and Lengnick-Hall (1988) classify the Strategic Human Resources Management (SHRM) literature into four areas: (1) human resource accounting, which attempts to assign value to human resources in an effort to quantify this organizational capacity; (2) human resource planning; (3) responses to a strategic change in the environment; (4) matching human resources to strategic or organizational conditions. We position our paper in this last area, where the human resource strategies should create a match between certain strategic or organizational conditions and certain specific aspects of the human resources (Gerstein and Reisman, 1983; Leontiades, 1982; Sweet, 1982). In this paper, the strategic or organizational conditions are the activities of IAD, while specific aspects of the human resources are the characteristics of the internal auditors. Although human resources characteristics (skills, education, professional experience, ) are relevant for creating value, producing competitive advantage, and enhancing organizational effectiveness, technical HRM alone is unlikely to produce sustainable competitive advantage (Huselid et al., 1997; Richard and Johnson, 2001). SHRM can have a positive impact on the department s effectiveness if the IAD is able to attract human resources that match well with the internal audit activities. This match is also important in order make sure that human resources have a so-called strategic value and become unique. Lepak and Snell (1999), in developing the human resource 5

6 architecture, define these two elements as principle drivers of HR configurations. The strategic value of human capital refers to the potential to improve the efficiency and the effectiveness of the firm; while the uniqueness refers to the degree to which it is rare, specialized and it is not easily duplicated by other firms. In this paper, we argue that in order make sure that internal auditors have a strategic value and become unique for the IAD, the IAD needs to find a match between the internal auditors and the internal audit activities. This fits into what Way and Johnson (2005) call the horizontal structural alignment (horizontal linkage), which refers to the extent to which there is a match between the characteristics of the people and the type of work they do. Open Systems Theory and Internal Auditing This study is based upon the Open System Theory. This theory is based on the general systems models (Von Bertanlanffy, 1950). According to this theory, organizations can be described as input, throughputs, output systems involved in transactions with a surrounding environment. One of the first studies that applied this theory to HRM was Mowday (1983). In this study, the theoretical model is based upon Wright and Snell (1991) who used this theory for examining the role of human resources. The inputs are the characteristics of the internal auditors. These characteristics make up the organization s (or the IAD s) dominant competence and represent the link between the external environment and the organization. Based on Shore et al. (2009), we talk in this study about the workforce diversity. In this study we examine four dimensions of diversity: education, skills, professional experience and professional certification. The throughputs are the activities that the internal auditors have to perform in the IAD. The outputs are according to the Open Systems Theory fully determined by the inputs and throughputs, and represent the result of the system. In this study, two specific outputs are considered. First, the performance outcomes, in our case, the degree of outsourcing/co-sourcing of internal audit activities; and second, the affective outcomes. Wright and Snell (1991) define these last ones as the feelings that employees have as a result of being part of the organization. In our context, they refer to the degree of the turnover within the IAD. The theoretical model of this study can be summarized as follows: 6

7 Environment Internal audit department INPUTS THROUGHPUTS OUTPUTS Workforce diversity Activities of IAD Affective outcomes Performance outcomes Figure 1: An open system model of an IAD The Open Systems Theory has important implications for SRHM within an IAD. It implies that one major objective of SHRM is to ensure that the IAD has the right people to perform a given set of internal audit activities. In other words, the IAD needs different people for different audit work. Furthermore, any change in the type of the internal audit activities (due to a changed risk profile of the company or different requests from management, the board or the audit committee) will create the need for different people with another profile or the same people with an changed profile to perform these new internal audit activities. Based on the Open Systems Theory and the general SHRM principles discussed in the previous paragraph, we can formulate the first two research questions: RQ1a: Is there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD? RQ1b: What type of internal auditors match with what type of IA activities? Co-sourcing/outsourcing as a result of a mismatch between internal auditors and internal audit activities As mentioned in the previous paragraph, within the context of the Open Systems Theory, co-sourcing or outsourcing of internal audit activities can be considered as a so-called performance outcome of the interplay between inputs and throughputs. Co-sourcing/outsourcing of internal audit activities has become common practice in the past two decades (Caplan and Kirschenheiter, 2000; Moeller, 2004). According to the internal auditing literature, several factors have had an impact on co-sourcing/outsourcing. Legislative reforms, corporate governance developments and a more complex internal and external business environment in general have brought internal auditors more to the forefront of the corporate governance debate and have had a significant impact on the scope of their work (with a stronger focus on risk management, control and governance as recognized by 7

8 the IIA definition). However, this evolution has also created a constant need for updating the body of knowledge for internal auditors (Abdolmohammadi et al., 2006; Allegrini et al., 2006; Brody and Lowe, 2000; Selim et al., 2009). In the internal auditing literature, it is generally argued that IAD mainly co-source/outsource internal audit activities because of the lack of knowledge and expertise in-house (for e.g., Caplan and Kirschenheiter, 2000; Selim and Yannakas, 2000; Speklé et al., 2007; Barac and Motubates, 2009; Barac and Motubatse, 2010). Even the IIA Standards (2011) explicitly recommends using externally provided services if the IAD does not possess the necessary knowledge, skills and disciplines internally (cf. Performance Standard 2070). In this study, we build upon these arguments and test whether there is a relationship between this match or mismatch between internal auditors and the internal audit activities they have to perform and the degree of co-sourcing/ outsourcing of internal audit activities. RQ2: Is a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD related to the degree of co-sourcing/outsourcing of internal audit activities? Turnover as a result of a mismatch between internal auditors and internal audit activities In the context of the Open Systems Theory, turnover of internal auditors can be considered as an affective outcome of the interplay between inputs and throughputs. A handful of studies in internal auditing have analyzed factors associated with the turnover within an IAD. For example, Arena and Azzone (2007) highlight that turnover is correlated with the age of the IAD. Barrier (2001) highlights that turnover is often considered as an opportunity related to the new vision of internal auditing. He also identifies three factors associated with turnover: the size of the organization and its IAD; the organizational culture encouraging people to rotate within the company and the changes in internal audit activities. This last factor is interesting for our study. As discussed before, a change in internal audit activities (for whatever reason), the so-called throughputs in the Open Systems Theory, could create a mismatch between the internal auditors and the internal audit activities. Based on Barrier (2001), we could wonder to what extent this mismatch leads to more turnover. Rasch and Harrel (1990) came up with a more detailed analysis of the relationship between turnover and internal auditors characteristics. They found that job satisfaction directly affects turnover intentions of internal auditors which is consistent with Apostolou et al. (1993). Increases 8

9 in job satisfaction should result in lower turnover, providing a cost saving to the organization through reduced training, staffing and recruiting costs. Rasch and Harrel (1990) also found that work-related stress has a negative impact on job satisfaction leading to higher turnover intentions. Based on these findings it is reasonable to assume that part of this work-related stress could be caused by a mismatch between the internal auditors profile and the type of internal audit activities they are expected to perform leading to higher turnover. This leads to our third research question: RQ3: Is a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD related to the turnover of internal auditors? Methodology Data Collection An online questionnaire was sent out in April 2011 to the 1,620 members of IIA Belgium. A copy of this questionnaire can be found in Appendix A. We have received 280 completed questionnaires that could be used for analysis. This represents a response rate of 17.3 percent which is relatively high compared to other studies in this area. Variable Measurement Workforce diversity The profile of the internal auditors was determined based on the following variables: (1) Highest level of education (question 1); (2) Area of education (question 2); (3) Professional certifications (question 3); (4) Working experience in internal auditing (question 4); and (5) A list of 30 skills based on the Competency Framework for Internal auditors (Birkett et al., 1999) that the responding internal auditors had to assess (question 5). Internal audit activities Respondents were asked in question 9 to indicate the proportion of the available working time of their IAD (percentage) spent on the following five internal audit activities: (1) financial audits; (2) operational audits; (3) IT audits; (4) consulting; and (5) compliance audits. The sum of these five activities had to add up to 100 percent. 9

10 Co-sourcing / outsourcing In question 10, respondents were asked to indicate (using six answering categories) what percentage of their internal audit activities is currently co-sourced/outsourced. Turnover Instead of asking directly the average tenure of internal auditors, which is hard to answer for an individual internal auditor, respondents were asked to judge (using a five point answering scale) the following five statements related to the turnover in their IAD: (1) the internal audit department is a management training ground and has an important role in training future managers; (2) the internal audit department focuses on attracting inexperienced talented individuals who are exposed to broad experience for 2 to 3 years. They will migrate to line management positions; (3) the internal audit department consists of experienced internal auditors who will stay with the internal audit function; (4) the internal audit department employs experienced internal auditors who eventually will migrate to line management positions; (5) the team of internal auditors within the department consists of experienced internal auditors and inexperienced internal auditors who will deploy their talent and migrate to other management positions. All five items are based on the career model for internal auditors by Macdonald and Colombo (2001). Items 1, 2, 4 and 5 load on one factor (loadings between.640 and.835; Cronbach s Alfa:.758) and measure to what extent an IAD is characterized by a high turnover. Item 3 refers to the opposite and measures to what extent an IAD is characterized by a low turnover. Empirical Results Descriptive Statistics Workforce diversity Table 1 shows the descriptive statistics for four of the five profile characteristics. Panel A shows that a large majority of the responding internal auditors has a master degree (82.5%). Panel B shows that the three most common educational specialisations are: general business / management (35.4%); finance (32.5%) and auditing (23.2%). Panel C shows that slight more than one third of the responding internal auditors (34.6%) has no professional certifications. Only 30.4% of the responding internal auditors have a CIA certification. Except for the CISA (9.3%) and CCSA (8.2%) certification, the remaining certifications turn out to be not very popular. Panel D shows 10

11 that slightly more than half of the responding internal auditors (53.7%) have less than six years of working experience in internal auditing. [INSERT TABLE 1 HERE] Table 2 shows the average scores (ranging from one to five) for the 30 skills the responding internal auditors were asked to assess. The results show that the respondents assess themselves as most competent in the following skills: (1) being objective (4.32); (2) logical reasoning (4.29); (3) being a team player (4.24); (4) being dedicated (4.14); (5) learning from others (4.14); and (6) comprehending internal audit in the context of the business (4.13). [INSERT TABLE 2 HERE] Internal audit activities Panel A of Table 3 shows that, on average, 32.9% of the working time of the responding IAD is spent on operational audits; 10.1% on IT audits; and 9.9% on financial audits. [INSERT TABLE 3 HERE] In order to identify the profile of the IAD in terms of dominant internal audit activities, a cluster analysis was performed for each of the five internal audit activities. A test to what extent these clusters are significantly associated with specific internal auditors characteristics will be performed in a next step. Panel B of Table 3 shows that: IAD (5.7%) spend a high proportion of their working time on financial audits (on average 54%) whereas the remaining 263 IAD (94.3%) spend a significantly lower proportion of their time on financial audits (on average 7%) IAD (45.7%) spend a high proportion of their working time on operational audits (on average 60%) whereas the remaining 151 IAD (54.3%) spend a significantly lower proportion of their time on operational audits (on average 10%) IAD (27.4%) spend a high proportion of their working time on IT audits (on average 27%) whereas the remaining 201 IAD (72.6%) spend a significantly lower proportion of their time on IT audits (on average 4%) IAD (13.3%) spend a high proportion of their working time on consulting (on average 24%) whereas the remaining 241 IAD (86.7%) spend a significantly lower proportion of their time on consulting (on average 3%). 11

12 5. 11 IAD (3.9%) spend a high proportion of their working time on compliance audits (on average 54%) whereas the remaining 268 IAD (96.1%) spend a significantly lower proportion of their time on compliance audits (on average 7%). Co-sourcing / outsourcing Table 4 shows that almost half of the IAD represented by the responding internal auditors (46.2%) do not co-sourcing/outsource internal audit activities. Slightly more than one third (36.6%) co-source/outsource at maximum 10% of their internal audit activities. For further analysis, the sample is split up in two groups: those IAD that do not co-sourcing/outsource and those IAD that co-source/outsource. [INSERT TABLE 4 HERE] Turnover Table 5 shows the average scores for all five items on turnover. The average of items 1,2, 4 and 5, all referring to a high turnover IAD, is rather low (mean = 2.64) suggesting that the responding internal auditors come from IAD characterized by a rather low turnover. For further analysis, the sample is split up into two groups: those IAD with a high turnover (mean of the four high turnover items > 3.5) and those IAD with a low turnover (mean of the four high turnover items < 3.5). This finding is consistent with the finding for item 3, referring to a low turnover IAD, which got the highest average score (mean = 3.38). A similar split up can be made: those IAD with a low turnover (average score on the low turnover item > 3.5) versus those IAD with a high turnover (average score on the low turnover item < 3.5). [INSERT TABLE 5 HERE] Research Questions 1a and 1b In order to find out whether there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD, significance tests (Chi-square for the binary variables and T-tests for the skills and competences) were performed for all five clusters based on the dominant internal audit activity in relationship to the internal auditors characteristics. Overall, the findings suggest that there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD. Table 6 only shows the significant results of these tests and allows seeing what type of internal auditors match with what type of IA activities. [INSERT TABLE 6 HERE] 12

13 First, it is found that IAD that spend a high proportion of the working time on financial audits are associated with internal auditors with: (1) significantly more CAT/AAT certification; and (2) significantly more CFE certification. This last finding suggests that fraud auditing knowledge is strongly associated with financial auditing. Overall, in this kind of IAD, a technical accounting certification turns out to be important. Second, IAD that spend a high proportion of the working time on operational audits are associated with internal auditors with: (1) significantly more educational background in auditing; (2) significantly more CIA certification; and in terms of skills and competences, significantly more internal auditors that: (1) are creative; (2) have a good knowledge of the business; and (3) are able to schedule their work. In this kind of IAD, a specialized educational background in auditing as well as the basic CIA certification turn out to be important. In terms of skills and competences, IAD with a high focus on operational auditing are staffed with more creative people that have a good knowledge of the business and that are able to schedule their work which fits the specific objectives and characteristics of an operational audit. Third, IAD that spend a high proportion of the working time on IT audits are according to the findings associated with internal auditors with: (1) significantly more educational background in mathematics and statistics; (2) significantly more CIA certification; and (3) significantly more internal auditors with a CISA certification. In this kind of IAD, a non-audit educational background and basic (CIA) as well as specialized certification (CISA) turn out to be important characteristics of the profile of the internal auditors which fits the highly specialized and technical nature of IT audits. Fourth, IAD that spend a relatively high proportion of the working time on consulting are associated with internal auditors with significantly more a secondary school degree as highest degree; and in in terms of skills and competences, significantly more internal auditors that: (1) are able to use non-financial evaluation methods in internal audit work; and (2) are proactive. These findings suggest that for IAD with a high focus on consulting, the level of the educational background is less important. The importance of proactivity can be explained by the fact that consulting work is typically future-oriented. Fifth, IAD that spend a relatively high proportion of the working time on compliance audits are associated with internal auditors with: (1) significantly more CGAP certification; (2) 13

14 significantly more external audit (public accounting) certification; (3) significantly more CAT/AAT certification; and in terms of skills and competences, significantly more internal auditors that are able to use and review accounting principles and procedures. The importance of the CGAP certification can be explained by the fact that 45.5% of the IAD in the high compliance audit cluster comes from the public sector. Furthermore, it turns out that staff with working experience in external auditing and technical accounting knowledge fits better with an IAD that focuses more on compliance audits. In other words, for this type of IAD, accounting, external auditing and compliance fit well together in terms of internal auditor s profile. Research Question 2 From the previous analysis, we know what type of internal auditor characteristics matches what type of internal audit activities. This allows us to compute how well the internal audit activities match with the profile of the workforce. For example, when the IAD is part of the high financial audit cluster (meaning that the IAD spend a high proportion of its working time on financial audits), we check out whether the responding internal auditor has a CAT/AAT certification and a CFE certification. The more of these characteristics can be found, the higher the matching score (% of internal auditor characteristics present). This allows computing for every respondent five matching scores (one for each internal audit activity). This matching score is only relevant if the IAD spends a high proportion of its working time on a specific internal audit activity (for e.g. the high compliance audit cluster). Finally, for all relevant matching scores, an average matching score can be computed. For e.g. when an IAD spends a high proportion of its working time on both operational audits and IT audits, only the matching scores for these two activities are taken into account to compute the average matching score. In this case, the average matching score shows to what extent the responding internal auditor has the characteristics that match best with these two internal audit activities (cf. before). The average matching score ranges from 25.0% to 100.0% with a mean of 62.8% (standard deviation = 17.8%). This means that, on average, the profile of the internal auditors match by 63% with the type of internal audit activities performed in the IAD. In a next step, this average matching score can be related to the co-sourcing/outsourcing of internal audit activities to find out whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the co-sourcing/outsourcing of internal audit activities. Panel A of Table 7 shows a significant negative relationship between the average matching score and the co-sourcing/outsourcing of internal audit activities (in two groups cf. 14

15 before). In other words, IAD that co-source/outsource parts of their internal audit activities are characterized by a significantly lower matching score. This confirms that a mismatch between the profile of the internal auditors working in an IAD and the activities of the IAD is a driver for IAD to co-source/outsource parts of its internal audit activities which is consistent with previous studies in this area. [INSERT TABLE 7 HERE] Research Question 3 Finally, the average matching score can be related to the profile of the IAD in terms of turnover of staff to test whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the turnover of internal auditors. As mentioned before, the sample is split up in two groups based on the average score on the high turnover items. As shown in Panel B of Table 7, no significant difference in matching score between both groups can be found. The same analysis can be done based on the score for the low turnover item (split up in two groups). Panel C of Table 7 shows a marginally significant difference in matching score between both groups. In other words, IAD with a high score on the low turnover item are characterized by a higher average matching score (65.7%) compared to the IAD with a low score on the low turnover item (60.6%). Overall, this suggests that within our sample of Belgian IAD, the turnover in an IAD can be partially linked to a mismatch between the profile of the internal auditors working in an IAD and the activities of the IAD. However, given the only marginally significant difference, it can be assumed that other factors are important as well. Conclusions and Discussion The objective of this study was threefold. First, we wanted to find out whether there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD, and if so, what type of internal auditors match with what type of IA activities. This fits into what Way and Johnson (2005) call the horizontal structural alignment (horizontal linkage) within an IAD. Second, we have tested whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the degree of co-sourcing/outsourcing of internal audit activities. Third, we have tested whether a (mis)match between the profile of the internal auditors working in an IAD and the activities of the IAD is related to the turnover of internal auditors. This study fills the existing gap in the academic literature given studies on human resource management in internal auditing are rare. Besides, the findings of this study open a whole 15

16 new area for future research in internal auditing. From a practitioner s perspective, it is interesting to understand how human resources can be managed in a way that they support the internal audit activities which is highly relevant nowadays in the discussion on the effectiveness of the IAD. Although this study has not investigated whether a match between internal auditors and internal audit activities increases the effectiveness of the IAD, the findings suggest that this match is a nonnegligible element to take into account in future studies on internal audit effectiveness. With respect to the first two research questions, the findings show that there is a match between the profile of the internal auditors working in an IAD and the activities of the IAD (research question 1a). Moreover, detailed analysis has shown that certain characteristics of internal auditors match well with certain types of IA activities (research question 1b). These results are interesting for Chief Audit Executives as guidance how to staff their IAD given the planned internal audit activities thereby optimizing the use of their budget. This could mean attracting new internal auditors, reorienting existing staff or co-sourcing/outsourcing some of the IA activities (cf. further). First, internal auditors with a technical accounting certification and knowledge about fraud auditing are more common in IAD that focus strongly on financial audits. Second, in IAD that focus strongly on operational audits, a specialized educational background in auditing as well as the basic CIA certification turn out to be more common. In terms of skills and competences, IAD with a high focus on operational auditing are staffed with more creative people that have a good knowledge of the business and that are able to schedule their work which fits the specific objectives and characteristics of an operational audit. Third, in IAD that focus strongly on IT audits, a non-audit education background and basic (CIA) as well as specialized certifications (CISA) turn out to be important characteristics of the internal auditors which can be explained by the highly specialized and technical nature of IT audits. Fourth, the findings suggest that for IAD with a high focus on consulting, the level of the educational background of the staff is less important. Being able to use non-financial evaluation methods in internal audit work as well as proactivity as typical skills can be explained by the fact that consulting work is typically less focused on financial issue and futureoriented. Finally, it was found that staff with working experience in external auditing and technical accounting knowledge fits better with an IAD that focuses more on compliance audits. In other words, for this type of IAD, accounting, external auditing and compliance fit well together in terms of internal auditor s profile. 16

17 With respect to the second research question, it was found that a mismatch between the profile of the internal auditors (the inputs according to the Open Systems Theory) and the activities of the IAD (the throughputs) is a driver for IAD to co-source/outsource parts of its internal audit activities which is consistent with previous studies in this area (for e.g., Caplan and Kirschenheiter, 2000; Selim and Yannakas, 2000; Speklé et al., 2007; Barac and Motubates, 2009; Barac and Motubatse, 2010). Co-sourcing or outsourcing of internal audit activities can be considered according to the Open Systems theory as a so-called performance outcome of the interplay between inputs and throughputs (Wright and Snell, 1991). This result confirms previous studies on IA cosourcing/outsourcing but from a human resource management perspective. With respect to the third research question, only partial support was found. The results suggest turnover in an IAD can be partially linked to a mismatch between the profile of the internal auditors and the activities of the IAD. According to the Open Systems Theory, turnover of internal auditors can be considered as an affective outcome of the interplay between inputs and throughputs. Although this finding is complementary to previous studies on turnover with an IAD (Arena and Azzone, 2007 and Barrier, 2001), the rather weak results suggest that future research on other factors determining the turnover in an IAD is needed. Future research could also investigate to what extent a mismatch between the profile of internal auditors and the IA activities is associated with work-related stress (Rasch and Harrel, 1990) and job satisfaction (Apostolou et al., 1993). These two concepts were only used as theoretical arguments for our third research question but were not empirically tested. Like other studies, ours has a few limitations. First, due to the size of the Belgian market, our sample was rather small and maybe highly country specific. Future studies using larger samples from various countries may provide stronger evidence of generalizability. Second, the results are based on the perceptions of the internal auditors themselves. For objective aspects such as education, certification or internal audit activities, this is less of an issue. However, a selfassessment of their skills as it was the case in this study could potentially create a bias. Future research could ask the CAE s / supervisor s perception of the staff skills or use a more objective way of testing skills. Third, given that the questionnaire was only distributed to IIA members, the results are not generalizable to non-iia members. 17

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22 Appendix A: Questionnaire The internal auditor 1. What is your highest level of formal education completed? - Secondary education - Bachelors diploma - Masters diploma (University) - Doctoral degree 2. Which specialisation did you follow? - Accounting - Finance - General business/management - Auditing - Engineering - Law - Languages, literature, history, psychology - Mathematics, statistics - Physics, chemistry, geology, biology - Other 3. Which professional certification(s) do you have? - Certified Internal Auditor (CIA) - Certification in Control Self-Assessment (CCSA) - Certified Financial Services Auditor (CFSA) - Certified Government Auditing Professional (CGAP) - Management/general accounting (IAB, BIBF) or (CMA, CIMA, GGA) - Public accounting/chartered accountancy (IBR) of (CA/CPA/ACCA/ACA) - Accounting-technician level (CAT/AAT) - Certified financial analyst (CFA) - Information systems auditing (CISA/QiCA) - Fraud examination (CFE) - None - Other 4. How many years have you been working as an internal auditor at your current organization and previous organizations you have worked for? - 3 years or less years years - 10 years or more 5. To what extent are you competent at the following skills? Not competent at all Very competent - Using database systems and spread sheets - Understanding of theories of risk - Apply laws and regulations - Using/reviewing accounting principles and procedures - Apply control systems designs and procedures - Logical reasoning - Analysing commercial and financial data - Designing control systems - Using non-financial evaluation methods in internal audit work - Designing new internal audit technologies for systems analysis and evaluation - Comprehending internal audit in the context of the business - Coping with increasingly complex transactions, regulations and organizations 22