Good governance encourages companies to invest in the skills of its internal auditors and preserve their independence. Knowing and understanding the levers that contribute to improving the quality of internal audits should be a priority for companies seeking to access reliable information concerning company efficiency and the management of their operations. However, very little is known about the best practices for managing high-quality, internal auditing.

Our study aims to identify the practices implemented by internal auditing departments for improving the quality of their work and to determine various companies’ investment strategies in these different practices.

By using an international survey involving 939 internal audit directors, we have identified three management practices that are important for quality auditing. They are centred respectively on:

  • the guidance and governance of the internal auditing department,
  • the quality of its human capital and the skills of its auditors,
  • the dedicated resources and the skills connected to the communication during audit missions and their results.

Among the companies that put in place such practices, only those that do so sufficiently and effectively are going to succeed in increasing the quality of their audits and thus are going to obtain a certificate of conformity for the international standards of internal audits (standards set by the Institute of Internal Auditors). By econometrically connecting the practices that lead to earning this quality label, we can identify their contributions relating to the quality of internal audits at companies.

Human capital and best governance practices

In our results, the development of human capital stands out as a prerequisite, which provides auditors with the needed expertise to successfully complete all of the stages of an assignment. This assumes that efforts are made to recruit auditors who have sufficient technical skills and to invest in their professional training, namely through certifications such as the CIA (Certified Internal Auditor).

For organisations that do not choose to development their human capital, they can also strengthen the quality of their auditing by relying on the implementation of best governance practices. In fact, these practices guarantee the independence of the auditors in terms of their access to the information needed for their work and the acknowledgement and application of their conclusions. The results show that this is very important in small companies whose internal audits do not have a robust structure.

While both aspects have a positive impact on the quality of internal audits, there is a difference: our results suggest that investments made to improve governance will be less profitable than those that focus on developing human capital in the internal auditing department.

Also investing in communication

Despite the importance of human capital and best governance practices, our results also emphasise that the quality of communication among auditors is a factor that improves auditing quality. The internal auditor must possess solid oral expression skills to create a trustworthy environment and to cooperate with those being audited, which will allow the auditor to establish greater understanding of the auditing processes and identify potential deviations. Likewise, objective and appropriate written communication facilitates the acknowledgment and application, through the audit report, of the quality of the work performed throughout the length of the mission.

However, while the auditors’ communication practices are essential for acknowledging the quality of their audits, auditors do not seem to use them during their auditing assignments. Our results suggest that greater clarifications could be applied in the IIA standards in order to steer the improvement of the communication skills of the auditors, and thus improve the quality of the internal audit.

But no visible synergies between these three forms of improvement to your internal audits

While the strategies deployed in the simultaneous implementation of these practices can be examined, companies expect to develop synergies in order to establish the quality of their internal audits. However, our results show that these synergies between best practices do not exist. Companies improve the quality of their internal audits by investing in governance, human capital and communication and by making trade-offs between the efforts put into developing each practice, judging which of these is more beneficial to invest in. Joint efforts made in developing human capital, auditor communication and governance practices do not offer additional quality gains for the companies that make these efforts. More specifically, the communication skills do not have a leverage effect on other skills: best governance practices are not going to have a larger impact on the audit’s quality simply because they are accompanied by better communication practices. Likewise, the increase of auditor skills is not going to have a greater impact on the audit’s quality just because their communication skills are also improved.

This lack of synergy can be explained in two ways: we believe that internal auditor directors do not think to manage potential synergies because they are guided by the outlook of auditing committees that take into account the department’s budget and tend to support independently one or the other of the best practices based on their productivity and the application of the practices at other companies. We can also assume that while companies look for synergies between these best auditing practices, their performance is not satisfactory, or at least, the international auditing quality standards still do not take into account the comprehensiveness of the quality efforts made by some companies. Our study does not make a choice between these interpretations. The study of these synergies at companies therefore remains a legitimate strategy.

By Stéphane Lhuillery, Finance Department, NEOMA Business School, Stéphanie Thiéry, FACC Department, ICN Business School and Marion Tellechea, ICN Business School.

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27 November 2020
Lhuillery Stéphane


Lhuillery Stéphane

Professor NEOMA BS

Stephane Lhuillery is full professor of industrial economics and innovation, and hold the NEOMA Chair in Industrial Bioeconomy. He graduated from the Ecole Normale Superieure in Cachan, has a PhD in Industrial Economics (Paris Nord University), and is authorised to supervise research (HDR from Paris Dauphine University). Formerly Associate Professor at Paris Nord University (1998-2004), he joined Dominique Foray's Chair of Economics and Innovation Management at EPFL (Lausanne) before becoming professor at ICN Business School (2011-2017). His main research interests are in knowledge creation and dissemination. He first studied how firms organize to absorb and disseminate knowledge. He then examined the co-factors driving the successful, lasting innovation: governance practices, R&D department structure, organizational slack, and complementary assets such as marketing. He has also worked in specific technological fields, such as Biotech, Nanotech, Med-tech and Green-Tech. Finally, the analysis and assessment of innovation policies are central to his work. These different fields of expertise have led him to serve regularly on national or international committees (France Strategies, HCERES, MESRI, INSEE; OECD, WIPO, European Commission). His writings have appeared in the leading academic journals in his field, such as Research Policy, Industrial and Corporate Change, Journal of Evolutionary Economics, Economics of Innovation and New Technology, Industry and Innovation among others. He is member of the scientific board of the journal M@n@gement.