The effects of audit committee on internal audit department: A study on the perceptions of chief audit executives in the context of Turkey

The second half of the 1990s is possibly best characterized by the term "change" in terms of commercial, economic, technological, sociological, cultural, local, global and glocal developments, which have also forced businesses to comprehensive reengineering processes. An increasingly competitive environment, rapidly changing market needs and desires, and more complex business processes have rendered organizational management an even more challenging task. All these developments have contributed to and enhanced the significance of internal auditing as a business function that provides organizations with an objective and transparent consulting service as well as a higher value added. The continuity of business activities in a consistently developing organizational ecosystem and leading the competition could only be possible by an ex-ante prediction and detection of the potential risk factors. Thereby, a fully operational internal audit function is necessary for uncovering any frauds and errors, and preventing recurrence of mistakes. The worldwide financial crises that affected the global economy, corporate scandals, the rapidly developing technology and the environmental dynamism that surrounds companies have expanded the sphere of influence of the internal audit function. Back in 1950s, internal audit was only about protection of the corporate assets whereas it is expected to be a source of higher company value by 2000s. This shift from a classical understanding of internal audit to a modern perspective also marks a transition from a reactive view to a proactive one (risk-oriented). Internal audit has thus become a thorough system that helps detect not only risks but also opportunities. In this sense, internal audit is expected to a be well-balanced organizational function that incorporates risk management and corporate governance. Internal audit function significantly contributes to a higher transparency and accountability vision within a corporate governance framework, which is only possible through solid collaboration of the internal audit committee. A staunch connection between internal audit function and internal audit committee has direct influence on organizational effectiveness and efficiency. The efficiency and effectiveness of the aforesaid relationship between internal audit unit and audit committee plays a particularly critical role in organizational decision making processes. Moreover, top management has direct responsibility to settle any disagreements and reinstate peace between internal audit and audit committee in the event. In addition, chief audit executive has a key role in developing more prolific relations between internal audit unit, corporate management and audit committee. To guarantee further efficiency of the business processes, chief audit executive should coordinate cross-functional relationships in a such a way to avoid any misunderstandings. A review of the relevant literature shows that there is a lack of research investigating the relationship between internal audit unit, chief audit executive (CAE) and audit committee. In that sense, this thesis is modest attempt that addresses this gap in the literature by investigating the hypothesized relationship between internal audit practices and audit committee. Specifically, this thesis problematizes the interaction between audit committee and internal audit unit through chief audit executives' perceptions. The findings of the empirical study show that public ownership does not provide a benchmark in terms of 'chief audit executives' perceptions regarding financial audit, communication, risk management and independence. Chief audit executive of companies with an internal audit committee where direct reporting is not the norm have less than perceptions of independence. The study also evidences the under representation of internal audit units in the context of Turkey and provides a preliminary example addressing the topic of interest. The findings are discussed with a view to theoretical and practical implications.