thesis in corporate management Ecole des haute etudes commercial

The School of Higher Commercial Studies Algiers
End-of-study thesis in view of obtaining a Master’s diploma
in Commercial Sciences
Specialty: Management and Entrepreneurship
Theme:
The impact of internal audit practices on
the corporate governance in center
of Algeria pubic companies
Case: GRTE Spa
Presented by:
Supervisor:
Mr. DJAHNIT Salah
Mr. KANDI Mohamed
Amine
Amine
Lecturer Class A
8th promotion
June 2021
‫ملخص‬
‫واستنادا ً إلى فكرة العولمة‪ ،‬فإن الشركات في مختلف أنحاء العالم شهدت عدة طفرات متعددة‪ ،‬ومن بين هذه التغيرات‬
‫االنفصال بين السيطرة والملكية‪ .‬التي جلبت لنا مشكلة الوكالة‪ ،‬حيث كان لهذه المشكلة العديد من االسباب التي تتفاوت من‬
‫عدم تماثل المعلومات‪ ،‬والموقف الذي يتسم بالمصلحة الذاتية من جانب المدير‪ ،‬والعزوف عن خوض المجازفة‪ ،‬إلى آخر‬
‫ذلك‪ ،‬كانت هذه المشاكل سببا ً في خلق عبء على الشركات وتهديد ثروات البالد على مستوى االقتصاد الكلي‪ ،‬والعديد من‬
‫أصحاب المصلحة على المستوى الجزئي‪.‬‬
‫وقد جاءت حوكمة الشركات لحل مشكلة الوكالة والعديد من المشاكل األخرى التي ظهرت بعد إعادة تشكيل هيئة‬
‫االقتصاد وتطوي ر المؤسسة‪ ،‬وبما أن جانب االدارة هو الذي ال يهتم فحسب بالصعيد الداخلي للمؤسسة‪ ،‬بل أيضا بالجانب‬
‫الخارجي للمؤسسة‪.‬‬
‫فمع الكثير من البحوث والمجالت وااقراحات المؤسسات عن أفضل الممارسات المقترحة إلدارة الشركات‪ ،‬فإن الضمان‬
‫الوحيد لكفاءة نظام حوكمة الشركات يتلخص في صحة وفعالية آلياته‪ .‬وهي تختلف من نظام إلى آخر‪،‬لكن عموما في داخل‬
‫نجد مجلس اإلدارة‪ ،‬لجنة مراجعة الحسابات و خارج المؤسسة نجد األسواق المالية الخارجية‪ ،‬و مراجعي الحسابات‬
‫الخارجيين‪.‬‬
‫ولكن نتيجة للفضائح المالية في الواليات المتحدة وأوروبا واليابان‪ ،‬أصبحت المراجعة الداخلية للحسابات أداة أساسية‬
‫في نظام حوكمة الشركات‪ .‬والواقع أنها تعتبر واحدة من اآلليات الرئيسية في نظام حوكمة الشركات‪.‬‬
‫والغرض من هذه االطروحة هو دراسة ما إذا كانت المراجعة الداخلية للحسابات آلية فعالة حوكمة الشركات في قلب‬
‫بيئة الجزائر في هذه المجاالت الثالثة‪ :‬الحد من عدم التناظر في المعلومات‪ ،‬وحماية حقوق أصحاب المصلحة‪ ،‬وتعزيز نظام‬
‫إدارة مخاطر المشاريع‪ .‬استنادا ً إلى مراجعة الكتابات التي تتناول النظريات المختلفة حوكمة الشركات وممارسات المراجعة‬
‫الداخلية للحسابات‪ .‬وتم توزيع استبيان جواب الذاتي على أفراد من مختلف الدوائر في شركة عامة جزائرية‪ .‬استنادًا إلى‬
‫اإلجابات التي نجري عليها بعض االختبارات اإلحصائية الوصفية والتحليلية للتحقق من صحة الفرضية أو رفضها‪.‬‬
‫الكلمات الرئيسية‪ :‬إدارة الشركة‪ ،‬التدقيق‪ ،‬عالقة الوكالة‪ ،‬عدم تناسق المعلومات‪ ،‬إدارة المخاطر‬
Abstract
Based on the idea of globalization, companies around the world have multiple mutations,
and one of these changes is the separation between control and ownership. Which brought to
us the agency, where the latter had many sources varying from the information asymmetry, the
self-interested attitude of the manager, and the risk aversion, etc. These problems have created
a burden to the companies and threatened the country’s wealth on the macroeconomics level,
and many stakeholders in the micro-level.
Corporate governance came to resolve the problem of agency and many other problems
brought into existence after the remodeling of the environment and the development of the
enterprise, since it is the aspect of management that interested not only on internal of enterprise
but as well to the external of the enterprise.
With much research, journals, institutions document the proposed best practices for
corporate governance the only guarantee of the efficiency of the system of corporate
governance is the validity and efficacity of its mechanisms. They differ from one system of
governance to another but generally, in the internal of the board of directors, the audit
committee where else on the external financial market, external auditors.
However, As a result of the financial scandals in the US, Europe, and Japan, internal audit
has become an essential tool in the corporate governance system. Indeed, it is considered one
of the principal mechanisms in the corporate governance system.
The purpose of this thesis is to examine whether the internal audit cloud is an efficient
corporate governance mechanism in the center of Algeria's environment in these three areas:
reducing the information asymmetry, protecting the stakeholder's rights, and enhance the
enterprise risk management system. Based on the review of the literature of the different
theories of corporate governance and the practices of the internal audit. A self-completion
questionnaire was distributed to individuals from different departments in a public Algeria
Company. Based on the responses we conduct some statistical descriptive and analytic tests to
validate or reject the hypothesis.
Keywords: corporate governance, audit, the agency relation, information asymmetry,
risk management
Résumé
Autour de l'idée de la globalisation, les entreprises du monde entier connaissent de
multiples mutations: et l'un de ces mutations c’est la séparation entre le contrôle et la propriété.
Ce qui nous a créa un problèmes d'agence: où ce dernier a de nombreuses facteurs variant de
l'asymétrie de l'information, l'attitude d’opportunisme des managers et l'aversion au risque: etc.
Ces problèmes ont créés un fardeau pour les entreprises et menacer la richesse du pays au niveau
macroéconomique: et les parties prenantes au niveau microéconomique.
Le gouvemement d'entreprise est venu résoudre le problème d’agence et bien d'autres
problèmes apparus après le remodelage de l'environnement et le développement de 'entreprise:
puisqu'il s'agit de l'aspect de la gestion qui s'intéresse non seulement à l'interne de l'entreprise
mais aussi à l'externe de l'entreprise.
Avec des nombreuses recherches effectuées par les institutions nationales et des chercheurs
qu’ont proposées les meilleures pratiques pour un bon gouvernance d'entreprise ; la seule
garantie de l'efficacité du système de gouvernance d’entreprise est la validité et l'efficacité de
ses mécanismes. Ils différent d'un système d’un pays à l’autre mais généralement. À l'interne
d’entreprise on se trouve: le conseil d'administration: le comité audit et à externe s’agissant le
marché financier et les auditeurs externes.
Cependant, à la suite des scandales financiers aux États-Unis, en Europe et au Japon: l'audit
interne est devenu un outil essentiel du système de gouvemement d'entreprise. En effet: il est
considéré comme l'un des principaux mécanismes du système de gouvemement d'entreprise.
L'objectif de cette thèse est d'examiner si l'audit interne peut être un mécanisme de
gouvernance d’entreprise efficace dans le contexte algérien à travers les trois domaines suivants
réduction de l'asymétrie d'information, protection des droits des parties prenantes et
amélioration du système de gestion des risques de l'entreprise. Basé sur analyse de la
documentation existante dans les différentes théories de la gouvernance d’entreprise et les
pratiques de l'audit interne. Un questionnaire a été distribué aux Individus de différents
départements d'une entreprise publique algérienne. et Sur la base des réponses recueilles nous
avons effectué des tests statistiques pour valider ou rejeter notre l'hypothèse.
Mots clés : gouvernance d'entreprise, audit, relation d'agence, asymétrie
d'information, gestion des risques.
Dedication
To anyone who have helped me
To the memory of my Mom
Acknowledgments
would first like to thank my supervisor, mister Mohamed Amine Kandi, who was
the teacher, a friend to me, and his expertise was invaluable to me. Your insightful
feedback pushed me to sharpen my thinking and brought my work to a higher level.
I would like to acknowledge my colleagues from my internship at GRTE. For their
wonderful collaboration. I would particularly like to single out my supervisor at GRTE,
Mme Geunfissi, I want to thank you for your patient support and for all of the
opportunities I was given to further my research.
I would like to thank my parents for their wise counsel and sympathetic ear. You are
always there for me. Finally, I could not have completed this dissertation without the
support of my friends.
List of Tables
Chapter and N°
Title
Page
Table N° I-1
an overview of the agency theory
25
Table N° I-2
micro theories of CG
43
Table N° II-1
IIA’s internal audit international standards
62
Table N° III-1
Statistical information about the questionnaire applications.
127
Table N° III-2
Likert response labels
129
Table N° III-3
reliability statistics
131
Table N° III-4
reliability statistics for axis 01
132
Table N° III-5
reliability statistics for axis 02
132
Table N° III-6
reliability statistics for axis 03
133
Table N° III-7
a summary of the Cronbach's Alpha results
134
Table N° III-8
distribution of the respondents by: sex
135
Table N° III-9
distribution of the respondents by: Age
136
Table N° III-10
the distribution of respondents by age and gender
138
Table N° III-11
the distribution of respondents by their educational backgrounds
138
Table N° III-12
The distribution of respondents by their Experience
139
Table N° III-13
The distribution of respondents by profession and department
139
The distribution of respondents by how to carry out an internal
Table N° III-14
audit/control/ inspection mission
Distribution of respondents by who carry internal audit/
141
141
Table N° III-15
inspection/ control across different departments
Table N° III-16
Distribution of respondents by their hierarchical position
143
Table N° III-17
statistics summary of all the response on the three-axis questions
145
Table N° III-18
the summary of the result of the first axis questions
147
Table N° III-19
the result of the total data in the above table
151
Table N° III-20
the summary of the result of the second axis questions
154
Table N° III-21
the result of the total data in the table
156
Table N° III-22
the summary of the result of the third axis questions
158
Table N° III-23
the result of the total data in the table
160
Table N° III-24
the z-score skewness or kurtosis
163
Table N° III-25
Kolmogorov-Smirnov test
165
Table N° III-26
Shapiro-Walik test
166
Table N° III-27
the result of the one-sample T-test for the first axis
167
Table N° III-28
the result of the T-test for the second axis
169
Table N° III-29
the result of the T-test for the third axis
170
List of Figures
Chapter and N°
Title
Page
Figure N° I-1
the firm as nexus of contract
20
the differences between the firm and the market contractual
Figure N° I-2
structure
21
Figure N° III-1
GRTE in the middle of the electrical grid.
109
Figure N° III-2
the development provision plan of GRTE infrastructure
110
Figure N° III-3
the GRTE organizational structure
117
Figure N° III-4
distribution of the respondents by: sex
136
Figure N° III-5
the histogram shows the distribution of the respondents by Age
137
Histogram demonstrates the distribution of the sample by
Figure N° III-6
profession and department
140
histogram illustrates the distribution of persons how have
conducted internal audit/ inspection/ control mission across the
Figure N° III-7
department
142
Histogram demonstrates the distribution of the sample by their
Figure N° III-8
hierarchical position.
144
Liste of Abbreviations
Abbreviations Meaning
AAA
American accounting association
ACIIA
Asian confederation of institutes of internal auditors
AC
Audit committee
BOD
Board of directors
CEO
Chief executive officer
CFO
Chief finances officer
COSO
Committee of sponsoring organizations of the Treadway commission
CAATs
Computer-assisted audit technologies
CG
Corporate governance
ERM
Enterprise risk management
FRAP
Feuille de révélation et d’analyse de problème
IIA
Institute of internal auditor
IFACI
Institut français de l'audit et du contrôle internes
IA
Internal audit
ICQ
Internal control questionnaire
ICS
Internal control system
ICS
Internal control system
ISA
International audit standards
AICPA
American Institute of certified public accountants
OCDE
Organization for economic co-operation and development
SOX
Sarbanes–Oxley act
SEC
Securities exchange commission
SME
Small-medium enterprise
UFAI
Union francophone de l' audit interne
Summary
General introduction…………………………………………………………………..01
Chapter one: Corporate Governance Literature Review……………………….......07
Chapter one introduction………………………………………………………………..08
Section one: Generalities and history of the corporate governance…………………….09
Section two: The two approaches of the paradigm of efficiency……………………….31
Section three: The corporate governance mechanisms…………………………………44
Chapter one conclusion…………………………………………………………………52
Chapter two: The Internal Audit and the Corporate Governance Interrelation from
Theoretical Perspective………………………………………………………………........53
Chapter two introduction……………………………………………………………….54
Section one: Generally about internal audit………………………………………….....55
Section two: Internal audit forms and types.………………………………………...…65
Section three: The organization of the audit mission…………………………………..72
Section four: internal audit as a mechanism of corporate governance...........................88
Chapter two conclusion………………………………………………………………..103
Chapter Three: Study Case: The GRTE’s Internal Audit Function as a Succor of
Corporate Governance…………………………………………………………………….104
Chapter three introduction……………………………………………………………...105
Section one: General Presentation of GRTE…………………………………….……..106
Section two: the internal audit function significance in the corporate governance case study
of the GRTE Algerian public company…………………………………………………….118
Chapter three conclusion ……………………………………………………………...172
General conclusion …………………………………………………………………..173
General Introduction
General introduction
2
General introduction
Each economic system has a theoretical or practical impediment and defectiveness that
could not provide us with a straightforward pathway to utopia. Meanwhile, with the charming
rise of capitalism, we have seen uncountable falls that led the world into the abyss. The capitalist
system could be viewed, as a robust chain conversely the falls of one part will certainly lead to
the dismantlement of the chain. From all the collapses of this system, we could observe that
corporate governance occupies the central part of the system. Where any failure in the latter
causes Punitive Damages to the global economy.
All the latter collapses around the world have one correspondence incitement, which is financial
scandals and the absence of meticulous control. As a result of these calamitous economic
consequences and the exigency of continued economic development. At first, all the corporate
governance participants have established multiple governance mechanisms to guarantee the
safeguarded of their economic wealth and the creation of the economic rent. Nevertheless, internal
audit was not a mechanism of corporate governance according to the agency theory the internal audit
was not considered to be a monitoring mechanism in the context of the agency relationship where
else external audit was deemed to be an effective oversight mechanism but scandals have shown the
inadequacy of the latter.
However, with the remarkable progress in the internal audit profession and the recent mandatory
requirements. Nowadays, internal audit has become one of the backbones branches of corporate
governance and essence to equilibrate the power between all the parties.
In economics, we see the firm as a receptacle of contractual relations, where corporate
governance is the system that controls and manages these relations in a systematized or
uncorroborated manner with a view to continuous development and sustainability. Traditionally,
corporate governance was for managing the relationship between the corporate owners, which are
the shareholders, and the risk owner, which are the managers.
However, not very far ago, we have seen a change in the formula where the stock market is not
the preserve of few majority shareholders or financial institutions anymore. Minority stockholders
commence to emerge and they started to verbalize for the abuse of the stoke market whales and
financial institutions and we could take a lesson from the GameStop collision. Nevertheless, as we
General introduction
3
stated earlier the capitalist system is a chain, and the corporate governance is indistinguishable from
the latter since the ignorance of one part from the minority of the shareholders, suppliers to the
customers will lead certainly to the collapse of the system. In nutshell, the corporate governance
system is a process and procedure in which it guarantees the distribution of the right and
responsibilities between all the stakeholders and participants in the organization so it could be
prevised as an arrangement for risk protection and decision-making.
Where else, internal audit is an objective and independent activity that provide the organization
and its stakeholders an assurance and clear view on the efficiency and effectiveness, and on the other
hand advise to develop and create value in three areas internal control, risk management, and
corporate governance in all organizational level from the operational to the strategic level.
The internal audit could enhance the corporate governance by providing the stakeholders with
a clear vision and independent vision on the risk management process, the efficiency of the internal
control, and contribute to reducing the information asymmetry between all the stakeholders.
Enhancing the system of risk management to resolve the problem of risk-averse. Moreover, it plays
the role of internal control system catalyzer to moderate the individual opportunism aiming for better
corporate governance to materialize sustainable development.
In the context of our country, over the history of Algeria, we have multiple mutations from the
dominant socialist nature of management to corporate autonomy. During this, we have seen wide
dissemination of fraud and bankruptcy phenomena. Which led the regulators to enact new laws,
instructions to strengthen the internal control and audit. Nevertheless, for more than two decades,
Algeria has been struggling with a painful transition process that is still far from being completed.
The value of the main governance indicators attributed to it by international institutions. However,
we have recognized in the last decade multiple government actions regarding corporate governance
with the intention of promoting corporate transparency, particularly in the financial reporting, and
the value creation process.
In recent years, these companies are compelled not only to appoint an internal audit function
but also to expand its role, especially in the area of corporate governance, considering that this
relationship between audit and internal is of considerable significance to Algerian companies.
Despite that, we also noticed that multiple research has been interested in this area of governance
and audit. On the other hand, the past, the contemporary occurrence that happened and happening
the business world inspire us, led us to enquire about corporate governance and internal audit, and
General introduction
4
analyses the interdependence of the letters and the significant addition put internal audit into service
of corporate.
All these reasons have given us an objective to answer our question and analyze the internal
audit practices and corporate governance within the Algeria environment.
Our subject is outlined as follows: «The impact of internal audit practices on the
corporate governance in center of Algeria public companies ».
There are accumulating shreds of evidence shown that substandard and adequate governance
systems are a manifest impediment to the development of many countries, notably in Africa. In other
terms, good economic performance is the result of good economic governance. In Algeria, The
Pandemonium of the social and the economic situation that is assessed based on objective criteria
could explain the corporate governance. To lessen the expected repercussion and abate the
economics miscarriage we need at first, to establish an efficient corporate governance system. and
the formula to that is by the inauguration efficient internal audit practices, which would be a
mechanism that helps strengthen corporate governance its transparency and overall from participates
in the proper functioning of the company to the development of the country economics’.
Our the other hand and form subjective-objective this aspect of business and economics’ has
fascinated us to dive into it in a meticulous manner aiming to acquire the needed clarification to
answer our numerous question and the multiple interactions of the elements in this world their cause,
consequence and magnitude over each other,
Therefore, we have chosen the framework of our thesis to explain the relationship between the
internal audit and the corporate governance system, and to attempt to respond to the following
problematic:
« How could the internal audit activity be conducive to the enhancement of the
corporate governance of Algeria’s companies? »
From this central problematic question, stem multiple secondary questions. They are in the
following:
1. Could the internal audit activity reduce the information asymmetry between all
the stakeholders of the company?
General introduction
5
2. Does the internal audit activity have an influence in moderating the risk-averse
among the risk owners?
3. Does the internal audit activity help to protect the stakeholders within and
outside the company?
In order to provide an appropriate response to these questions we submit the following
hypothesis:
1. The internal audit could be relied upon as a prime instrument in risk management to
improve corporate governance
2. The internal audit activity could mitigate the problem of the information asymmetry
between stakeholders
3. there is a positive correlation between the internal audit efficiency and the protection
of the rights of the stakeholders
To achieve the aims of our study we employed a descriptive and analytical approach. Firstly,
we aim to describe the concept of corporate governance and internal audit then we will analyze the
contribution of the internal audit activity on corporate governance, which we will analyze the
correlation of the two main variables. Moreover, to perceive a better understanding of the two
phenomena we begin with a literature review to clarify the ambiguity of the two concept-using
books, articles, etc., and establish a theoretical relation and hypothesis.
Then to confirm our assumptions we conduct an empirical study and do not limit the study to
theoretical acceptance. To conduct our study we have a population that has relation with the internal
audit e.g. ex-auditors, inspectors, administrators, etc. by conducting an audit, control, or inspection
mission, which qualify them to acquire respectable Knowledge about internal audit and governance.
The data was collected using a self-completion questionnaire in form of a Likert scale. After the data
collection, we analyze it using a descriptive statistic, which could give us preliminary explication
about the study result. In addition, after using a statistical test (T-test) we could confirm or denies
our hypothesis and provide an adequate response to the problem.
Provides an appropriate resolution to our problem, we have designed our study and segmented
it into three chapters, as follows:
We dedicated the first chapter literature review of corporate governance where we examine the
evolution of the term “governance” overages and in multiple cultures then we attempt to scrutinize
General introduction
6
rearrangement of the firm from the entrepreneurial to multinational. and the associated theories of
the firm across these passages with that attempt to give an explanation of what is the inducement that
facilitates this transfiguration with regard to the economic and social reality, and finally to arrive at
the adequate definition of the corporate governance. Then we proceed to provide a presentation of
the different approaches of paradigms of efficiency in corporate governance, their interaction,
dissimilarity, and the reasoning behind each of these approaches. Finally, we highlight the globally
recognized mechanisms of corporate governance on two levels of inside and outside we present their
interaction and their role attain a favorable system of corporate governance.
The second chapter focuses on the theoretical approach to internal auditing. With the purpose
of shedding light on this phenomenon by presenting at first its history, its various definitions, its main
activities, and the international standards regulating it. We then discuss the different types of internal
auditing to get a more in-depth idea. Then, we present the audit mission and how it is conducted, it
is well understood that any audit mission passes through three principal phases "preparation,
analysis, and conclusion". Then, demonstrate the main auditing tools as these tools are considered to
help the auditor to accomplish his mission. Finally, we analyze the relationship that exists between
internal audit and corporate governance in four different aspects.
The last chapter will our case study, we attempt to study and analyze from the point of view of
professionals. We start presenting the organization its main activities and their corporate governance
and audit. We present the choice of our methodology in depth. Moreover, the last section will be
based on the completion and analysis of the Likert questionnaire that was addressed to a set of
administrators in the center of the latter organization, which they are with continuous interaction with
internal audit. After the data was collected, we employed multiple statistical tools to analyze and
explain the perception of the respondent on the subject and the reality of the internal audit and
governance within the company. Then we conduct some statistical tests to validate or reject our
hypothesis
Chapter One: Corporate Governance
Literature Review
Chapter One: Corporate governance literature review
8
Introduction Chapter one
Corporate governance, as a subject has been barely discussed before the nineteenth century,
but now the situation has changed significantly and has become a universally cited topic to
debate between different researchers whenever business and economics are present, which
gives rise to multiple academic research and degree, conferences, speeches, and countless of
articles.
The ascending significance and importance of this subject was not surprising and became
a result rather than coincidence, on one hand, due to a series of corporate meltdowns and
scandals that grew out of managerial fraud, maladministration, and negligence leading to a
massive loss of the shareholder's fortune. And in the other one because of the intensifying
pressure and the dissatisfaction of the shareowners and the public,
An interrogation began to emerge and became an issue that places a heavy burden on the
firm's owners (stockholder), who is responsible for providing the appropriate protection and
preservation for the shareholder and their investments. Since the history of corporate
governance and the top management practices has been arguably understandable and rises
multiple concerns of ethics and disclosure in the community.
The literature review will set the ground, gives us a general insight and clearer vision of
corporate governance, and observe the evolution and the history of the subject of matter.
First, we propose to trace the evolution of the subject. Concepts and principles, actors,
nevertheless the historical revolution of the topic
Then we present the main approaches and standpoint of corporate governance with the
different theory that was derived from each approach.
Lastly, we have examined the external and internal mechanisms of corporate governance.
Chapter One: Corporate governance literature review
9
Section One: Generalities and History of the Corporate Governance
1. The historical evolution of the governance concept:
Corporate Governance as a concept has multiple interpretations depending on the context,
it seems appropriate to start with setting out the general concept of governance from a historical
and multidimensional level. Hence, the concept of “governance” has been controversial in the
economic world as well as for the political classes. The first attempt to analyze the subject was
in early classic political science and motioned as “governability” (Michel Foucault), as a
concept formed on two principle right and order, with the end of the cold war the last-mentioned
has been alternated by the concept of governance.
Contemporarily, the notion has been frequently studied since the problems of coordination
between actors are found at the levels of the State, the city, the company, and the world. There
is now talk of local governance, urban governance, corporate governance, employment
governance, global governance, multi-level governance.
This ambiguity of the term makes it challenging to conduct a unique and stable definition
of governance. An etymological diversion of the term. This will lead us to set the general
framework for the inclusion of governance definitions. The concept of governance is a longestablish one, and the term governance has been derived from the Latin "gubernare" and the
Greek "kubernân" which means, "to pilot a ship"1.
Therefore, it is the art and the procedure of governing within an environment characterized
by the plurality of actors (firms, state, associations…) all one of them held the decision-making
authority. The action of governing also supposes that we question the direction in which we
want to "direct the ship", hence a reflection on the end goal of the action.
“Gubernator” refers to the person who is holding the ruder of the warship; his role was
neither to row nor to command the rowers or the combination of the two. His role was to monitor
the vessel's trajectory. As result, the first definition of the word governance was surveillance
and monitoring (John O’Grady)2, however, governance is not just a matter of decision-making
for guidance, now governance tackles the issue of the mechanism needed to negotiate the
different interests of the society.
1
Maugeri (S), « Gouvernance (s) ». Edition Dunod, Paris, 2014, .PP.13.
O'GRADY {J], « Recent Corporate Failures - Key Lessons from the Private Sector ». Conference on
Corporate Governance in the Public Sector, Canberra, 13 August 2002.
2
Chapter One: Corporate governance literature review
10
To grasp a better understanding of the term in the current time, it is essential to observe
the different interpretation perceived from this word over the centuries, thus we have:
1.1. The Medieval governance:
In the 13th century in France, The terms governance, govern and government appeared to
be semantically indistinguishable, these notions meant "the action of piloting something".
Nevertheless, those terms have been easily recognized since political science in Frenchspeaking centuries was developed and pioneering in this field and with good governance
prescribed by an international organization (United Nations UN, International Monetary Fund
IMF, World Bank). Unlike other Europeans, countries at the time have not created an equivalent
of the word governance (Italia, German, Netherlands, and Swede…) those countries formalize
the English term.
1.2. The governance in the middle ages:
Jaen Pierre Gaudin3, a French specialist in public politics, has defined the three ages of the
evolution of the term governance (the first one cited above).
He then associates the second one to the age of enlightenment, as the conceptual cogitation
on the power, which this phenomenon has generated gradually, led philosophers to differentiate
the notion of government vis-à-vis the notion of governance. Based on Machiavelli's reflections
on the State and Jean Badin’s ideas on “absolute sovereignty”, the concept of a State monopoly
exercising power over a population circumscribed to a given territory. In this perspective, the
notion of government is associated with the idea of state-centered and hierarchical power; In
the meanwhile, the process of defining governance is more chaotic. The notion is associated
with "mutual adjustments between economic and social interests"; it is equally used in French
political philosophy debates to advocate a transformation of the Ancient Regime.
So the government was perceived as the absolute monarchy, whereas governance appeared
as an alternative mechanism imposing a balance between the royal and the parliamentary power.
Minorities used these expressions and the term governance was a subject of disuse during the
19th we can see at this moment not only the reasons for the distinction between the notion of
government and governance and the ambiguity surrounding the notion of governance.
3
GAUDIN, (J.). « Pourquoi la gouvernance ? », Presses de Sciences Po. (2002), PP 27-28
Chapter One: Corporate governance literature review
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1.3. Modern governance:
According to this conception of governance, it is more associated with the management
rather than authority, and with the migration of the term into the Anglo-Saxon world, the United
States to be particular. Thus, influenced by the American pragmatism and principles, the notion
of governance will take a place in the methodological analysis of public politics, management,
and even sociology, so this age corresponds to the return of the notion in the course of the 20th
with various innovative applications all of which draw inspiration from economics.4
1.4. Governance, a concept that draws on economics theory:
In the XX ͤ ͫ ͤ century, the re-emergence of the idea of governance initially appeared in the
economic field of the United States with the publication of an article by Ronald Coase5,
according to him, governance designates the internal coordination methods that reduce the
transaction costs that occurs when using the market apparatus, this theory was subsequently
adopted by neo-institutionalist economists’.
By the end of the 1970s, Oliver E. Williamson, with his theories address the possibility of
organizing and/or structuring firms employing hierarchical models enhancing efficiency,
furthermore, in the same context with his theories he calls into question the Fordist production
modalities as less efficient.
The notion of governance, therefore, draws inspiration from the American economists’
vision, according to which that economic coordination is essential for a firm to establish
conventions, norms, and immediate agreement. According to this perspective, the state is a
secondary entity, exciting exclusively to ensure the self-regulation of the market, from this
perception; the political institutions only serve the purpose of guarantee the liberation of the
economic force and compliance with the regulation of concurrency.
The evolution of the notion of economics theories has contributed to the development of
the governance notion. This evolution of the term and with the emergence of many financial
scandals, macro, and microeconomic filatures cause by the misdirection of the firms and the
market in general in the 1970s.
4
5
GAUDIN, (J), (2002), « Pourquoi la gouvernance ? », Ibid. PP.30
COASE, (R), “the nature of the firm”, Economica, New series, Vol. 4, N° 16, 1937. PP.386-390
Chapter One: Corporate governance literature review
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The term has shown large adaptability between scholars and economists in the context of
“corporate governance” to mention R. COASE and O.E. Williamson. The latter gives a general
definition of “corporate governance”, as a set of coordination and surveillance mechanisms
regulating the internal organization of the firm to achieve maximum efficiency.
2. The genesis of the corporate governance conceptual framework and firm theories
The rising interest in the firm among economists since the 1970s is the result of a twofold
transition. On one hand, the neo-classical theory and its conception of the firm have been
gradually brought into question in an attempt to promote a more realistic model, on the other
hand, innumerable transformations have destabilized the Fordist firm.
For the neo-classical theory, an approach associated with traditional microeconomics, they
consider well-functioning economics system as self-regulating, without any guidance of central
control or survey, as all the human activity are adjusted and fitted into a system of mutual
interaction, since the economic system is co-ordinated by the price mechanism and society
becomes an organism rather than an organization.6
According to this perspective, the firm was considered and seen exclusively from a
technological standpoint; it was treated as a production function or “Black Box”, the only
reason for excitement is to transfer input to be adjusted to generate a set of outputs
corresponding to a maximal level of profits or some other measure of owner utility. The inputs
are controlled by the firm assuming the resource will be used in a maximum efficiency without
looking inside the firm as an organization or outside the firm regarding the firm relations with
other economic actors.
By this assumption, the firm is Managed and directed by a perfectly rational owner how
chooses the levels of inputs and outputs.
COASE. R, with his article entitled “The nature of the firm” in 1937 he is the founder of
what so-called the modern theory of the firm. Thus, COASE tackles the reason for the existence
of the firm when the price system is supposed to achieve an optimal allocation of resources,
why do we have these “islands of conscious power”7; what is the nature of the firm? COASE
answers: if the firm does exist, that is because there is a “transaction cost” when adopting the
ROBERTSON., (D), “Control of Industry”, PP. 85, and by Professor Arnold (P), “ Trends in Business
Administration”,Economia,02/1932
7
COASE, (R). 1937, op cite, PP. 385-391
6
Chapter One: Corporate governance literature review
13
market mechanism; thereby, the “authority”, represented by the entrepreneur-coordinator,
determines the allocation of resources within the firm.
Our objective is to examine, in the framework of theoretical approaches, the empirical
transformation, which the firm have witnessed, particularly the major ones: the emergence of
the corporate system, internationalization, and the modification of ownership and power
dynamics with the rise of "corporate governance”... sofas
2.1. The emergence of the entrepreneurial firm:
For A.A. Berles and G.C. Means8, the typical business unite by the 19th century was
own and directed by an individual “entrepreneur” or a few collaborate was directed by them or
their appointees; and the limitation of the size is the personal wealth of the individuals in
supervision. North, explain this transition with the capitalist economic system was a headway
from his counterpart, the latter was founded on the private ownership of the instruments of
production and their exploitation for profit.
The central characteristics of capitalism are capital accumulation, competitive markets, a
price system, private property, and the recognition of property rights based on private
ownership of the means of production and their exploitation for profit. This was achieved
through the legal efforts of the advocates of the new socio-economic system, which generate a
series of lows such as the Bubble Act (1720) in England and the American legislation from the
General Incorporation of New York (1811).9
The propriety right does not refer to the relationship between the men and the things but it
refers to the right of men to use the resource or the propriety. Therefore, it is the behavior and
the standers of any individual should observe when interacting with other persons, so in other
words it the person's right of allocating limited resources with regard to the economics and
social arrangement.
Often this is associated with hypothesis the empowerment of the exclusive authority to an
individual to determine the use of the goods regards as his propriety right. in another word, the
owner, has a legitimate right of making the choice, unrestricted right of using specified good
8
BERLES, (A) and MEANS, (C). « The Modern Corporation and Private Property », McMillan, 1932,
PP. 02
KANDI (A) « l’audit et le control interne comme un outil de dynamisation de la gouvernance
d’entreprise dans un contexte algérien », thèse doctorat en science commercial, EHEC Alger, 2017-2018, PP.6061
9
Chapter One: Corporate governance literature review
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e.g.: the firm, which was considered at the time a specified good with the eligibility of
transferring propriety right between owner within a market regulated by the price mechanism.
With this have been said, it opens a tremendous variety of mutual sharing arrangements
partnership, corporation, employee and employer relationship….
Along with this at that time, the contemporary environmental circumstances which were
characterized by negligible competitiveness, stableness and where information is available and
cost-effective, the manager of this firm was responsible for organizing, set objectives, and
surveillance through the examination of the result vis-à-vis the desired.
Alongside, he is the founder and the proprietor of the business, directly or because he is a
member of the founding family, hence, the entrepreneur-co-ordinator is a one-man-band
orchestrating the firm's activities. In addition, as a counterpart for his effort, he had the right to
claim and receive the residual claimant-monitor of the team.
Therefore, according to Alchian and Demsetz, they consider the monitor or the manager
as the “residual claimant”10. He had the right to sell this residual claimant alongside the
ownership of the firm, and to observe the inputs, to be the center of all the contracts circulating
inside the firm he can modify it or terminate it. Correspondingly, as he the residual creditor his
compensation which could be relative to the profit, correlates to what is left when recompenses
all the expenditures. The reason for earning such premium remuneration has generally been, as
claimed by knight11, that the owner-entrepreneur assumes the risk inherent in the economic
activity, which may lead to profits but also losses.
This firm structure, which is similar to the typical SME (small and medium-sized
enterprise), has been universally recognized as the ideal framework by the neo-classical
economist. Because this form of the firm characterized by:

Increasing and enhancing productivity through team-oriented production

The monitor is considered as a specialized person and had the inactive to perform
his mission efficiently and optimally as possible. Which could be considered as a
risk and reward ratio.
10
ALCHIAN, (A), DEMSETZ, (H). « Production, Information Costs, and Economic Organization »,
American Economic Review, December, (1972), PP.783
11
KNIGHT (H), « risk, uncertainty and profit », Boston, Ma: Hart, Schaffer & Marx; Houghton Mifflin
Co, (1921), PP.264
Chapter One: Corporate governance literature review
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According to Alchain (A) in 1965, he gave the three classes of the propriety right and gave
the crucial difference between the private property right and the public property right. We
assume that public property right gives in his definition and interpretation is associated and/or
refers in our assumption to socialism theory as in the public property right or ownership is borne
with all member of the public and no can dispossess the ownership. Since the ownership of
public property is not discretionary, it is mandatory considering that you are a member of the
public.
Another (important difference in these two forms of ownership is the concentration of the
reward and cost or the penalty reward system. Alchain resembles and suggests that the main
difference between any forms of property right is the level of the concentration of the letter
system, which means simply that every individual is responsible for his activates since his
wealth is more dependent upon his own activates. In public property, the concentration of
penalty reward system is relatively very since the wealth of individuals is more dependent on
other people's activity.
this system could generate wealth and the total wealth gain would decrease since the
members have less incentive to work hoping to collect wealth from other people’s activity
where else in the private property the person's wealth depends on his own activates (knowledge,
risk-bearing …..). For him, this form of property will promise to maximize the efficiency of the
global economy.
Therefore, as far as what has been said the emergence and the rise of this form of the firm
could be argued with the authority exercised by the employer within the firm over employees
the employer's authority to command offers two main advantages. On the one hand, it allows
the employer to resolve disagreements and conflicts more rapidly and cost-effectively, and on
the other hand, it allows the employer to direct the employee's work for maximum efficiency.
At the end of the 19th century, business growth, environmental transformation, and
technological advancement have brought about important changes in the organization and
management with the establishment of new rules and regulations, as a result, production
organizations had to be optimally re-subtracted to enhance profitability and to meet
technological development.
The orthodoxy of the position of the owner-entrepreneur is been in question since this
development of the capitalist industry and the complexity of the labor market. Firms are obliged
to implement different techniques of production such as mass-production as a purpose to reduce
Chapter One: Corporate governance literature review
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cost and get the maximum workforce to yield the business potential and differentiate themselves
from competitors.
The growth in firm’s size in response to business development had brought into being two
problems, which are:

The financial constraints: that faced the entrepreneurs with a relatively limited
financial resource (wealth), to invest in new production infrastructure (human
force and equipment), to keep up with the tremendous industrial growth.

The management constraints: as was said earlier, the firm size was correlated
with the industry growth and had seen significant growth; the owner-manager
is no longer able to manage the firm alone. He was gradually obliged to recruit
qualified individuals to whom he will delegate his authority to manage
personnel; the contracted professional managers are responsible for the
management of the firm.
In the same framework, A.A. BERLES and G.C. MEANS12 studied these phenomena in
1929 in the United States of America. Examining the composition of the capital and the
ownership of the 200 largest American firms.
These two authors indicated in their celebrated book “The Modern Corporation and
Private Property”. That the increasing degree of independence between the management
(managers) and ownership (shareholders) is, in their views, the source of the problem occurring
to the shareholder, incapable of knowing neither the real state of the company nor the financial
condition of the firm, Who is considered as widely diffused.
In 1967, in “The New Industrial State”, J.K. GALBRAITH, According to him, it is more
essential to preserve and protect the organization rather than capital, considering that becomes
the core factor of the production, hence, it has substituted for the capitalist entrepreneur in the
decision-making function, since the latter is no longer capable to perform, for technical reasons.
He described a firm as a mature corporation when separating and/or removing the ownership
from the control.
Decision-making authority is and must be exercised by those who have access to the
information needed to make a decision. The required information to do so is possessed by those
12
BERLES.(A),and MEANS,(C),1932,op cite, PP.03-04
Chapter One: Corporate governance literature review
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whom we would call “techno- structure13”. Those letters have scientific knowledge and
specialized techniques.
He defined them as all those who bring special knowledge, talent, or experience to
decision-making groups since in the modern industry there is numerous important decision and
needs certain information witch one man cannot possess and consider them as the guiding
intelligence, the brain of the company.
2.2. From the entrepreneurial firm to Managerial Firm:
Following the crisis of 1929, according to BERLE and MEANS14, with the transformation
of the capitalist industry in America, more broadly the separation between the shareholder
(ownership) and manager (direction and control), arose the problem. Besides, remodelling the
ownership function into a disciplinary, supported by the incentive and supervision systems
(supposed to be performed by the shareholders) and the decision-making function (supposed to
be the managers’ prerogative).
Initially, this form of organization appeared in the early days of the last century following
the emergence of a large public corporation with a widespread shareholder base, called the
managerial firm, where the manager did not possess substantial capital share.
This separation would have resulted from a deficiency in the performance of the firm and
disruption in shareholders’ value considering the suit of failure of the disciplinary system who
is responsible to control the top management act.
Those functions were usually held by a signal entrepreneur, who would assume the risk
and held the position of “residual claimant”, and since those two functions were separated and
held by deferent individuals, according to BERLE and MEANS 15, the shareholder value
maximization should not be maintained as the ultimate objective of the firm. The diffused
shareholders of the giant corporation, have neutralized the active aspect of the ownership, which
is the control, and exclusively perform the passive aspect (risk assumption).
In this case, those shareholders would lose their eligibility of being the only residual
claimants, since, the private right to possess or acquire this status is held by actors who are
actively perfuming the entrepreneurial function.
13
GALBRAITH, (J), : « Le Nouvel Etat Industriel », éditons Gallimard Paris, 2ème Edition, 1974, PP.161
BERLE, (A) and MEANS (C), Op cit. PP.69-70;119
15
Ibid., PP.09
14
Chapter One: Corporate governance literature review
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Initially, for J.K Galbraith 16 the separation between ownership and control will result in a
conflict of interest and will lead to intensifying the power and the authority of the manager and
constrain shareholder ability to control. In addition, second place will result in a conflict
between the manager and all agents who are affected by the firm’s action (the stakeholder).
However, that’s would have led to reinforcing the stock market regulations in the United States
resulting in the creation of the Securities and Exchange Commission (SEC), responsible for
protecting financial investors.
Therefore, the managerial firm becomes an area of contention of value creation and the
allocation of the latter between different stakeholders, who have divergent interests, in that
order, the issue is how to unify different interests and achieve mutual agreement.
The governance at the time was a matter of “regulation” approaching the perspective of
supervising the managerial behavior of the agents and determining the rules of the game for
managers. Whether we are dealing with the relationship of political leader and public or
between manager and owner, according to lawyers and scientists the problem remains the same
for the governance, which is the separation of power, hence the rule of the game is exclusively
established to protect the financial wealth but furthermore underlying right. Which have
explained the emergence of national corporate governance systems (NSCG).
2.3. The transaction cost theory: “the firm as a governance structure”
In 1937, Coase with his article affirmed the presence of market utilization costs that explain
the emergence of the firm. Williamson17 will further analyze this issue using the concept of
transaction cost, following with his question: what is the organization form that reduces this
cost?.
The two assumptions of his theory are bounded rationality and opportunism, the first means
that agents have limited ability to predict future events, as a major consequence is an
impossibility for individuals to conclude what so-called complete contracts. Where they
identify the entire possible outcome and leave no room for chance and surprise, and they
identify ex-ante the appropriate arrangements for future states, must establish monitoring and
control systems during the contract and ex-post. In such a situation of uncertainty, the
16
GALBRAITH, (J),1974, op cite, PP .81-93
WILLIAMSON, (O):”Transaction-cost economics: The governance of contractual relations”. Journal
of Law and Economics, (1979), PP 22, 233–261.
17
Chapter One: Corporate governance literature review
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contractors are submitted to act opportunistically. Coupled with the limited rationality this will
to false promises, manipulation, and distortion of the information possessed by each party.
Williamson distinguishes two types of opportunism, ex-ante opportunism, and ex-post
opportunism. The first one occurs before the establishment of the contract, where the second
one after. The specificity of assets is for Williamson the essential feature of the transaction: an
asset is specific when its value in alternative uses is lower than in its present use. Moreover, he
distinguishes five types of the latter: human, localized, physical, intangible, and dedicated
assets. The expenses incurred in engaging such assets are "sunk" because they are not, or only
slightly, re-deployable to other applications. Actors may engage in opportunistic postcontractual behavior by practicing a "hold-up”. Since substituting, one contractor for another is
costly.
Finally, the level of transaction costs is determined by the combination of bounded
rationality, opportunism, and specificity asset. Therefore, the governance structure is used to
reduce the transaction cost. Williamson suggests three governance structures: market, the
hierarchy (the firm), and the hybrid form (long-term contracts). When transaction costs rise, the
transaction must perform through the market, internalization to the firm occur when the market
is inefficient.
2.4. The firm as nexus of contracts:
The origin of the theory that considers the firm as a “nexus of contracts” can be traced back
to a 1972 article titled “Production, Information Costs, and Economic organization” by A.
ALCHIAN and H. DEMSETZ18. Then in 1976 in “the theory of the Firm: Managerial
Behaviour, Agency Costs, and Ownership structure” by M. JENSEN and W. MECKLING19 set
the conception and theoretical background, since for them, the contractual relations are the
essential part for the firm, and those contracts are not with the relation employee-employer, but
with suppliers, clients, financial institution…. So the firm is considered to be
18
ALCHIAN, (A) and DEMSETZ, (H). (1972), op cite, PP. 777-795.
JENSEN, (M), and MECKLING, (W). « Theory of the Firm: Managerial Behaviour, Agency Cost, and
Ownership Structure », Journal of Financial Economics, N° 3, 1976, PP. 305-360.
19
Chapter One: Corporate governance literature review
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Figure N° I-1: the firm as nexus of contract
Source: Contractual Perspective on Succession in Family Firms (inspired by Ståhl (1976))
An artificial structure that has a special feature as being considered as an individual by the
legal system “legal fiction”.
From this perspective, the firm is a host that incorporates all the bilateral contracts
concluded and establish within the firm and with the suppliers, employees, and manager,
investors, and clients, as a legal entity, so its functions as a legal container for all the contracts.
For the proponents of this conception of the firm, the differences between the firm and the
market structure are that the latter is extremely delicate and inefficient under such conditions.
(Illustrated in figure 2)
In the market, every individual had to negotiate and establish contracts with all other agents
in the market, where else in the firm, a centralized agent, assembling all other parties and
engaging with each one of them. So the firm was established to reduce the number of bilateral
contracts to organize economic activities. (Illustrated in the figure below)
Chapter One: Corporate governance literature review
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Figure N° I-2: the differences between the firm and the market contractual structure
Source: the economics of the firm (l’economie de la firm) PP.09
These economics particularities of the bilateral contracts had enabled us to recognize the
frim as a subject of studies explore the black box, and all these contracts are settled in the
context of an agency relationship, this relation emerges any time an individual (called the
principal) set an arrangement with another person ( agent ) to perform a function for mutual
interest. In nutshell, the contractual approach gives rise to the construction and the
establishment of an alternative organization of the market “the firm” and bring into being types
of relationship resulted from this contractual organization “the agency relations”.
2.5. The theory of incomplete contract: The firm as a “collection of non-human assets”
Since the assumption at the time was considered the firm as, nexus of contracts this
approach come to an existence which is the theory of incomplete contracts with the work of O.
Hart et J. Moore, who discussed the problem of the “hold-up”. In TCI, the assumption is the
information between agents is supposed to be symmetrical since this is not the inadequacy in
formulating contracts. On the contrarily to the TTC when the constrain is the limits of the
rationality of the agent. In the TTC the only contains formulating a contract is the incapability
of verifying the “ex-post” by a third party the actual state of certain central variables in the
interaction between the agents e.g.: an investment in complex technology.
According to this theory, in a world where the contracts are incomplete and the transaction
cost excites, the ownership of non-human resources is crucial as it provides to the owner the
residual “ex-post” right of control over these assets. This gives him the right of using the
resource in such a manner that does not contradict the initial contracts, which means the
property right is acting as an authoritative source when the contract is incomplete. So
furthermore in this approach, the firm is not an organization, instead, it is a container of contact
Chapter One: Corporate governance literature review
22
between the owner and the non-human assets owned by him, employees may contract with the
firm but they are not part of the firm.
The Theory of incomplete contracts highlighted how the ownership of the resource and
fund affect the behaviors of agents towered the inactive of investments; it is for this purpose
the latter is sometimes referred to as the modern theory of the property right. About the "old"
theory of the property right in the 1960s, as represented by ALCHIAN and DEMSETZ.
2.6. The agency relationship
The firm’s nature is defined as Contractual relations, a contract concludes between deferent
actors with employees, suppliers, customers, and creditors, etc. and since we examined multiple
theory that viewed the firm as nexus for a set of contracting relationships among individuals to
cite the theory of transaction cost (TTC) assume that’s the individuals have limited rationality
and opportunism. Likewise, on the other hand, the theory of incomplete contracts (TIC)
assumes the information between agents is symmetrical and the agents are unable of concluding
a contract since the “ex-post” is undetectable.
Those assumptions will raise the issue of the validity of the relationship between agents
and the credibility of the contract that was concluded. and to be particular the relationship
between the principal and the agent, the agency theory deals with this relation, since many
auteurs have studied the relation more broadly and explain the consequences and the
significance of such relationships on the firm business and economy in general.
For knight (1921), he explains that the solution to agency problems lies in the selection of
good leaders for management activities. Although the foundations of agency theory were
formulated in the 1930s by BERLE and MEANS (1932), n their investigations, examine the
consequences of the separation of ownership and decision-making functions on the
performance of managerial firms.
W. MECKLING and M. JENSEN20 define the agency relationship which includes two
parties the principal(s) engage another person (the agent) to perform a service for their interest
which means that the agent is delegated with the decision making authority. If the assumption
that the agent is an opportunist and his more informed than the principal were true than the
agent will not perform to maximize and attain the best interest of the principal.
20
JENSEN, (M) and MECKLING, (H), 1976, op cite. PP.308-309
Chapter One: Corporate governance literature review
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2.6.1. The agency cost
The principal can constrain misalignments with his interest by establishing appropriate
incentive systems for the agent or by attempting the control and monitoring mechanism to
constrain dishonest activity by the agent. Also, in some cases, it would useful to pay a surety
bond by the agent to set a guarantee that he would not takes certain action he would not harm
the principal (e.g. building a reputation, showing solvency and faithfully….)
Both the principal and the agent cannot ensure that the counterpart will not take certain
action or decision that aligned the interest of both without cost, In the majority of the agency
relation both the parties ( agent and principal) will afford the optimal monitoring and bonding
cost and there will some divergence in the interest.
Moreover, those divergences in interest will initiate some decision from the agent
differentiate from the optimal decision who are in the favour of the principal, and, those
decisions will generate a reduction in the principal welfare is also a cost of the agency
relationship, and we can refer to the latter as the “residual loss”
W. MECKLING and M. JENSEN define the agency cost as the sum of:

The monitoring cost by the principal by the monitoring cost they refer to the cost
and the effort by the principal to control the behavior of the agent

The bonding cost by the agent

The residual loss
2.6.2. The source of agency conflict
The basic source of the problem that occurs between the shareholder and the manager can
be sum up into four elements:

The agent’s self–interest attitude (moral hazard)

Division of ownership and control

The information asymmetry

Residual right of the decision held by the agent
And for (lei 2007)21, he points out four possible sources of the agency's confits, namely
moral hazard which represent the manager’s inactive to consume the firm’s private resources
LEI, (C) : “revelation seen from the principal-agent theory to the reform of our management system of
institutions”, journal of Chengdu university, N° 1,2007, PP.31
21
Chapter One: Corporate governance literature review
24
to augment their wealth and that could not be done with the use of the managerial authority.
The earning retention is the case when the free cash flow will not be reinvested in the firm and
paid as a dividend. The third one is time horizon, the shareholder prefers the long-run
investment while the managers seek for the court term increase in value since their
remuneration. Lastly, Managerial Risk Aversion, manager prefers to diversify to reduce the
risk, this strategy may decrease the firm’s risk but also result in a significant loss in the
shareholder wealth since diversification may reduce risk but generally may not increase the
firm’s value.
To note the agency cost emerges whenever a situation requires collaborative work by two
people or more and it does not exclusively apply the principal-agent relationship, the agency
cost is very crucial and it is related to the problem of shrinking and monitoring production
which ALCHIAN and DEMSETZ (1972).
Since the agency is very general, and the problem of inciting an "agent" to behave as if he
maximizes the wealth of the "principal" is quite widespread. It is worth motioning that the
problem exists in all forms of organization and all; collaborative works at every level of the
firm management, in universities, mutual cooperatives, public authorities, and government
offices.
The governance system concentrates mainly on the normative dimensions of the agency
relationship e.g. how to establish an incentive contractual relation that provides the agent with
adequate motivation to take the action for maximizing the welfare of the principal given the
fact information asymmetries and imperfect monitoring exists. (Assumption of summarised in
the table below)
Chapter One: Corporate governance literature review
25
Table N° I-1: an overview of the agency theory
Key idea
Principal-agent relationships should reflect the efficient organization of
information and risk-bearing the cost
Unit of analysis
A contract between principal and agent.
Human
Self-interest; bounded rationality of agent, risk aversion.
assumption
Organizational
Partial goal conflict among participants; efficiency as effectiveness
assumption
criterion; information asymmetry between principal and agent.
Information
Information as a purchasable commodity
assumption
Contracting
Moral hazard and adverse selection; risk sharing.
assumption
Problem domain
Relationships in which the principal and agent have partly differing
goals and risk
Source: Eisenhadt (1989:59)
With this presentation of the corporate governance theories many definitions, policies and
systems have been into the table by multiple governance international institutions and
governments, since the agency relationship becomes a source of conflict and threatened the
country’s wealth on the macroeconomics level, and many stakeholders in the micro-level. In
the following, we will discuss the different definition of corporate governance the different
definitions, system, and mechanisms the countries set to ameliorate the corporate governance
system
Chapter One: Corporate governance literature review
26
3. Definitions of the Concept of Corporate Governance:
Since the concept of corporate governance had multiple definitions, we introduce some
definition given by the international organization and some auteur in the field:
The Organisation for Economic Co-operation and Development OECD22defines corporate
governance as:” Procedures and processes according to which an organization is directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among the different participants in the organization – such as the board,
managers, shareholders and other stakeholders – and lays down the rules and procedures for
decision-making.”23
Cadbury Committee report
24
of 1992 was established by the financial reporting council
(FRC), London stock exchange (LSE), UK Accountancy profession define corporate
governance as:” Corporate governance is the system by which companies are directed and
controlled…”. They recognize that the board of directors responsible for the CG of their
companies: “Boards of directors are responsible for the governance of their companies”. And
the role of the shareholder is to establish an adequate control and monitoring system:” The
shareholders’ role in governance is to appoint the directors and the auditors and to satisfy
themselves that an appropriate governance structure….”
Shleifer (A) and Vishny (W)25 in 1997, define the CG as “the way which suppliers of
finance to corporation assure themselves of getting a return on their investments….” And for
them, the corporate governance mechanisms are:” economic and legal institution that can be
altered thought the political process….” Denis (K) and McConnell (J)26 base on the latter work
define it:” as a set of mechanism both institutional and market based that induce the self-interest
of the controller “so these authors have seen the governance as a different mechanism whether
internal or external ones to safeguard the shareholder interest or the suppliers of the capital.
23
Organization for Economic Co-operation and Development (OCED) “principals of good corporate
governance”,2015, PP.03-05
24
The Committee on the Financial Aspects of Corporate Governance “the financial aspect of corporate
governance”, December 1992,UK
25
SHLEIFER (A) and VISHNY (W). : “Survey of corporate governance “. the journal of economics .Vol
II. N° 2, PP.737-738
26
DENIS.(K), and MCCONNELL.(J): “International Corporate Governance” ,Shleifer The Journal of
Financial and Quantitative Analysis , Mar., 2003, Vol. 38, No. 1 (Mar., 2003), PP.2
Chapter One: Corporate governance literature review
27
The Algerian Code of Corporate Governance (2009)27, define the corporate governance as
managerial philosophy and a set of arrangement aimed to ensure the sustainability and a set of
arrangement aimed to ensure the sustainability and competitiveness of the company through:

the identification of the rights and duties of stakeholders

The resulting sharing of prerogatives and responsibilities.
4. Corporate Governance Devices and Actors:
4.1. The board of directors:
The Board of Directors can be seen as a representative shareholder and the CG responsible
for the shareholder; develop the CG establishes and promotes business and organizational
objectives, oversee the business affairs and integrity, work with the management to establish a
long-term strategy, etc. The BOD has the full authority and independence to fulfill its
responsibilities, alongside, BOD develops CG practices and it helps to fulfill one of its
responsibilities, the latter are motioned in the CG code or guidelines.
Since we represent the organization as a knot of explicit and implicit contracts, for Achain
and Woodward (1988); Fama (1983)28, the board of directors serves to resolve the conflict that
occurs due to this agency relation and harmonize the relation of interest between those group.
The effectiveness of this harmonization between the interests can determine and support the
survival of the organization.
In theory, and for Shleifer and Vishny (1997)29, the role of the board members is supposed
to make sure that the contractual agreement is respected are direct the organization in favor of
the shareholder. So one of the main responsibilities of the BOD is to ensure the manager is
acting responsibly and effectively and does anything possible the minimization the conflict of
interest.
Thus, it is understandable the state and public law corporation requires the affaire of the
business to be directed under the supervision of the board of directors.
Code Algerian de Governances “The Algerian Code of Corporate Governance” , edition 2009 , PP.17
BAYSINGER (D) , BUTLER (N) “Corporate Governance and the Board of Directors: Performance
Effects of Changes in Board Composition”, The Journal of Law, Economics, and Organization”, Volume 1, Issue
1, SPRING 1985, PP.101
29
SHLEIFER, (A) and VISHNY, (W), op cite. PP.751-753
27
28
Chapter One: Corporate governance literature review
28
4.2. Corporate officers: management executives
Since the shareholder’s control of corporations under corporate law is limited with the
election of the board of directors and auditors, following the provision of corporate law, the
directors, on the other hand, select the chief executive officer CEO (and some other corporate
officer) and supervise their performance.
The CEOs in return for their compensation have the authority and obligation to make and
implement decisions in the ordinary course of the business concerning the disposition of the
corporation assets e.g. sign documents, act in the corporation’s name, and be the only legal
representative of the corporation. On the other hand, corporate officers by the force of the law
should report the result of the corporation operations to the directors of the board or the
shareholder representatives.
Often, the CEO can delegate (in some cases are and often are required by their
corporations’ policies to delegate) to other officers the authority to make and implement certain
actions e.g. the chief financial officer (CFO), or the chief legal officer (CLO), etc.
The CEO and the corporate officers elaborate and implement the strategic decision through
the approval of the board of directors within the framework of the approved annual plans and
budgets, and it reports to the board of directors on the results achieved in terms of the objectives
that were defined.30
4.3. Audit Committee
The first endorsement of the concept of the audit committee was in 1939 by the New York
stock exchange (NYSE), and due to the great demand for corporate governance and corporate
accountability, the U.S Securities and exchange commissions (SEC) in 1972 recommended that
public companies should create audit committee. In 1977, the New York Stock Exchange
required with the rule 10A-3 under the Securities Exchange Act of 1934 that all audit committee
members should be independent directors (not been employed by the company or its affiliates
within the past 5 years) and be a member of BOD31. Moreover, with The Sarbanes-Oxley Act
of 2002 in the U.S the authority and the responsibilities of the meeting frequency is three times
per year of the audit committee increased due to the major financial scandals.
Code Algerian de Gouvernances: “The Algerian Code of Corporate Governance” , edition 2009 , PP.41
Securities Exchange Act of 1934, “Regulation of Securities Exchanges”. Website: https://www.nyse.com
.(18/04/21)
30
31
Chapter One: Corporate governance literature review
29
The audit committee operates as a representative of the board of directors and from whom
it receives its authority to perform its responsibilities of corporate governance. The latter
provide the BOD with the necessary information, advice, and recommendations. In addition,
for European Union Directive 2006/43/EC states32 the mission of the audit committee:

Supervise the corporation internal control, internal audit, and risk management
system

Monitor the financial reporting and discloser

Review the impedances of the external auditor and the effectiveness of the internal
audit function

Monitor the statutory audit of the annual and consolidated accounts
4.4. The Corporate Stakeholders:
The stakeholders of certain corporations are those agents affected by the corporate actions
such as the suppliers, creditors, customers, employees. Stakeholders have been defined by
several authors, but the most commonly used definition is by Freeman (1984)33 as any group
that can be affected by the accomplishment of the corporation objectives
4.4.1. Internal stakeholders:34
There are two main categories of the internal stakeholder within the corporation

Employees: through their efforts, competencies, and involvement, they contribute
to corporation activities and endeavor for an efficient company. They, therefore,
expect the company to offer them appropriate remuneration, interesting working
environments, and working conditions.

Shareholders: they possess shares within the corporation so legally their own a
proportion of the company, they provide the company with equity and financial
liquidity; they may be individual shareholders or institutional investors.
Shareholders expect the company to pay them dividends that meet their expectations
32 European Union Directives (2006). Guiding Articles issued by the European Commission (EC), applied
across Europe through each country’s legislation.
33
FREEMAN, (R):” Strategic management: a stakeholder approach”. Massachusetts: Pitman, 1984,
PP.46
34
BENN (S). ABARTT (R). O’Leary (B): “Defining and identifying stakeholders: Views from
management and stakeholders”, S.Afr.J.Bus.Manage.2016, PP.2-5
Chapter One: Corporate governance literature review
30
4.4.2. External stakeholders:
The company is in regular contact directly or indirectly with the economics agents outside its
environment. Since it is located in the same geographical surroundings, each actor influences
the company the company’s activities and each company’s action influence, other actors:

Customers: whose expectations relate in particular to price, quality, the safety of
goods and services, and delivery times.

Suppliers: with their objectives, particularly in terms of price, sales volume, and
the company's solvency.

Financial institutions: provide the company with adequate financial liquidity to
execute their activities and achieve certain goals and in return, the company pays
reimbursement of the sums loaned as well as the amounts of interest.

State and public corporation: regulate the market and interrelation between actors
with low, policies, and Intervenes to the market when there is any deficiency in
return expect the enterprise to pay taxes and social contributions.
To note that here we present the primary stakeholder of the corporation since its survival
depends on the interaction with them, the secondary stakeholders do not engage in transactions
with the corporation and its survival does not depend on them.
Chapter One: Corporate governance literature review
31
Section Two: The Two Approaches of the Paradigm of Efficiency
Most micro theories focus on efficiency, inspired from an interpretation and on a particular
view of economic Darwinism “the economic selection”35, which lead to creating a correlation
between an inter-firm competition and CG system efficiency when we adopt the economics
selection into the governance field only the systems that create well-established regulation and
norms will create value. Thus, sustainability in the long term. As a result, the system observed
is expected to be efficient.
In the CG field, the efficiency of the first-degree would be guaranteed and the observed
system would reach the optimum performance automatically, these assumptions are usually
affiliated from the functionalist perspective. There are two approaches to the paradigm of
efficiency: (1) the disciplinary approach and (2) the knowledge-based approach.
Governance theory relating to the paradigm of efficiency is base are all founded, on a
specific framework of value creation and allocation, allied with the theory of organization that
is based on efficiency. Since the objective of any organization is perennity and the latter would
be feasible through producing surplus with regard to the resources used and the participation of
the various stakeholders. The perception of governance as a set of rules of the game for
managers could be represented as value creation and allocation model.36
The disciplinary approach perceives the firm as a “nexus of contracts”, which means that
the firm is a decision-making center that contains, negotiates, and manages all the contracts due
to the inefficiency of the market. The ineffectiveness arises from the information asymmetry
between economic actors and interest conflicts, which led to a loss in efficiency and not
generating a maximum value, e.g. for certain, contacts the authoritarian management run by the
order appears to be more efficient. So the firm excites because it is more efficient than the
market in reducing the loss due to opportunism and information asymmetry.
The contractual view of the firm may indicate a negative and restrictive view of the
productive project, the source of efficiency is disciplinary; incentive and supervision are
essential to avoid the loss of profit following the corporation. The concept of efficiency can be
translated as Pareto efficiency criteria, which means a firm is inefficient when another excites
WHITTA-JACOBSEN, (H); “Economic Darwinism.”, Theory and Decision 70, (2011), PP.385–398
CHARREAUX, (G). “Les Théories de La Gouvernance: De La Gouvernance Des Entreprises à La
Gouvernance Des Systèmes Nationaux.”, 12/2004, PP.04
35
36
Chapter One: Corporate governance literature review
32
and generate more value for the stakeholder in the same environment. Then shareholders are
free to enforce and implement their decision
The information concept is confounded with that of knowledge, and it is a crucial part of
the contractual theory since the organizational problems are rooted in information asymmetry.
Knowledge-based" theories distinguish between the concepts of information and knowledge.
For Fransman (1998)37, information refers to a set of data that can be acquired by any person
where else the knowledge represents the individual interpretation of the given information base
on their cognitive model then it can determine the meaning and the utility of the information.
The contractual approach saw that the value creation occurs only from resolving the interest
conflicts and the information asymmetry, then the knowledge-based approach has other
interpretation bases on the acquisition of knowledge and innovation since the value creation
does not always follow the disciplinary path. The dynamic and the adaptive approach replace
the static sense of the Pareto and the productive efficiency, derived from Schumpeter, who
emphasized innovation and the flexibility for creating sustainable value.
So the differentiation between the two paradigms can be represented by an argument
considered essential to the value creation process, rather than the difference between the “nexus
of contracts” firm and the “productive entity” firm, which can be surpassed by maintaining a
constitutional view of the relationship between contracts.
1. The disciplinary view of Corporate Governance
The disciplinary perspective has a lot of variants based on the representation of nexus of
contract and the process of the value creation but there are two major views the dominant one
that is the shareholder and the second one that is the stakeholder's view.
1.1. The Shareholder model of the corporate governance
The debate opened by Berle and Means concerning the large public corporation (the
primary focus of the analysis if about the entrepreneurial firm opening its’ capital) ironically
enough the outcome of this analysis is the financial model established in the analysis of Jensen
FRANSMAN (M), “Information, Knowledge Vision and Theories of the Firm,” Industrial and Corporate
Change, Volume 3, Issue 3, Oxford: Oxford University journal, 1998, PP.715–716.
37
Chapter One: Corporate governance literature review
33
and Meckling (1976)38. The latter focuses mainly on two objectives, the first one proposes a
contractual demonstration of the firm and considers it as a team of productive impute the
incentive view of the firm (Alchain and Demsetz 1972). The second one inspired by the theory
of the property right and focus on the agency relationship, with regard to these theories the
objective is to illustrate the capital structure of the firm.
Jensen and Meckling consider the firm as nexus of contracts contacting the firm with the
team of productive impute, their objective was to explain the capital structure with regard the
agency theory, have led them to construct a model of two agency relationship; the first between
manager and shareholders the second between the firm and the financial creditors.
The first model, which gives the priority to analysis the relationship between the managerentrepreneur (the agent) opening his capital and the new shareholders (the principal) has led to
the shareholder approach which still dominates in normative research and reflections.
Traditionally derived from the legal approach39 of ownership that is premised on the notion the
shareholders “own” the corporation as residual claimant since the shareholder's primacy notion
in the American law appears to be less robustly. Alongside, the governance systems have been
recognized as safeguard and receive the unique role of protecting and securing the financial
investments according to Shleifer and Vishny (1997)40.
Hence, the disciplinary prescriptive views the governance mechanisms as a means to force
the managers “agent” to maximize the shareholders’ value. With dominating studies relating to
the board of directors, the annual shareholders meeting, the executive’s compensation schemes,
takeovers, and the accounting disclosure and regulation.
The shareholders model is commonly derived from the regulative section of the agency
theory (principal and agent) claiming that the shareholder is the only principle and the managers
are the only agent, in addition, we can argue the shareholder objective to conform to the positive
branch of the agency theory. In addition, to conform to the natural selection principle, for Jensen
(2001)41 the organizational practices arose in endogenous to raise the chance of the survival of
38
JENSEN, (J), and MECKLING, (W): “Theory of the Firm: Managerial Behaviour, Agency Cost and
Ownership Structure”, Journal of Financial Economics, 10/1976: PP. 305–360.
39
BLAIR (M) and STOUT. (A): “A Team Production Theory of Corporate Law”, Virginia Law Review,
volume 85, n°: 02, 03/1999, PP. 247-328
40
SHLEIFER, (A), and VISHNY, (W): “A Survey of Corporate Governance”, Journal of Finance, 1997,
52: PP. 737–783.
41
JENSEN, (M): “Value Maximization, Stakeholder Theory, and the Corporate Objective Function”,
European Financial Management, 7, No. 3, 2001, PP. 297–317.
Chapter One: Corporate governance literature review
34
the firm that approved to use the latter. In addition, many attempts to justify this adoption as a
source of advantage.
The first argument formed by Williamson in 198442, includes the assumption that if the
stakeholders (not the shareholder) are protected by their contracts. The distinctive features of
the operation of the allocation of the financial capital, make the shareholder more vulnerable to
the risk that occurs by the opportunistic action and they will assume the major part of residual
loss and risk. Hence, the governance system is established by delegating the control to the
shareholder as they bear the risk and in an attempt to protect their interest and reduce the risk
of the transaction.
Hansmann (1996)43 settled on the first agreement and added the requirement of preserving
the control of the manager cost, since entrusting only the control to the shareholder the cost
could be too elevated to recompense for the transaction cost. As such, the heterogeneity interest
between the shareholders is required and it will lead to low cost by presuming a collective
decision. So the shareholder objectives are based on two hypotheses:

The shareholder wealth (investments) are the least protected against the manager
opportunism

The homogeneity between the shareholders exist
( the alignment of the
shareholder's interest
While the second hypotheses are denied and invalid since there is a conflict of interest
occur between the majority and the minority of the shareholders
Jensen and Meckling initiated the research in this perspective and enlarged by the analysis
of Fama (1980)44, dedicated to the large public companies, the system of governance is
constituted by “internal” mechanisms, applied by the stakeholders and legislator, and the
“external” mechanisms are resulting from the natural operation of markets. The internal ones
could be represented as e.g. the voting right of the shareholder, the board of directors, the
internal audit, and the remuneration systems, etc. while the “external” mechanism is the market
of managers and takeovers. All those mechanisms appear to be capable of resolving the agency
cost occurring due to the conflicts of interest between management and shareholders. Other
WILLIAMSON, (O), “Corporate Governance”, Yale Law Journal, 93, 1984, PP. 1197–1230.
HANSMANN, (H): “the Ownership of Enterprise”, Cambridge, MA: The Belk nap Press of Harvard
University Press. 1996, PP.20
44
FAMA, (E): “Agency Problems and the Theory of the Firm”, Journal of Political Economy, 88, No. 2,
1980, PP. 288–307.
42
43
Chapter One: Corporate governance literature review
35
mechanisms such as the bonding insurance (contractual guarantees), rules of the bankruptcy
procedure, the information market, and other informal mechanisms e.g. reputation, could
overcome the conflict of interest.
Those different mechanisms do not have necessarily the same significance, the type of the
organization determines the value and the necessity of each and differentiates between them,
for Fama, the large public corporation. The desirable mechanism to use is the market of
managers (the manager essay to maximize the shareholder value to improve their reputation in
the market), the latter is enhanced by internal mechanisms such as hierarchy, mutual monitoring
between the management team members, and the board of directors. The latter has a disciplinary
mission, either by incentive by relating the remuneration of managers to shareholders value, or
by sanction through managers discharging or controlling performance. E.g. the audit committee
to be efficient the BOD include inside director to informational purpose and outside directors,
which their independence’s guarantee by the market.
The value damage, depending on the nature of the conflict (manager with shareholder or
the firm and the financial creditor) can be rooted in various reasons (underinvestment, “private
benefits” arising from allocating some of the organizational rent into their welfare in form of
assets and additional remuneration). Certain models suggest that managers implement
entrenchment strategies according to Shleifer and Vishny (1989)45, the latter with those
strategies would be a guarantee that could not be dismissed (by avoiding the problem of losing
human capital and continue appropriate rents) which make his replacement expensive for the
shareholders. As well as preferring to invest in individualistic projects or projects with limited
discloser.
In the first case, the probability depends on the presence of the manager as the leader of
the corporation, in the second case; it would be more challenging for the shareholders to
evaluate the opportunity of replacing the manager, consequently, less pressure for the managers.
The managerial defensive behavior and the rent-seeking strategies do not contradict the
paradigm of efficiency. Since entrenchment increases agency costs. As result, the governance
system should maintain to reduce the negative consequence of these strategies.
The first approach focus on the financial investors and the creation of the shareholder value
depends upon the discipline of the managers. The financial model empowers the principle
SHLEIFER, (A), and VISHNY,(W): “Management Entrenchment: The Case of Manager- Specific
Investments”, Journal of Financial Economics, 25, No. 2,1989, PP. 123–139.
45
Chapter One: Corporate governance literature review
36
foundation for numerous debates on the executives and directors compensations their role and
composition (outsiders or insiders) and form (single or two-tier), the disciplinary role of the
takeover, the proficiency of the financial market, the minority of the shareholder rights.
This model has been inspired directly by the Anglo-Saxon large corporation have
significant development, contingent upon the concentration of the equity in the non-AngloSaxon countries' substantial dispossession of the minority of the shareholders right by the major
ones, when privatizations took place in the countries of the former Eastern bloc. Initially, the
focus was on the manager but the attention has been shifted to the dominant shareholders who
would benefit from their position of self-severing the majority of the rent. Nowadays, the
financial model focus on the conflicts between the major and small shareholders rather than the
manager and shareholders.
As the shareholders are the only “residual claimant” the measurement of the efficiency of
any of those mechanisms is measured by the contribution in creating value for the shareholders.
Moreover, thanks to the available financial information, many empirical studies resulted that in
all the probability and with taking into account, the interaction between all the mechanisms
concludes that the capability of the shareholder model is limited.
The limitation of the latter could be represented as an inadequate explanation of the
structure and functioning of non-Anglo-Saxon systems and the low level of truthfulness. Due
to the insignificant role played by shareholders in corporate financing or the correlation
between the shareholder value and the disciplinary systems, have contributed to enlarged the
view of this prescriptive to take into account other stakeholders
1.2. The stakeholders model of corporate governance:
The disciplinary stakeholder’s model like the shareholder model has been rooted in the
representation of the firm as a team of productive input of which the sum of the team effort
(synergies) creates the organizational rent. The only modification that happened to the value
creation in comparison to the shareholder model is in the allocation of the value or the
organizational rent, as the latter questioned the position of the shareholders as the only residual
claimant.
Like the investments and the financing that influences the value creation, the contributors
of production other than the shareholders also have, and would have the incentive to create
value only if they were receiving a portion of the rent, in other words becoming a residual
Chapter One: Corporate governance literature review
claimant. As for Zingales
46
37
(1997), which represents the ex-post rent as the essence of the
governance and the latter affect the value creation through the rent distribution: “corporate
governance system as the complex set of constraints that shape the ex-post bargaining of quasirent generated by the firm”.
This view is a result of an updated analysis of the property rights within the incomplete
contracts theory by Grossman and hart in 198647, which define the firm in terms of ownership
(physical) and authority and the ex-post allocation will influence the ex-ante decision. Hart and
Moor (1990)48 specify that the only right of the owner is his ability to prevent others from using
it.
So ownership is defined as residual control right with the new theory of the property rights,
and by the distribution of the residual rent. The ownership position could be extended to all the
parties of the nexus of contracts, an employee who is assigned with the decision authority to
better use his knowledge. become a partial owner, therefore he would get the incentives to
create more value and provide more input effort as he collects a share of the organizational rent
(over remuneration) and regardless of the form.
The supervision and focus on the managers, concerning the governance problem, led
Castanias and Helfat in 199149. Bring in questioning the role of the manager I creating the
organizational rent and the role of the managerial rent, even if the letter model does not connect
directly with the extended ownership principle, its assumption that the more rent acquires by
the managers the more initiative they will have to contribute the rent creation. Then the problem
of the allocation of the rent emerges between the shareholder, the manager, their contribution,
and the skill shortage. Since the shareholder held the passive ownership so, they hold less
power; eventually, their remuneration must be correlated with their opportunity cost, which is
deemed to be equal to the market equilibrium rate, to keep them among the nexus of the
contract, as a result, the manager would share the rent to avoid the dismissal. Therefore, the
interest would be aligned to some extent between these two parties.
46
ZINGALES, (L):“Corporate Governance”, N° 6309, NBER Working Papers, National Bureau of
Economic ,1997, PP.120
47
GROSSMAN, (S), and HART, (O): “the Costs and Benefits of Ownership: A Theory of Vertical and
Lateral Integration”, Journal of Political Economy, N° 94:1986, PP. 691–719.
48
HART, (O). and MOORE, (J):”Property Rights and the Nature of the Firm”, Journal of Political
Economy, 98, No. 6: 1990, PP. 1119–1158
49
CASTANIAS, (R) and HELFAT, (C):” Managerial Resources and Rents”, Journal of Management, 17,
N°. 1: 1991, PP. 155–171.
Chapter One: Corporate governance literature review
38
This change in the view of the governance conflict of interest is less significant in
comparison to the financial model, which led to a different interpretation of the governance
mechanisms. Thus, the manager's entrenchment strategies do not led always to the loss of value.
For Charreaux (1996)50, entrenchment, by ensuring the return for the human capital investment
in the specific firm, would encourage putting more investments and contribution by the
managers, leading to higher organizational rent. On the other hand, constraining the managerial
freedom and latitude with exaggerated disciplinary mechanisms could reduce the effort and the
initiative on the part of the manager consequently an efficiency drop.
With the new economy, the specificity of the origin of the rent has an emphasis on the
skills of the employees and the managerial capital since if we assume the human capital it will
make it vulnerable to potential dispossession. The governance is therefore to protect this capital.
As Rajan and Zingales (2000)51, explain the firm as nexus of specific investments or a
combination of co-specific assets and persons as result the rent depends on the process of the
accumulation of the latter brought by the manager. Moreover, the growth of the rent is sufficient
to encourage the stakeholder the sustainability is guaranteed.
The logic of the stakeholder approach is involving all the parties of the nexus of contracts,
contributing to the creation of the organizational rent, as well as their specific skills offered.
Especially in the long-term relationships with certain suppliers, customers, etc., this approach
assumes that the latter relations are not reduced into a simple market exchange organized by
the price mechanism but frequently co-constructed ones. For Charreaux (1995)52, this approach
suggested the ability to create a governance system that is capable of creating value for all
stakeholders by reducing the conflicts resulting due to the allocation of the rent among
stakeholders.
As has been said the resolution of the conflict when the allocation of the rent by influencing
the distribution will create value to all the stakeholders, even certain aspects of the knowledgebased roughly appear. According to Alchain and Demsetz, the manager has special skills
relating to other production factors, which gives him an important role in the management,
rather than monitoring. Many other authors are convinced that that organizational architecture,
50
CHARREAUX, (G) : « Pour une véritable théorie de la latitude managériale et du gouvernement des
entreprises », Revue Française de Gestion, 1996, PP.50–64.
51
ZINGALES, (L): “In Search of New Foundations”, Journal of Finance, 55, No. 4: 2000, PP. 1623–1653.
52
CHARREAUX, (G) : « Modes de contrôle des dirigeants et performance des firmes », Revue
D’Economie Industrielle, 1er trimestre: (1995), PP. 135–172.
Chapter One: Corporate governance literature review
39
the forms of ownership, and governance systems are arranged in a certain manner that
guarantees the optimum use of knowledge (Fama, Jensen, Meckling) and to note the knowledge
is considered as the information.
The models suggest by Rajan and Zingales (1998a), Blair and Stout53 offer little more since
the first model assume the organizational rent exist due to specific investment and the second
one insist on the importance of the vertical and horizontal corporation to produce rent we cannot
consist that the rent creation linked with a comparative production advantage. The view of the
firm in the Rajan and Zingales remains traditional but offers a complete model even though the
governance still disciplinary. The objective is to reduce the loss of efficiency resulted in the
share of the rent, especially that underinvestment is related to the specificity of the assets.
According to the new property right, the specificity of the assets determines the ownership
structure.
Zingales and Blair mention only the decision and the appropriation of the right of the rent,
where Berglöf and Von Thadden’s (1999)54. definition considering the governance as a set of
mechanisms that translate the market signal and production factor in the behavior of the firm
arguing by (1) the importance of recognizing other categorize rather than managers and
investors, (2) the existence of market competition and inter-firm connection.
Finally, the role of organizational knowledge appears in the theory of the specialized firm
Demsetz (1991)55, maybe it could be a primary synthesis of the knowledge-based approach.
Where the latter can be defined as a set of commitments to technology, personnel and methods,
all contained and bounded by an insulating layer of company-specific information. Of
information specific to the firm and this package cannot be alerted or emulated easily. In
addition, the latter definition is aligned with the contractual perspective and assumes there three
conditions in which the nexus of contract is a firm: specialization, continuity of association, and
reliance on the direction.
53
RAJAN, (R). and ZINGALES, (L). “Power in a Theory of the Firm, Quarterly”, Journal of Economics,
113, No. 2: 1998a, PP. 387–432.
54
BERGLÖF, (E), and THADDEN, (L): “The Changing Corporate Governance Paradigm: Implications
for Transition and Developing Countries”, Stockholm Institute of Transition Economics, Working Paper, No.
10. 1999, PP.34
55
DEMSETZ, (H): “The Theory of the Firm Revisited” in O. E. Williamson and S. Winter: “The Nature
of the Firm”, New York: Oxford University Press, 1991,PP. 159–178,
Chapter One: Corporate governance literature review
40
2. The knowledge-based approach of governance:
The disciplinary approach of the CG is bounded to the firm theories and the foundation of
the latter; this view ignores the productive dynamic and gives a restrictive view of the incentives
system on the production choice. Although the recognizing of the skill on the organizational
rent the potential of the stakeholder are better than those of the shareholder the view remains
based on a static conception of the efficiency. The main aspect of the disciplinary view is the
organization of the rent allocation to incentive actors to maximize value on the contrary the
process of the value creation through the emergence of the investment opportunity is neglected.
On the contrary, of this perspective, the knowledge-based approach could be viewed as an
extension of the neo-classical economic model, since this model rejects the hypothesis of the
first the calculative rationality, limited or not, supporting the idea of procedural rationality.
Following this view, the governing processes rather than the result of the decision measure
rationality.
The value creation depends on the skill of the firm and its identity considering it as a
coherent entity (Teece 56et al 1994), its particularity is its capacity of creating knowledge and
long-term profitability so a dynamic view of efficiency.
Likewise, the disciplinary approach had many theories the knowledge-based also had the
same numerous of theories we can note three of them:

The behavioral perspective introduced by Simon in 194757: which consider the firm
as a political coalition and cognitive establishment that survive through the
interdepended between individual building knowledge within the firm through
process formulation and problem resolution

The neo-Schumpeterian evolutionary economic theory introduce by Nelson and
Winter in 198258: the firm is a container of activities a depositary of productive
knowledge, the latter favored the innovation and competition based on it.
Substituted the investment choice as a pre-existing menu and the acquisition of the
knowledge of routinizing basis.
56
TEECE, (D), RUMELT, (R), DOSI, (G), and WINTER, (S): “Understanding Corporate Coherence”,
Journal of Economic Behavior and Organization, N°23: 1994, PP. 1–30.
57
Simon, (H): “Administrative Behavior: A Study of Decision-Making Processes in Administrative
Organizations”, Chicago: MacMillan. 1947, PP.125-126
58
Nelson, (R) and Winter, (S):”An Evolutionary Theory of Economic Change”, Cambridge MA:
Harvard University Press. 1982, PP.60
Chapter One: Corporate governance literature review

41
The resource-based view resulted from the theory of the firm by Penrose in 195959,
in which he considers the firm as a set of resources and establishments that
accumulate knowledge guided by the manager's competencies. The origin of
sustainability is the ability to leaning, stoking, and accumulating knowledge.
The knowledge-based theories differentiate from the contractual perspective in the scope
of creating and allocating resource, which the incentive aspect had greater importance
compared to the productive aspect, as resulted the reason of the existence of the firm is not only
distinguish it from the market but also from its competitors whit it capable of creating
knowledge. According to Foss (1996a)60, the firm exists because it is efficient in coordinating
the collective learning process, the boundary of the firm can be represented not only in terms
of transaction cost but also in terms of collective learning, innovation, selection of assets,
technological opportunity, etc.
The view of innovation as a coordination mechanism gives great importance to the
productive aspect, for Loasby (2001a)61, he rejects the view of the firm as an informational
system and coordination process are presumed by incentive method since for him the growth
should be attained not by acquiring information but the use of knowledge. Moreover, he sees
the firm as an open system where he rejects the equilibrium concept in favor of the process
concept.
The perceptive aspect of the entrepreneurial function or the manager competence, see the
managerial mission not only on the reconfiguration of the business portfolios to ensure
sustainable growth but on construction and the imagination of new opportunity
The role of governance has been brought into question with the knowledge-based approach
since the governance in this view must support and encourage the perception and the
implementation of profitable investment with a dynamic efficiency perspective. According to
Demsetz (1969) to recognize the impact of the governance role in the dynamic efficiency we
must equilibrate between three objectives: experimentations should be encouraged, the new
knowledge acquired should be implemented in a wide variety of ways, and investment should
be targeted a variety of promising experimental projects.
59
PENROSE, (E):”the Theory of the Growth of the Firm”, Oxford: Oxford University Press. 1959, PP.15
FOSS, (N):”Firms, Incomplete Contracts, and Organizational Learning”, Human Systems Management,
15, No. 1: 1996a, PP. 17–26.
61
LOASBY, (B):”Cognition, Capabilities and Cooperation”, International Journal of Management and
Decision Making, 2, No. 1, 2001a PP. 35–48.
60
Chapter One: Corporate governance literature review
42
Many critiques to the financial approach support this view and they claim that the relation
between manager and investors could be directed to influence positively and lead to a potential
increasing of the firm efficiency, as resulted in the knowledge-based approach study the
influence of the governance system of the cognitive aspect of the value creation.
To note the financial approach include some cognitive aspect e.g. the governance of the
venture capital model, the latter select the most promising project based on their experience not
the amount of contribution. Therefore, a certain number of interactions can be possible.
However, the cognitive aspect is related to the productive function acquiring a tactical and
social character related to organizational learning.
43
Chapter One: Corporate governance literature review
Table N° I-2: micro theories of CG
Governance
Disciplinary
The knowledge-based
theories
Shareholders
Theories of
the
Stakeholders
Agency theories
Agency
support
theories Behavioral theory
extended
firm
to
the Evolutionary theory
stakeholder's theories
Resources
and
competence theory
The
aspect Discipline and distribution Discipline
and Productive-cognitive
favoring the Reduce the loss of the distribution Reduce the aspects Create and
value creation conflicts
of
interest’s loss of the conflicts of seize new
opportunities
managers
between interest
and
opportunities
Financial between
the
investors. the shareholders stakeholders.
are the only residual claimant Numerous
categories
of residual claimants
Type
efficiency
of Constrained
or
static Constrained or static dynamic efficiency
Shareholder view of
stakeholders view of
efficiency and ownership
efficiency
Cognitive aspects of
and production
ownership
Efficiency
Shareholder value
Stakeholders value
criteria
Ability to create a
sustainable
organizational
rent
through
innovation
The corporate All
governance
systems
mechanisms
financial maintain
secure All mechanisms that All mechanisms that
maintain
guarantee the value
the managerial latitude
creation
through
learning
and
innovation
Source: corporate governance around the world (A. Naciri)
Chapter One: Corporate governance literature review
44
Section Three: The Corporate Governance Mechanisms
The wave of the recent financial scandals called into question the effectiveness of the
current CG mechanism and paved the way to take regulatory action to rebuild the investors’
confidence around the world and particularly in the U.S with the announcement of the SarbanesOxley Act (2002) which has attributed considerable importance to its control mechanisms. This
latter could be classified into internal and external according to Charreaux62
1. Internal mechanisms of corporate governance
A multilevel control implemented intentionally by the stakeholders including shareholders
to discipline the management and directors, in the following we are going to identify each one
of them and examine their mission and roles in CG.
1.1. The shareholder control mechanism of the managers
The new managerial firm is characterized by diffused ownership a large number of
shareholders own a small part of the capital and control held by managers who have the power
and do not have a significant part of the company according to Berle and Means 1932.
This situation of separation of control and ownership led to a divergence of interest
between parties or what so-called the agency theory many authors studied the reason for the
divergence Charreaux (1997), lei (2007) and they can conclude:63

Moral hazard where manager prefers to invest in a project that best suited their skill,
which leads to increase in their value and the difficulty of replacing him allowing
him to extract a higher level of perquisite

Earing retention managers prefer to retain earnings, whereas shareholders prefer
higher levels of cash distributions,

Time horizon manager prefers short-term projects with high cash flow and
shareholder long-term positive NPV investments.

Managerial risk aversion may pursue investment and financing policies that
minimize the risk of their company’s equity even when the benefit is relatively low.
62
CHARREAUX, (G). : « Vers une théorie du gouvernement des entreprises »., in G. Charreux (Ed.), « Le
gouvernement des entreprises », 1996, PP.06
63
ibid. PP.144-145
Chapter One: Corporate governance literature review
45
To resolve the conflict there are mechanisms to control managers that shareholders can
recourse: the board of directors
1.1.1. The board of directors
The BOD has the authority to monitor the manager's action, they appointed by the
shareholders and act on their behalf, they might or might not hold the executive role, managers
must report periodically to the Board of Directors, and the latter have to evaluate the proposals,
they have a legal authority to hire and fire managers.
Besides the watchdog role to safeguard the shareholder's investments, they are supposed
to provide the manager with advice and knowledge and the business networks (Zahra and
Pearce, 1989). To note that the disciplinary mission of the BOD depend on the property
structure e.g. in the family firms control held directly by shareholders charreuax64
While the shareholder holds diversified and fragmented ownership, they cannot bear the
cost of control of the management as result they rely on the BOD for the decisions control and
the management decision for the managers, with their direct relationship with the firm and as
they are near to management which could diminish the information asymmetry. Therefore, they
act, as is the most important authority responsible for internal control.
The Board of Directors is responsible for the evaluation of management’s performance.
From this standpoint, the BOD should be selected carefully to guarantee the independence
criteria rather than the background, current professional activities, etc. Nevertheless, whether
the directors could perform their duties without being subject to the influence of management.
A desirable composition of the BOD is a combination of outside and inside directors. The role
of insiders is to prevent the information process problem and enhance the decision and
evaluation process ex-ante and outsiders, conversely, assure the independence and autonomy
of judgment ex-post, (Hoskisson and Baysinger 1990).65 The Sarbanes-Oxley Act and the SEC
rules, do not require independent directors other than audit committee but the NYSE mandate
establishing a board composed of a majority of independent directors. In U.S and 2008 splitting
the role of CEO and the chairman has gain momentum supports argues that the separation of
the position could help to mitigate the risk. The NYSE (2009) requires an outside director to
64
Ibid. PP.27
BAYSINGER, (B), and HOSKISSON. (E):"The Composition of Boards of Directors and Strategic
Control: Effects on Corporate Strategy.” Academy of Management review 15.1, 1990, PP.72-87.
65
Chapter One: Corporate governance literature review
46
preside over executive sessions of the boards for the companies where the CEO and the chair
are the same.
The BOD relies on several committees to fulfill its duties especially the CG issue, each one
is composed and led by independent directors:

Audit committee

Compensation committee

Nominating committee

Finance committee
To enhance CG and to put a limit to the self-interest of the managers the BOD privilege
two courses of action, the first one is the compensation system of the managers and it is the
main responsibility of the Compensation Committee and the second one is the top management
turnover
1.1.2. Compensation committee: the remuneration mechanism
The Remuneration Committee is responsible for reviewing the performance of managers
and directors and establishing remuneration and benefits packages for senior management. To
prevent the influence from the management or the executives’ directors the board is composed
entirely of independents directors and they had the quality and the knowledge to perform the
evaluation. Compensation is an important device to solve the agency problem, and it could align
the interest of counterparties. The executives’ pay should be balanced between fixed and
variable pay the latter play a crucial role (Ellig 2001)66.
Jansen and Mackling argue that the composition in the compensation plan changes the risk
attitude, as the managers are risk-averse agents they prefer a plan that minimizes their risk so
they would promote fixed compensation policies rather than equity-based. When the plan is
based on fixed pay, the manager would have an incentive to reduce the risk to guarantee their
pay, which will lead to negative outcomes for the shareholders. On contrary, when the plan is
based on the performance-based-remuneration (pay for performance) the managers tend to be
less risk-averse, the latter enables risk-sharing. Thus, shareholders are not the only residualclaimant.
66
ELLIG, (B): “The Complete Guide to Executive Compensation”. McGraw Hill Professional. 2001, PP.25
Chapter One: Corporate governance literature review
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The salary composition is related to the monitoring structure; variable pay can be correlated
to the shareholder return (share price, ROE, etc.), a sound remuneration plan can bring
shareholders' and managers’ interests into congruence. The amount of remuneration that is
awarded to managers is determined in proportion to certain predetermined criteria that are
relevant to financial service providers. The letter will lead to risk sharing and provide an
incentive to managers as the management malfeasances are financially unattractive.
1.1.3. The management turnover
The BOD play held a controlling role with the power of hiring and firing managers, for
Pigé67when the replacement is radical, we consider it as a dismissal, and the manager turnover
had multiple aims: manager sanction for misaligned action, to drive up the price of short-term
securities, and encourage his replacement to act in the shareholder profit.
1.1.4. The shareholders right and general assemblies
The shareholder right is a device provided by corporate law, and its aim to protect the
shareholder from the manager and the minority from the major block-holders. Chugh in 2010,68
define the shareholder right as the voting right which shareholders use to get the profit and
decide the firm future, every national legal framework prescribes the presence of a shareholder
meeting (AGM). This right is guaranteed by the law however companies can include some
constrain that indirectly impede the exercise of these rights .e.g. takeover defenses that might
entrench management. Shareholders who participate in AGM have the right to elect the board
(with the help of nominating board), receiving dividends, requesting information from the
corporation (role of auditing committee), and filing civil actions against directors who failed to
perform their duties (watch the watchers). Minority rights start with 5 percent in public
companies and 10 percent in non-public. Minority shareholders can veto the release of
management; demand that the company or statutory auditors take legal action against directors
who violated the law.
1.2. External Audit and audit committee
Audit committees play a major role in information discloser and validity of the audit
process whether internal or external and the company's diligence, audit committees are directly
PIGE, (B). : “le pouvoir de revocation du conseil d’administration et l’incitation à la performance des
dirigeants’’, cahier de recherche du CREGO, n° 9306, université de Bourgone,september, 1993, PP..21.
68
CHUGH, (R), MEADOR (W), and MATTHEW (W): "Corporate Governance: Shareholder Rights and
Firm Performance." Journal of Business & Economics Research (JBER) 2010, PP.8-9.
67
Chapter One: Corporate governance literature review
48
responsible for establishing oversight mechanisms for financial disclosures of corporations and
therefore should be independent of management. SOX (2002) expands audit committee
responsibilities and requires committees to include independent directors, active participation
in the firm’s CG practices
One of the essential responsibilities of the audit committee is the responsibility for selecting
the external auditors, supervising their work, and managing their remuneration. External eternal
control is required even though the internal control is put in place but to guarantee independence
and compliance with the law. For Palmrose,69 External auditors exercise a gatekeeping role,
provide independent judgment, and assure the financial condition of the firm this could reduce
the agency problem relying on objective and independent supervision (reducing the information
asymmetry between agents by alerting the shareholders about the current condition).
1.3. Employees as a mechanism of controlling managers
With the emergence of the term shareholder-employee and his participation in creating
wealth to the organization by participating in the strategic decisions and with his human capital
nevertheless in financing the corporation, he should acquire sufficient information of the
corporate situation. This reasoning has two arguments:

the financial justification: as has been said the salary have the right to become
shareholders as a result one of their rights is inquiring the financial information of
the organization

The legal justification many regulatory and legislative arrangements had to
recognize the importance of the employee in the corporation and mandate the
participation of employee decision and control e.g. in France with 25/07/1994 act.
1.3.1. The procedures for controlling the managers by the employees
With the latter argument, the salaries could exercise control and involvement in decisions
making via two modalities
69
PALMROSE, (Z): "Maintaining the value and viability of independent auditors as gatekeepers under
SOX: An auditing master proposal." Financial gatekeepers: Can they protect investors: 2006, PP.103-135.
Chapter One: Corporate governance literature review
1.3.1.1.
49
Employee participation in the decision-making process
Since the information right is required by the salary, and with their through their
representatives in the personnel committee they can get greater access to information than is
provided to shareholders, personnel committee has multiple roles Ensure accurate and fair
annual evaluation of Chief Executive Officer and the management performance and guide CEO
develops personnel staffing70.
1.3.1.2.
Employee participation in the management control process
The personnel committee has the legal right can alert the authorities in the event of noncompliance with legal and regulatory measures. Many authors have discussed the right of
employees to be presented in the BOD. According to Summers and Fama, employees should
be integrated into the board of directors whereas Charreaux71 has a different vision since for
him the BOD's mission is to resolve agency conflicts between shareholders and managers.
1.4. The stakeholder's mechanisms of controlling managers
1.4.1. Internal stakeholders
There are two major categories of internal stakeholder employees and shareholders:
Shareholder: have a part of the ownership of the corporation they may be Institutional
shareholders or individual stockholder
Employees: they contribute to the organization with their human capital and may with their
funds.
1.4.2. External stakeholders72
Customers: influence the corporate position with the power of their decisions within the
market aspiring for quality service.
70
https://democracy.manchester.gov.uk/mgCommitteeDetails.aspx?ID=143 consulted (28/04/2021 at
23:47)
71
CHARREUX (G)., “Pour une véritable théorie de la latitude managériale et du gouvernement des
entreprises’’, Revue française de gestion,1996, PP.50-64.
72
KANDI (A) : « l’audit et le control interne comme un outil de dynamisation de la gouvernance
d’entreprise dans un contexte algérien », thèse doctorat en science commercial, EHEC Alger, 2017-2018, PP.6061
Chapter One: Corporate governance literature review
50
Suppliers: influence the corporation with the Prix and their objective is customer’s
solvability
Banks and financial institutions: influence the companies in term of financing, and gets
benefits and interest vis-à-vis their services
State: regulated the market and in a counterpart, they collect tax, social security
contribution, etc.
2. External corporate governance mechanism
Once internal mechanisms are insufficiently effective, there is an incentive for external
parties to attempt to take control of the company
2.1. The hostile takeover or the financial market
In marketed-based systems such as in the U.S, the takeover market plays an important role
in corporate governance the change in the control of the firm virtually always occurs always at
a high price. Creating shareholder's value. Furthermore, this change will provide the managers
with the incentive to act in the shareholder's interest to prevent becoming the target of a hostile
takeover.
2.2. The manager market labor
The role of the executive labor market is to assess continually the value created and the
skills of the human capital of the managers performing inside the corporation by the BOD and
outside the corporation by the market.
2.2.1. The internal labor market for managers
Inside the corporation, the market can be represented as a form of mutual control between
managers this evaluation and monitoring is not constrained by the hierarchical division as result
the low-level managers can perform control over superior manager especially when realizing a
negative income, the control can be performed through recruiting a new manager.
2.2.2. The external labor market for managers
Outside the corporation, competent managers are the target of companies on the contrary
the non-competent manager or the ones who are highly opportunistic are sanctioned by
unemployment and let them in offering positions, as a result, the manager must serve to protect
the interests of the shareholders to prevent them from being replaced.
Chapter One: Corporate governance literature review
51
2.3. The market for goods and services
For Demsetz73 poorly directed companies and managers who seek only for their interest
will lead the company to be less competitive. Moreover, as illustrated earlier the natural
selection law requires the only efficient system to survive, and this will to a first-degree efficacy
but in the case, high malfunctioning, poor direction, and deficient Competitivity on the part of
the firm this latter will to company disappearance.
to add in the case of high competition market this mechanism will more efficient with a
complimentary with the latter mechanism the market labor since less competitive firm led to
less value creation which leads to managers turnover by the BOD and the latter led negative
consequences on their reputation thus sanctioned by the market.
73
DEMSETZ (H) : “The Structure of Ownership and Theory of the Firm’’. Journal of Low and
Economics, 1983, PP.375-390.
Chapter One: Corporate governance literature review
52
Conclusion chapter one
Throughout this chapter, we present the different mutation of the notion of governance
overages and the corporate governance development concerning the firm evaluations in
economic theory, and we exposed different firm theories and relation form such as agency
relation and contractual relation:
Then, we gave different corporate governance definitions, devices, and key actors with this
we introduce the two school of thought of corporate governance and their argument for attaining
desirable and maximum efficiency.
Finley, we mention the corporate governance mechanism to examine the major internal
(stakeholders' power) or and the external (market-based) ones and illustrate their effectiveness
and influence regarding the agency relation.
Chapter Two: The Internal Audit and
the Corporate Governance Interrelation
from Theoretical Perspective
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
Perspective
54
Introduction chapter two
Economy mundialization and the global financial crisis due to a sequence of corporate
scandals such as Enron and WorldCom, audit function is becoming an instrumental component
within the company. Adhering to the latter in management turn it into a strategic function to
attain corporate sustainability.
In this scoop, we aim to study auditing mission and internal audit in general in creating
value to the organization by improving corporate governance, since he plays an important
internal mechanism. Initially, we will try to present some generality on an internal audit of his
definitions, mission, different types, organization, and objectives.
Then, we present some related disciplines and domains to internal audit i.e. internal control,
external audit, inspection and risk management as well as quality function
Lastly, we will examine broadly the internal audit mission from the preparation to
conclusion and will identify the different instruments used by auditors to accomplish this
mission.
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
Perspective
55
Section One: Generally About Internal Audit
1. An internal audit from a historical standpoint
The word audit came from the Latin word “audire” which means listen, which gives a
precise description of the function. In English, the verb, “to audit” have the meaning of
investigation, control, and verification.74
The profession of auditing can be traced to a long time ago, based on a stone document that
has been found, historians have estimated that in about 3000 B.C., scribes of the Mesopotamian
civilization have used a complex system of internal control based on dots, ticks, and
checkmarks. In middle age in the U.K75, a kind of internal audit was practiced in the castle and
mansion where the lord held the function of control and audit. This system consists of
crosschecking which mean comparing the information that has come from two independent
sources, where else, in the Roman Empire the internal audit mission was held by treasury
agents, where, the latter has to give an oral objective opinion on the functioning of the treasury
in front of auditor assembly.
In 1720, the first emergence of the external audit was after the Sea Bubble scandals where
an external certified public accountant held a mission of verification; this event was a novelty
in the auditing field.
Due to the industrial revolution that requires the corporation to open their capitals for
getting adequate funding, many shareholders invest incorporation with their fund, as result, an
internal and external audit was mandatory, in the U.K, with 1844 law that mandates U.K
companies to provide an audit function. To add, in the main time with the same revolution in
the U.S, British auditors were sent to assist the U.S companies e.g. PWC auditors were invited
in 1873, as result we can say that U.K helped to create audit infrastructure for the U.S.
However, the first major development of the audit profession was the creation of the
American Institute of Certified Public Accountants (AICPA)76 in 1887 in the U.S, nevertheless,
74
MIKOL, (A), : « formes d’audit : l’audit interne », in encyclopédie de comptabilité, contrôle de gestion
et audit, Economica, Paris. 2000, PP.733.
75
Moeller (R), (1999), « Brink’s Modern Internal Auditing » , (7th Ed), John Wiley & Sons, Inc., New
Jersey, PP.2
76
The American Institute of Certified Public Accountants (AICPA) created 1887 is the national
professional organization of Certified Public Accountants in the United States (CPA), with more than 418,000
members in 143 countries in business and industry, public practice, etc.
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
Perspective
56
in the 1930s77, with the establishment of the U.S. Securities and Exchange Commission (SEC)
in 1934, changing the external objective due to the major economic breakdown. This legislative
act requires the corporation to provide a financial statement certified by an independent auditor
as well as establishing an internal audit department to assist external audits. At the time internal
audits were concern with verifying accounts and financial errors.
In the 1940s, the audit saw a major event, which is the creation of the institute of internal
auditors (IIA), but the audit function did not see a crucial change comparing to the 1930s. Until
1963, where the audit mission and objective saw a revolutionary transformation from financial
and accountant mission to determining the internal control system, verifying the wellfunctioning of the organization and the compliance with the politics the procedures.
Tread-way commission report in 198778, this commission was established to studies the
fraudulent financial reporting have concluded that the audit function in mandatory function
within public companies, along with companies have to establish an audit committee composed
by non-executives independent director, with the latter conclusion we can see the role of the
internal audit on the financial fraud.
In Algeria, the legislative has mandate the promotion of internal audit function since the
low of 198879 following this low Algeria public economic enterprises should empower and
promote audit structure, and aim for steady improvement and management development.
The internal audit function has had major progress covering all areas of the enterprise, the
internal auditing profession itself, through its self-development and dedication.
2. The internal Audit definition
To clarify the internal audit concept it is more convincing to define the audit term in general
than we will dive into the internal audit concept.
77
Ibid., PP.4-5
Founded In 1987 by five private accounting organizations : the American Institute of Certified Public
Accountants (AICPA) ,the American Accounting Association (AAA), the Financial Executive Institute (FEI)
,the Institute of Internal Auditors (IIA) ,and the National Association of Accountants(NAA)
79
Article n°40, official journal, 27th N°02,chapter n°08, 12/01/1988
78
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
Perspective
57
2.1. Audit definition
In general, the audit is defined as a “systematic process of objectively obtaining and
evaluating evidence regarding the current condition of an entity, area, process, financial
account or control and comparing it to predetermined, accepted criteria and communicating
the results to the intended users. The criteria to which the current state is compared may be a
legal or regulatory standard (such as the Sarbanes Oxley Act), or internally generated policies
and procedures”80
The Sarbanes-Oxley Act Of 2002 also defines the “audit’’ term as a verification of the
financial statements, report, document, control, and procedures, etc. of any organization by an
independent public accounting firm in accordance with the rules of the Board or the
Commission aiming to express an objective opinion on such statements.81
For bécour and bouqui audit is an independent activity that follows a consistent procedure
and reviews the applicable standards to measure appropriateness, suitability, and the well
functioning of all the actions within the corporation vis-à-vis standards.
Furthermore, auditing for some authors could be perceived as a management tool that can
be applied in strategic management and for control and monitoring processes, and to do not
confuse audit advice, assist and recommend but do not decide.
Audit endeavor to evaluate the gap between the statement and reality, according to the
American Accounting Association (A.A.A) audit is a systematic process in which we evaluate
objectively and attempt to measure the degree of correspondence and review the differences
between the economic actions, events, and assertions to communicate the result to concerned
parties82.
From those multiple definitions, we could conclude that audit:
80

independent activity perform by independent persons

Use specific methodology and process

Held an adequate level of due diligence in accordance with standards
WEBER (C), et al, : “Internal Audit Handbook’’, Springer, Berlin, 2008, PP.02
United States. (2002). Sarbanes-Oxley Act of 2002: Conference report (to accompany H.R. (3763),
Washington, D.C.
82
SILVOSO, (J),« Report of the Committee on Basic Auditing Concepts », The Accounting Review, 47, 1972,PP.18
81
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Therefore, the audit is an independent activity that aims to improve the functioning of the
organization
2.2. Internal audit definition:
It is important to formulate a universal definition since it will have a vital impact on the
perceived role of the internal audit:
The institution of internal auditors (IIA) defines the internal audit as an” independent
objective assurance and consulting activity designed to add value and improve organization’s
operations, it helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of the risk management, control,
and governance processes”.
By analyzing this definition, we can examine in detail the deferent concept presented with
the latter: initially, internal auditing is a service provided within the organization performed by
one of its personals in contrary to the external audit. As illustrated in the definition the internal
audit adds value and improves the organization, IIA suggests that internal audit can add value
by three components that characterize the internal audit.
Independence: this concept is crucial, since independence is a core fundamental of internal
audit, all definition of internal audit feature the objectivity and the independence of the function,
and if a certain level of independence is not achieved the added value will be inadequate thus
the existence of the audit function questioned.
Objectivity: it is fundamental of the internal audit, objectivity means that the person
perfume the audit should have an unbiased and impartial attitude; It is, therefore, to appreciate
in all neutrality of opinion.
Assurance: internal audit gives an assurance that the governance process, risk management,
internal control are, or are not well functioning to help management and different stakeholder
to achieve their strategic, operational, and reporting and compliance objectives.
Consultation: (Evaluation and recommendation) this part of the definition shows a shift in
the audit practice. The consultation service will be done after analyzing and evaluating the
current situation searching for the efficiency of the organization, through objective
recommendation and advice that is based on evaluation and information and operation analysis
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that can create value for the organization. IIA Performance Standard 2100 internal audit must
evaluate and contribute to the improvement.
To add, the internal audit function is a universal and periodic function, which means that
the internal audit function can be applied in all forms of organization no matter the form or
purpose. Which will enable them to make a significant move towards efficiency criteria, and
since, the IA function is universal and it can be applied to all the organization activities. The IA
is a permanent function within the company, but it is a periodic function for those who are being
audited “auditees”.
Jaques Ranerd resembles the audit function to the gas odor, since it alert and warns before
the explosion.
Other authorities have used definition outside the IIA standards, but all the definition center
on one view the internal audit is an independent function in the organization evaluate the
effective risk management processes, internal control, and governance and create value through
giving the interest parties an objective recommendation, consultation, and assurance. Where
else in the classical view that limited the IA function into compliance function only
To mention, a definition was given by Professor Gerald Vinten in 1991, the audit function
should be performed to achieve a better future organizational state in the scoop of internal
control, risk management, governance.
3. Internal audit objectives
The IIA performance standards 2110.A1 emphasize the main element and objective of
internal audit, evaluate the risk with regard to the governance, information system, and
operation with taking into account:

The reliability and the integrity of the financial information

Improve the Effectiveness and efficiency of the corporate operation

Safeguarding of the asset

Compliance with the rules, laws, and regulation
But from the new definition of internal audit as a value creators, helping the organization
to achieve its objectives through multiple way assurance, consultation, and recommendations
to improve the overall performance of the organization, helping the latter to attain its objective
will help us to define the AI objective based on the latter. In 2004, the Committee of Sponsoring
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Organizations of the Treadway Commission (COSO) defines the deferent categories of the
organizational objectives: strategic objectives, operational objectives, reporting objectives, and
compliance objectives. Those objectives are fundamental for defining the internal audit mission
objectives, the direct relation between on one hand internal audit objective and on the other
organizational objective will help IA function to assist the organization reach its objectives.
4. Internal audit organization
As we have said, internal audit can be traced back to 3000 years B.C, but the attempt to
organize the auditing practice with the creation of the institute of internal audit (IIA) in 1941 in
the United State. An international professional association with 200000 around the world and
is organized into local chapters and affiliates, e.g. in the French-speaking countries, there are
IFACI, ASIA, IIA Luxemburg, etc. Besides the IIA, other international organization that is
organized on a regional or linguistic basis such as the European Confederation of Institutes of
Internal Auditing (ECIAA) and Asian Confederation of Institutes of Internal Auditors (ACIIA).
in Algeria we have an association of Algerian internal auditors and consultants (AACIA)
established in 1993 and it’s a member of the French-speaking Union of Internal Audit (UFAI),
the AACIA was created to developed internal audit in Algeria and its main activities: training,
conferences, workshops, etc.
4.1. Internal audit international professional practices framework (IPPF)
The international professional practice framework is the conceptual framework that
organizes facilitate the development, the interpretation and the application of concept and
techniques and provide formal guidance of the internal audit profession, The IIA provides a
global and authoritative guidance body to assist practitioners (auditors) and stakeholder in being
responsive to the market for higher internal audit quality. The application of IPPF will be
applicable within an environment in which the IIA activity is applicable and the interpretation
of the information should consistent with low and regulations. The updated version of the
framework was introduced in 2015.The IPPF consist of mandatory guidance and recommended
guidance.
Mandatory guidance is required and crucial for the internal audit profession; the latter is
developed based on the due diligence process, which includes a period of public consultation
for stakeholders' input. The mandatory element of the IPPF: the Core Principles for the
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Professional Practice of Internal Auditing
and audit definition, audit code of ethics,
International Standards for the Professional Practice of Internal Auditing (Standards).
The recommended guidance is authorized by the IIA through a formal approval process, it
gives guidance for efficient application for the mandatory guidance of the IPPF; the latter
consists of implantation guidance that helps auditors in the application of the standards and
codes but does not detail processes and procedures. Supplemental guidance (practice guides)
provides a detailed for conducting audit activities, it includes processes, procedures, programs,
etc.
5. Internal Audit Standards
Every profession requires certain norms and standards to govern its practices, procedures,
and ethics. This allows the globalization of the profession practices the key standard of the
internal audit the IIA’s standards, those standers have had seen major changes over time since
its publication in 1978, e.g. in 2004 internal audit as an internal consultant, and 2009 the
standard become mandatory for the IIA member’s. Besides the IIA’s standers, there are other
standards like the quality audit guidance from the American Society for Quality (ASQ)
represent a different vision from the IIA. The first authoritative document called the statement
of responsibilities of IA 1947 was revisited over the years until the current standards. The IIA’s
standards are designed to:

Formulate basic principles for internal audit practitioners

Establish a measurement standard for the internal audit activities

Aim to improve the organization process and operations

Help the internal audit to provide and offer a broad range of value for the
organizations
The IIA’s standards help the management and audit committee to evaluate the internal
audit performance, nevertheless for auditors to measure themselves.
The standards are a set of principle-based, mandatory requirement consisting of:

The statement of the basic requirement for the professional practices to evaluate the
performance of IA, and the latter are applied internationally

Interpretation to clarify the terms and the concept within the standards
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The standards include three main categories: performance standards attribute standards,
and implementation standards. Where the attribute standers describe the enterprise and the
parties performing the internal audit activities, the performance standers for the nature of the
internal audit activities, and how it should be done and evaluated. Furthermore, the
implementation standards are applied to a specific type of engagement divided between
assurance and consultation activities. The attributes standards are numbered in section by
number 1000 while the performance standard is numbered by 2000, implementation is
classified into (A) assurance activity and (C) consultation activity.
Table N° II-1: IIA’s internal audit international standards
IA attribute standards
IA performance standards
How they (the auditors) should be?
What they do?
1000: Purpose, Authority, and Responsibility 2000: Managing the Internal Audit Activity
1100: Independence and Objectivity
2010
1110: Organizational Independence.
2010: Planning
1120: Individual Objectivity.
2020:Communication and Approval
1130: Impairments to Independence or
2030: Resource Management
Objectivity.
2040: Policies and Procedures
1200: Proficiency and Due Professional
2050: Coordination
Care.
2060: Reporting to Senior Management
1210: Proficiency
and the Board.
1220: Due Professional Care
2070:
1230:
Organizational
Continuing
Professional
External Service Provider and
Responsibility
for
Internal Auditing
Development
1300: Quality Assurance and Improvement 2100: Nature of Work
2110: Governance
Program
1310: Requirements of the Quality
2120: Risk management
Assurance and Improvement Program
2130: Control
2200 engagement and planning
1312: External Assessments
1320:
Reporting
on
the
Quality
2201: Planning Considerations
Assurance and Improvement Program
2210: Engagement Objectives
1321: Use of “Conforms with the
2220: Engagement scope
International
2230: Engagement Resource Allocation
Standards
for
the
2240: Engagement Work Program
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Professional
Practice
of
Internal 2300: Performing the Engagement.
Auditing
1322:
2310: Identifying Information
Disclosure
conformance
of
Non-
2320: Analysis and Evaluation
2330 Documenting Information
2340: Engagement Supervision
2400: Communicating Results
2410: Criteria for Communicating
2420:Quality of Communications
2421: Errors and Omissions
2430:
Use
of
“Conducted
in
Conformance with the International
Standards for the Professional Practice of
Internal Auditing”.
2431: Engagement disclosure of Nonconformance
2440: Disseminating result
2450: Overall Opinions
2500: Monitoring Progress
2600: Resolution of Senior Management’s
Acceptance of Risks
SOURCE: The IIA International Standards for the Professional Practice of Internal Auditing
(Standards), 2016
5.1 Internal audit code of ethics
The purpose of IIA’s code of ethics is to promote an ethical culture for the profession of
internal auditing. The code focus on the trust of the audit user and objectivity, the code was
released in 2000 after replacing the earlier version of 1988; the current version emphasizes
integrity, objectivity, confidentiality, and competency. The code applies to both individuals and
entities of audit service. Any violation of the code will the Violators be held liable for
disciplinary action.
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
Integrity: the auditors should be honest, diligence and responsible as well as the
auditors should be trustworthy and credible and prevent any illegal objectives and
contribute to the legitimate objectives of the organization

Objectivity: auditors should not engage in activity that may impair or biases their
assessments.

Confidentiality: the auditors should protect and use wisely the information acquired
in the course of their duties and do not use it for any personal gain or illegal way

Competency: should have appropriate education, competencies, and expertise to
complete their mission
5.2 Internal audit charter
The audit charter sets a clear role and position of the internal audit in the organization, the
internal audit charter is a formal document that is developed by the Chief audit executive (CAE)
and approved by the board of directors and top management. The IIA glossary83 defines it as a
formal document set to define the internal audit activity, scope, objectives, responsibilities,
authority. The internal audit charter positions the IA activities within the organization and
provides it with the authority to access organizational information.
83
Institute of Internal Auditors, (2016), « International Standards for the Professional Practice of Internal
Auditing », Glossary. address: www.theiia.org.uk , PP.21
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Section Two: Internal Audit Forms And Types
The expansion of the internal audit scope and the historical evolution of the concept led to
complicate the term. Thus, we can classify the IA into two criteria that will help to differentiate
the different scopes of the IA. The first one is the classification of internal audit by objectives
(nature) and the second one is by destination (function), the classification by objective reflects
a historical evolution of the term (from the compliance nature to the strategic nature). Where
the other classification corresponds to the universal criteria of the internal audit where it is
applicable in all the organizational function (IT, security, social, HR, etc.). The latter can be
divided into financial auditing and operational auditing.
1. Accounting and Financial Audit
The National Council of Public Accountants (CSOEC)84 defines the financial audit85 as the
process of examination by a competent and independent external expert, which he aims to give
an evaluation and objective opinion on the regularity and honesty of the financial statement and
transaction of the organization. The latter definition does not take into account the internal audit
function since the mission is held by an external expert. However, the internal audit financial
mission should be held by an internal auditor, where he gives an objective opinion on the control
and the well-functioning of the financial function by managers and gives recommendations to
improve the efficiency and effectiveness of the function. Therefore, this mission is
performance-oriented where the first one is legally oriented.
For London86, the internal auditor in cooperation with the external auditors should give an
assurance that the internal accounting control procedures are reliable and reliable.
2. The operational audit
The operational audit covers all the components of the value chain of the organization with
the audit activity, the audit activity is performed by the internal auditor (organizational
employees), and they are related to the top management and independent from all other
functions.
84
TOKINIAINA (R), :« Réussir Le DSCG 4 Comptabilités Et Audit », Réussir le DSCG, N°02, Eyrolles,
2015, PP.181-182
85
The CSOEC in 1945 is an independent organization, under the purview of the Ministry of Economy,
Finance and Budget.
86
EBONDO (W)., 2007, « Organisation et méthodologie de l’audit interne », in « Audit Interne : Enjeux et
pratiques à L’international », Eyrolles, Paris.PP.22.
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Operational audit endeavors to understand the functioning of given activity; solve the
problems relating to the latter by providing recommendations and consultation and aim to
improve efficiency and prevent future risks and deficiencies. In nutshell, operational audits aim
to improve the performance of the organization and to note that audits do not judge the
performance of the organization. Thought, it gives assurance on the standards that allow the
organization to attain certain performance, which means it must guarantee the existence of the
performance objectives, the adequate resource to attain performance, and an information system
to measure.
Bouquin (H)87 defines the operational audit as an examination of organizational devices
and systems to promote the economy, the efficiency, and the effectiveness of multilevel choice
of the enterprise and evaluate the end-result of those devices. Therefore, internal operational
audit stand-alone as internal control, not just a single procedure or operation.
On contrary to the financial audit that focuses on financial information and statement
operational audit focus on all the actions of the organization without taking into account
financial results, which mean auditing the reality.88 A financial audit is a legal mission mandate
by the law and exercised by external experts and it can be a contractual mission, which is a
concern with accounts certification and examine regularity and accuracy of the financial
information. Where else audit operation is not a legal or contractual, mission held by an
independent employee within, the enterprise and mission do not deal with the accounting
processes. Lastly, financial audit focus on the “image” that accounting gives, where operational
audit focuses on the “reality” of the operation.
An additional important differentiation between the two forms of audit activities is that the
financial audit has specific and general reference defined by the law or by certain international
accountancy organization, as result the auditors know the specific needs, measures, and
expectation for a good accountancy system. Where the operational audit does not have such a
stable reference, since it depends on the organization's environment, which made a major
challenge to meet.
87
88
BOUQUIN (H), (), « Audit », in encyclopédie de gestion, Vol 1, n°12,1997, PP.200-218.
Thiery (D), : « L’audit », la découverte, Paris, 2004, PP.19.
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As we said earlier, internal audit is sectioned into two categories the first is by nature and
the second by destination, the operational and financial audit is an audit by destination, the
classification by nature of auditor by objective corresponds to the four categories:

Compliance or regularity audit

Efficiency audit

Management audit

Strategy audit
Each audits categories can be qualified as an audit by destination, which refers to different
organizational function audits, or what so-called operational audit, since the latter include them
all. To note that certain authors like H. Bouquin and Jean- Charles Becour (2008)89 have
separated the organizational process into three-level strategic audit, management audit, and
operational control, however, we will split the operational audit into four levels of audit that are
divided according to nature (objective).
2.1. Strategic audit
A strategic audit90 can be perceived as a comparative analysis between the enterprise
strategies and policies with the environment in which it operates to examine the overall
compliance and efficiency of the organization, as a result, the role of the auditor is to identify
inconsistencies. Moreover, to do so the auditors may set up a reference system based on the
specificity of the environment and enterprise characteristics. The auditor should not assess or
evaluate the policies or the strategies but only be limited to highlight any inconsistencies.
However, this simple act of disclosure could lead the top management to make fundamental
changes to regain the overall consistency; the strategic audit is a high level of audit, which
requires significant competence, the strategic audit is considered to be the final development
phase suggesting more sophisticated conceptions of internal auditing. Which lead to an
anticipated advance in the corporate governance audit.
89
BECOUR (J), BOUQUIN (H), : « Audit opérationnel, Entrepreneuriat, Gouvernance et Performance »,
(3rd Ed), Economica, 2008. PP15
90
BERTIN (É), : « Audit interne: enjeux et pratiques à l'international », Eyrolles, 2007, PP.182
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
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A strategic audit is concerned with numerous disciplines to analyze the subject in a
multidimensional level, including dimensions such as technical, human, financial, etc. this type
of audit resemble the compliance audit. However, the compliance audit identifies anomalies
and provide some recommendation to overcome them, in the other hand, strategic audit answers
to all the questions that caused it to be released, along with advises and consultations based on
the auditors' observation91.
2.2. Management auditing
Management auditing does not mean that audit will judge the strategic choice and policies
of the top management since this is not its objective and the latter does not have the competence
to do so. As result, the existence of this type of audit will not inherit the freedom and the
decision power of the top management, but the end-goal of the management audit is to observe
analysis and measure those choices and identify the consequence and risks of pursuing those
choices.
Therefore, we can define management auditing as an independent review, analysis, and
assessment of the effectiveness of managers and the efficiency of the corporate structure in
achieving the corporate goals, the goal of this audit is to identify the incoherence and the
potential ones in management and recommends to rectify those weaknesses. Concisely, the
audit verifies that the policies and control that are applicable are aligned with the strategy.92
The management audit can resemble the compliance audit type, but focusing on a specific
and delicate field of application, which is the strategic field. This type of audit requires a
significant amount of authority, professionalism, and good knowledge of the company, in
general, the mission of audit is held by an audit responsible e.g. CAE, the engaged mission is
performed to enhance the corporate governance as suggested in the definition of the internal
audit. This audit form may take a specific form of an assignment to examine the compliance of
the policy with the company’s strategy. Moreover, management auditing can take the form of
a traditional audit mission in which we can find certain statements and recommendations in the
LAROSE (G), : « La stratégie de la vie associative », L’harmattan, Paris, 2010, PP.109
https://www.accountingnotes.net/auditing/management-audit/management-audit-meaning-and-objectiveauditing/10525 , (11/05/2021 13:37)
91
92
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management audit form or other forms like the efficiency and compliance audit. This first type
of management audit focuses on high-level hierarchic and corporate managers.93
Additionally, this auditor will focus on the low-level hierarchic responsible, and will not
take into account the policy and company’s strategy anymore, but the implementation of those
policies and strategies. This form is complementary to the first form as the first one verify the
compliance of the policy with the strategy, the second one verifies that those policies the
recognized, comprehended, and applied and have the sufficient resources to do so.
There is a case where the management auditing is applicable within an international group
where the formulation of the strategy must follow a standardized process, the role of auditors
is to examine that the elaboration of the strategy complies with the rules of the group.
As a result of the management audit, verify that the internal control is applicable and
adequate throughout the entire hierarchical axis.
2.3. Compliance audit
Compliance makes a lot of problems for the auditors and during the audit, the compliance
audit can be described as the first form of audit this type of audit follows. The primitive form
of audit, where the auditor makes an assessment of which extent of the business respecting the
law,94 regulation, and control standards the IIA performance standards 2210.A3 confirms. The
audit mission is therefore to analyze the compliance with rules and report distortions, nonapplications to the manager and provide those causes consequences and recommendations.
Nevertheless, with the repeated and recent violations of different laws and regulations,
compliance takes an important place and still up to date, particularly in the banking sector. As
result, many regulations and laws become more restrictive e.g. Sarbanes-Oxley in the U.S.95
In addition, we can see “regularity audit” the same as the compliance, but the first concern
with the internal regulation of the organization where the second verify the compliance with
the law and regulation.
JACQUES (R), : « Théorie et pratique de l’audit interne » (7th Ed), Prime par l’IFACI, Eyrolles, 2013,
PP.52-53
93
94
95
Spencer (K), : « The Internal Auditing Handbook », (3ed Ed), John Wiley and Sons, Ltd, 2010, PP.637
JACQUES (R), Op.cit. PP.49
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2.4. Efficiency audit 96
When we speak on the efficiency audit, we encompass the efficiency and the effectiveness
term at the same time, it would be more convenient referees to the latter as performance audit,
but the term of efficiency take his place in practice and language. Efficiency audit assesses
method, procedures, and regulation on the contrary to compliance where the auditors give an
opinion on the application of the method, regulation, etc. in this form of audit the auditors give
their opinion on the quality of the method, procedures, etc.
The efficiency audit depends on the corporate culture, wherein large corporation with high
growth rate the aim is to eliminate as much as possible obstacles and delaying factors, the
efficiency for this organization is a simplification, on the contrary, in an organization with less
growth rate the efficiency measured in terms of adhering to rules and regulations.
2.5. Audit classification by function:
Since we characterize the internal audit function as universal, which means that, is
applicable in international level in all organization no matter what is their form, and in the
enterprise-scale audit applies to all functions without exception (depend on the organization
needs). Companies’ requirement has led auditors from accounting origin and people coming
from different background to specialize in order to offer an excellent service in their specialty,
such as:

Commercial and supply-chain audit: concern the marketing, sales, transport,
activates, audit analyses all other aspects of those function: commercial relations
and advertising, customer solvability, quality of shipments, prospect research, etc.

IT audit: performed by computer scientist educated about internal audit
methodology exercises his audit mission in data centers audit, IT network, etc.

Social audit: interested in audit payroll, HR audit, social declarations audit, etc.

Organizational audit: it analyses the current context of a structure and gives
incentives to put a reorganization in perspective

Security audit: verify the compliance in term of security and point out the potential
vulnerabilities of the system
96
JACQUES (R), ibid. PP.50
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
Legal audit: verify the legal framework of the entity, the role of the auditor is to
rectify any and to determine the legal and fiscal consequences.
There are other audits by function; it depends on the size, and the requirement of the
organization, to note that all those classifications of the audit by function lie beneath the
operational audit.
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Section Three: The Organisation Of The Audit Mission
The purpose of the internal audit mission is to examine and identify deficiency than
propose a solution, the audit mission varies in terms of duration from a few days to months it
depends on the audited topic and number of the auditor. Generally, it can last from four to six
weeks if the audit team was from two to four persons and one of them is the audit director.
The internal audit mission is to perform in three major phases the planning and the
preparation of the audit mission the second one performing the audit (verification) and lastly
communicating the audit result (conclusion). Moreover, not regardless of the audited function
or the mission type or importance the organization of the audit mission remains the same.
The audit mission is divided into two main activities the consultation and assurance as has
been given in the internal audit definition; the audit mission is a temporal mission since the
permanent work of auditors can be performed only through succession. As result the audit
mission can be determined in terms of duration and application field, the application field
depends on the object (help auditors to distinguish between a specific mission that has a spatial
limit in contrast to general mission) and the function (which can be the uni-functional mission
or multifunctional).97
The audit mission is divided into three phases as we said earlier the first two have
proximally the same length where the last one shorter. The planning phase is prepared in the
office and performed in the field and the second phase is purely fieldwork in contrast with the
last one, which is based on administrative work and interaction between the audit team.
However, before the internal audit function can lunch any audit mission, it needs some
foundation to establish an effective audit function, such as: 98

The internal audit activities organizational charter: the latter defines the audit
activities, responsibilities, and authority that position the audit function within the
organization

The long-term audit plan: which defines the audit strategy, the interaction between
the audit work and the organization, the audit objectives, and the organizational
needs.
RENARD, (J), : “Théorie et pratique de L’audit interne’’ 5th Ed, Eyrolles, Paris. 2010, PP.210
MOELLER, (R)., , “Brink’s Modern Internal Auditing: A Common Body of Knowledge’’, 7th Ed, John
Wiley & Sons, Inc., New Jersey, 2009, PP.157
97
98
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
Standard and effective approaches to perform internal audits: which define the audit
standards (IIA Standards) and the key competencies
3.1 The preparatory phase of audit activities:
Each audit project should be planned before the audit mission and scheduled in the annual
audit plan and risk assessment process, the annual plan is requested by the audit committee or
the top management this latter would be approved and updated periodically by the audit
committee. In response to an unplanned event e.g. fraud, change in regulation, etc. internal audit
have to launch audit reviews regularly.
3.1.1 Initial planning and preliminary objective statement
The annual plan covers typically covers which activities to perform in a fiscal year, which
is a risk-based internal audit planning process that draws the big picture activities list for the
internal audit. However, each internal audit mission should have a high-level objective
statement or what so-called the preliminary objective and scope statement or “planning memo”
which should be approved by the management and is not presented to the audited yet. The
palming memo describes what the internal auditor will accomplish, who will perform the
review, and the approximate period. After the validation of the planning memo or the
preliminary objective statement, the auditor receives the mission order.99
3.1.2 The mission order
After the approval of the preliminary objective statement, the auditor had to acquire the
authorization to access the necessary information to perform his duty and location and
concerned persons “auditee”, since the auditors do not have the right to access it.
The mission order100 is the mandate given by the competent authority to the audit structure
to carry out an audit mission on such an entity, which specifies the origin of the mission, and
its scope based on three principles: the internal auditor cannot engage an audit mission by itself.
the decision pf engagement does not belong to him the audit authority is limited in offering to
carry out a mission, the second principle is that the mission order must come from a competent
authority such as the audit committee or the general management. Lastly, the order mission is
99
Ibid., PP.158
Ibid., PP.160
100
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an information purpose since it is addressed not only to the audit structure but also to all the
audited structure.
As result, the mission order had to accomplish to purpose or function, which is the mandate
and information function the first one is to assigned and define the audit mission and give the
auditor adequate authority to access the needed information. The second one is to inform the
audited structure about the mission, although the latter has made a controversy between internal
audit professionals. Since they argue that, a surprise audit allows a review to see actual
conditions without giving the auditee the benefit of cleaning up records. There certain
circumstances where no formal engagement latter is released e.g. the case fraud.101
3.1.3 The preliminary study
It is impossible to execute an efficient audit without a prior knowledge of the expected area
to be audited (both the structure and the activity or the subject), e.g. we cannot perform an audit
of the treasury without knowing the treasury management, and therefore the auditor should have
the sufficient knowledge about the profession to be audited. this phrase has multiple objectives,
which are: (1) to get a clear vision internal control of the function and its process,(2) help to
select the internal audit mission objectives, (3) identify essential problems of the function (4)
avoid neglecting important questions, (5) do not fall into abstract considerations, (6) allow the
organization the internal audit mission.102
In this phase auditor review the collected document and establish a survey and interview,
those activities enable the auditors an audit referential of the audited activity to identify risk
and objectives of the audit mission. It is hard to perform the audit mission of activity for the
first but fortunately, in general, the audit mission is recurrent and is relevant to the expert
auditor.
To perform this phase auditor and acquire the needed knowledge about the topic to be
audited and the structure, and most importantly the risk of the opportunity to improve the
auditor tend to use the activity analysis to better understand the organization and its objective
and breaking down the process into auditable subjects. Every subject should have an audit
referential, which coupled the objective with the risk.103
101
Idem, PP.170
RENARD, (J), 2010, op cite. PP.217-218
103
SCHICK, (P), EVRAERT, (S), VERA, (J). :« Mémento d'audit interne ». Paris: Dunod. 2007, PP.69
102
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In this phase, we use different tools such as surveys or questionnaires that the auditor
should answer better to understand the domain. Auditors can use Up-to-date documents on
operational methods and procedures (flowchart), reports of the department to be audited, and
examine the rapport of the previous audit mission. Also in this phase, that we are going to
proceed the first interview held by the audit director, those interviews are very important since
the success of the mission depend upon them the difference between those interview and other
ones. The first is performed prior to the mission where the latter during the mission and those
interviews are with the highest-level manager of the audited activity where others performed in
the field with the agent.
The duration of this phase depends on the subject complexity, the profile, and the
competence of the auditors as well as the information and documentation quality of prior audits.
Finally, the use of those tools and activities will allow the auditor to acquire the necessary
knowledge of the audited domain subsequently this will enable him to establish a mandatory
document, which is a risk table or audit referential104.
3.1.4 Risk identification and evaluation
According to the IIA’s standards, 2210.A1 in the planning phase auditor should identify
and evaluate risks related to the audited activity, identify the probable risk and their
significance, and analyzing them. This phase will allow the auditors to establish his audit
reference with regard not only to the probable risk but also with regard to the manner of facing
them
105
Analyzing the risk is performed in separate sub-subject of the mission subject which socalled a micro evaluation the purpose of the risk assessment during the planning phase is to
identify the important areas to be audited. This allows auditors to select the important point to
emphasize or neglect depend on the mission complexity, culture, and degree of sophistication
of the audit methodology. Some auditors choose a detailed analysis and others choose to neglect
this aspect. This choice has a direct impact on the subsequent phases of the “in an abstract”
and “in concerto” approaches and they are performed at the fieldwork phase. Those approaches
help to identify the risks and elaborate the audit program.106
104
Idem, PP.70
RENARD, (J), 2010. Op cite. PP.233
106
SCHICK, (P), EVRAERT, (S), VERA, (J). (2007). Op cite. PP.74-77
105
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At the end of this process by comparing the risk to the measures already in place to counter
them, the auditor identifies what his or her reference framework should be; the objective to
achieve in regard to the current situation.
3.1.5 The audit reference
The risk table or the internal audit reference enables the auditor to define the scope and
the limit of the investigation and to organize his presentation and conclusion (problems, cause,
and consequence). The complexity of the construction of audit reference depends on the mission
in some mission we have the audit reference in the audit documents the case of classic mission
and other in more difficult in the new or complex mission.107
The first step is to split the activity into elementary steps or operations and the trait it
separately, we can spill the activity in chronological order if the process is relatively simple on
contrary in complex operation we can use semantic tree division and quality type division
following each operation we can have one or multiple finality or objective. The two consist of
the first colons of the risk table.108
Then we identify causes that may obstruct the realization of those objectives, this fourth
step consist of evaluating the risks from the most damageable to the least generally three levels
of classification. After that, identify the control criteria what the auditor should control. Then
we identify the impact of those risks in another term what are the consequence if we do not
attain the internal control objective. 109
Then we identify the best practices to face those risks, the latter identify what would
normally be found to counter the identified risk. We should have a procedure, standards,
supervision action, and adequate equipment or qualified personnel. Finally yet importantly, the
auditor only states if the identified internal control system exists (yes) or does not exist (no).
We only look at the existence of the device and not its operation.110
107
SCHICK, (P), EVRAERT, (S), VERA, (J). (2007). Op cite. PP.78
RENARD, (J), op.cit. PP.235
109
Idem, PP.236
110
SCHICK, (P), EVRAERT, (S), VERA, (J). (2007). Op cite, PP.84
108
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3.1.6 The orientation report
The orientation rapport is a document that synthesizes the audit objective and the risks zone
that auditor will examine, define and formalize the lines of investigation of the mission and its
limits “the scope”, the purpose of this document is to specify the points that will be analysed
during the mission. This document is a kind of contract between the audit service and the
auditors the orientation report defines the objectives of the mission under three rubrics: general
objectives, specifics objectives, and the scope.111
3.2 Performing the internal audit:
In this phase auditor should move to the auditee site, this phase is called “the fieldwork”112,
although the auditor could the auditor may not take place at the auditee location.
3.2.1
The opening meeting: “the kick-off meeting”
At the beginning of the audit mission, some contacts were made: vesting high-level
manager, reviewing the document, etc. Some have argued that opening meeting in the middle
of the audit mission and not the beginning; however, this meeting does not label the start of the
audit mission but the start of the implantation process. The purpose of the opening meeting is
to establish the first contact with all the people involved in the audit before starting work in this
meeting we present the audit team member and building trust among auditors and auditees.
During the meeting and with presentation support we present a Reminder on internal audit,
examination of the orientation rapport the scope the objectives, duration the method used, and
the procedures to permit the auditee to make observation and interrogation, audit logistics, and
resources, contacts. This meeting necessarily and symbolically takes place at the auditee
location113.
3.2.2 The audit work program
The audit program is a set of pre-established steps that the auditors will follow to perform
their mission, the latter is a tool to enable the auditor to plan, direct, and control the audit
mission it is like a blueprint for the auditor. The audit program allows the auditor to specify the
step to follow for attaining the audit objectives. It represents the auditor's selection of the best
111
SCHICK, (P), 2007, Op cite. PP.92
MOELLER, (R)., 2009, Op cite. PP.172
113
RENARD, (J), 2010. Op cite. PP.246
112
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methods for carrying out the work and serves as a record of the work steps affected. Any audit
department should have a set of general audit programs prepared for most repeated audit
activities114.
The audit program has multiple objectives: its contractual document between the auditor
and his hierarchy to evaluate the work of the auditors, a planning document that we can assignee
tasks to the different members of the mission, and planning the tasks to be executed e.g. PERT
diagram. Evaluation document and set the basis for the future mission set the basis for the
construction of internal audit questionnaire. The audit program contains the techniques, tools
that should be considered for use: traffic diagram, statistical survey, interview, and the task to
be done and when it should be done.115
3.2.3 Internal control questionnaire
Internal control questionnaire is an internal document that we have already begun to
elaborate on since the task division like the risk table the activity division set its basis, the QCI
helps the auditors to make the most complete possible observation of each item point to his or
her critical judgment. To do this, the questionnaire should contain all the appropriate questions
to ask to make a complete observation. Those questions are the audit guide that enables the
auditor to execute his program it is an important methodological tool. The latter asses the
internal control system through questions about specific functions or organization therefore the
QCI should not be general and the questions are necessarily specific. The auditor elaborates the
questions in the most precise form possible. These are necessarily open-ended questions.116
The QCI includes five fundamental questions, which allow grouping together all the
questions concerning the checkpoints: who – what – where – when – how, the latter gives him
the assurance that he has forgotten nothing. It is adding semantic division to sequential division.
For each operation catalogued as “at-risk”, a QCI is developed based on the five fundamental
questions, which make it possible to identify the elementary tasks from which the internal
control questions are deduced. We can refine the questionnaire by splitting the elementary tasks
into finer tasks, which are easier to observe, and we can go deep in analyzing them. For each
question, the auditor determines the tools to be used to answer them, when and by whom. With
114
MOELLER, (R), 2009, op cite. PP.168
RENARD, (J),2010, Op cite. PP.252-255
116
RENARD, (J), 2010, Op cite, PP.256
115
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the help of QCI, the auditor will make test and observations in the field, in which it carries out
FRAPs and validate them.117
3.2.4 The Audit Fieldwork
The actual audit fieldwork should follow the pre-established audit program, during this phase
the auditors must answer the questions from QCI, the tools to be implemented are determined
in the QCI. The latter range from observation to different forms of test document analysis, data
reconciliation, interviews.
3.2.5 The audit evidence
The information collected from those test and surveys are called the audit evidence, the
latter covers everything an internal auditor review or observe, the internal auditor should gather
audit evidence to enable him to perform the audit evaluation a well-constructed audit program
will guide the auditor in the gathering phase. The auditor must never base his finding on
hypotheses or intuitions; he must have evidence of what he claims, the four quality criteria for
that evidence to be proven and valid are sufficient, competent, relevant, and useful. The auditor
may encounter the different level of audit evidence and him attempt to use the best available
audit evidence here is some form of evidence:
physical proof, testimonial evidence,
documentary proof, and analytical proof.118
3.2.6 The audit work-papers
The internal audit work paper record the evidence obtained during the audit engagement
and document the work performed by the auditors and serves as a link between the procedures
documented in the audit program and the result of the audit test. The audit work papers
document also all the audit work while the audit management reviews and comment on the
work. If a step cannot be completed, the work papers must include a statement, which is
approved by audit management, explaining the situation. If this condition exists, audit
management must consider whether additional procedures should be identified to satisfy the
objective of the eliminated audit step. This consideration will be documented in the audit work
117
118
RENARD, (J), 2010, Op cite, PP.258
MOELLER, (R), 2009, op cite, PP.170-171
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paper. The working papers may variate in forms from a checklist, questionnaire to a note from
an interview or focus group. 119
3.2.7 The audit pointe sheet
Audit point sheets are used to document the potential audit finding and they are prepared
by the audit team who identify the finding. The audit management will examine the latter to
determine whether the potential audit finding is valid and should be included in the draft audit
rapport or any additional fieldwork should be done to fully develop the finding. All audit point
sheets are to be a cross-reference to the audit work papers before the review with the audit
management. The point sheet provides a standardized format for developing the potential audit
finding120.
3.2.8 The audit preliminary finding sheet “FRAPs”
Whenever the internal auditor finds a potential audit deficiency, he prepares a summary of
the conditions discovered and potential finding the latter is called an audit preliminary finding
sheet, the preliminary findings describe the deficiency and the potential of improvement that
were identified in the audit fieldwork phase. The latter is developed through the auditor point
sheet or any other internal audit documented finding and observation. These latter ensure that
the facts for developing the audit finding rapport are obtained. The content of the preliminary
audit finding can vary depending on the requirement of the particular audit mission but
generally, there is some element that marks their presence in most of the preliminary audit
findings.121
Base on the observation or the finding we can conclude the following element:122

Criteria or referential: describe ideal situation based on contract, document, agreement,
procedure, and policies “ the normal situation”
119
120
MOELLER, (R), 2009, op cite, PP.175
https://nanopdf.com/download/chapter-6-conducting-the-audit-engagement_pdf (consulted 5/16/2021
2:36 PM)
121
SCHICK, (P), 2007, Op cite, PP.107-110
122
MOELLER, (R), 2009, op cite, PP.176-178
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
Conditions: give the description of the actual situation briefly and sufficiently to the
audit management

Causes: it intended to explain when the current situation excites, the auditor should not
stop their analysis of the basic cause but should dig deeper into the root cause of the
phenomena, establishing a logical link between the causes in the condition. e.g.
“Ishikawa diagram”

Effect: To explain the negative consequence that could occur as a result of the current
condition, the auditor must develop an audit evidence a logical and convincing linkage
between the condition and the effect. The latter can be a support to the audit
recommendation

Audit recommendations: are the counterpart of the causes and they represent a
proposition for corrective action to They aim to reduce the gap between the criteria and
the condition and prevent the problem to occur again.
3.2.9 The draft rapport the communication phase
The potential finding should be discussed by the management of the audited unit during
the audit to determine whether their factual or appear to significant, if the findings are minors
or procedural the management of the unit can take corrective action at the moment as result
they would be deleted or deemphasize in the final report. The field audit team should review
all potential findings with the unit's management before leaving the site. This will provide an
opportunity for an internal audit to present its preliminary findings and recommendations to
local management for feedback and comment. It also gives both parties an opportunity to
correct any errors in the preliminary audit report findings before the internal auditor leaves the
site.123
123
Ibid, PP.178
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3.3 Conclusion phase
The audit is practically finished the auditor will return to their offices with the working
papers and the finding; in this phase validate the audit rapport, which will enable Future
surveillance actions.
3.3.1
Validation and cloture meeting
The same persons how attended the opening meeting will be present in this meeting is
conducted to receive comments from the audited entity on the findings and conclusions
presented in the draft discussion paper to ensure the accuracy of the report. The objectives of
the meeting are; present and obtain the validation of the finding from the audited, explain the
recommendation for the audited, and establish the practical arrangements for the action plan
and monitoring mission. During this meeting, two types of challenges may occur
124
: despite
the findings: the audit does not provide and evidence of the finding. Secondly, Disputes relating
to the recommendations the audit may suggest changing the recommendation and he has the
right to do so also the specialist in the subject. As we said earlier, during the meeting, we set
the basis for the action plan and this meeting must be the subject of a report incorporating all
the remarks on the findings and recommendations. This report is sent to the auditee for
approval.
3.3.2
The audit rapport
It is the final act of an audit mission, it communicates the conclusions and findings of the
mission to the general management and the main managers of the audited area, the latter
mentions the deficiency and sets the basis to elaborate the action plan. The final audit report
can only be drawn up when the auditees have submitted their written comments if planned
during the validation meeting. The rapport has two main objectives: information and
communication document that inform the auditee on the area audited and it’s a working tool
since the auditee establishes the action plan and performed the corrective actions based on the
latter. The audit rapport is consists of three parts the first is a synthase for the manager the
124
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second is the project of the internal audit which is then validated finding and recommendation
and the action plan125
3.3.3 The action plan
The audit structure has neither the authority nor the responsibility to implement the
recommendations in the audit rapport, after submitting the audit rapport the responsible of the
audited unit are asked to establish the action plan to implement those recommendations. Then,
the action plan is sent to the audit structure to be validated and make observations if the plan is
partially or completely insufficient then the auditee made the necessary modifications, for each
recommendation in the rapport the auditee may express: acceptance, partial acceptance, or
refusal. In the case of refusal, the auditee must also provide reasons that the finding and
recommendation cannot be implemented as it was validated at the closing meeting. In case of
acceptance, the auditee explains he will what and when. Also, for the partial acceptance explain
why acceptance is not total126.
3.4 The follow-up phase
The auditor seeks to find the outcome of their recommendations so that they can measure
the effectiveness of their work and monitor the solutions given to problems in the organization,
the term, and conditions of performing such phases differentiate from one organization to
another. The internal auditor must be informed of the follow-up to its proposals, which will
make it possible to measure efficiency and improve the future audit assignment. To note the
internal auditor should participate in the implantation of his recommendation. Within the
following, three to twelve months of the establishment of the action plan, formulate an opinion
of the quality and the quantity of the ameliorations made.127
There are two opinions on this the monitoring process, on which methods to use; it can be
grouped into two main categories:

French method: the auditors should perform the monitoring phase and it one of its
important roles
125
RENARD. (J), 2010, Op cite. P 195.
SCHICK, (P), 2007, op cite, PP.134-138
127
Institute of internal auditors (IIA), (2016), “internal standards for professional practice of auditing
internal’’, retrieved from: http://www.theiia.org
126
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
Anglo-Saxon method: The follow-up of recommendations is no longer the role of
internal audit. It is up to the hierarchy to assume its responsibilities.
4
The internal audit tools and techniques:
Generally, the internal audit tools and techniques presented in the audit process are
characterized by: They are not applied systematically, the auditor chooses the tool best suited
to the objective, they can be used in multiple areas such as external audit, consultation, etc. and
we can use multiple tools simultaneously128.
The internal audit tools are divided into two main categories:

The Investigation tools are tools to help the internal auditor to formulate questions or
answer questions that they have already asked.

The Description tools are tools to help the internal to remove the ambiguity and clarify
the specificities of the situations encountered.
4.1 The Investigation tools and techniques:
Those tools help the auditor to answer the question already exposed and formulate other
questions:
4.1.1 The Statistical survey:
All the auditors need to know how to make the statistical sampling and it is advisable to
adopt a clear policy regarding its use. When examining a large number of transactions or other
evidence. Internal auditors frequently misuse the Sampling term. Pulling one or two items from
hundreds of documents to review and perform the audit based on this selection is not
appropriate an internal auditor should not try to draw conclusions for the entire population based
on that limited and random sample. To perform a well-done statistical sampling auditor may
follow some steps: understand the population and develop a formal sampling plan with regard
to the population, Draw a sample from the population-based on that sample selection plan then
128
RENARD, (J), 2010, op cite, PP.329
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evaluate the sample with regard to the audit objectives finally conclude an opinion on the entire
population based on the sample.129
Even though audit sampling is very useful, an internal auditor must remember that
complete information cannot be obtained about a population based on just a sample, whether it
is judgmental or statistical. It is only by making a competitive test and following good audit
procedures that an internal auditor can obtain exact information. With non-statistical,
judgmental sampling, information is obtained about just the item examined130.
4.1.2 Interviews
Getting information is an essential part of the auditor's work since the auditor spends a
great deal of time gathering facts The starting place for establishing facts is just asking, and
here where it lies the importance of interviewing. The simple definition of an interview is
talking in a structured manner. According to Dale Flesher, the audit interview is a means of
gathering facts, opinions, and ideas, and is, therefore, an important source of evidence. It is a
means of interpreting information, and the auditors who have interviewing skills are often
perceived as professional.
To note that the interview is not dialogue, meeting, conversation and most importantly the
interview is not an interrogation. Since the internal auditor is not an accuser or denouncer, the
atmosphere of an internal audit interview must be collaborative
4.1.3 Computer-Assisted Audit Tools and Techniques (CAATTs)
The CAATT means the use of any computerized tools or techniques to increase the audit
efficiency and effectiveness ranging from basic tools such as Word to the most sophisticated
systems and techniques as simple as listing the data to matching files on multiple key fields. In
many cases, the use of computers can enable auditors to perform tasks that would be impossible
or extremely time-consuming to do manually. These three types of audit tools: 131

General audit software: those are some general and useful audit software like word,
reference libraries, presentation software, etc.
129
SPENCER. (P), 2010, op cite. PP.909-911
MOELLER, (R), 2009, op cite, PP.200
131
CODERRE, (D)., , “Internal Audit- Efficiency through Automation’’, Wiley, New Jersey, 2009, PP.10-15
130
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
Specialized audit software: specialized audit software has been designed to support
auditors in their various activities e.g. Data Access, Electronic Questionnaires and Audit
Programs, data warehouse and mining, rapport, etc.

Audit management activity software: help the auditor to manage their resources, and
monitor the operations of the organization, E.g. Audit Scheduling, Time Reporting, and
Billing, emails, and internet.
4.2 The Description tools
Among those, we will present some, which are:
4.2.1 The physical observation
Physical observation is the most compelling tool used by auditors, to verify the existence
of the assets; generally, this technique is used in inventory, tangible investments, cash in hand,
and equity and investment security, etc. to establish a well-done observation should not be
clandestine. Indeed, the internal auditor must inform the relevant managers of his visit. The
general rule of internal auditing is transparency; the observation does not have to be punctual
and the observation must always be validated, as it is uncertain.132
4.2.2 The flow chart
The main objectives of the diagram have visualized the circulation of documents and
accounting records through the deferent processing stage, it a dynamic tool that some present
as cinema. The latter makes it easy to understand the operations since it resembles every
operation with a symbol and the circulation with a flash.
However, the utilization of this technique is very difficult, as result; the internal auditor
needs to practice them regularly to master them. The use of the flowchart requires continuous
practical training. Nevertheless, the new software of flowchart makes it relatively easy for the
auditors.
4.2.3 The narrative
Some of the steps in the system are very difficult to describe with the diagram technique,
so we use narrative to describe some of the steps, when preparing the narrative the auditors
132
Centre d'Ingénierie et d'Expertise Financière, (CIEF), (n.d.), « Guide d’audit », Vol n°01, PP. 3131-3132
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must be aware of certain points to enable any to understand those narratives like any other work
paper. So the auditor must avoid: do not use a personal abbreviation, establishing narrative
without structure, telegraphic draft realized during the interview.133
4.2.4 Task Analysis Grid
A task analysis grid is a double entry table that enables us to view the assignments of people
or departments. Identify "who does what" and highlight a possible mismatch in the distribution
of tasks in a process between people and/or departments (as well as tasks not done).134
4.2.5 The functional organization chart
The hierarchical organization chart must be constructed and implemented by the person in
charge and the auditor needs to have it communicated.
The auditor establishes this chart through information gathering e.g. narration, interviews,
and observations. One of the main characteristics of this chart is that the words in the boxes do
not bear the names of persons but verbs that denote functions.
Moreover, two organizational charts are not the same, because the same person can have
several functions as well as being without a function. In addition, the same function can be
shared between several people or is not assigned at all. The creation of a functional organization
chart helps to enrich his knowledge.135
133
Idem, PP.3109
Idem, PP.3104
135
RENARD, (J), 2010, op cite, p 355 -356.
134
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Section Fore: Internal Audit as A Mechanism Of Corporate
Governance
With the recent global mutations that change the corporate environment, the audit function
has gained a lot of attention since it ensures that the organizations can achieve their objectives.
The capacity of attaining those objectives greatly depends on the quality of the corporate
governance system, which the latter also depends on the audit function, since it is one of the
powerful corporate governance mechanisms. The audit function could improve the CG quality
in four areas: assessment of the internal control system, strategic risk management, and
information asymmetry, and stakeholder protection.
1 Internal audit and corporate governance theories; agency theory and transaction cost
theory:
1.1 Internal audit and agency theory:
As we discussed in the first chapter the agency relationship, occur when there is a contract
between agent (which is management) and principle (which are the shareholders) and during
this relationship, multiple cost occurs both to the agent and the principle monitoring, bonding,
and residual loss.
In the relationship between principal and agent, we face the problem of the existence
of asymmetric information and risk aversion. Since the shareholders do not have the
information that managers possess and do not have the same risk aversion. Initially, the internal
audit was not a corporate governance mechanism for the agency theory because of his
connection to senior management. However, after the Sarbanes-Oxley act that mandate the
BOD to submit a report on internal control and the relationship between internal audit and the
Board of Directors and/or the Audit Committee. The internal audit became an important
mechanism of corporate governance that help to reduce the information asymmetry by
providing an objective judgment on the quality of the internal control.
The internal audit should have adequate independence to detect to report errors, even
against the will of the auditee. Corporate governance is a set of control systems that aim to
improve the relationship between managers and shareholders and act as a safeguard of the
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shareholder's wealth. According to Charreaux,136 the corporate governance is limited to the
financial aspect of the organization but all enlarge to cover all its activities, internal audit helps
the organization to attain its objective thus protect the shareholder wealth. According to Piot137,
the quality internal audit function should logically help to resolve the agency conflict minimize
contractual costs and maintain the sustainability of the governance system. In addition, the
internal audit role is not just limited to the financial aspect but all the enterprise activities.
1.2 The internal audit and the transaction cost theory
As we see previously the transaction cost theory came after the paper of Coase in 1937 in
which he stated that it is the presence of market costs of using the market, which explains the
emergence of the firm. O. Williamson explores this question further using the concept of
transaction cost and considers the firm as a form of organization that reduces the transaction
cost and it appears when the market fails to minimize this cost.
The firms could reduce the transaction cost better than the market because the firm is
recognized for its ability to internalize certain transactions and to carry them out at a lower cost
than if they had taken place on the markets. It is for this reason that companies, regardless of
their size (large companies or SMEs), have taken into consideration the internalization of their
legal audit activities (accounts officer) or the external audit through the creation of the internal
audit function this will result from the suppression of the external audit service cost.
So it is clear to create an internal audit function within companies is to reduce its costs. It
was therefore the concern of savings that led to the creation of the internal audit function in
large companies after the 1929 crisis.
2 The role of internal audit in the assessment of the internal control system
Many companies have already had an internal control system for a long time. The
disjunction of the owner of the management as well as the size of the company has led to an
increased focus on the internal control system. Before this separation, ICS has not considered
a significant means of control because of the absence of separation between ownership and
136
CHARREAUX (G), : « Gouvernance des entreprises : valeur partenariale contrevaleur actionnaire »,
Finance Contrôle Stratégie, Vol. 1, N°2, 2000, PP.57-88.
137
PIOT, (C). Chapitre 6 : « Qualité de l'audit, information financière et gouvernance : enjeux et apports ».
In : ALAIN FINET éd., « Gouvernement d'entreprise: Aspects managériaux, comptables et financiers » (PP.
203-204). Louvain-la-Neuve, Belgique: De Boeck Supérieur, 2005.
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management. In addition, the owners held the control activities and it was limited to financial
control.
However, after the economic growth, the company has encountered several obstacles in
multiple areas: financial, administrative and organizational, etc., which has led to the review of
the importance of internal control for modern management to protect its resources. Nowadays,
internal control system occupies an important place within the company, on contrary to the
traditional view; Internal Control is viewed in terms of process and take into account all the
company’s personnel, ISC became a central element of control due to its ability to ensure the
proper functioning of the company and identify and manage risks138. However, this system must
be assessed by the internal audit to guarantee its efficiency and effectiveness in the sense that
internal audit is the control of control.
2.1 Definition of internal control
The institute of internal audit (IIA) defines internal control as:” Any action taken by
management, the board, and other parties to manage risk and increase the likelihood that
established objectives and goals will be achieved. Management plans organize, and directs the
performance of sufficient actions to provide reasonable assurance that objectives and goals
will be achieved”139
In 1992, the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) released its Internal Control (integrated framework), the latter will raise the likelihood
of attaining the organization’s objectives by developing and maintaining an efficient control
system. Moreover, it gave the following definition: process, effected by the organization’s
board of directors, management, and entity’s personnel, Aims to provide reasonable assurance
that the objectives are achieved in terms of operations, reporting, and compliance140.
According to the COSO framework of the internal control, the latter helps the organization
to attain objectives in the following categories:
138
BENOIT (R), et al : « Les bonnes pratiques en matière de contrôle interne dans les PME ». Cahier n°13
Academia, 2008, PP.17
139
The Institute of Internal Auditors (IIA), “International Standards for the Professional Practice of
Internal Auditing (Standards)’’, glossary ,See https://na.theiia.org/standardsguidance/Public%20Documents/IPPF-Standards-2017.pdf
140
FREDERIC (B), REMI (G), LAURENT (R), : « Contrôle interne - Gestion des risques de fraude », 2nd
Ed, Maxima, 2008, PP.22
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
Operation objectives: It refers to the effectiveness and efficiency of the entity's
operations, including operational and financial performance objectives.

Reporting objectives: it refers to the reliability, timeliness, and transparency of both
the internal and external reporting and also both financial and non-financial
reporting

Compliance objectives: it refers to compliance with the applicable law and
regulation in which the entity is subject.
From those definitions, we conclude that the internal control is not limited only to the
financial aspect but it expands to the non-financial aspect of an entity like other operation.
Moreover, internal control is a state to be achieved; it is a process, not an organizational
function, which means it, is a means to an end, not an end in itself. Moreover, internal control
is influenced by people and by their actions at all levels of the organization so internal control
is not just about procedures and manuals.
In addition, Internal Control does not provide a guarantee because it does not completely
achieve the objectives but will provide a "reasonable assurance" that these objectives are
achieved.141
To ensure the attaining of the internal control objectives the COSO1 group's fives crucial
element and considered necessary for good control which means indispensable element for the
well functioning or the monitoring of activity:

Control environment: it refers to the standards, process, and structure that establish
the basis to implement internal control throughout the organization it represents the
culture of the organization (the integrity and ethical values). In addition, it depends
on multiple factors the most important is BOD and the top management since they
set up “the tone at the top” regarding the importance of internal control. The
environment influences the ethical value of the organization, governance, and the
competence of personal. It has a major impact on ICS

Risk assessment: involves an active and repetitive process of risk identification and
assessment for achieving objectives. The risk to achieving those objectives is
concerning risk tolerance. Thus, risk assessment establishes the basics of deciding
141
Idem, PP. 23
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how to manage risk. However, in reality, risks are carried out in an informal
manner.

Control activities are those actions that are established through policies and
procedures that help ensure that management’s instructions reduce the risk of
achieving goals. Control activities are performed at all levels of the entity. The latter
may be in preventive or detective form and it can manual or automated e.g.
authorizations and approvals, verifications

Information and communication: information is necessary to carry out internal
control throughout the entity and achieve the objectives. The top management
generates, uses, obtains information from an external and internal source.
Communication is sharing of that information internally and externally.
 Monitoring Activities: is used to ensure that internal control system with his
competent is present and functioning, the latter could ongoing or separate
evaluation e.g. hierarchical structures or audit.
Briefly, in order to identify the correct control, you must know what risks are present. To
know what risks are present, you need to understand what objectives are being sought.
Therefore, the ICS is a set of structure and instruction to identify and prevent any anomalies on
the entity activity aiming to ensure the reliability of the reporting information, the efficiency of
organization operation, and compliance with the regulation and lows.
2.2 The importance of the internal control
According to the international foundation of an accountant (IFAC), internal control is a
key
aspect
capabilities.
of
the
organization's
governance
system
and
risk
management
Supporting the achievement of organizational goals and is a crucial
element for the creation, enhancement,
and
protection
of
stakeholder
value.
Major
organizational failures often result in the implementation of additional rules and requirements,
as well as time-consuming and costly compliance work. 142
However, it may ignore the fact that adequate internal control (allowing the organization
to capitalize on opportunities while neutralizing threats) can save the time and money of the
organization, and promote the creation and preservation of value. Effective internal control can
142
International Federation of Accountants (IFAC), (2012), “Evaluating and Improving Internal Control
Organizations’’, PP.4-5, Website: https://www.ifac.org/about-ifac/professional-accountantsbusiness/publications/evaluating-and-improving-internal-control-organizations-0 , consulted (25/05/2021, 19:53)
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
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also create a competitive advantage, because an organization with effective control may take
additional risks.
Among the recommendation that was given in the IFAC survey in 2011, the majority of
business leaders and managers agreed that on ongoing risk management and control should be
a key part of the board of directors mission since good governance starts with tone at the top.
for them, the financial crisis demonstrated that in some organizations particularly in some
financial institutions risk management and control practices were flawed, the latter did not
understand the risk in which they operate and the control practices were only centered on the
finance aspect rather than other variables since the most significant risk came from an external
source. Moving forward, risk management and control systems should take a wider perspective
and should be integrated into management at all the organization levels and across all
operations.143
Furthermore, internal control and risk management systems must be better integrated into
the overall governance, strategy, and operations of organizations. In addition, the majority of
the respondents conduct that international alignment among the various governance, risk
management, and internal control guidelines would be very useful.
2.3 The relation between the internal audit and internal control system:
The internal auditors have to be concerned about the state of internal control in the
organization since it considers being an essential mechanism in the evaluation of the
organization’s system of internal control and one of the key elements that ensure the efficiency
and effectiveness of the latter. The Sarbanes-Oxley Act of the U.S in 2002, and precisely the
section 404144 and with the newly released AS5 standards in 2007 and section 302, internal
audit, outside consultants, or even the management team but not the external auditors have the
responsibility to review and assess the effectiveness of their internal controls. External auditors
are then to attest to the sufficiency of these internal control reviews built and controlled by
management. In addition, the internal auditor may act as an internal consultant assisting the
International Federation of Accountants (IFAC), (2011),’Integrating the Business Reporting Supply
Chain’’, website: https://www.ifac.org/publications/integrating-business-reporting-supply-chain , consulted
(25/05/2021 22:40)
144
The United States, (US) (2002), the Sarbanes - Oxley of 2002: Conference report (to accompany H.R.
3763). Washington, D.C.
143
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management to conduct the internal control statement or by supporting external auditors in
carrying out their reviews.
The institute of internal auditors (IIA) goes straight to the point in the performance
standards 2130145: ‘The internal audit activity must assist the organization in maintaining
effective controls by evaluating their effectiveness and efficiency and by promoting continuous
improvement.’
The internal audit responsibility with regard to the internal control are:

The area of the risk in term of the control objective

Defining a program for assessing the area in which it is more vulnerable to risk

advising management whether or not controls are operating adequately and
effectively

recommend the necessary improvement to enhance the internal control system

monitoring the audit work to find out whether management has acted on the agreed
audit recommendations
The IIA standards go beyond and take into account the consultation aspect of internal audit
in which the two standard 2130.C1 and 2130.C2146 stipule during a consultation mission must
alert any significant control issues and the auditors must use the knowledge that accumulates
during the consultation mission to evaluate the organization’s control processes.
The internal control evaluation process from an audit standpoint is just an audit mission.
However the COSO outline the evaluation process for reviewing internal control in which the
evaluator should understand the system design, test key control, and develop a conclusion based
on the latter and the COSO give an alternative to this process by what so-called benchmarking.
Internal auditors should report any deficiency in the internal control system to those who can
take the necessary action.
145
The Institute of Internal Auditors (IIA), (2016),” international Standards for the Professional Practice
of Internal Auditing (Standards)”, PP.13
146
Idem, PP.14
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An effective internal control system (which manages risk and enables the creation and
preservation of value) is an integral part of the organization’s governance system. Therefore,
an effective internal control system should be sought to achieve the governance objectives (the
protection of the stakeholder value) by achieving the control objective and most importantly
helping the organization to achieve its objectives. In propose of guarantee the internal control
efficiency and effectiveness, internal audit review and assess the internal control.
3 Internal audit role in enterprise risk management (ERM) for good corporate
governance
Every organization operates to generate value for its stakeholders, but that value can be
affected by unexpected events at all levels of the organization and in all activities ranging from
basic and regular operation to setting global organization strategy. All these activities are
exposed to potential uncertainties or risks.
The word risk means possibility that a combination of an event or a functioning mode will
affect the achievement of the organization's objectives, as result, there is no risk without a prior
fixed objective and the risk is related to an uncertain situation. So the risks are encompassed
risk factors which are deficiency in the organization generally are internal factors risk (causes:
e.g. deficiency in customers management) and external circumstances or event (event: e.g.
client did not pay) the consequences are the result of the combination of the two (e.g.
bankruptcy) and affect the achievement of the objectives (e.g. sustainability) 147. The risk is
measured by its consequences and probability of occurring.
The risk management activity was relevant activity before the 1960s; the risk management
was concerned about natural weather-related event protecting the enterprise against major
catastrophes such as the risk inheriting the computer system back then since it was stored in
one facility those concerns moved to a more general concern about managing a wide range of
other business. Companies today face a wide variety of risks and need tools to sort them out to
make rational cost and risk decisions; this is the process of risk management.
The COSO ERM framework defines enterprise risk management: “Enterprise risk
management is a process, effected by an entity’s board of directors, management and other
147
SCHICK, (P), EVRAERT, (S), VERA, (J).2007, op cite. PP.12-15
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personnel. Applied in a strategy setting and across the enterprise, designed to identify potential
events that may affect the entity, and manage risk to be within its risk appetite, to provide
reasonable assurance regarding the achievement of entity objectives”148.
From this definition, we can conclude that ERM is a process or a set of actions which not
a static procedure, and must be implemented by people who are close enough to the risk
situation. To add an effective ERM set of processes should play a major role in helping to
establish strategies. The concept of “risk appetite” is the degree of risk, at a broad level, that a
company and its managers are able to accept in their endeavor to achieve value. ERM provides
reasonable but not positive assurance (absolute assurance) on objective achievements no matter
the effectiveness of the ERM implanted within the organization. Lastly, the ERM is designed
to help the organization achieve its objective, which can be categorized into four sections: 149

Strategic: higher-level objectives, to support its mission.

Operational: effective and efficient use of its resources

Reporting: reliability of reporting

Compliance: commitment to comply with applicable laws and regulations.
The difference between the internal control objectives and the ERM objectives is that the
control objectives entirely depend on the internal circumstances of the organization where else
the ERM can help the organization attaining its objectives with regard to the external event such
as strategic and operational objectives.
The ERM framework is made of eight interrelated components inspired by the way, in
which the manager s run the business and integrated it into the latter. To note that some of those
components are also integrated into the internal control framework since internal control is an
integral part of enterprise risk management: internal environment, objective setting, risk
assessment, control activities, information and communication, monitoring, control activities,
event identification.150
The Committee of Sponsoring Organizations of the Tread way Commission (COSO), “Enterprise Risk
Management Integrated Framework”, 2004, PP.2
149
Idem, PP.3
150
Idem, PP.4
148
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3.1 The role of internal in the enterprise risk management
For a long time, risk has not been a major topic for auditors, and the international standards
for the professional practice of internal auditing did not mandate that from the auditor. It did
not until 2002 standard was issued requiring internal auditors to assess risk at least annually.
The auditor should assess the risk management process and give an objective opinion on the
effectiveness and efficiency of the latter, which will result: the organization’s goals are
consistent with the organization’s mission, significant risks are identified and assessed,
appropriate risk response are selected with regard to risk appetite, information, and
communication in are performed inappropriate manner.151
Nowadays, the internal audit department and an increasing pace have included a specific
focus on risk some internal audit departments have even assigned a defined portion of internal
audit resources to focus exclusively on the assessment of emerging risk areas.152 To note that
the internal audit function has experienced multiple mutations from compliance approach to
risk-based approach.
The principal role of auditors is to provide objective and independent consulting and
assurance this assurance could be acquired using a different source such as an external audit.
Speaking of internal audit and ERM, the internal auditor plays an essential in the ERM by
providing an objective assurance to the board of directors about the effectiveness of the risk
management. Some research has shown that internal audits can create value to the organization
in two ways: (1) provide objective assurance that major corporate risks are being appropriately
managed, (2) and assurance that risk management and control framework are operating
efficiently. The board of directors has agreed on this two-point. To note that any work beyond
assurance activities should be considered as consulting engagement and must follow the
consulting standards153.
The institute of internal auditor (IIA), : “International Standards for the Professional Practice of Internal
Auditing (Standards)”, 2016, PP.13
152
TERRY (H), Internal audit ,(n.d.), ”Trends and challenges”, deloitte , PP.54, Retrieved from:
https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/risk/internal-audit-trends-challenges_BHI.pdf ,
consulted (27/05/2021, 12:06)
153
Institute of Internal Auditors - UK and Ireland. & Deloitte & Touche (Organization). (2003). “the value
agenda: A detailed study of how and where internal audit adds value”. London:
151
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The UK and Ireland Institute of Internal Auditors following the COSO publication on risk
management have published the key role of the internal auditor to be an efficient mechanism
of risk management as well as some prohibition for the latter. Thus the major roles of auditors
in ERM are:154

Provide assurance on risk management processes.

Provide assurance that risks are properly assessed.

Evaluate risk management processes.

Evaluate the communication of significant risks.

Review the management of major risks
The internal auditor may provide consulting services to improve corporate governance, risk
management, and internal control. Consulting in the ERM depend on the resource provided to
the BOD and the risk maturity of the organization. The auditor consulting in the ERM is highly
required especially in the early stages of its introduction to the organization but It probably will
reduce over time as the organization’s risk maturity will increase, to note that before performing
the consulting activities the internal auditors should adopt the risk-based approach represented
by the assurance activities. The following are some of the consulting roles that the internal
auditor may take:155

Provide management with the tools and techniques used by internal audit to assess
risks and controls

Support the introduction of ERM into the organization, using his expertise in risk
management and control and knowledge of an organization

Provide advice, lead workshops, coach the organization on risk and control and
encourage the development of a common language, framework, and understanding.

Support managers to identify the best way to minimize risks

Coordinate, monitor, and rapport on risks
The internal auditor may provide advisory services as long as he/she does not play a role
in the actual management of risks, which is the responsibility of management. Since the plan
The Institute of Internal Auditors, : “IIA Position Paper: The Role of Internal Auditing in EnterpriseWide Risk Management”. 2009, PP.3
155
Idem, PP.4
154
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of audit should include the migration of the responsibility to the management team. The rapport
has encompasses the role that auditors should not perform, which are the following: (1) Define
risk appetite. (2) Define risk management processes. (3) Manage assurance on risks. (4) Define
the manner in which should respond to risks. (5) Implement risk control measures on behalf of
management.156
3.2 The importance of enterprise risk management in the corporate governance
Recently, risk management has become a critical function within good corporate
governance. Organizations should first determine and identify all the risks to which they are
exposed e.g. social, environmental, financial, and operational risks, and then explain how they
can keep them at an acceptable level with risk tolerance and risk appetite. In general, enterprise
risk management operates under the direct responsibility of the board. In fact, the board
delegates the operation of the risk management to the management team. As we said earlier,
risk management helps the organization in the achievement of its objectives and minimizes the
risk.
Many countries have established codes and regulations to enhance their corporate
governance for example King III in South Africa, the Combined Code in the UK, and ASX in
Australia.157 All those codes have mandated the organization’s board of directors to provide the
shareholders with sufficient and effective information about the risk profile and the policies of
risk management, the integration of risk management in the organization business especially
the strategic aspect, the assessment of the risk management’s policies and procedure and their
efficiency. With this obligation, the internal audit function has to play a crucial role in the
process of risk management to develop the efficiency of the risk management within the
organization not just providing an independent opinion to enhance the performance of the
organization also to provide assurance to shareholders that risks are being managed effectively.
Therefore the ERM supports and facilitates the governance process if it was implanted
effectively the purpose of the latter is to help the organization to achieve its objectives. And
optimize the value of the enterprise, board to approve strategic decisions, establish boundaries,
and oversee execution where the senior manager aligns strategy, operation, reporting, etc. to
156
Idem, PP.5
Canadian Securities Administrators (CSA), :“Staff Notice 58-306 2010 Corporate Governance
Disclosure Compliance” 2010
157
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attain mission with regard the value. The ERM infuse a discipline around manager
examine opportunities and risks and how should they undertake them, the ERM makes this
contribution in three ways: risk management philosophy, risk appetite, and control
environment.158
In brief, internal audit has become an essential tool for ensuring the efficiency of ERM.
Not only does it identify risks, but it also assures that its risks are properly assessed. The
effectiveness of internal audit's role in providing assurance on the ERM process requires highly
qualified auditors, who understand at the time the impact of ERM on corporate governance and
respect the measures international standards.
4 Internal audit and the problem of information asymmetry
As we highlighted earlier, the relation of agency between managers and shareholders will
produce conflicts of interest, the latter will affect negatively influence the performance of the
organization, one of the main reasons for this conflicts is information asymmetry The latter,
appears in economic theory with Akerlof's159 in 1970 with his article on "lemons", The market
for the lemons. According to him, information asymmetry occurs in the course of an exchange
or contract, some participants have relevant information that the others do not have. Information
asymmetry, therefore, defines relationships where one agent has (perfect) information that
another does not have (imperfect information).
Within the organization the manager is informed than the shareholder, he has a piece of
complete information about the financial situation of the enterprise such as information on
accounting internal audit report, etc. Information asymmetry appears to be one of the primary
causes of conflict within managerial companies. According to Pigé160, the asymmetry of
information related to governance appears in three categorize: (1) the asymmetry of information
between the shareholders and their representatives (the board of directors). (2) The asymmetry
ERM Initiative Faculty and ASHTON (J),: “The Relationship between Internal Controls, ERM, and the
Business Model”, Retrieved from:https://erm.ncsu.edu/library/article/the-relationship-between-internal-controlserm-and-the-business-model, 2018, (27/05/2021 18:23)
159
AKERLOF (G).,: “the Market for "Lemons": Quality Uncertainty and the Market Mechanism”,
The Quarterly Journal of Economics, Vol. 84, 3rd Ed, 2002, PP. 488-500
160
CHARLES (P). « Relations d’agence, opportunités de croissance et notoriété De l’auditeur externe: une
étude empirique du marché français ». 21eme congres de AFC, France, 2000.
158
Chapter Two: The Internal Audit And The Corporate Governance Interrelation From Theoretical
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of information between the board of directors and the managers. (3) And another type of
asymmetry arises when the shareholders of a company wish to open their capital and make a
public offering (the market). These three dimensions are considered to be one of the main
purposes of legal audit (Statutory auditor) who aims to reduce these three categories of
information asymmetry to guarantee the interest of the owner.
Internal audit has not been seen as a mechanism to reduce information asymmetries related
to corporate governance, due to its attachment to management. Sawyer defined the internal
audit function well when he saw it as the eye and ear of management. However, with the
multiple mutations, the business and agency theory of corporate governance in recent year’s
internal audit (like other mechanisms) has a fundamental role to contribute to corporate
governance. Especially, with the release of deferent low and regulation such as Sarbanes-Oxley
Act (SOX) which mandate the BOD to provide a detailed report on internal control, internal
audit, which is attached to the board of directors or the audit committee, involves verifying the
reliability and fairness of this rapport. As result, the latter contributes to the reduction of
information asymmetry between the different stakeholders. According to Godowski161, The
internal auditor is therefore required to position himself in relation to the quality of the
information produced by the company and which reflects its image. In this way, it contributes
to reducing the problems of asymmetric information between management and shareholders.
Internal auditor as one of his mission is to provide the management relevant information
so that the latter can make strategic decisions based on this information, so the internal auditor
plays the role of monitor. In this situation, the audit committee has an important role in
supervising circulated information to guarantee their reliability and accuracy to safeguard the
interests of the shareholders.
The Audit Committee is an operational component of the Board of Directors responsible
for overseeing internal controls and financial reporting. Because of this supervisory
responsibility, the members of the audit committee must be independent directors. With no
connection to the company's management. The existence of an audit committee within the
organization enables the auditor to carry out his or her activity in complete independence. The
GODOWSKI (C), et al, : « La contribution de l’audit interne au processus de gouvernance de
l’entreprise », in Audit interne : Enjeux et pratiques à l’international, Elisabeth (B), (Ed), Eyrolles Edition,
2012, PP.139-154
161
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Audit Committee aims to ensure that the processes used by management and internal audit, to
provide assurance on the quality of financial information are managed efficiently162.
The positioning of the internal audit function determines its authority or influence within
the company. Nevertheless, its impedance in executing its function and consequently its
contribution to corporate governance the positioning of the internal audit function can be
situated at two different states: (1) attachment to the senior manager or, (2) to the board of
directors or audit committee. In the first case, internal audit is value-adding activity and its
primary missions are to provide senior management with relevant information and insights
about the risk and internal control system, it is right that this attachment meets the objective of
value creation but may increase the problem of information asymmetry between shareholders
and management163. The IFACI and IFA recommend that the internal audit function should be
attached to senior management in order to ensure operational efficiency and management
involvement164, in the second case, when the internal audit is attached to the BOD or audit
committee, this attachment help to reduce the information asymmetry between shareholder,
managers, and directors. This positioning emphasizes the board's supervisory role by protecting
internal audits from the influence of senior management. This attachment allows the board of
directors to access essential information on risk management, implantation of strategy by the
executives, and anomalies165. However, this hierarchical attachment to the audit committee
remains exceptional (3% in the 2009 - IFACI survey). Nevertheless, even when the auditor is
attached to the management he should provide the audit committee with all information without
withholding or misrepresenting it, and this in a climate of transparency towards the
management. Since the latter ensure the reliability of information circulated between
management and audit.
Concisely, the internal audit is a crucial element in the suppression or at least the reduction
of the information asymmetry problem major scandals that affect the global economy in the last
century alike Enron and WorldCom have shown the world the importance of integrating internal
audit into the process of information production and informing other stakeholders.
162
MOELLER, (R), 2009, op cite. PP.537.
SCHICK (P), Vera(J), BOURROUILH-PAREGE(O), (2010), « Audit interne et référentiels de risques »,
Ed Dunod, Paris, PP. 25.
164
Idem, PP.46
165
Idem, PP.47
163
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Conclusion chapter two
In this chapter, we have the intention to present one of the corporate governance
mechanism, which is internal audit; in this chapter, we present the evolutionary path of internal
audit and its deferent interpretations overages we provide with that multiple audit generalities,
objectives, mission and audit in his different forms to shed the light on this profession.
Then we explicitly present the organization of an audit mission in its different phases
nevertheless the elements that influence this mission and the role of different enterprise
organizations to facilitate the latter, we introduce some of the commune audit tools and
techniques, which are used in the audit mission.
Finally, we try to match between the internal audit and the corporate governance by
presenting the element that internal audit could enhance the corporate governance alike the
internal control and risk management, etc. to get some understand of the relation between the
audit and governance
Chapter Three: Study Case: The GRTE’s Internal
Audit Function As a Succor of Corporate Governance
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
105
Introduction chapter three
After the literature review that we made in the first and second chapter to shed the light
on the principle variables of our subject, the corporate governance and the internal audit and
their interaction to create at the same a micro and macro sustainable environment. However,
create value will never depend on what is in books or what theories stipulate. Moreover, when
bringing governance into the discussion their multiple variables to take into consideration, the
economic reality and the particular country environment on the micro and macro level will be
the first.
This guides us to construct this chapter, which is an empirical study to examine and
analyze the reality of the interaction of governance and internal audit the role of the latter in
improving the corporate governance within our specifics environment and in Algeria
companies.
In first, we will present the reality and perspective of internal audit and corporate
governance in a public Algeria Company which GRTE Sonelgaz through a historical overview
of the companies and their main function. Nevertheless, we will present the system governance
in the company and internal audit.
Following that, we will introduce the different research methodology approaches and the
ones that are applied in our study as well as our study design and method, and the reason behind
choosing the appropriate method and methodology
Finally, the last section of this chapter will be a case study. Through it, we will present the
sampling method with that we will set out the statistical test used in the study, and then we will
analyze quantitatively the result of the questionnaire, interpret the result and test and validate
the hypothesis of our research
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Section One: General Presentation of GRTE
1.1. The Sonelgaz group presentation:
Sonelgaz, the successor to Electricity and Gas Algeria (EGA), has been carrying out its
public service mission since 1969 and has never ceased to embody the country's dynamics.
Constantly evolving to better adapt to its environment, and above all, to better meet the mutation
and increasing in Algeria’s requirements, the company continues today to assume its role by
actively contributing to the management of major structuring projects that require a national
mobilization.
After having taken up the challenge of ensuring continuity of service since the country’s
independence by courageously taking over after the departure of the colonists. After having
accompanied the development plans of the country by succeeding in providing the electricity
in the whole territory and developing gas works to reach today a penetration rate of natural gas
of nearly 44%. Sonelgaz was able to take up the challenge of the restructuration by adapting to
a new economic context translated by the law 02-01 of February 5, 2002, relating to electricity
and gas distribution by pipes. Indeed, in its article 165, stipulates that the Algerian Electricity
and Gas Company, which retains the name of 'Sonelgaz. Spa', is transformed into a 'holding of
joint-stock companies.
In addition to the parent company, the Group now has 33 subsidiaries and 6 directly-owned
companies. The head office is now mainly responsible for managing the portfolio of shares held
by the Group's companies, internal audit, and control. It is also responsible for drawing up and
implementing the Group's development strategy as a whole. As a reminder, Sonelgaz's
transformation process began in 2004 with the creation of three "business areas": SPE, for
electricity production, GRTE for electricity transmission, and GRTG for gas transmission.
On 1st January 2006, the process continued with the emergence of four electricity and gas
distribution companies (SDA, SDC, SDE, and SDO) and a national electricity system
management company (OS).
The creation on 1 January 2009 of the engineering company CEEG, the information
systems company ELIT and the property management company SOPIEG, as well as the
integration of Rouiba Eclairage, marks the completion of Sonelgaz' transformation into a
holding company
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1.2. The presentation of the GRTE-Spa company:
The Algerian Company for the Management of the Electricity Transport Network
"GRTE.Spa”, is a joint-stock company with a share capital of 40,000,000,000 DA, a subsidiary
of the SONELGAZ Group, created on 1 January 2004. Under the denomination "SONELGAZ
Transport de l'Electricité, GRTE Spa" in accordance with the dispositions of law 02-01 of 05
February 2002 relating to electricity and gas distribution through pipelines. Which introduces
the progressive opening of the electricity market, imposes the separation of Transmission,
Production, and Distribution activities, and regulates Third Party access to the network. In this
regard, in this respect, the Operator has the authorization to operate the transmission of the
electricity network issued by the Ministry of Energy and Mines, after the recommendation of
the Commission de Regulation de electricity and gas (CREG).
1.2.1. The mission of the company
In February 2009, the company's name was changed to "Société Algérienne de Gestion du
Réseau de Transport de l'Electricité, denominated GRTE Spa", a joint stock company with a
capital of 40,000,000,000 DA. GRTE is responsible for the operation, maintenance, and
development of the electricity transmission network, intending to guarantee adequate capacity
in relation to transit and reserve needs.
According to the law n°02-01 of 5 February 2002. GRTE has a natural monopoly on
electricity transmission. This monopoly guarantees it a necessary revenue, which results from
the remuneration on the transit of energy, those tariffs are fixed by the CREG and which is
identical on the whole national territory.
GRTE is responsible for the operation, maintenance, and development of the electricity
transmission network, intending to ensure adequate capacity in terms of transit and reserve
requirements.
GRTE carries out its activities through central departments and six departments of the
Electricity Transport Regions: Algiers, Centre, Oran, Sétif, Annaba, and Hassi Messaoud.
These regions, through 28 transport services spread over the national territory, ensure local
maintenance and direct relations with customers.
It consists of an interconnected network in the north of the country with international
interconnections (Tunisia, Morocco) and an isolated network in the south. The transmission
network is a set of high-voltage lines and substations (60, 90, 150, 220, and 400 kV) equipped
with a telecommunications network to monitor, control, and remotely control the equipment.
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The users of the network are power plants, electricity distribution companies, and high voltage
customers as well as international exchanges through interconnections. GRTE operates a
network consisting of:

31163 km of transmission lines, of which 4758 km is 400 KV

352 substations (including 24 at 400 KV) with a transformation capacity of
64,363 MVA through 866 transformers and mobile cabins

A fibre-optic network of 20116 km. GRTE provides transit for the Algerian gas
and electricity distribution company SADEG (including industrial customers
who are customers of these distribution companies).
In 2019, GRTE ensured a transit of 71526.36 GWH and achieved a turnover of 50068.5
billion Dinars for an investment of 29670 billion Dinars. GRTE ambition is to become an
efficient electricity transmission operator, actively contributing to the country's economic
development programs and acting as a good corporate citizen committed to a process of
continuous improvement. Rigorousness, fairness, respect, integrity, and transparency are the
values of the company.
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Figure N° III-01: GRTE in the middle of the electrical grid.
Source: made by the student using internal company document
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1.2.2. The company activities
The company has three main, which can be illustrated:

The exploitation is ensured at the level of the grouped control stations (PCG)
by a permanent staff who manages the slave stations (PA) and the mobile
stations, equipped with PCs. personnel who manage the slave stations (AP) and
the mobile stations, equipped with a remote control-command PC remote
control-command PC. The PCGs and APs are visualized by the Regional
Control Centres (RCCs) belonging to the Power System Operator, which is in
charge of the SPTE.

The maintenance work on substation equipment, Power washing work on
substation equipment, Helicopter-borne power washing of insulators of power
lines, Live working on HV and EHV power lines.

Project and development The GRTE plans to develop its network by 2028 by
the construction of 22,677 km of lines and 395 electrical transformer stations
For an estimated investment amount of 1 095 905 MDA. These achievements
will enable GRTE to meet the demand through the development of its line and
substation infrastructure in 2027. (see figure 01)
Figure N° III-02: the development provision plan of GRTE infrastructure
Source: internal company document
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2. The Governance and Internal Audit In GRTE
2.1. The governance of the GRTE:
The Sonelgaz holding company (the headquarters): is the owner of the GRTE's share
capital, and is responsible for the following main tasks:

defining the group's development policies and strategy

management of the portfolio of shares and holdings that it holds

exercising the power of orientation and control;

developing and disseminating management and regulatory guidelines;

Exercising the prerogatives of the general meetings of its subsidiaries.
2.1.1. The General Assembly
The general assembly is the supreme body where decisions relating to the owner's
operational control are taken. It meets once a year in ordinary sessions at the request of the
Board, or in extraordinary sessions e.g. acts of disposal such as the transfer of the real estate,
the transfer of shareholdings, the creation of securities, as well as sureties.
It decides on strategy, investment choices, and annual accounts. The General Assembly
has a stronger decision-making power than the Board of Directors,
2.1.2. The Board of Directors
The board of directors is a principal organ of the company and is vested with the broadest
powers to act in all circumstances in the name of the company; it exercises these powers "within
the limits of the company's purpose and subject to those expressly attributed by law to general
meetings of shareholders". The board of directors is composed of eight (08) directors where the
chief executive officer (CEO) held the responsibilities of the chairman of the organization.
The directors are elected by the constitutive general assembly or by the ordinary general
assembly. The duration of their mandate is determined by the statutes and may not exceed six
(6) years.
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2.2. The internal audit in GRTE:
As part of the chairperson and CEO of Sonelgaz group's commitment to promoting the
permanent improvement of the organization’s corporate governance, our processes, and our
internal control, he shaped the new internal audit function of the group by providing the internal
audit charter.
Since October 2004, a Sonelgaz Group Audit Department has been created, which operates
within all the subsidiaries and functional departments of the group. This department is placed
under the responsibility of the Audit Director, nevertheless under the direct authority of the
chairman, and the Audit Committee of the group. The principles and operating procedures
described in the audit function are the audit objectives with regard to international best practices
in this area.
2.2.1. The definition of internal audit in the GRTE-(Sonelgaz)
Internal auditing is an independent and objective activity that provides Sonelgaz with
reasonable assurance on the degree of control of its operations advises on how to improve them
and contributes to creating added value. Using a systematic and methodical approach, internal
auditing assesses the processes of risk management, internal control, and governance, and
makes proposals to strengthen their effectiveness.
Its objective is to assist the company's management in the exercise of their responsibilities.
To this end, the internal auditor provides them with analyses, assessments, recommendations,
opinions, and information concerning the activities examined. This includes promoting
effective control at a "reasonable cost".
The implementation of internal audit missions within the Sonelgaz Group must enable the
Sonelgaz staff to adopt the audit methodology as relevant in terms of:

Stimulation: initiative in the face of opportunities.

Simplification: anti-bureaucracy

Reliability: protection against unpleasant surprises

Delegation: responsibility at the right levels

Accountability: ownership of risks

Transparency: shareholder confidence
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2.2.2. The Missions and Objectives of Internal Audit function within GRTE
(Sonelgaz)
2.2.2.1
The mission of internal audit
The missions of the Group Internal Audit, as defined in the decision to create the Audit
Department are:

To ensure that the various Sonelgaz structures carry out their management and
control functions effectively.

ensure the reliability and integrity of financial information and the completeness of
financial and operational information

, to ensure the adequacy of the internal control system

the protection and safeguarding of the company's assets (all real and intangible
assets)

To improve the effectiveness and efficiency of internal control and the fight against
fraud

to propose and promote an internal audit policy at Sonelgaz

ensure that the Subsidiaries and functional departments of Sanelgaz assess and
control the risks inherent in their activities

Ensure that additional analyses carried out by internal audits and external audits
(auditors) are properly used.

ensure that internal procedures are defined, communicated, and implemented

Verify that employees' actions comply with policies, standards, procedures, and
regulations.

Ensure that resources are acquired economically, used optimally, and protected
appropriately and that strategic decisions made by the Board of Directors or
Executive Committee are implemented.

Ensuring that objectives are achieved and that quality and continuous improvement
are promoted in the organization's control procedure
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The objectives of the internal audit function within the GRTE
(Sonelgaz)
The core objective that the internal audit department should focus on and endeavors to
attain are the following:

To improve audit procedures and methods to further develop the efficiency and
accuracy of audit activities

develop and implement a strategy to ensure that audits are carried out effectively
and efficiently

persevere the development of the staff to ensure that the audit teams have the
resources and skills required to carry out its assignments and achieve its objectives,

Improve the overall effectiveness of communication with the audit major clients
and employees.
2.2.2.3
The Attachment of the Audit Department
In the scope of its assurance and advisory activities, the Audit Department reports directly
to the Chairman of Sonelgaz. This department is also placed under the authority of the Audit
Committee, a body that reports to the Board of Directors on any matter that may require their
attention.
In this regard, it is the responsibility of the Director in charge of the Audit Department to
maintain and develop the skills and expertise of the auditors to meet the requirements of this
chart within the framework of the budget approved by the Chairman and the Audit Committee.
Note: the composition and prerogatives of the Audit Committee are defined in the Audit
Committee Charter.
The Audit Committee's role within the Sonelgaz group is to:

ensure the independence of the Audit,

examine and approve the audit plan,

regularly review its implementation,

Moreover, examine the implementation of recommendations.
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Role and responsibilities of the audit function
To succeed in his mission, the Audit Director is responsible for developing flexible audit
plans, the Audit Director will establish a strategic plan that will be translated into an operational
audit plan, based on an appropriate risk-based methodology, and including the risks or control
deficiencies identified by management.
This audit plan will be submitted to the Audit
Committee and the Executive Committee of Sonelgaz for review and approval, the Audit
Director and his team will draw up annual audit plans, including special missions or projects
requested by Management and the Audit Committee. During the audit mission, the Audit
Director and his team should optimize the utilization of resources.
In addition, the Audit Director and his team are responsible for managing the engagement
and monitoring the development of recommendations, maintaining a professional audit team
with sufficient knowledge, assisting in the investigation of suspected fraudulent activities
within the organization. Nevertheless, taking into account the scope of the external auditors and
the regulatory authorities, to provide optimal audit coverage for the organization at a reasonable
cost.
3. The Organizational Structure of The GRTE-Spa Company
The reorganization of Sonelgaz Transport de l'Electricité has been in progress since 2004
when GRTE was created as a subsidiary of the group. The organizational study project was
contracted to ACCENTURE consultancy, where all the processes were revised with the
following phases:

Assessment of the current situation

Definition of the framework of the target organization

Implementation plan
The proposed organization of the GRTE, that was constructed by the entity was examined
and discussed by the monitoring committee responsible for validating and improving the
organizational proposals recommended by the working group and taking the structuring
decisions of the GRTE following the provisions of the decision N 155/PDG/2005 of 13.02.005.
This committee examined the organizational drafts during the working sessions dedicated
to the subject and provided feedback, suggestions, and strategic orientations that have been
taken into consideration and integrated into the construction of the organizational structure of
the company
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Key Organisational Aspects of the Proposal
The main features of the proposed organization structure are described below:

The creation of the patrimony department, which is divided into a patrimony
division at the level of the electricity transport regions and whose essential missions
are: (1) Physical and financial monitoring of the equipment plan with gap analysis
and recommendations, (2) The implementation of a database that takes into account
the feedback, analysis, and recommendations, (3)
The definition of the
maintenance doctrine, (4) Ensure that The maintenance methods are implemented

The separation of the operation and maintenance units at the level of the Electricity
Transmission Division and the integration, within it, of the procurement and supply.

The electrical control activity must be re-established by revitalizing it. This activity
will be implemented through the testing and control department in close
collaboration with the network monitoring and analysis department who will
develop the required solutions

The implementation of a similar process at the level of each electricity transmission
region, i.e.: an operation and maintenance entity, a customer relations entity, the
creation of a telecommunications maintenance entity in the same way as the
substations and lines.

The establishment of a telecommunications department to develop and deepen the
relationship between the prime contractor and the project owner in the same way
as the transport activity

The creation of a Human Resources Department capable of implementing the
human resources policies set by the group and the necessary instruments to ensure
that the HR policy is in line with the best practices in HR management.

The creation of a Customer Relationship Management Department that will
manage: energy transmission, customer relations

The implementation of the management and technical audit function according to
the decisions taken by the Sonelgaz Group.
The following figure will illustrate the final organizational project that was approved and
implemented in the GTRE Company:
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Figure N° III-3: the GRTE organizational structure
GENERAL MANAGEMENT
SECRETARIAT
ASSISTANTS:
DG/COM/QUAL/HSE/AUDIT/LEG/R.REG/R.EX
GENERAL INSPECTION
INTERNAL SAFETY DEPARTMENT
HUMAN RESSOURCE DEPARTMENT
FINANCE AND ACCOUNTANCY
DEPARTMENT
ORGANIZATION AND SYSTEMS
DEPARTMENT
CUSTOMERS DEPARTMENT
PATRIMOINY DEPARTMENT
TELECOMMUNICATION DEPARTMENT
DEPARTMENT RESOURCES DEPARTMENT
ELECTRICITY TRANSMISSION DIVISION
ASSISTANTS:
SIE/HSE/GEST/TECH/LEG
PROCUREMENT DEPARTMENT
MAINTENANCE DEPARTMENT
MARKET SUBDIVISION
OPERATIONS DEPARTMENT
PATRIMOINY SUBDIVISION
REGIONAL TRANSPORT
DIRECTORATES (6)
Source: made by the student using internal company document
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Section Two: The Internal Audit Function Significance In The Corporate
Governance Case Study Of The GRTE Algerian Public Company
Every scientific research requires certain methods and procedures, in this section we will
introduce the Scientifics research methods used in this research, explaining the types of research
methods and approach, data collection methods with regard to their validity and reliability.
1 Research Methodology
In the following, we will present the different research approach that could have been used
in this research to further deepen the investigation in the relationship between corporate
governance and the internal audit function. Regarding the selection of the appropriate research
methodology to employ, it is important to take into consideration the multiple perspectives or
paradigms we may guide the research and its result in alternative methods of data collection
and analysis.
In our thesis, two approaches could have been employed to collate the data, which are the
deductive and the inductive approach.
1.1.1
The deductive approach:
The deductive research method assumes that the theory is implicit in the existing
literature, and the hypothesis can be derived from the latter. Once hypotheses are established,
data are collected to affirm or reject these hypotheses, which will lead to a review of the
theory. The deductive method of the research process is guided by the positivist "belief set" 166.
Positivist researchers believe that social reality does not depend on the individual, and this
reality can be observed and measured (Bryman, 2004) 167. Positivists insist on the objectivity
of research and believe that researchers must truly be separated from the observed. researchers
must not intervene in the research process in any way, and must not impose their feelings or
social opinions on the observers. The positivist approach involves conducting worthless,
unbiased research. Positivist researchers focus on explaining human behavior.
The quantitative approach derives from positivism, which has a realist focus and is based
on the idea of the vision of an independently existing reality that can be described as it is. The
166
167
GUBA, (E). :“The paradigm dialog”, London: sage publication, 1990; PP. 17
BRYMAN. (A). : “Social research methods”. 2nd Ed. Oxford: Oxford university, 2004, PP.17
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ontological position of the quantitative paradigm argues that objective reality is independent of
human perception. It also postulates that the ultimate truth exists and that there is only one truth.
Positivism indicates that surveys are the most appropriate way to collect facts and create
knowledge which will set the basis for establishing theories. Quantitative positivist
epistemology168 also suggests that facts can be dissociated from values. Therefore, researchers
can achieve truth insofar as their work corresponds to the facts or the reality of things.
Therefore, the dualist perspective views truth as a matter of validity and views validity as the
alignment of data with the independent reality that the data represents (Guba & Lincoln,
1994)169. To eliminate the threats to validity, various approaches are prescribed to ensure that
values and biases do not influence the results. Research results are regarded as "true" or valid,
as long as the prescribed procedures are rigorously followed.
In this view, the phenomena of objective reality can be studied in terms of generalizable
causal effects that allow for prediction (Guba & Lincoln, 1994)170. Therefore, the objective of
scientific investigation would be to measure and analyze causal relationships between
phenomena in a value-free framework for generalization, Quantitative methodology can be
illustrated as experimental questions and hypotheses are developed, tested, and verified while
ensuring that conditions of distortion are met to avoid inappropriate influence on the results.
Since objectivity and generalization are the underlying methodological principles, the positivist
quantitative approach necessitates the application methods based on statistical analysis and
includes structured protocols and questionnaires, mathematical analysis, etc.
Nevertheless, it is unrealistic to assume that a given research method will be entirely and
truly positive and completely free of value. Considering the case of questionnaires, some
subjectivity would inherit the original choice and conduct of the questions. Guba (1990)171,
acknowledges that all the systems and paradigms are human; therefore, they are subject to errors
and human endeavors.
The post-positivist recognize the difficulty in eliminating the bias of the research Guba
(1990)172, believes that compared to positivist methods, post-positivism is a less naive method
168
Epistemology : refers to the branch of philosophy that explain the nature of the knowledge in which the
knowledge is acquired and validated
169
GUBA, (E). & Lincoln, (Y). : “Competing paradigms in qualitative research”. In DENZIN. (K) &
Lincoln (Y). (Eds.), “Handbook of qualitative research“. 1994,PP. 108-109
170
ibid. PP.110
171
GUBA.(E), 1990, Op cite, PP.18
172
GUBA. (E), 1990, ibid., PP.20
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of research. Post-positivists agree that, although the external reality of the individual exists, it
is not possible for humans to fully perceive it and be objective. Post-positivism is an improved
form of the positivism paradigm. It recognizes that researchers cannot ignore their beliefs when
conducting research, nor can they interject or alter the objects of observation in any way. Postpositivists favor the use of qualitative methods in research but believe that the results of these
investigations must be verified in some way. Typically, the results of qualitative methods will
be reviewed using other quantitative methods. In an example of a multi-method study, we could
use questionnaires and interviews simultaneously to verify the results of each.
1.1.2
The indicative approach:
The second research approach, which could have been used in the, is an inductive approach.
The inductive approach is less scientific than the deductive approach and implies the
construction of a theory as the research progresses rather than through the existing literature.
Saunders et al (2000)173 claim that those who pursue an inductive approach frequently criticize
the deductive approach for being too inflexible and not permitting alternative explanations to
be constructed.
Constructivists argue for an inductive research approach. The constructivist paradigm aims
to understand human behavior (how people make sense of the world around them). In
contradistinction to positivists, constructivists claim that there is no single reality, but that
reality is based on how each individual perceives the world according to their culture,
background, and social experiences. There are similar elements of reality that are shared
between individuals across cultures, but differences will always exist between the two.
The positivists tend to focus on explaining why things happen, while the constructivist
attempts to understand why things happened. Constructivists promote the employment of
deepening qualitative methods, which will enable the researcher to engage with the respondent
to comprehend their culture, behavior, meanings, and understandings. The letters assume that
research findings will be continually generated as the study progresses, and those results will
be continually reviewed as the researcher gains more knowledge. Both ethnography and indepth interviews are suitable research techniques for constructivist researchers, as they provide
the researcher with close contact with the participants.
173
PP.89
SAUNDERS, (M). Et al : “research methods for business students”, 2ndEd, London: prentice Hill. 2000,
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While the existence of permanent contrast between the positive and constative approach
that guides the research, Bryman (2004)174, from the technical school, advises against the risk
of falling into the gap between specific paradigms since more research is being “fused”.
Interpretivism is an approach that came as a reaction to the predominance of the positivism
approach. It rejects the single, verifiable reality that is fully independent. The latter approach
peruses an ontology where there no foundationalism which means neither adopting permanent
nor unvarying standards in which the reality is universally validated. Indeed, interpretivisms
claim that reality is multidimensional and socially constructed where the truth and reality are
created not explored, for them it is impossible to get the completed reality, as it is always
dependent on our sense.
The epistemology of this approach is subjective where external reality is constrained to the
individual observation, which is based on and depends upon the individual background, culture,
etc. the interaction between individuals and society will lead to the description of social
phenomena. Moreover, researchers are part of the social reality that is observed in this context
any observation or interpretation of one phenomenon does not imply that is more favored or
correct that another since multiple observation will bring different perspectives and standpoint
to the one phenomena, which will strengthen and enhance the knowledge perceived from the
latter. The goal of this approach rather than discover universal, contextual, and value-free
knowledge or truth is to try to understand individuals’ interpretation of the social phenomena,
which they interact. This concept of knowledge is an inevitable corollary of the Interpretivism
approach ontology. If one believes in multiple socially constructed realities then different
people will approach these realities from different angles.
The methodology of this approach requires the understanding of social phenomena through
the eyes of the participants, not the researchers. In addition, the goal is to understand the context
of the phenomena0 the Interpretivism tends to collect qualitative data from the participant over
a longitude period then analyzing them thus, it is indicative of which opposite of the deductive
approach. As result, the research identifies the hypothesis before starting data collection, then
conducting the data collection process then analyzing the predetermined hypothesis.
Interpertivits use the inductive approach because they claim that theories are driving by data
174
BRYMAN. (A), 2004. Op. Cite. PP.454
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collection instead of the force of the research. Moreover, there some examples of data collection
alike open-ended interviews, observation, and documents.
The interpretive paradigm has been criticized as soft, unable to produce a theory that can
be generalized and the participation of researchers and participants has led to a lack of
objectivity. Although there some complex social phenomena that should be explored through
an explanatory paradigm.
1.2
The current research design
The research design can be seen as the structure of the research. The “glue” and the
framework that binds all the elements of the research project together. In brief, it is the plan for
the proposed research. The research design is the concrete side of the plan, the structure and
strategy, and the investigation to ensure the tracking of problems and control of variance. Good
quality of the latter will help the reader in understanding the study. It combines the ways,
methods, and means used by the researcher.
However, the study established in this thesis is all about a social science phenomenon,
particularly happening in the corporate world; generally, the approaches that are pursued in
social phenomena are scientific by nature. The authors observe the existence of a relationship
between corporate governance and the internal audit function, which leads to the formulation
of a hypothesis. Then, objectively explore them.
In this thesis, we could employ different strategies and approaches to investigate the role
and the impact of internal audits on corporate governance. For example, under the interpretive
approach, we could perform interviews with auditors and administrators to collect qualitative
data and investigate the role of internal audits on corporate governance. Since in this approach
auditing is seen as a socially constructed practice since it is more than technical practice in
nature, to clarify more the audit should give professional judgments the letters should be
appropriate, sufficient, and following the audit best practices to guarantee that audit have high
quality. However the terms “appropriate” and sufficient” are somehow subjective. The
constrictive approach claim that there is no subject to be studied without the participation of the
researcher and following this approach you should have a certain level of competency.
However, the most appropriate positivism, which is deductive and scientific in nature. In
this thesis, the study was conducted in two separate phases. The first one is litterateur’s reviews
and documentary studies to identify the theoretical framework of both the internal audit and
corporate governance and this first step help also in formulating the thesis question and
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hypothesis. Moreover, the second stage was for the data collection to explore research questions
and validate hypotheses since we follow the deductive method.
1.3
Research method
In the light of what we have been discussed, we choose the survey in form of a self-
completion questionnaire as the most appropriate method for collecting data in the current
research, with this survey hypothesis can be validated since we could get a large sample size
consequently there is a greater chance that trend and coloration will appear. Positivists also
believe that there is less chance of bias when using this method instead of interviews because
the questionnaire is presented to each respondent in the same way, and it is almost a value-free
investigation since respondents are not influenced by attitudes. However, we recognize that
when using the method, there will be no opportunity to obtain in-depth information.
The survey is one of the most practical strategies used in business and management
research’s since it enables the collection of a large amount of data from a substantial sample
economically, Robeson (1993/)175 outlines the main feature of using the survey:

The selection of the sample of individuals from well identify population

Gathering a small amount of data in a standardized form from a relatively
considerable sample
According to De Vaus (1986)176, the survey provides a structured and systematic method
of data collection aiming for exploring the relation and the correlation between two variables.
Furthermore, directed by the positivism approach, a self-completion survey would be the best
form or method since we do not have any influence on the respondents and no direct contact to
illustrate the questions, and speaking of the question, we emphasize on a close-ended form of
questions with this there is no room for individual interpretation of the result.
Although, we are following the positivist approach some element of the questionnaire
would seem in contrast with the latter approach, as the objective is to study the role of audit in
corporate governance, and using the Likert questionnaire will enable the respondents to express
their attitude toward the audit and governance in their enterprise. Moreover, as we said we are
employing close-ended questions to limit the expression of the attitude. Following this, we will
175
176
Robeson, (E). ;”Real world research”. Oxford: Blackwell. 1993,PP. 124
De Vaus, (D). : “Survey in social research”, London: Allen and Unwin. 1986, PP.03
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analyze the survey using the quantitative method while the research is deductive and scientific
in nature some elements of the interpretivism approach will appear.
In our research, we choose to go with the quantitative method as our investigation and
analyzing method to explore the impact of the internal audit faction on the corporate governance
whit in public Algerian company. As result, we should identify our research variable in the
following.
1.4
Study variables
Many research projects frequently use the variable term which measurable factor
throughout an operational process, in our research, we have two types of variable independent
and dependant variables.

The dependant variable:
The dependant variables are the variables that are affected by the independent
variables which means it the consequence of the latter in our thesis the dependent
variable is the corporate governance in it decomposes in three axes which are the
information asymmetry, the risk-averse, and the opportunism

The independent variable:
The independent variable is attendance, which means that is an active variable, that
when manipulate its value will affect another variable, which is the dependent
variable. In our thesis, the independent variable is the internal audit, which
decomposes into three axes: the protection of the stakeholders, the reduction of the
information asymmetry, the improvement of the enterprise risk management
system
1. The first axis: the reduction of the information asymmetry by the audit
function; the axis is resolved into that element:

Help by providing reliable and truthful financial statement and ongoing
concern opinion

Provide clear and relevant information to the board of directors and the audit
committee helping them in the objective fixing process

Give enterprise personal’s adequate information about enterprise activities,
conditions, and well-functioning
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
125
Give assurance to the stockholder and financial providers about the
financial condition of the enterprise

Helping in reducing the information asymmetry between manager and
shareholders and between the entire stakeholder in general (board of
directors, audit committee, personals, etc.)

Reducing informational asymmetry in all the enterprise function not only
within the finance and accountancy function
2. The second axis: the enhancement of the enterprise risk management system
by the internal audit function; the axis is resolved into that element:

The internal audit function has a reasonable equilibrium between the
consultation and assurance activity when performing the audit on ERM

The internal audit guarantees consolidation of the reporting and the
communication of risk

internal audit help to develop the ERM framework adaptive to the enterprise
environment and culture

internal audit may give an assurance on the evaluation of risk

internal audit communicate the results of the rapport on the risk
management to the BOD or the audit committee

internal audit helps the management in aligning the risk appetite and the
enterprise strategy

internal audit may support management to identify the way to minimize risk
and enhance risk responses

internal audit communicate the results of the rapport on the risk
management to the BOD or the audit committee

internal audit of the risk management process and procedures and their
efficiency and effectiveness
3. the third axis: The role of internal audit in enhancing corporate governance
by reducing the problem of information asymmetry; the axis is resolved into
that element:
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126
the internal audit can give an assurance on the right of organization personal
by the application of adequate regulations

other functions in the company can use internal audit reports to improve
their performance

internal audits help enterprise employees in mastering their work by
developing new techniques and knowledge

internal audit function can facilitate the work of the external/legal audit

the internal audit consultation service can facilitate the work of the senior
manager

The internal audit can facilitate the work of the audit committee and the
board of directors by providing adequate assurance and guarantee.
2 Presentation of a quantitative survey
The basis of the current study is similar to any study in management and commercial
studies scientific and more deductive in nature, after reviewing literature research hypotheses
have deduced that data was collected and analysed quantitatively. In this section, we will
present the sampling and the data collection method as well as the data analysis and survey
result
2.1
Outline the current research process:
We will present the sampling and the data collection method, as well as we will present
some of the statistical tools that we will use to conduct the data analysis
2.1.1
Sampling and data collection methods
To validate our hypothesis which is based on the role of internal audit in corporate
governance. Our hypothesis is resolved into three elements, which are the audit and the risk
management system, information asymmetry, and the protection of the stakeholder we chose
an Algerian public joint-stock company which have a governance framework, which is GRTEspa nevertheless the latter, promote the audit activity.
To get the optimum we mainly focus on former auditors, inspectors, and administrators
how are in correspondence with the audit, control, and inspection activity. The letters have been
chosen from four (04) different departments, which are human resource, finance and
accountancy department, quality department, and central inspection. Those departments
perfume internal control and inspection in a periodical and regular manner, as well as the latter,
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127
encompasses of former internal auditor. Moreover, the majority of the sampled population has
at least five (05) years of experience. To note that some of the sample population do not perform
directly internal control, audit, and inspection but they planify or participate indirectly in the
mission and they acquire sufficient knowledge in the domain of audit, internal control, and
inspection and all the four (04) department have to contact external auditor since they were be
audited in annual basis. An important note with the new reorganization many of the sampled
population have acquired the status of internal auditor.
The data collection was conducted by a self-completion questionnaire; the study sample
consisted of forty (40) respondents from the sampled department that introduce earlier fifty-one
questionnaire (51) were distributed to those departments. Seven (07) of the questionnaire were
not recovered, two (02) were recovered later (after conducting the statistical analysis of the
study), and two (02) were found to be biased (either by do not respect the model proposed or
by not fully felling all the requested questions e.g. gender, age, etc.). Out of fifty-one (51)
questionnaires distributed, 40 were used in the statistical analysis, and the accepted and
registered response rate was 78.43 %.
Table N° III-1: Statistical information about the questionnaire applications.
Questionnaire
Cases
Number
Rate
Number of the distributed questionnaire
51
100%
Number of the unrecovered questionnaire
7
14%
Number of the biased questionnaire
2
4%
Number of questionnaires received after the duration
2
4%
Number of the analyzed questionnaire
40
78%
Source: Made by the student using MS excel
2.1.2
Questionnaire presentation
The questionnaire we constructed is based on our thesis problematics and subject, which
are on the role and impact of internal audit on corporate governance within public Algerian
companies. The questionnaire is self-completion as we said in the form of a Likert scale
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questionnaire, which will enable us the maximum value-free data following the positives and
deductive approaches.
The questionnaire is encompassed of two (02) main parts: the first one to identify the
sample and the second for collecting data for validating the hypothesis.

The first part: Provides questions about the basic characteristics of the sampled
population, such as age, gender, Year of experience, Level of education, socialprofessional position, specialty, and profession, etc.

The second part: consist of thirty-two (32) item were included and divided into
four (03) main axes, which are as follows:
1. The first axis: the role of internal audit in the enterprise risk management
system to enhance corporate governance. This axis comprises fourteen (14)
items.
2. The second axis: the role of internal auditor in resolving the information
asymmetry problem This axis comprises nine (09) items
3. The third axis: the role of internal audit in protecting and promoting the
right of the stakeholders. This axis comprises nine (09) items
We have chosen a self-completion questionnaire, which contains close-ended questions. In
addition, the best form of a questionnaire, which acknowledges the first two conditions, is the
scale form questionnaire. Moreover, precisely Likert scale form, which is an Attitude Scales
type, which measures the individual predisposition toward a phenomena or an event
Respondents, express their level of agreement or disagreement with a variety of statements
(varying from Very Strongly Agree to Very Strongly disagree) about phenomena or event. The
construction of Likert (or Likert Type) scales is rooted in the purpose of research. The Liker
scale is simple to construct and likely to produce a very reliable scale. In addition, from the
perspective of the participants, it is easy to read and complete.
In our thesis, we choose to go with a systematic Likert-type scale which means that the
position of neutrality (neutral/do not know) lies exactly in the middle of the two extremes of
strongly disagree (SD) to strongly agree (SA). It gives the participant the independence to
choose any answer in a balanced and symmetrical manner in both directions. Which is known
as a symmetrical scale.177 We choose the five pointe (05) scale rather than seven (07) or ten
Joshi, (A), et al, (2015). “Likert Scale: Explored and Explained”., British Journal of Applied Science &
Technology, PP.397-398
177
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(10) points since the latter is a variant of the first one and gives more independence it would be
more confusing and complicated to some respondents. Many scientists have argued that the
number of response option do not affect reliability and validity. The following table will
indicate the different Likert response labels on a five-point scale.
Table N° III-2: Likert response labels
Response
Strongly
disagree
neutral
agree
disagree
degree
1
Strongly
agree
2
3
4
5
Source: made by the student using EXCEL
We aim to measure response patterns by assigning points or degrees ranging from one (01)
to five (05) to the response option, where five (05) is given to the answer (strongly agree), in
the case where the items are favorable to a set of statements of research study’s hypothesis. The
answers (Strongly disagree) are given the degree (1) when the items are unfavorable.
In most cases, it does not affect the result if we approach parametric or non-parametric
tests when trying to analyze the data of the Likert survey. Parametric test stands for approaching
continuous data analysis to the Likert data where non-parametric is assuming that the Likert
data is ordinal and discrete and in this assumption we cannot also use mean and standard
deviation and orientalists suggested to use the median and interquartile range or mode. Since
the mean of strongly agree and agree is agree and half. Cario (J) suggests that all the true scales
must necessarily include multiple questions on a given topic whose summative score reflects
the scale or measurement and content that a minimum of six (06) items is necessary to create a
reliable scale that measures. In addition, the individual items in the scale are not independent
or autonomous and they should be connected to yield a unified result.
To determine the cell range we should determine the minimum and the maximum length
of the five (5) point Likert type scale, the range is calculated by (5-1)=4 then divided by five as
it is the greatest value of the scale (5/4)= 0.80. Afterward, number one, which is the least value
on the scale, was added to identify the maximum of this cell. The length of the cells is
determined below:
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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
From 1 to 1.80 represents (strongly disagree).

From 1.81 until 2.60 represents (disagree).

From 2.61 until 3.40 represents (neutral).

From 3.41 until 4.20 represents (agree).

From 4.21 until 5.00 represents (strongly agree)
130
When determining the center of the Likert scale we should take into consideration the
margin error and the confidence level. We disturbed the questionnaire to (51) person and we
get an accepted sample size of (40) and with a confidence level of (95%), we get a margin of
error of (7%). Therefore, our Likert center should be [2.79 to 3.21]. However, for convenience
reason we apply the empirical center which three (03) as our Likert scale center:

A mean of response contained between [1-2] is considered to very low
(approbation)

A mean of response contained between [2-3] is considered to be low (approbation)

A mean of response contained between [3-4] is considered to be high (approbation)

A mean of response contained between [4-5] is considered to be very high
(approbation)
2.1.3
Reviewing the questionnaire:
In reviewing our questionnaire we measure and assess the reliability and validity of the
questions or items, our first was a face validity with our thesis supervisor, who is competent
and familiar with the topic after evaluation; the draft questionnaire had multiple changes to
guarantee that questions capture the topic. The questionnaire was disturbed in three languages.
For ensuring that the survey does not contain language errors or misleading expressions we
resort to people how are competent in those specific languages (Arab, French, and English).
The questionnaire is available in the appendices in English, French, and Arabic, to obtain the
maximum number of answers.
2.1.4
Reliability test of the questionnaire
To test, the reliability of the questionnaire the Cronbach’s alpha is one of the most common
measures of internal consistency or reliability of the questionnaire. It is most commonly used
in multiple Likert questions in the survey that form a scale, which determines the reliability of
the scale. The reliability of the questionnaire is defined as giving the same result from a survey
that will be redistributed more than one time in the same circumstances and conditions. In other
words, the reliability of the questionnaire means the reliability of the results, there is no change
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of results in a significant way if it will redistribute them on a sample several times and in a
precise period. For measuring the inter-rate reliability, we could use Cohen’s (k) kappa.
However, in our study, we will just use Cronbach’s alpha.
The Cronbach’s alpha for a questionnaire using IBM SPSS, the Cronbach’s alpha value
ranges from zero (0) to one (1), with the higher value we can indicate greater internal
consistency, in social science we accept a value that is less than (0.7) and greater than (0.6).
Table N° III-3: reliability statistics
Case Processing Summary
Cases
N
%
Valid
39
97.5
Excluded*
1
2.5
Total
40
100.0
*. Listwise deletion based on all variables in the procedure.
Reliability Statistics
Cronbach's Alpha
Cronbach's
Alpha
Based
on
N of Items
Standardized Items
0.810
0.814
32
Source: made by the student using IBM SPSS result
We can form the above table, which measures the total inter consistency between all the
items of the survey (32), that the Cronbach's Alpha value equal to (0.810) that it is approaching
one (1), and it is greater than (0.7). This means that the questionnaire is characterized by
reliability according to the Alpha Cronbach coefficient.
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Table N° III-4: reliability statistics for axis 01
Reliability Statistics
Cronbach's Alpha
Cronbach's
Alpha
Based
on
N of Items
Standardized Items
0.851
0.852
14
Case Processing Summary
Cases
N
%
Valid
39
97.5
Excluded*
1
2.5
Total
40
100.0
*. Listwise deletion based on all variables in the procedure.
Source: made by the student using IBM SPSS result
This table summarizes the first axis, which contains (14), items, the result shown in this
table are the Cronbach's Alpha value equal to (0.851) ≥ (0.7), and approach one (01). This
means that the first axis is reliable and inter-consistent according to the Alpha Cronbach
coefficient.
Table N° III-5: reliability statistics for axis 02
Case Processing Summary
Cases
N
%
Valid
40
100.0
Excluded
0
0.0
Total
40
100.0
Reliability Statistics
Cronbach's Alpha
Cronbach's Alpha Based on
N of Items
Standardized Items
0.715
0.727
Source: made by the student using IBM SPSS result
9
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This table provides a summary of the second axis, which contains (09) items, the result
shown in the above table is Cronbach's Alpha value, which is equal to (0. 0.715) ≥ (0.7), and
approaches a (01). This means that the first axis is reliable and inter-consistent according to
Cronbach's Alpha.
Table N° III-6: reliability statistics for axis 03
Case Processing Summary
Cases
N
%
Valid
40
100.0
Excluded*
0
.0
Total
40
100.0
*. Listwise deletion based on all variables in the procedure.
Reliability Statistics
Cronbach's Alpha
Cronbach's Alpha Based on
N of Items
Standardized Items
0.599
0.545
09
Source: made by the student using IBM SPSS result
In the above table we at the Cronbach's Alpha in the third axis, which include (09) items
in this axis we see that the Cronbach's Alpha value equal (0.6), which is accepted but we say
that reliability of the questions in this axes acceptable reliability but a good level of reliability
and inter-consistency like the first two axis’s. However, we could summarize the above in the
following table:
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Table N° III-7: a summary of the Cronbach's Alpha results
N°
Axis
Reliability
Number
Of Number
of (Cronbach's
Items
excluded cases
Alpha value)
01
Axis 01
14
01
0.851
02
Axis 02
09
00
0.715
03
Axis 03
09
00
0.599
Total
32
01
0.851
Source: made by the student using IBM SPSS result
From the results presented in the table, we see that the value of alpha Cronbach’s
coefficient is high, and it ranges between (0.599) and (0.851) respectively for all the axis of the
questionnaire. Thus, the value of the alpha for all the sub-sections of the questionnaire is
(0.878), which means that the coefficient of consistency the reliability is high. Therefore, our
questionnaire will be finalized as it is in the annex
We have therefore confirmed the reliability and stability of the questionnaire intended for
the study, which makes us confident of the credibility and validity of analysis of the results to
answer the study questions and to examine their hypotheses.
2.1.5
The statistical method used in the study
After the collection of the distributed questionnaires, we choose to analyze our data by
Statistical Package for Statistical Package for Social Sciences [SPSS], which is used in a variety
of statistical analyses, which includes data completion, preparation, graphics, modelling, and
analysis. It is widely used in social studies as our studies one of them we choose it over other
product.

Standard deviation: measures of how to spread out values from their mean

The variance: show the average square of the deviation between the mean value
and individual mean
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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
135
Standard mean error: These are the approximate differences between the sample
mean and the population mean

Mean:: is the average mathematical average value of a set of data

Frequency and percentage: measures the count of the number of times that variable
occur

Cronbach's Alpha: to determine the stability of the questionnaire items and intercorrelation
2.2

Contingency tables: show the relationship between two or more variable

The z score test: testing the normality using skewness and kurtosis

The Kolmogorov-Smirnov: test the normality for large sample

Shapiro Wilk test: the most appropriate test for normality

One sample T-test: used for hypothesis testing
Data analysis and interpretation
The data analysis the interpretation of the data collected will be devised into stage the first
one is analysing the characteristics of the sample then analysing the responses, interpreting
them, and hypotheses test.
2.2.1
The statistical description of the selected study sample in terms of personal
characteristics
We will analyse the current sample members based on their characteristics
2.2.1.1
Distribution of sample members by: Gender
Table N° III-8: distribution of the respondents by: sex
Gender
valid
Valid
missing
Frequency
Percent
Valid
Cumulative
Percent
Percent
female
17
00
17
42.5%
42.5%
42.5%
male
23
00
23
57.5%
57.5%
100.0%
Total
40
00
40
100.0
100.0
Source: made by the student using IBM SPSS
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Figure N° III-4: distribution of the respondents by: sex
Source: made by the student using IBM SPSS
The above table and the graph shows that the number of male In the sampled population is
greater than female where the percentage of a male is (57.5%) and a number of (23) male
whereas (42.5%) of the population sample are female with the percentage of 17female.
However, these differences are insignificant in our research although the differences by
themselves are insignificant since the female and the male approach (50%) of the sample.
2.2.1.2
Distribution of sample members by: Age
Table N° III-9: distribution of the respondents by: Age
ages
Frequency
Valid
Percent
Valid
Cumulative
Percent
Percent
20-30 year
5
12.5
12.5%
12.5%
31-40 year
20
50.0
50.0%
62.5%
41-50 year
7
17.5
17.5%
80.0%
plus de 50
8
20.0
20.0%
100.0%
40
100.0
100.0%
year
Total
Source: made by the student using IBM SPSS
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Figure N° III-5: histogram shows the distribution of the respondents by Age
Source: made by the student using IBM SPSS
Ages for the sample are variating from (20) year to above (50) year and there are four (04)
categories of age, we see from above the most dominant category of age is between (31-40)
year where (50%) of the respondents are located. (12.5%) of respondents are under the age of
(31) year. (37.5%) of respondents are above the age of (40) where (17.5%) of them are between
(41-50) years and (20%) of them are above (50) years. The following table will show the
differences in gender by age categories where we see that the male number is greater than the
female number in two categories between the 41 and the 50 years, and above the 50 years,
where else there are no significant differences in other categories
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Table N° III-10: the distribution of respondents by age and gender
Sex * Age Cross tabulation
Count
Age
Sex
Total
20-30
31-40
41-51
plus de 50
female
3
10
2
2
17
male
2
10
5
6
23
5
20
7
8
40
Total
Source: made by the student using IBM SPSS
2.2.1.3
Distribution of sample members by: Educational Degrees
Table N° III-11: the distribution of respondents by their educational backgrounds
educational degrees
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
doctorate
-
-
-
-
engineering
2
5.0%
5.0%
5.0%
bachelor
24
60.0%
60.0%
65.0%
magister
1
2.5%
2.5%
67.5%
master
5
12.5%
12.5%
80.0%
High school
8
20.0%
20.0%
100.0%
40
100.0%
100.0%
education
Total
Source: made by the student using IBM SPSS
We see from the above table that the majority of the respondents have bachelor’s degree
(license) with a percentage of (60%) or (24) respondents, magister is the least apparent in the
sample. with one respondent and a percentage of (2.5%). We have (05) respondent who has a
master degree (12.5%) and eight (08) that are secondary degree (20%) and two (02) ingenerate
(05%).
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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2.2.1.4
139
Distribution of sample members by: Years of Experiences
Table N° III-12: The distribution of respondents by their Experience
Professional experience
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
less de 5 years
5
12.5%
12.5%
12.50%
between 5-10
10
25.0%
25.0%
37.5%
25
62.5%
62.5%
100.0%
40
100.0%
100.0%
years
above de 10
years
Total
Source: made by the student using IBM SPSS
We see from the table above, that only (12.50%) or (05) of respondents have then less (05)
years of experience where else (87.5%) of respondents have at least (05) years of experience
and there are (10) respondents who have between (05) and (10) years of experience.
Nevertheless, the most dominant category is the above (10) years of experience where (25) of
respondents have at least (10) years of experience. Which provides more reliability to the
answers.
2.2.1.5
Distribution of sample members by: profession
Table N° III-13-: The distribution of respondents by profession and department
profession and department
Frequency
Valid
Finances
and
Percent
Valid
Cumulative
Percent
Percent
15
37.5%
37.5%
37.5%
central inspection
7
17.5%
17.5%
55.0%
Quality
1
2.5%
2.5%
57.5%
human Resource
17
42.5%
42.5%
100.0%
Total
40
100.0%
100.0%
accountancy
Source: made by the student using IBM SPSS
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Figure N° III-6: histogram demonstrates the distribution of the sample by profession and
department
Source: made by the student using IBM SPSS
The figure and the table above shows that (42.5%) of the sample are from the human resource
department, following that 15 respondents are from the Finances and accountancy department
with a percentage of (37, 50%). central inspection has consist (17.5%) of responses where (07)
respondents belong to the latter. The quality department consists of one person, which is the
CEO assistant at the same time the percentage is (2.5%). The significant deference’s in the
distribution of the sample, which from the original distribution of the organigram where some
department has more personal than others is. Nevertheless, our goal is was to get responses
from, experienced people or individuals on how to carry out an audit/ inspections/control
mission. E.g., the quality department responsible is at the time the CEO assistant, which had
significant experience related to our thesis’s subject.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
2.2.1.6
141
Distribution of sample members by: internal audit/control/inspection mission
Table N° III-14: The distribution of respondents by who to carry out an internal
audit/control/ inspection mission
respondents who carry out an internal audit/control/ inspection mission
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
no
21
52.5%
52.5%
52.5%
yes
19
47.5%
47.5%
100.0%
Total
40
100.0%
100.0%
Source: made by the student using IBM SPSS
The table above shows that (47.5%) of respondents engage in an internal audit/control/
inspection mission with (19) respondents. The rest of the sample which is (21) with a percentage
of (52.5%) do not carry out an internal audit/control/ inspection mission but they had courses
and internship on audit, control, and inspection to prepare them for the fieldwork as well as
they are in contact on regular basis with persons how had important experience in the field.
Nevertheless, approximately half of our sample had the required experience in the field of
auditing. As result, those respondents have kept up with trends and new functions, acquired by
and confirmed by the Institute of Internal Auditors (IIA).
Table N° III-15: Distribution of respondents by who carry internal audit/ inspection/
control across different department
Have you already conducted an audit/ inspection/ control mission? *
Specialty and function Cross tabulation
Count
La spécialité et la fonction occupé
Finances and
central
accountancy
inspection
(%)
(%)
N°
Total
Quality
N
°
human
Resource
(%)
N
°
(%)
N°
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
no
Have
13
00%
0
2.5%
0
17.5%
7
21(52.5
%)
you
conducted
inspection/
mission?
audit/
already
yes
an
control
Total
32.5%
142
5.00%
2
17.5
7
00%
1
25.00%
10
%
37.5%
15
17.5
19(47.5
%)
7
2.5%
1
42.5%
%
17
40
(100%)
Source: made by the student using IBM SPSS
Figure N° III-7: histogram illustrates the distribution of persons how have conducted internal
audit/
inspection/
control
mission
across
department
Source: made by the student using IBM SPSS
The figure and the table from above show the distribution of respondents by how to carry
or not internal audit/ inspection/ control mission across the different departments. We see the
individual from central inspection all of them have carried out a mission with a percentage of
(100%). In addition, the human resource department where it consists (42.5%) of the sample
(58.8%) of the department have carried out a mission which consists (25%) of the sample and
(41.2%) which consist (17.5%) of the sample did not. On the contrary, Finances, and
accountancy personals have a significant difference between the two, where (86.7%) of them
did not carry out internal audit/ inspection/ control mission which consist (32.5%) of the sample
and only (13.3%) of the department have carried out a mission. To note that the quality
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
143
responsible did conduct a mission and consist (2.5%) of the sample but the latter is responsible
for monitoring the realization of the audit action plan. As result, the quality responsible do not
the authority and legitimacy of conducting the mission.
2.2.1.7
Distribution of sample members by their social professional position
Table N° III-16: Distribution of respondents by their hierarchical position
Hierarchical position
Frequency
Percent
Valid
Cumulative
Percent
Percent
Manager (Cadre)
22
55.0%
55.0%
55.0%
Executive officer (Cadre
1
2.5%
2.5%
57.5%
10
25.0%
25.0%
82.5%
2
5.0%
5.0%
87.5%
Maitrise
5
12.5%
12.5%
100.0%
Total
40
100.0%
100.0%
Dirigeant)
Superior manager (Cadre
Supérieur)
Senior manager (Cadre
Valid
Supérieur Sénior)
Source: made by the student using IBM SPSS
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
144
Figure N° III-8: histogram demonstrates the distribution of the sample by their hierarchical
position.
Source: made by the student using IBM SPSS
The figure and the sample form above illustrate the repartition of the sample by their
hierarchical position; we see that the dominant category are executives (Cadre) with a
percentage of (55%). Followed by superior executives(cadre Superieur) by a percentage of
(25%), senior executives (cadre Superieur senior) consist a (5%) of the sample and we have
one (01) chief executive (cadre dirigeant) which consist (2.5%) of the sample, the other (12.5%)
of the sample. are workmanship (maitrise) of the deferent department. The only hierarchical
position that was included in the sample is CEO since both of us did not have the chance to
meet.
2.3
The Analysis and Interpretation of Study’s Axis.
we will present the summary of all the question response, their mean, standard deviation,
missing value, Standard Error of Mean, variance, maximum and minimum to have a clear view
about the ensemble of the response then we will analyze them axis by axis to validate our
hypothesis the following table will be summery.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
145
Table N° III-17: statistics summary of all the response on the three-axis questions
N
Vali
Mi
d
ssi
Mea
Std.
Std.
Varian
Ran
Minim
Maxi Sum
n
Error
Deviati
ce
ge
um
mum
of
on
Mean
ng
question
40
0
3.48
0.119
0.751
0.563
3
2
5
139
40
0
3.73
0.095
0.599
0.358
2
3
5
149
40
0
4.15
0.076
0.483
0.233
2
3
5
166
40
0
3.65
0.146
0.921
0.849
4
1
5
146
40
0
3.70
0.120
0.758
0.574
4
1
5
148
40
0
3.80
0.144
0.911
0.831
4
1
5
152
40
0
3.80
0.120
0.758
0.574
3
2
5
152
39
1
3.77
0.124
0.777
0.603
3
2
5
147
40
0
3.70
0.114
0.723
0.523
4
1
5
148
40
0
4.13
0.102
0.648
0.420
3
2
5
165
40
0
3.60
0.128
0.810
0.656
3
2
5
144
1
question
2
question
3
question
4
question
5
question
6
question
7
question
8
question
9
question
10
question
11
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
question
146
40
0
3.50
0.124
0.784
0.615
3
2
5
140
39
1
3.59
0.146
0.910
0.827
4
1
5
140
40
0
3.60
0.147
0.928
0.862
3
2
5
144
40
0
3.53
0.124
0.784
0.615
3
2
5
141
40
0
3.43
0.107
0.675
0.456
3
2
5
137
40
0
3.60
0.112
0.709
0.503
3
2
5
144
40
0
3.53
0.101
0.640
0.410
3
2
5
141
40
0
3.48
0.143
0.905
0.820
4
1
5
139
40
0
3.73
0.113
0.716
0.512
3
2
5
149
40
0
3.83
0.123
0.781
0.610
3
2
5
153
40
0
3.83
0.133
0.844
0.712
3
2
5
153
40
0
3.53
0.119
0.751
0.563
3
2
5
141
40
0
3.30
0.172
1.091
1.190
4
1
5
132
40
0
3.63
0.146
0.925
0.856
3
2
5
145
12
question
13
question
14
question
15
question
16
question
17
question
18
question
19
question
20
question
21
question
22
question
23
question
24
question
25
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
question
147
40
0
3.63
0.122
0.774
0.599
3
2
5
145
40
0
3.70
0.165
1.043
1.087
4
1
5
148
39
1
3.08
0.178
1.109
1.231
4
1
5
120
40
0
3.95
0.094
0.597
0.356
2
3
5
158
40
0
3.10
0.100
0.632
0.400
4
1
5
124
40
0
4.03
0.098
0.620
0.384
2
3
5
161
40
0
3.58
0.168
1.059
1.122
4
1
5
143
26
question
27
question
28
question
29
question
30
question
31
question
32
Source: made by the student by IBM SPSS
The following will analyze the data that came from respondents by the axis of our research
to validate or discard our assumption and hypothesis.
2.3.1
Axis 01: The impact of the internal Audit in the enterprise risk management
system to improve corporate governance
The following tables will illustrate the summary of the result of the respondents
concerning the question of the first axis, which contain the mean, standard deviation, standard
error of the mean, and other statistical descriptive data:
Table N° III-18: the summary of the result of the first axis questions
3
Minimum
0.563
Range
0.751
Variance
0.119
Std. Dev
Std. Error
3.48
of Mean
0
Mean
audit take into
ng
Valid
Does internal 40
N Missi
axis 01
2
Ma
xim
um
5
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
account
148
the
risk
appetite
and
risk
tolerance
established by
the board of
directors
when
conducting an
audit of the
ERM
Does
the 40
0
3.73
0.095
0.599
0.358
2
3
5
0
4.15
0.076
0.483
0.233
2
3
5
0
3.65
0.146
0.921
0.849
4
1
5
internal audit
function have
a
reasonable
balance
between
consulting and
assurance
activity when
performing an
audit on ERM
The
internal 40
audit function
assists
other
functions
in
identifying
and assessing
risks
Internal audit 40
ensures
the
consolidation
of
risk
reporting and
communicatio
n.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
Internal audit 40
149
0
3.70
0.120
0.758
0.574
4
1
5
0
3.80
0.144
0.911
0.831
4
1
5
0
3.80
0.120
0.758
0.574
3
2
5
1
3.77
0.124
0.777
0.603
3
2
5
0
3.70
0.114
0.723
0.523
4
1
5
contributes to
the
development
of an ERM
framework
adapted to the
company's
environment
and culture.
Internal audit 40
verifies
the
risk
management
process
and
procedures
and
their
efficiency and
effectiveness
Internal audit 40
can
provide
assurance on
risk
assessment.
Internal audit 39
communicates
the results of
the
risk
management
report to the
board
of
directors
or
the
audit
committee.
Internal audit 40
can
provide
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
150
management
with tools and
techniques to
improve ERM
Internal audit 40
can
0
4.13
0.102
0.648
0.420
3
2
5
0
3.60
0.128
0.810
0.656
3
2
5
0
3.50
0.124
0.784
0.615
3
2
5
1
3.59
0.146
0.910
0.827
4
1
5
help
management
identify
appropriate
ways
to
minimize risk
and
improve
risk response
The
internal 40
auditor takes
responsibility
for evaluating
the
risk
management
process
for
which he or
she
is
responsible.
Internal audit 40
helps
management
align
risk
appetite
and
business
strategy.
Internal audit 39
can
help
management
seize
the
opportunity
and
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
151
management
takes
into
account
the
audit proposal
in
setting
objectives?
Does internal 40
0
3.60
0.147
0.928
0.862
3
2
5
audit have the
necessary
means
to
assess risks?
Source: made by the student using IBM SPSS
Table N° III-19: the result of the total data in the above table
result
N
Statisti
Minimu
Maximu
m
Std.
Varianc
m
Deviatio
e
mean
mean
n
Statistic
Statistic
c
Total
40
Mean
Statisti
Std. Err
Statistic
Statistic
0.0705
0.44647
0.199
range
04
c
2.46
4.54
3.7330
9
Vali
40
Max
05
min
01
dN
Source: made by the student using IBM SPSS
From first the tables above, we cloud analyze the different question responses from the first
axis. The first question, which is about the risk appetite, the risk tolerance, and the audit the
result of the mean of response (3.48) which is approximately neutral. That indicates two things
the majority of respondents do not know about the degree of risk appetite and tolerance since it
concerns the top management and the high standard deviation (0.751) indicates that some of
the responders have contact which the top management. On the other hand, there are
conservatives about it since it is confidential. The second question is about the consultation and
the assurance mission of audit; with a mean of (3.73) indicate the agreement of the respondent
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
152
that the audit has a reasonable balance between his two functions. The Std. Deviation is
relatively low with (0.599) that indicate two things the auditor or who carries out a mission are
strongly agree with and who does are not sure also, it can mean that top management
consultation. It is not a concern of our sample but it could indicate a positive sign of audit
practices of the (IIA) in the company.
The fourth question It is about if auditor assists other function to identify the risk, which
one of the audit mission goal, most of the respondents indicate their agreement with mean of
(4.15) approximately their strong agreement. Therefore, we can say that the audit in the
company helps the auditee function to identify the risk. To note that most of the sample agree
since the Std. deviation (0.483) is relatively low which means the agreement or strong
agreement of respondents. Question number five is about the consolidation of the audit report
and its communication with a mean of (3.65) respondents indicate their agreement, which
means that the audit function of the company ensures the consolidation and the communication
of the report. But we see that the Std. deviation (0. 921) is relatively high which means that
some functions or some audit reports are not a subject of communication since their confidential
or do not concern the function.
Question number six is about the contribution of the audit function in constructing an
enterprise risk management framework that is based on the enterprise environment and risk;
respondents indicate their agreement by a mean of (3.73) which could mean that the audit
function within the enterprise could contribute to creating a lean framework for the enterprise.
The high standard deviation could mean the difference between sample members about the
ERM framework and how it is created. The following question is about the assessment of the
risk management process by the audit the positive agreement (3.80) indicates that the audit
mission has aligned and merged the best practices of the (IIA) with its practices which is a good
sign of the efficiency of the audit mission.
Question eight is about assurance of the risk assessment by the audit respondents indicate
their agreement by a mean of (3.80) which could mean that the audit function within the
enterprise could ensure the assessment of risk. The difference (Std. deviation 0.758) between
the sample members shows the difference between the function since some risks are more
critical than other but in overall, the audit could provide a positive assurance. This reflects that
the audit engagement has aligned and merged the IIA's best practices with its practices, which
is a good indication of the audit engagement's effectiveness. The question concerning the
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
153
communication of the results of the risk management report to the board of directors or the
audit committee indicates the respondents show a positive agreement a mean of (0.777) of
which reflect the accomplishment of the audit duties by the audit function. The question that is
about internal audit provides management with tools and techniques to improve ERM shows a
positive agreement among respondents with a mean of (3.70) which means that audit has an
active consultation role toward the risk management within the company which a positive sign.
A strong agreement between respondents which is an internal audit can help management
identify appropriate ways to minimize risk and improve risk response with a mean of (4.13),
the latter question is collocated with the previous It could indicate that the auditor accomplishes
his consultation mission to the fullest extent. Respectively the last four-question have a positive
agreement with a mean of (3.60) which means that when auditing that auditor he or she is
responsible depend on the risk criticality and for the alignment of the strategy and the risk
appetite correlates with the first question and the Std. deviation have a reasonable ground. For
the question of the audit helps, the management seize the opportunity and management takes
into account the audit proposal in setting objective it depends on the situation but in general,
we have a positive agreement. The same thing the resource that is provided to the audit it
depends on the mission since some mission does not necessarily need many resources.
In conclusion, the result in the table above shows the degree of approval of the respondents
on the evaluation of the questionnaire items under the first axis. Stating, “The impact of the
internal Audit in the enterprise risk management system to improve corporate governance”, in
this regard the total average mean of (3.7330) which is higher than the empirical average
approval rating of (03) which fall into the category [3-4] high degree of approbation. This means
that the degree of approval of the sample members on the total of the questions falls into the
fourth category of Likert scales which the agreement of the members [3.41 ≤ 3.73 ≤ 4.2].
Furthermore, we see that Std. error of mean is low, lower than 60% of the sample mean the Std.
error of mean indicates the reliability of the sample means. We can say in our case that we a
confidence level of (95%) that the population means is within the interval [3.593-3.873], which
indicates the overall agreement of the population. The Std. deviation of the sample is relatively
low (0.44647) which indicates a low spread of the response of the member of the sample.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
2.3.2
154
Axis 02: The role of internal audit in enhancing corporate governance by
reducing the problem of information asymmetry
The following tables will illustrate the summary of the result of the respondents
concerning the question of the second axis, which contain the mean, standard deviation,
standard error of the mean, and other statistical descriptive data:
Table N° III-20: the summary of the result of the second axis questions
Range
Variance
Std. Deviation
Std. Error of Mean
Missing
Valid
Can the use of 40
Mean
N
axis 02
Min
Max
0
3.53
0.124
0.784
0.615
3
2
5
0
3.43
0.107
0.675
0.456
3
2
5
0
3.60
0.112
0.709
0.503
3
2
5
CAATs and the
information
system in the audit
facilitate
the
resolution
of
information
asymmetry?
Internal
audit 40
assists
third
parties
(shareholders and
funders)
by
providing a going
concern
and
opinion
financial
statement audit.
the reinforcement 40
of internal control
by
the
function
reduce
audit
can
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
155
information
asymmetry
between
management and
employees
the demand for 40
0
3.53
0.101
0.640
0.410
3
2
5
0
3.48
0.143
0.905
0.820
4
1
5
0
3.73
0.113
0.716
0.512
3
2
5
0
3.83
0.123
0.781
0.610
3
2
5
internal audit by
the manager to
reduce
the
information
asymmetry
problem
is
correlation
in
with
the latter
Internal audit can 40
help management
in the deployment
of
capital
by
obtaining
sufficient
information
capital needs, etc.
the internal audit 40
can facilitate the
work of BOD in
identify
the
strategy
by
providing relevant
information on the
ERM system and
control system
The internal audit 40
has
adequate
authorization
access
necessary
to
the
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
156
information at the
appropriate time.
Does the BOD 40
and
0
3.83
0.133
0.844
0.712
3
2
5
0
3.53
0.119
0.751
0.563
3
2
5
audit
committee
guarantee
the
independence
of
the internal audit
function?
The internal audit 40
function in your
company does not
put the financing
and accounting in
the first place than
other functions.
Source: made by the student using IBM SPSS
Table N° III-21: the result of the total data in the table
result
N
Range
Minimu
Maximu
m
m
Mean
Std.
Varian
Deviati
ce
on
tot
Statist
Statist
ic
ic
40
2.22
Statistic
2.33
Statistic
4.56
al
N
40
Range
04
max
Statist
Std.
ic
Error
3.605
0.066
6
33
05
Statistic
Statisti
c
0.41949
0.176
Min
01
Source: made by the student using IBM SPSS
From the first table above we can see and analyze the various responses to the questions in
the first section. The first question is about using the computer-assisted audit techniques and
information we can see from the mean of response (3.53) that we have a positive degree of
agreement which mean that the audit within the company promotes the use of new technology
to face the problem of information asymmetry. Although the Std. deviation is relatively high
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
157
(0.784) we argue that deference among respondents caused by the difference in age category
some respondents preferred to use traditional techniques. The second question is about the audit
opinion about the ongoing concern and financial statement we can see a positive agreement
among respondents with a mean of (3.43). however, this agreement is substantially low and
tends to be neutral we can argue that by the differences in the respondents function since audit
for the human resource department do not give an opinion of the financial statement and it is
the same thing for the high value of Std. deviation (0.675) but we can an overall agreement.
The third question is reinforcing the internal control to solve the information asymmetry
problem we can observe that we have a positive agreement among respondents with a mean of
(3.60) which indicate that internal audit attempt to reduce the information asymmetry problem
by reinforcing the internal control.
The fourth question is about the demand for an internal auditor by the manager in the case
of information asymmetry the respondents indicate a positive agreement by a mean of (3.53)
this means that the internal auditor has a great role in solving the information asymmetry
problem. However, we have medium Std. deviation (0.6), which could argue by the difference
between the companies' functions. The question number five have a positive agreement among
respondents with a mean of (3.48) which relatively tends to be neutral as the first question this
happens because the great difference between the sample member which some of them are from
the finances department which they will probably agree another department will tend to be
neutral. Since this is not one of their practices, we can argue that by the great value of Std.
deviation (0.905). Question number six is about the communication of the ERM and control
assessment to the board of directors and the audit committee we see a positive mean of (3.73)
which indicates a positive agreement among respondents. This means that the audit within the
company communicates the result to the BOD and audit committee, which a very good practice
to reinforce the corporate governance by the internal audit and reduce the information
asymmetry between the manager and the board of directors. The question number seven which
is about the authorization that audit have to indicate a positive agreement among respondents
with a mean of (3.83) which mean that audit within the company have the adequate
authorization to get the necessary information. Question number eight is about audit
independence we have to mean of (3.83) which means that the audit has the adequate
independence guarantee by the BOD however the spread between respondents which Std.
deviation is because the question could be interpreted differently. The last question is about
does the audit put the finances function in the first place not; the respondents state that the audit
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158
does not put it in the first place with a mean of (3.53). The mean could relatively low and the
Std. deviation could substantial-high due to the participant of finances personal so their
response could not be completely value, which reduces the mean of the response.
In conclusion, the findings in the second table above demonstrate the degree of approval
of the respondents on the assessment of the questionnaire items under the second axis. Suggests
that, the role of internal audit in enhancing corporate governance by reducing the problem of
information asymmetry, concerning this, we have an average mean of (3.6056) which is higher
than the average empirical mean rating of (03), which falls into the third category that indicates
a high approval rate. This means that the level of approval of the sample members on all
questions is located in the fourth category of Likert scales with the agreement of the members
between [3.4 ≤ 3.60 ≤ 4.2].
Nevertheless, we see that the Std. error of mean is relatively low less than (60%) of the
sample mean (0.066) with indicates that the reliability of the sample mean. We can conclude
that with (95%) confidence level that the population mean is within the interval [3.47363.7376], which indicates that the average mean of the population has agreed on the statement
of this axis. since the mean of the population is located with [3.4≤μ≤4.2] of Likert scale which
is a positive agreement. The Std. deviation is relatively low with (0.41949) which indicates a
low spread of the response of the member of the sample.
2.3.3
Axis 03: Importance of internal audit function in protecting and enhancing the
audit stakeholders
The following tables demonstrate the summary of respondents' results for the third axis
question, which contain the mean, standard deviation, standard error of the mean, and other
descriptive statistical data:
Table N° III-22: the summary of the result of the third axis questions
1
Maximum
Minimum
1.190 4
Range
Variance
1.091
Std.
Error
3.30 0.172
Deviation
Std.
the current situation
of Mean
employee understand
0
Mean
help 40
N Missin
audit
g
Valid
internal
5
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
Internal auditing helps 40
the
159
0
3.63 0.146
0.925
0.856 3
2
5
0
3.63 0.122
0.774
0.599 3
2
5
0
3.70 0.165
1.043
1.087 4
1
5
1
3.08 0.178
1.109
1.231 4
1
5
0
3.95 0.094
0.597
0.356 2
3
5
0
3.10 0.100
0.632
0.400 4
1
5
company's
employees to master
their
work
by
developing
new
techniques
and
knowledge.
Internal
audits
can 40
provide assurance on
the
rights
of
the
organization's
personnel through the
application
of
appropriate
regulations.
Other
company 40
functions
can
use
internal audit reports
to enhance their own
performance.
Internal
audits
can 39
protect
the
organization's staff by
providing
on
the
assurance
financial
situation.
The
internal
audit 40
function can facilitate
the
work
of
the
external/legal audit.
There is a negative 40
correlation
the
between
whistle-blower
program and internal
audit effectiveness.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
The
internal
audit 40
160
0
4.03 0.098
0.620
0.384 2
3
5
0
3.58 0.168
1.059
1.122 4
1
5
consulting service can
facilitate the work of
the senior manager.
Internal audit protects 40
shareholders' assets by
providing an opinion
on the reliability of
financial statements
Source: made by the student by IBM SPSS
Table N° III-23: the result of the total data in the table
Result
N
Range
Minimu
Maximu
m
m
Mean
Std.
Varian
Deviati
ce
on
Statist
Statist
ic
ic
result
40
1.78
Valid N
40
Range
Statistic
2.78
04
Statistic
4.56
max
Statist
Std.
ic
Error
3.554
0.068
5
76
05
Min
Statistic
Statisti
c
0.43486
0.189
01
Source: made by the student by IBM SPSS
From the previous tables, we will analyze the different responses to the questions of the
first axis. The first question, which deals with the internal audit helping the person of the
organization id understanding the current situation of the company show a neutral response
from the respondents with a mean of (3.30) it could argue since the company personals is not a
shareholder or due to the company culture. Although we see great differences between
respondents with Std. deviation of (1.09), we conclude the audit may provide more
understanding in some functions than others may. The second question is about audit helping
other employees improve their performance by providing knowledge we see an agreement
among respondents by a mean of (3.63). which means that audit could provide techniques and
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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161
knowledge to the auditee we could argue that from our observation in the fieldwork auditor
may solve problems and provide some solution that could help in enhancing the auditee
knowledge however we see a high value of the Std. deviation and its caused by the different
respondent's perceptions about the audit. The third question is about the audit assurance on the
rights of the organization's personnel we see an agreement among respondents with a mean of
(3.63) which indicates that the audit watches over the proper application of regulations.
The fourth question is about the relation of the audit with other functions within the
company where the participant shows an agreement with a mean of (3.70) which means that
other functions may take advantage using the audit rapport. However, we see also a high value
of Std. deviation of (1.043) we can explain this value by some of the audit rapport are
confidential which cloud means if other functions want to use or may take advantage of it, it
cannot use or access to it since the rapport is no destination to them. The following question is
about the assurance that auditors give to the company staff about the financial situation we see
that position of respondents is neutral with a mean (3.08) this could mean that as the company
personal are shareholders they do not have the right to access this information. However, with
a great Std. deviation value (1.109) some of the respondents think that audit should give a clear
view about the financial situation to the personal. The next question is about the relation of
internal audit with the external audit, respondents indicate their agreement by a mean of (3.95)
which mean that internal auditor could felicitate the work of the external auditor by using the
internal audit rapport, and collected information .etc. The Std. deviation is low (0.597) with a
mean that respondents have a similar view concerning this point. The next point which is the
correlation between the whistle-blower program and the internal audit respondents indicates
their neutral position by a mean of (3.10) in the phase of collecting the information the whistleblower program is illegal in the company and it was legal no tool long ago. Which could argue
the neutral position of the respondents however the neutral position could be the sweet spot for
the current question.
The next point is the consultation service of audit to the senior managers most of the
respondents indicate their agreement which a mean of (4.03) that could mean the audit within
the company facilitates the work of the senior managers however most respondents agree since
the Std. the deviation is relatively low (0.620). The last item is Internal audit protects
shareholders' assets by providing an opinion on the reliability of financial statements where
respondent indicate their agreement (3.58) this low value of agreement can be argued by most
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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162
of the sample member are not finance and accountancy this could argue the great value of the
Std. deviation (1.059).
Finally, the results of the second table above show the agreement of the respondents on the
evaluation of the items of the questionnaire under the second axis. This would suggest,” the
importance of internal audit function in protecting and enhancing the audit stakeholders”, in
relation to this we have an average total mean of (3.5545) which is higher than the empirical
mean of (03). which is located in the third category [3-4] that indicates a high approval rate,
This means that the level of agreement of the sample members on all items is in the fourth
category of the Likert scales with member agreement between [3.4 ≤ 3.54 ≤ 4.2].
Meanwhile, we find that the standard error of the mean is reasonably low, less than (60%)
of the sample mean (0.0687), which indicates that the sample means reflect reliably the
population means. We can conclude with (95%) confidence level that the population mean is
in the interval [3.4171≤μ≤ 3.6919], which indicates that the population has an agreement on
the statement of this axis. since the population mean is located with [3.4≤μ≤4.2] of the Likert
scale which is a positive agreement. The standard deviation is relatively low with (0.43486)
which indicates a low dispersion of the sample member's response.
2.4
Hypothesis test:
To test our hypothesis we will run first some statistical tests to choose between the
parametric and non-parametric test the normality tests that we will run are multiple but we will
choose the appropriate test among them for our study their many tests of normality, and the test
that we will conduct are: z-test, Kolmogorov-Smirnov, Shapiro-Walik.
2.4.1
The Z test for normality
A z test could be applied for test normality by using skewness and kurtosis. A z test could
be obtained by dividing the skew value or the excess kurtosis value by their standard error.
Since the standard error becomes smaller when the sample size increases, the z-test under the
null hypothesis of a normal distribution is often easily rejected in large samples whose
distribution may not be significantly different from normality, while the null hypothesis of
normality tends to be rejected in small samples. Therefore, the critical value for rejecting the
null hypothesis needs to be different according to the sample size, as shown below: For small
samples (n <50), if the absolute z-score of skewness or kurtosis is greater than |1.96|
(corresponding to α level of 0.05), reject the null hypothesis and conclude that the sample
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163
distribution is not normal. For a medium-sized sample (50 <n <300), when the absolute z value
exceeds |3.29| (corresponding to an alpha level of 0.05), the null hypothesis is rejected and the
sample distribution is non-normal.
Our sample is n< 50, as result; we need to follow the second hypothesis, which indicates
that the absolute value of the z score of skewness or kurtosis need to be lower than 1.96 we run
the z-test and the score are in the following table
Table N° III-24: the z-score skewness or kurtosis
Mean
Statisti
Std.
c
Error
3.6056
0.0663
3
95%
Lower 3.4714
Confidenc
Boun
e Interval d
Axis 01
for Mean
Upper
3.7397
Boun
d
5% Trimmed Mean
3.6111
Median
3.6111
Variance
0.176
Std.
0.4194
Deviation
9
z score
z-score
Axis 02
Skewness
Skewness
-0.255
0.374
Kurtosis
1.250
0.733
Mean
3.5545
0.0687
6
95%
Lower 3.4154
Confidenc
Boun
d
of z-score
Kurtosis
-0.681791307
1.706218699
of
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
Governance
e Interval Upper
for Mean
164
3.6936
Boun
d
5% Trimmed Mean
3.5451
Std. Deviation
0.4348
6
z score
z-score
Skewness
Skewness
0.221
0.374
Kurtosis
-0.201
0.733
Mean
3.7287
0.0722
95%
Lower 3.5826
Confidenc
Boun
of z-score
of
Kurtosis
0.590257519
-0.274309774
e Interval d
for Mean
Upper
3.8748
Boun
Axis 03
d
5% Trimmed Mean
3.7502
Median
3.8214
Std. Deviation
0.4569
1
z score
z-score
Skewness
Skewness
-0.759
0.374
Kurtosis
0.993
0.733
of z-score
of
Kurtosis
-2.031611882
1.355827444
Source: made by the student using IBM SPSS
We see from the table that the z score of Skewness and z score of Kurtosis are respectively
(-0.6817) and (1.70) which are lower than the absolute value of (1.96) as a result we can accept
the null hypothesis and which mean that according to the z test the data from the axis is normally
distributed. For the second axis, we see that the Z score of Skewness and Z score of Kurtosis
are respectively (0.590) and (-0.274) and the two of them are lower than the absolute value of
(1.96) we conclude that we can accept the null hypothesis and according to the z test the data
from the axis is normally distributed. However, the third axis has a Z score of Kurtosis (1.35)
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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165
that is lower than the absolute value of (1.96) but Z score of Skewness (-2.03) which mean we
reject the null hypothesis and conclude that the sample distribution is not normal for the third
according to the z test.
2.4.2
Kolmogorov-Smirnov for normality test
The Kolmogorov-Smirnov test compares the ECDF (empirical cumulative distribution
function) of the sample data with the expected distribution when the data is normal. The
Kolmogorov-Smirnov test is used for a large sample size where (n>50), the null hypothesis
state value that is taken for normal distribution population when the p-value is greater than
(0.05), the null hypothesis is accepted and the data is normally distributed. In the following, we
will run Kolmogorov-Smirnov using SPSS. The result is in the table below.
Table N° III-25: Kolmogorov-Smirnov test
Tests of Normality
Trimmed Kolmogorov-Smirnov a
Mean
Std.
5%
Statistic Std.
Deviation
Mean
Statistic df
Sig.
Error
Axis
3.6056
0.06633
0.41949
3.6111
0.125
40
0.120
3.5545
0.06876
0.43486
3.5451
0.098
40
.200*
3.7287
0.07224
0.45691
3.7502
0.175
40
0.004
01
Axis
02
Axis
03
Source: made by the student using IBM SPSS
We see from the table above that the first axis follows a normal distribution where the p
(0.12) value is greater than (0.05). As result, the null hypothesis is accepted and the data is
normally distributed. For the second axis, the data is also normally distributed where the pvalue (0.200 which a lower bound of the true significance) so the null hypothesis is accepted
and the data is normally distributed. Where in the last axis the data is not normally distributed
because the p-value (0.004) is, lower than (0.05) so we refuse the null hypothesis and the data
is not normally distributed.
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2.4.3
166
Shapiro-Walik test
When using the distribution platform to check continuous variables, you can use the
Shapiro-Wilk normality test. The null hypothesis of this test is that the data are normally
distributed. The Probability <W value is the p-value. If the selected alpha level is (0.05) and the
p-value is less than (0.05), reject the null hypothesis that the data are normally distributed. If
the p-value is greater than (0.05), the null hypothesis is accepted. The most appropriate test for
the small sample size (N<50) is the Shapiro-Walik test although it could be used in a large
sample size while the Kolmogorov-Smirnov test is good for a large sample it can be biased by
the extreme value limit. As our sample is (n<50) we choose to follow the result of the test, the
result is in the table below.
Table N° III-26: Shapiro-Walik test
Tests of Normality
Mean
Std.
5%
Statistic Std.
Deviation Trimmed Statistic df
Error
Mean
Shapiro-Wilk
Sig.
Axis 01
3.6056
0.06633 0.41949
3.6111
0.968
40 0.302
Axis 02
3.5545
0.06876 0.43486
3.5451
0.977
40 0.567
Axis 03
3.7287
0.07224 0.45691
3.7502
0.950
40 0.079
*. This is a lower bound of the true significance.
a. Lilliefors Significance Correction
Source: made by the student using IBM SPSS
From the result of the above table, we see that the thee axis have values that are respectively
(0.302) for the first axis greater than the bound of significance (0.05), the second has value
(0.567) which is greater than the bound of significance (0.05), as well as the third axis (0.079)
which is also greater than bound of significance (0.05). As result, the null hypothesis is accepted
and the data are normally distributed. And as our three-axis have a normal data distribution we
can conduct the parametric test. The most appropriate test of the hypothesis that met those
assumptions is the one-sample t-test.
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2.4.4
167
The One-Sample T-Test
The one-sample t-test is a statistical test of hypothesis used to determine whether a mean
of an unknown population is different from a specifics value in our case it is the empirical value
of (03) the test assumes the data is continuous and normal. Their three-way to confirm our
assumptions. In first, we can compare the P-value (Sig. (2-tailed)) if the p-value is less than
(0.005), the p-value is statistically significant where we reject the null hypothesis and accept
the null hypothesis. We can use also the T value. If the t value is larger than the t value that
corresponds to the value of significance in the student t table, we can reject the null hypothesis
and accept the alternative hypothesis. Last but not least we can use the confidence interval in
the (00) was not contained between the value of the confidence interval we can reject the null
hypothesis and accept the alternative hypothesis.
For out sample with a degree of freedom, which is (N-1), and in our case, it is equal to (39)
For this degree of freedom and from the student t table we see that our T value is equal to
(2.021). Moreover, our empirical mean is equal to (03)
2.4.4.1
The first hypothesis
It was noted earlier that the first (14) items of the questionnaire were dedicated to
measuring internal audit's ability to improve corporate governance through enhancing its
enterprise risk management system. The T-test for the first axis is presented in the table below:
Table N° III-27: the result of the one-sample T-test for the first axis
One-Sample Statistics
Axis 01
N
Mean
Std. Deviation
Std. Error Mean
40
3.7271
.45631
.07215
One-Sample Test
Test Value = 3
t
Axis 01
10.077
df
39
Sig. (2-tailed)
0.000
Mean
95% Confidence Interval of
Difference
the Difference
0.72706
Source: made by the student using IBM SPSS
Lower
Upper
0.5811
0.8730
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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168
Our null hypothesis for this axis is:
H0: internal audit could not improve the corporate governance by enhancing the enterprise
risk management system
To test this hypothesis, we will compare the average mean of the responses for the first
axis which indicates "The impact of the internal Audit in the enterprise risk management system
to improve corporate governance ", with that of the empirical mean which is (3) on the Likert
scale used. In addition, to reject or accept the null hypothesis we will use the three methods
cited above.
We see from the table from above the confidence level is (95%) and the significance value
for those values and from the student t table, we see that our t value is (2.021) form our T-test
table we see that the t value or the t score (10.077). As result, we see that the critical value
(10.077) is larger than the t value (2.021) so the results are significant. We note the p-value
from the table (00) is less than the (0.05) so the result is statistically significant. Moreover, we
see that our confidence interval [0.58110-.8730] does not contain the (00) which means that the
result is statistically significant.
Nevertheless, the average of the responses on the questions of the first axis which indicate”
contribute to improving corporate governance through the enhancement of the enterprise risk
management system” has the value of (3.7271) with Std. deviation of. (0.45631) which is higher
than the empirical value of (03).
From these results, we can reject the null hypothesis, stating that internal auditing does not
contribute to improving corporate governance through the enhancement of the enterprise risk
management system. In addition, accept our alternative hypothesis, which indicated that the
internal audit help to improve corporate governance by enhancing the enterprise risk
management system.
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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2.4.4.2
169
The second hypothesis
It was previously stated that the second nine (09) questions of the questionnaire were
dedicated to measuring the internal auditor's ability to resolve the problem of information
asymmetry to strengthening the corporate governance The T-test for the second axis is
presented in the table below:
Table N° III-28: the result of the T-test for the second axis
One-Sample Statistics
Axis 02
N
Mean
Std. Deviation
Std. Error Mean
40
3.6056
0.41949
0.06633
One-Sample Test
axis 02
Test Value = 3
t
df
Sig.
(2-
tailed)
9.130
39
0.000
Mean
95% Confidence Interval of
Difference
the Difference
0.60556
Lower
Upper
0.4714
0.7397
Source: made by the student using IBM SPSS
Our null hypothesis for this axis is:
H0: the internal audit could not help to reduce the problem of information asymmetry in
order to strengthen the corporate governance
To verify this hypothesis, we will compare the mean of the responses of the second axis,
which indicates "The role of internal audit in enhancing corporate governance by reducing the
problem of information asymmetry ", with the empirical mean which is (3) on the Likert scale
employed. Furthermore, to either reject or accept the null hypothesis, we will use the three
methods mentioned above.
We see in the table above that the confidence level is (95%) and the significance value is
(39). For these values and in the student t-table we see that the t-value is (2.021). in our t-test
table, we see that the t-value or the critical value is equal to (9.130) which higher than the tvalue for the student value (2.021) which means that our result is statistically significant.
Nevertheless, we can observe that the p-value in the table (00) is less than (0.05) so the result
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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170
is statistically significant. To add that the zero value (00) is not contained in our (95%)
Confidence Interval, which also means our results are statistically significant.
However, The mean of the responses to the questions in the second axis that indicate
"contribute to the improvement of corporate governance by strengthening the enterprise risk
management system" has the value of (3.6056) with a standard deviation of (0.41949) which
is higher than the empirical value of (03).
As result, we can therefore deny the null hypothesis, which states that internal auditing
could not help to reduce the problem of information asymmetry in order to strengthen corporate
governance Furthermore; we admit our alternative hypothesis, which states that internal
auditing participates in resolving the information asymmetry problem in order to strengthen the
corporate governance.
2.4.4.3
The third hypothesis:
The last nine-question of the questionnaire was concerned with verifying the capability of
the internal auditor in protecting the stakeholder towards more sustainable corporate
governance. The T-test for the third axis is presented in the table below:
Table N° III-29: the result of the T-test for the third axis
One-Sample Statistics
Axis 03
N
Mean
Std. Deviation
Std. Error Mean
40
3.5545
0.43486
0.06876
One-Sample Test
Test Value = 3
t
Axis
8.065
df
39
Sig. (2-tailed)
0.000
03
Source: made by the student using IBM SPSS
Our null hypothesis for this axis is:
Mean
95% Confidence Interval of
Difference
the Difference
0.55451
Lower
Upper
0.4154
0.6936
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of Corporate
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H0: the internal audit do not have the capability of protecting the audit stakeholders for
enhancing the corporate governance
To ascertain this hypothesis, we will compare the mean of the responses of the third axis,
which indicates,” The internal audit has the capability to protect the stakeholder towards more
sustainable corporate governance”. With the empirical mean which is (3) on the Likert scale
that we used. In addition, to reject or accept the null hypothesis, we will use the three methods
listed above.
We find in the table above that, the confidence level is (95%) and that the significance
value is (39). For these values and from the student's t-table, we see that the t-value is (2.021).
In our t-test table, we can observe that the t-value or critical value is equal to (8.065), which is
greater than the student's t-value (2.021), which means that our results are statistically
significant. However, we can observe that the p-value in the table (00) which is inferior to (0.05)
so the result is statistically significant. In addition, the zero value (00) is not within our
confidence interval (95%), which also means that our results are statistically significant.
Meanwhile, the mean value of response for this axis, which indicates” the internal audit
has the capability to protect the stakeholder towards more sustainable corporate governance”
has the value of (3.5545) and the Std. deviation (0.43486) which is higher than the empirical
value of (03).
Therefore, we can dismiss the null hypothesis, which states “the internal audit do not have
the capability of protecting the audit stakeholders for enhancing the corporate governance” On
the other hand, we accept our alternative hypothesis, which states, “the internal audit has the
capability to protect the stakeholder towards more sustainable corporate governance”.
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172
Conclusion chapter three
Throughout this chapter, we present the different aspects of our research we start with a
quantitative study where we examine our sample by using multiple statistical tests of reliability
then we analyze the background of our sample members to show the quality of the individual
that is being asked.
Then with the help of simple descriptive statistic, we aim to analyze the three axes of the
questionnaire that could provide us with an overview about the destitution of the response on
the questionnaire’s items then we interpreted the result of each item based on assumptions,
theoretical fact and the best practices of audit and governance. Which enables us to get an initial
conclusion about our hypothesis.
Finally, employing different static tests such as normality tests and using hypothesis tests,
we could validate our hypothesis and we confirm that the internal audit could help to enhance
the corporate governance by solving the information asymmetry problem, provide appropriate
protection to the stakeholders, and enhancing the enterprise risk management system.
General conclusion
General conclusion
174
General Conclusion
Our study objective was to determine whether the internal audit activity could contribute
to enhancing the corporate governance system in other how would the internal audit provide an
assurance of the well-functioning of the corporate governance system. Since the rapid
globalization of the world where the across continental trades are taking place at the click of a
button. Corporate governance could be viewed as a trust-building and authentication
mechanism that can help the organization achieve its strategic goals of creating value in
partnership with its stakeholders. The stakeholder should in continues communication that
whatever activity and the result of the company in the past and present and they should in
accordance with the plan it has through done through fair means. A lot of researchers have
considered the internal audit as a mechanism for managing risk and participating in the value
creation process and since the two phenomena aim to create value and achieve the
organization’s objectives we would examine if the internal audit were a means for enhancing
the corporate governance system in Algeria context.
We have sought to address our problem; we establish our study through two stages firstly
through literature review. We have extracted some of the elements and factors that indicate the
good practices of corporate governance and some of the elements that internal audit could
contribute in enhancing the corporate governance which are internal control, risk management,
the protection of the stakeholder's rights, and information asymmetry. From the latter, we could
construct a relationship between internal audit activity and corporate governance in a theoretical
aspect.
In the second stage, we attempt to validate the assumption that we establish in the
theoretical study and confirm the relation between internal audit and corporate governance and
this could be done through a quantitative study. We distribute a questionnaire in form of a Likert
scale followed by statistical analysis and tests such as (T-test) to respond to our problem.
Our principal question was as following: « How could the internal audit activity be
conducive to the enhancement of the corporate governance of Algeria’s companies? »
This problem has enabled us to stem three secondary questions by answering them we
could address the main problem, which is in the following
General conclusion
175
4. Could the internal audit activity reduce the information asymmetry between all
the stakeholders of the company?
5. Does the internal audit activity have an influence in moderating the risk-averse
among the risk owners?
6. Does the internal audit activity help to protect the stakeholders within and
outside the company?
After our investigation in the GRTE Sonlegaz company which was held in four different
departments human resource, central inspection, quality and finances, and accountancy with
multiple responsible, manager, and administrators. We get the following result:
The first hypothesis stipulates that the internal audit could be relied upon as a prime instrument
in risk management to improve corporate governance. From the statistical result, we find that the
majority of respondents agree that internal audits could enhance the enterprise risk management
system. Firstly, the agreement upon the respondent that the internal audit takes into account the risk
appetite and the risk tolerance fixed by the board of directors, which could help the company to align
the risk with the strategic objective. Moreover, with giving the assurance about the risk management
in the enterprise the responsible take action to fix or resolve the problem. Nevertheless, when
providing the assurance activity on the enterprise risk management system the internal auditor
provides at the same time assurance on the risk management and the internal control system. Which
will help the company in creating sustainable value and protecting the stakeholders by fulfilling
simultaneously the best practices of audit and governance. However, most of the respondents
indicate their agreement of this axis by a mean of (3.7330> 03) and we could conduct the
population have to view since the Standard error of the mean (0.44). Moreover, to confirm the
hypothesis, we run the T-test and from the result of the latter, we could confirm our hypotheses.
The second hypothesis indicates that the internal audit activity could mitigate the problem of
the information asymmetry between stakeholders. From the statistics result, we see that majority of
respondents agree that the internal audit could mitigate the information asymmetry. Moreover, since
we have interrogated four departments that have a different profession that could indicate internal
audit in the company is working with the new best practices of internal audit. which stipulate that
internal audit should focus on all the company function and not perverse his role to only the financial
function that could mean that all the stakeholder have adequate information and this could lead to
attaining the strategic objectives. We could notice also that internal audit have the ability to the
needed information to conduct their mission. In addition, by the use of computer-assisted audit
General conclusion
176
technology and information systems, internal auditors could access more information. With the
agreement of the member of the sample, that indecency of internal audit is guaranteed nevertheless
the internal audit provides the relevant information to the board of directors about the financial
situation, the internal control, and the risk management system. Whit this the majority of respondents
present their agreement with a mean of (3.6) which indicate that internal audit mitigates the
information asymmetry according to the member of the sample and Standard error of the mean (0.06)
which could indicate that this perception does not differentiate with regard to the population. In
addition, after conducting the T-test we could confirm our hypothesis.
The last hypothesis is there is a positive correlation between internal audit efficiency and the
protection of the rights of the stakeholders. In addition, from the result of our survey, we see that in
the first and fifth items the respondents indicate their neutrality that could mean that internal audit
could not play a great role in providing the relevant information to the person of the organization
about the financial situation. Where else the audit could help the external audit and other function to
improve their preference. An important note to add that the company prohibits the use of the whistblower procedure however most importantly to facilitate the work of both senior managers, board of
directors, and audit committee. Finally, most of the respondents indicate their agreement by a
(3.55>03) and we could conclude that the population has the same belief since the Standard error of
the mean (0.068). Moreover, after employing the T-test we can validate our hypothesis.
In terms of the global result and the provided evidence that we perceived we formulate an
objective conclusion. Of which that the internal audit could participate as a mechanism that enhances
the corporate governance system in four different areas: mitigating the asymmetry of the
information, providing sufficient protection to the stakeholders, and ensure the efficiency and
coherence of the risk management system and of course the internal control system.
Based on the results obtained through this study for improving the Future of internal audit and
the corporate governance of the organization we found some deficiency, as result, we present the
following recommendations and suggestion:

The importance of reinforcing the role of the internal audit function so that it can
improve corporate governance;

Enhancing the role of audit committees within the enterprise to ensure the reliability
and the reliability and accuracy of the financial information provided to the board of
directors;
General conclusion
177

Provide internal auditors with more independence in their assignments

Make the necessary distinction between the internal audit mission and the inspection
mission

The need for the company to provide internal and external training for its auditors
However, our results and the conclusions we draw from them. Has been interpreted with certain
restrictions and limitation, which in the following:

Some variables related to good corporate governance are absented in our study these
mainly concern the existence of the audit committee and its relationship with internal
audit. Moreover, that could be explained by the existence of an audit committee for
the entire group.

The sample size with (40) respondents could consider to be limited as it is disabled
from approaching reality.

The subject matter is extensive, permanently developing, and requires time to reach
relevant conclusions. At the same, the ambiguity of the concept of governance, for
certain individuals in the organization’s l has posed some constraint for our analysis.
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Appendices
Appendices
Background questions:
1. Gender:
 Male
 Female
2. Age:
 20-30 years
 31-40 years old
 41-50 years old
 Over 51 years old
3. Level of education:
 High school
 Bachelor's degree
 Engineering
 Master
 Magister
 PhD
4. Experience Professional:
 Less than 5 years
 Between 5 and 10 years
 More than 10 years
5. Specialty and position held:
 Human resources
 inspection
 Quality
 Accounting and Finance Department
6. Have you ever performed an audit/inspection mission?
 Yes
II
Appendices
 No
7. Your current position:
 Senior Manager
 Superior Manager
 Senior Executive
 Chief Executive Officer
 Manager
 Master
III
IV
Appendices
N
axis 01
°
1
disagree
Does internal audit take into account the risk
appetite and risk tolerance established by the
board of directors when conducting an audit of the
ERM
2
Does the internal audit function have a reasonable
balance between consulting and assurance
activity when performing an audit on ERM
3
The internal audit function assists other functions
in identifying and assessing risks
4
The internal audit ensures the consolidation of
risk reporting and communication.
5
Internal audit contributes to the development of
an ERM framework adapted to the company's
environment and culture.
6
The internal audit verifies the risk management
process and procedures and their efficiency and
effectiveness
7
Internal audits can provide assurance on risk
assessment.
8
Internal audit communicates the results of the risk
management report to the board of directors or the
audit committee.
9
Strongly
Internal audit can provide management with tools
and techniques to improve ERM
1
Internal audit can help management identify
0
appropriate ways to minimize risk and improve
risk response
disagree
neutral
agree
Strongly
agree
V
Appendices
1
The internal auditor takes responsibility for
1
evaluating the risk management process for which
he or she is responsible.
1
Internal audit helps management align risk
2
appetite and business strategy.
1
Internal audit can help management seize the
3
opportunity and management takes into account
the audit proposal in setting objectives?
1
Does internal audit have the necessary means to
4
assess risks?
N° Axis 02
Strongly
disagree
1
Can the use of CAATs and the information system
in the audit facilitate the resolution of information
asymmetry?
2
Internal audit assists third parties (shareholders and
funders) by providing a going concern opinion and
financial statement audit.
3
the reinforcement of internal control by the audit
function can reduce information asymmetry between
management and employees
4
the demand for internal audit by the manager to
reduce the information asymmetry problem is in
correlation with the latter
5
Internal audit can help management in the
deployment of capital by obtaining sufficient
information capital needs, etc.
disagree
neutral
agree
Strongly
agree
VI
Appendices
6
the internal audit can facilitate the work of BOD in
identify
the
strategy
by
providing
relevant
information on the ERM system and control system
7
The internal audit has adequate authorization to
access the necessary information at the appropriate
time.
8
Does the BOD and audit committee guarantee the
independence of the internal audit function?
9
The internal audit function in your company does not
put the financing and accounting in the first place
than other functions.
Axis 03
Strongly
disagree
1
internal audit help employee understand the current
situation
2
Internal auditing helps the company's employees to
master their work by developing new techniques and
knowledge.
3
Internal audits can provide assurance on the rights
of the organization's personnel through the
application of appropriate regulations.
4
Other company functions can use internal audit
reports to enhance their performance.
5
Internal audits can protect the organization's staff by
providing assurance on the financial situation.
disagree neutral
agree
Strongly
agree
Appendices
6
The internal audit function can facilitate the work of
the external/legal audit.
7
There is a negative correlation between the whistleblower program and internal audit effectiveness.
8
The internal audit consulting service can facilitate
the work of the senior manager.
9
Internal audit protects shareholders' assets by
providing an opinion on the reliability of financial
statements
VII
Table of contents
Table of Contents
Abstract
Dedication
Acknowledgments
List of Tables
List of Figures
List of Abbreviations
Summary
General introduction………………………………….…………….…...………….………1
Chapter one: Corporate Governance Literature Review….………...……………..….....7
Chapter one introduction………………..…………………..………………..................……8
Section one: Generalities and history of the corporate governance………………………….9
1
The historical evolution of the governance concept: ................................................... 9
1.1 The Medieval governance:......................................................................................... 10
1.2 The governance in the middle ages: .......................................................................... 10
1.3 Modern governance: .................................................................................................. 11
1.4 Governance, a concept that draws on economics theory: .......................................... 11
2
The genesis of the corporate governance conceptual framework and firm
theories……………………………...…………………………………………………..…….12
2.1 The emergence of the entrepreneurial firm:......................................................... 13
2.2 From the entrepreneurial firm to Managerial Firm: ............................................. 17
2.3 The transaction cost theory: “the firm as a governance structure” ...................... 18
2.4The firm as nexus of contracts: ......................... ...................................................19
2.5 The theory of incomplete contract: The firm as a “collection of non-human
assets” ................................................................................................................................ 21
2.6 The agency relationship ....................................................................................... 22
2.6.1 The agency cost........................................................................................... 23
Table of Contents
2.6.2 The source of agency conflict ..................................................................... 23
3
Definitions of the Concept of Corporate Governance: .............................................. 26
4
Corporate Governance Devices and Actors:.............................................................. 27
4.1 The board of directors:............................................................................................... 27
4.2 Corporate officers: management executives .............................................................. 28
4.3 Audit Committee........................................................................................................ 28
4.4 The Corporate Stakeholders:......................................................................................29
4.4.1 Internal stakeholders: ............................................................................................... 29
4.4.2 External stakeholders: .............................................................................................. 30
Section two: The two approaches of the paradigm of efficiency………………………….….31
1
The disciplinary view of Corporate Governance ....................................................... 32
1.1 The Shareholder model of the corporate governance ................................................ 32
1.2 The stakeholders model of corporate governance: .................................................... 36
2
The knowledge-based approach of governance:........................................................ 40
Section three: The corporate governance mechanisms……...………………….………….…44
1
Internal mechanisms of corporate governance .......................................................... 44
1.1 The shareholder control mechanism of the managers ............................................... 44
1.1.1
The board of directors ................................................................................. 45
1.1.2
Compensation committee: the remuneration mechanism ........................... 46
1.1.3
The management turnover .......................................................................... 47
1.1.4
The shareholders right and general assemblies........................................... 47
1.2 External Audit and audit committee .......................................................................... 47
1.3 Employees as a mechanism of controlling managers ................................................ 48
1.3.1
The procedures for controlling the managers by the employees ................48
1.3.1.1 Employee participation in the decision-making process ................................ 49
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1.3.1.2 Employee participation in the management control process .......................... 49
1.4 The stakeholder's mechanisms of controlling managers............................................ 49
1.4.1Internal stakeholders.................................................................................................. 49
1.4.2External stakeholders ................................................................................................ 49
2
External corporate governance mechanism ............................................................... 50
2.1 The hostile takeover or the financial market ............................................................. 50
2.2 The manager market labor ......................................................................................... 50
2.2.1
The internal labor market for managers ...................................................... 50
2.2.2
The external labor market for managers ..................................................... 50
2.3 The market for goods and services ............................................................................ 51
Chapter one conclusion……………...…………………………………………….….………52
Chapter two: The Internal Audit and the Corporate Governance Interrelation from
Theoretical Perspective……………..…………...……………………….….........................53
Chapter two introduction………………………....…………………………………………...54
Section one: Generally about internal audit……….………………………….......…………..55
1
An internal audit from a historical standpoint ........................................................... 55
2
The internal Audit definition ..................................................................................... 56
2.1 Audit definition.......................................................................................................... 57
2.2 Internal audit definition: ............................................................................................ 58
3
Internal audit objectives ......................................... ...................................................59
4
Internal audit organization ......................................................................................... 60
4.1 Internal audit international professional practices framework (IPPF) ....................... 60
5
Internal Audit Standards ............................................................................................ 61
5.1 Internal audit code of ethics ....................................................................................... 63
5.2 Internal audit charter .................................................................................................. 64
Section two: Internal audit forms and types.……………...……………….……………….…65
1
Accounting and Financial Audit ................................................................................ 65
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2
The operational audit ................................................................................................. 65
2.1 Strategic audit ............................................................................................................ 67
2.2 Management auditing ................................................................................................ 68
2.3 Compliance audit ....................................................................................................... 69
2.4 Efficiency audit ......................................................................................................... 70
2.5 Audit classification by function:................................................................................ 70
Section three: The organisation of the audit mission….…………………………….…..……72
3.1 The preparatory phase of audit activities: .................................................................. 73
3.1.1
Initial planning and preliminary objective statement.................................. 73
3.1.2
The mission order........................................................................................ 73
3.1.3
The preliminary study ................................................................................. 74
3.1.4
Risk identification and evaluation............................................................... 75
3.1.5
The audit reference...................................................................................... 76
3.1.6
The orientation report.................................................................................. 77
3.2 Performing the internal audit: .................................................................................... 77
3.2.1
The opening meeting: “the kick-off meeting” ............................................ 77
3.2.2
The audit work program.............................................................................. 77
3.2.3
Internal control questionnaire ..................................................................... 78
3.2.4
The Audit Fieldwork ................................................................................... 79
3.2.5
The audit evidence ...................................................................................... 79
3.2.6
The audit work-papers ................................................................................ 79
3.2.7
The audit point sheet ................................................................................... 80
3.2.8
The audit preliminary finding sheet “FRAPs” ............................................ 80
3.2.9
The draft rapport the communication phase ...............................................81
3.3 Conclusion phase ....................................................................................................... 82
3.3.1
Validation and cloture meeting ................................................................... 82
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3.3.2
The audit rapport ......................................................................................... 82
3.3.3
The action plan ............................................................................................ 83
3.4 The follow-up phase .................................................................................................. 83
4
The internal audit tools and techniques: .................................................................... 84
4.1 The Investigation tools and techniques:..................................................................... 84
4.1.1
The Statistical survey: ................................................................................. 84
4.1.2
Interviews .................................................................................................... 85
4.1.3
Computer-Assisted Audit Tools and Techniques (CAATTs) ..................... 85
4.2 The Description tools ................................................................................................. 86
4.2.1
The physical observation ............................................................................ 86
4.2.2
The flow chart ............................................................................................. 86
4.2.3
The narrative ............................................................................................... 86
4.2.4
Task Analysis Grid...................................................................................... 87
4.2.5
The functional organization chart ............................................................... 87
Section four: internal audit as a mechanism of corporate governance......................................88
1
Internal audit and corporate governance theories; agency theory and transaction cost
theory: ……………………………………………………………………………………....88
1.1 Internal audit and agency theory: ............................................................................... 88
1.2 The internal audit and the transaction cost theory ..................................................... 89
2
The role of internal audit in the assessment of the internal control system ............... 89
2.1 Definition of internal control ..................................................................................... 90
2.2 The importance of the internal control....................................................................... 92
2.3 The relation between the internal audit and internal control system: ........................ 93
3
Internal audit role in enterprise risk management (ERM) for good corporate
governance ................................................................................................................................ 95
3.1 The role of internal in the enterprise risk management ............................................. 97
3.2 The importance of enterprise risk management in the corporate governance ........... 99
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4
Internal audit and the problem of information asymmetry ...................................... 100
Chapter two conclusion………………………………….…………………...……………...103
Chapter Three: Study Case: The GRTE’s Internal Audit Function As a Succor of
Corporate Governance……...……………….………………………………….….…...…104
Chapter three introduction………………………………...…………….…………….……..105
Section one: General Presentation of GRTE…………………………………….………….106
1.1 The Sonelgaz group presentation: ............................................................................ 106
1.2 The presentation of the GRTE-Spa company: ......................................................... 107
2
1.2.1
The mission of the company ..................................................................... 107
1.2.2
The company activities ............................................................................. 110
The Governance and Internal Audit In GRTE ......................................................... 111
2.1 The governance of the GRTE: ................................................................................. 111
2.1.1
The General Assembly .............................................................................. 111
2.1.2
The Board of Directors ............................................................................. 111
2.2 The internal audit in GRTE: .................................................................................... 112
2.2.1
The definition of internal audit in the GRTE-(Sonelgaz) .......................... 112
2.2.2 The Missions and Objectives of Internal Audit function within GRTE
(Sonelgaz)……………………………………………………………………. ….....113
2.2.2.1 The mission of internal audit ........................................................................ 113
2.2.2.2 The objectives of the internal audit function within the GRTE (Sonelgaz) . 114
2.2.2.3 The Attachment of the Audit Department .................................................... 114
2.2.2.4 Role and responsibilities of the audit function ............................................. 115
3
The Organizational Structure of The GRTE-Spa Company .................................... 115
Section two: the internal audit function significance in the corporate governance case study of
the GRTE Algerian public company……………………………………..........................….118
1
Research Methodology ............................................................................................ 118
Table of Contents
1.1.1
The deductive approach: ........................................................................... 118
1.1.2 The indicative approach:............................................................................. 120
1.2 The current research design ..................................................................................... 122
1.3 Research method ...................................................................................................... 123
1.3.1
2
Study variables .......................................................................................... 124
Presentation of a quantitative survey ....................................................................... 126
2.1
Outline the current research process: ........................................................ 126
2.1.1
Sampling and data collection methods ......................................................... 126
2.1.2
Questionnaire presentation ........................................................................... 127
2.1.3
Reviewing the questionnaire: ........................................................................ 130
2.1.4
Reliability test of the questionnaire .............................................................. 130
2.1.5
The statistical method used in the study ....................................................... 134
2.2
2.2.1
Data analysis and interpretation ................................................................ 135
The statistical description of the selected study sample in terms of personal
characteristics .............................................................................................................. 135
2.2.1.1
Distribution of sample members by: Gender .......................................... 135
2..2.1.2
Distribution of sample members by: Age ............................................... 136
2..2.1.3
Distribution of sample members by: Educational Degrees ..................... 138
2..2.1.4
Distribution of sample members by: Years of Experiences .................... 139
2.2.1.5
Distribution of sample members by: profession ..................................... 139
2..2.1.6
Distribution of sample members by: internal audit/control/inspection
mission……………… ............................................................................................. 141
2.2.1.7
Distribution of sample members by their social professional
position……............................................................................................................. 143
2.3
The Analysis and Interpretation of Study’s Axis. ..................................... 144
2.3.1 Axis 01: The impact of the internal Audit in the enterprise risk management
system to improve corporate governance .................................................................... 147
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2.3.2
Axis 02: The role of internal audit in enhancing corporate governance by
reducing the problem of information asymmetry ........................................................ 154
2.3.3
Axis 03: Importance of internal audit function in protecting and enhancing the
audit stakeholders ........................................................................................................ 158
2.4 Hypothesis test: ........................................................................................................ 162
2.4.1
The Z test for normality ............................................................................ 162
2.4.2
Kolmogorov-Smirnov for normality test .................................................. 165
2.4.3
Shapiro-Walik test.................................................................................. 166
2.4.4 The One-Sample T-Test .......................................................................... 167
2.4.4.1
The first hypothesis ................................................................................. 167
2.4.4.2
The second hypothesis ............................................................................ 169
2.4.4.3
The third hypothesis: ............................................................................... 170
Chapter three conclusion…………………………………………………….………...172
General conclusion ………...…………………………………………..……………...173
References.………………………………………………………………….178
Appendices …………………………………...………………………..……................187