The effects of internal audit outsourcing effectiveness on firm sustainability: an empirical research of ISO 9001 business in Thailand.

• Author: Sudsomboon, Seerungrat

1. INTRODUCTION

   Traditionally, internal audit function has been designed to help ensure reliable in accounting information and protect company assets from fraud. The Institute of Internal Auditors: IIA define internal auditing is a dependent appraisal function established within and organization to examine and evaluate its activities as a service to the organization. The objective of internal auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, internal auditing furnishes them with analyses, appraisals, recommendations counsel, and information concerning the activities reviewed (IIA, 1978). But after corporate crisis such as Enron, WorldCom, decrease the creditability and reliability of the firms. These situations shown many factors as cause of crisis such as corporate governance awareness of manager, quality and efficiency of auditing both of external and internal audit. The USA introduced the Sarbanes-Oxley Act in 2002 and had influenced changes to the New York Stock Exchange Listing Rules. Later, some of the initiatives in the USA were stimulated for by the respective regulators and motivation of initiatives in the Asian region by the World Bank and the Organization for Economic Corporate and Development (OECD). The OECD Principles identified many elements especially corporate governance of the firms. The effective corporate governance helps ensure the manager work appropriate order to protect shareholders right and welfare (Gramling et al., 2004). Internal audit function is a one of main point to play important role in effective corporate governance of business. Thus, definition of internal auditing has change to consist of business environment. Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes (IIA 2003). Internal auditing practices is playing base on the code of ethic and professionalism. The Code of Ethics states the principles and expectations governing behavior of individuals and organizations in the conduct of internal auditing.

   Internal audit function has necessary for business firm especially public company and requirement firm such as firm received certificate of ISO 9001. In fact, the Stock Exchange of Thailand and ISO 9001 business standards require all companies to maintain an internal audit function. The requirement adds accountability to internal audit of the firm. For a firm, they have choice to staff internal audit department in-hour or to outsource form external. In fact, many companies outsource the activity to Big 4 audit firms other than their external auditor in hope of reducing cost while still receiving comparable or superior service (Deloitte & Touche, 2005; PWC, 2005). Even the Institute of Internal Auditors (IIA) recognizes that companies may outsourced the internal audit function when it state: "The IIA believes that a fully resourced and professionally competent staff that is an integral part of the organization, whether insourced or outsourced, best performs the internal audit activity" (IIA, 2005; Arel, 2010). However, for many years, companies have outsourced commodity-type services including food, security, and janitorial services. More recently, they have begun to outsource professional services such as payroll, tax, legal, data processing, and internal audit. Internal audit outsourcing has become popular because it offers many potential benefits to all parties involved (Aldhizer and Cashell, 2009). For companies, outsourcing the internal audit function offers potential cost benefits. Internal audit outsourcing may reduce overlapping positions and audit effort by creating more flexibility in increasing and decreasing workloads. Additionally, outsourcing allows a company to replace "fixed" cost employees with "variable" fees for services.

   Prior research, contents of internal audit outsourcing focus on affect the reliance decision as auditor or stakeholder by compares between performances of in-house and outsource internal audit staffs. (Glover et al., 2008; Caplan and Exby, 2005; Grabnkubg and vabdervekdem 2006). Other works have indicated the cause is motivated using internal audit outsourcing that by internal or external influence (Bhattacharya et al., 2003). The purpose of this study is to ensure the important role of internal audit outsourcing for business firms. Thus, the objective of this research to investigates the relationship among effectiveness of internal audit outsourcing, improvement competitiveness and firm sustainability. Moreover, the research attempts to explain the effect of antecedences of internal audit outsourcing of the firm include corporate governance awareness and organization support.

   The remainder of this study is organized as follows. First, literature reviews of corporate governance awareness, organization support, internal audit outsourcing effectiveness, improvement competitiveness, and firm sustainability are addressed, and research hypotheses developments are also presented. Second, the research methods used to test the hypotheses are discussed. Third, the results derived from 126 ISO 9001 business in Thailand are indicated and their reasonable discussions with existing literature supports are showed. Finally, the study concludes by discussing implications for theory and practice, identifying limitations of the study, and providing suggestion and directions for future research.

2. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

   Agency theory provides that firms consist of nexus of contracts between the principles which are owners of economic resource and agents which are manager who charged with using and controlling the resources (Jensen and Mecking, 1976). This theory explains the phenomena of moral hazard and adverse selection. Moral hazard is manager act to operating process with have self-seeking motives they are likely to take the opportunity to transfer wealth from firms to themselves. Adverse selection is principles or owners problem. The problem is principle do not have access to all available information at the time that manager make a decision. Thus, principles cannot determine whether manager's actions are in the best interests of the firm. Then, the problems lead to conflict of interest between agent and principle. Therefore, they seek the tool to decreases this problem. Internal audit function is one of tools they used. Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's...