The Internal Audit’s role in the Core Stakeholder Corporate                                Governance                     ...
better fulfills the fiduciary duty; Staff also hopes to know the information to ensure their legitimaterights and interest...
2.3 About employee      Nowadays more and more value of the enterprise are created by employee, employee’s benefits andthe...
And when the objectivity is severely injured, stop performance relevant business and report to                            ...
References[1]     Zhang Aiguo, Liao liuqing. Stakeholders and corporate governance. Commercial Research,      3(2005), p37...
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The internal audit¡¯s role in the core stakeholder corporate governance

  1. 1. The Internal Audit’s role in the Core Stakeholder Corporate Governance Chen Hongming, Guo Chunwei Management School, Changsha University of Sciences and Technology, P.R.China 410076Abstract: More attention has been paid to the internal audit’s role in corporate governance. This paperdiscusses the core stakeholders (shareholder, manager, and staff) have been allowed to participate incorporate governance more effectively with the help of the internal audit, achieve the business goal.Then point out the improvement approach to the problem of how the internal audit activity can play amore important role in corporate governance.Key words: Corporate governance, Core stakeholder, Internal audit1 Introduction The so-called corporate governance, is a series of systems that use to process the responsibility, thepower and the interests among different stakeholders, it not only include the relations between the firmand the stockholder, but also included the relations between the firm and the other stakeholder(like staff,customer, supplier, community and so on) . ① Many studies have shown that the importance of the large number of stakeholders to enterprises isdifferent, scholars CHEN Hong-hui in 2004 first put forth the concept of core stakeholder. He namedthose which have significant importance for the survival and development of an enterprise, and thosewhich have close interest with the enterprise, as core stakeholder, include shareholders, managers, andemployee. The core stakeholders invested the material capital and the human capital in the enterprise, anddirectly participate in companys daily management. Without them, the company will be unable tosurvive and development, and will be more impossible to achieve companys goal, therefore this paperalso thought the main body of corporate governance is the core stakeholder.Along with the continuous development of internal audit, the role of internal audit in corporategovernance has been well recognized. In April, 2002,the IIA’ s opinion stated about the SOX bill to theUnited States Congress opinion out : internal audit, external audit, the board of directors and the seniormanagement personnel are called four big cornerstones of corporate governance . ② In January, 2002, the China securities regulatory commission issued <The Rule of CorporateGovernance for Listed Companies> also especially mentioned the importance of the internal auditactivity in corporate governance. In May, 2006, China internal audit association issued internal audit concrete standard No.23 – therelationship between internal audit institution and the board of Directors – also depicts that the internalaudit institution should help the board of directors or senior officers take management responsibly, andcarry out the cooperating function of the board of directors, senior officers and internal audit in theorganization manage. So the establishment of effective corporate governance, raising the efficiency of corporategovernance, need to build up and perfect the internal audit system of the company, promote the positiveinteraction of internal audit and corporate governance.2 The core stakeholders may more effectively participate in corporate governancethrough internal audit In modern companies forms different quarters of the contract have different motive to getinformation. The shareholders care about the company’s achievements information, carry on thecompensation and supervision of management; The managers expect to grasps the present situation ofenterprise through the information,, guarantees the enterprise decision-making in scientific style, and 488
  2. 2. better fulfills the fiduciary duty; Staff also hopes to know the information to ensure their legitimaterights and interests. Since the external audit verification costs in the enterprise information for theday-to-day ongoing operations are high, in a modern enterprise, only internal audit in a company can bea independent third party status and with professional background to provide assurance and consultingservices, to guarantee the core stakeholders acquire the information they need and to ensure thereliability of information.2.1 About shareholders The purpose of shareholder investments is to maximize investment returns, the nature of thenon-refundable investment of shareholders make the return to the shareholders mainly rely on theincome generated from the effective corporate governance. So out of the motivation to avoid risks and toensure the investment returns, the shareholder has most motive to participate in the company tomanagement ,and carry on supervision to the operation of the company property. However, as the separation of ownership and management in the modern enterprise, information isdissymmetrical between shareholders and the companys managers; the managers may make the choicedeviate from the goal of shareholders in the day-to-day operations, which in turn may damage theinterests of shareholders. By making full use of internal audit reports and concluded information that shareholders receiverelated to their business needs, to solve the problems of "adverse selection" and "moral hazard".Through internal audit can fully understand the daily information of production to ensure that the goal ofthe company accurately and so on. Therefore the shareholder may draw support from the internal audit,then to make effective choices, compensation and supervision the managers.2.2 About managers As the competition that the enterprises face getting more and more intense, and the ever-changingexternal environment, managers need to take more responsibility. Without the help of internal audit,managers can’t effectively take the responsibility and ensure proper management of the company. Forinstance the SOX bill, requests the listed company’s CEO, CFO must under take the legalresponsibility for the validity of the finance statement, however, if CEO, CFO want to guarantee thevalidity of the financial statement, they must establish the effective internal control mechanism andinternal audit system. Simultaneously the managers want to prove the company operational result to theboard, also need to have the certification which provide by the internal audit in independent status. The internal audit has a set of systematic, standard methods to appraisement and enhance theenterprise risk management, the risk control and the efficiency of the government process, helps the 。③enterprise achievement its business goal Risk is an unavoidable to achieve business goals, managers aspart of the founders and executants of risk management process, they need the internal audit’s advisoryservices to evaluate the effectiveness of risk management procedures and made recommendations tohelp managers effectively prevent and reduce risks. First, the modern risk guidance internal audit takethe effective risk management as the priority target, actives carry on auditing before and during theevent process, helps the senior officers evaluate the enterprise risk, Pointed out the enterprise in therisk management loophole and the insufficiency, and provides the improvement opinions, distinguishesthe risk and confirm the key risk domain, then effective guard risk. Secondly, a reasonable internalcontrol can provide better protection for the efficiency and effectiveness of the business activities, assetssecurity, economic information and the reliability of financial reporting. As part of internal controls, theinternal audit provides protection through the strict supervision of auditing for effectiveness of internalcontrols. No doubt that after the internal audit’s help in ensure better management the internal controlsystem can ensure the legality of their internal management and efficiency. The Internal audit by valuation the risk, help management layer find out the potential risk andopportunity of the enterprise, helping governor to implement the trusteeship responsibility effectively,then reducing the agency cost of each proprietor of enterprise and management layer, improving theresults of management.Also, internal audit provide a certificate for managers completed theirmanagement responsibility; provide a basis for the enterprise incent managers. Thus, management is notonly the internal audit “supervisor”, but also “collaborators”. 489
  3. 3. 2.3 About employee Nowadays more and more value of the enterprise are created by employee, employee’s benefits andthe enterprise’s benefits relation became more close than before, and employee play a more and moreimportant role in enterprises. Now, more and more enterprises are encouraged staff, the board of directors, board of supervisorsand managers communicate directly, encourage the staff to express their views about financial situationand the interests of themselves. Company Law of the People’s Republic of China prescribes: “Acompany shall seek advices from its trade union when discussing and deciding upon important issues onthe restructuring or operation of the company, or formulating important rules and regulations and shall,through the congress of the workers and staff members or other forms, seek advice and suggestions fromits staff and workers.” Company Law of the Peoples Republic of China also prescribes: State-owned investment entitiesshall include representatives of the staff and workers of the company; the number of the staff andworkers’ representatives shall not be lower than one third of all the supervisors. Obviously thesemeasures effectively guarantee the rights of employees to participate corporate governance. If employees want to express their views on matters related to their own interests or the majoroperating issues but with an obstructed channel, then it will undoubtedly be difficult for the staff to carryout effective supervision of managers. As part of the companys independent third party, internal auditevaluates the effectiveness of enterprise communication channels, and makes objectiverecommendations for improvement, guarantees the voice of employees in corporate governance. The internal audit institution can make a independent evaluation about public, fair, equity ofdirectors, supervisor’s election, the internal audit can stand at an objectively angle and put forward animproved suggestion of the election method, guarantee employee execute their right to vote moreeffectively.3 How internal audit can play a greater role in corporate governance3.1 Internal audit services for the achievement of the corporate governance objectives The goal of corporate governance decides enterprise strategic direction, and then decides theconcrete company management goal and management measures. The internal audit as one of four bigcornerstones of the effective company governances, must penetrate the understanding of the goal corebenefit correlation carries on the company governances, assists the core benefit correlationestablishment effective governance structure and the government mechanism. Take new principle as a guide; reform the tradition audit mode, innovation audits method, setting upthe modern internal audit concept. Helping the core benefits acquire dependable information, makingeverybody participate in company management effectively, carrying out company manage objectives.3.2 More efforts must be made to maintain internal audit’s objectivity Because the internal audits a section of inner part organization, generally speaking, the higher thelayer of the internal audits report in the organization, the stronger its independence, but even is internalaudit report directly toward the audit committee organized by the independent director, its independenceis still relative. Although the objectivity of the internal audits is subjected to independent of organization, it is moredecided by the occupation morals character of the internal audits, the profession competence ability withwhether can avoid the internal audit benefits conflict. Compared with independence, the objectivity maymore possible to be attained by the effort of internal audit institution. Therefore, while the internal audits carry out" guarantee" business of independent evaluation, theyshould evaluate in the independent position as far as possible and point out the disadvantage in corporategovernance, the financial management, the inner controls of the enterprise. At provide the suggestion and the consultation service for management layer, because themselvesbecame an member to assess the result of the action they participant, having bigger influence to theindependence of themselves, this wills make the internal audit adopt measures to assurance objectivity,evaluate the factor that may influence objectivity, and consider whether the measure adopt to lower theinfluence to objectivity is valid or not. 490
  4. 4. And when the objectivity is severely injured, stop performance relevant business and report to ④board of directors or senior officers in time .3.3 Follow up study for the problem discovered in auditing After put forward improving an opinion for the company managing environment, manage procedureand manage process and carry on an evaluation, internal audit institution should follow up the scent forthe problem discovered in auditing. The internal audits organization can build up a simple databaserecord problem discovered and to follow. Draw up the innovate plan, completion time and therepresentative director etc. for innovate rule after the communication with the board of directors andhigh governor. The internal audit section still should periodically gather the innovation discover by follow up audit,to evaluate again for the audit problem carry on in the innovation. Pay attention to those have noinnovation without proper reason, and report to audit the committee in time.3.4 The internal audit should operate under the employees support First, the employee are one of core stakeholders of the enterprise, is the main participant whocarries on daily business activities for the company, is the main executor of the enterprise internalcontrol system, and usually is the earliest finder of the internal control system loophole .The internalaudit institution should, under the support of all employee, detect and investigate fraud availably, perfectcompany internal control system, restrict senior officers effectively through employee participate in thecompany manage. Secondly, the employee is the performance of good corporate culture. The good corporate culturecan produce valid morals standard, control self benefit behavior in every aspect of corporate governance,lower the business enterprise risk effectively, and make good foundation for the setting up of areasonable perfect corporate governance procedure.3.5 Build up a reasonable mechanism for the internal audits institution and construct an audittroop of keeping competition ability Changes of the internal audit’s function require a higher quality of the auditors. For example, in2003 IIA Global Auditing Information Network survey results show that the internal auditor must ① ②possess the following qualities: versatile, Involvement, ③ ④ Technology, Advisor, ⑤ Leader. Onone hand, internal audit institution should employ competent auditors and regular training andre-education auditors; on the other hand, internal audit institution should set up performance evaluationand incentive mechanisms incent or punish the auditors. Finally, the internal audit mechanism should be brought in wash out system unqualified auditorshould be washed out, construction the audit team that can remain competitive in the long run.4 Conclusion Core stakeholders provide material capital and human capital for the enterprise, and directlyinvolved in the day-to-day operation of the companies, putting their own interests and the enterpriseinterests closer together, without their participation and supervision, it is difficult for enterprises tosurvive and develop, the goal will be more difficult to achieve.Comparing with other stakeholders, theyare more motivated and the ability to participate in corporate governance. On one hand, through theevaluation of the companys environmental management, process management and control procedures , ⑤internal audit provide all the information need by the core stakeholders, in all relevant stakeholders tocreate an effective equilibrium mechanism and provide assistance for their effective corporategovernance; On the other hand, the effective corporate governance can be effective coordination of therelationship among the parties, and take the interests of all parties into consideration and construct areasonable framework for corporate governance, promote internal audit system construction, as well assafeguard independence, objectivity and authority of the internal audit. Therefore, an effective internalcontrol system and effective corporate governance can create a virtuous interaction, and jointly promotethe realization of the objectives of the enterprise. 491
  5. 5. References[1] Zhang Aiguo, Liao liuqing. Stakeholders and corporate governance. Commercial Research, 3(2005), p37~39[2] ZHANG Qiaoliang, CHEN Jun. A comparison and summary of internal auditing. Journal of Anhui University (Philosophy and Social Sciences), 6(2006), p130~134[3] The Institute of Auditing Research Foundation. Research Opportunities in Internal Auditing, 2003[4] Internal audit standard No. 22-Internal audit’s independence and objectivity. China Institute of Internal Audit, 5(2006)[5] & Xu Wenguan, The practice policy of strengthen internal audit’s role. Events Trends .2005,7 492