Protecting Existing and Prospective Investors and the Role of Internal

Auditors

Md Shoaib Ahmed
Independent University, Bangladesh (IUB)

Shubhankar Shil
University of Liberal Arts Bangladesh (ULAB)

ABSTRACT

In this study we tried to explore the idea of the independence of internal audit
committee, independence of finance and accounting departments and the corporate
charter followed by the board of directors of an organization and how they protect
existing and prospective investors. A multiple regression analysis and analysis of
covariance (ANCOVA) 2X2 have been used to analyze the data. A strong and
positive relation has been found in this study with a highly correlated independent
variable. It has been also found that 62% of the investors believed that internal
auditors and finance and accounting executives are not independent at their work
place. Surprisingly 89% felt that if internal audit committee and executives of
finance and accounting departments work independently and effectively, then
investors will be highly protected.
Keywords: Internal Auditors, Audit Committee, Investors’ Protection and
Corporate Governance
JEL Classification: M41, M42 and G34

INTRODUCTION

According to the definition of internal audit provided by the Institute of Internal

Audit (IIA) in 2011 that “an independent, objective assurance and consulting
activity is 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”. The internal audit function should be given the
appropriate status in the organization to enable the function to exercise
Protecting Existing and Prospective Investors and the Role of Internal Auditors 27

organizational independence and individual internal auditors to act objectively.

This is necessary because internal auditors are in a unique position as employees of
an organization with responsibility to assess and monitor decisions made by the
management and also to advise the management on the adequacy and effectiveness
of internal controls (Sarens & Beelde, 2006). Mercer (2004) notes that internal
auditors ‘serve as the first line of defense against disclosure errors, ferreting out
unintentional errors caused by weaknesses in a company’s internal controls and
intentional errors due to fraud.’ The internal auditing profession in general, and
internal audit activities more specifically, have changed significantly over the past
decade, mainly driven by evolutions in corporate governance (Ramamoorti, 2003).
Individual investors will use an internal audit reporting (IAR) when evaluating
a company and that such a report will increase perceived oversight effectiveness
and confidence in financial reporting reliability (Wilson & Walsh, 1996).
Protecting investors rights include those to receive dividends on pro-rata terms, to
vote for directors, to participate in shareholders' meetings, to subscribe to new
issues of securities on the same terms as the insiders, to sue directors or the majority
for suspected expropriation, to call extraordinary shareholders' meetings, etc.
Investors are entitled to know information about the company they own. And it is
only with that information that they can effectively engage with these companies.
If they don’t have this information, they really are in the dark. The Institute of
Chartered Accountant in England and Wales (ICA) strongly suggested the public
interest in audit in the Audit Forum in 2005. Whilst internal auditors carrying out a
statutory audit of financial statements are accountable and report to the investors of
a company only, there may be other prospective stakeholders who believe that an
independent internal audit provides some means of ensuring that the company’s
responsibilities to them are being met; in effect that it serves their interests too.
The audit committee is considered to be an important self-regulatory
governance mechanism with significant oversight responsibilities over financial
reporting, internal control and audit activities (Blue Ribbon Committee (BRC),
1999; United States Congress, 2002). There is also an expectation among these
other stakeholders that auditors should be independent of shareholders.
Furthermore, according to corporate governance guidelines the audit committee
has oversight responsibility for areas associated with preparing reliable financial
statements and this includes the internal audit function. Therefore, the need for
increased transparency about company governance, management, the audit
Independent Business Review, Volume 6, Number 2, July 2013 28

committee, the external auditor, and the internal audit department are cornerstones
of governance that are essential to managing organizational risks (Bailey et al.,
2003; Gramling et al., 2004).
The New York Stock Exchange now requires all listed companies to maintain
an internal audit function (SEC, 2003). While the NASDAQ has stopped short of
requiring member companies to maintain an internal audit function, it does
recognize the establishment of this governance mechanism as a best practice
(Harrington, 2004). Furthermore, the Public Company Accounting Oversight
Board (2004) stated that for large or complex companies, the absence of an
effective internal audit function should be regarded as a significant deficiency in
internal controls over financial reporting and possibly a material weakness. One of
the reports of PWC in 2012 outlined that business trends expected to have the most
impact on internal audit roles, responsibilities, and functions between 2007 and
2012 are technology, new regulations, risk management, corporate governance,
and ethics and compliance.
The main objective of this study is to determine whether and how the internal
auditor, finance and accounting department and board of directors can protect the
investment of individual investors who are planning to invest in a particular
company. We also tried to determine the role of internal auditors in corporate
governance and how corporate governance facilitate the internal auditors to prepare
the error free financial report so that prospective investors get the real scenario of
the company before making the investment decisions. The study was motivated
after reading the “Ibrahim Khaled Share Market Probe Committee” report on the
share market scam in Dhaka Stock Exchange (DSE) in 2010.
The capital market of Bangladesh is passing through a period of extreme
volatility, uncertainty and grave crisis. Following the bursting of the bubble in
December 2010, the market has lost values in terms of all major indicators. For
example, as of 31 December 2011, DSE General Index (DGEN) dropped by 41 per
cent; market capitalization went down by 29 per cent; and total trade value of the
DSE suffered erosion to the tune of 83 per cent from the peak on 12 December
2010, when DGEN attained 8918 points. The P/E ratio which rose to as high as 29.7
in November 2010 had come down to 13.68. A committee was formed by the
Government of Bangladesh and it was headed by Dr. Ibrahim Khaled. In his report
he mentioned five main reasons that triggered the collapse of DSE and one of the
reasons was manipulation of financial statements by internal auditors. The scam
Protecting Existing and Prospective Investors and the Role of Internal Auditors 29

victimized almost 3 million small shareholders who lost their investment and still
they are struggling to recover their principal amount. Moazzem and Rahman (2012)
brilliantly summarized the “Probe Report” in their paper. They investigated the
reliability and authenticity of audit reports of the listed companies in DSE. The
submitted audit reports did not reflect the actual financial situation of the company,
and appeared to be prepared with an intention to manipulate the market behavior
(e.g. issuance of a large number of right shares by several companies in 2010).
They figured out that only 19 per cent of the total listed companies were audited by
firms that had official affiliation with international audit firms and about 60 per
cent of listed companies were audited by firms which were enlisted with the NGO
Affairs Bureau or Bangladesh Bank. Surprisingly, more than one-fifth of the listed
companies were audited by firms which had no affiliation other than the Institute of
Chartered Accountants of Bangladesh (ICAB).

BACKGROUND STUDIES

Objectives, Independence and Effectiveness of the Internal Auditor

Over the past decade or so, companies have tended to operate with increasingly
sophisticated technology, growth in e-commerce transactions, more variations in
management control systems, more human resource turnover, and ongoing changes
to corporate and professional rules and regulations. Such underlying change and
complexity in the organization’s operating environment can make it increasingly
difficult for internal auditors to conduct their audit tasks or apply professional
standards with sufficient clarity. Faced with ambiguity, internal auditors would
have less certainty about whether the information gathered in the course of their
examinations is sufficiently objective and relevant (Ahmad & Taylor, 2009).
Institute of Internal Audit (IIA) defines the term Objectivity as “an unbiased
mental attitude that allows internal auditors to perform engagements in such a
manner that they have an honest belief in their work product and that no significant
quality compromises are made. Objectivity requires internal auditors not to
subordinate their judgment on audit matters to that of others.” Independence has
been defined as having ‘no relationship to the corporation that may interfere with
the exercise of their independence from management and the corporation’ (BRC,
1999). Independence is not an aspect of internal auditing that can be mechanically
exercised. Since professional pronouncements on auditor independence, such as
Independent Business Review, Volume 6, Number 2, July 2013 30

ISPPIA (2006), tend to be principles-based more than rules-based, the exercise of

independence will be cognitive in nature. It will rely on the internal auditor’s
personal attitude and commitment towards the exercise of independence in carrying
out tasks and making judgments at work. IIA has also published a framework to
guide internal auditors with respect to independence and objectivity. In this
framework, independence is recognized as a state where threats to objectivity are
appropriately managed. Independence, based on the criterion of objectivity, is
pivotal to the internal auditing profession and internal auditors (Mutchler, 2003).
Hence, internal auditors are required to identify, access and manage threats to
their objectivity, including the need to consider safeguards that can mitigate the
effects of the threats. Several empirical studies that have explored the association
between audit committee independence and financial reporting outcomes indicate
that firms with more independent members display better financial reporting
quality. For example, Beasley et al. (2000) found that companies committing
financial statement fraud have less independent committees than the industry
benchmarks. Likewise, Abbott et al. (2003), based on 78 matched pairs of fraud and
no fraud companies, found that no-fraud companies tend to have more independent
audit committees than fraud companies. Independent directors are not
economically dependent on the company, and thus are arguably less biased over an
entity’s financial outcomes (Beasley et al., 2000).
Internal audit function should be given the appropriate status in the
organization to enable the function to exercise organizational independence and
individual internal auditors to act objectively. This is necessary because internal
auditors are in a unique position as employees of an organization with
responsibility to assess and monitor decisions made by management and also to
advise management on the adequacy and effectiveness of internal controls (Sarens
& Beelde, 2006).
Goodwin and Yeo (2001) surveyed chief internal auditors in Singapore and
found that audit committee’s comprised solely of independent directors had more
frequent meetings and more private meetings with the chief internal auditor.
Goodwin (2003) obtained similar results in a survey of chief internal auditors from
Australia and New Zealand. In contrast, however, (O’Leary & Stewart 2007), in a
study of Australian internal auditors’ ethical decision making, found that the
existence of an effective audit committee had little impact on internal auditors’
perceptions of their willingness to act objectively.
Protecting Existing and Prospective Investors and the Role of Internal Auditors 31

Internal auditors should not be placed in a position where their independence

can be questioned and feel unable to make objective professional judgments
(Vanasco, 1994). Ideally, internal auditors must be free to report matters they audit
as they are and their reporting activities are not subject to any influences (Sawyer
& Dittenhofer, 1996). The ISPPIA (ISPPIA; IIA, 2006) has identified internal
auditor’s independence as the most important criterion for effectiveness of the
internal audit function. In general, shareholder and stakeholders perceive internal
auditors as being entrusted in making independent assessments, judgments and
decisions (Mutchler, 2003).
Effectiveness is the achievement of goals and objectives using the factors
measures provided for determining such achievements. However, it has been
traditional in internal auditing that the determination of internal auditing
effectiveness can be accomplished by evaluating the quality of internal auditing
procedures (Dittenhofer, 1997). The Sarbanes-Oxley Act of 2002 and board
responsibility for the effectiveness of internal control further raise this issue
(D’Silva & Ridley, 2007). For internal auditing to be effective, it requires a high
standard in work performance (Smith, 2003). The effectiveness of internal auditing
relies on an adequately staffed internal audit department (Mitchell & Sikka, 2005).

H1: Existing and prospective investors will have more confidence and feel
secure if internal auditors of the companies understand their objectives and work
independently than internal auditors of the companies’ who don’t.

Internal Auditors Relation with External Auditors

The frequent use of internal audit report by client firms leads to the possibility
that external auditors will increasingly rely on internal audit in conducting their
audits (Ward & Robertson, 1980). External auditors are responsible for verifying
that the financial statements are fairly stated in conformity with GAAP and that
these statements reflect the ‘true’ economic condition and operating results of the
entity. Thus, the external auditor’s verification adds credibility to the company’s
financial statements. Also, the external auditors are required by auditing standards
to discuss and communicate with the audit committee about the quality, not just the
acceptability, of accounting principles applied by the client company. Therefore, a
quality audit is expected to constrain opportunistic earnings management as well as
to reduce information risk that the financial reports contain such as; material
Independent Business Review, Volume 6, Number 2, July 2013 32

misstatements or omissions. The internal audit function is part of an organization’s

internal control system and thus the external auditors will seek an understanding of
the function as part of their overall audit planning process (ISA 610; SAS 65; AUS
604, Zain et al. 2006).
While the roles of internal and external audit are distinct, there are many
opportunities for coordination and cooperation between these two functions that
may yield synergistic outcomes, such as higher quality audits and economic
benefits. In fact, professional auditing standards acknowledge the potential
contribution that an IA function can provide to the external audit (SAS No. 65,
AICPA, 1991; ISA No. 610, MIA, 2000; PCAOB, 2007). This contribution can be
made by internal auditors either working as assistants under the direct supervision
of external auditors or independently performing various audits and reviewing
work throughout the audit year on which the external auditors may rely (SAS 65,
AICPA, 1991; Maletta, 1993).
However, a key factor in the consideration of the use of internal audit in the
external audit process is the quality of internal audit. Both professional auditing
standards and prior studies (SAS No. 65, AICPA, 1991; ISA No. 610, MIA, 2000;
Felix et al. 2001; IIA 2009; Prawitt, Smith & Wood, 2009) suggest internal audit
quality encompasses specific attributes of the organization and parties performing
internal audit activities (e.g., competency of internal audit staff) and external
auditors are to first consider the quality of internal audit function in terms of
objectivity, competence and work performed by the internal audit function before
relying on the work of the internal auditor. Previous research suggests that a
positive relation exists between external auditors’ reliance on internal audit work
and the strength of the internal audit function (Khalik et al., 1983; Brody et al.,
1998; Maletta, 1993; Schneider, 1985). The findings of (Krishnamoorthy, 2002)
indicate that the greater the objectivity, technical competence and quality of work
performance (i.e. the exercise of due professional care), the larger the potential for
internal auditors to contribute to the external audit. The contribution that internal
auditors make towards assisting external auditors in the financial statement audit
process has gained renewed attention (Elliot & Korpi, 1978; Felix et al., 2001;
Wallace, 1984).
The current governance environment has led to an increased emphasis on the
relationship between internal and external auditors (Gramling et al., 2004). The
economic benefits of external auditors’ reliance on internal audit work are well
Protecting Existing and Prospective Investors and the Role of Internal Auditors 33

recognized (Glover et al., 2008). They also predict that external auditors rely more
on work performed by outsourced internal auditors than by in-house internal
auditors because the latter are closely aligned with management. However, James
(2003) argued that in-house internal auditors are likely to be more accessible than
those from an outside provider as outsourced audit teams have limited contact with
the company.
H2: Existing and prospective investors will have more confidence and feel
secured if the companies’ internal and external auditors are truly cooperative while
auditing the financial statement than the companies’ internal and external auditors
are not.
Internal Audit as a Part of Corporate Governance
A good corporate governance structure helps ensure that the management
properly utilizes the enterprise’s resources in the best interest of absentee owners,
and fairly reports the financial condition and operating performance of the
enterprise. [Audit Quality, Corporate Governance, and Earnings Management: A
Meta-Analysis]. According to corporate governance guidelines such as the
Auditing and Assurance Standard Board of the Australian Accounting Research
Foundation (2002) and the MCCG (Finance Committee on Corporate Governance,
2000), the audit committee has oversight responsibility for areas associated with
preparing reliable financial statements and this includes the internal audit function.
As Holt (2009) said, from a research perspective of the corporate governance and
governance transparency literatures provided evidence that information about the
internal audit function affects investor confidence and decision-making. From
policy and practice perspectives, the study’s findings complement calls in the
contemporaneous accounting and governance literature for companies and
regulators to consider the potential for an internal audit report (IAR) to external
stakeholders to improve governance transparency.
Internal auditors play an important role in their organization's corporate
governance, internal control structure, risk management analysis, and financial
reporting process. Internal audit resources also have been expanded to satisfy the
high demand for services to assist in executive certifications of internal controls
and financial reports (Rezaee, 2010). Prior research provides consistent evidence of
a positive relation between corporate governance and financial reporting quality
(e.g., Dechow et al., 1996; Beasley et al., 1999, 2000; Klein, 2002; Agrawal &
Independent Business Review, Volume 6, Number 2, July 2013 34

Chadha, 2005; Krishnan, 2005; Srinivasan, 2005; Wang, 2006). Recent studies in
internal auditing have evaluated extensively the role of internal auditing in
corporate governance. Cooper et al. (2006); Hass et al. (2006); and Allegrini et al.
(2006) reviewed details of recent studies on internal auditing in the United States,
Europe, Australia and Asia.
It has become clear that, mainly driven by the increased attention for ‘good
governance’ and the resulting regulations and guidelines (for example, the
Sarbanes Oxley Act in the US, but also various corporate governance codes in
Europe), internal auditing has established its position within the corporate
governance field (Paape et al., 2003; Gramling et al., 2004; Leung et al., 2004).
More specifically, the internal auditor role in monitoring and improving risk
management and internal control processes has turned out to be an important
contribution to corporate governance (Sarens & Beelde, 2006).
H3: Existing and prospective investors will have confidence if the companies’
internal auditors play significant role in corporate governance than the companies’
internal auditors haven’t.
Investors Protection and Internal Auditors
To review the previous study we found very little research works have been
conducted on this area. This is the reason which drives us to explore the area.
Mercer (2004) suggests that internal audit information may be helpful to investors
in determining the veracity of information provided by a company. Elliott &
Jacobson (1994) noted that informative disclosures help reduce information risk
and are useful to investor decision-making by supplying the investor with a better
understanding of the company’s overall economic risk. Kinney (2000) notes that
this increase in reliability is attributable to increased confidence in the competence
and care applied to measurement methods and increased confidence in the
trustworthiness of the reported results produced by the auditors’ efforts.
A study was conducted by Holt (2009) that provided initial evidence that
increased internal audit transparency provides incremental usefulness to investors
beyond current mandated governance disclosures. The findings suggest that adding
an IAR to existing governance-related reports (e.g., Audit Committee Report,
External Audit Report, Management Discussion and Analysis) increases investors’
perceived oversight effectiveness and confidence in financial reporting reliability.
Protecting Existing and Prospective Investors and the Role of Internal Auditors 35

La Porta et al. (1997) show that countries that protect shareholders have more
valuable stock markets, larger numbers of listed securities per capita, and a higher
rate of IPO (initial public offering) activity than do the un-protective countries.
Countries that protect creditors better have larger credit markets. Johnson et al.
(2000) draw an ingenious connection between investor protection and financial
crises. In countries with poor protection, the insiders might treat outside investors
well as long as future prospects are bright and they are interested in continued
external financing. When future prospects deteriorate, however, the insiders step up
expropriation, and the outside investors, whether shareholders or creditors, are
unable to do anything about it. As (Levine et al. 2000; La Porta et al. 1998) said all
outside investors, be they large or small, creditors or shareholders, need rights to
get their money back.

H4: Protection of existing and prospective investors will mediate if the

companies’ board of directors let finance and accounts department, internal
auditors and external auditors do their job independently to prepare the financial
statement than the companies’ board of directors don’t.

METHODOLOGY

Data & Instrument

We developed four different survey questionnaires for internal auditors (staffs
and head), finance and accounting department executives (head and staffs), investors
(only individual) and Board of Directors. The questionnaire for internal auditors was
designed to evaluate their skills, knowledge, and independence and understand of the
objectivity of the audit functions. A major role is played by the finance and
accounting department in preparing the financial statements. Therefore, we thought
it would be an important criterion to evaluate the objectivity and interdependence of
finance and accounts departments. Investors are the key members of the whole
system. So we strongly believed that it is important to know what they think about
the work procedure, objectivity and independence of internal auditors and finance
and accounts departments of the local companies. And what duties the board of
directors should perform so that all investors will feel protected. Finally, we
approached to Board of Directors about their insightfulness regarding the practice of
Independent Business Review, Volume 6, Number 2, July 2013 36

corporate governance (e.g. independence of internal audit, preparation of error free

financial statements and the protection of individual investors). In the stock market
probe report, Dr. Ibrahim Khalid mentioned the name of 25 companies, which
manipulated the financial statements that was one of important causes of crash of the
market (e.g. DSE) in 2010. We selected 100 companies to survey that are operating
in stock market including those 25 companies. We personally went to these
companies, distributed the questionnaires and tried to interview the Board of
Directors. Regarding the investor survey, we distributed the survey questionnaire to
the different brokerage houses in four major cities in Bangladesh. The target number
of investors was 500 but we ended up with 400 complete questionnaires.
In the questionnaire, internal audit, the finance and accounts department and the
Board of Directors were asked to complete the structured survey questions using a
five point Likert scale (Strongly Agree =1, Agree=2, Neutral=3, Disagree=4, and
Strongly Disagree=5). However, investors were asked to complete the structured
survey questions using a five point Likert scale (Excellent = 4 and N/A = 0). For the
convenience of the respondents, we provided them a soft copy of the questionnaire
so that they could return it through email. We also provided the prepaid envelope
with the survey questions for the participants’ convenience.

Design
We analyzed all the data acquired from the questionnaires by using ANCOVA
(2 X 2) that enabled us to test the significance of the differences among more than
two sample means. Using this analysis of covariance, we were able to make
inferences about whether our samples are drawn from a population having the same
mean. Later, we used a multiple regression and it helped us to use more of the
information available to us to estimate the dependent variables. Analysis of
covariance has been used because sometimes the correlation between two variables
maybe insufficient to determine a reliable estimating equation. As we have three
independent variables, we may be able to determine an estimating equation that
describes the relationship with greater accuracy.
We used mediation to test the H4 that assumed both existing and prospective
investors will feel more condolence and secured if the companies’ board of
directors let finance and accounts department, internal auditors and external
auditors do their job independently to prepare the financial statement. Therefore,
the equations are:
Protecting Existing and Prospective Investors and the Role of Internal Auditors 37

Where, Investors Protection, Independence of Internal Auditors, Independence of

Finance & Accounts Department and Corporate Governance. However, regressions
intercept, = residual error.

Finally, we also used a multivariate regression analysis to see how protected the
investors are if you combine all the above mentioned variables such as;
Independence of Internal Auditors, Independence of Finance & Accounts
Department and Corporate Governance. Hence the equation is;

Where, Investors Protection and regression coefficient and residual error.

RESULT ANALYSIS

At first we checked the demographic factors of the participants. All the

participants were male for investors, internal audit and board of director’s survey.
From the investors survey 70% of the investors were trading in DSE for more than
five years, and considered themselves experienced investors. The rest of them were
considered inexperienced. In internal audit survey, 65% of the respondents were
working more than 5 years as a professional chartered accountant. Rests of the 25%
have less than 5 years of experience but they were also chartered accounts. In
finance and accounting departments, 10% of the respondents were female, 55% of
the total respondents have more than 5 years of working experience in a related
field. However, 70% of the participants have formal accounting or finance
education. Finally, boards of directors have the average age of 45 and 60% had the
professional experience in related field of more than 15 years.
We also conducted the manipulation check of the questionnaire and 90% of the
investors found the questions were relevant and important in the current scenario of
the country. The mean of the survey was 91.80. Internal auditors and finance and
accounting departments thought the survey was relevant (mean=92.30, 94.80)
respectively. The board of directors (mean=92.40) believed that the questions were
appropriate to study the current market.
Independent Business Review, Volume 6, Number 2, July 2013 38

Hypotheses Test Result

We used the R i36.15.1 to run the regression and test the hypotheses. The result
of the H1 is presenting below in table I.
Table I: Analysis of Covariance of IIA and IFA
Sum
Sq Mean Sq F Value Pr(>F)
IIA 0.09128 0.09128 0.4985 0.5310
IFA 0.33419 0.33419 1.8251 0.2696
IIA:IFA 0.48429 0.48429 2.6448 0.2024
Residuals 0.54932 0.18311
Source: from the data analysis in R

The F statistic of the analysis in table I is 1.656 and p-value is 0.3443, which
clearly indicated that there is a strong and significant relationship which exists
between IIA and IIA. And the multiple R2 is 0.6253 and adjusted R2 is 0.247, so
the variables in the regression are positively correlated.
Table II: Analysis of Covariance of IIA and CG
Sum
Sq Mean Sq F Value Pr(>F)
IIA 0.09128 0.09128 0.7770 0.44296
CG 0.83620 0.83620 7.1180 0.07582
IIA:CG 0.17917 0.17917 1.5252 0.30474
Residuals 0.35243 0.11748
Source: from the data analysis in R

Next, we analyzed the independence of internal audit and corporate governance

2
(H ) and obtained results in table II. We found a strong and positive correlation
between IIA and CG, which supported the results of multiple R2 (0.7585) and the
adjusted R2 (0.5169). And the F statistic of the analysis of table II is 3.14, whereas
p-value is 0.1862. Here, F-statistic is too high and p-value is more than 0.05, so in
this case again we say that H2 has been accepted. We also tried to measure the
relationship between the independence of finance & accounting departments and
corporate governance and see whether these can protect the existing and
prospective investors. The following table contains the results of the analysis.
Protecting Existing and Prospective Investors and the Role of Internal Auditors 39

Table III: Analysis of Covariance of IFA and CG

Sum
Sq Mean Sq F Value Pr(>F)
IFA 0.3101 0.3101 3.097 0.1766
CG 0.8140 0.8140 8.128 0.0650
IFA :CG 0.0343 0.03437 0.3432 0.59915
Residuals 0.3004 0.10015
Source: from the data analysis in R

The F statistic value of the analysis is 3.856, whereas the p-value is 0.1484. The
result portrays that p-value is more than 0.05 and F-statistic value is more than 1. It
indicates that the relationship between the independence of finance and accounting
departments and corporate governance are strongly related and significant. The
multiple R2 is 0.7941 and the adjusted R2 is 0.5882. Therefore, the variables are
positively correlated. Finally, we analyzed the multiple regression that has one
dependent variable and that is IP (Investors Protection) and three independent
variables which are: independence of internal auditors (IIA), independence of
finance and accounting department (IFA) and corporate governance (CG). Table
IV presents the result of the regression analysis.

Table IV: Analysis of covariance of IIA, IFA &CG

Sum
Sq Mean Sq F Value Pr(>F)
IIA 0.09128 0.09128 0.8288 0.42974
IFA 0.33419 0.33419 3.0342 0.17989
CG 0.70319 0.70319 6.3844 0.08567
Residuals 0.33043 0.11014
Source: from the data analysis in R

The F-statistics value of the multiple regression analysis is 3.146 and p-value is
0.17. It indicates that the independent variables are not only strongly but also
significantly related to each other. Multiple R2 value of the analysis is 0.7735 and
adjusted R2 is 0.5471. Thus, independent variables are highly and positively
correlated with each other.
Independent Business Review, Volume 6, Number 2, July 2013 40

DISCUSSION AND CONCLUSION

The main focus of the paper is to explore the independence of the internal
auditors, competence of the auditors and how strong their voice is in the
management so that they can protect the existing and prospective investors by
preparing an independent and error free audit report. We also tried to investigate the
independence and competence of the finance and accounting department of an
organization. How truly and error freely they prepare the financial statements for
the company. Lastly, we also explored the board of directors’ attitudes towards the
internal audit committee and finance and accounting department while preparing
the audit report and financial statements. And how cooperative they are in
implementing the corporate governance (corporate charter) in their organizations.
There are four hypotheses which have been used to find out whether existing
and prospective investors can be protected by the independence of internal auditors,
independence finance and accounting departments and corporate governance
practiced by the board of directors. All the hypotheses have been accepted and
independent variables of the study are significantly related with each others. And
they are positively correlated too. Graphical representations of correlation and
residuals, leverage, fitted values are provided in the annexure.
Apart from the analysis, we put 9 (nine) questions about the qualification,
independence, competence and integrity of internal auditors in the investors
question survey. We asked the investors to answer the questions in “Yes” or “No”
format. Surprisingly 65% said that companies do not follow the proper corporate
charter and 59% believed that companies do not follow the participatory
management approach. On the other hand, 62% strongly believed that none of the
departments of the organizations can work independently. Among the participants,
70% firmly believed that the internal audit committee and the finance and accounts
department have been pressurized to manipulate the reports/statements. More than
69% feel that internal audit departments should have the necessary freedom to
prepare an independent audit report. And finally 89% of the respondents strongly
believe that if the internal auditors and finance and accounting departments can
work independently and effectively, their investments in the organizations will be
more protracted. Graphical representations have been put in the annexure.
We approached the internal auditors, finance and accounting departments and
the board of directors of the 25 companies that have manipulated their financial
statements in 2010 share scam in DSE, mentioned in Dr. Ibrahim Khalid probe
Protecting Existing and Prospective Investors and the Role of Internal Auditors 41

report. We did not receive any complete questionnaires from these companies.
Therefore, the data we have gathered may not reflect the true scenario about the
investors’ protection in Dhaka Stock Exchange (DSE). Future research can be
conducted on focusing on the independence of the auditors (internal and external),
finance and accounting departments and corporate governance practice by the
board of directors of these 25 companies. It could provide more insights about the
investors’ protection. And we did not consider the roles, objectives and
independence of external auditors in our study. Prospective researchers can add
independence of external auditors as independent variables with the existing model
and see how external auditors perform to protect the existing and protective
investors in an economy.

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Protecting Existing and Prospective Investors and the Role of Internal Auditors 47

Appendix
Covariance of IP, IIA, IFA and CG
IP IIA IFA CG
IP 0.157550 0.00419000 0.0436500 0.1295900
IIA 0.004190 0.17731667 -0.0262150 0.03558833
IFA 0.043650 -0.02621500 0.0989275 0.0041550
CG 0.129595 0.03538833 0.0041550 0.14313667

Correlation of IP, IIA, IFA and CG

IP IIA IFA CG
IP 1.0000000 0.0250686 0.34963631 0.86298569
IIA 0.0250686 1.0000000 -0.19793225 0.22213136
IFA 0.3496363 -0.1979323 1.00000000 0.03491701
CG 0.8629857 0.2221314 0.03491701 1.00000000

Coefficients between IIA and IFA

Estimate Std. Error t value Pr(>|t|)
(Intercept) 31.138 19.977 1.559 0.217
IIA -11.780 7.464 -1.578 0.213
IFA -12.196 8.000 -1.525 0.225
IIA:IFA 4.869 2.994 1.626 0.202

Residual standard error: 0.4279, Multiple R-squared: 0.6235, Adjusted R-square: 0.247, F-
statistic: 1.656, p-value: 0.3443

Coefficients between IIA and CG

Estimate Std. Error t value Pr(>|t|)
(Intercept) 10.235 9.323 1.098 0.353
IIA -5.262 4.293 -1.226 0.308
CG -3.328 3.599 -0.925 0.423
IIA:CG 2.036 1.649 1.235 0.305
Residual standard error: 0.3427, Multiple R-squared: 0.7585, Adjusted R-square: 0.5169, F-
statistic: 3.14, p-value: 0.1862
Independent Business Review, Volume 6, Number 2, July 2013 48

Coefficients of IFA and CG

Estimate Std. Error t value Pr(>|t|)
(Intercept) 9.221 20.088 0.459 0.677
IFA -3.749 7.439 -0.504 0.649
CG -3.827 8.303 -0.461 0.676
IFA:CG 1.801 3.075 0.586 0.599
Residual standard error: 0.3165, Multiple R-squared: 0.7941, Adjusted R-square: 0.5882, F-
statistic: 3.856, p-value: 0.1484

Coefficients of IIA, IF and CG

Estimate Std. Error t value Pr(>|t|)
(Intercept) -2.65166 1.53108 -1.732 0.1817
IIA 0.06964 0.34853 0.200 0.8544
IFA 0.61195 0.45280 1.351 0.2694
CG 1.00795 0.30891 2.527 0.0857
Residual standard error: 0.3319, Multiple R-squared: 0.7735, Adjusted R-square: 0.5471, F-
statistic: 3.416, p-value: 0.17

Summary of ANCOVA

Intercept IA FA CG
Intercept 2.3442046 -0.2269919 -0.48788026 -0.22696409
IIA -0.2269919 0.1214752 0.01689707 -0.04259695
IFA -0.4878803 0.01689707 0.20502507 -0.02655461
CG -0.2269641 -0.04259695 -0.02655461 0.15913306
Protecting Existing and Prospective Investors and the Role of Internal Auditors 49

Covariance Graph of IP, IIA, IFA and CG

ANCOVA Graph of IP, IIA, IFA and CG

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Protecting Existing and Prospective Investors and the Role of Internal Auditors 51