Managerial Auditing Journal Volume 17, Number 3, 2002 pdf

Gwilliam 117 Re-engineering recruitment to theaccounting profession Malcolm Smith and Christopher Graves 122 A critical evaluation of the effect ofparticipation in budget targetsetting o

110 Access toManagerial Auditing Journal online

111 Abstracts & keywords

113 Accounting and auditingrequirements of the SudanCompanies Act 1925: time forchange

John A Brierley, Hussein M El-Nafabiand David R Gwilliam

117 Re-engineering recruitment to theaccounting profession

Malcolm Smith and Christopher Graves

122 A critical evaluation of the effect ofparticipation in budget targetsetting on motivation

Pamela Reid

130 An assessment of the newly definedinternal audit function

Albert L Nagy and William J Cenker

138 Auditing the indirect consequences

of rework in construction: a casebased approach

Peter E.D Love

147 Corporate governance:

communications from internal andexternal auditors

Janet L Colbert

153 Slack in public administration:

conceptual and methodologicalissues

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[ 110 ]

Accounting and auditing requirements

of the Sudan Companies Act 1925:

time for change

John A Brierley, Hussein M El-Nafabi andDavid R Gwilliam

Keywords The Sudan, Legal matters,Balance sheets, Profit and loss, AccountingThe Sudan Companies Act 1925 is outdated

There is a need for substantial revision to theAct either in accordance with, for example,current UK legislation, or a framework moredirectly suited to the economic and legalenvironment of the Sudan At a general levelthis should include the preparation of a profitand loss account, specific formats for theprofit and loss account and balance sheet,notes to the accounts and an auditor’s reportstating whether or not the accounts give atrue and fair view of the state of a company’saffairs

Re-engineering recruitment to the accounting profession

Malcolm Smith and Christopher GravesKeywords Recruitment, Biodata, Forecasting,Performance, Modelling

There can be few personnel techniques solowly regarded as the recruitment interview

Yet we persevere with the use of thetechnique despite the overwhelmingevidence of its deficiencies The accountancyand auditing professions are as guilty asmost in this regard, and suffer from rates ofattrition and job turnover, which should be

an embarrassment But there arealternatives available, and this paper reports

on the development of revolutionarytechniques which might have a significantimpact on recruitment to the accounting andauditing professions in the UK

A critical evaluation of the effect of participation in budget target setting

on motivation

Pamela ReidKeywords Accounting, Theory, Target setting,Participation, Performance

This paper critically evaluates the effect ofparticipation in budget target setting in aneffort to increase the probability of anorganisation’s goals being achieved and, in

so doing, considers some of the numeroustheories of motivation Such theories includeMaslow through to equity and expectancytheories However, given that there are amultiplicity of variables at work here, theauthor concludes that the effect of

participation is situation specific anddependent upon such variables: there is no

‘‘perfect’’ budgeting system

An assessment of the newly defined internal audit function

Albert L Nagy and William J CenkerKeywords Internal audit, Committees,Risk management, Corporate governance,Competences

The new definition of internal auditingdefines the function as an independent,objective assurance and consulting activitydesigned to add value and improve anorganization’s operations The purpose ofthis paper is to summarize an assessment ofthis new definition obtained throughstructured interviews from 11 internal auditdirectors of large publicly traded companies.The responses from the directors indicatethat there are wide differences in viewpointsand objectives; but a definite shift hasoccurred in the overall scope of internalaudit towards operational activities Whilemost of the interviewees are in conceptualagreement with the new internal auditdefinition, an underlying warning isvocalized: ‘‘Don’t throw out the franchise’’.That is, the traditional role of the internalauditor should not be completely abandoned.These, along with other responses pertaining

to related issues and suggestions for futureresearch, are summarized throughout thepaper

Auditing the indirect consequences of rework in construction: a case based approach

Peter E.D LoveKeywords Construction industry,Indirect costs, Contract, Defective premisesThere is little known about the indirectconsequences of rework in constructionprojects, especially the financial costs.Therefore, this paper uses examples from acase study to demonstrate the potentialindirect consequences and costs that areassociated with undertaking rework inbuilding construction projects A noveltaxonomy for categorising the indirectconsequences at an individual level,organisational level and project level ispresented Based on the findings fromexamples derived from the case study, it issuggested that the incidence of rework canhave a multiplier effect of up to six times theactual (direct) cost of rectification To reducethese costs it is concluded that design andconstruction organisations must improvetheir quality management systems byincluding a quality system for continuouslyauditing, analysing and presenting direct aswell as indirect rework costs

Corporate governance:

communications from internal and external auditors

Janet L ColbertKeywords Corporate governance, Auditors,Communication, Finance

International Standards on Auditing (ISAs)require external auditors to communicatewith the client’s governance body regardingsignificant matters which came to theauditors’ attention during the engagement

Similarly, the authoritative PracticeAdvisories (PAs), issued by the Institute ofInternal Auditors (IIA), mandate thatinternal auditors discuss certain items withthe board Thus, the governance body/boardshould be receiving information from twogroups of auditors Compares and contraststhe requirements of the ISAs and PAs withregard to communications with thegovernance body/board The differences inthe communications to the governance body/

board by the external and internal auditorsderive mainly from the focus of each group

The external auditors serve those usersexternal to the organization; in contrast,internal auditors serve the board, which isresponsible for the internal aspects of theentity Besides communication on financialissues, the board also desires information onoperational and compliance matters Thecomparison of the international externalauditing and the internal auditing standardsshows that some information received by thegovernance body/board is similar However,much is unique Both groups of auditors aidthe governance body/board in achieving itsobjective of guiding the entity to carry out itsmission effectively and efficiently

Slack in public administration:

conceptual and methodological issues

Tor BuschKeywords Costs, Management, Efficiency,Public administration

Ever since its introduction, the concept oforganisational slack has constituted the basisfor a considerable body of research withinbehavioural science A great deal of thisresearch has concentrated on budgetaryslack, and within the field of publicadministration the focus has been on theslack- or budget-maximising bureaucrat Asthe reduction of slack is the purpose of many

of the techniques which are part of the newpublic management, there is a need to focus

on how to measure changes in the level ofslack The objective of this paper is to discussthe relationship between three centralconcepts within the research on slack:organizational slack, budgetary slack, andthe discretionary budget; to assess whetherthese concepts are suitable for publicorganizations; and to discuss problems ofmeasurement

[ 112 ]

Managerial Auditing Journal

17/3 [2002] 111–112

Accounting and auditing requirements of the Sudan Companies Act 1925: time for change

John A Brierley Sheffield University Management School, The University of Sheffield, Sheffield, UK

Hussein M El-Nafabi Al-Madina Al-Munawarah College, Al-Madina Al-Munawarah, Saudi Arabia David R Gwilliam

School of Management and Business, University of Wales Aberystwyth, Aberystwyth, UK

by these regimes have been frequent changes

of government, continuous cabinet reshufflesand high ministerial turnover For examplethe Ministry of Economic Planning, whichplays a major role in the management of theeconomy, has been led by 32 ministers sinceindependence The last multiparty

democratic government, which came to office

in 1986, saw four ministerial reshuffles in itsthree years in office with some ministerialoffices changing hands on four occasions

These frequent cabinet reshuffles led to alack of continuity in government which hasbeen exacerbated by the lack of cleardescriptions of ministerial posts, and ofagreed policies or manifestos to be followed

by the appointed ministers Indeed, the lack ofclear policies and strategies has made it thegeneral norm in the Sudanese government’shistory that every new minister starts his job

by scrapping the policies adopted by hispredecessor This government instabilityaffects the environment in which accountingand auditing operate and has contributed tothe fact that no amendments have been made

to the Act Similarly, other acts establishedunder British colonial rule have not beensubsequently amended, these include theBills of Exchange Act 1917 and the InsolvencyAct 1929

Furthermore, it has been argued that theestablishment of a professional accountingbody in the Sudan was necessary to developaccounting and auditing practice To this endindividuals who were members of

professional accounting bodies outside theSudan, notably the Institute of CharteredAccountants in England and Wales and theAssociation of Chartered Certified

Accountants in the UK, made severalattempts in the early 1980s with thegovernment to establish a professionalaccounting body in the Sudan Due to therapid changes in the political system duringthe 1980s these efforts did not come tofruition until the Certified Accountants Act

1988, which established the SudaneseAssociation of Certified Accountants (SACA).Article 4 of the 1988 Act sets out the functions

of the council of the SACA, which includesthe enhancement of the role of accounts inthe commercial environment This has notled, however, to any changes in the Act Thusgovernment instability and the lack ofinfluence of the accounting profession hasmeant that the Companies Act 1925 has neverbeen amended

The Act was introduced to assist theformation of private and public limitedliability companies, and provide rules for thegovernance of their operations and financialaffairs, but today it is out of date Theobjective of this paper is to illustrate theoutdated nature of the Act’s provisionsrelating to accounting and auditing and offersuggestions for updating the legislation Thepaper is divided into three sections The firstsection discusses the Act’s accountingprovisions, the second section discusses theAct’s auditing provisions, and the thirdsection provides a brief discussion ofnecessary changes to the Act

The Sudan, Legal matters,

Balance sheets, Profit and loss,

Accounting

Abstract

The Sudan Companies Act 1925 is

outdated There is a need for

substantial revision to the Act

either in accordance with, for

example, current UK legislation, or

a framework more directly suited

to the economic and legal

environment of the Sudan At a

general level this should include

the preparation of a profit and loss

account, specific formats for the

profit and loss account and

balance sheet, notes to the

accounts and an auditor’s report

stating whether or not the

accounts give a true and fair view

of the state of a company’s affairs.

in which there shall be full, true andcomplete accounts of the transactions andaffairs of the company Section 124(1) statesthat every company has to prepare a balancesheet at least once a year and at intervals ofnot more than 15 months Further, section124(2) requires that the balance sheet has to

be audited by the auditor of the company, andthe auditor’s report should be attached to thebalance sheet, or there should be inserted atthe foot of the balance sheet a reference to thereport The auditor’s report should be readout at the general meeting and should beopen to inspection by any member of thecompany

Section 125(1) requires that the balancesheet contains a summary of the propertyand assets, and the capital and liabilities ofthe company Although no indication isprovided as to the amount of disclosure,details should be provided of the ‘‘generalnature’’ of assets and liabilities and ‘‘how thevalue of fixed assets has been arrived at’’

Details about the content of the balance sheetare stated in the Third Schedule Form C ofthe Act (see Appendix) There is norequirement to disclose comparative figures

on the face of the balance sheet; hence it isnot possible to make comparisons of amountsdisclosed in the balance sheet with theprevious year The balance sheet does notrequire separate disclosure of the accountingpolicies used or further disclosure of items inthe form of a note to the balance sheet Thebalance sheet does not provide separatedisclosure of a number of items, such asinvestments, like government securities,shares and debentures Nor is there arequirement for a breakdown of stocks andwork-in-progress and debtors (Tyagi, 1982)

There is no detailed breakdown of liabilities,for example, Tyagi (1982) notes that

disclosure is not required of proposeddividends and of the security for any loansreceived

There is no requirement to prepare a profitand loss account The only requirement is todisclose the profit for the financial year onthe face of the balance sheet, although thisrequirement does not apply if a separateprofit and loss account is prepared If a profitand loss account is prepared it does not have

to follow any specific format, which may lead

to difficulties when making comparisonsbetween companies

Auditing provisions

Section 138 of the Act specifies the powersand duties of auditors Section 138(1) statesthat auditors have the right of access at all

times to the books, records and accounts of acompany and are entitled to receive from thedirectors and officers of the company suchinformation and explanations as may benecessary to carry out their work as auditors.Auditors are required to report on:

. whether or not they have obtained all theinformation and explanations theyrequire;

. whether in their opinion the balance sheethas been drawn up in conformity with thelaw (presumably the Act); and

. whether or not the balance sheet exhibits

a ‘‘true and correct view of the state of thecompany’s affairs according to the best oftheir information and explanations given

to them, and as shown by the books of thecompany’’ (emphasis added)

The requirement to show a true and correctview is contrary to the concept of ‘‘true andfair view’’ in the UK According to Tyagi(1982), the auditor is unable to certifywhether the financial statements exhibit a

‘‘correct’’ view because the auditor is notconnected with the management of thecompany He argues that because the balancesheet is a summary statement of the

activities of the whole company it is moreappropriate for the auditor to assess whetherthe balance sheet shows a true and fair view.The Act does not require the auditor to statewhether or not the profit and loss account, ifprepared, gives a true and fair view of theprofit (or loss) for the period, nor whether ornot the accounts have been prepared properly

in accordance with the provisions of the Act.Section 137 of the Act specifies the

requirements regarding the qualificationsand appointment of auditors The Act doesnot specify the necessary qualifications ofpersons who are eligible to act as companyauditors, although in order to preserveauditor independence section 137(5) doesprevent certain persons from acting asauditors These include:

. a director or officer of the company;. a partner of such a director or officer;and

. any person in the employment of adirector or officer

Section 137(1) requires that an auditor shouldhold a certificate issued by the Minister ofFinance and National Economy Usually theauditor is appointed at the annual generalmeeting until the next such meeting If forsome reason an auditor is not appointed atthe annual general meeting, section 137(4)states that the court may, following theapplication of any member of the company,appoint an auditor and fix their

remuneration for the current year

[ 114 ]

John A Brierley,

Hussein M El-Nafabi and

David R Gwilliam

Accounting and auditing

requirements of the Sudan

Companies Act 1925: time for

change

Managerial Auditing Journal

17/3 [2002] 113–116

The 1925 Companies Act is outdated and does not reflect the changes and the worldwide developments in the areas of accounting and auditing practice There is clearly a need for substantial revision of the Act either in accordance with, for example, current UK legislation or, perhaps more appropriately,

in line with a framework more directly suited to the economic and legal environment

of the Sudan At a general level this should include the preparation of a profit and loss account, specific formats for the profit and loss account and balance sheet, notes to the accounts and an auditor’s report stating whether or not the accounts give a true and fair view of the state of a company’s affairs

Reference

Tyagi, C.L (1982), ‘‘Balance sheet reform needed’’, Sudanow, Vol 7 No 11, p 29.

Appendix Third Schedule Form C of the Sudan Companies Act 1925

Limited Balance-sheet

As at 19

Capital and liabilities Capital LS m/ms Authorized capital shares of LS each

Issued capital shares of LS each

Subscribed capital shares of LS each

Amount called up at LS per share

Less calls unpaid

Add – forfeited shares (amount paid-up)

Reserve fund or development fund

Any sinking fund

Any other fund created out of net profits

Any pension or insurance fund

Provision for bad and doubtful debts

Loans on mortgage or mortgage debenture bonds

Loans otherwise secured (stating the nature of security)

Loans unsecured

Interest

Accrued on mortgages, debentures of other secured loans

Unclaimed dividends

Liabilities For goods supplied

For expenses

For acceptances

For other finance

Advanced payments and unexpired discounts

(For the portion of which value has still to be given, e.g in the case of the the following classes of companies: Newspaper, fire insurance, theatre, club, banking, steamship companies, etc.)

[ 115 ]

John A Brierley,

Hussein M El-Nafabi and

David R Gwilliam

Accounting and auditing

requirements of the Sudan

Companies Act 1925: time for

change

Managerial Auditing Journal

17/3 [2002] 113–116

Profit and loss LS m/ms

Balance as per previous balance-sheet

Less – appropriation thereof

Balance brought forward

Profit since last balance-sheet

(N.B – These details need not to be given if the same be contained in a profit and loss account attached to the balance-sheet.) Contingent liabilities – claims against the company not acknowledged as debts

Money for which the company is contingently liable

Arrears of cumulative preference dividends

Property and assets Fixed capital expenditure

(Distinguishing as far as possible between expenditure upon goodwill, land, buildings, leaseholds, railway sidings, plant, machinery, furniture, development of property, patents, trade marks and designs, interest paid out of capital during construction, etc., and stating in every case the original cost and the total depreciation written off under each head) Preliminary expenses

Commission or brokerage

(Commission or brokerage paid for underwriting or placing shares or debentures until written off)

Stores and spare gear

Loose tools

Live stock

(Stating mode of valuation, e.g cost or market value.) Bills of exchange

Book debts

(Distinguishing in the case of a bank between those considered good and in respect of which the bank holds no security other than the debtor’s personal security, and distinguishing in all cases between debts considered goods and debts considered doubtful or bad Debts due by directors or other officers of the company or any of them either severally or jointly with any other persons to be separately stated in all cases.) Advances

(Recoverable in cash or in kind or for value to be received, e.g rates, taxes, insurance, etc.) Investments

(Nature of investment and mode of valuation, e.g cost or market value.) Interest accrued on investments

Cash and other balances

Amount in hand

Balances with agents and bankers (in detail, showing whether on deposit or current etc.)

Profit and loss (giving in the case of a debit balance details as far as possible as in the case of a credit balance)

[ 116 ]

John A Brierley,

Hussein M El-Nafabi and

David R Gwilliam

Accounting and auditing

requirements of the Sudan

Companies Act 1925: time for

change

Managerial Auditing Journal

17/3 [2002] 113–116

Re-engineering recruitment to the accounting

profession

Malcolm Smith School of Accounting and Information Systems, University of South Australia, Adelaide, Australia

Christopher Graves School of Accounting and Information Systems, University of South Australia, Adelaide, Australia

During this decade, dramatic changes haveoccurred in the business environment Inorder to remain competitive, accountancyfirms now need to provide a diverse range ofservices to their clients, at low cost To meetthese challenges, it is critical that

accountancy firms select their employeescarefully, as failure to select the right staffcan be costly Some of the costs associatedwith poor recruitment decisions include:

lower productivity and competitiveness,potential loss of clients, training costs,advertising costs, recruitment fees andredundancy packages The US Department ofLabour estimates that a poor recruitmentdecision can cost the employer an amountequal to 30 percent of the employee’s firstyear’s potential earnings (Hacker, 1997)

KPMG state that ‘‘the current estimate ofinvestment per student is £100,000’’

(KPMG-UK, n.d.)

Recruiters face a difficult task as they need

to make a decision that predicts thecontribution that an individual will make tothe organisation in the future based on thefactual and personal information availablenow As a result, any recruitment selectionprocedure adopted by the accountingprofession will be an imprecise selection tool

Essentially, there is no real substitute forobserving the performance of individuals inthe field, hence the popularity of internrelationships However, these may notalways be available Practical testsconducted at interview may be a less thansatisfactory alternative, but are still notuniversally adopted

Conventional approaches to recruitment

Most frequently, recruiters adopt a two-stageprocedure:

1 Select (or not) candidates for interviewbased on the contents of their applicationform requiring biographical information(biodata)

2 Make a final employment decision based

on a personal interview; this itself may be

a two-stage procedure if applicants arefirst used to draw up a short-list ofpotential appointees

Dipboye et al (1984) suggest that ‘‘no otherpersonnel technique is held in such lowesteem in the research literature as theinterview’’, yet despite its demonstrable lack

of reliability and validity, the unstructuredinterview remains the prime assessmentmechanism in graduate recruitment This isdespite the fact that, before the interview,applicants complete a form containinghistoric and verifiable information about theindividual which would permit the

development of scoring systems and theconstruction of models with potentially highpredictive ability of eventual success

In the UK, around 30 percent of graduatesentering the profession ultimately fail toqualify as accountants, a statistic whichHarvey-Cook and Taffler (1987) attribute tofailures of recruitment procedures

Harvey-Cook et al (1998) and Gammie (1999)demonstrate that selection models usingbiographical data have value to recruitersand outperform conventional approaches;they suggest that significant benefits can beaccrued by the accountancy professionthrough the adoption of formal statisticalprocedures at the selection stage

Emerging recruitment techniques

The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0268-6902.htm

There can be few personnel

techniques so lowly regarded as

the recruitment interview Yet we

persevere with the use of the

technique despite the

overwhelming evidence of its

deficiencies The accountancy and

auditing professions are as guilty

as most in this regard, and suffer

from rates of attrition and job

turnover, which should be an

embarrassment But there are

alternatives available, and this

paper reports on the development

of revolutionary techniques which

might have a significant impact on

recruitment to the accounting and

auditing professions in the UK.

on personal characteristics and previousacademic performance have been shown to

be the best predictor of employee turnover(Gable et al., 1989), job performance (Hunterand Hunter, 1984) and voluntary withdrawalduring training (Drakeley et al., 1988)

In the UK, the most common cause ofwithdrawal from the profession duringtraining is examination failure As a result,Harvey-Cook et al (1998) first developed amodel for success in the professionalexaminations (Model 1) and then a model for

‘‘success’’ which incorporated both progress

in examinations and good work performance(Model 2) Both of these models wereconstructed based on applicants to theprofession employed by second-tieraccounting firms (i.e not the then Big 6)

The models

The two models are described as follows:

1 Model 1: to predict examination success Sixsignificant variables were identified intrainee application forms that contributed

to examination success In descendingorder of importance:

. number of grade As at ‘‘O’’ level;

. a good first degree (first or uppersecond class);

. number of arts or language ‘‘A’’ levels(a negative variable);

. first degree in science or mathematics;

. head boy or girl at school;

. independent school background

The model’s overall probability of correctclassification is 74 percent, with 78percent of ‘‘pass’’ predictions correct and

69 percent of ‘‘fail’’ predictions correct in asample of 229 applicants taking theprofessional examinations (see Table I)

2 Model 2: to predict good work performance

Again six significant variables wereidentified In descending order ofimportance:

. number of ‘‘A’’ levels in sciencesubjects;

. head boy or girl at school;

. number of teams and societies atschool;

. exemption from the graduateconversion course specificallydesigned for non-accounting graduates;

. degree class for first degree;

size of social interaction groups atuniversity (a negative variable).The model’s overall probability of correctclassification is 75 percent, with 75percent of the ‘‘successful’’ predictionscorrect, and 76 percent of the

‘‘unsuccessful’’ predictions correct (seeTable II)

These two models were confirmed byapplying them to a second group ofapplicants three years later

Relevance to the accounting and auditingprofessions

As both models are based on UK data, theimportant variables in each of the modelsprovides a fair reflection of what might beimportant characteristics in a UK

. Students who choose electives inmathematics and science at school arelikely to fare better than those choosingarts and languages

. Students who choose an accountingdegree at university, and who aretherefore not subjected to a graduateconversion course, or equivalent, should

do better in the profession

. Interpersonal skills and social activitiesundertaken at school are important andpositive – e.g school dux, sports coloursand team participation The oppositeappears to be true at university, whereextra-curricula activities appear to have anegative effect

. The class of first degree awarded issignificant, so the achievement of FirstClass Honours or a ranking in the top 5percent of graduating students would bepositively regarded

. This study showed that an independentschool background was a positive factor,though one less important than the otherfactors

Gammie (1999)

Gammie (1999) constructed similar modelsfor predicting success in the professionalexaminations However, this study extends

Table I

Model 1: to predict examination success

Predictedpass

Predictedfail

the accounting profession

Managerial Auditing Journal

17/3 [2002] 117–121

prior research by developing and testingmodels within a Scottish environment.

Second, the models are applicable to allprofessional training offices (i.e first andsecond tier accountancy firms) Finally, themodels are extended to incorporate honoursgraduates who complete an additional year ofstudy (rather than the Year 3 categorisationcommon for honours awards within Englishuniversities)

This study was based upon the biodatacollected from recently qualified

accountants, who trained within the wholespectrum of ICAS training offices InScotland, students can choose either tocomplete an ordinary degree (three yearsduration) or decide to complete a fourth year

to obtain an honours degree As a result,Gammie (1999) developed separate models forordinary and honours graduates of fullyaccredited degrees

The models

The two models are described as follows:

1 Model 1: to predict examination success offully-accredited honours graduates Threesignificant variables were identified asindicators of examination success Indescending order of importance:

. honours award;

. number of jobs related to charteredaccountancy whilst at school anduniversity;

. whether progressed directly fromuniversity to ICAS training

The model’s overall probability of correctclassification is 69 percent, with 69percent of ‘‘pass’’ predictions correct and

69 percent of ‘‘fail’’ predictions correct in asample of 149 respondents taking theprofessional examinations (see Table III)

2 Model 2: to predict examination success offully-accredited ordinary graduates Twosignificant variables were identified asindicators of examination success Indescending order of importance:

. number of jobs related to charteredaccountancy whilst at school anduniversity;

. number of resits in second and thirdyear at university

The model’s overall probability of correctclassification is 61 percent, with 77percent of ‘‘pass’’ predictions correct and

43 percent of ‘‘fail’’ predictions correct in asample of 225 respondents taking theprofessional examinations (see Table IV).These two models were confirmed byapplying them to a second group of traineesone year later

Prior research in recruitment to theaccountancy profession has usually definedsuccess as ‘‘trainees who pass their

examinations’’ Gammie (1999), however,adopted a more restrictive definition ofsuccess, being ‘‘trainees who pass theirexamination at their first attempt’’ As aresult, the models developed by Gammie(1999) are not readily comparable withmodels developed by other researchers

Relevance to the accounting and auditingprofessions

As both models are based on data collectedfrom Scotland, the important variables ineach of the models provides a fair reflection

of what might be important characteristics inthe Scottish accountancy profession:

. With regard to fully-accredited honoursgraduates, the most important predictor ofICAS examination success is the degreeclassification This result suggests thatthe achievement of First Class Honourswould be positively regarded Onepractical limitation with using thisvariable arises from a timing issue.Recruitment of trainees often occurs early

on in students’ honours year andtherefore the degree classification isunknown (i.e has not been awarded).Gammie argues that this can be overcome

by using the academic staff’s prediction ofthe degree classification

. Regardless of the type of fully-accrediteddegree taken, a significant factor inpredicting ICAS examination success isthe number of chartered accountancy-related jobs undertaken whilst at schooland university Clearly, this suggests thatthe more jobs undertaken by studentswhich relate to the profession, the greatertheir chance in passing the ICAS

examinations at their first attempt

Table II

Model 2: to predict good work performance

Predictedsuccess

Predictedleaver

Predicted failone or more

Correct

the accounting profession

Managerial Auditing Journal

17/3 [2002] 117–121

Fully-accredited honours graduates aremore likely to pass the ICAS examinations

at their first attempt if they commence theICAS examination process straight aftercompleting their degree

. This study suggests that the greaternumber of resits encountered byuniversity students studying fully-accredited ordinary degrees, the lesslikely they are to pass ICAS examinations

in their first attempt

Applying these models in practice

Harvey-Cook et al (1998) used a decisionmatrix, based on appropriately weightedvariables from Model 1, to generate a logitscore with the following outcome

probabilities Table V is potentiallyinvaluable to accountancy firms informulating successful recruitmentstrategies

Based upon this matrix, nearly half of allapplicants with scores < 0.20 fail, and thechances of individuals in this group passingare extremely low (5 percent) Conversely,only 6 percent of those with scores and > 0.80are likely to fail

Application of a cut-off score of 0.70 forrecruitment through Model 1 would havegiven a 14 percent probability of failure in thetest group (rather than the 25 percentobserved) Application of a cut-off score of0.80 through Model 2 would have given a 7percent probability of a ‘‘poor performer’’

(rather than the 24 percent observed)

The models were further applied to a set ofapplicants (262 in total) to determine howclosely their predictions conformed to

recruiters’ ‘‘call for interview’’ decisions.Applicants were assigned to one of threegroups, based upon their combined scoresfrom both models Applicants were classified

as ‘‘high’’ (highly desirable) if they scoredabove the suggested cut-offs for eachmodel (0.7 for Model 1, 0.8 for Model 2).Applicants were classified as ‘‘low’’

(undesirable) if they scored below the cut-offsfor both models

As Table VI shows, only 50 percent (19) ofthe applicants rated ‘‘desirable’’ by themodels were actually called for interview,while almost a third (41) of those classified

‘‘undesirable’’ were As a result, of the 38

‘‘desirable’’ candidates, only 18 percent (7)received offers of employment, while 34percent (13) of those classified as

‘‘undesirable’’ received employment offers.Recruiters could provide no adequateexplanation of the differences, suggestingflaws in the interview process and/orindeterminate variables possibly associatedwith the corporate culture of the accountingfirm

Gammie’s (1999) study has importantimplications for the structure of accountingdegrees in the UK These models suggest thatincorporating accountancy placements andformal internships into the degree structure,

as is already commonly the case withsandwich-type business studies degrees, willhave a significantly positive influence onstudent success in professional accountancyprograms This is consistent with thefindings of Eskew and Faley (1988) whichsuggest that previous related experience issignificant for the prediction of studentperformance Second, performance inundergraduate degrees (i.e honoursclassification or number of resits in secondand third year) continues to be a usefulindicator for recruiters in their task ofselecting the most appropriate graduates.Finally, honours graduates should beencouraged to progress directly fromuniversity into the professional accountingprograms as this will maximise their chances

of passing the professional exams at theirfirst sitting

Table IV

Model 2: to predict examination success of fully-accredited ordinary

graduates

Predicted passfirst time

Predicted failone or more

Correct

Table VOutcome probabilitiesScore

Probability offailure (%)

Probability ofpass (%)

the accounting profession

Managerial Auditing Journal

17/3 [2002] 117–121

The models developed by Harvey-Cook et al

(1998) and Gammie (1999) provide a viablealternative to the conventional ‘‘hit andmiss’’ type approaches to recruitment Theadoption of these models will not only reducethe costs associated with poor recruitment, itmay spare the applicant from the stress andloss of confidence associated with a

mismatched career choice

Biodata techniques do not suffer frominherent interview bias, are arguably fairer

to all candidates and are robust in theirapplication They do, however, need to beupdated regularly to accommodatedemographic changes, grade inflation inschool and university examination results,and new sources of applicants, to ensuretheir continuing effectiveness over time

The nature of the models means that theyare designed to exclude those candidateslikely to fail examinations, leave theorganisation during training, orunderperform in practice (i.e to identify

‘‘failures’’ in some sense) However, in order

to do so they overcompensate and willexclude some candidates who may have made

a positive contribution to the profession, onthe basis that this is the least expensive errorfor recruiters to make

References

Dipboye, R.L., Stramler, G.A and Fontenelle, V.

(1984), ‘‘The effects of application recall of information from the interview’’, Academy of Management Journal, Vol 27 No 3,

pp 561-75.

Drakeley, R.J., Herriot, P and Jones, A.P (1988),

‘‘Biographical data, training success and

turnover’’, Journal of Occupational Psychology, Vol 61 No 2, pp 145-52.

Eskew, R.K and Faley, R.H (1988), ‘‘Some determinants of performance in the first college level financial accounting course’’, Accounting Review, Vol 63 No 1, pp 137-47 Gable, M., Hollon, C and Dangello, F (1989), ‘‘The relationship of application form information and performance to managerial trainee turnover’’, International Journal of Management, Vol 6 No 3, pp 289-95.

Gammie, E (1999), ‘‘The use of biodata in the pre-selection of graduates for chartered accountancy training places: an evaluation’’, British Accounting Association Conference, Glasgow, April.

Hacker, C (1997), ‘‘The cost of poor hiring decisions and how to avoid them’’, HR Focus, Vol 74 No 10, pp S13(1).

Harvey-Cook, J.E and Taffler, R.J (1987),

‘‘Graduate recruitment procedures in the UK accounting profession: a preliminary study’’, Accounting and Business Research, Vol 17

No 66, pp 99-108.

Harvey-Cook, J.E., Taffler, R.J and Williams, A.P.O (1998), ‘‘Improving graduate recruitment methods in the accounting profession’’, AAANZ Annual Conference, Adelaide, July.

Holland, J.L (1976), ‘‘Vocational preferences’’, in Dunette, M (Ed.), Handbook of Industrial and Organizational Psychology, Rand McNally, Chicago, IL.

Hunter, J.E and Hunter, R (1984), ‘‘Validity and utility of alternative predictors of job performance’’, Psychological Bulletin, Vol 96,

pp 72-98.

KPMG-UK (n.d.), ‘‘Graduate recruitment brochure’’, Online, URL: http://

jobs.kpmgcareers.co.uk/career/training.htm, accessed 1 June 1999.

[ 121 ]

Malcolm Smith and

Christopher Graves

Re-engineering recruitment to

the accounting profession

Managerial Auditing Journal

17/3 [2002] 117–121

A critical evaluation of the effect of participation in budget target setting on motivation

Pamela Reid Seaford, UK

Introduction

The highly competitive global economy oftoday means that many, if not most,organisations’ productivity is constrained bycost pressures Accordingly, as Drury (1999)has pointed out, standard costing systemsand budgetary control endeavour to ensurethat the overall aims and objectives of theorganisation are efficiently and effectivelyachieved Such planning and controlmeasures focus on encouraging individualswithin the organisation to tailor theirbehaviour towards the effective and efficientmeeting of those goals

Budget use

Willsmore (1973, p 11) noted that ‘‘ budgetshave a very wide potential use’’ Areas inwhich budgets can be used to assist inmanagement planning and control, includingproblem identification, co-ordination of thevarious parts of the whole, delegatedauthority to spend, controlling andmeasuring performance, and motivationhave been identified by Atrill and McLaney(1999), to which Berry and Jarvis (1999) haveadded communication and providing a basisfor responsibility accounting Tensions,however, between these uses of budgets mayexist, for example, in using a budget as ameans of control and also as a means ofauthorisation Authorised managers may bemotivated to spend their entire allocatedbudget if, for example, they believe that thefollowing year’s budget will be reduced if

‘‘under spending’’ occurs in the current year

Such behaviour, at least in the short term, isunlikely to be congruent with the

organisation’s overall concerns withefficiency (both ‘‘pure efficiency’’[1] and

‘‘mixed efficiency’’[2] as described by

Wildavsky, 1975) and effectiveness, i.e.control

In view of such inherent tensions, Stedry(1960) has proposed that separate, differentbudgets be used for differing purposes for hebelieves that no one budget can meet thediffering requirements Thus one could beutilised for planning purposes and anotherfor motivational purposes Given that thiswas proposed in 1960, before the advent ofnotions of government transparency,accountability, and communityparticipation, which are some of theobjectives introduced in pluralistic bestvalue (Burton, 1997), it would be difficult tosee how this proposal could now gaincredence in the public sector Within theprivate sector too, it also easy to see that theexistence of two (or more) budgets may have

a negative impact on motivation and wouldmilitate against effective, open and honestparticipative management

To paraphrase Theodore Levitt, the known American management guru, ‘‘if youdon’t know where you are going, any roadwill take you there’’ (Johnson, 1998) Drucker(1954), likewise, advocated the use of settingclear, tangible, verifiable, measurable goals

well-in order to motivate, rather than to ‘‘control’’,people Evidence abounds to show thatwithout such quantitative goals,performance suffers (see, for example,French et al., 1965)

Theories of motivation

The maximisation of individuals’ motivation

to achieve the organisation’s objectives canonly really be obtained through a thoroughunderstanding of theories of motivation.Such theories grew from a realisation thatthe principles of ‘‘scientific management’’ asadvocated by Taylor (1911), involving theradical division of labour (Smith, 1904) bymanagers (the antithesis, one might argue, ofparticipation), relied too much upon anassumption that economic reward motivates

The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0268-6902.htm

This paper critically evaluates the

effect of participation in budget

target setting in an effort to

increase the probability of an

organisation’s goals being

achieved and, in so doing,

considers some of the numerous

theories of motivation Such

theories include Maslow through

to equity and expectancy theories.

However, given that there are a

multiplicity of variables at work

here, the author concludes that

the effect of participation is

situation specific and dependent

upon such variables: there is no

‘‘perfect’’ budgeting system.

This realisation, combined with an emergingconsciousness regarding the conditions ofthe working classes in the industrialisedWest (Mayo, 1933, 1945; Braverman, 1974),saw the birth of a new school of thought – thehuman relations movement – marked by theHawthorne Study (Roethlisberger andDickson, 1939) From this ‘‘industrialpsychology’’ school developed two streams ofwork motivation theory generically known

as ‘‘content’’ theories[3] and ‘‘process’’

theories[4] (Rollinson et al., 1998)

Probably the most obvious starting pointfor a consideration of concepts of workmotivation commences with Maslow’s (1954)

‘‘hierarchy of needs’’ However, it issomewhat unfortunate that such a widelypromulgated hypothesis regarding factorsthat motivate people, thus far, appears to lackempirical backing (see, for example, Hall andNougaim, 1968; Wahba and Bridwell, 1976)and appears to be peppered with untestedassumptions Nevertheless, it formed thebasis of a revised hierarchy produced byAlderfer (1969) identifying the core needs ofexistence, relatedness and growth Corelearned and culturally sensitive needs ofachievement, power and affiliation wereproposed by McClelland (1967, 1975) asexplaining motivation However, it is fair tosay that such needs, and hence their effect onmotivation, are different for different peopleand, indeed, can vary over situationsand time

Herzberg et al (1959) moved on fromhierarchical needs to examine what theytermed ‘‘motivators’’ and ‘‘hygiene factors’’ inthe workplace, postulating that where jobsatisfaction was high there would becorrespondingly high motivation Althoughone can argue that this work constituted anexamination of job satisfaction rather thanmotivation, Robbins (1998, p 173) believesthat the recent growth of worker

participation in planning and controllingtheir work is due to Herzberg et al.’s (1959)recommendation that those factors whichthey find intrinsically rewarding

(achievement, recognition, the work itself,responsibility and growth) should beemphasised Nevertheless, if one followsHerzberg et al.’s thinking to its logicalconclusion, no matter how much emphasis isplaced upon factors that staff find

intrinsically rewarding, such as workerempowerment, supportive management,team work, delegated authority andresponsibility, if hygiene factors, such as lowpay, are not addressed their full effect willnot be felt

The interdependence of intrinsic rewardswith extrinsic rewards with consequences

for motivation has also been postulated (deCharms, 1968) However, it would appear thatthere is limited applicability of this cognitiveevaluation theory in the world of work andthat further research is required

Emphasis upon the manager’s essentiallynegative or essentially positive view ofhuman nature comprises McGregor’s (1960)Theory X and Theory Y McGregor himselfsubscribed to the more positive view of hisfellow man as being creative; able to exerciseself control and self direction; and likely toseek responsibility and to enjoy work Herecommended such behaviours asparticipative decision making inorganisations Theory X, though, wouldsuggest that a more authoritarian style ofmanagement is required in order to pushworkers towards meeting organisationalneeds and meeting targets Nevertheless, inthe absence of rigorous empirical evidence tosupport his views, they must remain, surely,merely assumption X and assumption Y,dependent upon situational, and other,variables

One of the most popular theories ofmotivation is that of expectancy theory,whereby an individual’s motivation to work

is affected by a wide range of bothindependent and interdependent variables(satisfaction associated with the work itself;satisfaction associated with the achievement

of objectives; satisfaction with extrinsicrewards associated with the meeting oftargets; and the individual’s perceivedexpectancy of linked reward) The mostnotable of these theories is Vroom’s (1964)model and the, perhaps, lesser known outside

of academia, Porter and Lawler (1968) modelwhich builds upon the previous model Thelatter, one can argue, fits into currentthinking regarding best practicesurrounding the valuing of diversity, andopen and honest communication in theworkplace However, Landy and Becker(1987) take the perhaps more cynical viewthat real choice does not exist in theworkplace as factors such as coercion andinsecurity ensure that workers’ performance

is maintained One variable thatorganisations are not able to affect directly isthat which is intrinsic to the individual: theperson’s ‘‘locus of control’’[5] and, obviously,any other personality traits Interestingly,personality traits, it can be argued, may play

a significant part in people’s career/

employer choice Organisations need tounderstand that different variables, indifferent people, in different jobs, in differentdepartments, at different levels in thehierarchy affect motivation and that

measures to influence performance of thosedifferent individuals must reflect that.

Another important factor in employeemotivation can be seen in equity theory(Adams, 1965) with its notions of proceduraland distributive justice in absolute and, inparticular, relative rewards If employeesperceive that their inputs, in terms of theireffort or performance, do not receiveadequate reward, either on their own merit

or in comparison with others, a perception ofinequity will result Attendant negativefeelings of dissatisfaction will result in theindividual being motivated to redress theinequity Generally speaking, this is likely toaffect their future performance in thatorganisation in an adverse manner It is, ofcourse, possible for the reverse situation tooccur whereby the reward is overly generous

in relation to the input (the ‘‘fat cat’’

scenario) and it is believed that guilt feelingsmay be felt Interestingly, little is written onthe effect upon motivation in the ‘‘fat cat’’

scenario! And finally, as far as this briefconsideration of some of the large numbers ofvarying motivation theories are concerned,there is goal setting theory[6] (Locke, 1968),although this time focussing on the

individual rather than the organisation

on performance, the meeting of targets,rather than issues such as seniority forexample, fits with expectancy theory Thequestion that then can be posed is at whatlevel of difficulty should the budget target beset in order to maximise motivation?

Expectancy theory dictates that there will belittle motivating effect if the budget target isset so high that it is perceived to be

unattainable, irrespective of the certainty ofexpected performance associated rewards onoffer

Lyne (1995) has related equity theory toperceptions of the target set, either initially

or upon revision if activity based budgeting

is in operation If the target is seen asirrelevant or unfair in some way then thelikely effect is to de-motivate

Revision of budget targets may also bemade following a comparison of the target setand actual performance Indeed, Becker andGreen (1962), in order to maximise

continuous levels of motivation, advocatedthis For example, if performance is meeting,

or is even in excess of, expectation then, toprevent the worker ‘‘coasting’’, budgettargets should be revised upwards However,one can, at this point, issue a caveat for there

is possibly a strong argument for aconcurrent review of extrinsic rewards toprevent the worker with the revised targetexperiencing equity theory related tensions.Becker and Green (1962) also advocated therevision of budget targets downwards if there

is significant under performance in order toincrease motivation Likewise, one should,perhaps, issue a caveat here Natural justicedictates that one should recognise whenperceived poor performance is due to factorsbeyond the control of the worker (e.g.unrealistic targets, unexpected changes inthe external environment that could not havebeen reasonably foreseen and planned for).Equally, however, it may not be in theorganisation’s best interests to be seen to be

‘‘carrying’’ under-achievers by the revision ofbudgetary targets Capability proceedingsshould be considered in order to assist thesituation

Participation?

According to Macintosh (1995, p 211), asurvey of managers and supervisors by theNational Industrial Conference Board (USA)

in the 1930s showed that there wasconsiderable dissatisfaction with the setting

of ‘‘top-down’’ budgets This appeared to behaving a negative effect upon motivation.Thus notions of participation in budgettarget setting were first proposed

A further study in the USA by Argyris(1952) examined the behavioural dynamics ofbudgeting in four firms The study uncoveredsome very unhelpful attitudes and de-motivating behaviours For example, budgetswere frequently used as an oppressive tool by

an authoritarian, autocratic managementwith a focus on mistakes; an undue attention

on their own departments, rather than on thewhole organisation; the emergence of

‘‘budget slack’’; and a ‘‘blame culture’’.Supervisors, however, were able to see thatthe budgets included unrealistic targets;were backward looking; rigid and inflexible;and were used to apply pressure to increaseproduction All in all, the focus was uponoutputs, not processes, and the result wasde-motivating Indeed, the supervisors tried

to redress what they saw as an imbalance bynot referring to budgetary targets andcontrol The main recommendations flowingfrom this work were those of the supervisorsparticipating in the setting and revision of[ 124 ]

their budget targets and of increased opencommunication amongst them.

Other studies, however, lead one toconclude that, although participativemanagement is seen as being rather

‘‘politically correct’’ currently, it may be thatits value is situation-specific: there may besome organisations in which it is notnecessarily a major motivational force Forexample, Cherrington and Cherrington’s(1973) study found that the ‘‘top down’’

imposition of budget targets led to higherperformance amongst the recipients asopposed to those managers who, more or less,set their own targets Also, contrary tocurrent popular belief, the setting of budgettargets and budgetary control does notalways lead to autocratic managerialbehaviour (DeCoster and Fertakis, 1968)

Managers can be motivated to respond tosuch pressures by exercising their authority

in an inclusive, supportive, democratic,participatory way

Performance

Part of that exercising of authority includesthe use of performance evaluation In today’sworld of Investors in People awards,

performance related pay, and suchlike, theuse of performance appraisals is widespread

Through marking performance against a set

of measures, it is believed that, especially ifthis is linked to relevant rewards, greaterindividual and organisational goalcongruence will be achieved and workerswill engage in behaviour likely to result ingreater efficiency and effectiveness in themeeting of organisational goals Output,especially in the private sector, has,historically, appeared relatively easy tomeasure (sales; profit; units produced;

budget targets met) but some outputs,especially in the public sector, have appeared

to pose more of a challenge to quantify(Pendlebury, 1996) However, with the ‘‘newway of thinking about the state’’ (Ridley,1995), including the introduction of marketforces via a variety of initiatives comingunder the catch-all term of ‘‘privatisation’’

(Ascher, 1993) and the devolvement ofbudgets, this challenge is increasingly beingmet

But what of those areas of performancethat are not subjected to measurement andevaluation? One can argue that worker effortmay be concentrated in those areas that aresubject to scrutiny, possibly to the detriment

of others Effort may also include the use ofbehaviours incompatible with organisationalvalues Drury (1999) has also questioned the

lack of evaluation based on longer-termperformance factors than against relativelyshort-term budgetary indicators

Dysfunctional behaviour associated withperformance evaluation against budgettargets includes the oft-reported creation of

‘‘budgetary slack’’ (see, for example, Loweand Shawe, 1968; Schiff and Lewin, 1968).Essentially, this is where workersendeavour, through the participatoryprocess, to ensure that the budget target isrelatively easy to achieve By so doing, themotivational properties of the budget clearlyare reduced Lyne (1995) has pointed out thatthe likelihood of slack being manipulated isdependent upon a lack of congruencebetween the individual’s and theorganisation’s goals and a lack of open andhonest information sharing and

communication between worker andmanager Gamesmanship may result,however, in the setting of budget targets ifthe manager holds views compatible withTheory X! Despite the reduction in themotivational properties of the budget withthe creation of slack, it should be pointed outthat smoothing properties will be enhancedand stress experienced by the workeroperating to such budgets reduced which, inturn, may prove to motivate

To search for, and identify, managementtechniques that lead to budget targets beingachieved with minimal dysfunctionalbehaviour has been the quest, therefore, ofsome academics Hofstede (1968) advocatedthe creation by managers of ‘‘game spirit’’and effective upward communication inorder to maximise motivation andacceptance of the targets set He argued forbalance The manager needs to walk atightrope in terms of ensuring adequateemphasis is placed upon the demanding, butnot unachievable, target and sufficientopportunities for discussion aroundbudgetary matters to increase motivation,whilst ensuring that unhelpful feelings ofpressure or negative criticism are notengendered which prove to be de-motivating.The latter may sometimes be expressed indysfunctional behaviours such as

absenteeism, which militate againstefficiency and effectiveness

Given managers’ need to evaluateefficiency and effectiveness, Hopwood (1974)identified four styles of employing budgetaryand accounting information in the

evaluation process These were a constrained style; profit conscious style; and

budget-a non-budget-accounting style Although Hopwood(1974) did not explain the origin or

development of these, styles that were linked

to concerns around accountancy issues were

also linked to a variety of dysfunctionalbehaviours and lower reported levels of jobsatisfaction It would appear, however, thatthere is a lack of research into possibleeffects upon the motivation of workers whohave higher budgetary and accountingawareness than do their managers, some ofwhom may have a non-accounting style inthe Hopwood tradition Contagion effectsappear only to have been considered aspossibly acting in a ‘‘top-down’’ fashion(Macintosh, 1995) One may hypothesise thatfrustration and consequent adverse effectsupon motivation must surely result?

Variables

Briers and Hirst (1990) have highlightedsome of the wide-ranging variables,intervening, dependent, moderating andantecedent, upon performance as regardsbudget targets Hopwood (1974) himself notedthat participation in target setting acted as amoderating variable upon dysfunctionalbehaviours and negative job-related tensionwhen effected in a situation where themanager was exhibiting a budgetconstrained style

Participation in the budget target settingprocess has traditionally been taken to meanthe active involvement of the budget holders,

at least, which goes beyond simpleconsultation Anything else is, as Argyris(1952) called it, pseudo participation

Specifically from an accounting perspective,participation is seen as a way of increasingmotivation by getting the staff to ‘‘own’’ thebudget and associated targets and see itsrelevance to them Brownell (1982) took theview that if staff were able to participate inthe setting of their budgetary targets, thenthe emphasis given to the measure of thisarea of performance should be

correspondingly higher, as opposed to whensuch participatory opportunities do not exist

or if they do not represent true participation

However, if the participation is meaningful,the improved communication and (hopefully)control should have a knock-on effect ofimproving performance as the quality of life

at work improves The more cynical, though,would always, perhaps, question the extent towhich workers in primarily hierarchicalorganisations in inequitable powerrelationships really have the ability toinfluence the setting of their budget targets

Effective participation itself is dependent

on the structure of the organisation so, forexample, it is likely that those working indecentralised environments will perceivethemselves to have greater role in

participative budget target setting and suchlike (Bruns and Waterhouse, 1975) Lyne(1995) reports that, by ensuring participation

in the setting of budget targets, motivation of

‘‘low authoritarian persons with highindependence needs’’ is stimulated Suchstimulation of motivation in participativesituations thus varies according topersonality type Drury (1999) has pointed tothe positive effects on motivation thatparticipation produces, but only in thoseworkers who have confidence in their ability

to perform This has implications fortraining and the onus is upon organisations

to ensure that their selection andrecruitment procedures result in staff beingobtained with, and subsequently trained in,the skills required to perform effectively Afurther hypothesis proffered by Lyne (1995)concerned the existence of favourableorganisational attitudes He expressed theview that unless there existed positiveattitudes by workers to the organisation as awhole, management, and the performancemeasurement system employed,

participation was unlikely to increasemotivation Indeed, it may offer anopportunity for destructive and manipulativebehaviours to show themselves overtly Theincidence of manipulative behaviours such

as the creation of budgetary slack was found

by Onsi (1973) to reduce when participativemanagement techniques were used

The environment in which theorganisation finds itself operating maymilitate against the introduction ofparticipatory practices on the grounds ofoverall economic efficiency, however, for it is

a truism that true participation, as opposed

to pseudo participation, involves a heavyinvestment of time and time is money.However, equally, an impetus for theimplementation of participation in budgetingmay be the uncertain nature of the

environment Internal drivers for theimplementation of participation may alsocome from uncertainty for, if seniormanagers lack knowledge and information(i.e there is uncertainty) which is held bysubordinates, then participation is likely to

be pursued

From this, one can question as to whethermotivation is affected by the participants’understanding or perception as to whyparticipation, be it real or pseudo, is pursuedwithin certain organisations Given thecomplexity of researching such a topic withall its interdependent variables, it is,perhaps, unsurprising that attempts to locatepossible answers to this line of enquiry havedrawn a blank thus far

Carried to its logical conclusion, realparticipation would result in the ‘‘bottom-upemployee empowerment’’ envisaged byJohnson (1992) Here, employees at the base

of the pyramid would not only have access todetailed accounting information, but theywould be encouraged and facilitated to usethis, together with their knowledge of thefundamentals of the organisation, to progressand grow that organisation and ensuremaximum efficiency and effectiveness in themeeting of its goals This, it can be argued, is

a somewhat Utopian vision, involving astrong belief in the efficacy of Barnard’s(1938) assertion that power in anyorganisation is held at its base and also thatall have sufficient competence and

motivation to analyse detailed accountinginformation

Much of the current literature concerningparticipation in budget target setting hastended, it seems, to focus on verticalparticipative budgeting Shields and Young(1993), accordingly, have called for futureresearch to examine horizontal participativebudgeting which would, no doubt, stimulateinterest given the flatter organisationalstructures of today and the growth oforganisations working in partnership andutilising pooled budgets

The role of the supervisor and their stylecannot be underestimated when consideringparticipation in setting budget targets, andespecially in their evaluation of

performance Fisher (1989) also highlightedthe provision of accurate speedy feedback bythe supervisor Briers and Hirst (1990) calledfor greater research into various facets ofthis area, such as the selection of supervisorystyle

Conclusion

Clearly the strength of setting budget targetslies in their easily quantifiable, measurableform which removes some of the inherentsubjectivity in evaluating performance

However, performance is generally alsoexpected in areas other than those which can

be measured via the accounting domain

There are many factors that influencemotivation to perform overall and some ofthese have been examined here The use ofparticipation in the setting of budget targets

is one such factor It is hard to see, however,how participation can be isolated from itscontext, for in some circumstances whereparticipatory practices are utilisedmotivation may be increased There is aninherent danger, however, that, because ofthe politically attractive elements of

participation, it may become some kind ofdogma, to be pursued as some sort ofuniversal truth irrespective of the context

Notes

1 ‘‘Pure efficiency’’ being defined as where an objective is met at the lowest cost or where the maximum amount of an objective is obtained for a specified amount of resources.

2 ‘‘Mixed efficiency’’ being defined as where an objective is changed to suit the available resources.

3 ‘‘Content’’ theories focus on the needs of people as the prime impetus for motivated behaviour.

4 ‘‘Process’’ theories focus on the mental processes which transform the motive force/ need into particular patterns of behaviour.

5 This being whether a person believes outcomes and events are under his or her control, or whether they are determined by external factors that cannot be controlled by the individual.

6 In goal setting theory behaviour that is motivated is considered to be a function of the individual’s set goals and the likelihood of achieving these.

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Arnold, J and Turley, S (1996), Accounting for Management Decisions, Prentice-Hall, Hemel Hempstead.

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Reinhold, Wokingham.

Madsen, V and Polesie, T (1981), Human Factors

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Shields, J.F and Shields, M.D (1998),

‘‘Antecedents of participative budgeting’’, Accounting, Organisations and Society, Vol 23

An assessment of the newly defined internal audit function

Albert L Nagy Department of Accountancy, John Carroll University, Cleveland, Ohio, USA William J Cenker

Department of Accountancy, John Carroll University, Cleveland, Ohio, USA

Introduction

In June 1999, the Institute of InternalAuditors (IIA) officially adopted a newdefinition of the internal auditing function

The new definition was developed by theGuidance Task Force (GTF) and defines theinternal audit function as:

an independent, objective assurance andconsulting activity designed to add value andimprove an organization’s operations It helps

an organization accomplish its objectives bybringing a systematic, disciplined approach

to evaluate and improve the effectiveness ofrisk management, control, and governanceprocesses (IIA, 2000)

The new definition shifts the focus of theinternal audit function from one of assurance

to that of value added and attempts to movethe profession toward a standards-drivenapproach with a heightened identity(Bou-Raad, 2000; Krogstad et al., 1999)

The overriding issue addressed in thispaper is whether or not the new definitionactually reflects the day-to-day activities ofinternal audit departments That is, have theactivities of internal auditors really changed?

In addition, the new definition of internalaudit elicits other issues worthy ofexamination For example, do internal auditdepartments have sufficient resources andexpertise to fulfill their role as consultants?

Has there been adequate coordination withthe other traditional corporate governanceparties (e.g audit committees and externalauditors) in regard to the changing focus ofinternal audit? Where does the newly definedinternal audit department fit in the

company’s organizational structure? Thisarticle summarizes the responses andinsights to these and other related questionsfrom internal audit directors of largepublicly traded companies

With the objective of obtaining meaningfulinsight, we conducted structured interviews

with the directors of internal audit of 11 largepublicly traded companies (average revenuesapproximately $6.4 billion), most of whichhave their main offices located in northeastOhio The directors are perceived as highlymotivated, well-seasoned professionals withtenures in their current positions rangingfrom two to 19 years, and internal audit staffsranging from three to 70 individuals Thedirectors have an average of 17 yearsexperience in internal audit, and 19 yearswith their present employer We considerthese individuals to be some of the leadingprofessionals in the field of internal auditing,and believe that their opinions and insightwould be valuable to the financial

2 Organizational structure – how is theinternal audit department perceived andevaluated?

3 Risk management – how does the directorassess business risk and identify auditareas to target?

4 Audit committee – what are the auditcommittee’s expectations of internalaudit?

The issues discussed with the directors arecouched in terms of discussing the changeswithin their respective departments over aten-year time frame Those individuals whohad not been with their respective companiesfor ten years represented to have a goodunderstanding of their companies’

environment in the early 1990s The remainder

of this paper provides a summary of theresponses provided by the directors to selectedquestions in the above stated categories, alongwith some general comments

The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0268-6902.htm

The new definition of internal

auditing defines the function as an

independent, objective assurance

and consulting activity designed

to add value and improve an

organization’s operations The

purpose of this paper is to

summarize an assessment of this

new definition obtained through

structured interviews from 11

internal audit directors of large

publicly traded companies The

responses from the directors

indicate that there are wide

differences in viewpoints and

objectives; but a definite shift has

occurred in the overall scope of

internal audit towards operational

activities While most of the

interviewees are in conceptual

agreement with the new internal

audit definition, an underlying

warning is vocalized: ‘‘Don’t throw

out the franchise’’ That is, the

traditional role of the internal

auditor should not be completely

abandoned These, along with

other responses pertaining to

related issues and suggestions for

future research, are summarized

throughout the paper.

The scope and orientation of internal audit

The questions in this section of the interviewaddress the overall orientation of theinterviewee’s internal audit department, anyrecent shift in this orientation, and severalsurrounding issues arising from this shift

Based on our discussions and consistent withthe new internal audit definition, theorientation of internal audit has shiftedtoward consulting and value added servicesand away from the traditional assuranceservices Such a shift raises severalinteresting issues including: has the externalauditor compensated for the reduction inassurance services previously provided byinternal audit, and who determines the scope

of activities for the newly defined internalaudit function? The following is a

summarization of the responses to these andother selected questions in this section of theinterview

Question: do you agree with the changingdefinition/role of the internal auditfunction?

The directors interviewed generally agreethat the changed internal audit definitionfocusing on value-added activities isappropriate Those directors in supportgenerally believe that ‘‘there are no cost-savings for departments focusing onfinancials,’’ and that the ‘‘responsibility offinancial reporting ‘watchdog’ falls mainly

on the external auditor.’’ Although thesedirectors agree with the new definition, theimpact it has on their department’s scope andactivities is minimal A recurring

observation from the directors was that theirrespective internal auditing departmentshave been focusing on value-added activitiesfor years, and that ‘‘the definition has finallycaught up with practice.’’

Interestingly, several directors takeexception to the use of the term ‘‘consultants’’

to describe their internal auditors and arecareful to distinguish between operationalauditing and consulting For example, onedirector defines operational auditing as

‘‘assessing business processes and controlsagainst established criteria Value-addingrecommendations may or may not resultfrom such audits.’’ In other words,operational auditing involves the assessment

of the effectiveness of internal controls andsystems in place, and is clearly a function ofinternal audit Being a consultant, on theother hand, was viewed as ‘‘having a level ofknowledge and expertise that most internalauditors do not possess.’’ Consultants arehired to solve problems or recommend

solutions, which is a different function thanassessing controls or procedures againstestablished criteria

Along with questioning the capabilities

of internal auditors as consultants,several directors are weary of the longevity

of the consultant’s role That is, consultantsare ‘‘hired to fix problems and then go away,’’certainly not a desirable role for mostinternal auditors Thus, despite the factthat the new internal audit definitionincludes consulting as an internal auditactivity, most of the directors refuse to labelthe activities of their departments as

‘‘consulting.’’

A cautionary reminder to the internalaudit community consistently given by thedirectors was to ‘‘not forget our roots.’’ Thesedirectors note that the traditional attestationfunction of internal audit has been useful toorganizations for many years, and it is thearea of expertise of internal auditors.Therefore, these directors believe that thetraditional role of internal audit should not

be completely abandoned in favor of the new

‘‘foolish for the profession to stand up andsay, this is what you have to be.’’ Anotherechoes this belief by suggesting that ‘‘thedefinition of internal audit should not fallinto generalities because every company isdifferent Our current chairman does not feelthat operational auditing has significantvalue, certainly not as much as traditionalfinancial statement auditing does

Management does, and should, dictate what

we do, not the profession.’’

Questions: given the new definition of theinternal audit function, have the objectives

of your department shifted to focus onvalue added activities? If so, who initiatedthe change?

Most managers opine that the focus hadshifted several years prior to the definitionalchange and that the new definition simplybetter reflects existing practice However,only two managers indicate that theinitiative for the change originated with theinternal audit department A consistenttheme in the responses is that management,not the profession, ultimately determinesthe orientation of the internal auditdepartment of a company One commentperhaps best illustrates the actual status,

[ 131 ]

Albert L Nagy and

William J Cenker

An assessment of the newly

defined internal audit function

Managerial Auditing Journal

17/3 [2002] 130–137

even though the manager agrees with thechanged definition: ‘‘We [internal auditors]

are trying to dictate what we are; butactually it is dictated by managementexpectations.’’

Question: assuming a shift in yourdepartment’s focus, has there been asatisfactory coordination with theactivities of the external auditor?

The responses to this question fell on aspectrum from ‘‘total coordination’’ to

‘‘coordination just not being there.’’ Notsurprisingly, the level of coordination withthe external auditor seems to be dependentupon the focus of the internal auditdepartment That is, directors of departmentswith a significant orientation towardsthe traditional assurance/complianceservices indicate far more extensivecoordination with the external auditor Thedirectors whose departments have anoperational focus generally consider theirrole (that of improving operationalefficiency) quite different than that of theexternal auditor (assuring the financials),and thus believe that less coordination isnecessary

A director from a ‘‘pure operational shop’’

indicates that the communication betweenthe internal and external auditors is as if ‘‘theGreat Wall of China exists between the two

We’ve got a long way to go and I am not surethat we will ever get there [coordination]

External auditors perform, at best, only acursory review of the suggested internalaudit plans.’’ On the other end of thespectrum, a director of a company thatrequires extensive compliance audits,because of many overseas divisions,indicates that total coordination existsbetween external and internal auditors

For this company, the external auditor

‘‘performs an extensive review of the internalaudit program so that work will not beduplicated.’’

Several directors of departments focusingprimarily on operational auditing express ageneral concern about the level of reviewbeing conducted on the quarterly reports(10-Qs) These directors note that the shift

in focus toward operations coincideswith a reduction of traditional attestationtesting, and that the external auditors

‘‘had not increased their level of detailedtesting to compensate.’’ When asked if thequarterly statements are being reviewed at

an adequate level, many of the directorssimply did not know These responsesraise additional questions that may beworthy of future empirical research

For example, has the shift towards

operational auditing by the internal auditorscreated a gap in the attestation reviewfunction? Are important accounts receivingadequate attestation review? Are quarterlyresults receiving adequate attestationreview?

Questions: based on your experience, what

is the relative input from the followingsources in determining what subjectmatter to audit: line manager, topmanagement, audit committee, internalaudit director, and other? Has thischanged over the past ten years?

Consistent with internal audit departmentsmoving toward an operational/consultingorientation, the directors interviewedindicate that the relative input from thedepartment’s ‘‘customers’’ (i.e line managersand top management) has increased over thelast ten years The internal audit directorsstill possess significant input in determiningwhat should be audited, but not nearly asmuch as ten years ago One director, wholabels his department of ten years past as a

‘‘graveyard’’ where ‘‘nothing was beingdone,’’ asserts that the department was run

by a director who dictated 100 percent of thedepartment’s activities without input of anykind from line managers or top management

An interesting, and perhaps disturbing,observation from the responses is that theaudit committee has minimal-to-no input indetermining the audit plan

Another observation consistent withinternal audit departments moving toward

an operational/consulting orientation is thatdirectors are allotting significant amounts ofbudget time for unanticipated requests fromcustomers Arguably, consulting and value-added activities are more reactionary thantraditional assurance activities and thus aremore difficult to plan One director from a

‘‘purely operational’’ shop sets asideapproximately one-half of his department’stime for unanticipated requests, and justifiesthis act by stating ‘‘in the 1980s our activitieswere driven internally In the 2000s, I don’t

do it if someone doesn’t want it done.’’

Organizational structure

Some interesting organizational structureissues arise from the newly defined internalaudit role One such issue is how doesmanagement evaluate the activities ofinternal audit? That is, the traditionalassurance function of internal audit, oftenperceived as a ‘‘necessary evil,’’ had a clearand distinct role within the organization andthe value of these services often went[ 132 ]

Albert L Nagy and

William J Cenker

An assessment of the newly

defined internal audit function

Managerial Auditing Journal

17/3 [2002] 130–137

unquestioned However, by migrating toward

a consulting role within the organization,internal audit departments may lose thesafety net of being labeled as a ‘‘necessaryevil’’ and may now have to justify the value oftheir activities to top management on acontinuous basis By reaching anunderstanding with management of whatmakes internal audit services value-added,internal audit ensures that their services will

be fully utilized and that theirrecommendations will be respected (Flesherand Zanzig, 2000) The following is a

summarization of the responses to selectedquestions in this section of the interview

Question: do you feel an increased need tojustify the services of internal auditing totop management?

Surprisingly, only one of the directorsinterviewed found it important to justify theservices of internal audit to top management

on a continuous basis In general, thedirectors believe that their services areperceived within their organization asimportant and have never felt the threat ofbeing outsourced or discontinued Mostdirectors cite a strong ‘‘tone at the top’’ inregard to quality reporting and controls,and thus feel no need to continuously justifytheir existence The one director whoperceives an ‘‘absolute’’ need to justify thedepartment is in an organization whosemanagement is committed to value-basedmanagement (VBM), and thus feelscompelled to present cost savings or valueadded amounts from internal audit to topmanagement and the audit committee Theseresponses reflect a potential inconsistency Is

it hypocritical for internal auditors, whoassess the efficiencies and justification oforganizational units’ services, to avoid thescrutiny of being evaluated themselves byothers?

Question: do you measure the amount ofvalue-added by your department?

Consistent with the previous question’sresponses, most of the directors interviewed

do not attempt to quantify or measure theamount of value that is added from theirdepartment’s activities These directors donot feel threatened or pressured to justifytheir department’s services, and thus believethat measuring the amount of value-addedwould be a pointless exercise Additionally,these directors opined that the inherentdifficulty in measuring value-added amountsmakes quantifying them impossible or at bestproblematic One director went so far as toindicate that it is ‘‘dysfunctional’’ to reportsuch an amount because management may

use this number as a benchmark for futureresults

Despite the inherent difficulties inmeasuring value-added amounts, a few of thedirectors interviewed quantify and reportthis amount to top management on an annualbasis These directors believe that

quantifying and reporting the value-addedamount is a positive process that can bemeasured objectively Annual cost savingscaptured by internal audit is the basis forthis measurement These directors view theprocess as ‘‘job security,’’ that helps promote

a company-wide attitude of perceivinginternal audit as a ‘‘resource.’’ Only one ofthe directors is required to formally establish

a target goal as part of the operating budget(the one director subject to VBM) Reviews offleet leasing arrangements (number ofvendors, evaluating lease/purchase options),and healthcare (improved Medicare

integration, use of generic drugs), were given

as examples where ‘‘real dollar’’ savings weregenerated by the departments

Question: do you survey your customers toobtain feedback about the performance ofyour audit staff?

Two viewpoints emerged from the responses.One group of directors believes that

surveying their customers is a usefultechnique in assessing the amount of valuethat their department is providing Thesesurveys typically ask for an evaluation of theindividual auditor’s effectiveness andprofessionalism Most of these directors (allbut one) indicate that the survey results arenot directly linked to the auditor’s

compensation, but may be used as criteriawhen considering promotions The onedirector whose company formally links theinternal audit department’s annual bonus tosurvey results represents a department that

is heavily operational in nature and thedirector believes that ‘‘customer satisfactionshould weigh in compensation decisions.’’The other group of directors believes thatsurveying customers is not a justifiableexercise for internal audit departments toperform This group suggests that suchinformation is ‘‘worthless’’ and could

‘‘potentially undermine the auditor’sobjectivity and independence.’’ One directorsummarizes this group’s viewpoint bystating, ‘‘I want our auditors to do their joband not worry about ‘finding’ things orsatisfying the customer An auditor thatdoes not find anything wrong or discovercost-savings did not necessarily do abad job.’’

[ 133 ]

Albert L Nagy and

William J Cenker

An assessment of the newly

defined internal audit function

Managerial Auditing Journal

17/3 [2002] 130–137