=Paper=
{{Paper
|id=Vol-1498/HAICTA_2015_paper63
|storemode=property
|title=Compliance of Food and Beverage Companies as to the Requirements of Internal Audit
|pdfUrl=https://ceur-ws.org/Vol-1498/HAICTA_2015_paper63.pdf
|volume=Vol-1498
|dblpUrl=https://dblp.org/rec/conf/haicta/BoskouKS15
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==Compliance of Food and Beverage Companies as to the Requirements of Internal Audit==
https://ceur-ws.org/Vol-1498/HAICTA_2015_paper63.pdf
Compliance of Food and Beverage Companies as to the
Requirements of Internal Audit
Georgia Boskou1, Efstathios Kirkos2, Charalambos Spathis3
1
Department of Accounting and Finance, Technological Educational Institute of Thessaloniki,
Greece, e-mail: boskoug@acc.teithe.gr & Department of Economics, Division of Business
Administration, Aristotle University of Thessaloniki, Greece, e-mail: mposkoug@econ.auth.gr
2
Department of Accounting and Finance, Technological Educational Institute of Thessaloniki,
Greece, e-mail: stkirk@acc.teithe.gr
3
Department of Economics, Division of Business Administration, Aristotle University of
Thessaloniki, Greece, e-mail: hspathis@econ.auth.gr
Abstract. This study assesses factors influencing Internal Audit Quality (IAQ)
in Greece. Hand-collected data were obtained from 2013 and 2014 annual
financial reports from companies such as food industries, beverage –and their
subcategories- industries as well as fishing and distillation, listed in Athens
Stock Exchange (ASE). Previous literature was chosen in order to highlight
significant independent variables. Linear regression analysis examines the
association between Internal Audit Compliance (IAC) and seven principal
factors. In order to define IAC we consider the compliance of an internal audit
function analyzing in operational aspects such as the Segmentation of Duties
and the Professional Competence and Knowledge Adequacy. The results found
indicate Internal Audit Compliance, on a sample of Greek listed firms; have
significant associations between the degrees of compliance to some external
audit variables.
Keywords: Internal Audit Compliance, External Audit, Corporate
Governance, Food and Beverage Industry, Greece
Data Availability: All data are publicly available.
1 Introduction
Internal audit regulations have been the subject of an ongoing debate among
academics, regulations, and practitioners, all over the world, and its effectiveness
remains controversial in the aftermath of the recent financial crisis (Altamuro and
Beatty 2010). One of the objectives of an internal control system is to provide
reasonable assurance regarding the reliability of financial reporting (COSO 1992).
The OECD (Organization for Economic Cooperation and Development) published
the “Corporate Governance Principles” in 1999. The term “corporate governance” is
used to define the way companies are governed and audited. Corporate governance as
551
a concept and as a method of verification of transparency, the effective financial
reporting and the way companies function, is considered as top priority for the
investors in the money market from 1990s until today (Xanthakis, Tsipouri, Spanos,
2003). The high profile financial reporting scandals than marked the first decade of
this century like: Enron, Worldcom, Parmalat, have highlighted the weaknesses
management and control in business and especially in listed companies, provided
evidence that the auditing practices may be enriched and improved (Kirkos et al,
2007a, Kirkos et al, 2007b) and led to revisions in internal control regulations
globally. Different countries make different choices regarding the reporting of
internal control in annual reports. Aglo-Saxon countries, along with the U.S.A have
pioneered in this issue by legislating laws such as Cadbury, Sarbaness-Oxley (SOX).
The European Commission (2006) has chosen the “comply-or-explain principle”
with regard to corporate governance regulation, meaning the management either has
to comply with the applicable internal control regulations of the member state or
explain and report why they do not comply. The Greek Code of Corporate
Governance (EKED) has been drawn up with the initiative of the Association of
Corporations and Industries (SEB) and was modified afterwards in the framework of
its first review by the Greek Council of Corporate Governance (ESED) on 28th June
2013. The Code aims at constant improvement of the Greek corporate institutional
framework and the wider corporate environment, as well as to increase the investors’
trust, not only to the total of the listed firms but also to each one of them separately,
broadening at the same time the horizons of attracting entrepreneurial capitals. The
Code is followed of the approach “comply-or explain” and demands from the listed
firms that choose to implement it: to make known what specific intention of theirs
and either to comply with the total of the special practices of the code or to explain
the reasons for their non-compliance with the specific special practices (EKED, SEB
2013).
The purpose of this paper is to enhance the compliance of the companies, in the
food and beverage sector, listed in ASE with the requirements of the Internal Audit,
as defined by the Corporate Governance Code (CGC).
The rest of the paper is structured as follows:
• In Sect.2 the literature on IAQ is examined and specifically the literature
on IAC.
• In Sect.3 a methodological notes describes the related indicators, the
techniques and the regression model adopted in this study and the sample
being considered.
• In Sect.4 results, in order to assess whether a relationship between the IA
Compliance and the seven factors exists, in Food and Beverage
companies and also presented directions for future research.
552
2 Literature Review
Law imposes the formation of an auditing committee on the listed firms.
According to the optimum European practice, the Code recommends the formation of
an auditing committee, which consists –in the majority- of independent non-
executive members of the board. This recommendation improves the established
order of corporate auditing of the listed firms in Greece, in which the dominance of
big stockholders is obvious, as it enhances the feeling of safety of minority
stockholders, imposing the independent supervision of the system and the internal
auditing unit, including the auditing of financial informing. The listed companies are
required –by law- to examine regularly their internal auditing system. What is
defined as a system of internal auditing are all the procedures that are put in force by
the Board, the Administration and the rest of the staff of a company, targeting at the
ensuring of the effectiveness and the efficiency of the company tasks, the credibility
of financial informing and the compliance with the applied laws and regulations
(Kontogeorgis, 2013)
According to the model of Corporate Governance of Institute of Internal Audit
(2005), the effective function of internal audit constitutes one of the basic pillars of
corporate governance along with three others. Those three pillars are the control
committee, the external auditor and company’s administration. The significance of
the internal audit can also be stressed by the fact that in many stock markets it is
compulsory for the listed companies to run internal audit procedures. Especially now,
following the latest corporate scandals that shocked U.S.A. it is compulsory for the
companies not only to enact the function of internal audit but also to enact control
committees within the company aiming at the most efficient function of the company
(IIA, 2015). The Internal Audit Department (IAD) must adopt the following
definition coming from the Institute of Internal Auditors and is accepted worldwide:
“Internal audit is an independent, objective, ensuring and consulting activity,
designed to add value and improve an organization’s functions. It also assists the
organization to achieve its professional goals by adopting a systematic, professional
approach towards the evaluation and improvement of the efficiency of procedures of
risk handling, of internal audit systems and corporate governance.
In 1992 the COSO committee sites a definition about internal audit that
emphasizes the role of the administration during the control procedure. More
specifically, according to COSO, “internal audit is a procedure which can be affected
by the Company’s Board, the Administration and the rest of the staff and is designed
to provide sufficient reassurance” regarding the achievement of the following
objectives:
• The effectiveness and efficiency of the functions
• The credibility of financial status
• The compliance with the applied laws and regulations (COSO, 1992)
One of the objectives of an Internal Audit (IA) system is to provide reasonable
assurance regarding the reliability of financial reporting. IA quality is an issue of
great significance to both internal and external audit professions. Additionally, the
quality of the Internal Audit Function (IAF) will probably affect the assessment,
553
carried out by management and the external auditors, of the effectiveness of internal
control over financial reporting that is now required by Auditing Standard No 2
(Gramling et al, 2006, Boskou and Spathis 2014). The public trust in an auditor’s
judgment is highly important in the process of accepting audit functions as valued-
added services, that drive credibility to published financial statements (Rezaee 2004;
Arena and Azzone, 2009). As a result it is important to examine which monitoring
mechanism corporations can use in order to ensure the effectiveness of their internal
control (Krishnan, 2005). Typical of the quality changes that the concept of internal
audit has undergone, is the existence of a current trend that compels the internal
auditor to comprehend and probe a number of issues of the company before he
completes his briefing towards the Board. The new extended responsibilities of the
internal auditor can be abbreviated with the letters GRC, which mean Governance,
Risk and Compliance (GRC). An accepted and reliable definition of the GRC is that
of “Open Compliance and Ethics Group” that was drawn up by a group of
professionals relevant to internal audit. A summary of this definition refers to how an
organization perceives the expectations of those interested in it, how activities are
managed and run so as to maximize the performance of these expectations, handling
risks, being at the same time in compliance with the applied laws, regulations and
duties (Marks, 2010). In an attempt to study the relationship between internal control
reporting and accruals quality in an alternative internal control regime based on the
‘‘comply-or-explain principle’’ in the Netherlands. They found that the
noncompliance rate of providing a statement of effective internal controls is
relatively high, and that companies give generic explanations for noncompliance or
no explanation at all. In addition, they found that the noncompliance rate of
providing a statement of effective internal controls is relatively high (Van de Poel
and Vanstrelen, 2011).
A survey in Italian listed firms tried to find if there is an association between the
compliances to codes and internal control effectiveness through IAF operational
aspects. They conclude that there are significant associations between the degree of
compliance to some corporate governance regulation and the Internal Audit
Department (IAD) index for the sample being considered (Regoliosi and D’Eri,
2014). Mahdy and Park (2014) examine the association between disclosure of
internal control deficiencies and information asymmetry in the US secondary loan
market. Motivation for their research was the fact that legislation SOX 2002 requires
firms to disclose the effectiveness of their Internal Control weaknesses as well as
management evaluation of the effectiveness of controls and procedures (section 302)
and external auditor’s opinion (section 404).This research on Saudi Arabia public
sector employs several measures of Internal Audit Effectiveness (IAE), implement
internal audit recommendations. The findings depict an association between
management support and more effective internal audits and the necessity for
implementation and compliance internal audit recommendations (Alzeban and
Gwilliam, 2014).
Food and Drink Industry –even in financial crisis times- retains its fundamental
role in Greek Economy and in Greek processing industry and has the potential to
remain the basic force of the country’s development. These industries constitute an
important factor of Greek Economy, because they are supplied with raw materials
from the agricultural sector and because they provide consumers with basic daily
554
goods (Mattas and Tsakiridou, 2010, Chatzipetrou and Moschidis, 2015). Issues that
come up regarding the role of domestic food and drink industry as a vaulting bar for
growth and development have to do with the extroversion and exporting, the equality
of Greek products, the identity of the products and the organized promotion of Greek
food products. The effective coordination and the close cooperation of the
representatives of this sector can contribute to the improvement of the efficiency and
effectiveness of the promotion of the Greek products, to the ensuring of choosing the
proper strategy and to the stability of the realization of this long-term planning. The
creation of additional value and the enhancing of the extroversion of the profession
are up to –a great extent- to the promotion of the Greek product, to its relation with
the third primary sector of tourism but also to the perspective that the profession
presents on the financial elements revealed at the annual reports, adding value to it
(Antoniadis, 2004, Report, ΙΟΒΕ 2013).
Against this background, the following hypothesis is formulated:
Η1. In a comply-or-explain regime, there is an association between Internal Audit
Compliance (IAC) and external auditors report.
3 Methodology
3.1 Sample size and selection
Studies of internal audit quality are few in number compared to studies of external
audits. This research investigates factors that may influence IAQ within food and
beverage companies listed in ASE during the crisis period and especially years 2013
and 2014.
Specifically the sample consists of Food and Beverage industries and their
subcategories as well, fisheries and distillation. This gives us 23 firms on an annual
basis observation. Further we exclude 2 firms, one that its data was not available as it
was on suspension (Dias SA) and the other because its twelve-month use does not
coincide with the calendar year (1/1-31/12) but with the taxable year (1/7-30/6)
(Hellenic Sugar Industry SA). This yields a final sample of 44 firms examined over a
period of two years (Appendix A). We retrieve financial data and data relevant to the
function of Internal Audit taken from the annual reports. Data on the internal audit
requirements and rations were hand collected and manually coded from the annual
reports of the companies.
3.2 Research models
We use multiple linear regression analysis to examine the association between
IAC and external auditors report. The dependent variable in this study is Internal
Audit Compliance (IAC) which is a complex variable resulting from the i)
Segmentation of Duties and the Professional Competence and knowledge Adequacy
555
ii) Regulation Levels of Approval iii) Authorization of Access to files on the
financial statements.
The factors were identified from a review of previous academic literature studying
the internal audit function. Guidance from International Professional Practices
Framework (IPPF) and other related documentation is also considered. These choices
identified seven factors as relevant to IAC: Opinion with paragraph, number of
paragraphs, audit company code, return of assets (ROA), return of equity (ROE),
leverage, company size.
We use external auditors’ opinion, as independent variables, to evaluate IAC on:
1. Whether the external auditors’ report contains remarks (with paragraph) in
the external auditor’s evaluation report. (An indicator variable equals 1 if
the auditor’s report contains remarks, otherwise it equals 0).
2. The number of issues external auditors’ reports refers to. (An indicator
equals to the total of the remarks).
3. Whether the auditing company belongs to Big.4 or not. (An indicator
variable equals 1 if the audit company belongs to Big 4, otherwise it equals
0).
In order to ensure that we could isolate the factors that are associated only with
high degree of compliance and that they do not belong to the external audit variables
mentioned previously, it was important to include additional control variables which
have been identified by previous literature as being significant ones in the analysis.
For example, we examine specific firm characteristics like ROA, ROE, Leverage and
Company Size:
• Return of Assets (net income/average total assets, Mahdy and Park, 2014).
• Return of Equity (net income/average equity).
• Leverage measured at year end 2013 and 2014: LEVERAGE (as measured
in terms of Average Assets and Equity).
• Company size as of 31.12.2013 & 31.12.2014: SIZE (as measured in terms
of the natural logarithm of total assets Klein 2002, Regoliosi and D’Eri
2012).
3.3 Empirical results
Descriptive statistics
Table 1 shows the mean and the std. deviation.
556
Table 1. Descriptive Statistics of All Variables
Panel A: Full Sample (n=44 )
Variable Mean Std. Deviation
IAC 0.91 1.427
Opinion with paragraph 0.41 0.498
Number of paragraphs 1.22 1.725
Audit company code 0.15 0.363
ROA -0.05 0.117
ROE -0.07 2.307
Leverage -2.30 47.356
Size 7.66 1.242
Correlations
Table 2 present Pearson correlations between the transformed dependent and
independent variables. The following correlations support several theoretical
hypotheses: IΑC is significantly positively correlated with Number of paragraphs.
Table 2 also shows that many explanatory variables are significantly correlated with
each other. The test of the formal hypothesis is based on linear regression analysis.
Table 2. Pearson Correlation Coefficients between the Variables
Audit
Opinion with Number of
Variable IAC company ROA ROE Leverage Size
paragraph paragraphs
code
IAC 1
Opinion with
paragraph 0.239 1
Number of
paragraphs 0.369* 0.851** 1
Audit
company code 0.069 0.136 -0.019 1
ROA 0.052 -0.579** -0.547** -0.207 1
ROE 0.001 -0.016 -0.072 0.018 -0.179 1
Leverage -0.219 -0.107 -0.115 0.043 0.022 -0.871** 1
Size 0.213 0.203 0.180 0.215 -0.274 0.050 0.037 1
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
557
Table 3 shows the Adjusted R2 is 0.209 which is satisfactory.
Table 3. Regression Model Summary
Adjusted ANOVAa
R Square F Sig
0.209 2.545 0.032b
Regression
a. Dependent Variable: IAC
b. Predictors: (Constant), Opinion with paragraph, Number of paragraphs,
Audit company code, ROA, ROE, Leverage, Size.
Table 4 presents the empirical results. Significant variable is Number of
paragraphs. As far as control variables are concerned, we can see that IAC is
significant positive associated with Size and ROA.
Table 4. Regression Coefficientsa
Unstandardized Standardized
Coefficients Coefficients
B Std. Error Beta t Sig.
(Constant) -8.350 4.138 -2.018 0.052
Opinion with
-0.707 0.782 -0.250 -0.905 0.372
paragraph
Number of
0.599 0.257 0.714 2.328 0.026
paragraphs
Audit company
0.180 0.621 0.048 0.289 0.774
code
ROA 4.938 2.149 0.425 2.298 0.028
ROE -0.113 0.189 -0.189 -0.599 0.553
Leverage -0.023 0.021 -0.352 -1.061 0.296
Size 1.161 0.537 0.360 2.160 0.038
a. Dependent Variable: IAC
b. Predictors: (Constant), Opinion with paragraph, Number of paragraphs, Audit
company code, ROA, ROE, Leverage, Size.
558
4 Conclusions
The purpose of this study is to provide insights into the internal control quality,
the compliance with the internal audit regulation and the relation with the external
audit. In particular, we investigate the relation between compliance with the internal
audit regulations as they depict on the annual reports and the present interaction with
the indicators of external audit.
We conduct our study in Greece and specifically on food and beverage companies,
which are listed in ASE for the following reasons. Firstly, a corporate governance
code is applied in Greece, in particular the “comply-or-explain” regime which by its
structure it contains important information on the internal audit system and its
application. Secondly, we wished to view the correlation between internal audit
quality and the external audit opinion. Last but not least, the specific sector of food
and beverage industry is particularly important in our country due to its relation both
to the primary and the tertiary sector of production, especially in these two years
during the elation of the economic crisis, examined in our sample.
The results found indicate that internal audit compliance, the dependent variable,
is a complexion of: 1) the segmentation of duties and 2) professional competence and
knowledge adequacy and is related to a great extent with one of the three
independent variables, that is “number with paragraph” which refers to the number of
issues that the external auditor puts stress on without on the other hand his positive
view to be influenced in the external audit report. There is also a high degree of
correlation with the two of the four control variables, such as “SIZE”, which refers to
the company’s size, and “ROA”, which is an indicator of how profitable a company
is relative to its total assets.
Although considerable attention was given to the method and the design of this
paper, some limitations still exist. Firstly, in order to be able to conduct the
comprehensive literature review, the focus was kept relatively narrow in IAQ. Also,
we found only 23 companies for the year 2013 and 21 for the year 2014 listed in ASE
that are part of the food-beverage sector due to the economic crisis that our country
has been facing for the last five years, many companies have been on suspension
regime. Secondly, the existing literature studying the relation between IAQ and IAC
is rather restricted, due to the fact that reports in IA departments are not publicly
available. Results provided by this research cannot be regarded as generally
applicable, although this study should contribute to the development of a deeper
understanding of the characteristics of Internal Audit Quality.
The suggestions formed after the completion of this present research paper on
future research could be as follows:
1. Extension of research to other sectors of Athens Stock Exchange in order to
broaden our knowledge on the quality of internal audit on more sectors of
ASE.
2. The correlation of internal audit quality with financial sizes. This
investigation will provide the possible existence of relations between the
internal audit quality and the financial sizes of a company.
559
3. Wider evaluation of the compliance with internal audit models or with
corporate governance codes on the part that refers to the known object of
internal audit.
4. The correlation of internal audit quality with the external audit and the
interaction between them.
5. Focusing analysis on the specific components of the IA indicator or create
other IA total indicators and attempting to assess the contribution of several
CG elements to other aspects of IAQ.
The contribution of internal audit quality has greatly increased nowadays due to
the hard economic conditions that our country faces. Internal audit can resolutely
contribute to the improvement of competitiveness of Greek company, specifically in
food and beverage sector and by extension to Greek Economy. This improvement
can constitute a major factor so as Greece exits the economic crisis.
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Appendix A
Industry Segment Companies
Refreshments Coca Cola ΑΕ
Distillation & Wine Boutari SA
Production Constantin Lazarides SA
Dias SA
Galaxidi Marine Farm SA
Agriculture & Hellenic Fishfarming SA
Fishing Nireus SA
Kreka SA
Selonda SA
Creta Farm SA
Elgeka SA
Evrofarma SA
Hellenic Sugar Industry SA
K.Sarantopoulos SA
Karamolegos SA
Kepenos Flour Mills SA
Food
Kri-Kri SA
Kriton Artos SA
Loulis Mills SA
Nikas SA
Perseusgroup SA
Sons E.Xatzikraniotis Flour Indusrty SA
SteliosKanakis SA
562