an empirical investigation of turnover intentions of internal auditors

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AN EMPIRICAL INVESTIGATION OF TURNOVER INTENTIONS OF INTERNAL AUDITORS

A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business at

Virginia Commonwealth University

by

Satina V Williams

Master of Business Administration, University of North Carolina, Chapel Hill, NC, 1991 Bachelor of Science, Benjamin Franklin University, Washington, DC, 1984

Director: Dr Benson Wier, Associate Professor, Department of Accounting

Committee members:

Dr Ruth W Epps, Chair, Department of Accounting, VA Commonwealth University Dr, Don W Finn, Chair, Department of Accounting, Louisiana State University

Dr Margaret L Williams, Department of Management, VA Commonwealth University

Virginia Commonwealth University Richmond, VA

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UML UMI Microform 3091837

Copyright 2003 by ProQuest Information and Learning Company

All rights reserved This microform edition is protected against unauthorized copying under Title 17, United States Code

ProQuest Information and Learning Company 300 North Zeeb Road

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Virginia Commonwealth University

This is to certify that the dissertation prepared by Satina V Williams entitled, AN EMPIRICAL INVESTIGATION OF TURNOVER INTENTIONS OF INTERNAL AUDITORS, has been approved by her committee as satisfactory completion of the dissertation requirement for the degree of Doctor of Philosophy in Business ÂwwU /JA« Benson Wier, Director, Virginia Commonwealth University Commmittee Mefners: Ắ TW ff yee! Ruth W Epps, Virginie’ Commonwealth University Don W- Fam Don W Finn, Louisiana State University 7 haramet Lh hill, 4Œ

Margaret L Williams, Virginia Commonwealth University

Ruth W Epps, Chair, BepArtment of Accounting

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ii

Acknowledgements

I wish to acknowledge my committee chair, Dr Wier, for his support, guidance and patience throughout my dissertation process I thank my committee members, Drs Epps, Finn, and Williams for their support and guidance I acknowledge the VCU accounting faculty and other School of Business faculty and staff for always having encouraging words To my classmates, thank you for your support and encouragement

Thank you to KPMG and Bernie Milano and the staff of the PhD Project for the financial support and the vision that is becoming a reality in business schools across the country My family and friends have also played an important role in my completing the PhD program I thank my parents, John Arthur and Vernola Williams, who always came through for me My sisters (Shelley, Leona and Arlisa) and brothers (Quintelle, John,and Reginald, PhD) and many friends who asked the important question, how is your

dissertation coming?

A special thank you to Dr Charles Cook (Raleigh, NC) who made it possible for me to stay healthy while living the life of a student and always remembered to ask about my progress in the program

I must also thank those who came before me My ancestors, whose names I will never know, who came to this country in chains and endured hardships I can only imagine Because of their determination to be free and live, I have reached this goal To my ancestors born in this country and who are now asleep, they could not enjoy the many privileges we enjoy today but fought so their children could Thank you to my

grandparents who raised my parents to appreciate the importance of a good education To my parents who understand that the future belongs to those who prepare for it today I thank you all I only pray that you are as proud of me as I am of you

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Table of Contents

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Abstract " ¬ - ¬ se, Vil

Chapter 1

The Theoretical Model VY ng ng v4 4157174 H1 K2 11 8 1 10 k1 11215 8 key saves Current State of Voluntary TUTHOVCF co HH ng TH kg Hà 4x mưu Internal Audit Profession — KH ng ưếy oe Internal Audit Ôu[SOUTCITE cung HH ng ng nh net mom

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Chapter 2

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT 15 Literature R€VICNW co càng HH TH Hà ng Hà the trrierveeee Ÿ PO) 8N 19 Survivors’ Reactions to Layoffs ¬ seed 6022 nh can 26 Hypotheses Developimenf sen HH HH HH HH ưêc 30 Psychological State-Job Ïns€CUTify sen xe, 30 Consequences-Professional Commitment and Organizational

Commitment ¬ ¬ 31 Professional CommIfmeni cv H21 11k cày 31 Orgamizational Commitmeri( or sessed Outcome-Turnover Intention V* HH HH ve ch LH nghe HH ket 35 Chapter 3

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Table | Page 1 Reliability Scores and Factor LOAd1DBS cá HH HH HH 9g 1x xay _ 2 Demographic Variables — K.9Ề1 11 1110121 tá Hà KH TT HT T1 Cà Hà trọ 47 3 Descrnptive Statistics of Measured Varlables v.v Ô 4, Pearson Correlations Among Measured Variables Ăn Hye 31

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ABSTRACT

AN EMPIRICAL INVESTIGATION OF TURNOVER INTENTIONS OF INTERNAL

AUDITORS |

By Satina Vivian Williams, Ph D

A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Business at Virginia Commonwealth University

Virginia Commonwealth University, 2003

Major Director: Dr Benson Wier, Associate Professor, Department of Accounting

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_HNTRODUCTION

_ The purpose of this study is to investigate turnover intentions of internal auditors who have remained in the profession subsequent to the increased outsourcing of internal audit functions Turnover intention is “an individual’s own estimated (subjective) probability that they are permanently leaving the organization at some point in the near future (Vandenberg and Nelson 1999, p 1315).”

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in an organization’s best interest to use all available, relevant evidence to analyze turnover-related issues pertaining to outsourcing (Moody 2000)

While excessive turnover in any department would be of concern to management, internal auditors were chosen as subjects for this study because of their importance to _ management and their unique position in the organization Often referred to as the eyes and ears of ‘management, internal auditors 1) possess intimate knowledge of the organization required for high-quality audit services, 2) are a management resource for immediate attention in crisis situations, 3) are in a position to help prevent fraud and handle fraud related issues and 4) help maintain independence and objectivity by ‘separating attestation and consulting services (Chadwick 2000) Vinten (1995) suggests that the internal auditor, as a participant observer, is in a better position to obtain more information and a greater depth of knowledge than would be possible from third party providers When comparing organizations that maintain internal audit departments with those that do not, Welch, Holmes, and Strawser (1996) find that internal auditors are able to detect fraud earlier than others and limit resulting damage, thus, adding value to the firm Kalbers and Fogarty (1995) assert that internal auditors, a part of the accounting profession, serve an important role in today’s organizations However, compared to other accounting professionals, research examining internal auditors is relatively limited

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countries.! Not only should current and potential internal auditors be aware of the current trend in outsourcing, but they should also be aware of its impact on the profession

This study also enhances our understanding of outsourcing and its effect on attitudes, behavior and commitment to the profession and employing organizations Positive trends shown in the 2000 Job Market Survey for the internal auditing profession indicate that the health of the profession is strong (Oxner and Kusel 2000) Inasmuch as this may be good news for the profession, management must also consider how internal auditors’ perceptions of outsourcing impact their psychological state and behavior and that those perceptions may differ from the conclusions reached in the job market survey Low levels of organizational commitment and job satisfaction coupled with high turnover adversely impact the internal audit department's ability to provide usable information to external auditors and organizations Low levels of organizational commitment and job satisfaction accompanied by high turnover can “ 1) reduce the level of professional experience and skill in the department, 2) reduce the emphasis on and opportunities for continuing professional education for internal auditors, 3) alter internal auditor assignment policies so that repeat assignments are necessary, and 4) strain application and enforcement of the policies regarding prior and post internal audit department

„x2

assignments (Quarles 1994, p 177).”“ Less reliance on internal auditors' work ađđs less value to the firm, which may increase the likelihood of partial or complete outsourcing

' See Institute of Internal Auditors website: http\\www.iia.org

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The motivation for this study is the growing trend in outsourcing the internal audit function (see, for example, Kusel, Schull and Oxner 1996; Petravick 1997; Rittenberg and Covaleski 1997; and Pelfrey and Peacock 1995) Outsourcing is by no means a new phenomenon, “but a decade of downsizing and restructuring has brought it a higher level of attention (American Management Association (AMA) 1997).” The Internal Auditor’s 2000 biannual job market survey indicated that 38 percent (21 percent in 1996) of U.S internal audit directors anticipated using outsourcing to fulfill some staffing requirements (Oxner and Kusel 2000) Although not specifically addressing internal audit outsourcing, the AMA (1997) reported that outsourcing grew most rapidly in accounting and finance activities (100 percent increase over three years) Even though occurrences of outsourcing are increasing and there is a great deal of research on employee turnover, there is little or no research evidence that examines the impact outsourcing has on the turnover intentions of internal auditors The research question for this study is: How does outsourcing impact the turnover intentions of internal auditors? »

The Theoretical Model

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business practices, such as outsourcing, that affect a profession, create a degree of job insecurity and can result in undesirable changes in organizational and professional commitments and a higher probability of turnover intentions Other researchers (e.g., Ameen, Jackson, Pasework, and Strawser 1995; Byington and Johnston 1991; and Harrell, Chewning, and Taylor 1986) studied relationships among job insecurity, commitment, satisfaction, and turnover intentions (see Ameen et al 1995, for a summary) However, this study differs in that variable relationships are within the context of internal audit outsourcing The study examines the effect of outsourcing rather than an attitudinal variable, such as role ambiguity, on employees’ attitudes and behavior Although both downsizing and outsourcing represent managerial strategies to improve efficiency and enhance financial performance, survivors of outsourcing are not only affected by layoffs of co-workers as survivors of downsizing are affected, but they also experience their co-workers being replaced by outsiders Whether outsourcing has the same impact on employees as downsizing is an empirical question Replacing co-workers may result in more severe and/or different survivor reactions when compared to reactions from a typical downsizing event

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JOB PROFESSIONAL INSECURITY COMMITMENT ORGANIZATIONAL COMMITMENT TURNOVER INTENTION H6: (-) Figure 1 Hypothesized Model

Current State of Voluntary Turnover

This study proposes that outsourcing of the internal audit function increases the likelihood that internal auditors will leave their organizations voluntarily The current state of voluntary turnover and its high costs to businesses demonstrate the need for management to better understand how outsourcing impacts turnover intentions

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percent, the lowest third quarter rate since 1998 For the first nine months in 2001, the year-to-date turnover rate was 1.2 versus 1.4 percent in 2000 Interestingly, turnover rates for organizations employing less than 2,500 workers decreased while rates increased for companies with 2,500 or more employees Although declining, turnover rates currently averaging 1.2 percent of the workforce per month continue to represent high costs for employers With the downturn in the U.S economy and fewer jobs available, employees are reluctant to leave their current employer thereby decreasing turnover rates However, decreasing job opportunities due to economic conditions should strengthen the argument that other factors, such as outsourcing, that lead to job insecurity, may influence the turnover intentions of employees

From 1994 to 1999, the number of workers who voluntarily left their jobs increased from 10 million to 17 million (Moody 2000) Estimated turnover cost to hire and train a new hourly employee ranges from 300 to 700 times the worker’s hourly wage Turnover cost for salaried employees can cost between 100 and 300 percent of the employee’s annual salary (Moody 2000) In fact, the estimated costs to replace a worker are two to three times greater than those of retaining an existing employee

Human resource experts have divided turnover costs into categories of hard and soft costs (Joinson 2000) For one industry, Joinson (2000) reports that hard, or out-of- pocket,’ turmover costs totaled $813 million for the year while soft costs, such as information the departing employees take with them, totaled an additional $4.9 billion

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While quantifiable turnover costs are significant, management must also identify other areas of losses that affect the organization Group morale and effectiveness may be negatively affected by turnover as well as losses in privileged information, trade and customer data, and, possibly, customers (Moody 2000) The high cost of turnover and its continuing concern to businesses necessitates management’s continuing efforts to seek out reasons valued employees intend to leave, and to decide what action, if any, should be taken to minimize departures

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job insecurity manifested through fear, anxiety, and burnout may consequently lead to increased voluntary turnover (Mone 1994)

Internal Audit Profession

The internal auditor’s unique position and important role in the organization support the need for additional research to understand what impact internal auditors’ attitudes and behaviors have on the business organization For this reason, I discuss next the role of the internal auditor, various views on outsourcing the internal audit function, and the current state of internal audit outsourcing

Internal auditing is a subfield of the auditing profession with close ties to public accounting (Quarles 1994) Often in concert with the external auditors, internal auditors assess their organization’s financial and operational information for reliability and integrity, assure compliance with policies and regulations, judge the adequacy of procedures to safeguard assets, evaluate the economic and efficient use of resources, and measure the achievement of established operational goals and objectives.* In other words, internal auditing can be involved with all facets of an organization The internal auditing function, predicted to be more influential in the future, has evolved from an appraisal to consulting function that assists management in strategic planning In 1999, the Institute of Internal Auditors released a revised definition of internal auditing:

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“An independent, objective, assurance and consulting activity designed to add value and improve an organization's operations It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes Persons within or outside the organization in diverse legal and cultural environments within organizations that vary in purpose, size, and structure perform internal audit activities, (ITA 1999).”

As defined by the ITA, persons within or outside the organization perform the internal auditing function In the past, CPA firms have been instrumental in providing limited internal auditing functions for organizations However, outsourcing has increased for two reasons First, outsourcing vendors and CPA firms are providing internal auditing and other services and thereby increasing their profits Second, management is reducing nonoperational organizational costs by outsourcing internal audit functions

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when these employees leave an organization they take with them innovative ideas and work approaches that could have benefited the company (Figg 2000) Accordingly, Moody (2000, p 40) recognizes that, “organizations are damaged every time an experienced, competent, talented worker leaves the firm voluntarily.”

Challenges in recruiting internal auditors, increases in business complexities, and greater demands for assurance are some of the reasons management chooses to outsource the internal audit function (Accountancy 2001) Management determines that the company’s resources are better used to contract with third parties to provide the function However, if the effects of outsourcing are similar to the effects of downsizing (i.e., increased job insecurity and tumover intention and decreased professional and organizational commitments) then it follows that outsourcing can also raise staff loyalty issues (Figg 2000) Internal auditors leaving voluntarily makes management goals more difficult to attain as well as impairs management's ability to influence certain organizational outcomes, such as, high-quality audits and fraud prevention (Mabert and Schmenner 1997; Chadwick 2000) Petzall, Parker, and Stoeberl (2000) recommend that firms involved in organizational changes that reduce the number of employees attempt to minimize distrust, stress, and morale problems and maximize the loyalty of survivors

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ability to build a viable internal audit department (Oxner and Kusel 2000) According to the ITA, an internal audit department can be critical to the efficiency and effectiveness of management and add value to the firm only when its staff is “fully resourced and professionally competent.” Increases in turnover and employees leaving with valuable knowledge and skills may hinder the department’s usefulness Managers may find the research model suggested in this study useful for identifying and addressing turnover intentions as a result of outsourcing

Internal Audit Outsourcing