Internal auditor’s compliance to code of ethics. Empirical findings from Malaysian Government-linked companies

Date07 January 2019
Published date07 January 2019
AuthorNoor Furzanne Alias,Anuar Nawawi,Ahmad Saiful Azlin Puteh Salin
Subject MatterAccounting & Finance,Financial risk/company failure,Financial crime
Internal auditors compliance
to code of ethics
Empirical findings from Malaysian
Government-linked companies
Noor Furzanne Alias and Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia, and
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy, Universiti Teknologi MARA,
Perak Branch Tapah Campus, Malaysia
Purpose The purpose of this study was to determine the professional competency levels acquired by
internal auditors in detectingunethical behaviour, to evaluate the position of internalauditors on objectivity
and integrity in dealing with unethical behaviour and to examine the extent of their awareness on ethical
issues in government-linkedcompanies (GLCs).
Design/methodology/approach Data were collected via questionnaires that were randomly
distributed to the internal auditors of the selectedGLS in Malaysia. These questionnaires were constructed
from the Certied Internal Auditor (CIA) Examination Paper and The Institute of Internal Auditors (IIA)
Findings This study found that internal auditors of the GLCs had a high level of competency in
performing audit engagementsand were able to detect unethical practices in the companies.The majority of
the internal auditors also had a high level of objectivityand integrity when faced with unethical behaviour
during auditengagements.
Research limitations/implications This study providedstrong evidence that the internalauditors of
Malaysian GLCs strongly compliedwith IIA Code of Ethics. Besides, they were also aware of the unethical
behaviour whichoccurred within their organizations. However,this study is limited to the internal auditors in
GLCs, while the questions of the surveyinstrument are restricted to the elements of integrity, objectivity and
professionalcompetencies of internal auditors.
Practical implications This study highlightsthe level of internal-auditor competencyand adherence to
the IIAs International Standards for the Professional Practice of Internal Auditing (ISPPIA) and IIAs
PracticeGuide to identify unethical behaviour within the Malaysian GLCs.
Originality/value This study is original as itfocusses on GLCs which did not get much attention from
previousresearchers, particularly the GLCs that operate in a developingcountry such as Malaysia.
Keywords Malaysia, Code of ethics, Ethics, Government-linked companies, Internal auditor, GLCs
Paper type Research paper
The role of internal auditors to safeguardthe assets of the company and act as a last line of
defence to prevent and detect fraud cannot be denied. Internal auditors are professionally
qualied people with experience and knowledgeand who understand a companys internal
and external processes, its culture and systems. Most importantly, these auditors provide
assurance that the internal controlsystems in the organization are sufcient to mitigate any
Compliance to
code of ethics
Journalof Financial Crime
Vol.26 No. 1, 2019
pp. 179-194
© Emerald Publishing Limited
DOI 10.1108/JFC-07-2017-0066
The current issue and full text archive of this journal is available on Emerald Insight at:
type of risks, to ensure that governance processes are effective and efcient and to assure
that organizationalgoals and objectives can be achieved.
In performing their job, internal auditors need to be objective and uphold the value of
integrity. This is not easy because,as compared with external auditors, internal auditors are
vulnerable to internal inuence, powerful insiders (Suddaby et al.,2009) and ofce politics
(Reynolds, 2000) and are under pressure to satisfy management demands (Roussy, 2013).
Thus, there is an issue whether the internal auditor can act professionally and ethically
(Everett and Tremblay, 2014). Because of that, the accountant generally, and the internal
auditor particularly, needs to be seen as a moral actor involved in shaping the morality of
the markets (Lehman, 2006;Shearer, 2002). Neu et al. (2013) found that when political
consideration is able to inuence and frame audit judgements, it limits the likelihood of
auditors to detect and report potentially corrupt activities. Empirical research has shown
that if accountants are heavily exposed to questionable ethical behaviour, it increases their
level of acceptanceof unethical behaviour (Mirshekary and Carr, 2015).
Apart from that, an internal auditor needs to appreciate the value and ownership of the
information he/she discoversalong with the task by keeping it private and condential.The
auditor is also required at all times to maintainthe quality of his/her knowledge, skills and
experience in performing his/her duties. For those who are also a member of professional
organizations such as The Institute of Internal Auditors (IIA), values such as objectivity,
integrity, condentialityand competency are important principles and form part of the IIAs
Code of Ethics. This code is established to promote an ethical conduct and culture in the
internal-auditingprofession (IIA, 2009).
Some of the biggest challenges and responsibilities that are increasingly critical for
internal auditors are their ability to deal with unethical and fraud issues. IIAs
ImplementationStandard 2120.A2, for example, clearly states that the internal-auditactivity
must evaluate the potential for the occurrence of fraud and how the organization manages
fraud risks. On the other hand, Standard 2110 requires internal auditors to assess and
suggest actions to improve governance processes of the company that relate to
accountability, ethicsand value promotion in the organization (IIA, 2012). Although internal
auditors are not responsible for detecting fraud, they must have reasonable skills and
knowledge to indicate and sense the possibility of fraud and malpractices, including the
existence of unethicalbehaviour in an organization.
An internal auditor is also responsible for evaluating fraud indicators such as unethical
behaviour and to decide on a course of action to be taken, such as recommending more
robust and comprehensive investigations to be conducted. As posited by Schwartz and
Sharpe (2006), although an individual has skills, he/she also needs the will, that is, the
willingness to do it. In this context, an internalauditor must have the will to take a course of
action, although he will risk retaliation from the organization.This corresponds to the IIAs
International Standards for the Professional Practice of Internal Auditing (ISPPIA), which
requires internal auditorsto have sufcient knowledge to evaluate the risk of fraud and the
way it is managed by the organization.Therefore, internal auditors have to play an essential
role for evaluating the ethical-behaviourclimate in their organization.
This role becomes more signicant because, currently, the trend of fraud, corruptionand
unethical practices in Malaysia are on the rise. The KPMG Malaysia Fraud, Bribery, and
Corruption Survey Report in 2013 (KPMG Malaysia, 2013), for example, found that the
number of fraud cases among corporatecompanies in Malaysia is expected to increase in the
future, partly because of the nancial crisis (KPMG, 2013). Even so, many companies in
Malaysia are willing to manipulate their nancial statements, such as backdate a contract
and book revenues, earlier than they should be to meet nancial targets(Ernts and Young,

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