The Impact of Culture on the Quality of Internal Audit

Abstract

This study draws on Hofstede’s theoretical framework to examine the impact of different dimensions of culture on the quality of internal audit (QIA) in Saudi Arabia. A sample of chief internal auditors from 67 listed companies has been used to examine the direct effect of the cultural dimensions of power distance, uncertainty avoidance, and individualism on the QIA. Evidence was found that organizations, in which power distance and uncertainty avoidance are high, are characterized by lower QIA. The results also show a positive association between individualism and the QIA, indicating that internal audit is largely based on the accomplishments of the individual internal auditors associated with the process. Considering these outcomes from the Saudi Arabian standpoint, where the cultural and economic contexts are underpinned by collectivism rather than individualism, it emerges that it is only comparatively recently that a tradition of governance and audit has started to develop, and that quite particular and strong cultural influences stemming from tribalism and pervasive core traditions beliefs operate to condition the effort to achieve the ideal internal audit environment.

Keywords

internal audit quality of internal audit culture

Introduction

The importance of internal audit quality is well-accepted in the developed countries, where the International Standards for the Professional Practice of Internal Auditing (ISPPIA) are complied with through the actions of Chief Audit Executives (CAEs), who facilitate the internal audit function (IAF) in a variety of ways. In this respect, their brief is to instill a sense of professionalism within internal auditors, and implement organizational structures to allow them to operate unhindered in the interests of effective internal control and transparency. In parts of the developing world, however, attitudes toward the types of action required by CAEs to safeguard the independence of the IAF are different, thereby raising obstacles to the effective discharge of internal audit duties. These varying attitudes are the result of differing cultural outlooks and traditions, a topic which has raised interest among researchers concerning the influential role of culture upon the way in which auditing in general operates (e.g., Abdolmohammadi & Tucker, 2002; Chan, Lin, & Lan Mo, 2003; Cohen, Pant, & Sharp, 1995; Hell & Wang, 2009; Hope, Kang, Thomas, & Yoo, 2008; Jeffery, Dilla, & Weatherholt, 2004; Patel, Harrison, & McKinnon, 2002; Sim & Goodwin, 2004; Umar & Anandarajan, 2004; Wingate, 1997).

However, despite such interest, very few researchers have addressed the impact of culture upon the way in which internal as opposed to external audit performs its duties (e.g., Abdolmohammadi & Sarens, 2011; Sarens & Abdolmohammadi, 2010). Nonetheless, the study conducted by Sarens and Abdolmohammadi (2010), that does focus on internal audit, has provided a commentary on the link between the professionalism of internal auditing and the prevailing cultural context in which that takes place and the uniformity of internal audit practice. These researchers reveal that in countries believed to score low on uncertainty avoidance, collectivism, and assertiveness, it is more common to find a professional internal audit community than in countries not characterized by these traits. At the same time, they find that in countries where a lower level of power distance and collectivism prevails, it is more likely to find a high degree of uniformity in internal audit practice. Saudi Arabia, like the rest of the Arab World, scores high on uncertainty avoidance, collectivism, and power distance, and consequently can be expected to generate a lack of uniformity in internal audit practice in tandem with a lack of professionalism among its internal audit personnel.

This absence of uniformity and professionalism can be seen as a result of particular cultural hallmarks resulting from the fact that Saudi society is predicated on the notion of familial and personal ties, and traditional imperatives. These mean that it is highly likely that the activities undertaken by the IAF, which operates as a monitoring and control mechanism to remove personal interest from financial dealings, may well be compromised, and with that so too efforts to engender good corporate governance.

Despite these underlying suppositions, however, no empirical research has yet been undertaken to directly examine the relationship between culture and the quality of internal audit (QIA; as measured by competence, objectivity, and the work performed by internal auditors). In an attempt, therefore, to contribute to the literature, this study focuses on the issue of whether the QIA is affected by particular cultural dimensions that can be identified in the Saudi Arabian context. Consequently, its findings offer empirical evidence of the way in which certain cultural dimensions impinge upon the QIA, and identify the relative force of each of these dimensions on the process.

In so doing, they extend existing literature in the field and address the shortcoming in the literature by examining the way in which internal audit is conceived and performed in an oil-based economy where a definite robust traditional culture straddles liberal market capitalism. This effort thus has implications for Middle Eastern and other developing contexts, where similar traditions prevail and share a similar socioeconomic environment.

The three dimensions of culture identified (power distance, uncertainty avoidance, and individualism) as affecting the QIA are used to operationalize the study, and hypotheses on the impact of these constructs in this respect formulated and tested using data collected from 67 listed companies in Saudi Arabia, and doing so with the use of regression models.

Beyond this opening introduction, the article is structured as follows. The next section (“The Prevailing Dimensions of Culture in Saudi Arabia” section) discusses the dimensions of culture prevailing in Saudi Arabia. The “Literature Review and Development of Hypotheses Concerning the Cultural Influence on Auditing” section considers the influence of culture on auditing and formulates the research hypotheses. In the “Research Method” section, the research methodology is presented, and the main variables and the manner in which they are measured are defined and explained. The “Statistical Tests of Hypotheses” section reports the statistical tests of hypotheses. The “Discussion” section reports the main findings of the analysis, and finally in the “Conclusion” section, a conclusion is drawn in which the results are contextualized and their wider implications are considered.

The Prevailing Dimensions of Culture in Saudi Arabia

In Hofstede’s framework, there are six dimensions along which it is possible to compare national cultures, these being power distance, uncertainty avoidance, individualism versus collectivism, masculinity versus femininity, long-term versus short-term orientation, and indulgence versus restraint. Specifically in terms of Saudi Arabia, it has been argued by Idris (2007) that a reasonably homogeneous culture exists, but nonetheless, the Muslim faith is influential in all decision making in the Kingdom and has a substantial impact upon business and legal practices (Idris, 2007). Consequently, for any enterprise to be successful in Saudi Arabia, it is essential that a strong grasp of the national culture is possessed, and in this section, three of the dimensions of culture have been identified as dimensions that relate closely to national auditing environments (Hughes, Sander, Higgs, & Cullinan, 2009), these being power distance, uncertainty avoidance, and individualism. For example, Abdolmohammadi and Sarens (2011) undertook a large cross-cultural sample spanning 19 different countries. They examined the potential relationships between certain cultural dimensions and differences in the use of internal audit standards and in the degree of overall compliance with these standards. They found an inverse relationship between uncertainty avoidance and both use and compliance. Moreover, they revealed a positive association between assertiveness and human orientation to compliance, but not to the use of standards.

Power Distance

Power distance is a concept relating to inequality in society, and fundamentally it gives an indication of how the culture views this. Hofstede (n.d.) states this as being “the extent to which the less powerful members of institutions and organisations within a country expect and accept that power is distributed unequally.” According to Hofstede’s ranking, Saudi Arabia scores 80,¹ which demonstrates a high level of inequality in respect of power and wealth within Saudi society (Cassell & Blake, 2011). This implies that the hierarchy existent within Saudi society is accepted as functional, and that no rationale needs to be provided for the fact that some people have more than others in status or financial terms. In organizations, this is demonstrated by heavily centralized structures in which the inherent inequalities are evident in the command and control culture, with those in junior positions receiving instructions from those further up the hierarchy, irrespective of qualification or ability. Subordinates have the expectation that they will be told how to behave, and they do not question this arrangement.

Uncertainty Avoidance

Hofstede (n.d.) explains the dimension of uncertainty avoidance as the degree to which organizational or societal members depend on, and revert to, social norms, rituals, and bureaucracy in a bid to minimize the unpredictability of events that will happen in the future. Having received a ranking of 68 on Hofstede’s uncertainty avoidance index, Saudi Arabia demonstrates that it does not tolerate uncertainty well (Cassell & Blake, 2011), and the strict regulatory system in operation in the Kingdom is one strategy to help reduce levels of uncertainty. In societies that score high on uncertainty avoidance, there are continual efforts to keep control of as many variables in life as possible, and not surprisingly in such environments, change is not readily accepted, and generally, people are risk averse (Butler, n.d.). Hofstede (2001) confirmed this aversion, emphasizing that populations with this mentality try to reduce the threat which ambiguous situations bring to them by searching for stability in their careers, operating within the rule system, rejecting deviant ideas and behavior, and accepting the possibility of absolute truths and the attainment of expertise.

Individualism

The dimension of individualism concerns the extent to which people are concerned with their own well-being rather than accepting responsibility for the well-being of others. As a polar concept, collectivism is about the degree to which individuals perceive themselves as being part of a group which can legitimately demand their loyalty in exchange for protection or support (Hofstede, n.d.). Self-interest and personal prestige are prevalent in cultures scoring high on individualism, and in organizations in such cultures, the relationship between the employer and employee is perceived as no more than a business contract founded on mutual benefit. Conversely, in collectivist cultures, people’s motives are influenced by the aims and objectives of the group, and these are generally elevated above personal goals in circumstances where a choice has to be made. In the organizational setting, collectivism is seen in the use of teams, in the sharing of praise and reward, and in the high level of loyalty which employees demonstrate toward the organization (Hofstede, 2001).

In Hofstede’s ranking for Saudi Arabia, the individualism score is low at 38, thereby indicating society to be collectivist in nature. Indeed, this is apparent in the long-term commitment to the “group,” whether this be the family, extended family, tribe, or other ties (Cassell & Blake, 2011). This long-term commitment overrides other societal norms, loyalty being considered as an all-important characteristic (Butler, n.d.), which guarantees a natural disposition among people to take care of others in their immediate and wider group. Concepts such as “loss-of face” are prevalent in collectivist societies where supportive behavior to others within one’s group is expected, and where failure to deliver leads to shame.

Literature Review and Development of Hypotheses Concerning the Cultural Influence on Auditing

Cultural dimensions have served as the basis for a number of cross-cultural studies in auditing, in which it has been found that a significant variation exists in practice according to cultural context. One of these studies, undertaken by Hughes et al. (2009), explored the role played by three of the cultural dimensions proposed by Hofstede—power distance, uncertainty avoidance, and individualism—in the investigative procedures performed by entry-level auditors in Mexico and the United States. In that particular study, it emerged that the participants’ abilities to predict income statement balances were not in themselves impaired by these cultural dimensions, but that there was the potential for these dimensions to affect their ability to predict changes in balance sheet accounts. Moreover, they highlighted the effect of culture upon the risk assessment process, showing that auditors rarely differentiated between accounts that changed according to, from those that changed contrary to, expectation; instead they amended their risk assessments to match the direction of balances that increase or decrease.

In another recent study, Hope et al. (2008) constructed a novel measure of how secretive societies are based on Hofstede’s (1980) cultural factors and employed a large sample of firms (i.e., 91,030 firm-year observations) from 37 countries, to explore the impact of national culture on the choice of auditors. They found that in a large sample of firms from 37 countries, those firms in more secretive cultures were less likely to employ one of the Big 4 auditors.

Clearly, auditor independence is a consideration of those seeking to appoint auditors who are expected to work within the confines created by home-country norms, and shedding light on the process in this respect, Kosmala (2007) considered the influence of aspects of culture upon the actual construct of auditor independence, particularly, ideas concerning individual freedom, political and economic liberalism, and economic reality.

A little earlier, Chan et al. (2003) investigated the influence of the cultural dimensions identified by Hofstede on the detection of accounting errors by auditors finding that power distance and individualism were significant in explaining the variations in the relative magnitude of errors. In addition, they found that the concentration of power in just a few people, the practice by management of overriding audit controls, and the employment of personnel on attributes other than competence were unsatisfactory outcomes of a large power distance culture, and that these phenomena underpinned the production of many more mistakes in the audit process.

From the literature, it is evident that much of the research effort surrounding culture to date has focused on auditing per se, rather than on internal audit. However, the conceptual frameworks offered by Gray (1988) and Hofstede (1991, 2001) have been used as the basis for some studies that have sought to explore the relationship between culture and internal audit (e.g., Abdolmohammadi & Sarens, 2011; Abdolmohammadi & Tucker, 2002; Sarens & Abdolmohammadi, 2010). In particular, Abdolmohammadi and Sarens (2011) undertook a large cross-cultural sample spanning 19 different countries. These researchers examined the potential relationships between certain cultural dimensions and differences in the use of internal audit standards and in the degree of overall compliance with these standards. Using CAEs and internal audit managers as their informants, Abdolmohammadi and Sarens found an inverse relationship between uncertainty avoidance and both use and compliance. Moreover, they revealed a positive association between assertiveness and human orientation to compliance, but not to the use of standards. In respect of the control variables, positive relationships were identified between the length of Institute of Internal Auditors (IIA) membership, professional certification in internal auditing, and hours of continuing professional education (CPE) training, and both perceived use and compliance. However, none of the previous studies specifically examine the association between cultural dimensions and the QIA. This is the issue that is addressed in the current study, which concentrates on the impact of culture on the QIA function.

Focusing on three of Hofstede’s cultural dimensions (power distance, uncertainty avoidance, and individualism), this study extends prior literature by examining directly the impact of culture on the QIA. Hypotheses in this respect are developed in the following sections.

Power Distance

Hofstede’s (2001) understanding is that power distance can be explained as the degree to which the less powerful members of organizations anticipate power to be distributed unequally, and accept this status quo. In organizational terms, certain differences are apparent between those where high and low power distance exist. Particularly, high power distance organizations have strong centralization (Wong & Birnbaum-More, 1994). In countries scoring high on power distance, employees are relatively uneducated (Hofstede, 2001), and this influences the QIA as competency is an indication of quality (e.g., Al-Shetwi, Ramadili, Chowdury, & Sori, 2011; Al-Twaijry, Brierley, & Gwilliam, 2004; Arena & Azzone, 2009). Auditors in high power distance environments should anticipate greater levels of fraud from employees, and place more efforts in ensuring the effectiveness of internal controls (Hell & Wang, 2009). In low power distance organizations, however, the hierarchy merely exists for administrative usefulness, and there is greater decentralization of power with a tendency for people throughout the workforce to be well qualified. Given their level of qualification, subordinates are usually consulted in decision making, and superiors are easily accessible for discussion (Hofstede, 2001).

Undoubtedly, there are implications for the effectiveness of internal audit of these characteristics, and hence, it is vital to consider these in any exploration of internal audit quality, because, as noted by Gramling and Vandervelde (2006), low QIA can represent material weaknesses in internal controls. Indeed, Hofstede (2001) has identified that in organizations where there is high power distance, top management often regard accounting systems as available for their manipulation to justify their decisions, and in this situation, figures are often presented in a less than complete way so as to project the desired image (Hofstede, 2001). Often in these organizations, managerial staff will circumvent or override controls that exist to guarantee transparency. The centralization of power in the hands of just a few people is believed to precipitate an increased risk of material misstatements in the reporting of financial matters (Haskins, 1987). Moreover, as already mentioned, employees in high power distance organizations are usually less knowledgeable than those in low power distance organizations, and it is known that the QIA is dependent among other things, on an educated and trained team of auditors.

Clearly, in a small power distance organization, the use of power should be legitimate, and subject to more checks and balances. There is an expectation in such organizations that the integrity of auditors is relatively high and that the greater level of education, training, and qualification will lead to a better QIA (Gray, 1988; Hofstede, 1991). Sarens and Abdolmohammadi (2010) found that the uniformity in internal audit practice is characterized by a significantly lower degree of power distance. Thus, it can be argued that in low power distance organizations, a high QIA is expected. Accordingly, the following hypothesis is formulated:

Hypothesis 1 (H1): Power distance is negatively associated with the QIA.

Uncertainty Avoidance

As already stated, uncertainty avoidance concerns the degree to which ambiguity is perceived by individuals as a threat to them, and to reduce this threat, those individuals seek out situations where there are formalized rules to guide and protect them. Transferred into an internal audit environment, this concept would suggest that the standards stipulated by the IAF would serve to reduce uncertainty and ambiguity in practice because they engender predictability, consistency, and uniformity. The regulation of internal audit procedures does not allow for interpretation at the local level, which could be rife in the absence of strict rules. In a study by Sarens and Abdolmohammadi (2010), it emerged that uncertainty avoidance was negatively associated with internal auditing professionalism. And other researchers, such as Hell and Wang (2009) and Hughes et al. (2009), claim that high uncertainty avoidance environments promote less accurate audit. Thus, it can be argued that organizations with high uncertainty avoidance have less QIA. Accordingly, the following hypothesis is formulated:

Hypothesis 2 (H2): Uncertainty avoidance is negatively associated with the QIA.

Individualism

Individualism, as already mentioned, relates to the extent to which people perceive themselves in a nuclear perspective, responsible for their own well-being and unreliant upon others for support. When people perceive themselves as members of a group to which they owe loyalty and from which they expect support and commitment, they score low on individualism and are considered to be collectivist in character. In collectivist societies, people live in tightly knit groups in which relatives and friends care for each other, demonstrating unquestioning loyalty (Hofstede, 2001). It is expected that those within cultures where there is a high degree of individualism will behave according to their own interest and promote themselves on the basis of their personal achievements. They believe in the value of individual achievement and perceive this as much more important than achievement by a collective. In an organization where such individualist attitudes prevail, the management culture is one that rewards individuals for effort expended such that the employer–employee relationship is based on mutual advantage. This is in stark contrast to the atmosphere in a collectivist organization, because in that environment individuals behave according to the interests of the wider groups to which they belong, and in the situation where conflict arises between personal and collective goals; the personal goals are downgraded in favor of the commitment to the team. Employees in collectivist organizations demonstrate strong loyalty for their work colleagues, their departments, and their organizations generally (Hofstede, 2001).

Conversely, it can also be argued that the self-interest inherent in individualism can precipitate risks to the internal control system. Glover and Aono (1995) made the point that personnel policies and practices are important in ensuring that audit procedures are properly followed. Chan et al. (2003) also observed that staff turnover has an effect upon the control environment. Organizations that are individualist in character tend to experience low employee loyalty, and hence, high turnover, as people continually look elsewhere for better employment opportunities, and clearly with frequent changes of personnel, the chances of errors and irregularities are increased. This is especially the case with senior accounting staff, as the lack of familiarity with an organization’s business and financial practices will increase the inherent risk factors. In contrast, organizations that are collectivist in nature will tend to attract employees who actively want to work in a supportive environment and who will demonstrate loyalty to the employer. Indeed, in collectivist societies, there is a tendency for unquestioning loyalty, and jobs are often for life. In this scenario, employees are confident in their colleagues’ intention and willingness to support them. There is implicit trust, and as observed by Chan et al. (2003) and Abdolmohammadi and Sarens (2011), this is a hallmark of an effective control environment and good quality audit. Certainly, one might suggest that individuals who appreciate the support of a formal professional community will be predisposed to implement best practice, and hence, enhance the QIA.

Moreover, it could be argued that among internal auditors, in-group (professional) collectivism may well be strong, and this may precipitate greater professional attitudes toward the use of, and compliance with, standards (Abdolmohammadi & Sarens, 2011), thereby enhancing the QIA. Certainly, it is logical for individuals who perceive themselves as part of a professional community to strive to adhere to best practice as identified by that community, thereby preserving quality within the IAF. This leads to the following hypothesis:

Hypothesis 3 (H3): Individualism is negatively associated with the QIA.

Research Method

Hofstede’s framework is used as a theoretical underpinning, and specifically, three of the dimensions embodied in his model are used, these being power distance, uncertainty avoidance, and individualism.

To ensure that the scales used in the formal study are statistically reliable, a pilot study of Certified Internal Auditors (CIAs) in the Saudi Arabian private sector was conducted, when 15 questionnaires were distributed. The total number of questionnaires collected was 11 (73% response rate). A quantitative questionnaire which measured Hofstede’s (1980, 2001)² cultural dimensions (power distance, uncertainty avoidance, and individualism) were used as the research instrument.³ All cultural dimensions were measured using a 7-point Likert-type scale. The first section of the questionnaire was related to the respondent’s background. The second, third, and fourth sections covered the cultural dimensions under study, and the fifth section covered the QIA.

Consistent with much prior internal audit research (e.g., Abbott, Parker, & Peters, 2010; Carcello, Hermanson, & Raghunandan, 2005; Mat Zain, Subramaniam, & Stewart, 2006), the survey was sent to CIAs. The sample frame included all Saudi companies listed in the Saudi Stock Exchange TADAWL in 2013, which amounted to 156 in total. Completed questionnaires were received from 67 of these 156 companies, representing 42% of all listed companies. The researcher undertook the distribution and the collection of the questionnaires in person. The method of administering the questionnaires personally was found the most appropriate and efficient way to collect data from the Saudi private sector.

Measurement of the Variables

Independent variables

The three cultural dimensions—power distance, uncertainty avoidance, and individualism—serve as the independent variables. It has been indicated that the work on work-related cultural dimensions undertaken by Hofstede (1980, 2001) is considered internationally as a robust model in cross-cultural studies. In particular, researchers have devoted much attention to Hofstede’s work-related cultural values, but it is notable that despite the apparent lasting relevance of these ideas, the data were gathered three decades ago now, and are somewhat dated. In gathering data from Saudi Arabia, the current study re-visits three of Hofstede’s (1980, 2001) cultural dimensions in a specific setting that Hofstede himself did not explore as a separate entity, his score being based on a cluster of Arab countries.⁴ To do this, it employs a quantitative questionnaire in which the three cultural dimensions are measured as shown in Table 1.⁵

Table 1.

Measures of the Independent Variables.

Independent variables	Measurement^a
Power distance	Managers should make most decisions without consulting subordinates. It is frequently necessary for a manager to use authority and power when dealing with subordinates. Managers should seldom ask for the opinions of employees. Employees should not disagree with management decisions. Managers should not delegate important tasks to employees.
Uncertainty avoidance	It is important to have job requirements and instructions spelled out in detail, so that employees always know what they are expected to do. Managers expect workers to closely follow instructions and procedures. Rules and regulations are important because they inform workers what their organizations expect of them. Standard operating procedures are helpful to employees on the job. Instructions for operations are important for employees on the job.
Individualism versus collectivism	Members assume that they are independent of the organization and believe that it is important to bring their unique skills and abilities to the organizations. Employees develop short-term relationships and change companies at their own discretion. Organizations are primarily interested in the work that employees perform and not their personal or family welfare. Important decisions tend to be made by individuals. Jobs are designed individually to maximize autonomy.

Measurements of cultural dimensions that have been operationalized in earlier studies were employed in this study (e.g., Hofstede, 1984, 2001; House, Hanges, Javidan, Dorfman, & Gupta, 2004; Yi Wu, 2006).

Dependent variable

The QIA is the dependent variable in this study. It is assessed using a composite measure which has been employed in several previous studies (e.g., Al-Shetwi et al., 2011; Al-Twaijry, Brierley, & Gwilliam, 2003, 2004; Arena & Azzone, 2009; Gramling & Vandervelde, 2006; Lin, Pizzini, Vargus, & Bardhan, 2011; Messier, Reynolds, Simon, & Wood, 2011; Prawitt, Smith, & Wood, 2009). The attributes forming the composite are competence, objectivity, and the work performed by internal auditors.

In respect of the first attribute, competence, it is stated by the International Standards that “[i]nternal auditors must possess the knowledge, skills, and other competencies needed to perform their individual responsibilities” (IIA, 2012, p. 5). Several factors are considered in evaluating competence, including professional experience, education, professional certification, and training (Lin et al., 2011; Prawitt et al., 2009). Experience is the average number of years of internal auditing experience of the internal audit staff. Education is the average number of years of undergraduate and graduate education. Previous studies have recommended the inclusion of internal audit as a separate course in universities (Al-Twaijry, 2006; Cooper, Leung, & Mathews, 1994; Fernandes, Poposky, & Savage, 1995). Certification is the percentage of professional staff members who have the CIA or Certified Public Accountant (CPA) certification. Training is the average of annual hours of training completed by internal auditors during the year.

The second attribute, objectivity, is defined as an “unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made” (IIA, 2012, p. 4). The indicator of the objectivity of internal audit is generally considered to be whether the CAE reports to the audit committee (Messier et al., 2011; Prawitt, Sharp, & Wood, 2011; Prawitt et al., 2009). Indeed, it is noted by Gramling, Maletta, Schneider, and Church (2004) that external auditors usually take this reporting relationship when they are making an assessment of the objectivity of internal audit.

The third attribute, work performance, has been evaluated according to different criteria by previous research studies, including management’s overall support of internal audit, external auditor’s satisfaction with previous internal audit work, supervision of internal audit work, follow-up procedures, and internal audit scope (Brown, 1983; Clark, Gibbs, & Schroeder, 1980; Messier & Schneider, 1988). Following Al-Shetwi et al. (2011) and Lin et al. (2011), internal audit work performance is measured by several items, including quality assurance, working papers, control, internal audit report, and audit client feedback.

Model

The hypotheses are tested using multiple linear regression. A multiple regression was performed between QIA as the dependent variable and the independent variables, namely, power distance (PD), uncertainty avoidance (UA), and individualism (IDV). Analysis was performed using SPSS regression, and the regression model used was as follows:

\begin{array}{l} QIA = b_{0} + b_{1} SIZE + b_{2} INDEPENDENCE + b_{3} EXPERTISE \\ + b_{4} ACSIZE + b_{5} PD + b_{6} UA + b_{7} IDV + e_{i}, \end{array}

where QIA is the quality of internal audit (1 = strongly disagree to 7 = strongly agree), SIZE is the firm size, INDEPENDENCE is the number of independent members on the audit committee as a percentage of total number of members on the committee, EXPERTISE is the number of audit committee members with knowledge in accounting and auditing, ACSIZE is the number of audit committee members, PD is power distance (1 = strongly disagree to 7 = strongly agree), UA is uncertainty avoidance (1 = strongly disagree to 7 = strongly agree), and IDV is individualism (1 = strongly disagree to 7 = strongly agree).

The control variables are based on the results of previous researchers (Barua, Rama, & Sharma, 2010; Carcello et al., 2005; Goodwin & Kent, 2006; Sarens & Abdolmohammadi, 2011) who find that firm size is positively and significantly related to QIA (investment of Internal Audit Function (IAF)): firm size (measured by total assets); and also independence of committee members, expertise of committee members, and size of audit committee were added in the regression model (Beasley, Carcello, Hermanson, & Neal, 2009; Raghunandan, Read, & Rama, 2001; Zaman & Sarens, 2013). The other variables in the regression model test the hypotheses as follows: PD testing H1, UA testing H2, and IDV testing H3.

Statistical Tests of Hypotheses

Table 2 presents descriptive statistics for the variables of this study. It provides the average ratings for the variables. The scale for these averages is 1 to 7 (strongly disagree to strongly agree).

Table 2.

Descriptive Statistics Quality of Internal Audit and Cultural Dimensions.

Variables	Maximum	Minimum	M	SD
SIZE (million)	165	92	136	24
INDEPENDENCE	3	1	2.2	0.47
EXPERTISE	2	1	1.3	0.34
ACSIZE	4	2	3.4	0.61
COM	5	2	2.3	1.2
OBJ	5	2	2.6	1.2
PERF	6	1	2.8	1.5
PDA	7	2	5.6	1.4
PDB	7	3	5.5	1.1
PDC	7	2	5.3	1.2
PDD	7	2	5.3	1.3
PDE	7	2	5.6	1.2
UAA	7	3	5.4	1.1
UAB	7	2	5.5	1.3
UAC	7	2	5.5	1.2
UAD	7	3	5.3	1.1
UAE	7	1	5.4	1.5
IDVA	5	1	2.1	1.2
IDVB	5	1	2.0	1.3
IDVC	5	1	2.3	1.3
IDVD	5	1	2.1	1.1
IDVE	6	1	2.2	1.4

Note. SIZE: Firm size (total assets); INDEPENDENCE = number of independent members on the audit committee as a percentage of total number of members on the committee; EXPERTISE = number of audit committee members with knowledge in accounting and auditing; ACSIZE = audit committee size; COM = competence; OBJ = objectivity; PERF = work performance; PDA = managers should make most decisions without consulting subordinates; PDB = it is frequently necessary for a manager to use authority and power when dealing with subordinates; PDC = managers should seldom ask for the opinions of employees; PDD = employees should not disagree with management decisions; PDE = managers should not delegate important tasks to employees; UAA = it is important to have job requirements and instructions spelled out in detail, so that employees always know what they are expected to do; UAB = managers expect workers to closely follow instructions and procedures; UAC = rules and regulations are important because they inform workers what their organizations expect of them; UAD = standard operating procedures are helpful to employees on the job; UAE = instructions for operations are important for employees on the job; IDVA = individualism versus collectivism: Members assume that they are independent of the organization and believe that it is important to bring their unique skills and abilities to the organizations; IDVB = employees develop short-term relationships and change companies at their own discretion; IDVC = organizations are primarily interested in the work that employees perform and not their personal or family welfare; IDVD = important decisions tend to be made by individuals; IDVE = jobs are designed individually to maximize autonomy.

Table 2 shows the mean values of the measurements of the QIA, indicating that the level of QIA is low for all attributes of QIA. These results are comparable with the findings of other studies conducted in Saudi Arabia (e.g., Al-Shetwi et al., 2011; Al-Twaijry et al., 2003, 2004).

As mentioned previously, power distance measures the extent to which a society accepts the unequal distribution of power in institutions and organizations. The power distance ranges from 1 to 7, with a score of 3.5 as the midpoint. A power distance of more than 3.5 represents a large power distance. Table 2 shows that Saudi Arabia has a high power distance scores. However, it must be noted that Hofstede’s classification of Arab countries (including Saudi Arabia) as large power distance countries was formulated in the 1970s and confirmed in 2001,⁶ and that since then, the Kingdom has witnessed certain social development as a result of wealth accumulation that has been directed toward Joint Venture business activity. Such activity has made the country more aware of other national cultures and especially those in Western countries. This can be attributed to one reason for the difference between the score obtained in this study, and that of Hofstede’s.

With regard to uncertainty avoidance, Hofstede confirms this aversion, emphasizing that populations with this mentality try to reduce the threat which ambiguous situations bring to them, by searching for stability in their careers, operating within the rule system, rejecting deviant ideas and behavior, and accepting the possibility of absolute truths and the attainment of expertise. Table 2 shows that Saudi Arabia has a high uncertainty avoidance score. Results from this study confirm those found by Hofstede, and indeed by Al-Twaijri and Al-Muhaiza (1996) in categorizing the Arab countries as rating highly on uncertainty avoidance.

Table 2 also shows lower individualism score, which is similar to that reported by Hofstede for the Arab group in his study and also to the results obtained by Al-Twaijri and Al-Muhaiza, thereby indicating that Saudi Arabia is indeed collectivist in its culture. Furthermore, power distance and individualism are inversely associated. In general, countries with large power distance are more likely to be lower on individualism (Hofstede, 2001). These results suggest that despite lifestyle changes in the Arab World between the 1970s and 2013, some values have remained constant, such as the linkage of the individual to a group, family, and relatives. Hofstede’s Law of Conservation, which asserts that old values simply do not vanish overnight and are often sustained even in very new settings, is confirmed by these events.

Before running the correlation tests and regression analysis, Reliability test was conducted to determine the connections where items are maximally correlated with one another and minimally correlated with other variables. The results showed that the reliability QIA was .67 (Cronbach’s α). The reliability of the PD was .79; the third variable, UA, received a reliability score of .61; and the last variable, IDV, had a reliability score of .78.

Table 3 documents the results of the correlation between the QIA and average scores of cultural dimensions, and Table 4 reports correlation results between the QIA and all items of cultural dimensions. Both results show a negative association between the three attributes of the QIA (competence [COM], objectivity [OBJ], and work performance [PERF]) and PD and UA, whereas IDV is positively associated with the attributes of QIA (COM: p < .05; OBJ: p > .01; and PERF: p < .05). The coefficients on all control variables, except ACSIZE, are significant at conventional levels with the expected signs.

Table 3.

Correlation Between the QIA and Average Scores of Cultural Dimensions.

	1	2	3	4	5	6	7	8	9	10
1. SIZE	1.00
2. INDEPENDENCE	.25**	1.00
3. EXPERTISE	.12	.35**	1.00
4. ACSIZE	.19	.02	.17	1.00
5. COM	.50**	.43**	.26**	.09	1.00
6. OBJ	.44**	.31**	.38**	.01	.19	1.00
7. PERF	.23*	.22*	.27**	.06	.28**	.31**	1.00
8. PD	−.12	−.04	−.05	−.09	−.30**	−.28**	−.31**	1.00
9. UA	−.16	−.26**	−.36**	−.18	−.16	−.25**	−.24*	.23*	1.00
10. IDV	.13	.33**	.22*	.14	.24*	.26**	.16	−.27*	−.31**	1.00

Note. QIA = quality of internal audit; SIZE: firm size (total assets); INDEPENDENCE = number of independent members on the audit committee as a percentage of total number of members on the committee; EXPERTISE = number of audit committee members with knowledge in accounting and auditing; ACSIZE = audit committee size; COM = competence; OBJ = objectivity; PERF = work performance; PD = power distance; UA = uncertainty avoidance; IDV = individualism.

Correlation is significant at the .05 level. **Correlation is significant at the .01 level.

Table 4.

Correlation Between the QIA and Cultural Dimensions.

	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18
1 COM	1.00
2 OBJ	.19	1.00
3 PERF	.28**	.31**	1.00
4 PDA	−.29**	−.33**	−.34**	1.00
5 PDB	−.24*	−.11	−.16	.44**	1.00
6 PDC	−.35**	−.13	−.26*	.48**	.39**	1.00
7 PDD	−.08	−.29*	−.06	.50**	.53**	.30**	1.00
8 PDE	−.12	−.18	−.29**	.54**	.43**	.40**	.35**	1.00
9 UAA	−.07	−.22*	−.15	.19	.07	.87	.21*	.06	1.00
10 UAB	−.08	−.13	−.11	.24*	.23*	.13	.17	.19	.12	1.00
11 UAC	−.13	−.23*	−.21*	.16	.08	−.01	.09	.06	.43**	.27**	1.00
12 UAD	−.10	−.08	−.12	.25*	.11	−.02	.10	.13	.26**	.15	.26**	1.00
13 UAE	−.12	−.10	−.17	.12	.15	−.03	.01	.09	.16	.11	.21*	.33**	1.00
14 IDVA	.21*	.13	.17	−.16	−.16	−.07	−.09	.01	−.19	−.1	−.16	−.36**	−.26**	1.00
15 IDVB	.17	.19	.13	−.43**	−.23	−.18	−.24*	−.22*	−.20*	−.07	−.13	−.21*	−.16	.45**	1.00
16 IDVC	.15	.17	.11	−.22*	−.11	−.18	−.14	.04	−.21*	−.11	−.01	−.14	−.05	.60**	.58**	1.00
17 IDVD	.11	.24*	.07	−.35**	−.04	−.14	−.09	−.12	−.22*	−.22*	−.08	−.09	−.03	.37**	.60**	.56**	1.00
18 IDVE	.25*	.22*	.12	−.21*	−.12	−.09	−.10	−.01	−.14	−12	−.10	−.13	−.04	.16	.30**	.34**	.25*	1.00

Note. QIA = quality of internal audit; COM = competence; OBJ = objectivity; PERF = work performance; PDA = managers should make most decisions without consulting subordinates; PDB = it is frequently necessary for a manager to use authority and power when dealing with subordinates; PDC = managers should seldom ask for the opinions of employees; PDD = employees should not disagree with management decisions; PDE = managers should not delegate important tasks to employees; UAA = it is important to have job requirements and instructions spelled out in detail, so that employees always know what they are expected to do; UAB = managers expect workers to closely follow instructions and procedures; UAC = rules and regulations are important because they inform workers what their organizations expect of them; UAD = standard operating procedures are helpful to employees on the job; UAE = instructions for operations are important for employees on the job; IDVA = individualism versus collectivism: Members assume that they are independent of the organization and believe that it is important to bring their unique skills and abilities to the organizations; IDVB = employees develop short-term relationships and change companies at their own discretion; IDVC = organizations are primarily interested in the work that employees perform and not their personal or family welfare; IDVD = important decisions tend to be made by individuals; IDVE = jobs are designed individually to maximize autonomy.

Correlation is significant at the .05 level. **Correlation is significant at the .01 level.

Table 5 presents the basic regression results. The overall model is significant (p < .01) with an adjusted R² of .32. The results show that PD and UA are negatively associated with QIA (p < .01 and p < .05). These findings support H1 and H2. These results are consistent with the results of Sarens and Abdolmohammadi (2010). The results also show that IDV is positively associated with QIA (p < .05), indicating that the result is inconsistent with the expectation of H3.

Table 5.

Regression Results of the QIA Against the Three Cultural Dimensions.

Variable	Expected sign	β	t	p value
Constant			3.249	.000
SIZE	+	.238	2.345	.021
INDEPENDENCE	+	.270	2.844	.005
EXPERTISE	+	.205	2.010	.047
ACSIZE	+	.047	0.491	.625
PD	−	−.310	−3.232	.002
UA	−	−.193	−2.235	.028
IDV	−	.170	2.102	.038

Note. R² = .35. Adjusted R² = .32. F = 13.071. p < .01. QIA = quality of internal audit; SIZE = firm size (total assets); INDEPENDENCE = number of independent members on the audit committee as a percentage of total number of members on the committee; EXPERTISE = number of audit committee members with knowledge in accounting and auditing; ACSIZE = audit committee size; PD = power distance; UA = uncertainty avoidance; IDV = individualism.

Discussion

Power distance is quite clearly inversely associated with the QIA. These results support the hypotheses that higher QIA is expected in organizations with lower power distance. Sarens and Abdolmohammadi (2010) found that power distance is negatively associated with uniformity of internal audit practice. As can be seen that Saudi Arabia attracts a large power distance ranking, the level of QIA can be understood as being low. Saudi Arabia has strong cultural traditions, including familial allegiances and pervasive and core traditional beliefs, and this has promoted a heavily centralized system of governance that in itself reinforces the power distance existing between different strata in society, although there have been some changes in recent years.

Consequently, it is probable that a gradual shift to a more relaxed and consultative approach in the workplace will ensue, thereby precipitating a drop in the extent of power distance within business organizations, and by implication, the national culture.

With regard to uncertainty avoidance, the results indicate that uncertainty avoidance is negatively correlated with QIA. These results support the hypotheses that higher QIA is expected in organizations with lower uncertainty avoidance. This suggests that organizations where uncertainty avoidance is low are characterized by higher QIA. These results provide empirical support for the findings of Sarens and Abdolmohammadi (2010) who found uncertainty avoidance to be negatively associated with internal auditing professionalism. In addition, Abdolmohammadi and Sarens (2011) found that uncertainty avoidance is inversely associated with both the use and the compliance of ISPPIA.

In countries ranking high on uncertainty avoidance, lifetime employment is more common than in countries which rate low on this dimension (Hofstede, 2001). The situation in Saudi Arabia is that a company is not able to terminate the employment of any Saudi national unless that person has committed a criminal act. This is clearly a protection delivered by the state to its citizens, but at the same time, citizens have a strong respect for their workplace, and are sensitized to their position in the hierarchy, and the roles and responsibilities accruing to them. In this respect, in high power distance and high uncertainty avoidance, workers are aware of the pyramidal structure of their organizations, employees are very much aware of the line management applying to them, and follow the formal lines of communication which are seen to channel from top to bottom.

Moving to the third hypothesis, the results indicate that individualism is positively correlated with QIA. These results do not support H3. Rather, they indicate that organizations where individualism is low are characterized by low QIA. Sarens and Abdolmohammadi (2010) found that individualism is positively correlated with uniformity of internal audit practice, and countries with a lower degree of collectivism have more uniform internal audit practice. This relationship can be seen in Saudi Arabia through the results of this study, which demonstrate that when there is a lower degree of individualism, QIA is negatively correlated with this.

Interestingly, the increasing wealth experienced by Saudi Arabians has not provoked changes in society’s level of collectivism, as the expectation that this would cause a reduction in the dependence of individuals on one another has not been met. Rather, Hofstede found that a strong social framework still exists in the Kingdom, possibly because tradition imperatives, external threats, and long-embedded social forces have been much more influential on people’s beliefs and behavior than their relatively new-found affluence.

It is essential to return to the specific cultural context of Saudi Arabia, which as highlighted earlier, results in the family being regarded as the center of community. In this concept of society, individuals are responsible for the survival and general well-being of their families, and this extends to their greater family network, including their relatives. Hence, individual behavior in all of life’s circumstances is an expression of family patterns.⁷ As noted by Haniffa and Hudaib (2007), mediation (wastah)⁸ is an expected and dynamic force in routine life, representing the interdependence of family members and the use of intervention to help those in need (see also Aldraehim, Edwards, Watson, & Chan, 2012). These conditions which militate against the notion of social independence can do no other but impinge upon the way in which internal audit is conceived, as auditors, like all other individuals, must respond to family pressure if it arises, and consequently, compromise their professional behavior. This is likely to result in an internal auditor failing to issue an accurate report on an auditee for whom he or she has some social responsibility (i.e., family/relatives/clan member, or even a friend) if that report would be negative and have unwanted repercussions. Consequently, professional independence cannot be guaranteed in the absence of the ability of internal auditors to reject the social pressure to show favoritism and nepotism in their work. Given the collective nature of Saudi society, this would seem to be a tall order for internal auditors as they cannot isolate themselves from their relatives, and essentially are motivated in all their behavior to promote those relatives’ interests.

At the same time, it is noted that centralization is a feature of all Saudi organizations and that internal audit departments are themselves subjected to the instructions coming from the organizational hierarchy (see also Al-Twaijry et al., 2003; Alzeban & Sawan, 2013). The outcome of such centralization is that despite the expectations of directors of internal audit departments concerning how IAFs should be discharged, the reality is often quite different as senior managers intervene to ensure compliance with cultural rather than professional norms.

Such intervention may take several forms, one being related to the recruitment of personnel, as the procedures involved are subject to favoritism, friendship, and the obligation to please the relatives from which the appointers and organization’s supporters come (see also Haniffa & Hudaib, 2007). In addition, however, there is often an obligation to curry favor with more senior personnel by appointing those whom such personnel would like to be employed. Undoubtedly, employment practices such as recruitment and indeed, promotions, are often influenced by the desire to cater to family and friends, and it is not surprising, therefore, that the selection process in respect of internal audit staff can be flawed, as indicated by Alzeban and Sawan (2013), who noted that this was based on relationships with top management. Thus, the existence of favoritism and nepotism when recruiting new staff is also influential in the choice of internal audit staff and that has implications for the competence of the auditors appointed.

It is no surprise that these (favoritism and nepotism) might influence any attempt to construct a rigorous IAF, as these are able to exert pressure on internal auditors to act in their interest (and often do so), thereby disrespecting internal auditors’ professionalism.

That said, it should come as a surprise to see such phenomena operating in Saudi Arabia as the expectations of Islam are that individuals behave ethically in all their dealings with others, and this demands socially responsible actions that respect fairness. Consequently, practices that encourage a disregard for what is right and proper (as do favoritism and nepotism) fall outside Islamic teachings as they go against the fundamental responsibility of all people to be accountable to God. In fact, in their studies of audit practice, Omer, Sharp, and Wang, reporting in both 2010 and 2013, were able to demonstrate that in the United States, a greater frequency of reporting in respect of going-concern decisions is present in areas that are highly religious, the reason being that auditors behave more professionally when they have religious convictions.

Conclusion

This study provides indicative evidence as to the manner in which cultural dimensions—power distance, uncertainty avoidance, and individualism—affect the QIA. Hofstede’s theoretical framework is used to examine the impact of these cultural dimensions on the QIA in Saudi Arabia. The results indicate that power distance is negatively associated with the QIA. More specifically, organizations where power distance is high are characterized by lower QIA and vice versa. Furthermore, these results suggest that the best practice in operation within internal audit departments is not imposed by hierarchical means but rather by the professionalism of those working within them. Moreover, evidence was found that uncertainty avoidance is negatively associated with the quality of internal auditing, which confirms that organizations characterized by high uncertainty avoidance progress slower to the IAF. The results also confirm that individualism is positively associated with the quality of internal auditing, thereby suggesting that it is the accomplishments of individual internal auditors and their personal professionalism which influences the quality of audit performance. Internal auditors who behave in an individualistic as opposed to a collectivist manner are believed to be intrinsically motivated to work toward improving their professional practice as ultimately this will be advantageous to their own promotion.

The deeply held traditions beliefs and observances, the co-existence of almost unparalleled wealth with a perception of lack of opportunity and employment for many younger people, and ambivalent attitudes at all levels to “Westernization” and “Western powers,” all make for a social and cultural milieu within which it would perhaps be surprising if internal audit developed in a manner identical with, or even consistent with, that in countries with a longer tradition—countries more secularized and perhaps most importantly, with less emphasis on traditions and friendships and linked associations. Furthermore, Saudi Arabia, like other countries emerging from a long history of close tribal relationships and overarching traditional structure and doctrine, still adheres to a concept of employment, which elevates the social aspects rather than the functional aspects of work, and this is obviously a factor which militates against the effective discharge of any attempt at procedural control, as represented by the IAF. Moreover, the desire to avoid disharmony and indeed repercussions within the clearly structured and hierarchical environment characteristic of Saudi society impinges upon internal auditor independence (Marnet, 2008). All these cultural predispositions combine to produce a situation where internal audit is neither effective nor given sufficient credence and importance, as has been identified by other researchers (Al-Twaijry, 2000).

It is important at this point to consider how far the results of this study might be generalized. On one hand, Saudi Arabia is part of the wider Arab World and theoretically can be considered a developing country. On the other hand, it is a country of substantial wealth occasioned by its oil resources, which set it apart from the vast majority of other Arab countries. Consequently, while it mirrors other Arab countries in certain cultural respects, it is questionable whether it can stand as a representative for other developing countries. Likewise, in considering how similar it may be to advanced countries, it is also likely to be shown that there are few similarities because the strong traditions and their effects upon social structure differ entirely from traditions and structures in the Western world.

Furthermore, this study has focused on the main effects of three particular cultural dimensions, as identified by Hofstede, on the QIA, and has revealed some interesting findings. However, Hofstede’s is not the only theoretical model in this field, and indeed, not all of Hofstede’s suggested dimensions have been included in this study. Indeed, the literature provides other frameworks with quantitative measures of national culture (e.g., Sarens & Abdolmohammadi, 2010; Schwartz, 1994), and a useful extension of this study could be another one in which other cultural dimensions are included, and possibly studied using a different methodological approach.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

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