A Study on Internal Auditor Perceptions of the Function Ability to Add Value Giuseppe D’Onza, 1 Georges M. Selim, 2 Rob Melville 2 and Marco Allegrini 1 1 University of Pisa 2 Cass Business School, London In the context of internal auditing, when there is no obvious correlation between auditors’ activities and financial performance, it is critical to identify areas where value is added as well as the drivers that enable this, in the evaluation of the effectiveness of the internal auditing function (IAF). This paper addresses whether and how internal auditing activities (IAAs) can add value to their organisations. In order to gain some understanding of value-adding processes, we analysed the responses of more than 1,800 internal auditors to questions specifically designed to evaluate this contribution. This sample was based on the 2010 global survey of the internal auditing profession that the Institute of Internal Auditors Research Foundation (IIARF) carried out; only those respondents were included whose role showed they were in a position to make decisions and influence the work of their IAF. This study found evidence that four variables are positively associated with adding value: IAF independence and objectivity; compliance with the Institute of Internal Auditors’ (IIA) Code of Ethics; the IAF’s contribution to the evaluation of the effectiveness of internal control; and the IAF’s contribution to the evaluation of the effectiveness of risk management. With the exception of independence and objectivity, the analysis reveals that the remaining value drivers of the IAF’s activities vary between developed and emerging countries and between financial and non-financial companies, suggesting that the factors influencing the IAAs’ effectiveness might be partially context dependent. Key words: adding value, value drivers, objectivity, internal controls, risk management INTRODUCTION The objective of this study is to explore the potential contribution of internal auditing activities (IAAs) to value-adding processes and to identify the main factors associated with these activities. The study is based on the latest in the series of surveys of members of the Institute of Internal Auditors (IIA), known as the Common Body of Knowledge (CBOK). These began in 1972 and have been repeated at regular intervals ever since. The purpose of the CBOK surveys is to investigate the factors that influence the working practices, rationales and capability of internal auditing functions (IAFs) in all sectors across the world. This database is recognised as the most comprehensive survey on the state of the internal auditing profession world-wide. Some scholars (e.g., Chambers, Selim & Vinten, 1987) have argued that ‘internal audit does not exist as a divine right’. Rather, its raison d’être is its value-generating capability: The perception and measurement of its ability to add value are therefore fundamental elements in evaluating internal auditing’s role in making a significant contribution to organisational performance. While adding value has always been perceived as a key factor in evaluating the need for an IAF, many organisations are experiencing a reduction in their revenues and profitability in the post-financial crisis environment. There are strong pressures on senior management to ensure that their IAAs’ added-value contribution is clear and measurable. Prior studies (Bou-Raad, 2000; Roth, 2000; Mihret & Woldeyohannis, 2008; Barac, Plant & Motubatse, 2009; Chen & Lin, 2011) have attempted to identify the main drivers that might enhance value creation processes. These studies show mixed results with no clear dominant model. Some common value drivers, such as the characteristics of the organisational environment in which the IAF 1 is located, the way it is managed and the skills and competencies of the individuals performing the internal auditing engagement, have been identified. These studies are limited to single countries and are based on a small sample; the results are therefore likely to have only limited generalizability (Roth, 2000; Mihret & Woldeyohannis, 2008; Barac et al., 2009). In comparison, this study is based on responses from more than 1,800 internal audit leaders, extrapolated from a database that includes 13,582 responses of internal auditors working in 107 countries who participated in the CBOK survey in 2010. The respondents work in organisations of different sizes, in different industries with a differing range of activities and are members and associates of the Institute of Internal Auditors (IIA). Similar to the studies mentioned above, we explore several factors associated with internal auditors’ capability to add value to their organisation by analysing the responses of those survey participants who are leaders of internal auditing services. Our analysis addresses both micro- and macro-findings and we are confident that our conclusions are generalizable. Similar to various studies on IAA effectiveness and value-adding capabilities (Lenz & Hahn, 2015), this paper addresses the supply-side perspective, with internal auditors self-assessing their capability to add value, describing the characteristics of IAFs and the roles they play in their organisations. 2 According to the definition provided by the IIA in the International Professional Practice Framework (IPPF), IAAs add value when they contribute to governance, risk management (RM) and the effectiveness and efficiency of control processes (IIA, 2013). This definition forms the basis of the research hypotheses posited to investigate the relationship between IAAs perceived to add value and the IAF’s characteristics drawn from the extant literature. These include: Correspondence to: Giuseppe D’Onza, Department of Economics and Management, University of Pisa, Via Cosimo Ridolfi, 10, 56124 Pisa PI Italy. Email: giuseppe.donza@unipi.it International Journal of Auditing doi:10.1111/ijau.12048 Int. J. Audit. 19: 182–194 (2015) © 2015 John Wiley & Sons Ltd ISSN 1090-6738