Internal Audit Function & the Development of Corporate Governance Code

Running head: RESEARCH PROPOSAL
Research Proposal
Internal Audit Function & the Development of Corporate Governance Code
Student’s name:
Name of the university:
Author’s note:

1RESEARCH PROPOSAL
1. Introduction
Corporate governance can be defined as oversight of the organisation's policies,
procedures and practices. This oversight assists the organisation to ensure the operation in
best interests of the organisation and its shareholders. In addition, this method of controlling
corporate governance is done by the Board of Directors and the management can employ the
internal auditors to monitor and test the internal control (Hayes 2017). In this research
proposal, the theory of corporate governance and the relationship between corporate
governance and internal audit will be explained. The purpose of the research proposal is to
explain the adoption, introduction and application of corporate governance code in Libya,
mainly in Harouge Oil Operations. Therefore, problem statement, aim and objectives of the
study will be identified. In addition, a literature review of the scholarly articles will be done
in order to establish a theoretical understanding of the study. In the methodology section, data
collection and analysis procedure will be discussed.
4. Literature Review
The concept of internal audit function within an organisation
Internal audit is an objective assurance, independent and consulting activity and it is
designed to provide value and develop a firm’s operations (Abbott et al. 2016). Internal audit
assists an organisation to accomplish its goals by creating a systematic as well as disciplined
approach to improve and evaluate the risk management, the effectiveness of the control and
governance systems. Internal audit can be defined as the catalyst for developing corporate
governance by giving recommendations and managerial insights. This analysis is mainly
done by assessment of business processes and data. As stated by Lenz and Hahn (2015), with
a commitment towards accountability and integrity; internal auditing can share value to
senior management as well as governing bodies as an objective source of service that is

2RESEARCH PROPOSAL
independent. The authors further argued that within an organisation, the roles of internal
auditing are broad and it encompasses with corporate governance, management controls, risk
management, the effectiveness of the organisational operations, reliability of management
and financial reporting and it also helps the organisation to follow compliance with
regulations and laws. As opined by Pizzini et al. (2014), internal auditing is very important in
the developing countries where corruption and fraud activities are prevalent as it involves in
conducting proactive audits in fraudulent cases through investigating and participating fraud
examinations.
The concept of corporate governance
Corporate governance can be defined as the practices, rules and processes through
which the firms are controlled and directed. As opined by Dodd (2017), corporate governance
is involved in balancing the interest of the company's stakeholders and the stakeholders of the
organisations are the management, shareholders, customers, financiers, suppliers and
community. Corporate governance gives the organisation a chance to provide a framework
towards gaining the company's objectives and it surrounds the practically every aspect of the
management (McCahery et al. 2016). Corporate governance encompasses from internal
controls of the performance of the organisation to the actions plan about the performance
measurement. According to Tricker (2015), the board of directors are primary stakeholders of
the corporate governance and shareholders elect the directors of the organisations. The
directors take important decisions about the business. On the other side, as stated by Allen
(2017), poor corporate governance can make doubt about the company’s integrity, reliability
and obligations towards the shareholders. In recent time, Volkswagen faced the issue of poor
corporate governance when it got caught in emission scandal of the organisation.
The theoretical perspective of the internal audit function and corporate governance

3RESEARCH PROPOSAL
Agency Theory of corporate governance
Agency theory involves the issues of the directors that control the company whereas
shareholders own the company. Agency theory takes this issue into consideration to prevent
it. According to Hoenen and Kostova (2015), the key concept of agency theory is that an
agent is recruited by the principle to continue the task on their behalf and the agency is the
relationship between the agent and the principle. The authors in the article further stated that
agencies costs are given by the principles in controlling the agency behaviour just because of
the lack of trust in the belief of the agents. It is needed to undertake the task on behalf of the
agent and the agent becomes accountable to that principle. There are three separations of
ownership and control; such as principal (shareholders), agents (directors) and task
(Managing the company) (Muller 2017). The agency theory helps the company to create the
corporate governance and it starts with the companies owned and managed by the same
people. In the next stage, it expands the business through required investors and these people
could be shareholders and limited liability. In the following stage, it delegates the running of
the company and to managers (agents). In the next stage, the company goes towards the
separation of the goals. As stated by Bosse and Phillips (2016) separation of ownership in
business can lead to the potential issues between directors and shareholders and principal-
agent relationship can be dealt with corporate governance codes and that with the firm with
the auditors.
Stewardship Theory of corporate governance
Stewardship theory is about the managers who can act as responsible stewards of the
principle and assets that they control (Kruitwagen et al. 2017). In addition, stewardship
theory is the alternative view of the agency theory where the managers are taken as to act in
their own enthusiasm and self-interest. It can be specified that stewardship is a certain