Tag Archives: corporate governance

#VolkswagenScandal. Why did nobody stop the malpractice at the People’s Car? Is the German two-tier board system part of the problem?

27 Sep



According to SPIEGEL ONLINE (September 27, 2015), Volkswagen was alerted by Bosch already in 2007 for what the wrongdoing is concerned. In the recent edition of DER SPIEGEL (September 26) reference is made to the European Union-Law No. 715/2007, which prohibits the use of systems that manipulate the analyses of car emissions; a law to be enforced by no later than 2009. That article is titled German Double Standards (“Deutsche Doppelmoral”) for German politics have not yet been enforcing that law in practice. In 2011, according to SPIEGEL ONLINE (September 27), Volkswagen’s Internal Audit department addressed the matter.

It is unclear at this point, who knew what and when. As a matter of fact, nobody stopped the malpractice. Another four years on, in September 2015, energy emission fraud eventually hit Volkswagen, the People’s Car. Then, all happened rapidly. The CEO was forced to step down. The share price dropped over 40% within two days. The stock value melted from EUR 80 billion to EUR 55 billion within a week. A lot of money lost. Even worse, reputation went downhill. Nobody likes fraud and fraudster.

Volkswagen is about to get back on its feet. Rebuilding trust will be more demanding than smoothening crumpled paper. That is expected to take a decade as a supervisory board member states (DER SPIEGEL, September 26, 2015) – if at all successful. I very much hope so.

I ask myself, why did nobody stop the malpractice at the People’s Car? I wonder whether the German two-tiers board system is part of the problem. The German corporate governance context is characterized by two-tier board structures with a Management Board (Vorstand or Geschäftsführer depending on the type of legal entity) and a separate Supervisory Board (Aufsichtsrat). In Germany, Senior Management is generally regarded as the chief stakeholder of Internal Audit as it is common practice for the Chief Audit Executive to report directly to the Management Board, while the Chief Audit Executive may or may not have direct access to the supervisory body or a sub-committee thereof, such as the Audit Committee. Thus, in the German two-tiers board system the risk is that Internal Audit’s reports to the Supervisory Board/Audit Committee may be filtered by Senior Management in such a way that only what is palatable to Senior Management is communicated (2tier).

I am keen on learning the information flow to the Supervisory Board / Audit Committee @ Volkswagen. What did they know? Who informed them? How was that done? What did the Internal Audit report from 2011 actually say? Etc.

In order to “get the boss right”, strategically positioning the Internal Audit Function closer to the Supervisory Board to help the Internal Audit Function’s performance and effectiveness, may be worthy of consideration.

What do you think?

Internal Audit. Effective? Questions!

9 Dec



Rainer Lenz, Ulrich Hahn (2015), A synthesis of empirical internal audit effectiveness literature pointing to new research opportunities, Managerial Auditing Journal, Vol. 30 Iss: 1, pp. –


Ten years after Bailey, Gramling and Ramamoorti (2003) presented research opportunities in Internal Audit (IA) this paper provides a synopsis of what academic literature says about IA effectiveness. A new set of research questions that may help to bring the best out of IA is proposed.


Empirical studies based on internal auditors’ self-assessments (“inside-out”) and empirical studies based on other stakeholders’ perspectives (“outside-in”) are reviewed through an “effectiveness lens”. The “outside-in” perspective is regarded as particularly valuable.


First, we identify common themes in the empirical literature. Second, we synthesize the main threads into a model comprising macro and micro factors that influence IA effectiveness. Third, we derive promising future research paths that may enhance IA’s value proposition.

Practical implications

The “outside-in” perspective indicates a disposition to stakeholders’ disappointment in IA: IA is either running a risk of marginalization (IIA, 2013; PWC, 2013) or has to embrace the challenge to emerge as a recognized and stronger profession. The suggested research agenda identifies empirical research threads that can help IA practitioners to make a difference for their organization, be recognized, respected and trusted, and help the IA profession in its pursuit of creating a unique identity. This paper wishes to motivate researchers to explore innovative research strategies and probing new theories as well as benefitting from cross-fertilization with other research streams.


This paper summarizes the state of research on IA effectiveness and proposes a guide for future IA research. It provides pointed questions that may further advance the understanding of what constitutes IA and how IA can enhance its value proposition.

Factors associated with the internal audit function’s role in corporate governance

6 Apr

2012 Factors_Associated

Corporate governance gained much attention in recent years due to the scandalous frauds of the early 2000s. Given this background, it is curious as to why CBOK (2006) indicates that some 41.7 percent of the Internal Audit Functions (IAFs) do not play an active role in corporate governance. CBOK (2006) also indicates that only 6.5 percent of the IAFs’ working time is allocated to governance issues.

This paper wants to provide guidance on strengthening the role of IAFs in corporate governance. We use responses from 782 US CAEs in the CBOK (2006) database for our investigation. Using a binary questioning mode in CBOK (2006) the CAEs indicated whether their IAFs had an active role in their firm’s corporate governance. We find that IAFs that are perceived to have active roles in corporate governance are significantly and positively associated with the use of a risk-based audit plan, an existence of a quality assurance and improvement program (QAIP) and input to the audit plan from the audit committee. In our multivariate analysis we find that a number of control variables (e.g. exchange listing, firm size, CAE certification) are also significantly associated with the IAF’s active role in corporate governance.

Our results have implications for CAEs who wish to increase their IAF’s role in corporate governance by providing services that are better aligned with the needs of their clients, such as the audit committee.

Sarens, Gerrit, Abdolmohammadi, Mohammad J., and Lenz, Rainer (2012), Factors Associated with the Internal Audit Function’s Role in Corporate Governance, Journal of Applied Accounting Research, Vol. 13 No. 2, pp. 191 – 204