External Auditor’s Trust in Internal Auditors : The Cultural Effect - A Study Between Greece and Sweden

Abstract: Nowadays, the importance of the external auditing is demonstrated by the highly risky business environments, that fertilize the fraud and irregularities, which lead businesses to provide mistaken financial statements and misleading financial information. The uncertainty that occurs in the decision process in businesses, enhance the risks and requires the attention of the employees. More specifically, the audit profession is characterized by high levels of ambiguities, with a combination of serious responsibilities that affect the financial position of the companies. Following this, businesses started to consider the advantages of having an internal control department. This internal audit function would, on the one hand provide consulting services for the proper operation of the company, but would also assist the external control. With this intention, our research attempt to provide further clarification of a judgmental problem that appears when external auditors utilize the internal control’s work. The external auditor’s judgments are affected by a variety of factors, such as the professional qualities and the communication abilities of the internal auditors, but also the external’s auditor personal experiences and personality. In our research we have chosen to demonstrate if culture is a factor that could affect the trust towards the internal audit function. This is because there is an increasing awareness that culture is an important factor that affects many actions and outcomes in finance (Lehnert et al. 2013). In order to identify the culture as a factor, we have utilized the theory of Hofstede and the uncertainty avoidance level; this is due to the high levels of uncertainty that occurs in decisions of trust. According to Hofstede et al. (2010, pp. 191), the avoidance of uncertainty is defined as “the extent to which the member of a culture feel threatened by ambiguous or unknown situations”. Regarding our research, we have compared Greek with Swedish external auditors, so as to identify whether their cultural dimension in uncertainty avoidance affect the trust in the internal audit function. Our choice is due to the Hofstede results, in which Greece is in the higher level of the uncertainty avoidance, and Sweden is in the lowest. Thus, we have compared two totally different cultures in order to enhance the interest for our study. The research was conducted with questionnaires that were demonstrated by questions divided in three categories, and a case study by Richard G. Brody (2012) “External auditors' willingness to rely on the work of internal auditors: The influence of work style and barriers to cooperation”; the case was adjusted 5 so as to meet the EU business regulatory environment. The first questions aim to provide information about the demographic characteristics of the participants, in the second part was measured the trust that the external auditor would show towards the internal control’s information and the third part was focused on the cultural aspect; the uncertainty avoidance. The questionnaire answers where gathered through email and phone communication with the audit firms. The results of our research showed that Greek auditors follow Hofstede’s outcomes concerning their judgments the internal audit work. The Swedish auditors are totally different than expected. Consequently, the high regulatory system, the rules and the risks that occur within the profession, drive the Swedish auditors to present a different cultural style and avoid uncertainty more in their job responsibilities. Thereupon, the Greek and the Swedish external auditors are avoiding the uncertainty in a high degree. Both of the cultures preferred regulations and rules, overtime work and advice from supervisors and experts. In conclusion of our research, our findings support that the cultural dimension, in avoidance of uncertainty, affected the judgments of the external auditors in terms of proceed additional activities for investigating the internal audit work.