Managerial Auditing Journal

Total quality management and the internal audit: empirical evidence

Lindsay C. Hawkes, Michael B. Adams,
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Managerial Auditing Journal, Vol. 10 Issue: 1, pp.31-36, https://doi.org/10.1108/02686909510077361
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 TOTAL QUALITY MANAGEMENT AND THE INTERNAL AUDIT: EMPIRICAL EVIDENCE
Total quality management and
the internal audit: empirical
evidence
Lindsay C. Hawkes and Michael B. Adams
Total quality management (TQM) has major implications for internal audit
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Introduction
Clinging to tradition, many of us still over emphasise the
element of compliance. This limits the potential of audit to
deliver real value-for-money and will continue to do so until
we broaden our scope[1, p. 16].
In a recent article published in this journal[2] we argue that
total quality management (TQM) has major implications
for the practice of internal audit. We suggest that TQM
concepts, such as people empowerment, are incongruous
with traditional notions that internal audit should be an
independent and internal control-focused function that
reports exclusively to management. We also put forward
four possible scenarios as to the prospective role that
internal audit could adopt in responding to the challenges
posed by TQM. Emanating from our initial article, we
believe that at least three important research questions
emerge:
(1) If an organization which embraces TQM has an
internal audit department, what role do internal
auditors perform and what responsibilities are
assigned to them?
(2) What is the impact of the TQM revolution on
internal auditors? For instance, do internal auditors
have a place in the TQM revolution? If they do, how
quickly are practitioners responding to the needs of
TQM organizations?
(3) What are the organizational features of TQM
entities that employ internal auditors?
In this article, we present and discuss the findings of an
empirical study carried out within the New Zealand
manufacturing sector which seeks to address these three
research questions. The article is organized as follows. The
next section outlines the data collection method adopted in
the study, while the following section analyses and
interprets the survey results. Then the important
implications of the survey results for the internal auditing
Managerial Auditing Journal, Vol. 10 No. 1, 1995, pp. 31-36 © MCB University
Press Limited, 0268-6902
31
profession are discussed. Finally, some conclusions are
made.
Research design
Mail survey questionnaire
The study examines the role of internal audit in New
Zealand manufacturing companies that have implemented
TQM. The manufacturing sector was selected as a suitable
environment to examine empirically the three research
questions outlined, for two main reasons. First, some
writers[3] opine that fierce competitive pressure has forced
many manufacturers to embrace TQM actively in order to
survive and succeed in business. Thus, TQM should be
well established in the manufacturing sector compared to
other sectors of the economy. Second, source data on
quality assurance programmes in the New Zealand
manufacturing sector are readily available from registered
bodies such as the Telarc organization[4]. This information
would help us to design an appropriate sampling
framework for our study.
Data were gathered by means of a mail-survey
questionnaire. To overcome the potential problem of
misinterpretation of questions by respondents in mail-
surveys, careful attention was given to the design and
development of the questionnaire[5]. As an initial
screening process, the draft questionnaire was reviewed by
an expert in market research at the Department of
Marketing, Massey University, so that any drafting errors,
ambiguities and misleading questions could be identified
and rectified. The mail-survey questionnaire was then
despatched to a pilot group of five manufacturing
companies. This procedure further helped to ensure that
The authors would like to thank Professor Philip Gendall,
Department of Marketing, Massey University, New Zealand,
for his advice on the research design employed in this study.
They are also grateful to Ted Drawneck, Computer Services
Department, Massey University, New Zealand, for his
assistance with SPSS/PC+.
 32 MANAGERIAL AUDITING JOURNAL 10,1
questions were worded in a manner which would facilitate
ease of completion by senior managers in the firms
targeted and thereby enhance the likely rate of response to
the main survey. To improve the prospective response rate
further, and to avoid the problem of non-response bias[6],
survey techniques suggested by Courtis[7, pp. 123-5] were
adopted in the survey. These measures included: the use of
a covering letter under the heading of the Department of
Accountancy, Massey University, which was signed by the
head of department; the specification of a deadline date for
the return of the mail questionnaire; and the enclosure of a
stamped addressed envelope for return of the completed
questionnaire.
Sampling method
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Once the design and development stages of the mail-
survey questionnaire were complete, the research
instrument was despatched to a random sample of chief
executives/managing directors in 120 New Zealand
manufacturing companies. These firms were drawn from a
register of firms accredited with ISO series quality
standards by the Telarc organization. The sample was
selected by means of a random number generating
machine and represents approximately 60 per cent of the
total population of manufacturing firms registered with
Telarc as at 31 December 1992 (N = 199).
At the time of the survey (February 1993), the Telarc
register was the most comprehensive database on quality
assurance systems in New Zealand manufacturing
companies available to us. However, as Hand[8, p. 26]
points out, it is not a prerequisite for a manufacturer to
have a TQM programme in place for it to be issued with
ISO series standards of quality. Nevertheless bodies such
as the Institute of Internal Auditors (UK)[9] report that
organizations accredited with the ISO 9000 series or BS
5750 quality standards also tend to have established TQM
programmes. Therefore we considered that the Telarc
register was an appropriate source from which to select
our sample of firms. In the event, 92 per cent of firms (n =
79) responding to the mail questionnaire confirmed that
they have had a TQM programme in place for at least one
complete year, thereby vindicating ex post our choice of
sampling source.
Response rate
Consistent with market research practices recommended
by Kanuk and Berenson[10], follow-up procedures were
also employed to ensure a good response rate to the survey.
A month after the mail questionnaires were first sent out to
firms, a formal reminder letter, together with a copy of the
original research instrument, was sent to non-respondents.
Finally, approximately one month after the second
despatch, a telephone reminder to non-responding
companies was carried out. These efforts helped to
produce a final response rate to the survey of 72 per cent (n
= 86) (see Table I). The effective sample size (n = 86)
Table I. Survey response rate
Number Percentage
Number of questionnaires despatched 120 100
Replies received 86 72
Usable replies 86 72
Population (N) = 199
Effective sample (n) = 86 (n/N% = 43%)
represents approximately 43 per cent of the target
population. As reported in the note to Table II, item non-
response only related to questions relating to the
completion of accounting data, such as turnover and profit
– information which many firms were reluctant to
disclose for reasons of confidentiality. Therefore, overall,
the survey results are judged to be fairly representative of
the total population of New Zealand manufacturers that
have TQM systems in place[11,12].
Analysis and interpretation of results
Frequencies and descriptive statistics
The data obtained from the mail-survey questionnaire
were analysed by the statistical software package,
SPSS/PC+. Important data relating to those firms
responding to the mail-survey questionnaire are detailed in
Table II.
The majority of respondents are New Zealand-owned, non-
listed companies operating in largely specialist
manufacturing activities, such as food processing and
engineering tools. Nevertheless, a substantial minority of
firms are publicly listed and overseas controlled (33 per
cent and 43 per cent of the effective sample, respectively).
Fifty-one per cent of companies declined to provide
details of total assets and turnover, which are common
proxies for firm size. Therefore, an alternative measure,
the total number of full-time equivalent (FTE) staff
employed, is used as a proxy for firm size in this study.
On this indicator, the average size of company, is 254
FTE, which is substantially greater than the 12 FTEs
per company reported for the New Zealand manufacturing
sector as a whole[13]. This finding suggests that it is the
larger New Zealand manufacturer which tends to seek ISO
certification and implement formal TQM programmes.
The statistics in Table II also show that of the 86 usable
replies, 79 firms (92 per cent of respondents) have TQM
programmes in place, and 56 (65 per cent) have an internal
audit function.
 TOTAL QUALITY MANAGEMENT AND THE INTERNAL AUDIT: EMPIRICAL EVIDENCE 33

Table II. Firm details – numbers and percentages audit function tends to have been in existence for at least
five years, compared to the two-year average in the case of
Feature Number Percentage
TQM programmes. In most of these companies, internal
auditors seem to have adapted to the requirements of TQM
(1) Status by primarily carrying out quality assurance and quality
Public-listed firms 28 33 programme assignments with traditional pursuits such as
Non-public-listed firms 58 67 financial, and internal control compliance audits being of
86 100 secondary importance. In 29 companies, internal auditors
(2) Nationality have reportedly abandoned their traditionally independent
New Zealand firms 49 57 and prescriptive position by regularly taking an active
Non New Zealand firms 37 43 part in TQM programme improvement initiatives. Such a
86 100 role involves helping and coaching operatives, rather than
(3) Activity
Engineering 28 33
simply prescribing changes and solutions to problems at a
Consumer goods 27 31 distance. Interestingly, only 15 firms (27 per cent of firms
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Other 31 36 with internal audit) give prominence to fraud

86 100 investigations and financial audits in the annual audit
(4) Firm size (total assets $) plan.
Less than 5m 17 20
5m-10m 10 12 The survey evidence also indicates that in TQM
More than 10m 15 17 environments the internal audit function tends to consist
Unknown 44 51
86 100
of a single member of staff rather than a department
(5) Internal audit comprising more than one person. This person is normally
Firms with internal audit 56 65 responsible to the chief executive/managing director on
Firms without internal audit 30 35 quality systems issues. Only in 7 per cent of cases (n = 4
86 100 firms) do internal auditors report primarily to the chief
(6) Internal audit role financial officer on accounting and financial control
Firms with internal audit – no TQM role 10 18 matters. It was noted that where internal auditors report to
Firms with internal audit – TQM role 46 82 the chief executive/managing director on quality matters,
56 100
their contribution to the firm is generally highly regarded
(7) TQM programmes
Firms with TQM in place 79 92 by those to whom they report.
Firms with no TQM 7 8
86 100 Only in eight out of the 30 firms currently without an
internal audit function were internal auditors formerly
Note: Out of the 46 firms where internal audit has a TQM role, employed before the implementation of TQM. In these
42 firms reported that internal audit suggestions were cases, the main reason for disbanding the internal audit
positively helpful to the TQM process function is reported to be the high cost and the perceived
low contribution of internal auditors to the TQM process.

Descriptive statistics shown in Table III highlight that on
average firms have been operating in New Zealand for
approximately 37 years, and that the most common length
of period of operations reported by companies
(as measured by the mode statistic – mo) is approximately
20 years. In contrast, the adoption of TQM is a very recent
phenomenon in that, on average, firms have only been
formally committed to TQM for approximately two years.
Role of internal audit
The first research question posed above is examined from
the survey evidence summarized in Tables II and III.
In the 46 firms where internal auditors reportedly play an
active role in the TQM process, their role is substantially
involved in quality assurance reviews, rather than with
examinations of accounting controls and verification of
financial transactions and balances. Table III shows that in
those firms which employ internal auditors, the internal
Research hypotheses and chi-square tests
To examine further the role of internal audit in TQM
manufacturing environments, three hypotheses, relating to
the second and third research questions posed in the
Introduction, are formulated and tested by means of the
chi-square (χ2) statistical test of association. The χ2 test is
used because it is able to handle discrete categories of data
and test for statistical independence between groups of
data[14].
The three research hypotheses, expressed in the
conventional null format (Ho) and tested in the study, are as
follows:
Hypothesis 1. Firms with TQM programmes do not
have an internal audit department.
Hypothesis 2. The role of internal auditors is unrelated
to the number of years that the firm has been committed
to TQM.
 34 MANAGERIAL AUDITING JOURNAL 10,1

Table III. Selected descriptive statistics

Standard
Mean Median Mode deviation High Low
Variables (x) (md ) (mo) (s) (H) (L)

Years committed to TQM 3.00 3.00 3.00 2.20 12 1

Years accredited with ISO standards 2.00 2.00 1.00 1.42 10 1
Years operating in New Zealand 37.50 35.50 20.00 30.50 140 3
Percentage turnover – exports 24.00 25.00 0.00 27.00 99 0
Years with an internal audit department 5.00 3.00 3.00 6.00 25 1
Full-time equivalent (FTE) staff in internal audit (n) 2.00 1.50 1.00 1.50 7 1
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TQM suggestions per annum – all staff 41.00 40.00 0.00 55.75 241 0
TQM suggestions per annum – internal auditors 25.00 25.00 0.00 30.20 100 0
Firm sizea
Turnover ($) NZ$74m NZ$65m NZ$15m NZ$199m NZ$1,300m NZ$0.49m
Total assets ($) NZ$70m NZ$65m NZ$9m NZ$202m NZ$1,200m NZ$0.30m
Profits ($) NZ$3m NZ$4m NZ$1m NZ$7m NZ$41m NZ$0.10m
Full-time equivalent (FTE) staff (n) 254.00 240.50 100.00 589.80 3,350 10
Note: aAccounting information is rounded to nearest whole number. Furthermore, approximately half of the companies responding to
the survey did not disclose accounting information for reasons of confidentiality.

Hypothesis 3. The employment of internal auditors in a 3 × 3 matrix. The calculated χ2 statistic of 5.73 is less
TQM firms is not related to firm size, type and than the tabulated significance value of 13.28 at the 0.01
ownership of company, and the nature of its business. confidence level (at 4 degrees of freedom). Therefore, the
The calculated χ2 statistics are reported in Table IV. role of internal auditors is not dependent on how long the

Are TQM firms likely to have an internal audit function? Table IV. Chi-square (χ2) statistics
To determine whether there is any association between the
existence of internal audit and TQM in manufacturing Variables
companies, the two variables were cross-tabulated in a 2 ×
2 matrix on SPSS/PC+ and a χ 2 statistic of TQM IAUD ROLEIAUD
0.81 calculated. The calculated χ 2 statistic was
considerably less than the 6.63 significance statistic TQM – – –
recorded at the 0.01 confidence level (with 1 degree IAUD 0.81 – –
of freedom)[15]. Therefore, there is no prima facie evidence Size – 2.19 –
to suggest that the existence of internal audit Status – 4.06 –
in New Zealand manufacturers is necessarily incompatible
Activity – 7.74 –
with TQM.
Nation – 2.06 –
What role do internal auditors have in TQM Exports – 1.19 –
environments? Years TQM – – 5.73
For those manufacturers which have an internal auditing Notes: Variable labels – TQM = Existence of TQM; IAUD =
function, a cross-tabulations procedure was run on Existence of internal audit; Size = Firm size (FTEs); Status =
SPSS/PC+ between the role of internal auditors and the Ownership/listing status; Activity = Manufacturing activity;
number of years that firms had been committed to TQM. Nation = Nationality of ownership; Exports = % turnover sold
To enable this test to be performed, data on the role of in overseas markets; ROLEIAUD = Internal audits’ role and
internal audit was pooled into three categories responsibilities in firms; Years TQM = Number of years TQM
(financial/control, quality audit and other) and cross- has been in place in firms
tabulated against the number years of TQM grouped into All χ2 statistics are insignificant at the 0.01 confidence level
three categories (1-2 years, 3-5 years, 6-12 years) to produce
 TOTAL QUALITY MANAGEMENT AND THE INTERNAL AUDIT: EMPIRICAL EVIDENCE
firm has had TQM in place and the changes brought about
by TQM need not necessarily result in an immediate
change in internal auditing activity from a financial
auditing to quality focus approach.
Which corporate features distinguish those TQM firms
which employ internal auditors?
A priori, there may be organizational characteristics which
could help to explain why certain manufacturing
companies with TQM programmes in place employ
internal auditors while other firms do not. For example,
the larger, publicly listed companies may be more disposed
to employ internal auditors because they have more
resources to support an internal audit function. Moreover,
owners of larger manufacturers may believe that the
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internal audit function helps to overcome information
asymmetry problems in the company[16].
Therefore, the study examines whether the existence or
otherwise of internal audit in TQM environments is
influenced by five variables: firm size (measured by FTE),
company status, manufacturing activity, nationality of
ownership, and the extent to which the firm relies on
overseas markets. The relevant χ2 statistics are shown in
Table IV.
The computed χ2 statistic for firm size (FTE) against the
variable representing the existence of the internal audit
function is 2.19 (at 3 degrees of freedom). The tabulated χ2
value at 0.01 significance is 11.35. Therefore, the existence
or otherwise of internal audit is not dependent on firm size.
At the same significance level and degrees of freedom, the
calculated χ2 statistics for company status (χ2 = 4.06) and
reliance on exports (χ2 = 1.19) were also not statistically
significant at the 0.01 confidence level. Furthermore, the
variables for manufacturing activity (χ 2 = 7.74, at 6
degrees of freedom) and nationality of ownership (χ2 =
2.06, at 4 degrees of freedom) were again not statistically
significant. Therefore, the empirical results suggest that
the existence of internal audit in TQM environments does
not appear to be dependent on the size, status and
nationality of ownership of the firm or its business
activities and markets.
Implications
The survey results suggest that internal auditors in New
Zealand-based manufacturing companies change their role
and responsibilities in response to TQM initiatives.
Generally, this change in focus involves a move away from
financial auditing and internal control compliance checks
to a primary focus on quality systems reviews.
The new objectives and expanded scope of the internal
audit function will require a major change in emphasis on
internal auditors’ skills, training needs and professional
education. For instance, internal auditors will need to
35
become well versed in the theoretical aspects of TQM and
skilled in the application of techniques, such as statistical
control methods, which can help in quality control and
improvement. Internal auditors will have to be better
trained and educated to identify, measure and evaluate
quality problems, preferably before they can adversely
affect business processes. Internal auditors will then be
better placed to assist operatives and managers to find
collectively the source of a problem(s) and develop a
solution which addresses the cause of the problem, rather
than just suppressing the symptoms.
An important feature of internal auditing in TQM
environments seems to be the co-operative and
participative approach rather than the independent
and prescriptive appraisal function. Many survey
respondents indicated that production staff and internal
auditors were involved in jointly performing quality
reviews. In one case, production operatives reportedly
carried out the quality review assignment under the
supervision of the internal audit department. This
co-operative and participative approach will require the
internal audit staff to display good communication and
coaching skills as they assist production staff to review the
systems that they operate. Mints’ study[17] of relations
between internal auditors and operatives in US
organizations also stressed the benefits of a participative
approach.
Such changes in approach suggest that internal auditors in
manufacturing firms are more likely to operate as either
supportive reviewers or participative advisers rather than
independent appraisers of systems[2]. As previously
mentioned, this has major implications for the workplace
training and professional education of internal auditors.
Many of the firms in our survey had established internal
audit functions in the last three years in conjunction with
the introduction of quality management programmes and
ISO certification. This suggests that quality review
requirements of the ISO 9000 series standards, together
with the continuous improvement philosophy of TQM,
have provided opportunities, as well as challenges, for the
internal audit function in manufacturing firms. However, if
internal auditors are to capitalize fully on the
opportunities offered, traditionalist views regarding the
predominance of financial auditing and compliance checks
should arguably be altered. If the internal audit function
does not extend its scope to include quality reviews, others,
such as external quality audit agencies, will take up the
opportunity and eventually replace the internal auditor.
Indeed, there is some anecdotal evidence to indicate that
this scenario is already occurring. For example, as
Peters[1] reports:
Throughout the world, quality systems audit is being
provided by a new breed, the quality systems auditor. They
already outnumber us. And why aren’t we that new breed[1,
p. 17]?
 36 MANAGERIAL AUDITING JOURNAL 10,1
Conclusion
The findings of this study indicate that the existence of an
internal audit function is not necessarily incompatible
with TQM initiatives. However, the study suggests that
internal auditors have to respond positively to TQM by
performing quality assurance reviews and by taking an
active part in quality initiatives and the TQM
improvement process. To some degree, the survey results
may not report the full impact of TQM on the internal
audit function in New Zealand manufacturing companies
since many respondents have only implemented TQM in
the last two or three years. Nevertheless, the evidence from
this study suggests that internal auditors are changing the
focus of their activity in response to the TQM revolution.
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Therefore, the internal auditing profession will have to
review the skills and educational needs of new entrants
and the training and continuing education needs of the
current membership. If internal auditors do not actively
respond to the challenges and opportunities of TQM, then
others will do so and will eventually replace the internal
auditor. Therefore, the professionalization of quality
management could be a catalyst that instigates radical
changes in the practice of internal audit. Ultimately,
however, we believe that the future role and, indeed,
survival of internal auditors in TQM environments largely
lies with the internal auditing profession. Indeed, as Peters
opines,
Whether the TQM movement represents threats or
opportunities may depend on how (and when) the profession
responds. Internal auditors need to re-examine their
services, redirect their efforts, and build responsive teams to
meet the challenge[1, p. 19].
Notes and references
1. Peters, B., “The quality revolution”, Internal Auditing,
December 1992, pp. 16-18.
2. Hawkes, L.C. and Adams, M.B., “Total quality
management: implications for internal audit”,
Managerial Auditing Journal, Vol. 9 No. 4, 1994, pp. 11-18.
3. For example, see Kaplan, R.S. and Atkinson, A.A.,
Advanced Management Accounting, Prentice-Hall,
Englewood Cliffs, NJ, 1989.
4. Telarc New Zealand is the national technical and quality
system accreditation and certification authority for
quality assurance, laboratory testing and industrial
design and manufacture.
5. Misinterpretation due to the inclusion of ambiguous and
leading questions in mail-survey questionnaires is
recognized as a potentially major problem in social
science research. For example, see Moser, C.A. and
Kalton, G. in Bynner, J. and Stribley, K.M. (Eds), Social
Lindsay C. Hawkes and Michael B. Adams are both Lecturers at the Massey University, Palmerston North, New Zealand.
Research: Principles and Procedures (ch. 12, pp. 140-55),
Longman/Open University Press, London, 1979.
6. Non-response bias arises where the usable responses to a
survey are of such a small number that they do not
accurately represent or describe the characteristics of the
population. This reduces the generalizability of results
and prevents substantive conclusions from being drawn.
Non-response bias relates both to the failure to return the
questionnaire (i.e. “questionnaire non-response”) and to
the failure to answer one or more of the questions (i.e.
“item non-response”).
7. Courtis, J.K., “Perception data-gathering: a note on mail
questionnaire methodology and bias”, Pacific Accounting
Review, Vol. 2 No. 1, 1989, pp. 118-35.
8. Hand, M., “Total quality management – one God, but
many prophets”, in Hand, M. and Plowman, B. (Eds),
Qual ity Management Handbook, Butterworth-
Heinemann, London, 1992, ch. 2, pp. 26-46.
9. Institute of Internal Auditors (UK), “Total quality
management – the implications for internal audit units”,
Internal Auditing, November 1991, pp. 12-14.
10. Kanuk, L. and Berenson, C., “Mail surveys and response
rates: a literature review”, Journal of Marketing Research,
Vol. 12 No. 11, 1975, pp. 440-53.
11. It is difficult to specify precisely a lower bound below
which non-response bias is likely to be a problem.
However, from illustrations made in Courtis[7] it would
appear that a response rate of less than 30 per cent of the
initially selected sample is likely to lead to problems of
non-response bias in the interpretation of results. For a
good review of the problems of non-response bias in mail
surveys, as well as possible tests for non-response bias,
see[7].
12. Wallace, R.S.O. and Mellor, C.J., “Nonresponse bias in
mail accounting surveys: a pedagogical note”, The
British Accounting Review, Vol. 20 No. 2, August 1988,
pp. 131-9.
13. New Zealand Official Year Book, Wellington, New
Zealand Government Department of Statistics, 1992.
14. Siegal, S., Nonparametric Statistics for the Behavioral
Sciences, McGraw-Hill, New York, NY, 1956.
15. The tabulated values of the χ2 statistics reported in this
study are taken from Murdoch, J. and Barnes, J.A.,
Statistical Tables for Science, Engineering, Management
and Business Studies, Macmillan, London, 1974.
16. Information asymmetry problems refer to the loss of key
business information emanating from the separation of
ownership from control as firm size increases. Agency
theory posits that internal audit is a mechanism by
which owners of firms are able to overcome information
asymmetry. See Adams, M.B., “Agency theory and the
internal audit”, Managerial Auditing Journal, Vol. 9 No. 8,
1994, pp. 8-12.
17. Mints, F.E., “Behavioral patterns in internal audit
relationships”, Research Report No. 19, IIA Inc., Florida,
FL, 1975.
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