Uncertainty avoidance versus policies and procedures

How does it work in a multinational?

Drs. E.F. (Edwin) van der Burg Utrecht, July 2010

Supervisor: Dr. F.J. de Graaf Universiteit van Amsterdam Business School Executive Master of Internal Auditing Universiteit van Amsterdam Business School

Preface I write this thesis to finalise my Executive Master of Internal Auditing (EMIA) at the Universiteit of Amsterdam, Amsterdam Business School. This thesis marks the final stage of 2 years of my EMIA education. It was with pleasure that I went to the university every Friday, gaining the theoretical background in Internal Auditing and having interesting discussions with my fellow students.

The subject of my thesis was easily chosen, mainly due to my background and my international ambition. In my previous education, I not only had the opportunity to work together with other cultures, but I also had the chance to study and work abroad. This triggered my interest to explore a thesis focussing on policies and procedures and how they are received by the various cultures. Even though it is known that cultures differ from each other, departments of multinationals still issue policies that are globally applicable. Therefore, I decided to take a closer look on the relation between culture and adherence to policies and procedures and the role of the internal auditor.

I would like to use this opportunity to thank my girlfriend and my family for their support and understanding over the past two years. Furthermore, I would like to thank my supervisor Frank Jan de Graaf for his support during the process of writing my thesis. His valuable input and challenging questions have resulted in this finished thesis. I would also like to thank the auditors who filled out the questionnaire and made it possible to conclude this effort.

Edwin van der Burg

Edwin van der Burg 2 Studentnummer 6020288 Universiteit van Amsterdam Business School

Table of Contents Preface ...... 2 Summary ...... 5 Chapter 1. Introduction ...... 6 1.1. Background and motivation...... 6 1.2. Research objective and sub questions...... 7 1.3. Scope and limitations...... 7 1.4. Structure ...... 9 Chapter 2. Culture and its influence on risk preference...... 10 2.1. Definition of national culture...... 10 2.1.1 Mental programming...... 10 2.1.2 Dimensions of national cultures ...... 12 2.1.3 The relation of dimensions of national culture to policies and procedures...... 12 2.2. Risk preference ...... 14 2.2.1 Cushion hypothesis ...... 15 2.3. Uncertainty avoidance versus risk avoidance...... 15 2.4. Summary ...... 16 Chapter 3. Policies and procedures ...... 17 3.1. Management control systems ...... 17 3.2. Policies and procedures ...... 18 3.2.1 Rationale for using policies and procedures...... 19 3.2.2 The internal auditor and policies and procedures...... 20 3.3. Summary ...... 21 Chapter 4. Uncertainty avoidance and its relation to policies and procedures ...... 22 4.1. According to the theory ...... 22 4.2. Hypothesis development ...... 24 4.2.1 Connection between hypotheses ...... 26 4.3. Summary ...... 27 Chapter 5. Research and results ...... 28 5.1. Research method ...... 28 5.1.1 Research setup...... 28 5.1.2 Validation of the questionnaire ...... 29 5.1.3 Respondents ...... 29

Edwin van der Burg 3 Studentnummer 6020288 Universiteit van Amsterdam Business School

5.2. Results...... 29 5.2.1 Hypothesis 1...... 30 5.2.2 Hypothesis 2a/b ...... 31 5.2.3 Hypothesis 3a/b ...... 32 5.3. Summary and conclusions ...... 34 Chapter 6. Summary, concluding remarks and further research ...... 35 6.1. Summary ...... 35 6.2. Implications for the internal auditor...... 36 6.3. Limitations and further research ...... 37 6.3.1 Further research ...... 37 Bibliography ...... 39 Appendix A: Questionnaire...... 41 Appendix B: Respondents ...... 43 Appendix C: Uncertainty Avoidance Index Values...... 44

Edwin van der Burg 4 Studentnummer 6020288 Universiteit van Amsterdam Business School

Summary With policies and procedures being rolled out globally the national culture plays an important role in how these policies and procedures are experienced. The most important cultural dimension when it comes to policies and procedures is the cultural score on uncertainty avoidance. High uncertainty avoidance cultures have a preference for clear, unambiguous and formalised policies and procedures. Low uncertainty avoidance cultures on the other side have a preference for a limited number of policies and procedures, being informal and do not have a problem with non‐adherence.

Policies and procedures play an important role in the management control system and for the internal auditor since they are a source of information on the processes and the controls that are performed by the business. Next to the action controls described in the policies and procedures three other types of controls are identified, namely result controls, personnel controls and culture controls.

With the help of a questionnaire (see Appendix A) I have conducted a research to find out to what extend the internal auditor is influenced by the score on uncertainty avoidance and how this affects his way of looking at the policies and procedures as they are available within the business. The outcome of my research has shown that the categorisation made by Hofstede, in relation with uncertainty avoidance, is not applicable when only internal auditors are involved. Internal auditors who filled out the questionnaire are all, independent from their cultural background, in favour of clear and formalised procedures that contain a sufficient level of detail. Furthermore, the research shows that irrespective of the national culture in which the auditor is operating, checks are performed within the business to make sure that the policies and procedures used by the business are updated and that they are followed accordingly. Another outcome of the research was that the extend to which internal auditors value the existence of the action controls in relation with culture and personnel controls does not differ among groups with a different score on uncertainty avoidance.

To what extend the other cultural dimensions are applicable to the internal auditor could be closer looked at. The same goes for the type of findings raised by the internal auditors within the different cultures in relation with policies and procedures. The availability of other cultural dimensions and the difficulty to isolate one of them through asking specific questions is a possible limitation of my research.

Since differences in scores on uncertainty avoidance are available within the business, it is important for the internal auditor to be aware of it and to know how to deal with it. In cultures with a low score on uncertainty avoidance the internal auditor will have spend more time on making sure that the business has updated the policies and procedures and is working accordingly. At the same time in cultures with a high score on uncertainty avoidance, the internal auditor has to make sure that the correct controls are described in the policies and procedures and that they all have been formalised.

Edwin van der Burg 5 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 1. Introduction As the final part of the Executive Master in Internal Auditing (EMIA) a thesis has to be written. This thesis is about a current relevant topic within the field of internal auditing. The introduction will describe my reasoning behind writing this thesis (motivation), the objective and the research questions, the scope and limitations and the structure of this thesis.

1.1. Background and motivation My personal interest in cultures and their accompanying behaviour in combination with the growing number of companies that operate in multiple countries or even operate in multiple continents are the reasons for writing this thesis. In this thesis the effect of the national cultural dimension uncertainty avoidance will be researched in relation with adherence to policies and procedures.

Even though companies are operating in more countries (a multinational), the employees still have to comply with the same corporate standards. These standards are often captured in policies and procedures that prescribe how the employees are expected to perform their duties. This, to my point of view, looks weird and raises multiple questions on how these rules are perceived, whether they address the issues that are locally available and to what extend they mitigate the inherent risk.

To what extend are the specific cultural dimensions, which the employees bring along in their way of working, looked at and taken into account? As was already mentioned by Warner (1995) and cited by Weber et al. (1998) the importance of understanding cross cultural differences is increasing. It should be taken into account that the increasing connection among countries, and the globalisation of corporations, does not mean that cultural differences are disappearing or diminishing. (House, et al., 2004)

“Understanding other people and developing sensitivity to their ways of life are very crucial to the success of our social and business interactions.” (Tayeb, 1994) The statement made by Tayeb underlines the importance of understanding and differentiating between people, for the success of a multinational. However, does this also indicate, that working with the same corporate policies and procedures in all areas, would have a negative effect on the multinational?

“With cross cultural political and economic interactions growing at an exponential pace, it is becoming important to be aware of the existence and precise nature of cultural differences in perception and/or preference, not only to avoid conflicts and resulting failures that have been reported for many cross‐cultural interactions – for example, cross‐national joint ventures – but also to leverage those cultural differences to achieve joint gains.” (Warner, 1995)

The scientific literature that is currently available does not clearly indicate how the cultural background of the employees, the human capital factor, is influencing the way these employees adhere to the controls available in their daily work. As was mentioned by Chow et al. (1991), no empirical study has directly tested the effects of national culture and management control systems on performance.

Edwin van der Burg 6 Studentnummer 6020288 Universiteit van Amsterdam Business School

Since there is only limited literature available stating the influence of culture on the management control system, I would like to use this thesis to find out whether cultural dimensions influence the effectiveness of the management control system. This thesis will be an explorative research in the area of internal auditors and what they should do to deal with national culture. In case it is known that cultural dimensions are influencing the effectiveness of controls in place in the organisation, in such a way that only limited assurance can be derived from them, a multinational might decide to put in place different controls in different cultures and no longer work with a universal set of controls, since they are no longer applicable for all areas. For the internal auditor it is important to know to what level the control is mitigating the inherent risk in order to be able to measure the residual risk.

1.2. Research objective and sub questions Based on the information above, in paragraph 1.1, the research objective that can be derived will focus on gaining insight in the effect national culture has on the internal auditor and on the way in which he performs his job. The research objective that will be answered in the course of this thesis is the following:

“How are internal auditors influenced by the score on uncertainty avoidance, in relation with policies and procedures, and how do they deal with it in practice?”

Are policies and procedures in place for the same reason (e.g. to structure the work, because of regulatory laws and/or to define roles and responsibilities) and what level of assurance can be derived, by the internal auditor, from having up‐to‐date policies and procedures in place?

In order to be able to be able to answer the research objective a number of sub questions have been drawn up. These sub questions will help to answer the objective in a structured manner.

• What is national culture o What is defined as national culture according to the theory? o What is the influence of national culture on risk preference? • What are policies and procedures o What role do policies and procedures have in a management control system? o Where are policies and procedures used for? • What is the influence of the cultural dimension ‘Uncertainty Avoidance’ on adherence to policies and procedures o Based on the theory and theoretic models o Based on field research

1.3. Scope and limitations Since the problem definitions and research questions cover a reasonable broad area, this paragraph is used to define the scope of this thesis and to state preconditions and limitations that are used farther onwards during the literature study and field research.

Edwin van der Burg 7 Studentnummer 6020288 Universiteit van Amsterdam Business School

If the term culture is used in this thesis, national culture is mentioned. National culture is mentioned specifically here, to prevent it from being mixed up with organisational culture. For writing this thesis I have decided not to use organisational culture. This has been decided, since the organisational culture might differ because of the industry the employees are in. The influence of organisational culture is minimised in the research performed for this thesis, due to the use of one company in the financial sector.

National culture is further specified in to five behavioural dimensions, which are found in every culture. The research performed for this thesis is focussing on the behavioural dimension uncertainty avoidance. The dimension uncertainty avoidance is chosen, because the level of uncertainty avoidance that a specific culture has is critical in relation to policies and procedures. This relationship is further specified in Figure 3 Influence of culture on policies and procedures, which can be found on page 14. High uncertainty avoidance societies have more formal laws and informal rules controlling the rights and duties of employers and employees. (Hofstede, et al., 2005) Since differences in uncertainty avoidance have an impact on how cultures perceive rules it might be experienced as difficult to keep the organisation working towards the shared goals, making it important for the multinational and internal auditor to gain more insight on this topic.

Within this thesis, the relation between culture and the management control system is closer looked at. Because a management control system covers a broad spectrum of different controls I have decided to focus on policies and procedures since they are in place within every company. They are not only in place within every company, but often also universally applied throughout all the different countries a company is located.

Within the research performed for this thesis one company will be closer looked at. This approach is similar to the research performed by Hofstede when he examined the national culture with the help of surveys filled out by IBM employees. In order to be able to perform an analysis of the results of the questionnaire, the respondents will be clustered in three groups with a respectively high, medium and low score on uncertainty avoidance. Even though there are five behavioural dimensions in every culture, the influence of the other four dimensions will be minimised due to the use of questions used in prior research on the subject of uncertainty avoidance.

Edwin van der Burg 8 Studentnummer 6020288 Universiteit van Amsterdam Business School

1.4. Structure The structure of this thesis will look as follows as can be seen in Figure 1. In chapter 2 the definition of national culture will be explained with a main focus on the influence that culture has on the levels of risk appetite and preference. Chapter 3 will focus on management control systems and policies and procedures. Special attention will be paid on what dimensions they cover and where they are used for. Chapter 4 will be used to describe what there is found to be available describing the relation between the cultural dimension uncertainty avoidance and its influence on adherence to policies and procedures. Based on the information found in the literature hypotheses will be developed. How theory and practice are actually aligned and to what extend the hypotheses are met will be researched in chapter 5 with the help of questionnaires. A summary of the final results will be given in chapter 6 together with an answer to the objective, concluding remarks and suggestion for the future research.

Chapter 1: Introduction, motivation, research objective and limitations Theory

Chapter 2: Culture, risk preference and the relation to policies and procedures

Chapter 3: Management control systems and the rationale for using policies and procedures

Chapter 4: Uncertainty avoidance vs. policies and procedures and hypothesis development Research Chapter 5: Research method, questionnaire and respondents

Paragraph 5.2: Paragraph 5.2: Paragraph 5.2: Hypothesis 1 Hypothesis 2a/b Hypothesis 3a/b

Chapter 6: Summary, concluding remarks and recommendations

Figure 1 Structure of this thesis

Edwin van der Burg 9 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 2. Culture and its influence on risk preference In order to conduct research in the field of culture and risk it is of importance to first expand on the theory on both subjects. For that reason, this chapter will describe national culture followed by the effect national culture has on risk preference, risk perception and attitude towards risk.

Paragraph 2.1 will focus on the definition of national culture, the five cultural dimensions are introduced and there respective relation to policies and procedures, if available. Paragraph 2.2 describes risk perception and how it differs throughout countries. Paragraph 2.3 explains the relationship between uncertainty avoidance and risk in order to get a common understanding about the similarities and differences of these two terms.

2.1. Definition of national culture Regarding the term culture, there is no consensually agreed‐on definition among social scientists for the term culture. That there is no agreement reached can be seen in all the different definitions that currently exist. In order to give an indication on the different definitions a couple will be mentioned.

The definition used within project GLOBE1 is as follows: “Shared motives, values, beliefs, identities, and interpretations or meanings of significant events that result from common experiences of members of collectives and are transmitted across age generations.” (House, et al., 2004) Within this definition no difference is made between societies and organisations.

Geert Hofstede states in his book Culture’s Consequences (2001) that culture is defined as: “Collective programming of the mind; it manifests itself not only in values, but in more superficial ways: in symbols, heroes, and rituals.” (Hofstede, 2001)

In the book Cultures and Organizations: Software of the Mind (2005) written by Geert Hofstede and his son Gert Jan Hofstede, culture is defined as: “The collective programming of the mind that distinguishes the members of one group or category of people from others.” (Hofstede, et al., 2005)

Even though there is no mutually agreed consensus on the term culture, as can be seen above with even having Hofstede using 2 different descriptions on the term culture, similarities between the different definitions can be found. For the sake of clarity one definition will be used throughout this thesis if a reference is made to culture. The following definition will be used since it includes the message as given by project GLOBE and Hofstede:

“Culture deals with collective programming of the mind, whereby shared values, beliefs and interpretations, distinguishes members of one culture of members from other cultures.“

2.1.1 Mental programming Culture deals with programming of the mind, as is mentioned in the definition of culture stated above. Every person’s mental programming is partly unique and partly shared with others. The

1 A ten‐year research program; the Global Leadership and Organizational Behaviour Effectiveness (GLOBE) research program

Edwin van der Burg 10 Studentnummer 6020288 Universiteit van Amsterdam Business School sources of mental programming lie within the social environment in which the person grew up and collected his/her live experiences.

Figure 2 Levels of Mental Programming (Hofstede, et al., 2005)

Basically three levels of mental programming can be distinguished, as can be found in Figure 2. The least unique and thereby most basic level is ‘Human Nature’, which can be found as the basis in the pyramid. This level can be defined as the biological operating system that enables a human being to feel fear, anger, love, sadness and aggression. The way a human being deals with the emotions and how one expresses e.g. fear, love and aggression, is modified by culture. ‘Culture’ is thereby the second layer of mental programming. Culture is shared with some, but not all other people. Similarities can be found among people belonging to a certain group, but different from people belonging to another group. The top level of the pyramid is called ‘Personality’. The personality of an individual is ‘that’ what makes no two persons alike. Personality is a combination of human nature, culture and unique personal experiences.

This thesis will deal with the second level of the pyramid (Figure 2), as this level distinguishes groups of people and their way of coping with emotions and specifically relevant for this thesis, their adherence to policies and procedures.

Edwin van der Burg 11 Studentnummer 6020288 Universiteit van Amsterdam Business School

2.1.2 Dimensions of national cultures As is mentioned in paragraph 2.1.1, a culture is shared with a group of people. Geert Hofstede performed an analysis on data collected by IBM. The data was derived from the company’s international employee attitude survey program between 1967 and 1973. In two rounds answers were given to more than 116.000 questionnaires from 72 countries in 20 languages. (Hofstede, 2001) Hofstede conducted his analysis in the period 1973‐79, after he had left IBM and was based at the European Institute for Advanced Studies in Management (EIASM) in Brussels, Belgium.

Four dimensions were identified based on data analysis and theoretical research. The four dimensions that were being identified are the following:

1. Power distance: The degree of inequality in power between a less powerful individual and a more powerful other, in which the individual and the other belong to the same (loosely or tightly knit) social system. (Mulder, 1977) 2. Uncertainty avoidance: Uncertainty about the future is a basic fact of human life; all human beings have to face the fact that we don’t know what will happen tomorrow. (Cyert, et al., 1963) 3. Individualism and Collectivism: Individualism applies to societies in which the ties between individuals are loose: everyone is expected to look after himself and his immediate family. Collectivism as its opposite applies to societies in which people from birth onward are integrated into strong, cohesive in‐groups, which throughout people’s lifetimes continue to protect them in exchange for unquestioning loyalty. (Hofstede, et al., 2005) 4. Masculinity and Femininity: A society is called masculine when emotional gender roles are clearly distinct: men are supposed to be assertive, tough, and focused on material success, whereas women are supposed to be more modest, tender, and concerned with the quality of life. A society is called feminine when emotional gender roles overlap: both men and women are supposed to be modest, tender, and concerned with the quality of life. (Hofstede, et al., 2005)

A fifth dimension was found, independent from the IBM study, in the answers of student samples from 23 countries (around 1985) to the Chinese Value Survey (CVS).

5. Long‐ versus Short‐term Orientation: It opposes long‐term to short‐term aspects of Confucian thinking: persistence and thrift to personal stability and respect for tradition. (Hofstede, 2001)

2.1.3 The relation of dimensions of national culture to policies and procedures In paragraph 2.1.2, five dimensions of national culture are introduced. This paragraph will outline the effect and/or influence that the five dimensions have on policies and procedures, if applicable. Furthermore, it will be made clear why the cultural dimension uncertainty avoidance is of critical importance in relation with policies and procedures. First, power distance, individualism and collectivism, masculinity and femininity and long‐ versus short‐term will be discussed and after that uncertainty avoidance will be examined. An overview of the different cultural dimensions in relation

Edwin van der Burg 12 Studentnummer 6020288 Universiteit van Amsterdam Business School with the intrinsic need to comply with policies and procedures and the need for policies and procedures is shown in Figure 3.

1. Power distance has to do with following up orders and doing what is told. To what extend the employees adhere to and comply with the policies is dependent upon the tone at the top coming from higher management. Within this cultural dimension the integrity of business management is critical in relation to compliance with policies and procedures. 2. Individualism and Collectivism: Employees in high individualistic cultures do what is good for them without taking into account whether there is a policy in place or not. They might be compliant with a policy, but only if it is in their own interest. Employees in high collectivistic cultures make decisions based upon what is best for their “in‐group”. As with individualistic cultures, they might thereby be compliant with the company policies and procedures, but that would not be there main focus when making a decision or carrying out a job. The opinion of the individual or the “in‐group” is critical when making a decision. 3. Masculinity and Femininity do not have a clear relationship with policies and procedures. In feminine cultures consensus is reached on decisions whereas in masculine cultures decisions are made amongst business management. It could therefore be expected that feminine cultures have a higher need to comply with the policies and procedures since they were involved in developing them, and on the other hand the higher need for masculine cultures to have policies and procedures in place to maximize productivity. The possible influences that were just mentioned have not been addressed in literature or proper research. 4. Long‐ versus Short‐term has no direct relationship with policies and procedures. In short‐ term‐oriented cultures the bottom line (results of the past month, quarter or year) is a major concern, control systems are focussing on it and managers are judged by it. As with high power distance, managers might decide to move away from the policies to reach the short term goals. In long‐term‐oriented cultures managers are allowed time and money to make their own contribution, the need for policies and procedures is hereby not compulsory. 5. Uncertainty avoidance has a direct relationship with policies and procedures due to the need for structure and formalisation. Employees in high uncertainty avoidance cultures prefer formalisation of routines that are used to reduce employee uncertainty by offering unambiguous guidance on task‐related matters. The level of uncertainty avoidance of a culture is therefore crucial in relation to the need for policies and procedures and the intrinsic need to comply with them.

Edwin van der Burg 13 Studentnummer 6020288 Universiteit van Amsterdam Business School

+

Uncertainty avoidance procedures

and Power distance policies

with

comply Masculinity/ to

Femininity need

Individualism/ on collectivism Long‐, versus short‐term Influence ‐

‐ Influence on need for policies and procedures +

Figure 3 Influence of culture on policies and procedures (Van der Burg, 2010) 2.2. Risk preference This paragraph will shortly touch upon on the influence culture has on the risk perception and attitude towards risk; two components of risk preference introduced by Markowitz in 1959.

Douglas and Wildavsky (1982) looked at risk preference from a cultural perspective and distinguished between societies whose cultural values, perceptions, and attitudes are shaped by either a market environment or a hierarchical bureaucratic environment. Societies in which an individualistic market orientation predominates (such as the United States) are described as appreciative of uncertainties as providing opportunities and thus more risk‐taking. More hierarchical and bureaucratic societies (such as China) are described as deciding more by standard operating procedures and consequently as more cautious and risk averse. Whether, the statement of Douglas and Wildavsky would hold, was closer looked at by Elke Weber and Christopher Hsee2. During the nineties, they performed extensive research in the field of risk perception and cross‐cultural psychology. Most of their research was focussing on the differences of risk perception and attitude towards risk between Chinese and American. Research performed by Weber and Hsee between Chinese and Americans found that: “Chinese respondents exhibited a greater risk‐seeking tendency than the Americans. By taking into account this outcome, the statement made by Douglas and Wildavsky does not hold based on the outcome of the research conducted by Weber and Hsee. In one of the articles of Weber and Hsee, the following concluding statement is made:

2 Elke Weber and Christopher Hsee both have a PhD with respectively Harvard and Yale University

Edwin van der Burg 14 Studentnummer 6020288 Universiteit van Amsterdam Business School

“To get maximum benefit from business and cultural exchanges between nations, participants in such exchanges need to realize that their foreign counterparties may not have the same risk preferences as themselves, and that predictions of a foreigner’s risk preferences based on stereotypes can be seriously wrong” (Hsee, et al., 1999)

2.2.1 Cushion hypothesis The cushion hypothesis was first discussed by Weber and Milliman (1997) who found that apparent differences in risk preferences, as they infer from choices, can arise from differences in people’s perception of risk rather than from differences in their attitude towards risk.

Additional research was performed by Hsee and Weber in 1999, who conducted a study towards the cross‐national differences in risk preference and lay predictions of Chinese and Americans. The outcome of their study resulted in two noteworthy findings, namely: (1) the Chinese were significantly more risk‐seeking than the Americans, and (2) both the Americans and the Chinese predicted the opposite. (Mahajna, et al., 2008)

The outcome of the research conducted by Hsee and Weber can be explained by putting it into practice. Members of a collectivist culture (e.g. China) can afford to take greater financial risks, since their social network (the ‘cushion’) will protect them against large losses. In individualist cultures (e.g. the United States) the person making a risky decision will be expected to personally bear the possible adverse consequences of his decision. The cushion hypothesis only holds in a financial context. The social network (friends and family) are able to support for financial losses, but not in case of social risk. It might even be the case that members of a collectivist society become more risk averse when the decision implies social risk, since they do not want to lose face. However, this has not been further looked at by scientists. The outcome of the studies conducted by Hsee en Weber shows that the statement put forward by Douglas and Wildavsky doesn’t hold in case of financial risk.

In this thesis, adherence to policies and procedures, and the influence culture has on it, will be closer looked at. Since policies and procedures in general don’t deal with minimising just financial risk, the influence of the ‘cushion hypothesis’ is expected to have minimal impact on the outcomes of this thesis.

2.3. Uncertainty avoidance versus risk avoidance To some people, uncertainty avoidance and risk avoidance are alike. This suggests that they would have the same effect when it comes to, for example, business decisions. That the two subjects are not alike will be explained in this paragraph.

Since Hofstede deals in his books with uncertainty avoidance and not with risk avoidance he felt that he had to make a statement in his second edition of Cultures Consequences stating:

“Uncertainty Avoidance Is Not the Same as Risk Avoidance” (Hofstede, 2001)

Risk is focussing on something specific, the possibility that something unpleasant, an event with a negative outcome, will happen. It can be explained by stating a percentage or probability that a

Edwin van der Burg 15 Studentnummer 6020288 Universiteit van Amsterdam Business School particular event might happen. Uncertainty, on the other hand, is a state of doubt about the future or about what is the right thing to do; it has no probability attached to it. As soon as uncertainty is expressed as risk, it ceases to be a source of anxiety. It may become a source of fear, but it may also be accepted as routine being no longer uncertain.

Rather than leading to reducing risk, uncertainty avoidance leads to a reduction of ambiguity. Cultures that score high on uncertainty avoidance stay away from ambiguous situations. People in high uncertainty cultures look for a structure in their organisations, institutions, and relationships that make events clearly interpretable and predictable. (Hofstede, et al., 2005)

2.4. Summary Regarding the term culture no consensus has yet been reached on a definition. As the answer for the first part of the first research question national culture is defined according to the theory as: “Culture deals with collective programming of the mind, whereby shared values, beliefs and interpretations, distinguishes members of on culture of members from other cultures”. The second part of the first research question can be answered by stating that national culture has an influence on risk preference, but that this influence is diffuse due to the existence of the cushion hypothesis. More than the other cultural dimensions is the cultural dimension uncertainty avoidance crucial in relation with policies and procedures. Uncertainty avoidance is related to the need for existence of policies and procedures as well as to the intrinsic need to comply with the available policies and procedures.

Edwin van der Burg 16 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 3. Policies and procedures Now that the concept culture has been introduced, and it is made clear why the cultural dimension uncertainty avoidance is critical in relation to policies and procedures, this chapter will further elaborate on the management control system they are part of and the policies and procedures itself.

Paragraph 3.1 will be used to introduce the definition of a management control system. In paragraph 3.2 the definition of policies and procedures is further explained followed by the rationale why policies and procedures are actually used. This paragraph is rounded off with the connection internal auditors have with policies and procedures.

3.1. Management control systems This paragraph will touch upon management control systems and the relation it has with national culture. Since people in various cultures behave different from each other, it might be expected that the same management control system cannot be applied one‐on‐one in all different cultures.

The definition of a management control system used by Birnberg and Snodgrass (1988) is the following:

“A management control system is a mechanism designed to limit the decision space of individuals within an organisation so as to affect their behaviour. Its purpose is to coordinate the decisions which they make so as to increase the probability of achieving the organisation’s goals.” (Birnberg, et al., 1988)

It is mentioned in the literature, that culture is an important environmental factor influencing accounting practices and management control systems. For example, cross‐cultural studies suggest that people from different cultural backgrounds have different preferences for management practices and control systems. (Birnberg, et al., 1988) (Chan, et al., 2001). On the other hand, no empirical study has directly tested the effects of national culture and management control system on manufacturing performance. (Chow, et al., 1991)

Even though, research on the effect of national culture and management control systems on manufacturing performance has not yet taken place, there is literature available stating differences between cultures’ attitude towards various components of a management control system. National culture affects the effectiveness of alternate management controls as can be seen in Figure 4. The degree of cooperation in a culture and the extend to whether shared values are important has an impact on the degree of formality in the system.

Edwin van der Burg 17 Studentnummer 6020288 Universiteit van Amsterdam Business School

Figure 4 Influence of culture on MCS design (Birnberg, et al., 1988)

On a high level two different forms of management control system can be distinguished, explicit and implicit. An explicit management control system is defined as a control system in which the bureaucratic rules and standards are formalized and clearly observable to all parties involved. On the contrary, an implicit management control system is defined as a control system where the bureaucratic rules and standards are not clearly set out or unambiguous to all parties involved. Merchant and Van der Stede (2007) describe four types of controls that can be part of an explicit or an implicit management control system.

The following two controls can be part of an explicit management control system:

1. Action controls, this type of control is the most explicit form of control that involves describing the steps to ensure that the employee acts in the organisations best interest. 2. Result controls, they are an indirect form of control not focussing explicitly on the employees’ actions, but clearly stating the result that has to be accomplished.

The two controls that can be part of the implicit management control system are:

1. Personnel controls, these controls are ‘build’ on the employees’ natural tendency to control and/or motivate themselves. 2. Cultural controls, they are designed to encourage mutual monitoring; a powerful form of group pressure on individuals who deviate from group norms and values. (e.g. In high collectivist countries like Indonesia)

3.2. Policies and procedures Policies and procedures are amongst the most common forms, if it comes to elements used in a control environment. Even though policies and procedures are often mentioned together they are not the same and have a different meaning. The following definition gives a clear overview of a policy as well as of a procedure:

Edwin van der Burg 18 Studentnummer 6020288 Universiteit van Amsterdam Business School

“Policies are principles, rules, and guidelines formulated or adopted by an organization to reach its long‐term goals. They are designed to influence and determine all major decisions and actions, and all activities take place within the boundaries set by them.

Procedures are the specific methods employed to express policies in action in day‐to‐day operations of the organization.”3

The use of procedures is however not as applicable in every situation. Perrow (1970) argued that the organisational structure and, in particular, reliance on a bureaucratic organisational form, will be dependent upon the degree of routine (number of exceptions) and the analysability of the task. The relation between the two variables can be seen in Figure 5 Perrow's model of structure and technology (Perrow, 1970).

Figure 5 Perrow's model of structure and technology (Perrow, 1970)

Tasks that are repetitive and only have a few exceptions (Cell 1 fig. 4) are well suited to be controlled by policies and procedures. Organisations facing such tasks would be able to rely on procedure guides, operating manuals, job codification and rigid lines of reporting and accountability for controlling employee behaviour. (Perrow, 1970) Cell 3 represents the non‐routine situation, Perrow expects that formal bureaucratic controls will not be effective for controlling performance.

3.2.1 Rationale for using policies and procedures Why the business would have policies and procedures in place will be further explained in this paragraph.

3 Source www.businessdictionary.com (4 June 2010)

Edwin van der Burg 19 Studentnummer 6020288 Universiteit van Amsterdam Business School

Policies can be seen as a general guide for action. They tend to pre‐decide issues, help avoid repeated analysis, and give a unified structure to other types of plans. At the same time, policies are making it possible for the managers to delegate authority while maintaining control. Like principles, they channel thinking and action in decision‐making but allow a certain amount of good judgment. The essential difference between a policy and a strategy is that a policy guides individual thinking and decision‐making, while a strategy guides the actions for the entire organisation.

Procedures are specific guides that prescribe the action to be executed. Procedures detail the exact manner in which a certain activity must be accomplished, often as a chronological sequence of events leading to the accomplishment of a task.

Clearly written, available policies and procedures are on of the foundation elements of any system in which individuals and units are held accountable for adherence to policies and procedures. (UCSC, 1994) Policies and procedures are in place to inform/instruct employees on their tasks and responsibilities in the process. Furthermore it can be stated that policies and procedures are in place to:

• Reduce the possibility of fraud and error, when they coordinate the work in such an order that one employee’s work is automatically checked by another who is independently performing separate prescribed duties. • Increase maximum efficiency if they indicate how a task could be performed in the most efficient way. • Increase consistency in the tasks carried out if there are more employees involved and in case of illness or leave of an employee, tasks can easily be taken over.

3.2.2 The internal auditor and policies and procedures Policies and procedures are a useful source of information for the internal auditor. This is also indicated by Driessen and Molenkamp (2008) when they say that procedures are a welcome tool for the internal auditor to gain insight in the process flow. (Driessen, et al., 2008)

A more specific role for using policies and procedures is added be Sawyer (2005) when he elaborates on the involvement of policies and procedures in preparing the audit program. As a guideline he states that the internal auditor should review policies and procedures for the audited function, its operating manuals, organisation charts, chart of authority, long‐range and short‐range objectives and goals. This should be done in order to be able to determine the areas that can be measured and appraised, and whether the function is operating in accordance with the intentions of management.

An internal auditor assesses the control risk4 by examining the existing policies and procedures. As a result of the assessment the internal auditor may assess the control risk at the maximum level when either policies or procedures are unlikely to be effectivee or it is not worth the cost of evaluating their effectiveness. (Sawyer, et al., 2005) Evidence will have to be obtained by the internal auditor,

4 Control risk is the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by an entity’s control structure, policies or procedures. (Sawyer, et al., 2005)

Edwin van der Burg 20 Studentnummer 6020288 Universiteit van Amsterdam Business School about the design and operation of the specific policies and procedures, to justify such an assessment.

Based on the position that internal auditors have, they will have to read and examine the policies and procedures to gain an understanding of the process and the accompanying controls and to be able to prepare their audit program. At the same time they are expected to say something about the adequateness of the policies and procedures. The internal auditor should assess the control risk based upon the level of the policies and procedures in place. Policies and procedures are thereby not only rated to be important for the internal auditor, but they are also rated to be important for the business.

3.3. Summary To answer the first part of the second research question, policies and procedures have an important role in a management control system. A management control system is a mechanism designed to limit the decision space of individuals and to affect their behaviour. National culture has an effect on the formality of the management control system. A policy is any stated principle that requires, guides, or restricts action. Procedures are means employed to carry out activities in conformity with prescribed policies. The second part of the second research question can be answered by stating that policies and procedures are mainly applicable in a situation in which there are only a few exceptions and are highly repetitive. They are thereby used to reduce the possibility of fraud and error, to increase maximum efficiency and to increase consistency in the tasks carried out. The condition of the policies and procedures in place is important for the internal auditor when determining its control risk within the process. If the policies and procedures are not properly maintained or lacking important controls the risk that a material misstatement may occur in the process is rated higher.

Edwin van der Burg 21 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 4. Uncertainty avoidance and its relation to policies and procedures This chapter will further elaborate on the relation between the level of uncertainty avoidance within a culture and its influence on the use of policies and procedures.

This chapter is divided into two parts. The first part is focussing on information that is available in the literature. The second part is focussing on the development of hypotheses which will be used in chapter 5. In chapter 5, a questionnaire is used in order to find out how the connection between uncertainty avoidance and adherence to policies and procedures works out in practice and how the internal auditor reacts on it.

4.1. According to the theory The basis for most research performed and theory written about uncertainty avoidance is the research, conducted by Geert Hofstede in the period 1973‐1979. His research was followed by the publication in 1980 of his book; Cultures Consequences.

The appeal to rules in higher avoidance cultures should be evident from the “structuring of activities” found in Aston‐type studies5 conducted by the “Aston Group” including amongst others Pugh, Hickons and Hinings. Structuring of activities includes in this context: formalisation, specialisation and standardisation. (Pugh, 1976) (Pugh, et al., 1976) Hofstede mentions that in weak uncertainty avoidance cultures managers and employees feel definitely uncomfortable with systems of rigid rules, especially if it is evident that many of these are never followed. In strong uncertainty avoidance cultures, managers and employees feel equally uncomfortable without the structure of a system of rules, even if many of these rules are impractical. (Hofstede, et al., 2005)

The level of rules available in connection with the level of uncertainty avoidance is also mentioned by Merchant and Van der Stede (2007). They state that when designing a management control system in high uncertainty avoidance countries, organisations should, to the extent possible, agree on rules of behaviour. This should be done in the following ways, first by making planning and budgeting systems more elaborate to reduce employees’ levels of anxiety and second the organisation should use more formalised performance standards and less subjectivity in performance evaluations. (Merchant, et al., 2007). Burke, et al., (2008) found that within organisations in cultures with a high score on uncertainty avoidance more formalised training procedures are used for their employees. It appears that in countries with high uncertainty avoidance firms operate under formal policies and procedures controlling the rights and duties of employees in the work environment. In these countries formalisation routines can reduce employee uncertainty by offering unambiguous guidance on task related matters (Joiner, 2001). Newsburry, et al. (2006) further reports that employees from countries with a high score on uncertainty avoidance prefer standardised processes in multinational enterprises.

5 A team of researchers originally located at the University of Aston in Birmingham, England, who developed standardised measuring methods for organisational structures. The Aston group found that the two main dimensions along which structures varied were “concentration of authority” and “structuring of activities”.

Edwin van der Burg 22 Studentnummer 6020288 Universiteit van Amsterdam Business School

On the contrary to what has been said about high uncertainty avoidance countries, low uncertainty avoidance countries exhibit greater willingness to take risks and prefer fewer rules (Hofstede, 2001). In these nations employees favour less specificity in the organisational decision process (Hood, et al., 2002).

Shane, Venkataraman and Macmillan conducted a research in 1995 about the employees’ roles in championing innovations at work. Three factors were found related to power distance, individualism and one focussing on the relationship between uncertainty avoidance and rules in organisations. It turned out that, in cultures that score high on uncertainty avoidance, innovators felt more constrained by rules and regulations, the more so if they were more experienced and male. (Shane, et al., 1995)

Even though a certain base level of rules and regulations has to be in place, the mentioned example shows that a too high number of rules and regulations in place results in employee behaviour, which is not goal congruent. This is also mentioned by Hofstede (2005), when he refers to the different levels of uncertainty avoidance as representing a serious problem for the functioning of multinationals. If rules mean different things in different countries, it is difficult to keep the organisation together and working towards the same goal.

How the difference between levels of uncertainty avoidance become visible within the working environment can be seen in Table 1 en Table 2. Hofstede as well as House et al. have put together a list of differences between low and high uncertainty societies and how these differences are reflected in the working environment. Both tables are a neither inclusive nor exhaustive list of uncertainty avoidance attributes. Even though cultures may not fit exactly into the columns, these stereotypes are presented to define the concept uncertainty avoidance and how it could show up in the different cultures.

The statements made in both tables reflect the items raised in other literature, as can be seen above. Some of these statements are: High uncertainty avoidance societies work with a high degree of formalisation, innovation is facilitated but applied through tight controls and the reliance on formalised policies and procedures. On the other hand low uncertainty avoidance societies rely on informal interactions and informal norms, have tolerance for ambiguity in structures and procedures and show less desire to establish rules in order to dictate behaviour.

Key differences between low and high uncertainty avoidance societies in the work situation

Weak uncertainty avoidance Strong uncertainty avoidance

• Strong appeal of technological solutions • Scepticism toward technological solutions

• Innovators feel constrained by rules • Innovators feel independent of rules

• Power of superiors depends on control of • Power of superiors depends on position and uncertainties relationships

• Highly formalized conception of management • Tolerance for ambiguity in structures and

Edwin van der Burg 23 Studentnummer 6020288 Universiteit van Amsterdam Business School

procedures

• Innovations resisted but, if accepted, applied • Innovations welcomed but not necessarily taken consistently seriously

• Top managers involved in operations • Top managers involved in strategy

Table 1 Key differences between weak and strong uncertainty avoidance societies (Hofstede, 2001)

Societies that score higher on uncertainty avoidance Societies that score lower on uncertainty avoidance tend to: tend to:

• Have a tendency toward formalising their • Have a tendency to be more informal in their interactions with others interactions with others

• Document agreements in legal contracts • Rely on the word of others they trust rather than contractual arrangements

• Be orderly, keeping meticulous records, • Be less concerned with orderliness and the documenting conclusions drawn in meetings maintenance of records, often do not document the conclusions drawn in meetings

• Rely on formalised policies and procedures, • Rely on informal interactions and informal norms establishing and following rules, verifying rather than formalised policies, procedures and communications in writing rules

• Take more moderate calculated risks • Be less calculating when taking risks

• Inhibit new product development but facilitate • Facilitate the new product development especially the implementation stage through risk aversion in the initiation phase, through higher risk taking and tight controls in minimal planning or controls

• Show stronger resistance to change • Show less resistance to change

• Show stronger desire to establish rules allowing • Show less desire to establish rules to dictate predictability of behaviour behaviour

• Show less tolerance for breaking rules • Show more tolerance for breaking rules

Table 2 Higher uncertainty avoidance societies versus lower uncertainty avoidance societies (House, et al., 2004)

It is made clear, based on the literature available, that the level of uncertainty avoidance of a certain culture is of upmost importance for the type of framework of policies and procedures to be put in place. The level of policies and procedures available within the company does not only influence the way people feel about their job, but it also ultimately influences the companies ability to reach its strategic (long‐term)goals.

4.2. Hypothesis development This paragraph will be used to, based on the literature and the statements found therein, establish hypotheses that will be researched in practice. This will be done to see to what extend the statements made in the literature are actually reflected in practice.

The in paragraph 2.1 introduced definition of culture was the following: Culture deals with collective programming of the mind, whereby shared values, beliefs and interpretations, distinguishes

Edwin van der Burg 24 Studentnummer 6020288 Universiteit van Amsterdam Business School members of one culture of members from other cultures. Internal auditors are, within many multinationals, not only located at headquarters, but also regional audit teams are used. It might be expected that their view on policies and procedures is corresponding with the behaviour of the business in respectively high and low uncertainty avoidance cultures. With this behaviour being similar to the business, mistakes in incompleteness or procedures not being updated might go unnoticed. The hypothesis that is drawn up to reflect this behaviour is hypothesis 1.

Hypothesis 1: With the internal auditors having the same cultural background as the business, internal auditors will fit in the categorisation as made by Hofstede.

The theory has shown that employees in low uncertainty avoidance cultures don’t mind policies and procedures to be ambiguous. Furthermore, it is mentioned that they are less concerned with orderliness and the maintenance of records. Changes in the information mentioned in the policies and procedures, e.g. due to regulatory changes or changes of systems, may not be reflected and incorporated in the policies and procedures. It is therefore to be expected that low uncertainty avoidance cultures will update their policies on an irregular basis only, in that way not reflecting the current situation. As mentioned in chapter 3, policies and procedures do have an important position as a source of information for the internal auditor and they are important from the viewpoint of the audit profession. Internal auditors are therefore expected to pay additional attention to the condition of the policies and procedures in case of a low score on uncertainty avoidance since the business is paying less attention. The internal auditor is expected to pay less attention in case of a high score on uncertainty avoidance since in that case the business is also focussing on updating policies and procedures. The hypotheses that are drawn up to reflect this behaviour are hypotheses 2a and 2b.

Hypothesis 2a: The internal auditor pays additional attention to policies and procedures in low uncertainty avoidance countries since these cultures are less focused on maintaining their policies and procedures.

Hypothesis 2b: The internal auditor pays little attention to policies and procedures in high uncertainty avoidance countries since these cultures are already focused on maintaining their policies and procedures.

Action controls are described in the literature as controls that precisely prescribe which steps have to be taken in what following order. This type of control can be linked to the type of controls/procedures that are preferred by high uncertainty avoidance cultures. Cultural or personnel controls are not seen as a replacement or addition to the control environment, since they cannot be properly formalised and communicated. Internal auditors in high uncertainty avoidance cultures are therefore expected to be solely focussing on what is in the policies and procedures in correspondence to what is actually performed by the business. The hypotheses that are drawn up to reflect this behaviour are hypotheses 3a and 3b.

Edwin van der Burg 25 Studentnummer 6020288 Universiteit van Amsterdam Business School

Hypothesis 3a: Internal auditors in low uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as less important than the existence of culture or personnel controls.

Hypothesis 3b: Internal auditors in high uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as more important than the existence of culture or personnel controls.

4.2.1 Connection between hypotheses How the hypotheses are related to each other and the expressions used throughout this thesis, can be seen in Figure 6. This figure shows a graphical picture of the four expressions used in this thesis (i.e. National Culture, Uncertainty Avoidance, Internal Auditor and Policies & Procedures) and the three different hypotheses.

Hypothesis 1 is related to National Culture and Internal Auditor and indicates the expected influence national culture will have on the behaviour of the internal auditor. This hypothesis will find out whether the categorisation found by Hofstede is also applicable for internal auditors. This hypothesis is a control variable to test whether internal auditors fit into the categorisation as made by Hofstede.

Hypothesis 2 is related to the effect Uncertainty Avoidance and Internal Auditor have on Policies and Procedures. To what extend is the technical training received by the internal auditor stronger than uncertainty avoidance when it comes to monitoring the business on their attitude towards policies and procedures.

Hypothesis 3 is related to Uncertainty Avoidance and Internal Auditor and indicates the expected influence the score on uncertainty avoidance has on the type of controls valued by the internal auditor. A high score on uncertainty avoidance would indicate a preference for action controls and not for personnel/cultural controls whereas a low score on uncertainty avoidance would indicate the opposite.

National Culture

Uncertainty Avoidance H1

H3 H2 Internal Auditor Policies & Procedures

Figure 6 Research model

Edwin van der Burg 26 Studentnummer 6020288 Universiteit van Amsterdam Business School

4.3. Summary The importance of the uncertainty avoidance score of a culture in relation with policies and procedures was already stressed in chapter 2. This paragraph has further elaborated on the impact a score on uncertainty avoidance, either high or low, has on the way employees prefer to see their policies and procedures. Employees in cultures with a high score on uncertainty avoidance prefer a high number of formal standardised procedures whereas on the other hand employees in a culture with a low score on uncertainty avoidance prefer to have informal rules and less policies and procedures.

Based on the theory as is discussed in chapter 3 and 4, five hypotheses are formulated.

H1: With the internal auditors having the same cultural background as the business, internal auditors will fit in the categorisation as made by Hofstede.

H2a: The internal auditor pays additional attention to policies and procedures in low uncertainty avoidance countries since these cultures are less focused on maintaining their policies and procedures.

H2b: The internal auditor pays little attention to policies and procedures in high uncertainty avoidance countries since these cultures are already focused on maintaining their policies and procedures.

H3a: Internal auditors in low uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as less important than the existence of culture or personnel controls.

H3b: Internal auditors in high uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as more important than the existence of culture or personnel controls.

These hypotheses will be tested in chapter 5.

Edwin van der Burg 27 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 5. Research and results The fifth chapter will focus on the practical implications that the level of uncertainty avoidance is expected to have on the adherence to policies and procedures. The first paragraph will elaborate on the research setup that has been followed, the questions that will be asked and the respondents who participated in this research. Within the second paragraph, the hypotheses that have been developed and introduced in paragraph 4.2 will be answered with the help of the outcomes of the questionnaire. The third part is used to translate the answers found, into implications that it might have for the internal auditor e.g. findings that are raised on policies and procedures and the level of risk mitigation that can be derived from the policies and procedures.

5.1. Research method This first paragraph elaborates on the construction of the questionnaire. In this paragraph the expected answers are given by way of examining the in section 4.2 developed hypotheses. Paragraph 5.1.2 explains the validation of the questionnaire. Paragraph 5.1.3 will give information of the respondents, which will at a later stage be used for the analysis of the research results.

5.1.1 Research setup In order to be able to test the in paragraph 4.2 drawn up hypotheses in practice a questionnaire has been developed. This questionnaire can be found in Appendix A of this thesis. The questionnaire consists of a small number of situational questions in which the respondent is requested to select the answer that is the closest to his preference. Some general questions are asked (i.e. age, gender and nationality) in order to be able to perform an analysis on the results and say something about the hypotheses. The question concerning ‘age’ is used to get a view on the respondents and is not further used for answering a hypothesis. Question 1 till 11 are content related questions used for answering the different hypotheses. The relation between the different hypotheses and the questions is further explained in Table 3 overview of hypotheses per question.

Question Hypotheses 1 1 2 3a/b 3 2a/b 4 1 5 2a/b 6 3a/b 7 1 8 2a/b 9 3a/b 10 3a/b 11 2a/b Table 3 overview of hypotheses per question

The questions 1, 4 and 7 are based on a research conducted by Ming‐Yi Wu (2006). This research was focussing on the question whether the results obtained by Hofstede would still hold 30 years later. The same types of questions are asked to be able to say something about the score on

Edwin van der Burg 28 Studentnummer 6020288 Universiteit van Amsterdam Business School uncertainty avoidance. In the area of hypotheses 2a/b and 3a/b no previous research has been conducted in this explorative area. For this reason two types of questions are asked to the respondents, namely quantitative questions (2, 3, 5, 6, 8 and 9) and qualitative questions (10 and 11). These two types of questions are used to find out how the respondents will react on these types of questions and to what extend they can be used in further research.

Answers to the quantitative questions are measured on a scale from 1 to 7. This scale is also used by Ming‐Yi Wu (2006) when he re‐examined Hofstede’s Cultural Dimensions. Furthermore, a 7 point scale is used because it gives the respondent a possibility to be more precise by giving his answer.

5.1.2 Validation of the questionnaire In order to validate the questionnaire, I have presented it to several employee of ING. One of these employees is in its role connect and co‐responsible for the global ING satisfaction survey (i.e. the Winning Performance Culture scan), which is conducted globally on a yearly basis. His experience with the way questions might come across to the audience has resulted in some changes to decrease the ambiguity of the questions and make them easier to understand. The other ING employees were colleagues within the internal audit department. In their role as internal auditor they were asked to indicate whether they would understand the questions. As a consequence of this, within the introduction to the questionnaire more information was given on the subject of the thesis.

5.1.3 Respondents The respondents who participated in this research are all working for the Corporate Audit Services within ING. The reason for having only internal auditors working for ING involved in this research is to minimise the possible cultural differences that exist between companies due to a different corporate culture. In this research only one corporate culture has been involved. This approach is similar to the research performed by Hofstede who also dealt with one corporate culture; IBM.

The questionnaire was send by mail to 80 auditors within ING. From the 80 auditors that were asked to fill out the questionnaire, 30 auditors where Dutch whereas the other 50 auditors were from different nationalities from around the world. A number of 61 questionnaires were returned, containing two invalid questionnaires due to multiple answers given on one question, a response rate of 76%. A list of the national culture of the respondents that participated in this research can be found in Appendix B.

In order to work with groups that are of a reasonable size, the respondents are clustered in three categories, respectively with a high (1), medium (2) and low (3) score on uncertainty avoidance. This is based on the categorisation made by Hofstede in his book Culture’s Consequences (2001) and can be seen in Appendix C.

5.2. Results In this paragraph, the results of the research are presented. Per hypothesis a table is included in which the relevant results for that specific hypothesis are mentioned. For examining the hypotheses the statistical program SPSS is used.

Edwin van der Burg 29 Studentnummer 6020288 Universiteit van Amsterdam Business School

Since the answers to the questions are on an ordinal scale, the results are examined with the One‐ Way ANOVA. The significance level used to measure the significance of the output is α =0,05. This is a common used significance level. A score lower than α = 0,05 would indicate a significant relation between the variables. In case the score is higher than α = 0,05 no significant relation can be found between the variables, which results in the hypothesis not being excepted.

5.2.1 Hypothesis 1 H1: With the internal auditors having the same cultural background as the business, internal auditors will fit in the categorisation as made by Hofstede.

Table 4 shows an overview of some general numbers that can be derived from the answers given to the questionnaire. It shows the number of respondents per group, the average score per group, the standard deviation and the standard error. It can be seen that the mean for group 1 and group 3 only differ by 0,56 whereas group 2 has a lower mean.

Group N Mean Std. Deviation Std. Error High (1) 25 15,24 3,643 ,729 Medium (2) 24 12,58 3,463 ,707 Low (3) 10 15,80 2,821 ,829 Total 59 14,25 3,670 ,478 Table 4 Hypothesis 1 descriptives

In order to find out whether there is a significant relation between the separate groups, each time two groups are compared with the help of One‐Way ANOVA. This was done to find out which relation had a major influence on the significance level. This has resulted in an outcome, which can be found in Table 5.

Group High (1) Medium (2) Low (3) High (1) ,012 ,666 Medium (2) ,012 ,014 Low (3) ,666 ,014 Table 5 Hypothesis 1

The results in Table 5 indicate that there is a significant relation between the outcome of group 1 and group 2 α = ,012 and between group 2 and group 3 α = ,014. However, the result between group 1 and group 3, the groups that are the furthest apart from each other does not show a significant relation α = ,666. Since the significance level between group 1 and group 3 is above the significance level of α = 0,05 the hypothesis has to be rejected.

The effect of cultural related uncertainty avoidance on policies and procedures, as was described and researched by Hofstede and others, does not hold for internal auditors based on my research and the results. The middle group has the lowest score when it comes to the need for policies and procedures. At the same time are the groups with a respectively low and high score on uncertainty avoidance (Hofstede, 2001) having almost the same score when it comes to their need for policies and procedures.

Edwin van der Burg 30 Studentnummer 6020288 Universiteit van Amsterdam Business School

Because of the use of groups of countries instead of single countries there might be the effect of extremes being flattened out by lower scores in the same group. To see if the hypothesis holds for specific countries an additional analysis was performed comparing Belgium (high uncertainty avoidance) and America (low uncertainty avoidance) with the following result:

Group N Mean Std. Deviation Std. Error Belgium (1) 7 12,43 1,813 ,685 America (2) 4 15,00 1,414 ,707 Total 11 13,36 2,063 ,622 Table 6 Belgium vs. America descriptive

Table 6 shows that Belgium has a mean, which is 2,57 points lower than America. This is opposite to what would be expected, because Belgium has a culture with a high score on uncertainty avoidance. To find out whether the result between Belgium and America is significant Table 7 is used.

Group Belgium (1) America (2) Belgium (1) ,038 America (2) ,038 Table 7 Belgium vs. America

The significance level that can be seen in Table 7 shows a score of α = ,038 which is lower than α = 0,05. This outcome shows that there is a significant relation between the score of Belgium and the score of America. The outcome is however the complete opposite of what would be expected based upon the research done by Hofstede and the stated hypothesis. The hypothesis still has to be rejected.

5.2.2 Hypothesis 2a/b H2a: The internal auditor pays additional attention to policies and procedures in low uncertainty avoidance countries since these cultures are less focused on maintaining their policies and procedures.

H2b: The internal auditor pays little attention to policies and procedures in high uncertainty avoidance countries since these cultures are already focused on maintaining their policies and procedures.

In order to accept hypothesis 2a, internal auditors in cultures with a low score on uncertainty avoidance have to pay additional attention to the policies and procedures used by the business; a high ‘mean’. To accept hypothesis 2b, internal auditors in cultures that score high on uncertainty avoidance pay less attention to the policies and procedures used by the business; a low ‘mean’.

Table 8 shows an overview of some general numbers that can be derived from the answers given to the questionnaire. It shows the number of respondents per group, the average score per group, the standard deviation and the standard error. It can be seen that the mean for group 1 is the highest followed by group 3 with group 2 having the lowest mean.

Edwin van der Burg 31 Studentnummer 6020288 Universiteit van Amsterdam Business School

Group N Mean Std. Deviation Std. Error High (1) 25 17,48 3,002 ,600 Medium (2) 24 16,75 2,786 ,569 Low (3) 10 16,90 2,961 ,936 Total 59 17,08 2,879 ,375 Table 8 Hypothesis 2a/b descriptives

To find out whether the relation between the groups is significant, each time two groups are compared with the help of One‐Way ANOVA. This was done to find out which relation had a major influence on the significance level. This has resulted in an outcome, which can be found in Table 9.

Group High (1) Medium (2) Low (3) High (1) ,269 ,216 Medium (2) ,269 ,734 Low (3) ,216 ,734 Table 9 Hypothesis 2a/b

The outcome of Table 9 shows that there is no significant relation between any of the groups. The significance levels are in a range between α = ,216 and α = ,734. Thereby, it can be seen that none of the significant levels is below α = ,05 and therefore hypotheses 2a and 2b have to be rejected.

The importance of policies and procedures for the business and the internal auditor is addressed in paragraph 3.2.. Even though Merchant and Van der Stede (2007) addressed the influence of uncertainty avoidance on policies and procedures, the outcome of this research does not indicate a significant relation between the score on uncertainty avoidance and the level of attention given to it by the internal auditor.

5.2.3 Hypothesis 3a/b H3a: Internal auditors in low uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as less important than the existence of culture or personnel controls.

H3b: Internal auditors in high uncertainty avoidance cultures value and judge the existence of action controls in policies and procedures as more important than the existence of culture or personnel controls.

To accept hypothesis 3a, internal auditors in low uncertainty cultures are expected to not only focus on action controls, but also value the existence of personnel and culture controls that make up a significant part of the management control framework. To accept hypothesis 3b, internal auditors in high uncertainty avoidance cultures value the existence of culture and personnel controls as less important when compared to action controls.

The questions asked to measure the value internal auditors link to action controls vs. culture and personnel controls has resulted in the figures, which can be found in Table 10. The mean for group 1, with a high score on uncertainty avoidance, is 15,00. This mean is lower than the mean for group 2

Edwin van der Burg 32 Studentnummer 6020288 Universiteit van Amsterdam Business School and group 3, which is respectively 15,79 and 16,10. Based on this outcome it could be said that internal auditors with a high score on uncertainty avoidance prefer the existence of action controls whereas internal auditors with a low score on uncertainty avoidance believe that culture and personnel controls also add value to the control framework. However, thereby the level of significance is not taken into account.

Group N Mean Std. Deviation Std. Error High (1) 25 15,00 2,432 ,486 Medium (2) 24 15,79 2,519 ,514 Low (3) 10 16,10 2,025 ,640 Total 59 15,51 2,410 ,314 Table 10 Hypothesis 3a/b descriptives

To find out whether the relation between the groups is significant, each time two groups are compared with the help of One‐Way ANOVA. This was done to find out which relation had a major influence on the significance level. This has resulted in an outcome, which can be found in Table 11.

Group High (1) Medium (2) Low (3) High (1) ,383 ,608 Medium (2) ,383 ,889 Low (3) ,608 ,889 Table 11 Hypothesis 3a/b

The outcome of Table 11 indicates that there is no significant relation between the different groups. The significance levels are in a range between α = ,383 and α = ,889, not being lower than α = ,05. The numbers indicate that there is no significant relation between the score on uncertainty avoidance and the extend to which internal auditors value the existence of culture and personnel controls. Hypotheses 3a and 3b have to be rejected.

Merchant and Van der Stede (2007) outlined four types of controls that can be part of an management control system. In relation with the research conducted by House, et al., (2004) indicating the need for formalised extensive and clear policies and procedures in case of a high score on uncertainty avoidance. It might have been expected that internal auditors operating in a high uncertainty avoidance culture would value the existence of culture and personnel controls as not important. However, the outcome of the research has not statistically proven that internal auditors in high uncertainty avoidance cultures don’t value the existence of culture and personnel controls as part of the management control framework. At the same time the outcome also shows that internal auditors in low uncertainty avoidance cultures do not significantly more rely on culture and personnel controls.

Edwin van der Burg 33 Studentnummer 6020288 Universiteit van Amsterdam Business School

5.3. Summary and conclusions This chapter has been used to give an answer to the different hypotheses. In order to be able to answer the hypotheses a questionnaire was drawn up. This questionnaire was drawn up in such a way that it became possible to answer the hypotheses that were developed in paragraph 4.2. The questions used to answer hypothesis 1 were based on previous research conducted by Ming‐Yi Wu (2006).

Results of 59 returned questionnaires indicate that there is a limited, non‐significant, differentiation between the outcomes of the different groups. This automatically indicates that the hypotheses that were drawn up have to be rejected. My research has thereby shown that:

H1. Internal auditors are not aligned with the categorisation of Hofstede when it comes to the national culture aspect uncertainty avoidance.

H2a In low uncertainty avoidance cultures, internal auditors do not give significant more attention to the policies and procedures maintained by the business.

H2b In high uncertainty avoidance cultures, internal auditors do not give significant less attention to the policies and procedures maintained by the business.

H3a Internal auditors in low uncertainty avoidance cultures do not value the existence of culture and personnel controls of significant more importance when compared to action controls.

H3b Internal auditors in high uncertainty avoidance cultures do not value the existence of culture and personnel controls of significant less importance when compared to action controls.

As a result of the outcome of hypothesis 1, which indicates that the categorisation made by Hofstede does not correlate with the outcome of my research, there was no significant output to the two qualitative questions.

A significant relation was noted between the Belgium score and the American score, but the population was too small to draw conclusions. This outcome could suggest that the culture dimension uncertainty avoidance is not the most important factor when it comes to the influence on behaviour of employees in relation to policies and procedures. Other factors might play a role when it comes to employee behaviour, which is stronger than the culture dimension uncertainty avoidance. Reason for this could be, but is subject to further research, the level of job security, the maturity of the internal audit department and the difference between financial auditors and operational auditors.

This research has shown that the score on uncertainty avoidance among internal auditors differs from the national score on uncertainty avoidance as calculated by Hofstede. Furthermore, this research has shown that internal auditors work according to the same standards by way of supporting the business and having the same focus on culture and personnel controls.

Edwin van der Burg 34 Studentnummer 6020288 Universiteit van Amsterdam Business School

Chapter 6. Summary, concluding remarks and further research Within this chapter, the answer will be given to the research objective as was presented in paragraph 1.2: ““How are internal auditors influenced by the score on uncertainty avoidance, in relation with policies and procedures, and how do they deal with it in practice?”. Paragraph 6.1 summarises the conducted research, both literature and the field survey. Paragraph 6.2 addresses the research objective and elaborates on the implications, which different levels of uncertainty avoidance bring along, for the internal auditor. Paragraph 6.3 mentions the limitations of this research and give possible areas for future research subjects.

6.1. Summary Within the literature, a lot has been written about culture and the way it influences people’s behaviour. One of the five dimensions available in every culture, uncertainty avoidance, has a strong weight in how policies and procedures are perceived. For this research, I have looked at to what extend internal auditors can be placed in the categorisation on uncertainty avoidance, as made by Hofstede, and how they deal with the business in cultures with a respectively high or low score on uncertainty avoidance.

Based on the literature, hypotheses were formulated to find out how internal auditors fit in to the categorisation made by Hofstede, to see how they deal with the business in cultures with a high or low score on uncertainty avoidance and to test how they value action controls compared to culture/personnel controls. The hypotheses were answered with the help of a questionnaire (see Appendix A), which was send to 80 internal auditors and returned by 61 internal auditors; a response of 76%.

The questions that were used to measure the score on uncertainty avoidance were based on previous research. The outcome of the analysis of the results shows that there is no significant relation between the outcomes of cultures with a low score on uncertainty avoidance and the outcomes of cultures with a high score on uncertainty avoidance. This was a surprise and did not correlate with the literature that is currently available on the subject of culture and uncertainty avoidance.

To test whether the use of the three groups had flattened out the scores, the outcome of Belgium and America were analysed. This analysis showed a significant relation, which was the opposite of the categorisation made by Hofstede. This part of my research could suggest that there are more factors influencing the score on uncertainty avoidance within a group of internal auditors. Other factors for this could be, but are subject to further research, the level of job security, the maturity of the internal audit department and the difference between financial auditors and operational auditors.

This explorative research has touched upon some interesting areas that do not correlate with previous research and current literature. Ideas for further research are mentioned in paragraph 6.3.

Edwin van der Burg 35 Studentnummer 6020288 Universiteit van Amsterdam Business School

6.2. Implications for the internal auditor As can be derived from the literature, national culture and in particular uncertainty avoidance, plays an important role in how policies and procedures are experienced. With the knowledge that employees in diverse cultures have a different attitude towards policies and procedures it is important that appropriate actions are taken by the internal auditor to prevent a weakening of the overall management control framework.

How the internal auditor should deal with cultural related uncertainty avoidance on the adherence to policies and procedures in a multinational can be addressed in several ways whereby the level of uncertainty avoidance, as measured by Hofstede in 1980, is an important factor. Table 12 shows an overview of the actions that derive from respectively cultures with low score on uncertainty avoidance and cultures with high score on uncertainty avoidance. The table shows the expected action from the business in relation with the reaction that should be given by the internal auditor.

In case an internal auditor is operating in a low uncertainty culture he has to be aware that the business does not add the same value to policies and procedures as might be expected from his point of view. There will be a tendency not to put everything in formal writing and if it has been written down, it might not be up to date. The internal auditor in this case has to make sure that the controls that are carried out by the business are described in a formal document. Controls that are in place have to be tested to make sure that they are performed according to what is written about them since the business might deviate from the rules. Since low uncertainty avoidance cultures are not very keen on action controls the internal auditor has to check which other types of control i.e. culture or personnel controls are used by the business as part of the management control system.

An internal auditor working within a culture with a high score on uncertainty avoidance has a different way of working when it comes to his involvement with policies and procedures of the business. Since these cultures value policies and procedures as very important, as a way of structuring their job and by way of expressing what others can expect of them. For the auditor, it is important to check whether the correct controls are described and to what extend all the controls that have to carried out are adequately described. A missing control in the policies and procedures could result in a control not being performed.

The research has shown that the score on uncertainty avoidance, as calculated by Hofstede, is not one‐to‐one applicable for the internal auditor. This is the case even though a research method was applied that was used before to research levels of uncertainty avoidance. Furthermore, the research has also not shown that there is a different way of working when it comes to dealing with the business. It is important for the auditor to be aware of the influence the score on uncertainty avoidance has on the adherence to policies and procedures of the business. This research has shown that the internal auditors in the different groups almost have the same focus when it comes to policies and procedures.

Edwin van der Burg 36 Studentnummer 6020288 Universiteit van Amsterdam Business School

Score Action business Reaction internal auditor Low • Preference for informal controls; • Make sure important controls are formalised; • More tolerance for breaking the rules; • Focus on effectiveness of controls to see if they are working properly; • Limited need for updating of policies • Check to find out if changes are and procedures; and incorporated in the policies and procedures; and • Low preference for action controls. • Find out if compensating culture or personnel controls are in place. High • Need for detailed and formalised • Check whether roles and policies and procedures; responsibilities are clearly indicated in the policies and procedures; • Less tolerance for breaking the rules; • Make sure that the policies and and procedures contain the right rules; and • Preference for action controls within • Find out if all necessary controls are the policies and procedures. adequately described in the policies and procedures. Table 12 What should the internal auditor do to deal with uncertainty avoidance within the business (Van der Burg, 2010) 6.3. Limitations and further research Three limitations can be identified based on the conducted research. First of all, the result of the research could have been influenced due to the usage of the three groups, which was based on the categorisation made by Hofstede. The three groups were used in order to work with a reasonable group size, but it might limit the usability of the outcomes since extremes regarding scores on uncertainty avoidance are averaged with lower scores in the same group.

The second limitation is the availability of the five cultural dimensions in every culture, as defined by Hofstede. This research was only focusing on one of the five dimensions (i.e. uncertainty avoidance). With the questions in the questionnaire, the announcement that the answers could be send to my personal mailbox and the answers to be analysed anonymously the influence of the other dimensions was minimised. However, there is always a chance that for example the score on power distance has influenced the outcome.

The third and final limitation is related to the possibility of receiving social acceptable answers. This might especially have been the case in the questions 10 and 11 were an indication had to be given on how they would react in a specific situation.

6.3.1 Further research Since this is an explorative research in the area of internal auditors and their relation with national culture there are several possibilities for further research.

Edwin van der Burg 37 Studentnummer 6020288 Universiteit van Amsterdam Business School

First of all, since the results of this research has shown that the cultural dimension uncertainty avoidance does not result in the same categorisation when applied to internal auditors it could be questioned to what extend the other four dimensions are applicable to the internal auditor. It would also be interesting to conduct an additional research on factors that have a possible effect on the score of uncertainty avoidance.

Secondly, since the results of this research indicate that the way of working of the internal auditor is not influenced by the score of uncertainty avoidance, it might be interesting to see what effect this has on the findings raised during an audit. Is it, for example, for the internal auditors in low uncertainty avoidance cultures more likely to raise a finding on the maintenance of policies and procedures?

Thirdly, since this explorative research has made use of three groups of countries (i.e. high, medium and low score on uncertainty avoidance) to test the hypotheses, during further research it might be decided to focus on some specific countries. It is, for example, interesting to find out if there is still a significant relation between Belgium and America when the population is increased.

The fourth and final suggestion for further research would be to focus on internal auditor, who works in another culture than his one. To what extend does he experience the level of e.g. uncertainty avoidance to be similar to his own and is there a difference in how internal auditors, in different cultures, see themselves.

Edwin van der Burg 38 Studentnummer 6020288

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Appendix A: Questionnaire Dear Colleague,

Please indicate how important the following statements are for you, with 1 being not important and 7 being very important.

1 4 7 1. It is important for me to have job requirements and

instructions spelled out in detail so that I always know what I’m expected to do.

2. How important are informal controls (i.e. not written down in

a procedure description), for the control environment.

3. In case regulatory changes are announced within the

business, I check whether the business has incorporated them

in its procedure.

4. Policies and procedures are important, since they inform me

what the organisation expects of me.

5. Policies and procedures are updated on a regular basis.

6. The business should have all the steps in a process described

in the procedure description.

7. Standard operating procedures are helpful in doing my job.

8. If a new product has been introduced by the business, I make

sure the Product Approval Process has been followed.

9. How important is the level of experience of employees, in a

department, for the level of detail in the procedures.

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10. The business has decided to leave it up to the employees (experienced professionals) on how they perform their work. What is your response?

The employees within the business department are capable enough to be able to perform the activity without a new procedure. A basic procedure should be in place to highlight the most important steps. Not acceptable, there should be a procedure in place for all the tasks performed.

Other,

11. A new system is introduced, which results in changes in the process flow of the business. What do you do expect to find in this situation?

Updated procedures that reflect the new situation and carry out the new process. Procedures are not changed, but the changes are incorporate in their work. The procedures are left as‐is and the process is carried out like they were used to. Other,

General Questions Age Gender Nationality

Thank you for your time

Appendix B: Respondents High Number Medium Number Low Number Greece 1 Colombia Norway Portugal Croatia New Zealand Guatemala Brazil South Africa Uruguay Venezuela Canada total 1 Belgium 7 Italy 1 Indonesia Malta Czech Republic United States 4 Russia Austria Philippines Salvador Luxembourg India Poland 2 Pakistan Malaysia 3 Japan Switzerland (French) Great Britain Serbia Taiwan 2 Ireland Suriname Arab Countries China Romania 4 Morocco Vietnam Slovenia Ecuador Hong Kong 2 Peru Germany Sweden Argentina Thailand Denmark Chile 1 Bangladesh Jamaica Costa Rica Canada Quebec Singapore France Estonia Panama Finland Spain 2 Iran Bulgaria 2 Switzerland (German) Korea (South) 2 Trinidad Turkey 1 West Africa Hungary Netherlands 21 Mexico 3 East Africa Israel Australia Slovakia Table 13 respondents divided per country

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Appendix C: Uncertainty Avoidance Index Values High Actual Medium Actual Low Actual Greece 112 Colombia 80 Norway 50 Portugal 104 Croatia 80 New Zealand 49 Guatemala 101 Brazil 76 South Africa 49 Uruguay 100 Venezuela 76 Canada total 48 Belgium 94 Italy 75 Indonesia 48 Malta 96 Czech Republic 74 United States 46 Russia 95 Austria 70 Philippines 44 Salvador 94 Luxembourg 70 India 40 Poland 93 Pakistan 70 Malaysia 36 Japan 92 Switzerland (French) 70 Great Britain 35 Serbia 92 Taiwan 69 Ireland 35 Suriname 92 Arab Countries 68 China 30 Romania 90 Morocco 68 Vietnam 30 Slovenia 88 Ecuador 67 Hong Kong 29 Peru 87 Germany 65 Sweden 29 Argentina 86 Thailand 64 Denmark 23 Chile 86 Bangladesh 60 Jamaica 13 Costa Rica 86 Canada Quebec 60 Singapore 8 France 86 Estonia 60 Panama 86 Finland 59 Spain 86 Iran 59 Bulgaria 85 Switzerland (German) 56 Korea (South) 85 Trinidad 56 Turkey 85 West Africa 54 Hungary 82 Netherlands 53 Mexico 82 East Africa 52 Israel 81 Australia 51 Slovakia 51 Table 14 Uncertainty Avoidance Index Values for 74 Countries and Regions (Hofstede, et al., 2005)

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