AAA Spark Meeting of Regions

The Effects of Internal Audit Sourcing Arrangements and Reporting Relationships on Shareholder Perceptions of Financial Statement Reliability

• In Event: External and Internal Audit

Abstract

As corporations continue to strengthen their governance and oversight activities, the internal audit function (IAF) has taken on a more prominent role within the corporate governance mosaic. Consequently, the Institute of Internal Auditors (IIA) has called for corporations to provide investors and shareholders, in the form of disclosures, with more information about the IAF, including its composition and reporting structure. The purpose of this study is to investigate the effects that IAF sourcing arrangements and reporting relationships have on shareholders perceived reliability of the financial statements.
Utilizing a 2 x 2 between-subjects design, I manipulate IAF sourcing arrangements at two levels [(1) outsourced and (2) in-house] and IAF reporting structure at two levels [(1) primary accountability to the Audit Committee Chair (ACC) and (2) primary accountability to the CFO]. Overall, I find that there is no significant difference in shareholder perceptions of financial statement reliability between an outsourced and in-house IAF. Additionally, I do find evidence that when an IAF is outsourced, shareholders perceive the financial statements to be more reliable when the head of the IAF has primary accountability to the ACC. Finally, I find that when the head of the IAF has primary accountability to the CFO, there is a statistically similar difference in how sourcing arrangement affects reliability.

Author

• Patrick E. O'Brien, SUNY College at Old Westbury