The results of this study suggest that companies who offer incentive-based compensation to chief internal auditors, especially through equity, are more likely to be perceived as having a higher audit risk by external auditors. Consequently, external auditors may charge a higher fee for their services. This study gives a basis for the benefit/cost analysis of providing incentive-based compensation for chief internal auditors. While it is possible internal auditors will respond positively to an IBC and bring extra value to the organization, there is a risk that an external auditor could raise audit fees cancelling out this added benefit.   

Chen, Lucy Huajing, H. H. Chung, G. F. Peters., and J. P. Wynn. (Jeannie).2017. Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective. Auditing, A Journal of Practice and Theory 36 (21): 21-44

This study develops an empirical measure of internal audit quality, and provides evidence supporting companies’ use and  development of an IAF as part of improvements to its overall governance environment.  Regulators and other parties interested in corporate governance may find it helpful to more explicitly consider the role of internal auditor in the evaluation of the firm. 

Prawitt, D., J. Smith, D. A. Wood 2009. Internal Audit Quality and Earnings Management. The Accounting Review 84 (4): 1255-1280.

The results of this study are important for audit firms to consider when determining the extent of reliance on internal auditor’s fraud risk assessments.  Internal auditor judgments may be influenced by pressures to decrease risk assessments when reporting to the audit committee.  Thus, the recent suggested improvements for improving audit practice and risk assessment processes by reporting to the audit committee may have adverse and unexpected consequences.  Additionally, internal auditor judgments may be influenced by an over-reliance on attitude cues, even when decomposing fraud risk assessments.  Thus, decomposition may amplify the problem that prompted its use.

Norman, C.S., A.M. Rose, and J.M. Rose. 2010. Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society 35: 546-557.

The findings illustrate how and when internal auditors can achieve agreement from managers using tactics that can be effective even when the underlying information supporting their position is not particularly strong. The findings should also be informative to external auditors, managers, researchers, and others interested in influencing managers’ judgments and corporate governance. The study can help develop a theory about day-to-day behavioral factors that drive variance in internal auditors’ influence over managers’ judgments.

Fanning, K., & David Piercey, M. 2014. Internal auditors’ use of interpersonal likability, arguments, and accounting information in a corporate governance setting. Accounting, Organizations & Society 39 (8): 575-589.

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The authors conclude that companies should consider the potential costs of using a rotational staffing model in the internal audit function and, if adopting this practice, should ensure the appropriate compensating controls are in place to mitigate such costs. The evidence on the consequences of systematic rotation will also be interesting to investors, boards of directors, audit committees, and management. These stakeholders rely on the IAF to monitor financial reporting, and they can benefit from evidence about how systematic rotation affects financial reporting quality. Furthermore, regulators and standard setters, such as the IIA, would benefit from understanding how these rotational assignments affect financial reporting quality and what organizations can do to address the potential consequences.

Christ, M. H., A. Masli, N. Y. Sharp, and D. A. Wood. 2015. Rotational internal audit programs and financial reporting quality: Do compensating controls help? Accounting, Organizations & Society 44: 37-59.

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