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  • Jennifer M Mueller-Phillips
    Factors Influencing Recruitment of Non-Accounting Business...
    research summary posted June 22, 2017 by Jennifer M Mueller-Phillips, tagged 13.0 Governance in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing
    Practical Implications:

    Internal audit plays a critical role in maintaining corporate governance. This study examines factors that lead into non-accounting business professionals’ willingness to work in the internal audit function. This is an effort to provide guidance to the internal audit profession on how to better recruit students and non-accounting business professionals into internal audit roles. 

    Citation:

    Bartlett, Geoffrey D., J. Kremin, K. K. Saunders, D. A. Wood.2017. “Factors Influencing Recruitment of Non-Accounting Business Professionals into Internal Auditing”. Behavioral Research in Accounting 29.1 (2017): 119.

     

    Keywords:
    internal audit; hiring decisions; business professionals; outsourcing; management training ground.
    Purpose of the Study:

    An effective component of corporate governance for many entities is a strong internal audit function. According to recent studies stakeholders are generally dissatisfied with their current internal audit division. Additionally, prior research also indicates that companies face difficulties in recruiting for internal audit roles. This study examines the perception of the profession and factors affecting non-accounting business professionals’ willingness to work within internal audit.

    Design/Method/ Approach:

    The research project contains two different studies. The first study had a final sample size of 502 and the participants were undergraduate and graduate non-accounting business students from four different universities. The participants were read job descriptions and their responses were used as data. The second test included 46 students from across the country. They were provided a survey and asked what would make a career in internal audit more appealing to them.

    Findings:

    The authors find the following from the first study:

    • Business professionals have positive perceptions of internal auditing. These perceptions include internal auditors being respected and highly compensated, while performing meaningful work and having abundant career opportunities.
    •  Business professionals believe other business professionals hold negative stereotypes of internal auditing.
    • Business professionals are less willing to apply for positions in internal auditing than similar positions outside of internal audit.
    • Business professionals are not more inclined to work in internal audit even if the structure of their job is varied.

    The authors find the following from the second study:

    • Students with lower academic performance would be more interested in internal auditing if they were paid more.
    • Students with higher academic performance would be more interested in internal auditing if they performed less boring/tedious work, worked in a preferred company, and if they had a better understanding of the profession.
    Category:
    Corporate Matters, Governance
    Home:

    http://commons.aaahq.org/groups/e5075f0eec/summary

  • Jennifer M Mueller-Phillips
    Female Board Presence and the Likelihood of Financial...
    research summary posted October 31, 2013 by Jennifer M Mueller-Phillips, tagged 12.0 Accountants’ Reports and Reporting, 12.03 Restatements, 13.0 Governance, 13.01 Board/Audit Committee Composition in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Female Board Presence and the Likelihood of Financial Restatement
    Practical Implications:

    Female board presence has a beneficial impact on a board of director’s governance function and is negatively associated with financial restatements, a costly ordeal for any company. Increasing board diversity through many characteristics (culture, age, etc.) helps avoid the pitfalls of groupthink and leads to better corporate governance.

    For more information on this study, please contact Lawrence J. Abbott at the University of Wisconsin-Milwaukee (abbotl@uwm.edu).
     

    Citation:

    Abbott, L. J., S. Parker, and T. J. Presley. 2012. Female Board Presence and the Likelihood of Financial Restatement. Accounting Horizons 26 (4): 607-629

    Keywords:
    board gender diversity; corporate governance; restatement.
    Purpose of the Study:

    A large amount of research has been devoted to understanding the relationship between board member independence and financial restatements. However, the overall results have been mixed with evidence for and against the idea that director independence leads to better governance. The study tests whether a more diverse board leads to greater independence and therefore a lower likelihood of restatement. The measure the authors use for diversity is the presence of a female board director.

    The authors motivate their study based on the idea of “group-think,” which is a mode of thinking group members engage in when seeking consensus rather than pursuing other, possibly better courses of action. Gender diversity has been shown to decrease this tendency in groups and this paper tests whether that leads to better corporate governance when at least one board member is female.
     

    Design/Method/ Approach:

    The results of this study are based on firm restatements included in the GAO report from 1997 through 2002. All firms in the study were non-Fortune 1000 firms. The authors believe larger firms may have more pressure to have a “token” female board member and so this sample of smaller firms better represents the true effect of having a female present on the board. The authors matched a sample of firms with restatements with a control sample of firms that did not restate during the same period. The control firms were matched with a firm in the restatement sample as best as possible using characteristics such as market value of equity and industry code to ensure that they represented the best possible match for a similar firm that did not have to restate during the same time period.

    Findings:

    About 65 percent of firms in the sample had boards that did not include a single female director. Results from the study show a significant reduction in the likelihood of a financial restatement when the board contains at least one female board member. However, the authors admit that it may not actually be the female presence on the board that leads to a lower likelihood of restatements. For example, firms with better overall corporate governance may be more likely to appoint female board members for real or perceived benefits. Better corporate governance could drive both likelihood for restatement and the presence of a female board member.

    Category:
    Accountants' Reporting, Governance
    Sub-category:
    Board/Audit Committee Composition, Restatements
  • The Auditing Section
    Financial Restatements and Shareholder Ratifications of the...
    research summary posted April 23, 2012 by The Auditing Section, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers, 13.0 Governance, 13.05 Board/Audit Committee Oversight in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Financial Restatements and Shareholder Ratifications of the Auditor
    Practical Implications:

    The authors’ results show that restatements are viewed by investors as audit failures and restatements reflect negatively on investor perceptions of the external auditor. The study also suggests that audit committees’ decisions to change auditors are not influenced by shareholder ratification voting.  The authors state that the results support “efforts to require SEC registrants to submit auditor selection for a shareholder ratification vote.”

    Citation:

    Liu, L., K. Raghunandan, and D. Rama. 2009. Financial Restatements and Shareholder Ratifications of the Auditor. Auditing: A Journal of Practice & Theory 28 (1): 225-240.

    Keywords:
    restatements; shareholder voting; auditor ratification
    Purpose of the Study:

    The purpose of this study is to examine the impact that client restatements have on shareholder ratification votes for the external auditor.  Restatements have been widely recognized as an indicator of low audit quality and as such may influence shareholder perceptions of the external auditor.  Shareholder ratification of the external auditor is not required by state or federal laws; however, many firms maintain the practice as a measure of good governance.  This ratification vote is the only opportunity shareholders have to comment on their approval/disapproval of the audit firm and/or audit quality.  Furthermore, some investor advocate groups (e.g., CalPERS) have withheld votes against audit committee directors of firms that did not offer shareholders an opportunity to vote on auditor ratification.                                                                                                                           

    The authors expect that firms will have a higher proportion of shareholders not voting for the appointment of the auditor following a restatement.

    Design/Method/ Approach:

    The authors collect data on firms that restate 2004 or 2005 financial statements and compare shareholder ratification votes for the restating firms to shareholder ratification votes for a control sample of firms that did not restate their 2004 or 2005 financial statements.

    Findings:
    • The authors find that shareholders are more likely to vote against auditor ratification after a client restatement relative to firms that do not restate their financial statements and relative to shareholder voting prior to the restatement.
    • There were 19 of 97 restatement firms that had more than 5 percent of shareholder votes not in favor of ratifying the auditor; only 2 of these 19 firms subsequently changed auditors the following year.
    Category:
    Auditor Selection and Auditor Changes, Governance
    Sub-category:
    Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc, Board/Audit Committee Oversight
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  • The Auditing Section
    Internal Audit Quality and Earnings Management
    research summary posted May 7, 2012 by The Auditing Section, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Audit Quality and Earnings Management
    Practical Implications:

    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. 

    Citation:

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

    Keywords:
    corporate governance; internal audit function; internal audit quality; earnings management; abnormal accruals; analyst forecasts
    Purpose of the Study:

    Standards promulgated by the AICPA and PCAOB recognize the impact that a high-quality internal audit function (IAF) can have on reducing control risk, and by extension, audit risk.  As such, regulators permit and encourage external auditors to rely on the work of others if that work is deemed to be performed by “competent and objective persons” (PCAOB 2007).  Similarly, the Institute of Internal Auditors (IIA) recognizes the IAF as one of the four cornerstones of corporate governance, along with the audit committee, executive management, and the external auditor.  However, while several prior studies establish a negative association between the quality of firm’s corporate governance mechanisms and management’s tendency and ability to manipulate reported financial results, there is little evidence that relies on archival data concerning the impact of a quality IAF on firms’ earnings manipulation activities.

    The purpose of this study is to examine archival data to determine whether differences in the quality of firms’ IAF impact firms’ earnings management activities.

    Design/Method/ Approach:

    The authors rely on the IIA maintained GAIN database (a proprietary database), that is composed of survey responses from chief audit executives associated with IIA member organizations.  Member organizations responding to the survey include publicly traded and private companies, educational and governmental institutions, as well as individual divisions within companies.  The study covers the fiscal years of 2000-2005. 

    The authors create an index based on six factors that SAS No. 65 suggests external auditors should consider when evaluating whether to rely on the work of the internal auditors, and therefore differentiate IAF quality.  Those factors include the IAF’s professional experience, professional certifications, training, objectivity, relevance of their work to the financial reporting function, and the IAF’s relevance to the organization based on how much resources the corporation invests in the IAF group.  To capture management’s earnings management activities, the authors rely on measures of abnormal accruals and whether the firm just misses or beats analysts’ forecasts.

    Findings:
    • Overall, the results suggest that higher quality IAFs reduce management’s ability to manipulate earnings.
    • Specifically, higher quality IAFs appear to be associated with smaller negative abnormal accruals.
    • Companies with higher quality IAFs appear more likely to just miss analysts’ earnings forecasts, a measure of less earnings management.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Reliance on Internal Auditors, Internal auditor role and involvement in controls and reporting
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  • Jennifer M Mueller-Phillips
    Internal Audit Quality and Financial Reporting Quality: The...
    research summary posted October 12, 2016 by Jennifer M Mueller-Phillips, tagged 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence
    Practical Implications:

     This study is the first to establish IAF characteristics as separate, distinct constructs that act jointly in creating IAF quality; therefore, it contributes to the overall understanding of IAF quality and the determinants of the IAF as an effective internally based financial reporting monitor.

    Citation:

     Abbott, L. J., B. Daugherty, S. Parker and G. F. Peters. 2016. Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence. Journal of Accounting Research 54 (1): 3-40.

    Purpose of the Study:

     In 2013, the NASDAQ Stock Market LLC (NASDAQ) proposed a rule change that would require all NASDAQ registrants to maintain an internal audit function (IAF). The New York Stock Exchange (NYSE) has required all registrants to maintain an IAF since 2006. The thinking behind these requirements is that an effective IAF provides the audit committee and other financial reporting stakeholders with critical information pertaining to a company’s risks and internal controls. Corporate governance proponents also emphasize the IAF’s role in enhancing financial reporting quality; however, despite having many proponents the IAF’s role in the financial reporting process is not yet fully understood and empirical evidence concerning the impact of IAF quality is minimal. As a result of this lack of evidence, the authors investigate the potential impact of IAF quality as a joint function of the IAF’s competence and independence. They base this view upon theoretical work stating that external audit quality is a function of the external auditor’s ability (competence) to detect accounting misstatements and willingness (independence) to oblige proper accounting treatments.

    Design/Method/ Approach:

    In this paper, the authors develop and test a two-factor model of IAF quality as a function of the IAF’s ability to prevent/detect financial misstatements (competence) and its inclination to report the misstatements to the audit committee and/or external auditor (independence). The study uses survey evidence from 189 Chief Internal Auditors from Fortune 1000 companies during fiscal 2009.

    Findings:
    • The authors’ overall results provide evidence consistent with the hypothesis that the combined presence of both competence and independence is a necessary antecedent to effective IAF financial reporting.
    • The authors find results consistent with independence being enhanced by relatively greater degrees of audit committee oversight of the IAF, as opposed to management oversight.
    • The authors find that enhanced independence interacts with IAF competence as a means of curtailing financial reporting discretion in both income-increasing and income-decreasing environments. A similar set of relationships were documented when the authors interact IAF competence and the relative lack of IAF outsourcing.
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors
  • The Auditing Section
    Internal Audit Reporting Lines, Fraud Risk Decomposition,...
    research summary posted May 4, 2012 by The Auditing Section, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Audit Reporting Lines, Fraud Risk Decomposition, and Assessments of Fraud Risk
    Practical Implications:

    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.

    Citation:

    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.

    Keywords:
    internal audit, fraud risk assessment, audit committee
    Purpose of the Study:

    The internal auditor function is one of the four cornerstones of corporate governance along with senior management, the board, and external auditors.  External auditors frequently rely on the work of internal auditors, including firm risk assessments per AS5, An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements.  Internal auditors may report to management or to the audit committee.  Many investors and regulators have suggested that internal auditors should report directly to the audit committee to minimize the threats to independence and objectivity that may potentially occur when internal auditors report to management.  However, if the audit committee is given power over the internal audit function, this may create potential new threats to internal auditor independence not previously considered.  For example, many audit committees now have the authority to hire or fire the Chief Audit Executive.  This paper addresses the effects of internal audit reporting lines on the fraud risk assessment judgments of internal auditors.  Below are two objectives that the authors address in their study: 

    • Examine the extent that internal auditors may be subconsciously motivated to avoid reporting higher levels of fraud risk to the audit committee, relative to when the risks are reported to management.
    • Examine whether decomposition of fraud risk into the components of the fraud triangle (management attitude, incentives, and opportunities) improves the internal auditor’s sensitivity to opportunity and incentive cues.
    Design/Method/ Approach:

    The authors collected their evidence from highly experienced internal auditors (mean experience of 15.3 years) via survey instruments. The authors then collected additional evidence using an experiment where participants were asked to complete a simulated task. Experiment participants were experienced internal auditors with mean experience of 9.6 years.  Survey participants were asked five questions about risk assessment discussions, reporting lines, and reactions.  In the simulated task participants were asked to assess the level of fraud risk in a hypothetical firm.  Participants were assigned to either a higher or lower level of fraud risk and to a reporting line of either audit committee or management.  The research was conducted in the mid- to late-2000s time period.

    Findings:
    • The authors find that internal auditors perceive greater personal threats when reporting high levels of fraud risk to the audit committee than when reporting to management.  Internal auditors fear overreaction from the audit committee, potentially leading to increased workload and management reprisals.   
    • The perception of greater perceived threats leads internal auditors to reduce assessed levels of fraud risk when reporting to the audit committee relative to reporting to management.  This finding is contrary to expectations and reveals additional unexpected threats created by having internal audit report to the audit committee.
    • Internal auditors increase attention to management attitude when risk assessments are decomposed, without a corresponding increase to incentive or opportunity cues.  Thus, unlike external auditors, fraud decomposition does not appear to mitigate perceived problems associated with insensitivity to incentive and opportunity cues.    
    Category:
    Risk & Risk Management - Including Fraud Risk, Auditing Procedures - Nature - Timing and Extent, Governance
    Sub-category:
    Fraud Risk Assessment, Reliance on Internal Auditors, Internal auditor role and involvement in controls and reporting
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  • The Auditing Section
    Internal Audit Sourcing Arrangement and the External...
    research summary posted May 7, 2012 by The Auditing Section, tagged 07.0 Internal Control, 07.01 Scope of Testing, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Audit Sourcing Arrangement and the External Auditor’s Reliance Decision
    Practical Implications:

    The results of this study suggests that external auditors place more reliance on “outsourced” internal audit work, especially under high inherent risk conditions, than on “in-house” internal audit work due to the external auditors’ assessment of higher objectivity on the part of the “outsourced” internal auditor. The authors suggest this may have implications for external audit teams’ planning and assessment of internal audit work, in that whether or not the work is outsourced might need to be considered in the assessment. Also, audit clients might consider a need to outsource more internal audit work or try to make changes to increase the external auditors’ perception of their “in-house” internal audit team, in terms of objectivity.

    Citation:

    Glover, S. M., Prawitt, D. F., and D. A. Wood. 2008. Internal Audit Sourcing Arrangement and the External Auditor’s Reliance Decision. Contemporary Accounting Research 25 (1) 193-213.

    Keywords:
    assessment of internal audit work; internal audit outsourcing; auditor judgment
    Purpose of the Study:

    Under Section 404 of the Sarbanes-Oxley Act (SOX), client management must evaluate the effectiveness of internal controls over financial reporting (ICOFR). In order to meet new regulations, many firms outsourced internal audit functions to third-parties. Auditing standards state that external auditors are required to evaluate the objectivity, competence, and work performed by internal auditors. Since third-party internal audit teams likely have different incentive and motives, compared to in-house internal audit teams, the external auditor may have different perceptions of each team’s objectivity. This study examines whether external auditors’ reliance on the work of outsourced internal auditors differs from the reliance of “in-house” internal auditors.

    Design/Method/ Approach:

    The authors collected their evidence via experimental cases administered to auditors from one of the Big 4 accounting firms. Approximately 21 percent were staff-level; 59 percent were senior staff, the other 20 percent were manager-level or higher. Data was collected prior to 2007.  Participants were provided background information about the hypothetical company, the internal audit team, and the audit procedures performed by the internal audit team. Participants were asked to evaluate the internal audit team’s competency and objectivity, as well as the amount of reliance to place on the internal audit team’s work.

    Findings:
    • When inherent risk is low, external auditors are just as likely to rely on “outsourced” internal audit work as “in-house” internal audit work. 
    • External auditors perceive “outsourced” internal audit work to be more objective than “in-house” internal audit work. 
    • When inherent risk is high, external auditors are more likely to rely on “outsourced” internal audit work as “in-house” internal audit work. 
    • External auditors are more willing to rely on internal auditors’ work when they perceive the internal auditors to be performing objective tasks, versus subjective tasks. (This is for both “in-house” and “outsourced” internal audit teams.) This difference in reliance between objective and subjective tasks is magnified when inherent risk is high.
    • However, when the task is subjective, the auditor relies less on the internal audit team’s work when inherent risk is high.
    Category:
    Internal Control, Governance
    Sub-category:
    Scope of Testing, Internal auditor role and involvement in controls and reporting
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  • Jennifer M Mueller-Phillips
    Internal Audit Sourcing Arrangements and Reliance by...
    research summary posted September 26, 2013 by Jennifer M Mueller-Phillips, tagged 07.0 Internal Control, 07.01 Scope of Testing, 08.0 Auditing Procedures – Nature, Timing and Extent, 08.11 Reliance on Internal Auditors, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Audit Sourcing Arrangements and Reliance by External Auditors
    Practical Implications:

    The authors note a couple of implications for practitioners resulting from this study.  First, given the fact that external auditors assess internal audit quality and rely upon the work similarly for outsourced and cosourced internal audit functions, it may be worthwhile for companies to consider engaging some level of independent outside service provider to work along with their in-house internal auditors for high risk areas. 
        Second, having the same 3rd party internal audit service provider also provide tax services results in less reliance upon the work performed by internal audit, even though those services are approved by the audit committee and performed by different individuals.  Therefore, external audit increases their audit effort, thereby implying that external audit must see this additional service provision to be detrimental to the internal audit service provider’s objectivity. 
     
    For more information on this study, please contact Naman K. Desai.
     

    Citation:

    Desai, N. K., G. J. Gerard, and A. Tripathy. 2011. Internal Audit Sourcing Arrangements and Reliance by External Auditors. Auditing: A Journal of Practice & Theory 30 (1):149-171.

    Keywords:
    cosourcing; external auditor reliance; internal audit; sourcing
    Purpose of the Study:

      The purpose of this study is to investigate potential internal audit (IA) sourcing arrangements (in-house, outsource, and cosource) and to determine how that impacts an external auditor’s evaluation of the IA function’s competency, objectivity, and technical skills. The extent to which the audit team will rely upon work performed by the internal auditors can also be determined this way.  This study also looks at whether tax services provided by the IA service provider impacts the extent of reliance for outsourced or cosourced IA.
    This study is important because the Institute of Internal Auditors makes no preference between any of these sourcing arrangements.  Prior research has shown that outsourcing the IA function results in higher ratings of objectivity and more reliance upon their work when inherent risk is high (but no differences when inherent risk is low).  However, no studies test how cosourcing arrangements are evaluated.  This question is important to answer since a cosourced arrangement is a blend of in-house and outsourced internal auditors, which indicates that results could go either way. 
     

    Design/Method/ Approach:

    The authors conducted an experiment including experienced CPAs from Big 4 and regional firms prior to October 2007.  The design results in only 5 groups – in-house, outsource, or cosource without mention of tax services and outsource or cosource with the service firm also providing tax services.  External auditors were asked to provide ratings related to internal audit’s quality, reliance on internal audit work, audit risk, planned external audit effort, and likelihood that IA would give in to management regarding potential findings.

    Findings:
    • The authors find that in high risk areas, external auditors’ rate outsourced and cosourced internal auditors as having higher levels of quality than in-house internal audit.
    • They similarly find that external audit is more likely to rely upon the internal audit work performed if it is performed by outsourced or cosourced IA.
    • Further, the authors find no differences in quality or reliance ratings between outsourced and cosourced IA. 
    • However, when outsourced or cosourced internal audit service providers also provide tax services (which are performed by individuals other than those who perform the internal audit work) external auditors perceive the quality of the internal audit work to be lower.  As a consequence, they rely less upon the internal auditor’s work and instead increase their own external audit efforts. 
       
    Category:
    Auditing Procedures - Nature - Timing and Extent, Governance, Internal Control
    Sub-category:
    Internal auditor role and involvement in controls and reporting, Reliance on Internal Auditors, Scope of Testing
  • Jennifer M Mueller-Phillips
    Internal Auditors’ Fraud Judgments: The Benefits of B...
    research summary posted October 22, 2013 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 13.0 Governance, 13.07 Internal auditor role and involvement in controls and reporting in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Auditors’ Fraud Judgments: The Benefits of Brainstorming in Groups
    Practical Implications:

    Internal auditors frequently work alone, but the findings from this research indicate that brainstorming in groups produces higher quality fraud risk assessments.  Additionally, this research has practical implications because qualitative risk assessment scales have been shown to result in higher assessed fraud risks than quantitative risk assessment scales, but brainstorming in groups appears to alleviate this response mode bias.

    For more information on this study, please contact Tina Carpenter.
     

    Citation:

    Carpenter, T.D., J.L. Reimers, and P.Z. Fretwell. 2011 Internal Auditors’ Fraud Judgments: The Benefits of Brainstorming in Groups. Auditing: A Journal of Practice and Theory 30 (3): 211-224.

    Keywords:
    fraud risk assessments; brainstorming; response mode bias; group interaction; internal audit.
    Purpose of the Study:

    Although not required by internal auditing standards, the role of internal auditors in the fraud detection and prevention process has gained attention from many parties in the auditing process including external auditors and standard setters.  This study examines the following:

    • How type of brainstorming (group versus alone) affects internal auditors’ fraud risk assessments by examining whether the internal auditors produce a high number of assessed risks, or higher quality risk assessments.
    • How group interaction decreases response mode bias caused by making risk assessments quantitatively versus qualitatively.
       
    Design/Method/ Approach:

    To conduct the study, 162 internal auditors participated in an experiment that required the internal auditors to brainstorm potential fraud risks from a case which was adapted from an actual fraud that had been examined by the SEC.  Participants were randomly assigned to conditions where they were asked to make fraud risk assessments using on quantitative scale or a qualitative scale.  Subjects were then instructed to brainstorm either individually or in a group setting.  Quantity of assessed risks is determined by the number of risks identified and quality of risk assessment is determined by whether the identified fraud risk was actually present in the case.  Data for the experiment was collected prior to September 2008. 

    Findings:
    • Internal auditors who assessed fraud risk using a qualitative scale (for example, assessing fraud risk as low, moderate, high, very high) assessed fraud risk higher than internal auditors who assessed fraud risk on a quantitative scale (for example, assessing fraud risk on a scale from 1 to 5).
    • Internal auditors brainstorming individually (alone) identified a higher number of fraud risks than internal auditors brainstorming in groups.
    • Internal auditors brainstorming in groups identified higher quality fraud risks than internal auditors brainstorming alone.  However, they collectively identified fewer fraud risks than the aggregation of internal auditors brainstorming alone.
    • Brainstorming in groups reduces response mode bias.  That is, internal auditors who assessed risk using a qualitative scale assessed fraud risk as being higher than internal auditors who assessed fraud risk using a quantitative scale.  However, the brainstorming process removed this bias so that there was no significant difference in the internal auditors’ risk assessments after the group interaction.
       
    Category:
    Governance, Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Fraud Risk Assessment, Internal auditor role and involvement in controls and reporting
  • Jennifer M Mueller-Phillips
    Internal Control Quality: The Role of Auditor-Provided Tax...
    research summary posted September 16, 2015 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services, 07.0 Internal Control, 07.03 Reporting Material Weaknesses, 13.0 Governance, 13.05 Board/Audit Committee Oversight in Auditing Section Research Summary Database > Auditing Section Research Summaries Space public
    Title:
    Internal Control Quality: The Role of Auditor-Provided Tax Services.
    Practical Implications:

    The results of this study are important to audit regulators as they make decisions regarding policies, and to corporate governance officials as they make decisions regarding the audit firms they engage to provide tax nonaudit services. The evidence indicates that tax nonaudit services accelerate audit firm awareness of material transactions as these services are associated with a lower likelihood of a material weakness in internal controls. In addition, further evidence supports that this finding is not simply due to impaired auditor independence. Overall, this suggests that tax nonaudit services provided by the audit firm improve internal control quality. As regulators and companies evaluate the consequences of tax nonaudit services, the findings in this paper may impact their conclusions.

    Citation:

    De Simone, L., M.S. Ege, and B. Stomberg. 2015. Internal Control Quality: The Role of Auditor-Provided Tax Services. The Accounting Review. 90(4): 1469-1496.

    Keywords:
    auditor fees, nonaudit services, auditor independence, internal controls, tax, financial reporting quality
    Purpose of the Study:

    Audit regulators and companies’ corporate governance officials are charged with understanding and creating policies for auditor provided nonaudit services. To make informed decisions, it is important for these groups to know the benefits and costs of auditor provided nonaudit services. Previous research has reported a positive association between tax nonaudit services and financial reporting quality and audit quality. This paper investigates the relationship between tax nonaudit services and a specific component of financial reporting quality: internal control quality. Specifically, the authors:

    • Examine the relationship between tax nonaudit services and the probability of a material weakness in internal controls (i.e. internal control quality).
    • Examine whether tax nonaudit services are beneficial to companies experiencing a shock to their internal control environment.
    • Examine how the relationship between tax nonaudit services and internal control quality is affected by audit firm tenure.

    The authors also explain the process through which they propose tax nonaudit services affects non-tax financial reporting quality.

    Design/Method/ Approach:

    The authors collected auditor internal control opinions and data necessary to calculate control variables on publicly-traded companies that are subject to SOX Section 404(b). The information collected on these companies was for years 2004-2012.

    Findings:
    • The authors find that companies that purchase tax nonaudit services are significantly less likely to disclose a material weakness. A one standard-deviation increase in tax nonaudit services is associated with approximately a 13% decrease in the rate of material weaknesses relative to the base rate. Further analysis indicates that impaired auditor independence does not account for this result.
    • The authors find that when companies experience a significant shock to their internal control environment, tax nonaudit services incrementally benefit internal control quality relative to other companies.
    • The authors find that the benefits of tax nonaudit services on internal control quality are greater in the early years of audit firm tenure.
    Category:
    Governance, Independence & Ethics, Internal Control
    Sub-category:
    Board/Audit Committee Oversight, Non-audit Services, Reporting Material Weaknesses