Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective

2016 ◽  
Vol 36 (2) ◽  
pp. 21-43 ◽  
Author(s):  
Lucy Huajing Chen ◽  
Hyeesoo H. (Sally) Chung ◽  
Gary F. Peters ◽  
Jinyoung P. (Jeannie) Wynn
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Positive Association ◽  
Audit Fees ◽  
Data Availability ◽  
Company Performance ◽  
Potential Threat ◽  
External Audit ◽  
Internal Auditors ◽  
Survey Responses

SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.

Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?

2011 ◽  
Vol 23 (2) ◽  
pp. 187-206 ◽  
Author(s):  
Douglas F. Prawitt ◽  
Nathan Y. Sharp ◽  
David A. Wood
Keyword(s):  
Internal Audit ◽  
Audit Fees ◽  
Data Availability ◽  
Potential Contribution ◽  
Archival Studies ◽  
External Audit ◽  
Data Set ◽  
Internal Auditor ◽  
Internal Auditors ◽  
Auditing Standards

ABSTRACT Consistent with guidelines from external auditing standards, experimental and survey research suggests that an internal audit function (IAF) can contribute in ways that lead to decreased external audit fees; however, research using archival methodologies generally finds either no relation or a positive relation between proxies for IAF contribution and external audit fees. In this paper, we provide new evidence using a unique and previously unavailable data set to develop archival proxies of internal audit contribution. We find that archival proxies for the contribution of internal audit based on Statement of Audited Standards (SAS) No. 65 are associated with lower unexpected external audit fees. We show that proxies used in prior archival studies are limited in their ability to capture the IAF's potential contribution to external auditing, and suggest that the lack of high-quality proxies could help explain the divergent findings of experimental and survey-based studies in relation to archival studies in this area. In addition, our results suggest that fee reductions are associated with the direct assistance of, but not with reliance on, work previously performed by the internal auditor. Overall, our results provide evidence consistent with external auditing standards and with results from prior experimental and survey studies suggesting that IAFs can indeed contribute in ways that lead to lower external audit fees. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors are subject to restrictions.

The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision

2011 ◽  
Vol 86 (6) ◽  
pp. 2131-2154 ◽  
Author(s):  
William F. Messier ◽  
J. Kenneth Reynolds ◽  
Chad A. Simon ◽  
David A. Wood
Keyword(s):  
Internal Audit ◽  
Management Training ◽  
Audit Fees ◽  
Data Availability ◽  
External Audit ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Management Positions ◽  
The Many

ABSTRACT This study examines how using the internal audit function (IAF) as a management training ground (MTG) affects external audit fees and the external auditors' perceptions of the IAF. Over half of all companies that have an IAF specifically hire internal auditors with the purpose of rotating them into management positions (or cycle current employees into the IAF for a short stint before promoting them into management positions). Using archival data, we find that external auditors charge higher fees to companies that use the IAF as a MTG. Using an experiment, we provide evidence as to why fees are higher. Specifically, we find that external auditors perceive internal auditors employed in an IAF used as a MTG to be less objective but not less competent than internal auditors employed in an IAF not used as a MTG. These results have important implications for the many companies that use their IAF as a MTG. Data Availability: Contact the authors. Data provided by the Institute of Internal Auditors Research Foundation are subject to restrictions.

The Value to Management of Using the Internal Audit Function as a Management Training Ground

2018 ◽  
Vol 32 (2) ◽  
pp. 121-140 ◽  
Author(s):  
Joseph V. Carcello ◽  
Marc Eulerich ◽  
Adi Masli ◽  
David A. Wood
Keyword(s):  
Financial Reporting ◽  
Internal Audit ◽  
Management Training ◽  
Audit Fees ◽  
Senior Management ◽  
Data Availability ◽  
Negative Consequences ◽  
Internal Auditors ◽  
Internal Audit Function ◽  
Survey Results

SYNOPSIS This study examines how using the internal audit function as a management training ground (MTG) impacts managers' reliance on internal auditor recommendations. While prior research suggests that using internal audits as a MTG can adversely affect financial reporting quality, external audit fees, and internal audit efficiency, many internal audit functions use this practice. We study how this practice influences another important stakeholder—senior management. Based on survey results of 355 chief audit executives (CAEs), we find that CAEs perceive senior management to be more likely to use recommendations from MTG internal auditors than non-MTG internal auditors. To bolster the validity of these findings and provide evidence as to why this is the case, we conduct two experiments with 147 executives (47 MTurk workers) with an average of about 25 (13) years of experience. The experimental results confirm the survey results. We also find that the key reason why managers rely more on MTG than non-MTG recommendations is that MTG internal auditors are perceived to have more natural ability, which is a key driver in managers' reliance decisions. Taken together, our research provides the first empirical evidence that there are positive consequences to using the internal audit function as a MTG in contrast to the negative consequences previously reported. Data Availability: Please contact the authors.

scholarly journals The effects of human resources in internal audit on external audit pricing decision

2018 ◽  
Vol 15 (4-1) ◽  
pp. 165-180
Author(s):  
Moon Kyung Cho
Keyword(s):  
Small Firms ◽  
Internal Audit ◽  
Audit Fees ◽  
Auditor Independence ◽  
Professional Judgment ◽  
External Audit ◽  
Internal Auditor ◽  
Internal Auditors ◽  
External Auditors ◽  
General Internal

This study presents evidence that external audit fees are negatively and significantly associated with the proportion of general internal auditors. Further, external audit hours are negatively and significantly associated with the proportion of general auditors without affecting external unit audit price. In addition, the results of the data adjusted for firm size suggest that audit fees and audit hours decrease for smaller firms as the proportion of general internal auditor increases. The result implies that both small firms and their external auditors are encouraged to utilize more general internal auditors in performing an external audit. The author finds no evidence that external audit fees are associated with internal auditor expertise or experience. This shows that external auditors are not likely to rely on internal auditors’ professional judgment in performing an external audit due to reduced auditor independence.

The Influence of Internal Audit on External Audit

2019 ◽  
pp. 1-25
Author(s):  
Ana Silva ◽  
Helena Inácio ◽  
Elisabete Vieira
Keyword(s):  
Significant Influence ◽  
Audit Quality ◽  
Internal Audit ◽  
Audit Fees ◽  
External Audit ◽  
Internal Auditors ◽  
External Auditors ◽  
The Relationship

The main purpose of this chapter is to analyze the relationship between internal and external audit and its effect on external audit fees, through a questionnaire addressed to the external auditors of Portugal and Spain. It obtained 131 answers for Portugal and 149 answers for Spain. According to the results, the competencies and characteristics of internal auditors, as well as the type of activities performed by them and the communication between internal and external auditors, have a significant influence on the decision of using the internal audit work. However, the Portuguese external auditors do not consider this influence to be so significant that it affects the number of substantive tests, the quality of external audit, and external audit fees. However, for Spanish auditors using internal audits decreases the planned hours, the number of control and substantive tests, and improves external audit quality, but does not reflect in the fees to be charged to the client.

The relationship between adherence of internal audit with standards and audit fees

2016 ◽  
Vol 14 (1) ◽  
pp. 72-85 ◽  
Author(s):  
Abdulaziz Alzeban ◽  
Nedal Sawan
Keyword(s):  
Stock Exchange ◽  
Internal Audit ◽  
Performance Standards ◽  
Audit Fees ◽  
International Standards ◽  
Annual Reports ◽  
External Audit ◽  
Content Type ◽  
Internal Auditors ◽  
The Relationship

Purpose This study aims to examine the relationship between external audit fees and the adherence of internal audit with the International Standards for the Professional Practice of Internal Auditing (ISPPIA), i.e. whether such adherence has a relation with lower or higher audit fees. Design/methodology/approach Data were gathered from the annual reports and 229 chief internal auditors (CIAs) from UK companies listed on the London Stock Exchange. Findings The result suggests that, in fact, higher external audit fee is related with adherence with both attribute and performance standards. Also, there is an association between audit fees and budget for the internal audit with longer tenure of the CIA. Originality/value Given the lack of attention to the potential impact of the ISPPIA on audit fees by previous researchers, any insight provided by the study in this regard will represent a valuable contribution to the literature in complementing what already exists and pointing the way to further research opportunities.

External Auditors' Involvement in the Internal Audit Function's Work Plan and Subsequent Reliance Before and After a Negative Audit Discovery

2016 ◽  
Vol 35 (4) ◽  
pp. 159-173 ◽  
Author(s):  
Byron J. Pike ◽  
Lawrence Chui ◽  
Kasey A. Martin ◽  
Renee M. Olvera
Keyword(s):  
Internal Control ◽  
Internal Audit ◽  
Internal Controls ◽  
Professional Standards ◽  
Data Availability ◽  
Internal Auditors ◽  
External Auditors ◽  
Internal Audit Function ◽  
Anchoring Bias ◽  
Before And After

SUMMARY To reduce redundancies and increase efficiency in the evaluation of internal controls (PCAOB 2007, 402–403), professional standards encourage coordination between external auditors and their clients' internal audit function (IAF). Recent surveys of internal auditors find that a component of this coordination is external auditors' involvement in developing the IAF's audit plans. Nevertheless, it is not known how such involvement affects external auditors' reliance on the internal control test work of the IAF, either before or after a negative audit discovery. Based on an experiment with 107 experienced auditors, we find that external auditors involved in the development of the IAF's audit plan perceive the IAF as more objective and that both objectivity and involvement contribute to these auditors' placing more reliance on the IAF as compared to external auditors with no involvement. This initial reliance results in the involved auditors' proposing reductions to the audit budget and re-performing less of the IAF's work. Consistent with an anchoring bias, we find that involvement leads to external auditors' continuing to place greater reliance on the IAF's work, even after they become aware of a negative audit discovery that should not have occurred had the client's controls been effective. Data Availability: Data are available from the authors on request.

Audited Financial Reporting and Voluntary Disclosure of Corporate Social Responsibility (CSR) Reports

2016 ◽  
Vol 28 (2) ◽  
pp. 53-76 ◽  
Author(s):  
Long Chen ◽  
Bin Srinidhi ◽  
Albert Tsang ◽  
Wei Yu
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Financial Reporting ◽  
Voluntary Disclosure ◽  
Stock Price ◽  
Reporting Quality ◽  
Positive Association ◽  
Audit Fees ◽  
Csr Reporting ◽  
Corporate Social

ABSTRACT Prior studies show that corporate social responsibility (CSR) reporting is informative to investors but lacks credibility. This study examines whether a commitment to audits of financial outcomes, proxied by audit fees, is associated with greater CSR reporting credibility. We find that audit fees are positively associated with the likelihood of standalone CSR report issuance, and this positive association becomes stronger when managers perceive a greater need for credibility, i.e., when CSR reports are longer or issued with external assurance, when firms have strong CSR concerns, and when reports are issued sporadically. Corroborating our results, we find that CSR reports issued by firms committing to high audit fees accelerate the incorporation of future earnings information into current stock price. Taken together, our findings suggest that a commitment to higher financial reporting quality has the potential to bring positive externality to firms' nonfinancial disclosures and ultimately affects the issuance of CSR reports.

The Influence of Country-Level Religiosity on Accounting Conservatism

2018 ◽  
Vol 18 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Matt Bjornsen ◽  
Chuong Do ◽  
Thomas C. Omer
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Positive Association ◽  
Accounting Conservatism ◽  
Data Availability ◽  
Country Level ◽  
Legal Enforcement ◽  
Prior Literature ◽  
Reported Earnings ◽  
High Degree

ABSTRACT This study investigates how religiosity (i.e., the strength of religion) differences across countries influence an important characteristic of financial reporting, accounting conservatism. Prior literature suggests that religious individuals are more risk averse and have higher ethical standards, while accounting conservatism has been shown to reduce various risks to the firm (e.g., bankruptcy and stock price crashes) at the expense of higher reported earnings. We find that managers in more religious societies report more conservatively. Specifically, our cross-country analysis reveals that firms headquartered in countries with higher levels of religiosity exhibit, on average, higher accounting conservatism in financial reporting. This positive association is stronger in countries following IFRS or U.S. GAAP, and weaker in countries with a high degree of uncertainty avoidance, strong legal enforcement, and countries with greater numbers of religions. JEL Classifications: G34; M41; Z12. Data Availability: Data are available from the public sources cited in the text.

scholarly journals Audit committee compensation, best practices and audit fees

2019 ◽  
Vol 50 (1) ◽  
Author(s):  
Bum-Jin Park
Keyword(s):  
Best Practices ◽  
Financial Reporting ◽  
Regression Models ◽  
Audit Committee ◽  
Best Practice ◽  
Audit Quality ◽  
Positive Association ◽  
Audit Fees ◽  
High Quality ◽  
The Relationship

Background: It is extremely important that an audit committee (AC) monitors a company’s financial reporting process, and that the committee engages a high-quality auditor to carry this out effectively. Prior research on ACs has paid much attention to the relationship between AC best practices and audit fees (AF). Although compensation is a means of aligning interests between ACs and stakeholders, previous studies have neglected the complementary interaction between AC compensation and compliance with best practices on audit quality.Objectives: The purpose of this study is to investigate how compensation for ACs affects AF, and how the association is moderated by compliance with best practices to capture effective monitoring.Method: The regression models are estimated to verify how the relationship between AC compensation and AF is moderated by AC compliance with best practice. Moreover, the logistic regression models are used to investigate how the relationship between AC compensation and the opportunistic achievement of earnings goals is moderated by AC compliance with best practice.Results: The findings show a positive association between the levels of compensation AC members receive and AF, which is reinforced in firms that have ACs that comply with all best practices.Conclusion: The results suggest that highly paid ACs engage high-quality auditors to complement their function of monitoring management and AC compensation and compliance with best practices are complementary to enhance audit quality. This study thus provides the interesting insights that can be applicable to countries with requirements relating to the compensation schemes for ACs or the formation of the AC.

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