Audit Fee Reductions from Internal Audit-Provided Assistance: The Incremental Impact of Internal Audit Characteristics

• Published in: Contemporary accounting research Vol. 29; no. 1; pp. 94 - 118
• Main Authors: Abbott, Lawrence J., Parker, Susan, Peters, Gary F.
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.03.2012; Canadian Academic Accounting Association
• Subjects: Accounting standards; Audit committees; Audit fees; Auditing; Audits; Fees & charges; Financial resources; Impact analysis; Internal audit functions; Internal auditing; Internal auditors; Organizational behaviour; Resource management; Studies; Subcontracting
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/j.1911-3846.2011.01072.x

We question whether audit committee oversight, resource commitments, and the sourcing of internal audit functions have value implications for external audit reliance on internal audit assistance. When evaluating the quality of internal audit, professional standards guide external auditors to consider the oversight of, and resource commitment to, the internal audit function. Alternatively, to promote higher quality, some organizations outsource internal audit services to independent outside auditors. However, oversight roles, resource commitments, and outsourcing strategies are not costless alternatives for strengthening internal audit functions. Despite the findings of prior research that internal audit quality and consequent external audit reliance on internal audit assistance are functions of these dimensions, little is known about the separable influence of these characteristics on the value of assistance provided. We introduce new measures of internal audit assistance, oversight influence, resource commitments, and their distinct impact on external audit fee reductions resulting from reliance on internal audit assistance. Our results are consistent with external auditors using internal auditors for higher value tasks (not just more tasks) when the audit committee oversight and/or resource commitments to internal audit functions increase. Although we find economic advantages for outsourced internal audit assistance, these advantages are mitigated by increases in audit committee oversight and resource commitments to in-house internal audit functions. Moreover, our results suggest that, to enhance the organizational status of internal audit, organizations should not only consider the official placement of the internal audit function, but also informal influences from the organization's oversight functions, including the executive suite and the audit committee. [PUBLICATION ABSTRACT]