The Effects of Using the Internal Audit Function as a Management Training Ground and Audit Committee Oversight on Financial Reporting Quality
Margaret H. Christ
University of Georgia - Terry College of Business
University of Arkansas - Sam M. Walton College of Business
Nathan Y. Sharp
Texas A&M University - Department of Accounting
David A. Wood
Brigham Young University - School of Accountancy
November 20, 2013
Prior studies report that a majority of Fortune 500 companies systematically rotate internal auditors out of the internal audit function and into operational management. We examine whether reduced financial reporting quality is an unintended consequence of this popular practice. We find that companies that use the internal audit function as a management training ground have significantly lower financial reporting quality than companies that do not. We also find that strong audit committee oversight reduces, but does not completely eliminate, this adverse financial reporting effect. We conclude that companies should consider the potential costs of using the internal audit function as a management training ground and ensure the appropriate corporate governance mechanisms are in place to mitigate such costs.
Number of Pages in PDF File: 56
Keywords: internal audit function; accounting risk; management training ground; audit committee; financial reporting quality
JEL Classification: M41, M43, G34, M52working papers series
Date posted: October 21, 2011 ; Last revised: November 21, 2013
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