Internal Audit Quality and Earnings Management
Douglas F. Prawitt
Brigham Young University
Jason L. Smith
University of Nevada, Las Vegas
David A. Wood
Brigham Young University - School of Accountancy
September 11, 2008
The Accounting Review, Vol. 84, No. 4, pp. 1255-1280, 2009
Internal auditors often perform work that is relevant to their host entities' financial reporting processes, yet little research attention has focused on the effects of internal auditing on companies' external financial reporting. Using a unique and previously unavailable data set, we investigate the relation between internal audit function (IAF) quality and earnings management. We measure IAF quality using a composite measure comprising six individual components of IAF quality based on SAS No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role in financial reporting. Earnings management is measured using two separate proxies, (1) abnormal accruals and (2) the propensity to meet or barely beat analysts' earnings forecasts. We find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.
Number of Pages in PDF File: 42
Keywords: Corporate Governance, Internal Audit Function, Internal Audit Quality, Earnings Management, Abnormal Accruals
JEL Classification: M41, M43, M49, M55, G34, G38Accepted Paper Series
Date posted: July 17, 2006 ; Last revised: May 11, 2010
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