Abstract

http://ssrn.com/abstract=916081
 
 

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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

Abstract:     
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, G38

Accepted Paper Series


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Date posted: July 17, 2006 ; Last revised: May 11, 2010

Suggested Citation

Prawitt, Douglas F. and Smith, Jason L. and Wood, David A., Internal Audit Quality and Earnings Management (September 11, 2008). The Accounting Review, Vol. 84, No. 4, pp. 1255-1280, 2009. Available at SSRN: http://ssrn.com/abstract=916081

Contact Information

Douglas F. Prawitt (Contact Author)
Brigham Young University ( email )
Provo, UT 84602
United States
801-422-2351 (Phone)
801-422-0621 (Fax)
Jason L. Smith
University of Nevada, Las Vegas ( email )
4505 S. Maryland Parkway
Las Vegas, NV 89154
United States
David A. Wood
Brigham Young University - School of Accountancy ( email )
529 TNRB
Brigham Young University
Provo, UT 84602
United States
801-422-8642 (Phone)
801-422-0621 (Fax)
HOME PAGE: http://marriottschool.byu.edu/employee/employee.cfm?emp=daw44
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