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

Posted: 28 Jan 2009 Last revised: 20 May 2015

See all articles by William F. Messier, Jr.

William F. Messier, Jr.

NHH Norwegian School of Economics

J. Kenneth Reynolds

Florida State University

Chad Simon

Utah State University - School of Accountancy

David A. Wood

Brigham Young University - School of Accountancy

Date Written: March 1, 2010

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.

Keywords: Internal Audit Function, Internal Audit Quality, Management Training Ground, and External Audit Fees

JEL Classification: M41, M49, G34

Suggested Citation

Messier Jr, William F. and Reynolds, J. Kenneth and Simon, Chad A. and Wood, David A., The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor's Reliance Decision (March 1, 2010). Messier, W.F., J.K. Reynolds, C.A. Simon, and D.A. Wood. 2011. The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision. The Accounting Review 86 (6): 2131-2154., Available at SSRN: https://ssrn.com/abstract=1313806

William F. Messier Jr

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
678-386-8634 (Phone)

J. Kenneth Reynolds (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

Chad A. Simon

Utah State University - School of Accountancy ( email )

School of Accountancy
Jon M. Huntsman School of Business
Logan, UT 84322-3540
United States

David A. Wood

Brigham Young University - School of Accountancy ( email )

518 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
7,776
PlumX Metrics