Abstract

https://ssrn.com/abstract=1333710
 
 

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Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong?


Douglas F. Prawitt


Brigham Young University

Nathan Y. Sharp


Texas A&M University - Department of Accounting

David A. Wood


Brigham Young University - School of Accountancy

2012

Contemporary Accounting Research, Vol. 29, No. 4, 2012

Abstract:     
The Sarbanes-Oxley Act (SOX) prohibits companies from outsourcing internal audit work to their external audit provider. Competing predictions on the effects of this prohibition stem from two academic arguments relating to the provision of nonaudit services by the external auditor: knowledge spillover and economic bonding. Using proprietary data, we investigate whether companies that outsourced internal audit work to their external auditor pre-SOX had a higher risk of misleading or fraudulent external financial reporting (accounting risk). Consistent with the knowledge spillover argument, our results indicate that prior to SOX, outsourcing internal audit work to the external auditor is associated with lower accounting risk as compared to keeping the internal audit function (IAF) entirely in-house or outsourcing the work of the IAF to a third party other than the external auditor. The magnitude of the relation is significant, as outsourcing to the external auditor is associated with a 23 percent reduction in accounting risk relative to firms that kept the IAF in-house.

Number of Pages in PDF File: 47

Keywords: Internal Audit Function, Outsourcing, Sarbanes-Oxley Act, Corporate Governance, Financial Reporting Quality, and Accounting Risk

JEL Classification: M41, M43, M49, M55, G34, G38, K22


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Date posted: January 29, 2009 ; Last revised: February 5, 2015

Suggested Citation

Prawitt, Douglas F. and Sharp, Nathan Y. and Wood, David A., Internal Audit Outsourcing and the Risk of Misleading or Fraudulent Financial Reporting: Did Sarbanes-Oxley Get It Wrong? (2012). Contemporary Accounting Research, Vol. 29, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=1333710 or http://dx.doi.org/10.2139/ssrn.1333710

Contact Information

Douglas F. Prawitt
Brigham Young University ( email )
Provo, UT 84602
United States
801-422-2351 (Phone)
801-422-0621 (Fax)
Nathan Y. Sharp
Texas A&M University - Department of Accounting ( email )
4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

David A. Wood (Contact Author)
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
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