Rotational Internal Audit Programs and Financial Reporting Quality: Do Compensating Controls Help?

67 Pages Posted: 21 Oct 2011 Last revised: 2 Apr 2015

See all articles by Margaret H. Christ

Margaret H. Christ

University of Georgia - Terry College of Business

Adi Masli

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

Date Written: April 1, 2015

Abstract

A report from the Institute of Internal Auditors finds that a majority of Fortune 500 companies systematically rotate internal auditors out of the internal audit function and into operational management (IIA 2009a). We use semi-structured interviews with 11 chief audit executives and 2 audit committee chairmen to develop an initial framework focusing on how this practice affects financial reporting quality. We then test these associations with archival data and find that companies that use a rotational staffing model for the internal audit function have significantly lower financial reporting quality than companies that do not. However, we find that several compensating controls identified from the interviews (e.g., consistency of IAF leadership or supervision, audit committee oversight, and management oversight and direction) can reduce this adverse financial reporting effect. We conclude that companies should consider the potential costs of using a rotational staffing model in the internal audit function and, if adopting this practice, should ensure the appropriate compensating controls are in place to mitigate such costs.

Keywords: internal audit function; accounting risk; management training ground; rotational staffing models; audit committee; financial reporting quality; compensating controls

JEL Classification: M41, M43, G34, M52

Suggested Citation

Christ, Margaret H. and Masli, Adi and Sharp, Nathan Y. and Wood, David A., Rotational Internal Audit Programs and Financial Reporting Quality: Do Compensating Controls Help? (April 1, 2015). Available at SSRN: https://ssrn.com/abstract=1946518 or http://dx.doi.org/10.2139/ssrn.1946518

Margaret H. Christ

University of Georgia - Terry College of Business ( email )

Athens, GA 30602-6254
United States
706-542-3602 (Phone)

Adi Masli

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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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