Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence

Posted: 19 Jun 2016

See all articles by Lawrence J. Abbott

Lawrence J. Abbott

University of Memphis

Brian Daugherty

University of Wisconsin - Milwaukee

Susan Parker

Santa Clara University

Gary F. Peters

University of Arkansas at Fayetteville

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2016

Abstract

In light of the growing importance of internal audit functions (IAF) and the limited archival evidence on internal audit quality, we examine an interactive model of IAF quality (comprised of competence and independence) to better understand the determinants of IAF effectiveness as a financial reporting monitor. Our tests support the hypothesis that the joint presence of competence and independence is a necessary antecedent to effective IAF financial reporting monitoring. In sum, our results show that, the answer to “what is the effect of internal audit competence (independence) on financial reporting quality?” is “it depends on the independence (competence) of the internal auditor.” Our study extends the understanding of IAF quality determinants in the realm of financial reporting as it relates to ongoing discussions by researchers, standard setters, regulators, and practitioners.

Keywords: internal audit; financial reporting quality; auditor independence; auditor competence

JEL Classification: D83; G39; M12; M41; M42

Suggested Citation

Abbott, Lawrence J. and Daugherty, Brian and Parker, Susan and Peters, Gary F., Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence (March 1, 2016). Journal of Accounting Research, Vol. 54, No. 1, 2016. Available at SSRN: https://ssrn.com/abstract=2796739

Lawrence J. Abbott

University of Memphis ( email )

Department of Accounting
Memphis, TN 38152
United States
901-678-4576 (Phone)
901-678-2685 (Fax)

Brian Daugherty

University of Wisconsin - Milwaukee ( email )

Sheldon B. Lubar School of Business
P.O. Box 742
Milwaukee, WI 53201-0742
United States
414-229-5737 (Phone)
414-229-5999 (Fax)

HOME PAGE: http://www4.uwm.edu/business/faculty/busfaculty/daugherty.cfm

Susan Parker

Santa Clara University ( email )

Leavey School of Business 500 El Camino Real
Santa Clara, CA 95053
United States
(408) 554-4899 (Phone)
(408) 554-5193 (Fax)

Gary F. Peters (Contact Author)

University of Arkansas at Fayetteville ( email )

Sam M. Walton College of Business
Department of Accounting
Fayetteville, AR 72701

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