Are Internal Audits Associated with Reductions in Perceived Risk?

41 Pages Posted: 18 May 2017 Last revised: 24 Mar 2020

See all articles by Joseph V. Carcello

Joseph V. Carcello

University of Tennessee

Marc Eulerich

University of Duisburg-Essen, Mercator School of Management

Adi Masli

University of Arkansas - Sam M. Walton College of Business

David A. Wood

Brigham Young University - School of Accountancy

Date Written: March 23, 2020

Abstract

We examine whether internal auditing provides value to organizations by reducing risk. We compare the changes in risks between audited business units and matched non-audited units within the same company. This design allows us to isolate the importance of an internal audit while holding constant changes in risk due to the organization and time period. Based on ratings from the heads of audited and non-audited units, we find that managers of audited units perceive a greater decline in risk as well as a greater increase in performance compared to managers of non-audited units. We also find that companies that have had a quality assurance review and are used as a management training ground are associated with greater reductions in risk and improved overall performance. Our study contributes to the academic literature by documenting a new facet of internal audit benefits—risk reduction—and internal audit characteristics that increase risk reduction.

Keywords: Internal Audit, Risk Management, Operational Risk, Financial Risk, Compliance Risk

JEL Classification: M4, M40, M41, M42, G30

Suggested Citation

Carcello, Joseph V. and Eulerich, Marc and Masli, Adi and Wood, David A., Are Internal Audits Associated with Reductions in Perceived Risk? (March 23, 2020). Available at SSRN: https://ssrn.com/abstract=2970045 or http://dx.doi.org/10.2139/ssrn.2970045

Joseph V. Carcello

University of Tennessee ( email )

Department of Accounting & Information Management
629 Stokely Management Center
Knoxville, TN 37996-0560
United States
865-974-1757 (Phone)
865-974-4631 (Fax)

Marc Eulerich

University of Duisburg-Essen, Mercator School of Management ( email )

Lotharstrasse 65
Duisburg, 47057
Germany
00492033792600 (Phone)

HOME PAGE: http://www.msm.uni-due.de/ircg

Adi Masli

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

Fayetteville, AR 72701
United States

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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