Internal Audit Competency Changes in Response to Financial Reporting Quality Failures

60 Pages Posted: 22 Aug 2018 Last revised: 2 Jun 2019

See all articles by Melissa Reville

Melissa Reville

Bentley University - Department of Accountancy

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: May 30, 2019

Abstract

Limited data availability on the internal audit function (IAF) has constrained research on the topic. This study uses unique, manually collected data from LinkedIn on internal audit personnel that overcomes certain limitations of previous survey-based data. Using this longitudinal data, we test whether IAF competency is associated with financial reporting failures and whether IAF competency improves after financial reporting failures. We find that IAF competency is inversely related to the propensity for material weakness disclosures and restatements. We also find a significant increase in IAF competency in the year following material weakness and restatement disclosures. Importantly, we document that the increase in competency is not uniform across firms and is greater in firms with higher audit committee commitment toward the IAF, lower audit committee accounting expertise, and when the CFO lacks accounting expertise. These findings suggest that while there is no regulatory oversight governing the IAF, certain audit committees and executives recognize its value. Regulators that have focused on improving financial reporting quality by enhancing oversight over external auditors and audit committees should also consider focusing on the IAF.

Keywords: Internal Audit Function, Internal Audit Competency, Financial Reporting Quality, Material Weakness Disclosure, Restatements, LinkedIn

JEL Classification: M40, M41, M42

Suggested Citation

Reville, Melissa and Hoitash, Rani and Hoitash, Udi, Internal Audit Competency Changes in Response to Financial Reporting Quality Failures (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3229966 or http://dx.doi.org/10.2139/ssrn.3229966

Melissa Reville

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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