Internal Audit Competency Changes in Response to Financial Reporting Quality Failures

56 Pages Posted: 22 Aug 2018 Last revised: 27 Jan 2021

See all articles by Melissa Renschler

Melissa Renschler

Suffolk University; Bentley University - Department of Accountancy

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Date Written: November 5, 2019

Abstract

Limited data availability on the internal audit function (IAF) has constrained research on the topic. This study uses manually collected data from LinkedIn of internal audit personnel that overcome certain limitations of previous survey-based data. Using this longitudinal data, we find that IAF competency is inversely related to the propensity of material weaknesses and misstatements. We also find that IAF competency improves 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 longer auditor tenure and higher audit committee accounting expertise. These findings suggest that while there is no regulatory oversight governing the IAF, certain auditor and governance characteristics influence 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

Renschler, Melissa and Hoitash, Rani and Hoitash, Udi, Internal Audit Competency Changes in Response to Financial Reporting Quality Failures (November 5, 2019). Available at SSRN: https://ssrn.com/abstract=3229966 or http://dx.doi.org/10.2139/ssrn.3229966

Melissa Renschler

Suffolk University ( email )

Boston, MA 02108
United States

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

HOME PAGE: http://www.xbrlresearch.com

Udi Hoitash

Northeastern University - Accounting Group ( email )

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

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