Internal Auditor Turnover, Financial Reporting Quality, and Audit Risk Assessment

43 Pages Posted: 7 Oct 2019

See all articles by Kenneth L. Bills

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems

Hua‐Wei Huang

National Cheng Kung University - Accounting

Yi-Hung Lin

Monash University

David A. Wood

Brigham Young University - School of Accountancy

Date Written: September 2019

Abstract

Internal audit serves a valuable monitoring role inside of companies; yet, we understand relatively little about factors that affect internal audit’s ability to monitor financial reporting. We study one factor — how turnover of the chief audit executive (CAE) position influences financial reporting quality and audit risk assessment. Using data from Taiwan where companies are required to disclose when and why CAEs change position, we find that a CAE turnover event is associated with a significant increase in the odds of a financial statement misstatement and an increase in discretionary accruals. Furthermore, we find that the relation only holds for firms with forced CAE changes (i.e., demotions, dismissals, or resignations) and not for unforced changes (i.e., lateral moves in the company, promotions, retirements, etc.). We exclude observations with contemporaneous CEO, CFO, or auditor switches and control for changes in signing audit partners. Results are robust to a generalized difference-in-difference design that includes both year and company fixed effects. We corroborate these findings by examining external auditors’ response to CAE turnover and find that external auditors charge higher fees the year there is a CAE change. The results provide evidence of the important monitoring role of internal auditing, and especially of the critical role the CAE plays in the internal audit function.

Keywords: internal auditor turnover, financial reporting quality, audit risk, chief audit executive (CAE)

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

Suggested Citation

Bills, Kenneth L. and Huang, Hua-Wei and Lin, Yi-Hung Jerry and Wood, David A., Internal Auditor Turnover, Financial Reporting Quality, and Audit Risk Assessment (September 2019). Available at SSRN: https://ssrn.com/abstract=3464557 or http://dx.doi.org/10.2139/ssrn.3464557

Kenneth L. Bills

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Hua-Wei Huang

National Cheng Kung University - Accounting ( email )

1 Ta-Hsueh Road
Tainan, 701
Taiwan

Yi-Hung Jerry Lin

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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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