Corporate Governance, Audit Quality and the Sarbanes-Oxley Act: Evidence from Internal Audit Outsourcing

Posted: 20 Feb 2007

See all articles by Lawrence J. Abbott

Lawrence J. Abbott

University of Memphis

Susan Parker

Santa Clara University

Gary F. Peters

University of Arkansas at Fayetteville

Dasaratha V. Rama

Florida International University (FIU)

Multiple version iconThere are 2 versions of this paper

Abstract

This study extends current literature related to non-audit services by investigating internal audit outsourcing to the external auditor. We posit that certain types of internal audit outsourcing (i.e. those which are non-routine, and thus tend to be non-recurring in nature) are unlikely to lead to economic bonding, while offering significant potential for improvements in audit coverage and scope when provided by the external auditor. Alternatively, outsourcing routine internal audit tasks is more likely to lead to economic bonding, as well as potentially threatening internal auditor independence. Our results are consistent with firms with independent, active and expert audit committees being less likely to outsource routine internal auditing activities to the external auditor. However, the outsourcing of non-routine internal audit activities such as special projects and EDP consulting are not negatively related to effective audit committees. Additionally, outsourcing of either type of internal audit activity to an outside service provider other than the external auditor is not related to effective audit committees. Collectively, we interpret these findings as supportive of an effective audit committee's ability to monitor the sourcing of the firm's total (i.e. internal and external) audit coverage, while simultaneously exhibiting concern for external auditor independence.

Keywords: Internal Audit, Outsourcing, Audit Committees, Audit Quality

Suggested Citation

Abbott, Lawrence J. and Parker, Susan and Peters, Gary F. and Rama, Dasaratha, Corporate Governance, Audit Quality and the Sarbanes-Oxley Act: Evidence from Internal Audit Outsourcing. Accounting Review, Vol. 82, 2007. Available at SSRN: https://ssrn.com/abstract=963536

Lawrence J. Abbott

University of Memphis ( email )

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

Susan Parker (Contact Author)

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

University of Arkansas at Fayetteville ( email )

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

Dasaratha Rama

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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