Internal Audit Quality: Insights from Audit Committee Members, Senior Management, and Internal Auditors

Abstract

SUMMARY We investigate the concept of internal audit function (IAF) quality from a multi-stakeholder perspective through conducting 36 interviews with key IAF stakeholder groups: audit committee members, senior management, internal audit executives, and outsourced internal audit partners from the major accounting firms. We adapt established quality frameworks that suggest quality is a five-dimensional construct (including input, process, output, outcome, and contextual dimensions) to the internal audit context. We find that the various stakeholder groups focus on different quality dimensions in their evaluation of IAF quality. For example, the groups focus on the process dimension (internal audit executives), output dimension (audit committee members and internal audit partners), or outcome dimension (senior management and internal audit partners). We also find that the five dimensions comprise multiple indicators of IAF quality. We conduct six supplementary interviews with external audit partners to compare their insights on IAF quality to the focal IAF stakeholder groups. External auditors evaluate quality via the output dimension after an ex ante assessment focusing on the input dimension. Finally, we contribute to the IAF quality literature by developing a multi-stakeholder IAF quality framework.

New Perspectives in Internal Audit Research: A Structured Literature Review

“…Unsurprisingly, the two main IAQ indicators that emerge from the literature are (i) the degree to which the external auditor relies on the work of the internal audit (Abbott et al, , ; Bhattacharjee et al, ; Chen et al, ; Davidson et al, ; Issa and Kogan, ; Malaescu and Sutton, ; Munro and Stewart, ; Pizzini et al, ; Prawitt et al, ; Singh et al, ), viewed as a proxy for the IAF's “work performance” (Desai et al, ; Trotman and Duncan, ), and (ii) the effectiveness of the audit committee (Abbott et al, , ; Anderson et al, ; Carcello et al, ; Christ et al, ; Davies, ; D'Onza, Selim, Melville, and Allegrini, ; Mat Zain and Subramaniam, ; Regoliosi and d'Eri, ), considered as the main proxy for independence…”

“…In addition, some recent studies show the difficulty of recruiting highly qualified candidates to the IAF given their negative perceptions of this function (Bartlett et al, , ; Burton et al, ). However, Trotman and Duncan () argue that the use of the IAF as a training ground for senior managers is perceived as a positive signal regarding internal auditor competence and that it informs the recruitment of good candidates.…”

“…The main weakness of the first group of articles on IAQ is that they focus almost exclusively on independence and competence criteria. Similarly to the literature on external audit quality, these studies overlook other important aspects of audit quality (Trotman and Duncan, ). In addition, the external auditor's viewpoint dominates the analyzed data, indicating that prior literature, despite using a variety of methodologies, has largely neglected the perspectives of other stakeholders.…”

“…They consider that there can be no single definition of IAQ because this concept is a matter of stakeholder perception. On this topic, Roussy and Brivot (), as well as Trotman and Duncan (), have drawn inspiration from Knechel et al's () paper on external audit quality. Roussy and Brivot () used a mixed‐method design to explore the IAQ perceptions of the IIA, external auditors, audit committee members, and internal auditors.…”

“…More concretely, the IAF, once considered a deathtrap for less competent practitioners (Roussy, ), is increasingly recognized as an important agent of organizational change (IIA Research Foundation, ; IIA Research Foundation and Proviti, ). From this perspective, internal auditors' competencies have gained newfound respect (Roussy and Brivot, ; IIA Research Foundation and Proviti, ; Trotman and Duncan, ). In the post‐SOX era, board members on the audit committee have seen a considerable increase in their responsibilities as directors, but not being involved in the organization's day‐to‐day operations or its risk management and control process, they now rely extensively on the IAF for “comfort” (Sarens, De Beelde, and Everaert, ; IIA Research Foundation and Proviti, ).…”