The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency

Abstract

SYNOPSIS: This paper considers the need for an internal audit report ͑IAR͒ to increase governance transparency for external stakeholders. While the internal audit function is an important and distinct governance mechanism, external stakeholders typically lack the direct relevant information about the function that is available to insiders from other governance mechanisms ͑e.g., management, audit committee, and external auditor͒. This information asymmetry is inconsistent with current objectives for governance, transparency, and accountability in the Sarbanes-Oxley era. We evaluate potential IAR disclosure benefits ͑e.g., increased transparency and accountability͒ and costs ͑e.g., increased information load, legal exposure, and reporting costs͒ using a literature review and the results of 18 semi-structured interviews with analysts, audit committee members, internal auditors, and policymakers. We also propose a model IAR that provides basic descriptive information about the internal audit function for stakeholders to evaluate when considering overall governance within an organization. Ultimately, we conclude that an IAR has potential to complement existing governance disclosures, increase stakeholder confidence in governance quality, and motivate internal audit diligence. However, further research is needed to guide specific report content and to evaluate benefits and costs in both voluntary and mandatory disclosure environments.

Does Internal Audit Function Quality Deter Management Misconduct?

“…suggest that IAF quality is a good predictor of accounting-related management misconduct and provide empirical evidence of the claims of stakeholders in Archambeault et al (2008) that disclosure of IAF quality could be beneficial to the market.…”

Comment apprécier la compétence d’un auditeur interne ? L’opinion des membres du comité d’audit

“…Les relations entre l'audit interne et le comité d'audit L'audit interne est l'un des pivots de la gouvernance des organisations (Archambeault, DeZoort et Holt, 2008 ;Gramling et autres, 2004 ;Holt et DeZoort, 2009 ;Mat Zain et Subramaniam, 2007 ;Prawitt, Smith et Wood, 2009 ;Rezaee, 2005). Ce point de vue est partagé par les directeurs de la fonction d'audit interne qui se considèrent comme faisant partie intégrante de la gouvernance (Buranby et Hass, 2009, p. 822).…”

Does Internal Audit Function Quality Deter Management Misconduct?

“…External stakeholders such as investors generally lack information related to the IAF. Survey and experimental research report that disclosure of information related to the IAF would increase stakeholder confidence in governance quality and potentially affect investment decisions (Archambeault et al 2008;Holt and DeZoort 2009). I find that IAF quality is negatively associated with accounting-related management misconduct even after controlling for observable predictors of accountingrelated management misconduct (see Dechow et al 2011).…”

“…This provides insight into whether disclosures of IAF quality would be informative to investors. Interviewees in Archambeault et al (2008) state that a report on internal audit would not only be useful to various stakeholders, but could also increase IAF accountability and incentives to perform effectively. Holt and DeZoort (2009) found that participants in their experiment were more confident in financial reporting reliability and perceived the oversight of financial reporting to be more effective when provided with an internal audit report.…”