Factors influencing outsourced IAF provider change: Do audit committee characteristics have a role in this change?
Keywords:
Audit committee; IAF, outsourced IAF provider; auditor change
Abstract
Outsourcing of internal audit function (IAF) to external provider such as audit firms becomes a widely spread phenomena among corporate business as it is associated with high-quality IAF and cost saving if it is compared with in-house IAF. This study aims to investigate the factors associated with external IAF provider change, particularly, on the effect of audit committee on this change, as it is the most corporate governance mechanism involved in suggesting, assigning, changing, and determining the audit fees for auditors. Using logistic regression for 572 observations for companies listed on Muscat Securities Market over the period 2005-2019 with outsourced IAF, this study finds that audit committee independence is positively associated with outsourced IAF provider change while audit committee size and meetings are negatively associated with such change. In additional analyses, this study also finds that audit committee independence is positively associated with outsourced IAF provider change if the change was from nonbig4 to big4 audit firms, whereas the finding suggests that audit committee financial expertise is positively associated with the change if the change was from big4 to non-big4 audit firms. To the authors’ best knowledge, this is the first study examining how audit committee affects outsourced IAF provider change, which is important for several policy-makers in companies and regulatory authorities.
References
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28. Mubako, G. (2019), “Internal audit outsourcing: A literature synthesis and future directions”, Australian Accounting Review, Vol. 29 No. 3, pp. 532-545.
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33. Sultana, N., Cahan S.F. and Rahman A. (2020), “Do gender diversity recommendations in corporate governance codes matter? Evidence from audit committees”, Auditing: A Journal of Practice & Theory, Vol. 39 No. 1, pp. 173-197.
34. The Business Research Company. 2019. Internal audit services global market report 2018. The Business Research Company, 2018 [cited 25 September 2019]. Available from https://www.thebusinessresearchcompany.com/report/internal-audit-services-global-market-report-2018.
2. Abbott, L.J., Parker S. and Peters G.F. (2004), “Audit committee characteristics and restatements”, Auditing: A Journal of Practice & Theory, Vol. 23 No. 1, pp. 69-87.
3. Abbott, L.J., Parker S. and Peters G.F. (2012) “Internal audit assistance and external audit timeliness”, Auditing: A Journal of Practice & Theory, Vol. 31 No. 4, pp. 3-20.
4. Abbott, L.J., Parker S., Peters G.F. and Rama D.V. (2007), “Corporate governance, audit quality, and the Sarbanes-Oxley Act: Evidence from internal audit outsourcing”, The Accounting Review, Vol. 82 No. 4, pp. 803-835.
5. Abdolmohammadi, M. (2013), “Correlates of co-sourcing/outsourcing of internal audit activities”, Auditing: A Journal of Practice & Theory, Vol. 32 No. 3, pp. 69-85.
6. Adams, M.B. (1994), “Agency theory and the internal audit”, Managerial Auditing Journal, Vol. 9 No. 8, pp. 8-12.
7. Al-Akra, M., Abdel-Qader W. and Billah M. (2016), “Internal auditing in the Middle East and North Africa: A literature review”, Journal of International Accounting, Auditing and Taxation, Vol. 26 No., pp. 13-27.
8. Anderson, D., Francis J.R. and Stokes D.J. (1993), “Auditing, directorships and the demand for monitoring”, Journal of Accounting and Public Policy, Vol. 12 No. 4, pp. 353-375.
9. Baatwah, S.R., Al-Ebel A.M. and Amrah M.R. (2019), “Is the type of outsourced internal audit function provider associated with audit efficiency? Empirical evidence from Oman”, International Journal of Auditing, Vol. 23 No. 3, pp. 424-443.
10. Baatwah, S.R. and Al-Qadasi A.A. (2020), “Determinants of outsourced internal audit function: a further analysis”, Eurasian Business Review, Vol. 10 No. 4, pp. 629-659.
11. Barr-Pulliam, D. 2018. Engaging third parties for internal audit activities. The Institute of Internal Auditors Research Foundation 2016 [cited 14/4/2018 2018]. Available from https://www.iia.nl/SiteFiles/Downloads/IIARF%20CBOK%20Engaging%20Third%20Parties%20For%20IA%20Activities%20Jan%202016_0.pdf.
12. Berle, A.A. and Means G.G.C. (1932), The modern corporation and private property. New Brunswick, USA: Transaction publishers.
13. Brocard, M., Franke B. and Voeller D. (2018), “Enforcement actions and auditor changes”, European Accounting Review, Vol. 27 No. 3, pp. 407-436.
14. Brooks, L.Z., Gill S. and Wong-On-Wing B. (2019), “Corporate social responsibility risk and auditor–client retention”, International Journal of Auditing, Vol. 23 No. 1, pp. 95-111.
15. Burton, J.C. and Roberts W. (1967), “A study of auditor changes”, Journal of Accountancy (pre-1986), Vol. 123 No. 000004, pp. 31.
16. Cairney, T. and Stewart Errol G. (2019), “Client industry characteristics and auditor changes”, Review of Accounting and Finance, Vol. 18 No. 2, pp. 245-267.
17. Carey, P., Subramaniam N. and Ching K.C.W. (2006), “Internal audit outsourcing in Australia”, Accounting and Finance, Vol. 46 No. 1, pp. 11-30.
18. DeFond, M. and Zhang J. (2014), “A review of archival auditing research”, Journal of Accounting and Economics, Vol. 58 No. 2–3, pp. 275-326.
19. Eshagniya, A. and Salehi M. (2017), “The impact of financial restatement on auditor changes: Iranian evidence”, Asia Pacific Journal of Innovation and Entrepreneurship, Vol. 11 No. 3, pp. 366-390.
20. Fontaine, R., Letaifa S.B. and Herda D. (2013), “An interview study to understand the reasons clients change audit firms and the client's perceived value of the audit service”, Current Issues in Auditing, Vol. 7 No. 1, pp. A1-A14.
21. Gujarati, D.N. and Porter D.C. (2009), Basic econometrics. 5th ed. New York: McGraw-Hill/Irwin.
22. Heliodoro, P.A., Carreira F.A. and Lopes M.M. (2016), “The change of auditor: The Portuguese case”, Revista de Contabilidad, Vol. 19 No. 2, pp. 181-186.
23. Jensen, M.C. and Meckling W.H. (1976), “Theory of the firm: Managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
24. Jiang, L., William F. Messier J. and Wood D.A. (2020), “The association between internal audit operations-related services and firm operating performance”, Auditing: A Journal of Practice & Theory, Vol. 39 No. 1, pp. 101-124.
25. Klein, A. (2002), “Audit committee, board of director characteristics, and earnings management”, Journal of Accounting and Economics, Vol. 33 No. 3, pp. 375-400.
26. Laux, C. and Laux V. (2009), “Board committees, CEO compensation, and earnings management”, The Accounting Review, Vol. 84 No. 3, pp. 869-891.
27. Lin, S., Pizzini M., Vargus M. and Bardhan I.R. (2011), “The role of the internal audit function in the disclosure of material Weaknesses”, The Accounting Review, Vol. 86 No. 1, pp. 287-323.
28. Mubako, G. (2019), “Internal audit outsourcing: A literature synthesis and future directions”, Australian Accounting Review, Vol. 29 No. 3, pp. 532-545.
29. Prawitt, D.F., Sharp N.Y. and Wood D.A. (2012), “Internal audit outsourcing and the risk of misleading or fraudulent financial reporting: Did Sarbanes‐Oxley get it wrong?”, Contemporary Accounting Research, Vol. 29 No. 4, pp. 1109-1136.
30. Roberts, R.W., Glezen G.W. and Jones T.W. (1990), “Determinants of auditor change in the public sector”, Journal of Accounting Research, Vol. 28 No. 1, pp. 220-228.
31. Sarbanes-Oxley Act. (2002). “The public company accounting reform and investor protection”. US: US Congress.
32. Sarens, G., De Beelde I. and Everaert P. (2009), “Internal audit: A comfort provider to the audit committee”, The British Accounting Review, Vol. 41 No. 2, pp. 90-106.
33. Sultana, N., Cahan S.F. and Rahman A. (2020), “Do gender diversity recommendations in corporate governance codes matter? Evidence from audit committees”, Auditing: A Journal of Practice & Theory, Vol. 39 No. 1, pp. 173-197.
34. The Business Research Company. 2019. Internal audit services global market report 2018. The Business Research Company, 2018 [cited 25 September 2019]. Available from https://www.thebusinessresearchcompany.com/report/internal-audit-services-global-market-report-2018.
Published
2021-01-01
How to Cite
Saeed Rabea Baatwah, & Amer Mohammed Al-Shehri. (2021). Factors influencing outsourced IAF provider change: Do audit committee characteristics have a role in this change?. Journal of Arts, Literature, Humanities and Social Sciences, (63), 151-167. https://doi.org/10.33193/JALHSS.63.2021.384
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