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Rotational internal audit programs and financial reporting quality: Do compensating controls help?

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  • Christ, Margaret H.
  • Masli, Adi
  • Sharp, Nathan Y.
  • Wood, David A.

Abstract

A report from the Institute of Internal Auditors finds that a majority of Fortune 500 companies systematically rotate internal auditors out of the internal audit function and into operational management (IIA, 2009a). We use semi-structured interviews with 11 chief audit executives and 2 audit committee chairmen to develop an initial framework focusing on how this practice affects financial reporting quality. We then test these associations with archival data and find that companies that use a rotational staffing model for the internal audit function have significantly lower financial reporting quality than companies that do not. However, we find that several compensating controls identified from the interviews (e.g., consistency of IAF leadership or supervision, audit committee oversight, and management oversight and direction) can reduce this adverse financial reporting effect. We conclude that companies should consider the potential costs of using a rotational staffing model in the internal audit function and, if adopting this practice, should ensure the appropriate compensating controls are in place to mitigate such costs.

Suggested Citation

  • Christ, Margaret H. & Masli, Adi & Sharp, Nathan Y. & Wood, David A., 2015. "Rotational internal audit programs and financial reporting quality: Do compensating controls help?," Accounting, Organizations and Society, Elsevier, vol. 44(C), pages 37-59.
    • Handle: RePEc:eee:aosoci:v:44:y:2015:i:c:p:37-59
    DOI: 10.1016/j.aos.2015.05.004
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    5. Steven DeSimone & Giuseppe D’Onza & Gerrit Sarens, 2019. "Correlates of Internal Audit Function Maturity," Working Papers 1905, College of the Holy Cross, Department of Economics.
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    8. Lawrence J. Abbott & Brian Daugherty & Susan Parker & Gary F. Peters, 2016. "Internal Audit Quality and Financial Reporting Quality: The Joint Importance of Independence and Competence," Journal of Accounting Research, Wiley Blackwell, vol. 54(1), pages 3-40, March.

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