Determinants and Consequences of Internal Audit Functions within Colleges and Universities

Using a combination of publicly available and hand-collected data, this paper uses a two-stage model to first examine what drives the presence and use of internal audit functions (IAFs) at U.S. colleges and universities, and then how IAFs influence financial reporting quality (reported material weaknesses in internal controls for financial statements and federal programs) and grant outcomes therein. Results indicate that institutions receiving public funding, those with larger enrollments and endowments, and those that maintain a hospital and audit committee are more likely to maintain an IAF. Findings also suggest that the presence of an IAF is negatively associated with reported material weaknesses for major programs at significant levels. Finally, the presence of an IAF is found to have a positive and significant association with federal grants received by the institution. The study’s findings provide the first quantitative insights on IAF work within U.S. colleges and universities. Results should be of interest to college/university leadership as they attempt to improve financial reporting quality and transparency, as well as grant outcomes.