Open innovation in managerial innovation: the case of internal audit

Research on innovation has grown into a substantial body of literature and has drawn attention to knowledge sources. However, little is known about the drivers of audit innovation. This article seeks to identify, delineate and categorize knowledge sources’ impact on internal audit innovation. We implement an econometric model and find that internal audit departments developing search capabilities to modify their processes can innovate in their practices. Using the original measures of internal search capabilities and innovation, our findings highlight the effects of search, intrafirm and external knowledge sources on internal audit innovation: among intrafirm knowledge sources, management’s reviews of internal audit functions are key factors that foster innovation. Among external sources, professional associations play a prominent role in firms’ propensity to innovate. Most noticeably, firms with high absorptive capabilities deliberately deviate from compliance to innovate using professional associations’ and ICT consultants’ knowledge. Our study contributes to the literature on open innovation and auditing by illuminating internal audit functions’ innovative potential.