The impact of audit committee expertise on auditor resources: the case of Israel

We investigate the association between internal audit resources and both audit committee financial expertise and independence using hand-collected data on firms traded on the Tel Aviv Stock Exchange in 2010–2014. This period follows the full implementation of SOX (and a similar regulation in Israel), a law that increased the burden of responsibility of audit committee members. Since expertise allows for a better appreciation of the risks inherent in the firm’s operations and the appropriate audit scope, we believe that expert committee members are more likely to require additional audit hours. Thus, we expect and document a significant and positive association between internal audit resources and audit committee expertise. This relation contrasts with the findings in Barua et al. (J Acc Public Pol 29(5):503–513, 2010), a study conducted on data gathered in the midst of the implementation of SOX. However, we fail to find any significant association between internal audit resources and audit committee independence. Our paper is the first to use publicly available data on internal audit resources, based on mandatory disclosures that are required in Israel but not in the US. Our analysis is thus not subject to non-response and self-selection biases existing in previous studies using survey data. Moreover, our study uses the number of hours worked by internal audit, a more direct measure of internal audit effort than budget or number of employees.