Determinants of outsourced internal audit function: a further analysis
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Determinants of outsourced internal audit function: a further analysis Saeed Rabea Baatwah1,2 · Adel Ali Al‑Qadasi3,4 Received: 4 July 2019 / Revised: 1 October 2019 / Accepted: 25 October 2019 © Eurasia Business and Economics Society 2019
Abstract The aim of this study is to investigate how the board of directors, audit committee (AC), external auditor and management explain the outsourced internal audit function (IAF) practice. Although prior studies provide some insights into the determinants of IAF, we have little understanding of how their characteristics are associated with outsourced IAF. Using 767 observations from an emerging market, we find that board independence and AC accounting expertise are negatively associated with outsourced IAF. We also observe a positive association between board expertise, AC independence, CEO with accounting expertise, and the size of the external audit firm and outsourced IAF. Corroborating these findings, additional tests show that the type of outsourced IAF provider, either big4 or non-big4, plays a significant role in these associations. We also extend the recent literature on the governance role of an AC chair with accounting expertise and report that a chair with accounting expertise is associated with outsourced IAF if the provider is a big4 audit firm. These findings may serve a large number of stakeholders who are interested in audit practices in general and IAF practices in particular. Keywords: Outsourced IAF · Board of directors · Audit committee · Management · External auditor · Emerging market JEL Classification M40 · M42 · M49 * Saeed Rabea Baatwah [email protected]; [email protected] Adel Ali Al‑Qadasi [email protected] 1
Department of Accounting, College of Business Administration, Shaqra University, Shaqra, Saudi Arabia
2
Department of Accounting, College of Administrative Sciences, Seiyun University, Seiyun, Yemen
3
Department of Accounting, College of Science and Humanities, Shaqra University, Shaqra, Saudi Arabia
4
Hodeidah University, Hodeidah, Yemen
13
Vol.:(0123456789)
Eurasian Business Review
1 Introduction The audit profession, practitioners, regulatory authorities and academics have recognized that the internal audit function (IAF) is among the crucial corporate governance mechanisms for addressing agency problems (Cohen et al. 2004; DeFond and Zhang 2014; Sarbanes-Oxley Act 2002; Institute of Internal Auditors (IIA) 2006; Roussy and Perron 2018). However, little is known about the determinants of effective IAF, in particular outsourced IAF. Companies that outsource IAF to an external provider could find greater independence, secure more skilled and knowledgeable staff, and enjoy cost-saving (see Mubako 2019 for review). Therefore, these companies are more likely to have a high-quality internal control system, financial reporting, and audit. There is widespread adoption of outsourcing IAF, where in developed markets (e.g., US) 30–40% of companies outsourced part or all of their IAF activities to external providers (Abbott et
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