THE IMPACT OF INTERNAL AUDITORS' PROFESSIONAL AND SOCIAL AFFILIATIONS ON FINANCIAL REPORTING QUALITY
Chair or Co-Chair
Dr. Vineeta Sharma
Dr. Divesh Sharma
Dr. Dana Hermanson
The internal audit function is a critical component of strong corporate governance, along with firm management, the audit committee, and the external auditor (Hermanson & Rittenberg, 2003; Gramling, Maletta, Schneider, & Church, 2004). A potential threat to this strong corporate governance is professional and social affiliations. Accordingly, the Sarbanes-Oxley Act (SOX, 2002) limits some professional affiliations among management, the audit committee, and the external auditor (S206; S301), but only provides one limitation related to the internal auditor, which is that an external auditor cannot simultaneously provide internal audit consulting services to its audit client (S201(a)). Professional and social affiliations among other corporate governance actors have been shown to influence financial reporting quality (e.g., Beasley et al., 2009; Naiker & Sharma, 2009; Bruynseels & Cardinaels, 2014, Wilbanks, Hermanson, & Sharma, 2017), yet the impact with regard to internal audit is unknown but potentially significant since internal auditors are a key corporate governance actor (Carcello, Hermanson, & Ye, 2011; Gramling et al., 2004). Therefore, the purpose of my study is to examine the impact of internal auditors’ professional and social affiliations with (i) CEOs, (ii) CFOs, (iii) audit committee members, and (iv) the external auditor on financial reporting quality.
This examination utilizes archival methods to study data from publicly traded firms in the United States for the period of 2010 to 2016. The main contribution of my study is to fill an important gap in the internal audit literature because no simultaneous, archival examination of the professional and social affiliations of the internal auditor and the CEO, the CFO, the audit committee, and the external auditor has been performed previously, despite calls for examinations of such affiliations (DeFond & Francis, 2005; Lennox, 2005; Wilbanks et al., 2017).
I find that CAE professional affiliations and social affiliations do impact financial reporting quality. CAE social affiliations with the CEO and CFO tend to degrade financial reporting quality. In contrast, CAE professional affiliations with the CFO improve financial reporting quality. Results for CAE professional affiliations with the CEO are mixed. Interestingly, CAE professional and social affiliations with the audit committee both improve financial reporting quality. These findings support thought-provoking implications for the relationship of internal auditors with other corporate governance actors.
Available for download on Wednesday, June 12, 2024