A comparison of finance officer and auditor assessments of municipal internal control

Abstract

There is an increased emphasis on internal control in the governmental sector. We compare finance officer assessments of internal control to auditor assessments for a sample of Michigan municipalities. On average, the finance officers' assessments of their control systems were more favorable than the assessments made by auditors from a regional CPA firm with a large governmental practice, suggesting that auditor reports on internal control may result in a more conservative evaluation of the control system than reports provided by management. One measure of the effectiveness of the internal control system is its ability to prevent errors. We compare the finance officer and auditor assessments of internal control to the number of audit adjustments as an objective measure of the accuracy of the control assessments. The internal control assessments made by auditors were significantly more highly correlated with the number of audit adjustments than those made by finance officers. This suggests that the accuracy of internal control reports may be improved if the reports are prepared by auditors.