Determinants and consequences of internal audit functions within colleges and universities

Abstract

Purpose The purpose of this paper is to identify factors associated with the presence and use of internal audit functions (IAFs) at US colleges and universities, as well as their relationship with financial reporting quality and federal grant outcomes. Design/methodology/approach Using a combination of publicly available and manually collected data, this paper uses a two-stage model to examine both the factors associated with the use of IAFs within US institutions of higher education and the consequences therein. Findings Results indicate that institutions with larger enrollments and endowments, those that receive public funding and those that have an audit committee are more likely to maintain an IAF. Findings also suggest that the presence of an IAF is negatively associated with reported material weaknesses for major programs at significant levels. Finally, the presence of an IAF is found to have a positive and significant association with federal grants received by the institution, with an even stronger association for IAFs that perform grant-specific procedures. Originality/value The study’s findings provide the first large-sample quantitative insights on IAF work within US colleges and universities. Results should be of interest to college/university leadership as they attempt to improve financial reporting quality and grant outcomes, as well as external stakeholders looking to evaluate whether institutions are acting as good stewards over resources. Additionally, the Institute of Internal Auditors may find the results helpful when promoting the profession.