Does Organizational-level Affiliation of Internal Audit Influence Corporate Risk-Taking? -Evidences from Chinese Listed Companies

Abstract

This paper empirically examines the relation between corporate risk-taking and the organizational level with which internal auditing is affiliated in Chinese listed firms. Using a sample of 1,806 firm-year data available from 2007 to 2009, we find that Chinese corporate risk-taking is only marginally related to the organizational level with which internal auditing is affiliated. This result suggests that internal auditors may only play a marginal role in assessing and controlling corporate risk in Chinese listed firms. However, our additional split sample analyses reveal a significant difference between Chinese state controlled and non-state controlled firms not only in their organizational-level affiliation of internal audit but also in their effects on corporate risk-taking as well. This additional finding indicates that internal auditors are more likely to have high independent authority to perform their critical tasks in Chinese non-state controlled firms than in state controlled firms. Overall, our results provide important insights on how Chinese firms may improve their internal audit functions and increase their corporate risk management effectiveness.