Does the Presence of Internal Audit Affect the Outcome of a Municipality’s Financial Audit?

Abstract

Several recent studies have examined whether the presence of internal audit in the public sector affects the outcomes of external audits. The issue is important because all government leaders face pressure to justify program and organizational unit value in measurable ways or risk budget reductions and elimination. The earlier studies offer mixed conclusions focusing on larger cities and state agencies. Our study examines the same issue but focuses on larger and smaller cities. Using data from a population of Florida cities we test using logistic regression whether external audit outcomes differ between those cities with and those without an internal audit function. Our results show that cities with an internal audit function are more likely to receive a clean audit report than those without one.