Information Asymmetries and Intra-Company Monitoring: an Empirical Analysis of Nonlinear Relationships Between Company Characteristics and the Size of the Internal Audit Function

Christian Lohmann,Marc Eulerich

doi:10.1007/s41471-021-00128-2

Abstract

The internal audit function (IAF) has become one of the main pillars of good corporate governance. Empirical findings show that the size of the IAF varies considerably across companies. This study analyzes the relationships between selected company characteristics as determinants of intra-company information asymmetries and the size of the IAF as an indicator of intra-company monitoring. We test these relationships by analyzing comprehensive survey data obtained from chief audit executives from 283 Austrian, German, and Swiss companies. Using a nonparametric regression approach, we identify significant nonlinear relationships between company characteristics and IAF size. The empirical analysis identifies threshold levels for several metric company characteristics, such as the number of employees and the number of subsidiaries, whose relationships with the size of the IAF change its intensity.

Highlights

The level of acceptance of internal auditing as a crucial element of good corporate governance has been increasingly acknowledged (e.g., Carcello et al 2020; Eulerich and Eulerich 2020; Gramling et al 2004)
We investigate from an organizational perspective whether and to what extent several company characteristics that largely determine intra-company information asymmetries are associated with different sizes of the internal audit function (IAF) of European companies
The present study examines whether and to what extent several company characteristics affect the size of the IAF

Summary

Introduction

The level of acceptance of internal auditing as a crucial element of good corporate governance has been increasingly acknowledged (e.g., Carcello et al 2020; Eulerich and Eulerich 2020; Gramling et al 2004). Internal auditing can be seen as “a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes” that can “add value and improve an organization’s operations” (Institute of Internal Auditors 2016). In this context, the Institute of Internal Auditors, the worldwide standard-setting body, as well as other regulating institutions, such as the United States Securities and Exchange Commission and the New York Stock Exchange, require listed companies to implement an internal audit function (IAF). A special feature of the empirical method applied in this paper is that it takes into account nonlinear relationships between metric company characteristics and the size of the IAF.

Methods

Results

Conclusion