Innovation in lieu of compliance: Internal audit departments’ standardized and non-standardized knowledge sources

Abstract

There is a substantial body of work on managerial innovations, but less attention has been paid to innovation in regulated professions such as internal audit. The aim of this paper is to identify the sources of knowledge on internal audit innovations. Our model is derived from the work on technological innovation, internal and external learning, search capabilities and related absorptive capacity (AC). We draw on AC theory to consider the arbitrage between standardized knowledge with low value for innovation and up-to-date knowledge which might lead to radical innovation. We exploit organizational theory to examine the effect of hierarchical pressure for compliance with standardized practices. Our econometric results support the idea that our technological innovation model can be applied to audit innovations. We confirm the existence and the dominant role of search activities for audit departments which are not simply innovation adopters and demonstrate the role of external knowledge sources for extending work on open innovation. We identify an adverse role of AC in relation to standardized knowledge which adds to the mixed results in the AC literature. By challenging the dominant view of auditing as purely compliant, we contribute to the emergent stream which considers internal auditing an innovative profession.