Internal Audit Quality: The Joint Importance of Independence and Competence

Abstract

In light of the growing importance of internal audit functions (IAF) and the limited archival evidence on internal audit quality, we examine an interactive model of IAF quality (comprised of competence and independence) to better understand the determinants of IAF effectiveness as financial reporting monitors. Our competence variable captures average hourly IAF compensation. We incorporate three distinct facets of independence: degree of audit committee oversight, IAF management training grounds, and IAF outsourcing. Our tests support the hypothesis that the joint presence of competence and independence is a necessary antecedent to effective IAF financial reporting monitoring. In sum our results show that if one wishes to ask what is the effect of internal audit competence (independence) on financial reporting quality, the answer is depends on the independence (competence) of the internal auditor. Our study extends the understanding of IAF quality determinants in the as it relates to ongoing discuss...