Internal Auditor Turnover, Financial Reporting Quality, and Audit Risk Assessment

Abstract

We understand relatively little about factors that affect the internal audit function’s ability to serve as an important monitor of financial reporting quality. We therefore study how turnover of the chief audit executive (CAE) influences financial reporting quality and stakeholders’ perceptions. Using data from Taiwan where companies are required to disclose when CAEs change position, we study how investors react to the announcement of a CAE turnover event, whether financial statements are of higher or lower quality after the turnover event, and how external auditors change their pricing behavior after the turnover event. We find that a CAE turnover event is associated negative stock mark reactions, a reduction in financial reporting quality, and higher external audit fees. Combined, the results provide evidence of the important monitoring role of internal auditing and especially of the critical role of the CAE.