Internal Controls Over Financial Reporting in the Context of Offshore Outsourcing: A Theory-Based Research Agenda

Abstract

Auditing Standard No. 5 (AS-5) of Public Company Accounting Oversight Board (PCAOB) suggests, for organizations (user) that are outsourcing their processes to service organizations, that user management should evaluate controls at the service organization, as well as related controls at the user company, when making its assessment about internal controls over financial reporting. In spite of this directive, a number of PCAOB inspection reports find user auditors making judgment errors related to internal control reports generated by service organizations. Thus, it seems third-party internal controls seem to be a neglected area in terms of practice as well as research. Though, outsource offshoring has become a strategic business model, related internal controls issues have not been explored by academicians. This paper is an attempt to develop a research agenda that is grounded in theory, and supported by prior literature, and interviews with practitioners. The paper has implications for academicians as well as practitioners.