Reconciling Archival and Experimental Research: Does Internal Audit Contribution Affect the External Audit Fee?

Abstract

Consistent with guidelines from external auditing standards, a large body of experimental and survey research suggests that an internal audit function (IAF) can contribute in ways that lead to decreased external audit fees; however, research using archival methodologies generally finds either no relation or a positive relation between proxies for IAF contribution and external audit fees. In this paper, we provide new evidence using a unique and previously unavailable data set to develop archival proxies of internal audit contribution. We find that SAS No. 65-based proxies for the contribution of internal audit are associated with lower unexpected external audit fees. We show that proxies used in prior archival studies are limited in their ability to capture the IAF’s potential contribution to external auditing, and suggest that the unavailability of high quality proxies could help explain the divergent findings of experimental and survey-based studies in relation to archival studies in this area. In addition, our results suggest that fee reductions are more strongly associated with the direct assistance of, than with reliance on work previously performed by, the internal auditor. Overall, our results provide evidence consistent with external auditing standards and with results from prior experimental and survey studies suggesting that IAFs can indeed contribute in ways that lead to lower external audit fees.