The Effects of Internal Audit Consulting Services on Firm Performance

Abstract

In this paper, we examine whether operations-relevant consulting services (OCS) provided by the internal audit function (IAF) bring economic benefits to firms. Using a sample constructed by matching a global internal auditor survey with public firms’ data in Compustat, we find that the extent of OCS provided by the IAF has a significant positive association with operating performance. This result is robust to multiple sensitivity tests. In addition, a DuPont Analysis reveals that OCS provided by the IAF are associated with a higher asset turnover ratio and greater operating profit margin but not related to the equity multiplier. Moreover, the relation between OCS and operating performance is only achieved for companies that have high-status IAFs and that follow a defender (as opposed to a prospector) business strategy. Finally, we find that extensively outsourcing internal audit activities reduces the positive effect of OCS on operating performance. Our findings shed light on the current debate about the value added by the IAF.