The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency

Abstract

SYNOPSIS: This paper considers the need for an internal audit report (IAR) to increase governance transparency for external stakeholders. While the internal audit function is an important and distinct governance mechanism, external stakeholders typically lack the direct relevant information about the function that is available to insiders from other governance mechanisms (e.g., management, audit committee, and external auditor). This information asymmetry is inconsistent with current objectives for governance, transparency, and accountability in the Sarbanes-Oxley era. We evaluate potential IAR disclosure benefits (e.g., increased transparency and accountability) and costs (e.g., increased information load, legal exposure, and reporting costs) using a literature review and the results of 18 semi-structured interviews with analysts, audit committee members, internal auditors, and policymakers. We also propose a model IAR that provides basic descriptive information about the internal audit function for stakeholders to evaluate when considering overall governance within an organization. Ultimately, we conclude that an IAR has potential to complement existing governance disclosures, increase stakeholder confidence in governance quality, and motivate internal audit diligence. However, further research is needed to guide specific report content and to evaluate benefits and costs in both voluntary and mandatory disclosure environments.