An Examination of Internal Auditor Objectivity: In-House versus Outsourcing

Abstract

The internal audit function is evolving from its traditional oversight function to one that includes a wider spectrum of activities that add value to their organizations. In addition, economic pressures have forced many companies to consider outsourcing as an alternative. These ongoing changes have caused some concern regarding the potential lack of objectivity and independence for internal auditors. This exploratory study examines whether outsourcing of the internal audit function is susceptible to client advocacy vis-a`-vis in-house auditing, which itself may be sensitive to an employer advocacy Sixty-six practicing members of the Institute of Internal Auditors (IIA) completed a case study involving a corporate acquisition scenario. Of the 66 participants, 35 were from corporations (in-house), while the remaining 31 were from the Big 4 accounting firms (outsource). Advocacy was manipulated by asking participants to assume the role of internal auditor for either the buyer or the seller of a target division. Result s indicate that significant advocacy existed in the judgments of both in-house and outsource internal auditors. However, the extent of advocacy was less severe in the case of outsource auditors.

Auditor liability: A comparison of judge and juror verdicts

“…In addition, the case materials described the internal audit personnel and internal audit function identically. Nonetheless, we anticipate that judges may attribute greater quality of performance to outsourced internal auditors from other Big 4 firms (DeAngelo, 1981;Ahlawat and Lowe, 2004) irrespective of factual quality factors related to objectivity and competence described in the case, as the judges search for factors other than just outcome upon which to base their decisions. On the other hand, research shows jurors do not differentiate on audit quality when consequences are severe (Kadous, 2000) leading us to expect jurors will default to strict liability assessments to guide their decisions.…”

Internal Audits as a Source of Ethical Behavior, Efficiency, and Effectiveness in Work Units

“…The reporting relationship of internal auditors should also be taken into consideration since it may influence the orientation, conduct, and outcomes of the audit activity (Ahlawat and Lowe 2004). However, in the setting of governmental agencies, the reports are sent to the ministry.…”

Sourcing of internal auditing: An empirical study

“…But is has also changed the demands being put on internal auditors. Their new role requires different skills and competencies, and many organizations need to face the choice whether to develop these broader competencies internally or to outsource internal auditing to outside service providers (Ahlawat & Lowe, 2004;Widener & Selto, 1999).…”