ust how objective are auditors that perform both external and internal audits for clients? From the SEC to commercial loan officers, this question is on the minds of many who worry about the impact of such an arrangement on auditor independence and financial statement reliability. Financial analysts—for example—consider auditor objectivity every day in evaluating how genuine companies’ audit reports are. We therefore surveyed them about their perceptions of auditor independence under various internal-audit-outsourcing arrangements.
We asked 250 analysts to give their impressions of auditor independence based on the history, prospects and internal audit arrangements of a hypothetical publicly owned company. Each participant considered one of five scenarios detailing ways the company handled its internal audit, including whether it
Conducted its own.
Outsourced to the current external auditor.
Outsourced to another CPA firm.
Divided the external auditor staff into those performing the internal audit function and those performing the external audit tasks.
Outsourced only part of the internal audit function.
Results showed that financial analysts were wary of auditor independence when the same CPA firm performed both internal and external audits, but only if there was no separation of the two audit staffs. Therefore, according to the analysts, separating staff appeared to be a viable way to safeguard auditor independence. Likewise, this belief held when a company outsourced its internal audit function to another firm. The results also showed that analysts did not perceive a difference in independence between partial and full outsourcing. This finding did not support the SEC’s outsourcing rule that restricts companies from outsourcing more than 40 percent of the internal audit function to their own external audit firm.
For the full text of the research paper, see “The Effect of Internal Audit Outsourcing on Financial Analysts’ Perceptions of External Auditor Independence,” Auditing: A Journal of Practice & Theory, September 2001, vol. 20, no. 2.
SUSAN L. SWANGER, CPA, PhD, is assistant professor, department of accountancy, finance and entrepreneurship, College of Business, Western Carolina University, Cullowhee, North Carolina. Her e-mail address is Swanger@wcu.edu . EUGENE G. CHEWNING JR., CPA, PhD, is associate professor of accounting, Moore School of Business, University of South Carolina, Columbia.
|This series is based on work published in Auditing: A Journal of Practice & Theory. The intent is to bridge the gap between researchers and practitioners by offering concise practice summaries of cutting-edge research in the field of auditing.|