Keywords

corporate governance, internal audit function, internal audit quality, earnings management, abnormal accruals

Abstract

Internal auditors often perform work that is relevant to their host entities’ financial reporting processes, yet little research attention has focused on the effects of internal auditing on companies’ external financial reporting. Using a unique and previously unavailable data set, we investigate the relation between internal audit function (IAF) quality and earnings management. We measure IAF quality using a composite measure comprising six individual components of IAF quality based on SAS No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role in financial reporting. Earnings management is measured using two separate proxies, (1) abnormal accruals and (2) the propensity to meet or barely beat analysts’ earnings forecasts. We find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.

Original Publication Citation

Prawitt, D. F., J. L. Smith, and D. A. Wood. 2009. Internal audit quality and earnings management. The Accounting Review, 84 (4): 1255-1280. DOI: 10.2308/accr.2009.84.4.1255.

Document Type

Peer-Reviewed Article

Publication Date

2009

Publisher

The Accounting Review

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Full Professor

Download

Included in

Accounting Commons

Share

COinS