Document Type

Working Paper

Date of This Version

7-1-2017

Keywords

internal auditing, internal audit quality, external assessments, financial reporting quality, audit reportable conditions, restatements

JEL Classification

G32, M4

Abstract

Using a unique set of hand-collected data, this study investigates the association of (1) the presence of an Internal Audit Function (IAF) and (2) the use of quality assurance programs for the IAF with financial reporting quality in public sector organizations. Specifically, I examine if the presence of IAFs and the use of quality assessments therein is associated with the presence of financial statement audit reportable conditions and restatements in municipalities in the U.S. Results indicate that both the presence of an IAF and use of external quality programs therein are positively associated with financial statement audit reportable conditions related to internal control (significant deficiencies). Findings also suggest that the presence of an IAF is negatively associated with restatements in U.S. municipalities with populations over 100,000 at significant levels. The use of quality assurance programs for the IAF has no effect on the occurrence of restatements. The study’s findings provide insights on IAF influence over financial statement reporting quality in the public sector and suggest further research is necessary. Results should be of interest to standard setters, regulators, and pubic-sector leadership as they attempt to improve governmental financial reporting quality and transparency.

Working Paper Number

1802

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