Determinants of outsourced internal audit function: a further analysis

• Published in: Eurasian business review 2020-12, Vol.10 (4), p.629-659
• Main Authors: Baatwah, Saeed Rabea, Al-Qadasi, Adel Ali
• Format: Article
• Language: English
• Subjects: Accounting firms; Audits; Business and Management; Emerging Markets/Globalization; Entrepreneurship; Innovation/Technology Management; Regular Article
• ISSN: 1309-4297; 2147-4281
• DOI: 10.1007/s40821-019-00142-9

The aim of this study is to investigate how the board of directors, audit committee (AC), external auditor and management explain the outsourced internal audit function (IAF) practice. Although prior studies provide some insights into the determinants of IAF, we have little understanding of how their characteristics are associated with outsourced IAF. Using 767 observations from an emerging market, we find that board independence and AC accounting expertise are negatively associated with outsourced IAF. We also observe a positive association between board expertise, AC independence, CEO with accounting expertise, and the size of the external audit firm and outsourced IAF. Corroborating these findings, additional tests show that the type of outsourced IAF provider, either big4 or non-big4, plays a significant role in these associations. We also extend the recent literature on the governance role of an AC chair with accounting expertise and report that a chair with accounting expertise is associated with outsourced IAF if the provider is a big4 audit firm. These findings may serve a large number of stakeholders who are interested in audit practices in general and IAF practices in particular.