The effects of internal audit outsourcing on perceived external auditor independence

David Lowe, Marshall A. Geiger, Kurt Pany

Research output: Contribution to journalArticle

49 Citations (Scopus)

Abstract

The accounting profession is currently attempting to redefine its role and is expanding the types of services provided. With this expansion, however, comes a concern regarding the potential lack of independence between the auditor and the client requesting these services. This exploratory study examines whether the outsourcing of the internal audit function to the company's external auditor affects financial statement users' perceptions of auditor independence oand financial statement reliability, as well as loan decisions. The overall objective of this study is to assess reactions to various internal-audit outsourcing arrangements, and in doing so, to evaluate the accounting profession's current position regarding the acceptability of performing this type of "extended audit service" to audit clients. Results indicate significant differences across the various outsourcing groups involving the company's external auditor and the nonoutsourced group. Specifically, auditor performance of management functions had a significantly negative impact on users' perceptions of auditor independence and financial statement reliability, and resulted in the lowest percentage of loan approvals. However, the separation of audit-firm staff performing the outsourced internal audit from those performing the financial statement audit had a significantly positive impact on financial statement users' perceptions and loan approvals. The findings of this study support the AICPA's current position on internal audit outsourcing and also suggest that a requirement be established that provides a distinct separation of staff between a CPA firm's internal and external audit teams.

Original languageEnglish (US)
JournalAuditing
Volume18
Issue numberSUPPL.
StatePublished - 1999
Externally publishedYes

Fingerprint

External auditor
Auditor independence
Financial statements
Outsourcing
Internal audit
Loans
Audit
Accounting profession
Auditors
Staff
Internal audit function
Audit firms
External audit
Acceptability
Exploratory study

Keywords

  • Auditor independence
  • Extended audit services
  • Internal audit outsourcing
  • Staff separation

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

The effects of internal audit outsourcing on perceived external auditor independence. / Lowe, David; Geiger, Marshall A.; Pany, Kurt.

In: Auditing, Vol. 18, No. SUPPL., 1999.

Research output: Contribution to journalArticle

Lowe, David ; Geiger, Marshall A. ; Pany, Kurt. / The effects of internal audit outsourcing on perceived external auditor independence. In: Auditing. 1999 ; Vol. 18, No. SUPPL.
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