The internal audit function (IAF) is an important component of high-quality corporate governance. We study how the head of internal audit perceives the executive management team and the audit committee to rely on the IAF’s work. It is not obvious from prior work or professional anecdotes whether the IAF satisfies the needs of both groups. If multiple factors influence the IAF’s work, chief audit executives (CAEs) may find themselves in a situation with competing demands, which could then compromise quality for all stakeholders. Based on a unique dataset from CAEs, two logistic regression models identify factors that influence the degree to which IAF’s results are perceived as being used by both executive management and the audit committee. The results show the existence of various factors that are relevant either to both groups (e.g., strategic project reports and IAF quality) or to only one (e.g., only audit committees are interested in risk management reports while only executive management teams are interested in internal control reports), depending on whether the IAF focuses on assurance or consulting work.
In order to fulfill its duties as an objective and independent provider of assurance and consulting services, the internal audit function (IAF) reports to both executive management and the audit committee, both of whom need specific information provided by the IAF (Abbott, Parker, & Peters, 2010). However, these two stakeholders differ in their specific duties; thus, their intended uses of IAF-provided information and their requests of the IAF differ. For example, executive management likely depends on the IAF’s work to help them minimize the company’s risks and to improve the operations of the company; that is, they have a managerial focus. On the other hand, the interests of the audit committee are likely more focused on monitoring; that is, they seek stronger internal controls, regulatory compliance, or quality of financial reporting (e.g., Paape, Scheffe, & Snoep, 2003). The divergent objectives of these two stakeholders present potential confusion and can divide the attention of the IAF. In recent studies by two Big 4 accounting firms, IAF stakeholders (specifically audit committees, boards of directors, and senior executives) note a decreased satisfaction with their IAFs (KPMG, 2017; PwC, 2017), reporting overall satisfaction at only 44%, the lowest number reported since the measure has been collected. Among those respondents who report some satisfaction with IAF results, more than half still expect more from their IAF (PwC, 2017). Specifically, these stakeholders reported wanting more value in the areas of potential revenue enhancements, cost savings, or smarter capital expenditures. These findings indicate that both executive management and audit committees expect more; however, because both stakeholders have different expectations of IAFs (Lourens & Coetzee, 2018), IAFs might struggle to decide how to satisfy both groups, given their limited resources. To help internal audit better serve both stakeholders, it is important to understand what each group values about IAF work. Prior research has not examined what factors are associated with greater use of internal audit results by executive management teams and audit committees.