External Auditor Evaluations of Outsourced Internal Auditors

Abstract

SUMMARY: In the last decade internal auditing services has been a significant area of growth for public accounting firms. Unlike the provision of external audits, the provision of outsourced internal audit services does not prohibit accounting firms from providing the client with additional services. This study investigates some implications of an outsourced internal auditor providing nonaudit services. Specifically, 89 experienced external auditors completed an experiment to investigate whether external auditors will evaluate and rely on an outsourced internal auditor’s work differently when the internal auditor also provides nonaudit services. Results indicate that evaluations of the outsourced internal auditors’ objectivity were negatively affected by the provision of nonaudit services. Further, the differences in objectivity perceptions are tempered by the use of different personnel to provide consulting services. Competence perceptions were not affected. Results also indicate that external auditor reliance on internal audit and suggested audit fees are affected. However, these results do not appear to be tempered by audit and nonaudit staffing decisions.