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The Cost of Auditor Independence

The line Sarbanes-Oxley drew between audit firms and their clients may have been a good idea overall, but it increased accounting risk, a new study indicates.

Sarah Johnson, CFO.com | US
February 12, 2009

IAs are no doubt effective, but should not be overused

Internal auditors do possess an unparalleled understanding of organizational risks, so the findings of this study are not surprising. However, efforts must be made to keep internal auditors indpendent of other functions, both internal and external to the organization, in order to maintain their effectiveness. The expertise of internal auditors makes them appealing candidates for risk management teams,as well. However, here too, we see that internal auditors must remain independent to be objective enough to effectively evaluate the risk management process. Efforts to stretch internal auditors beyond their principle mission,either toward external audit or risk management, are inspired by frugality and the temptation must be avoided.

Posted by Sheila Keefe | April 16, 2010 04:01 pm

Provocative title, but....

did you fairly present all relevant conclusions of the study?

Posted by Shari Thompson | March 02, 2009 01:18 pm

Clarification requested

In the first paragraph the research claims that the banning by the Sarbanes-Oxley Act, actually reduced companies' accounting risk, however the rest of the article is expressing an increased risk ? Thank you.

Posted by Mahmoud Abbas | February 19, 2009 09:50 am

IVORY TOWER - PART II

I too had a real experience with co-sourcing while running the audit department at a manufacturing company. The EA said they had an expert in our manufacturing industry and wanted a chance to perform an internal audit of our manufacturing process at one of our plants that had a simple operation. Their audit fee cost the company 2 1/2 times more than our internal audit department's cost and the EA recommendations were so petty that the Plant Manager told them it was a waste of time. So I ask you, if the EA does not know how to dig into operations for the risks and opportunities for improvement, what type of communication and efficiencies are you going to get? If you want good communication between EA and IA and even the Accounting / Finance department encourage everyone and it can happen. I am in a different industry now that is just as complicated as manufacturing and our communication with each other is excellent. Nuf said.

Posted by Chuck Smith | February 18, 2009 09:51 am

Expanding on the Value of Co-sourcing

I appreciated the opportunity to be interviewed for this article. Overall, I thought my opinions on the research were captured correctly. However, I would like to clarify The IIAŭs and my views on internal audit co-sourcing in a more complete manner. In today's complex business environment, a fully resourced and professionally competent internal audit activity that is a key part of the organization, whether in-house or co-sourced, provides the best source of independent and objective assurance on the effectiveness of risk management, control, and governance processes. Given the vast array of complex risks facing companies today, many chief audit executives find it impossible to maintain the resources to address every conceivable risk. Co-sourcing often proves to be an excellent practice to help internal audit activities meet the evolving needs of their stakeholders.

Posted by Richard Chambers | February 17, 2009 05:29 pm

Real Experience with These Engagements

I'm one of the few internal auditors who actually ran a combined internal/external arrangement with their external auditors. If you take all the emotion out of this topic (almost impossible to do) the simple fact is that, run properly, we found that the level of communications and knowledge sharing increased substantially in this kind of arrangement. Again, not allowed by the current rules. I'm not advocating a change but actual history supports the findings of the study. I had a article published on this in the IIA magazine "Internal Auditor" in 1994!

Posted by Richard Anderson | February 16, 2009 11:00 am

Ivory Tower

External auditing and internal auditing are two different professions that have little overlap in how their work is performed. Each has its own special skill sets that are set apart by financial auditing under materiality guidelines versus operational auditing for continuous efficiency gains. Also, did the study include in its scope the value of internal audit employees having a stake in the company versus an outsider billing by the hour? Did the study confirm that if additional knowledge was obtain by the external audits that they would use this advantage to lower their overall fees? To me if the internal and external auditors communicate sufficiently these cross-knowledge advanatages can still be accomplished, so beware of ivory towers.

Posted by Chuck Smith | February 13, 2009 07:47 am

"Knowledge Spillover" hypothesis is faulty

If the authors conclude that performing internal auditing for a client results in "spillover knowledge" that materially facilitates the external audit, this is evidence that the external audit standing alone did not meet generally accepted auditing standards which require the external auditor to acquire sufficient knowledge to plan and perform the audit.

Posted by Curtis Verschoor | February 12, 2009 10:58 pm

One study?

One study does not prove findings validity. Another study could contradict the first study findings. Plus, this referred to reduction in financial statement fraud but I don't recall mention of asset misappropriation, stock option manipulation, or other news reporting impacting share price. Additionally, what about insider trading cases? Were all these risky areas accounted for in the study? It doesn't look like it prima facie.

Posted by David Newman | February 12, 2009 02:45 pm

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