Internal audit and audit fees: further evidence

Abstract

Purpose The paper aims to examine the direction of the relationship between a firm's internal audit function and its external audit fees, extending a previous study by Goodwin‐Stewart and Kent, which used data from 2000. Design/methodology/approach The paper uses publicly available information to analyse the relationship between internal audit and audit fees. Findings The findings support Goodwin‐Stewart and Kent's result that the existence of an internal audit function in a firm has a significantly positive relationship with audit fees. In fact, the strength of this relationship has increased since 2000. Research limitations/implications The study focuses on the top 300 public companies from a market capitalisation perspective and, therefore, the results may not be generalisable to other smaller public companies or to private firms. Second, the dichotomous experimental variable used in the study (existence of internal audit) might not be an ideal measure of internal audit usage since it may not be sensitive enough to capture all the variation in external audit fees. The findings suggest that companies use internal audit and audit fees in a complementary way to strengthen their overall control/operating environment. Originality/value Although the study extends and validates work already completed by Goodwin‐Stewart and Kent, the true value of its result is that users can use publicly available information to determine that firms with an internal audit function are more likely to use it in a complementary way with audit fees, thereby potentially indicating a commitment by that firm to a stronger monitoring/control environment.

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