“The demand for internal auditors in response to accounting and operational failures” by Dr. Matthew Ege
Dr. Matthew Ege
Associate Professor in Accounting
Mays Business School
Texas A&M University
The value of internal auditing is subject to much debate. Using a comprehensive database of U.S. internal auditor job postings, we find evidence that suggests firms increase their demand for internal auditors by 11.5%, on average, after the revelation of accounting and operational failures. Among firms posting internal auditor job positions, firms also demand higher-quality internal auditors in response to failures compared to when there has not been a recent failure. Also, firms that respond to accounting failures by posting at least one internal auditor position have a 20.7% lower likelihood of a subsequent failure compared to firms that do not respond to accounting failures by posting internal auditor positions. However, the effectiveness of hired internal auditors is contingent on support from a strong board of directors. Overall, our evidence suggests that internal auditors are valuable to a firm’s overall control structure aimed at ensuring high-quality financial reporting and effective operations.