The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence - Summary and Results

Sep 2, 2026

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The study evaluates whether outsourcing internal audit functions to the company’s external auditor influences financial statement users’ perceptions of auditor independence and perceived financial statement reliability, as well as loan decision outcomes. It compares multiple outsourcing arrangements, including cases where the outsourced internal audit is performed by another external auditor versus in-house performance. Findings show no significant differences for the “another external auditor” arrangement, but significant effects across other outsourcing groups. Management-function performance by the outsourced external auditor reduces perceptions, reliability, and loan approvals.

LanguageEnglish

CategoryPresentations

FormatDOC

Pages40

Reading Time14 min

AccessFree to download

Summary

Introduction

Independence and outsourcing context

Research objective and comparison groups

Results and implications

Impact on perceptions, reliability, and loan approvals

The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence Marshall A. Geiger Professor of Accounting Department of Accounting University of Rhode Island Kingston, RI 02881-0802 geiger@uriacc.edu D. Jordan Lowe Associate Professor School of Business Administration 5998 Alcala Park University of San Diego San Diego, CA 92110-2492 dlowe@acusd.edu Kurt Pany Professor of Accountancy School of Accountancy Arizona State University Tempe, Arizona 85287-3606 kurt.pany@asu.edu June 2, 1999 We greatly appreciate the financial support of the University of Rhode Island, Virginia Polytechnic Institute and State University and Arizona State University. We acknowledge the valuable comments made by Arthur Siegal, Executive Director of the Independence Standards Board, Susan Ayers, Sunita Ahlawat, Gene Chewning, and Curtis Vershoor. The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence SUMMARY The accounting profession is currently attempting to redefine its role and is expanding the types of services provided. With this expansion, however, comes a concern regarding the potential lack of independence between the auditor and the client requesting these services. This exploratory study examines whether the outsourcing of the internal audit function to the company’s external auditor affects financial statement users’ perceptions of auditor independence and financial statement reliability, as well as loan decisions. The overall objective of this study is to assess reactions to various internal audit outsourcing arrangements, and in doing so, to evaluate the accounting profession’s current position regarding the acceptability of performing this type of “extended audit service” to audit clients. Results indicate no significant differences in perceptions or decisions when the outsourced internal audit was performed by another external auditor (i.e., not their own external auditor) compared to when this service was performed in-house. Conversely, significant differences were found across the various outsourcing groups involving the company's external auditor and the non-outsourced group. Specifically, auditor performance of management functions had a significantly negative impact on users’ perceptions of auditor independence and financial statement reliability, and resulted in the lowest percentage of loan approvals. However, the separation of audit firm staff performing the outsourced internal audit from those performing the financial statement audit had a significantly positive impact on financial statement users’ perceptions and loan approvals. The findings of this study support the AICPA’s current position regarding the acceptability of auditors performing outsourced internal audit activities for clients as long as the auditor does not engage in management functions. The results also support establishing a requirement to provide a distinct separation of staff within the CPA firm for those performing the outsourced internal audit from those performing the financial statement audit. Key Words: Auditor independence, Internal audit outsourcing, Extended audit services, Staff separation. Data Availability: Data used in this study is available upon request from the authors. The Effects of Internal Audit Outsourcing on Perceived External Auditor Independence INTRODUCTION “Independence is the cornerstone of the accounting profession and one of its most precious assets.” Robert Mednick, Chair, American Institute of Certified Public Accountants (AICPA) Board of Directors, 1997. Global competition and overcapacity have prompted many companies to downsize, reengineer and implement substantial organizational changes. As a cost reduction strategy, companies have begun to outsource (i.e., engage outside individuals or organizations to provide services previously done within the company) many of their non-core functions such as data processing, taxation and legal services (Hodgson and Puschaver

FAQs

本研究关注的核心问题是什么？

研究探讨将内部审计外包给公司外部审计师是否会影响财务报表使用者对审计师独立性的感知、财务报表可靠性的判断以及贷款决策。

哪些外包安排没有带来显著差异？

当外包的内部审计由“另一家外部审计师”执行（而非该公司的外部审计师）且与由机构内部自行执行的情形相比时，用户的看法与决策未出现显著差异。

研究发现的关键影响因素是什么？

如果外包的外部审计师为管理层执行职能，会显著降低用户对审计师独立性与财务报表可靠性的认知，并导致最低的贷款批准比例；而把执行外包内部审计的人员与执行财务报表审计的人员进行明确分离，则显著提升用户认知并提高贷款批准。

Sep 2, 2026

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