1. PUBLISHED IN THE ACCOUNTING REVIEW
Does Internal Audit Function Quality Deter Management Misconduct？
——Matthew S. Ege
University of Florida
PUBLISHED IN THE ACCOUNTING REVIEW

2. Contents INTRODUCTION
BACKGROUND, RELATED LITERATURE, AND HYPOTHESIS DEVELOPMENT Governance-Related Reforms of the Early 2000s
SAMPLE SELECTION
RESEARCH DESIGN
DESCRIPTIVE STATISTICS AND RESULTS
ADDITIONAL ANALYSIS
CONCLUSION
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3. Abstract
Regulators do not enforce IAF quality or require disclosures relating to IAF quality
A composite measure of IAF quality is negatively associated with the likelihood of management misconduct
Misconduct firms have low IAF quality and competence during misconduct years and improve IAF quality and competence in the post-misconduct years
Competence includes the knowledge and skills required to perform job responsibilities, while objectivity refers to an unbiased mental attitude toward audit matters (IIA 2012).
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4. Keywords internal audit quality corporate governance
internal audit function
management misconduct

5. Research Design Measures of IAF Quality
Define EXPERIENCE as the average number of years of internal auditing experience in the IAF
Define CERTIFICATION as the percentage of internal auditors who have the Certified Internal Auditor (CIA), Certified Public Accountant (CPA), or Certified Fraud Examiner (CFE) certifications
Define TRAINING as the average number of hours of training internal auditors completed during the year
Create dichotomous variables:EXPERIENCE_IND,CERTIFICATION_IND, TRAINING_IND
Set INDEPENDENT to 1 if the IAF functionally reports to the audit committee,
and 0 otherwise
Create an IAF size measure similar
Create a comprehensive IAF quality measure
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6. Research Design Management Misconduct Model
Control for growth prospects, leverage, audit committee accounting expertise, director independence, external auditor industry expertise, chief executive officer duality, founders who are also the chief executive officer, institutional holdings, debt and equity offerings, and size
Control for the extent to which the IAF assists the external auditor and the percentage of sales attributable to foreign segments
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7. Research Design——the model
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8. Conclusion
A composite measure of IAF quality, as well as IAF competence, is negatively associated with the likelihood of management misconduct, and that misconduct firms improve IAF quality through IAF competence after misconduct revelations.
These results suggest that regulators and audit committees should consider ways to improve IAF quality and, more specifically, IAF competence.
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9. Conclusion
IAF quality is negatively associated with accounting-related management misconduct even after controlling for observable predictors of misconduct.
This suggests that IAF quality is a good predictor of accounting-related management misconduct and supports survey and experimental evidence that reports that IAF-related disclosures could affect investment decisions. Accordingly, investors could benefit from disclosures pertaining to IAF quality.
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10. Limitations There are several limitations to this study——
It is possible that IAF quality and the likelihood of management misconduct are jointly determined.
Because of this, the author include control variables in the levels analysis that capture corporate governance quality.
The lack of a relation between IAF objectivity and the likelihood of management misconduct should be interpreted with caution.
It is possible that all firms in the sample have sufficiently high levels of IAF objectivity and/or that there is not enough variation in the IAF objectivity measures to demonstrate a significant association.
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11. Does Internal Audit Function Quality Deter Management Misconduct？
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