Management trade-offs of internal control and external auditor expertise

Kevan L. Jensen, Jeff L. Payne

Research output: Contribution to journalArticlepeer-review

23 Scopus citations

Abstract

Managers of organizations establish control systems to reduce the agency costs inherent in those organizations. Control systems include both internal and external control mechanisms, some of which may be viewed as substitutes for each other. We develop a model of the demand for external auditor industry expertise and then examine whether managers substitute such expertise for certain closely related internal control mechanisms in their overall control systems. Using a sample of municipalities, we find evidence that managers who do not hire internal auditors or who hire accounting personnel with low levels of accounting expertise tend to hire external auditors with higher levels of industry expertise. We interpret this to be a conscious trade-off on the part of the managers, which appears to be linked to the costs of hiring the internal mechanisms in question.

Original languageEnglish
Pages (from-to)99-119
Number of pages21
JournalAuditing
Volume22
Issue number2
DOIs
StatePublished - Sep 2003

Keywords

  • Agency costs
  • Auditor expertise
  • Control systems
  • Internal control

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Management trade-offs of internal control and external auditor expertise'. Together they form a unique fingerprint.

Cite this