Internal Audit Function Quality and Operating Performance Recovery: Evidence from Recent Post-Financial-Crisis Period

Standard-setters and internal audit practitioners have claimed for years that a high-quality internal audit function (IAF) should be beneficial for firms’ operations. In this paper, I attempt to provide the initial empirical evidence on this issue. Replying on a unique set of archival IAF data, I use the recent post-financial-crisis period as the research setting and test whether high-quality IAFs are helpful for firms to recover from the financial crisis. Defining performance recovery as reaching a firm-specific performance benchmark calculated in the pre-financial-crisis period, I find that the likelihood of recovery is significantly higher for firms with high-quality IAFs than for firms with low-quality IAFs. In addition, the speed of performance recovery is significantly quicker for firms with high-quality IAFs than for firms with low-quality IAFs. Furthermore, I document that firms with high-quality IAFs have more efficient investments, which can be one of the reasons why such firms experience quicker performance recovery after the financial crisis. Overall, I demonstrate that a high-quality IAF plays an essential role in supporting the decision making of managers and board of directors, which is important for firms’ performance.

This seminar is organised by the Erasmus Accounting Research Group.