Outsourcing the internal audit function is perhaps the greatest challenge the internal audit profession

Audit Committee Effectiveness and Internal Audit Outsourcing Lawrence Abbott University of Memphis Susan Parker Santa Clara University Gary Peters University of Arkansas Dasaratha V. Rama Florida International University December 1, 2003 Audit Committee Effectiveness and Internal Audit Outsourcing Abstract Outsourcing of the internal audit function to the external auditor has been a controversial issue. Recently the Sarbanes-Oxley Act (SOA 2002) has prohibited the outsourcing of any internal audit functions to the financial statement auditor due to independence concerns. The Sarbanes-Oxley Act also requires the audit committee consider the impact of non-audit services – including services similar to internal audit outsourcing - on external auditor independence. In this paper, we examine the association between audit committee effectiveness and internal audit outsourcing. Data obtained from a survey of 219 Chief Internal Auditors and from relevant proxy statements filed in 2001 (prior to legislative restrictions) indicate that companies with effective audit committees are less likely to outsource internal auditing to the external auditor. Effective audit committees which also have authority over the chief internal auditors’ dismissals have an incrementally negative relation with the extent of outsourcing. Our results are sensitive to the specification of internal audit outsourcing. In particular, ...