A STUDY ON THE EFFECTS OF INTERNAL AUDIT SOURCING ARRANGEMENTS IN SINGAPORE

Abstract

There has been a growing emphasis on the importance of internal audit (IA) function in Singapore in recent years to enhance supervisory oversight of risk management and internal controls. However, few have studied the contribution of IA function and whether an effective IA function is best achieved in-house or via outsourcing. This paper seeks to examine the outcome effects of different types of IA sourcing arrangements in Singapore. Using information on IA function found in companies' corporate governance reports, this paper measures the effects of different types of IA sourcing arrangements on audit fees and earnings response coefficient (ERC). To do so, this paper adopts the Heckman two-step procedure to address the issue of self-selection bias. Results show that firms that have IA function are more likely to face lower audit fees. On the topic of performing IA function inhouse or outsource, results show that outsourcing of IA function significantly lowers the audit fees. Furthermore, firms that outsource their IA function to a Big 4 auditing are more likely to face lower audit fees. Meanwhile, results for ERC analysis also show that firms that outsource their IA function have higher ERC.