In recent years, the scope of internal auditing has broadened considerably, increasing the importance of internal auditing as part of the organization’s management control structure. This expanding role has changed the demands being put on internal auditors. Their new role requires different skills and competencies, and many organizations now need to face the choice whether to develop these broader competencies internally or to outsource internalauditing to outside service providers. This paper studies the factors associated with organizations’ internal audit sourcing decisions, building from a previous study by Widener & Selto (1999; henceforth W&S). In their study, W&S used Transaction Cost Economics (TCE) to explain the organization of internal auditing. Our study seeks to replicate their results, using newly collected data from 66 companies headquartered in the Netherlands. Our findings are supportive of W&S. Like W&S, we find asset specificity and frequency (both individually and in interaction) to be significantly associated with sourcing decisions in a regression model that explains 65% (adjusted R2 = 0.63) of the variance in outsourced internal auditing. Additional analyses reinforce the importance of these TCE variables in explaining organizations’ internal auditing sourcing behaviour.

internal auditing, make-or-buy decision, transaction cost economics
Organizational Behavior; Transaction Costs; Property Rights (jel D23), Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates (jel L22), Organization of Production (jel L23), Business Administration and Business Economics; Marketing; Accounting (jel M), Accounting and Auditing (jel M4), Accounting (jel M41), Auditing (jel M42)
hdl.handle.net/1765/6891
ERIM Report Series Research in Management
ERIM report series research in management Erasmus Research Institute of Management
Erasmus Research Institute of Management

Speklé, R.F, van Elten, H.J, & Kruis, A.M. (2005). Sourcing of Internal Auditing: An Empirical Study (No. ERS-2005-046-F&A). ERIM report series research in management Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/6891