SUMMARY
We examine whether internal auditing provides value to organizations by reducing risk. We compare the changes in risks between audited business units and matched non-audited units within the same company. This design allows us to isolate the importance of an internal audit while holding constant changes in risk due to the organization and time period. Based on ratings from the heads of audited and non-audited units, we find that managers of audited units perceive a greater decline in risk as well as a greater increase in performance compared to managers of non-audited units. We also find that companies that have had a quality assurance review and are used as a management training ground are associated with greater reductions in risk and improved overall performance. Our study contributes to the academic literature by documenting a new facet of internal audit benefits—risk reduction—and internal audit characteristics that increase risk reduction.
