Use of in-house internal audit functions in New Zealand

Purpose: The purpose of this study is to examine which factors explain the use of an in-house internal audit function (IAF) in a voluntary setting. Design/methodology/approach: Based on the foundations of agency and resource-based theory, this study examines a unique data set from the New Zealand setting, which combines information obtained from The Institute of Internal Auditors of New Zealand with empirical firm data collected from publicly available sources. Multivariate analysis is performed to test the prediction that in-house IAF use is associated with factors such as strong corporate governance, firm size, risk, complexity and firm ownership structure. Findings: There is strong evidence that larger organisations are more likely to use an in-house IAF. The authors also find that listed firms and organisations that use a Big Four auditor are less likely to use in-house-based IAF. The authors learn that the IAF investment decision is dominantly influenced by a firm’s ability to fund an in-house IAF as compared to the IAF being used as a resource to improve firm performance to achieve sustained competitive advantage. This implies that IAFs need to ensure cost efficiency and eliminate unnecessary overheads and demonstrate and make visible the benefits the function offers to the host organisation. Originality/value: The unique New Zealand setting, where the establishment and use of an IAF are voluntary, provides an environment to study factors that promote demand for internal audit services. Research implications are applicable to most parts of the world, including the UK, EU nations and the Asia-Pacific region, where IAF use is voluntary.