New research indicates that external auditors are likely to rely on the work of internal auditors only under certain circumstances.

Professor James Bierstaker of the Villanova School of Business in Pennsylvania has written a study of the matter. The Public Company Accounting Oversight Board has recommended that external auditors “rely on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the Sarbanes-Oxley Act. However, despite the PCAOB’s guidance, little research has been done since Sarbanes-Oxley to investigate the external auditors’ “reliance decisions.”

The decision on whether to rely on the work of internal auditors, as opposed to external auditors doing the work themselves, can be complex decisions that require auditor’s judgment and can be influenced by a number of factors, the study found. Bierstaker’s study examines both the internal and environmental influences via an experiment with nearly a hundred auditors, including 48 senior-ranking auditors and 48 auditors at the manager or partner rank.

The study identified different working styles among the auditors and measured the barriers to their cooperation with one another. The participants were randomly assigned to conditions of high or low audit budget pressure, and to high or low client pressure. Perceptions of risks associated with “reliance decisions” were also measured.

The study found that external auditors were more likely to find the internal auditors’ work useful under conditions where the perceived risks were low or when they were pressed to do so by client management, particularly management seeking returns on enhanced investments in the internal audit function, a common condition following compliance with SOX mandates and efforts to reduce related costs.

The influence of the perceived barriers to cooperation (related to internal auditor ability and objectivity) were contextual (interacting with each other and budgetary pressures). The external auditors were more likely to rely on internal audit when they were viewed as highly competent and also highly confrontational.

Professor Bierstaker’s findings suggest that in addition to client risks and internal audit quality, auditors’ reliance on the work of internal audit may depend on their willingness to confront management or their preference to avoid conflict, as well as their perceptions about whether it would be pleasant or unpleasant to work with internal audit. These individual differences could very well exert significant influence over any task that requires significant judgment.

The study originated with Auditing Standard No. 5, which the Public Company Accounting Oversight Board approved as a way to make Sarbanes-Oxley audits more efficient and cost-effective, in part by allowing external auditors to rely on the work of others, including internal auditors.

“We did this study to see whether external auditors would really start to use internal auditors’ work,” Bierstaker said in an interview. “What we found was, if it was a high-risk area, for example, they were still reluctant to rely on internal auditors. And another thing that would get in the way was the professionalism of the internal auditors. In looking at the barriers to communication, what we found was that if the communication skills of the internal auditors weren’t that good, that could be another potential problem area.”

Other studies have also found that internal auditors may not have as much training in communication “soft skills” as external auditors, Bierstaker noted. “What we found was that if an external auditor had a negative prior experience with an internal auditor, they might be reluctant to use internal auditors’ work,” he said. “And work styles came into play too because if an external auditor had a conflict avoidance work style, and the CFO was really pushing to rely on internal audit, they might just do it to avoid a conflict with the CFO. But if the external auditors had more of an activist work style, if they were more comfortable pushing back and saying, ‘No, I still don’t want to rely on internal audit, even though you’re telling us they’re really great,’ they would still stand up more to the CFO, so it kind of depended more on their own work style.”

Bierstaker recently presented the study at the Center for Global Leadership at Villanova, where it won the Research Excellence Award. He is planning to submit the study to academic journals for publication, and he has volunteered to work on synthesizing the research with other academics for the PCAOB.