Does Effort Pay Off? Evidence From Internal Audit in Israel

The research question we address in this paper is whether the effort invested by the internal auditor in the firm is associated with better firm performance. Our measure of effort is the number of audit hours invested in the firm, and firm performance is measured by the likelihood of a restatement of the firm's financial results. This study is the first to analyze this question, an endeavor made possible by a difference in disclosure requirements regarding internal audit effort between the US and Israel. Our analysis is conducted using hand-collected data on firms traded on Tel Aviv Stock Exchange (TASE) during the period 2010–2014. We expect that auditor effort is negatively associated with the likelihood of restatements of the firm's financial results. Indeed, our findings support this hypothesis. We also consider the association between restatements and two audit committee characteristics – the degree of independence and the degree of expertise of its members. However, these associations are not upheld by the data.