This study examines whether internal audit expertise on the audit committee is positively associated with financial reporting quality and operating performance. Internal audit exposes individuals to holistic risk management, develops a deep understanding of firm risks and operations, and generates valuable financial reporting knowledge. Because internal auditors perform both monitoring and advising duties, individuals with this expertise are uniquely positioned to both identify weaknesses and implement solutions in a way that is distinct from other accounting experts and external auditors. I hypothesize audit committee members with internal audit expertise will leverage this distinct knowledge to effectively manage both financial and non-financial risks. As predicted, I find firms with audit committees who possess internal audit expertise are associated with stronger financial reporting quality, as proxied by a lower likelihood a firm experiences a material misstatement of their financial statements and lower levels of accruals-based earnings management. Additionally, I find a positive association between audit committees with internal audit expertise and changes to operating income but no association for other measures of non-financial reporting performance. Taken together, the evidence suggests that internal audit expertise on the audit committee contributes positively to financial reporting and has some, but limited, effects on operating performance.
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