Description
This paper examines the recent trend towards the outsourcing of internal audit services to the public accounting
profession. Here we draw from two dominant literature perspectives (the sociology of professions literature and the
outsourcing literature) to examine this clash between the public accounting profession and the internal auditing profession
over the provision of internal audit services. Two major research propositions are postulated from which to
consider these issues. These propositions concern themselves with the efforts of both the public accounting profession
and the internal audit profession in this outsourcing debate. We examine these professions both in terms of volitional
professional behavior (as espoused in the sociology of professions literature) and organizational arguments (inherent
advantages and disadvantages of the externalization of work as typically espoused by the outsourcing literature).
Internalization versus externalization of the internal
audit function: an examination of professional and
organizational imperatives
Larry Rittenberg, Mark A. Covaleski*
School of Business, University of Wisconsin — Madison, 975 University Avenue, Madison, WI 53706, USA
Abstract
This paper examines the recent trend towards the outsourcing of internal audit services to the public accounting
profession. Here we draw from two dominant literature perspectives (the sociology of professions literature and the
outsourcing literature) to examine this clash between the public accounting profession and the internal auditing pro-
fession over the provision of internal audit services. Two major research propositions are postulated from which to
consider these issues. These propositions concern themselves with the e?orts of both the public accounting profession
and the internal audit profession in this outsourcing debate. We examine these professions both in terms of volitional
professional behavior (as espoused in the sociology of professions literature) and organizational arguments (inherent
advantages and disadvantages of the externalization of work as typically espoused by the outsourcing literature).
#2001 Elsevier Science Ltd. All rights reserved.
1. Introduction
A marketing brochure of Arthur Andersen
(1995) stated that the outsourcing of internal audit
services is a ‘‘strategic concept — a way to add
value to a business — that converts an in-house
cost center into a customer-focused service opera-
tion with you as the customer.’’ The ?rm appealed
to corporations to focus on the critical ‘‘core’’
areas of the business that create and sustain com-
petitive advantage and outsource non-core com-
petencies such as internal auditing. The alternative
view to these alleged advantages of the outsourcing
of internal audit services comes from, as might be
expected, in-house internal audit departments
such as the one at J. C. Penney. The internal audit
department at this company espoused its commit-
ment to ‘‘value-added services’’ and argued that
their internal audit department achieves a compe-
titive advantage through knowing the business
and performing comparative analysis and bench-
marking within units. In fact, J. C. Penney has an
Internal Auditor’s Bill of Rights which states that
its internal auditors have ‘‘the right to feel
important — indispensable, in fact — to corporate
management.’’
To some extent, these opposing views as to the
appropriate manner in which to have internal
audit services provided — to have such services
outsourced to a public accounting ?rm (as argued
by a public accounting ?rmproviding these services)
or to have such services maintained in-house (as
argued by an in-house internal audit department) —
are no surprise. Such self-serving expressions of
0361-3682/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 01) 00015- 0
Accounting, Organizations and Society 26 (2001) 617–641
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +1-608-262-4239; fax: +1-
608-263-0477.
E-mail address: [email protected] (M.A. Covaleski).
optimal internal audit practices are a re?ection of
Hopwood’s recent (1998, p. 515) observation as to
the changing nature of the audit industry:
. . .changes afoot are taking place in the audit
industry, including the audit itself. Ernst &
Young, for example, now claim that it ‘‘has
challenged all aspects of the traditional
audit’’. Professionalism has been replaced by
business acumen. Notions of independence
seem curiously antiquated in a world where
audit is conducted in the very same business
unit as the promotion of consultancy products
and services. Even ideas of ‘‘paper walls’’
between the professional and the commercial
are now remnants of the past in audit orga-
nizations that pro-actively structure their
operations to facilitate the commercial
potential of the joint operation of the two.
At a very general level, these contrasting views
as to the provision of internal audit services pro-
vide a meaningful arena for more research which
addresses some of the more macro behavioral
issues which are shaping the internal auditing
profession (Kalbers & Fogarty, 1995). At the
heart of the development of the internal auditing
profession are such issues as the battle for profes-
sional turf (Abbott, 1988; Freidson, 1986; Reed,
1996) in terms of e?orts towards self-motivated
market control, as well as changing organizational
structures and processes such as outsourcing (Bet-
tis & Hitt, 1995; Davis-Blake & Uzzi, 1993; Halal,
1994; Matusik & Hill, 1998; Wallace, 1995) within
which internal auditing is embedded.
The purpose of our paper is to draw from two
dominant literature perspectives to examine the
changing nature of the internal auditing profes-
sion. The next section of this paper presents these
theoretical arguments supporting the paper and
the resultant research propositions to be exam-
ined: the sociology of professions literature which
provides a theoretical basis from which the voli-
tional behavior of both the public accounting
?rms and the corporate internal audit departments
can be recognized and the outsourcing literature
which frames the organizational arguments
(changing organizational structures and processes)
which are challenging all internal support
services — not just internal auditing — in terms of
their inherent ‘‘value-added’’ relative to the out-
sourcing of such services.
The third section of the paper provides a dis-
cussion of the research methods used in this study.
Fig. 1. An overview of the research study.
618 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
The fourth section will be guided by the ?rst
research proposition which presents observations
related to the e?orts of the public accounting
profession to stake to claim internal auditing work
(see Fig. 1). Here we will consider both the voli-
tional professional behavior of the public
accounting profession (as espoused in the sociol-
ogy of professions literature) and organizational
arguments (inherent advantages of the externali-
zation of organizational processes as espoused by
the outsourcing literature). This public accounting
profession perspective will be grounded by obser-
vations from recent positions taken by the AICPA
and the active role of three public accounting ?rms
(Arthur Andersen, Ernst & Young, and KPMG)
which have taken aggressive positions in the e?ort
to market their delivery of internal audit services.
The second research proposition which pertains to
the internal audit profession perspective (see
Fig. 1) will then be presented in section ?ve both
in terms of the volitional professional behavior of
the internal audit profession as well as the organi-
zational arguments as to the inherent advantages
of the internalization of organizational processes.
This internal audit profession perspective will be
grounded by observations from: early IIA posi-
tions on this issue as well as the advocacy from
internal audit departments (S.C. Johnson Wax
and J. C. Penney) which have thus far successfully
defended their delivery of internal audit services.
The sixth section of the paper o?ers additional
observations and suggestions for future research
revolving around some of the dynamics identi?ed
in this research pertaining to other critical social
actors (the IIA and the SEC — see Fig. 1) who,
although not the major focus of the study, seemed
to be making a signi?cant impact on the changing
public accounting and internal audit professions.
The ?nal section of the paper provides a closing
discussion.
2. Two major forces: inter-professional competi-
tion and organizational imperatives
The tension that was apparent in the di?ering
views of Arthur Andersen versus J. C. Penney as
to the nature of the internal audit function can be
addressed from the sociology of professions lit-
erature which recognizes that both sides (the
internal and external auditors) are capable of
engaging in volitional professional behavior in the
protection and/or advancement of their respective
professional turf. These di?ering views can also be
addressed through the outsourcing literature
which recognizes that both sides can stake claim to
traditional organizational arguments regarding
the inherent advantages and disadvantages of
externalized work. This section of the paper will
provide a theoretical backdrop from the sociology
of professions literature and the outsourcing lit-
erature from which to consider these dramatic
changes in the internal audit profession.
2.1. Sociology of professions
Abbott’s (1988) work on the manner in which
occupations de?ne their jurisdiction in terms of
the right to control the provision of particular
services and activities becomes helpful to address
the increasing trend in outsourcing of professional
work. Abbott (1988) was concerned with the
manner in which the work content of a profession
may become routine and cast o?, while other parts
of work content may become elaborated and
de?ned as the core of the profession (Tolbert,
1990). Thus, as Abbott (1988) suggested, an occu-
pation’s ability to assume exclusive control of
work activities depends largely on inter-profes-
sional competition. This point is important
because it basically states that one professional
occupation such as internal auditing cannot be
studied in isolation from other occupations such
as the external audit profession. Similarly, Hop-
wood (1998, p. 516) stated, ‘‘Rather than taking
professional claims for granted, the ways in which
they are sustained must be investigated, as should
their consequences.’’
On this point, the sociology of professions lit-
erature has increasingly probed the dynamic pro-
cesses by which professions establish and defend
their jurisdictional domains. It focuses in parti-
cular on inter and intraprofessional competition in
socially constituting both jurisdiction and the right
to control the provision of services in that domain,
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 619
as well as the abstract system of knowledge that
undergirds these services. Abbott (1988, pp. 8–9)
reasoned that it is essential for an occupational
group to control its abstract system of knowledge
in order to claim professional stature it is through
this control that a profession can de?ne and rede-
?ne the societal problems it addresses, develop the
services and practical techniques to be performed
to address these problems (that Abbott de?nes as
the profession’s jurisdiction), and defend this resul-
tant jurisdiction against competing professions or
factions within the profession. With time and legal
sanction, this jurisdiction may eventually comprise
a monopoly over performing speci?ed activities.
This jurisdiction includes formal control over both
key de?nitions of professional service and the lan-
guage used in describing the techniques performed,
the practitioners that perform them and the actual
conduct of the work (Abbott, 1988, p. 62).
On this theme, Crozier (1964, p. 165) observed
that the expert’s success is constantly self defeat-
ing. The rationalization process provides a basis
for power, but the end results of rationalization
curtail this power. As soon as a ?eld is well cov-
ered, as soon as the ?rst institutions and innova-
tions can be translated into rules and programs,
the expert’s power disappears. This simulta-
neously enabling and disabling (Zubo?, 1988),
Janus-faced (Reed, 1996) e?ect of codi?ed knowl-
edge contributes to a profession’s downward
spiral unless it regenerates its abstract system of
knowledge and thereby extends its jurisdictional
domain to possibly encroach upon that of adja-
cent professions.
Subsequent work in the sociology of professions
area has sought to extend Abbott’s general thesis
of jurisdictional disputes. Key, once more, is a
profession’s command over an abstract body of
knowledge that is storable, controllable, inde-
terminable, and deployable to convince con-
stituents that the profession has expertise that is of
utility to them (Derber, Schwartz, and Magrass,
1990; Drazin, 1990; Larson, 1990). Such a body of
knowledge must be:
e?ectively protected from incursion by pre-
datory competitors if it is to remain the spe-
cialized preserve of a particular expert group.
The political strategies and tactics through
which such expert jurisdictional domains are
constructed and policed need to be supported
by ideological resources and moral prohibitions
that legitimate monopoly control for ‘us’’by
delegitimating predatory incursions by ‘them’
(Reed, 1996, p. 575)
Similar to Abbott’s (1988) concern for mapping
disturbances, such jurisdictional disputes give rise
to the ‘‘politics of expertise’’ that tend to be more
intense and unstable during periods of profes-
sional transformation. According to Reed (1996),
the politics of expertise, in turn, revolve around
the knowledge base with which professional sta-
ture is claimed, the technical work and bene?ts for
clients derived from this knowledge, the political
strategies used to defend a jurisdiction, and the
organizational forms used to mobilize expertise.
The basic power strategy and corresponding
legitimating discourse for the entrepreneurial pro-
fessions or knowledge workers, Reed (1996) theo-
rized, also begins with displaying appropriate,
though more general, credentials than organiza-
tional professionals [in our case, the Certi?ed
Public Accountant (CPA) is an older and more
widely recognized credential]. In contrast with the
speci?c and localized knowledge of organizational
professions, knowledge workers, rely on develop-
ing, deploying and displaying a highly esoteric,
intangible system of knowledge. This knowledge
entails a ‘‘sophisticated combination of theoretical
knowledge, analytical power and tacit or judg-
mental skills’’ (Reed, p. 588) that are re?ned, even
partially codi?able, but transferable to other set-
tings thus granting the knowledge worker a com-
petitive advantage. As Reed (p. 576) reasoned,
‘‘. . .it is the putative universality, codi?cability,
neutrality and mobility of modern, [entrepreneurial]
expertise that sets it apart from the localism, parti-
cularlism and stability characteristic of traditional
[organizational] expertise.’’ It is by virtue of this
very universality or generality of expertise, which
can be communicated relatively easily to external
constituents, that enables the client organization
to be more mobile as it extends it global reach in
that these constituents are comforted that appro-
priate expertise is being applied. Such globalization
620 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
‘‘o?ers to the entrepreneurial professions/knowl-
edge workers the opportunity to exploit the poten-
tial for cognitive expansion, material advancement
and socio-political enhancement that these develop-
ments present (Reed, 1996, p. 588).
The dark side of this universality and serving the
client organization is that the entrepreneurial pro-
fession could be seen as too closely aligned to the
vested interests of the client thereby undermining
the professional claim of neutrality and indepen-
dence in that the exercise of expertise is not
objecti?ed by a wholly codi?ed knowledge base
(see also Freidson, 1986). As Reed (p. 588)
observed, ‘‘Once they become ‘tainted’’ through a
much closer incorporation into business practice,
the disinterested claim to moral and cultural
authority is increasingly di?cult to sustain.’’
Shaping the jurisdictional disputes of, for exam-
ple, organizational and entrepreneurial profes-
sionals is an institutional environment that Reed
(1996, p. 586) characterizes as being comprised of
the ‘‘state, political ideologies and policies highly
suspicious of, if not downright hostile to, profes-
sional power.’’ Such an environment of regulation
and suspicion tends to lead to both a strong frag-
mentation among the forms of expertise being
mobilized, and more dramatic disputes over jur-
isdictions (Freidson, 1994).
This recognition of the importance of under-
standing professional claims is at the crux of Kal-
bers and Fogarty’s (1995) point that there are
more macro-behavioral forces which need to be
considered as impacting the internal auditing pro-
fession. In short, the di?erentiation between the
external and internal audit profession may be the
possession of a body of abstract knowledge on
which the occupation bases its claims for the
exclusive right to control speci?c work activities.
Such claims to work, from Abbott’s (1988) per-
spective, is the critical, distinguishing character-
istic of professional occupation. Abbott’s (1988)
approach emphasized that the analysis of the tasks
or work activities of occupations is the key to
understanding changes in professionalization. In
this vein, we are interested in the manner in which
the work of internal auditing is de?ned — from
both sides of the competing professions. Similarly,
Larson (1977) argued that professionalization is a
collective assertion of special social status and
upward social mobility where producers of special
services seek to constitute and control a market
for their expertise. Thus battles over marketable
expertise is a crucial element in the structure of
professionalism.
2.2. Outsourcing literature
Outsourcing is proving to be a growth industry,
with employment growing by 250 percent between
1982 and 1992 (compared with overall employ-
ment growth of 20 percent; Morrow, 1993), with
contingent workers comprising approximately 10
percent the US workforce (Cohany, 1996).
Growth in and reliance on technical experts has
been especially dramatic, with 43 percent of large
US companies outsourcing professional and tech-
nical functions, thus potentially having a sig-
ni?cant impact on the stock of knowledge
available to them (Matusik & Hill, 1998; Wysock,
1996). The rationale for outsourcing organiza-
tional functions is predominantly stated in eco-
nomic terms: within a ‘‘new competitive
landscape’’ demanding a reduction in costs, orga-
nizations can manage their capacity more e?-
ciently and enhance their ?exibility by focusing on
their ‘‘core activities’’ and outsourcing their ‘‘non-
core activities’’ to an external, contingent work-
force of independent contractors. The company
thus averts the high costs of recruiting, training
and paying an internal workforce, though it incurs
both a higher marginal cost of paying contingent
workers and a potential cost of giving up the
advantage of utilitizing unique ‘‘local knowledge’’
in advancing the ?rm. Moreover, organizations
may gain access to a wider range of publicly
available information, though it may also ‘‘leak’’
proprietary information to contingent workers
thus impacting the organization’s competitive
advantage (Bettis & Hitt, 1995; Davis-Blake &
Uzzi, 1993; Matusik & Hill, 1998; Roodhooft &
Warlop, 1999; Tsui, Pearce, Porter, & Hite, 1995).
The importance of understanding the manner in
which workers adapt within organizational work
settings was also recognized by Davis-Blake and
Uzzi (1993) who stated that most research on
internalization of work (traditional internal work
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 621
force) provides considerable agreement that inter-
nal workers increase workforce stability and give
the employing ?rm control over employees. These
traditional internal labor markets provide these
bene?ts by selecting workers capable of following
the rules, and by embedding jobs in hierarchical
structures that socialize workers, monitor beha-
vior, provide opportunities, etc. However, because
internal labor markets are designed to provide
stability and control, this traditional internal
approach may make it di?cult and expensive for
employers to adjust to changing internal and
external conditions. Thus, ?rms may derive the
bene?ts of a traditional internal labor force at a
cost of reduced organizational ?exibility.
In contrast to internalization, externalization
(outsourcing) may increase a ?rm’s ?exibility in
dealing with changing market conditions and
organizational requirements (Davis-Blake & Uzzi,
1993). Externalization reduces many types of
employment and administrative costs (bene?ts and
administration of such bene?ts). Externalized
workers are hired without the expectation of long
term employment and therefore can be let go
without tarnishing the ?rms image. Externaliza-
tion may o?er a ?rm a way to access highly spe-
cialized skills that are needed for only a short
period of time, such as engineering skills. Essen-
tially, Davis-Blake and Uzzi argued that inter-
nalization and externalization serve di?erent but
complementary purposes. Internalization enhan-
ces organizational control and stability, while
externalization increases organizational ?exibility.
When used together, these two arrangements give
a ?rm a mechanism for developing stable yet
adaptable work arrangements.
Halal (1994) characterized this rapid expansion
of the externalization of the work force as part of
a trend toward structuring modern organizations
as internal markets. Referring to several successful
?rms such as Hewlett Packard, Johnson & John-
son, and Clark as companies who have been novel
in their creation of internal markets, Halal argued
that just as the post-Communist bloc is adopting
markets, so too are corporations moving to mar-
ket systems. Halal drew from Tom Peters’ battle
cry to ‘‘Force the market into every nook and
cranny of the ?rms’’ to emphasize the importance
of today’s growing use of ‘‘intrapreneurs’’ ‘‘inter-
nal customers’’ and other equivalents of markets.
This ‘‘market test’’ on internal markets is con-
sistent with Davis-Blake and Uzzi’s (1993) broad
concept of the bene?ts of internalization of work
being stability and the bene?ts of externalization
being ?exibility, and that the tradeo?s need to be
considered within a corporation’s assessment of
costs pertaining to the respective alternatives this
is the internal market test.
Matusik and Hill (1998) also made similar
arguments regarding the tradeo?s in the inter-
nalization versus externalization debate when they
stated that contingent work is an increasingly
integral part of the world of work and that its use
a?ects ?rms’ abilities to accumulate knowledge,
create value, and establish competitive advantage.
The authors broadly de?ne contingent workforce
as consisting of several types of work groups,
including those workers on site whose services are
provided by contract ?rms such as outsourced
internal audit services. Consistent with Davis-
Blake and Uzzi (1993), Matusik and Hill
acknowledge the typical arguments that depict
contingent work use as an attempt by ?rms to
drive down their cost structure (bene?t, training,
recruitment, capacity) and increase their ability to
reduce or expand their workforce in order to
match rapidly changing market conditions and the
sta?ng demands of internal projects. However,
Matusik and Hill (p. 681) go beyond these issues
to further by stating that:
. . .the most signi?cant impact of contingent
work may be on the knowledge stock of the
?rm and, through that, on the ?rm’s long
term competitive position. Contingent work
can be an important vehicle for importing
valuable performance enhancing knowledge
into the ?rm. At the same time, the
unchecked use of contingent work can result
in the leakage of valuable private knowledge
into the public domain.
With this serious tradeo? in mind, Matusik and
Hill (1998, p. 694) go on to ‘‘call into the question
the one-size-?ts-all adage to protect core functions
and outsource liberally in non-core areas.’’ As the
622 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
authors argued, the internalization versus exter-
nalization decision is more complex. They
observed that sources of technical knowledge are
not necessarily contained within organizational
boundaries. And similar to Davis-Blake and Uzzi
(1993), Matusik and Hill stated that the e?ects of
changing boundary conditions such as through
outsourcing of organizational processes and out-
comes have yet to receive much attention.
On this point, Davis-Blake and Uzzi (1993), in
their analysis of trends in the outsourcing of cor-
porate work, argued that future research needs to
recognize that the majority of externalized work-
ers no longer perform unskilled clerical tasks
many are professionals such as nurses or accoun-
tants (see Ang & Cummings, 1997) The authors
stated that as the externalized workforce becomes
more numerous and diverse, it is important to
explore why ?rms internalize and/or externalize
these types of workers. This call for future work to
recognize outsourcing in terms of professional
work is particularly relevant to our work where
the outsourcing decision pertaining to the internal
audit involves professional work, i.e. internal
auditors if the work is internalized, or external
auditors if the work is externalized.
Matusik and Hill (1998) reasoned that com-
mand of knowledge is key in outsourcing work to
external professionals and experts, and identi?ed
two important dimensions of knowledge: (1) pri-
vate versus public knowledge, and (2) archi-
tectural versus component knowledge. Private or
localized knowledge is the proprietary knowledge
which an organization develops internally that
involves idiosyncratic procedures, processes, rou-
tines, documentation and trade secrets that grant
an organization its competitive advantage thus,
there is great concern as to its leakage. Public
knowledge resides in the external environment and
includes tools, techniques processes, even account-
ing and auditing practices, etc. found in a society,
economic sector, industry or professional group,
that are applicable across a number of social settings
and are often discussed using their acronyms —JIT,
MBO, TQM, etc. As a public good, such knowledge
cannot confer competitive advantage. The key
issue concerns the possession of su?cient expertise
to recognize its existence, understand it, tailor it to
?t the unique features of an organization, and
apply it. From a sociology of professions perspec-
tive, Reed (1996, p. 577), reasoned that it was
precisely in the area of public knowledge that jur-
isdictional disputes would >be sharpest, and the-
orized that the entrepreneurial professions would
eventually come to dominate because of their
‘‘putative universality, codi?ability, neutrality and
mobility’’ that set them apart from the ‘‘localism,
politicularism and stability’’ of organizational
professionals whose province is private knowledge.
Architectural knowledge, Matusik and Hill
(1998) stated, relates to organization-wide philo-
sophies, schemas and routines that are gleaned
from deep, long term emersion in an organiza-
tion’s culture su?cient to develop a collective,
tacit understanding of the overall system. Archi-
tectural knowledge is predominantly ‘‘private’’ in
nature and is essential to the organization’s com-
petitive advantage. In contrast, component
knowledge relates to the concrete operation of
organizational subsystems that consume speci?c
inputs and produce speci?c outputs. Such compo-
nents may be either ‘‘core’’ or ‘‘non-core’’ to the
organization, and either private or public in nat-
ure. Component knowledge is, in turn, embedded
within architectural knowledge which is used to
orchestrate subsystems.
Matusik and Hill (1998) hypothesized that
because of the very nature of the forms of knowl-
edge involved, organizations would most likely out-
source professional and expert work to external
contractors that predominantly concerned public
versus private knowledge, and non-core component
versus architectural knowledge. They reasoned that
this work would be outsourced because it would
allow the least leakage of proprietary knowledge of
strategic importance, while simultaneously engen-
dering the most importation of public knowledge
due to external contractors being exposed to the
discipline of market forces which would force them
to be more abreast of public knowledge concerning
such components as accounting, inventory, and
personnel management techniques (e.g. ABC, JIT,
and TQM) that are deemed generally necessary to
compete in the marketplace.
In summary, the ?ow of logic begins the recog-
nition by Davis-Blake and Uzzi (1993) that the
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 623
outsourcing of work increasingly pertains to pro-
fessional workers, including the internal audit
function as the nature of control is changing dra-
matically in contemporary organizations (Simons,
1995). Furthermore, Matusik and Hill’s (1998)
provided a taxonomy to suggest the impact of
outsourcing on the importing or exporting of
valuable knowledge into and out of the ?rm. It
appears that: the outsourcing of work such as
internal auditing can be characterized as merely
entailing public, non-core knowledge thus recep-
tive to market testing or entailing valuable private,
architectural knowledge too valuable to the com-
petitive advantage of companies to risk leakage.
Such characterizations and opposing views are rife
with con?ict and thus have the potential for
enriching our understanding of the outsourcing of
the internal audit function. Therefore, the follow-
ing propositions will be examined:
P1: The sociology of professions literature sug-
gests that public accounting ?rms will attempt
to re-de?ne the boundaries of the external and
internal audits in an e?ort to justify their
entrance into the provision of internal audit
services. Furthermore, as suggested by the
outsourcing literature, these public accounting
?rms will attempt to de?ne their provision of
internal audit in line with broader organiza-
tional imperatives — i.e. the internal audit
function containing public, non-core compo-
nent knowledge that should be exposed to the
discipline of market forces.
P2: The sociology of professions literature sug-
gests that corporate internal audit depart-
ments will attempt to re-a?rm the boundaries
of the external and internal audits in an e?ort
to retain their provision of internal audit ser-
vices. Furthermore, as suggested by the out-
sourcing literature, these corporate internal
audit departments will attempt to de?ne their
provision of the internal audit function in line
with broader organizational imperatives —
i.e. internal auditing function containing pri-
vate, architectural knowledge that is too
valuable to the competitive position of the
company to outsource.
3. Research methods
Consistent with our theoretical perspective that
professional jurisdiction is socially constituted
through the interactions of various constituent
groups, evidence was gathered through qualitative
analysis of archival material from both side of the
professional dispute. This evidence was supple-
mented with extensive interviews with key organi-
zational actors from the two professional sides to
elicit their views and their guidance on accessing
relevant material. Archival material took the form
of both public and private records (Denzin, 1978)
as well as business press coverage of the events
examined (Allison, 1971; Herman & Chomsky,
1988; Zelizer, 1992). Public material included: IIA
exposure drafts of proposed standards and de?ni-
tions of internal auditing AICPA audit guides,
speeches by Big Five ?rms members, and IIA o?-
cers and SEC o?cials. Private material included
interview comments from key social actors
pertaining to both the Big Five ?rms and the
corporate internal audit departments (see Lincoln
& Guba, 1985). These interviews were supple-
mented with internal memos, brochures, and
documents from these studied organizations.
Finally, IIA memoranda and correspondence ?les
of key social actors were important sources of
data. Press coverage includes minutes of CNBC
broadcasts, and articles, editorials, and advertise-
ments appearing in the Wall Street Journal, Public
Accounting Report, Internal Auditor, and Account-
ing Today.
Latent or qualitative content analysis, in which
the researcher serves as a research instrument in
interpreting archival material (Van Maanen, 1979,
1988), was deemed especially relevant in order to
place emphasis on the character of the archival
material rather than on quantitative procedures of
analysis. According to Berg (1989, p. 107), latent
content analysis represents an ‘‘interpretive read-
ing of the symbolism underlying the physically
presented data’’ and thus provides a very useful
approach in examining archival material complicit
in the exercise of power and exertion of in?uence
(Merton, 1968, pp. 366–370). Such exercise of
power and in?uence underlie the two major
research propositions of this study.
624 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
The primary groups of social actors examined
include the AICPA, the Big Five public account-
ing ?rms (increasingly relabeled as ‘‘profession
service ?rms’’), with a particular focus on Arthur
Andersen, Ernst & Young, and KPMG Peat
Marwick; two corporate internal audit depart-
ments (S. C. Johnson Wax and J. C. Penney) two
professional associations — the AICPA and the
IIA and the interests of the federal government in
the form of the SEC. The Big Five ?rms are
among the largest professional bureaucracies in
the world (Mintzberg, 1979; Whittington,
McNulty, & Whipp, 1994), are also the pre-
dominant form of under-researched, organization-
based profession that has emerged as a direct
consequence of commercial enterprise within
which expertise may ?rst be expected to become
commodi?ed to justify the expansion of CPA’s
jurisdictional domain (Abbott, 1988; Freidson,
1986).
4. Analysis: e?orts by the public accounting pro-
fession to re-de?ne the boundaries between the
external and internal audit function
The AICPA Professional Ethics Division
released an exposure draft in February 1996, pro-
posing several interpretations and guidelines for
the performance of extended audit services (such
as internal auditing) for external audit clients. The
1996 AICPA Professional Ethics Committee’s
Exposure Draft e?ectively codi?ed ‘‘best prac-
tices,’’ a?rming that extended audit services such
as the provision of internal audit services would
not impair independence with respect to attest cli-
ents. As the AICPA (1996) Exposure Draft con-
cluded:
A member’s performance of extended audit
services would not be considered to impair
independence with respect to a client for
which the member also performs a service
requiring independence, provided that the
member of his or her ?rm does not act or
does not appear to act in a capacity equiva-
lent to a member of client management or as
an employee.
In May of 1996, the Ethics Committee upgraded
the Exposure Draft to an o?cial interpretation,
Extended Audit Services, and speci?cally con-
cluded that outsourcing does not impair the
external auditor’s independence as long as some-
one from management remains in charge of the
internal audit function, and the internal audit
function does not perform ‘‘on-going’’ monitoring
activities. The consequence of this ‘‘green light’’
into extended audit services by the AICPA was a
dramatic growth in the performance of internal
audits services by the Big Five. According to a
Public Accounting Report (1997, p. 2) article, for
example, these ?rms’ ‘‘plotted annual growth rates
of 80 to 100% through the year 2000 for this
?edgling practice area.’’
As a speci?c example of the actual performance
of such services, a Wall Street Journal (WSJ)
(1996a) article described a situation where Arthur
Andersen reached an agreement with the Camp
Fire Boys and Girls to give up their external
?nancial audit role due to the client’s insistence
(and a related $50,000 per year audit fee) in order
to make possible an outsourcing agreement to
provide full-time, on-site accounting and systems
services at approximately $400,000 per year.
Arthur Andersen defended this newarrangement by
arguing that they could better serve their client
through this outsourcing arrangement than through
the attest arrangement. As the WSJ (1996a) sum-
marized, this recent expansion of services by pub-
lic accounting ?rms has also been characterized as
‘‘an outrageous con?ict of interest’’ and as a trend
which ‘‘could add to the accounting profession’s
credibility problems’’ (p. B8). It (WSJ, 1996a,
p. B8) warned that the internal auditing profession
as represented by the 60,000 member IIA, ‘‘wants
double duty auditing stopped entirely.’’
According to two other 1996 Wall Street Jour-
nal articles, this expansion of services is attribu-
table to a problematic external audit market. The
?rst (WSJ, 1996b, p. B1), whose title succinctly
captures the issues at hand (i.e. entitled ‘‘Who is
Going to Audit the Auditor’’) stated that Big Five
accounting ?rms, worried about slowing revenues,
have tripled the amount of ‘‘double duty work’’
they perform in the past ?ve years. The second
(WSJ, 1996c. p. B1), further argued that accounting
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 625
?rms are trying to broaden the scope of the audit
business. It noted that while the major public
accounting ?rms have almost doubled their con-
sulting business since 1990 (collectively they per-
form 23 percent of such services worldwide Public
Accounting Report, 1998, 1999a, 1999b), their
audit business has edged up only 16 percent. It
characterized the external ?nancial audit (’’the
plain vanilla audit’’) as having become ‘‘a stagnant
commodity,’’ where clients resist fee increases
because ‘‘they increasingly feel that traditional
audits don’t help their business and that one is as
good as another’’ (WSJ, 1996c, p. B1 see also SEC
Commissioner Norman Johnson, 1999, p. 3). Also,
the more lucrative outsourcing work does not sim-
ply consist of small engagements with camp ?re
boys and girls anymore: PWC just reported a $850
million outsourcing contract with a governmental
agency in New Zealand (WSJ, 2000).
The’’green light’’ provided into extended audit
services by the AICPA and the corresponding
movement by the major public accounting ?rms
can be illustrated by the posturing of three of the
Big Five ?rms in their e?orts to re-de?ne the
internal/external audit relationship. The combined
e?orts of the AICPA and the ?rms themselves
illuminate the issues raised in the ?rst research
proposition of this study which argued that public
accounting ?rms will attempt to re-de?ne the
boundaries of the external and internal audits in an
e?ort to justify their entrance into the provision of
internal audit services. Furthermore, these public
accounting ?rms will attempt to de?ne their provi-
sion of internal audit in line with broader organiza-
tional imperatives. A common theme in these ?rm-
speci?c e?orts is the attempt to unfreeze the body
of abstract knowledge on which the internal audit
profession bases its claims for the exclusive right
to control speci?c work activities — i.e. the inter-
nal audit function (Abbott, 1988; Reed, 1996).
Furthermore, the three ?rms all seem to char-
acterize the internal audit function in terms of
public, non-core work (Matusik & Hill, 1998) that
can best served by subjecting it to the discipline of
market forces which, of course, would be the ser-
vices o?ered by these ?rms (see also Cooper,
Scarborough & Chilton, 1995; Preston, et al.,
1995; Sikka & Willmott, 1995).
4.1. Arthur Andersen
The marketing brochure of Arthur Andersen
(1995), the most active ?rm in internal audit out-
sourcing (Public Accounting Report, 1997), stated
that outsourcing is a ‘‘strategic concept’’ — a way
to add value to a business — that ‘‘converts an in-
house cost center into a customer-focused service
operation with you as the customer.’’ The ?rm
appealed to corporations to focus on the critical
‘‘core’’ areas of the business that create and sus-
tain competitive advantage and outsource such
non-core competencies (Matusik & Hill, 1998)
such as internal auditing. Arthur Andersen (AA)
de?ned its outsourcing services wrapped around
internal auditing as including: assisting manage-
ment in the planning and execution of the internal
audit process identifying customer needs assessing
risks supervising audits and communicating
results and performing partial outsourcing services
for peak period needs, international locations,
regulatory compliance, and EDP audits on both
recurring and non-recurring bases. Arthur Ander-
sen’s pamphlet listed the bene?ts of outsourcing in
terms highly consistent with the traditional out-
sourcing literature: outsourcing eliminates the
tasks of recruiting, training and maintaining
employees helps manage costs engenders objectiv-
ity, expertise and consistent quality leverages
existing internal audit resources focus on more key
organizational needs o?ers technologies or geo-
graphical ?exibility reduces ?xed salary costs shifts
liability for attestation assignments frees manage-
ment to focus on core competencies opens internal
audit services to the discipline of market forces and
engenders a dynamic for continual improvement —
all in a competitively priced package.
The position of AA as articulated by their
Director of Contract Audit Services is that the
audit business is evolving to meet the clients’’
needs in terms of broad business assurance as to
their procedures, processes, systems, and risk
areas. This view sees, and advocates, the tradi-
tional audit as migrating from auditing ?nancial
statements to auditing the business (Abbott, 1988;
Reed, 1996). The historical focus of attestation
remains important, according to this perspective,
but is of less value today than the need to assure
626 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
that business processes are in place to compete in
a rapidly changing world. While the ?nancial
statement remains important in the integration of
?nancial markets, this view argues that it is not as
relevant in the management decision making pro-
cess. Here, it is argued that the move to providing
contract audit services is a natural move to pro-
viding greater relevance to clients in an area in
which the public accounting ?rms have a compe-
titive advantage. Essentially, AA is stating that
business organizations want more than ?nancial
statement audits they want broader attestation
service — business risk/internal audit/consulting
services. Here, AA is interested in providing these
broader assurances in terms of how the host
organization benchmarks relative to best practice
processes/operational e?ciencies. At this point,
the internal audit becomes the mechanism where
AA attempts to blend the knowledge base of the
client with the broad knowledge of the business
and best practices.
Furthermore, the ?rm’s views, as expressed by
their Head of Contract Services believes that the
line between internal and external auditing is not
relevant (Abbott, 1988; Reed, 1996). Here the
?rms argues that indepedence is not a major issue
when AA performs outsourcing as long as the cli-
ent accepts the responsibility for the function as
outlined in the AICPA position. Critical in this re-
de?nition of the nature of the audit is the distinc-
tion between auditing and attestation. This views
suggests that while attestation services requires an
assertion (e.g. management’s assertion that the
?nancial statements are fairly presented) to a third
party recipient, auditing and assurance services do
not necessarily require these components. For
example, an auditor can provide assurances to
management on the e?ciency of its practices or
the likely e?ectiveness of its control practices
without performing the attestation function. The
resultant model for AA is a depiction of broad
range of services provided by external auditors
along the following continuum:
ATTEST—AUDIT—ASSURANCE—CONSULTING
Here, AA sees the challenge for the auditor is to
provide relevance to management, including control
e?ectiveness and strategic decision making along this
continuum. In other words, their changing external
audit philosophy is to adapt to business needs or face
the risk of becoming irrelevant. The resultant audit
service that AA o?ers as the outsourcer of internal
audit services emphasizes working as partners with
the organization to control business risk. AA
emphasizes three things to its potential client: (1) a
standardized approach to address risk in the fra-
mework of strategic management and operational
control (2) its access to ‘‘best practices’’ and (3) a
one-step solution to risk management. This stan-
dardized,‘‘one-stop’’ solution (Matusik & Hill,
1998) advocated in the AA (Arthur Andersen,
1995) brochure is revealed in the following:
We work with many of the world’s leading
companies to provide rigorous internal audit
and risk management services. We have the
skills and tools to help you access risk, evaluate
the e?ectiveness of your business and ?nancial
controls, and use best practices to continually
improve them. We can help you anticipate, not
simply react to risk, and put you in control.
Once the boundaries between external and
internal auditing are re-de?ned in AA’s terms, this
allows AA to advocate the advantages that they
perceive that their ?rm has in being the provider
of internal audit services. The Head of Contract
Services believes that the competitive marketplace
drives the demands for services. AA is essentially
justifying their position in terms of companies
wanting broader attestation — i.e. business risk,
internal audit, consulting services. This, in their
view, is part of the natural migration a migration
that ‘‘converts an in-house cost center into a cus-
tomer focused service operations’’ and allows
companies to sustain competitive advantage
through outsourcing such non-core competencies
as internal auditing (Arthur Andersen, 1995).
4.2. Ernst & Young
Ernst & Young’s (E&Y) depiction of the chan-
ging nature of the internal audit function also
advocates a continuing change in the boundaries
between the external and internal audit processes
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 627
(Abbott, 1988; Reed, 1996). Essentially this per-
spective sees the job of internal auditing as moving
closer to a consulting role. In this view, the ‘‘big-
gest issue the internal auditor faces today is not
the perceived threat of outsourcing but the chal-
lenge from management to add value to the com-
pany’’ (Internal Audit Alert, 1996, p. 4). As to the
future, their view is:
Ten years from now, the internal auditor will
be a high level management person who
knows about a business, its products, and risk
management. The internal auditor depart-
ment will be smaller, more high-powered, and
more ?exible. It will be part of a broader risk
management area, probably part of the
CFO’s world. There will also be more inter-
action and collaboration between internal
and external auditors (Internal Audit Alert,
1996, p. 5).
E&Y’s Director of Outsourcing Services argues
that the idea of ?nancial statement audits, internal
audits, and consulting being able to operate as
independent functions is a thing of the past
(Abbott, 1988; Reed, 1996). E&Y feels that these
functions need to become more focused on the
business processes — thus, a potential blurring of
the services. In serving the organization, internal
auditing will be called upon to serve on task for-
ces, while managers take on more of the control
function by doing more self-assessment. In this
view, the blending of these services allows the
organization to focus on pro?tability, thus
appealing to a market-solution to the delineation
of the responsibilities of the internal audit func-
tion (Matusik & Hill, 1998). This view sees the
audit market as existing on one common con-
tinuum (not as two distinct markets) where the
continuum runs from exclusive internal auditing
(and no external auditing) to exclusive external
auditing (and no internal auditing), with any
combination of the provision of internal auditing
and external auditing services in between. Here,
the Director of Outsourcing Services at E&Y
argues that the extent of outsourcing of the internal
audit function can be anywhere on the continuum.
In their experience, they have started with a client
on exclusive external auditing side of the con-
tinuum and have helped the client move towards
engaging E&Y in more-and-more internal audit
services. The E&Y position concedes that both the
internal and external audit groups need indepen-
dence to determine the scope of activities. How-
ever, this independence often results in audit
duplication. Therefore, it is argued that value can
be added (Matusik & Hill) by ‘‘objectively’’
reconsidering the costs related to monitoring the
boundaries between the external and internal audit
groups (Abbott, 1988; Reed). E&Yis convinced that
quality could be improved by removing the bound-
aries between the external and internal audits,
while retaining the critical bene?ts of objectivity
and independence. The perspective is this:
A look at the businesses we audit suggests an
answer. Time after time, in area after area,
business mangers have been able to ?nd ways
to re-engineer redundant or layered work
processes while both improving product or
service quality and reducing all-in costs. Why
should auditors, either internal or external, be
held to a lesser performance standard? Why
should the business practices and processes
followed by auditors be any less innovative or
?exible than those of their most successful
clients? (Anderson, 1994, p. 13)
A more speci?c example of the changing nature
of the business of internal auditing comes from
E&Y’s development of the outsourcing function in
Great Britain. One of their selling points as to the
non-core, public nature of the internal audit func-
tion (Matusik & Hill, 1998) is that internal audit-
ing tends to be ?xed in nature, but the risks of the
company, or management’s needs to have the
audit function focus on particular risks, may vary
over time (see Fig. 2). The E&Y partner in Lon-
don then asks the question whether there should
be a role that the outsourcer should play in assisting
the internal audit function. The obvious answer, in
his view, is that an outsourcer provides ?exible
sta?ng and expertise that will allow the internal
audit department to best address unaddressed risks
when they arise. His view then is a traditional
economic argument (Davis-Blake & Uzzi, 1993) in
628 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
terms of the bene?ts of outsourcing; i.e. ?exible
sta?ng can provide better coverage of risks
throughout the year at no additional cost. E&Y
then presents additional economic arguments for
utilizing outsourcing much in the same manner as
AA: organizations tend to underestimate the cost
of the internal audit function employment, and
other costs, e.g. bene?ts, are usually double salary
costs specialists, in such areas as treasury, will
reach issues (de?ne, analyze, and suggest solu-
tions) more quickly than non-specialists and
implementation of modern audit methodologies
and technology leads to savings in audit time of
about 20 to 50%.
In summary, E&Y’s approach to auditing has
evolved to emphasize auditing and risk analysis as
a core competency an approach which, in their
view, ‘‘transcends’’ traditional external/internal
audit boundaries (Abbott, 1988; Reed, 1996).
E&Y particularly bases its new audit philosophy
around the issue of information technology as the
?rm accelerates its development of a worldwide
knowledge base to share information as key to the
organization’s future success with this audit phi-
losophy. They believe that as organizations
become more dependent on information systems,
?rms will be able to invest in the technology that
visualizes the organizational processes, develop
tools that will help management monitor controls,
and develop audit techniques concurrent with the
technology which can add value to the organization.
Again, their view is that the value-added from
such inter-related use of the new technology would
be strongly retarded by audit boundaries which
only results in a duplication of services (Matusik
& Hill, 1998).
4.3. KPMG
KPMG’s new ‘‘Business Measurement Proces-
s’’provides an excellent overview of their new
audit approach which, as with the previous two
?rms, is justi?ed as being a much broader and
more meaningful than traditional ?nancial state-
ment audits (Abbott, 1988; Reed, 1996). This
Business Measurement Process is an endorsement
of the integrated audit approach because, in their
view, part of this integration may be due to the
fairly dramatic change taking place in their exter-
nal audit philosophy. They describe their
approach as follows:
Our internal audit methodology is based on a
combined assurance approach. It provides a
model for your internal audit function to
work closely with management and your
external auditors, so as to maximize the
internal control assurance provided to your
Audit Committee and provide e?ciency by
avoiding duplication.
Furthermore, KPMG has restructured its audit
approach along ?ve industry lines that represent
distinct service areas such as manufacturing,
Fig. 2. Challenges for internal auditing.
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 629
?nance, retail, entertainment, health care, and
high technology to enhance their newly de?ned
audit approach as one that focuses on operational
and business risks.
KPMG described their audit approach as one
that focuses on operational and business risks.
This approach contains two other dimensions that
blur the distinction between internal and external
audit services (Abbott, 1988; Reed, 1996). First, it
emphasizes a willingness to assist an organization
in starting an internal audit function. The intent
may to eventually bring the function in-house or
retain it as an outsourcing function. Second, they
have developed a ‘‘Quality Assurance Review and
Re-engineering’’ service speci?cally for existing
internal audit departments. They describe this lat-
ter approach as ‘‘an e?ective means of assessing
the performance of the internal audit function
against management expectations and best prac-
tices.’’ The services emphasize the standardized,
public nature of the internal audit function by
including benchmarking against other organiza-
tions that are similar in industry and basic attri-
butes (Matusik & Hill, 1998).
The contrasts that KPMG makes between the
old traditional audit (where KPMG does the
external audit and the company’s internal audit
department does the internal audit) versus their
world-class audit (where KPMG does both the
external and internal audit function) reveals their
e?orts to re-characterize the nature of internal
audit work (Abbott, 1988; Reed, 1996). The tra-
ditional audit (and traditional boundaries) simply
involves detection whereas the new world-class
audit (which blurs and blends the boundaries)
means that the company hires a risk partner. The
traditional audit simply provides an audit focus
the world-class audit provides business focus.
Other contrasts are just as apparent in their e?orts
to re-de?ne the audit process: cost focus versus
customer focus functional focus versus process
focus hierarchical versus horizontal green pen
versus harnessing technology and fragmented
approach versus integrated approach.
In summary, the actions of KPMG, as with AA
and E&Y, are fully consistent with the recent
AICPA (1996) document on Extended Audit Ser-
vices. These combined e?orts to rede?ne the nature
of internal audit work are indicative of the macro
forces which are shaping the nature of the internal
audit profession (Kalbers & Fogarty, 1995). At
stake are traditional lines drawn between the work
of the public accounting ?rms — the external
?nancial audit — and the work of the internal
audit profession — the internal audit (Abbott,
1988; Freidson, 1994; Reed, 1996). This line
between respective jurisdictional claims and the
e?orts to blur these lines are at the core of Hop-
wood’s (1998) concern as to the commercialism of
the audit industry and, more speci?cally, support
Abbott’s (1983) contention as to the signi?cance
of claims for the exclusive right to control speci?c
work activities as being the critical, distinguishing
characteristic of professional occupation. In this
vein, we are interested in the manner in which the
work of internal auditing is de?ned — here from
the side of three of the ?rms in the public
accounting profession. According to Reed, the
politics of expertise, in turn, revolve around the
knowledge base with which professional stature is
claimed, the technical work and bene?ts for clients
derived from this knowledge, the political strate-
gies used to defend a jurisdiction, and the organi-
zational forms used to mobilize expertise. Also,
more speci?cally, the positions taken by these
three ?rms support Matusik and Hill’s (1998)
hypothesis that these ?rms would characterize
internal audit work as being predominantly pub-
lic, non-core knowledge that should be exposed to
the discipline of market forces (Halal, 1994).
5. Analysis: e?orts by the internal audit profes-
sion to re-a?rm the boundaries between the
external and internal audit function
The Institute of Internal Auditors (IIA) (1978)
developed a codi?ed set of Standards for the Pro-
fessional Practice of Internal Auditors that includes
the association’s de?nition of internal auditing.
Here, the IIA presented the case for internal audit
services remaining a strictly in-house function and
established the point that keeping the internal
auditing function as an integral part of the orga-
nization o?ers clear advantages. Extending this
view, the IIA’s (1994, p. 2) own white paper
630 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
emphatically stated that a ‘‘competent internal
audit department that is properly organized with
trained sta? can perform the internal audit func-
tion more e?ciently and e?ectively than [an
externally] contracted service.’’ Consistent with
the political advantage of organizational profes-
sionals being localized knowledge (Reed, 1996),
the primary rationale for this position was that
internal auditors are ‘‘intimately acquainted with
their organizations’’ policies, procedures, operat-
ing practices, and personnel’’ (IIA, 1994, p. 3).
The IIA argued that through day-to-day experi-
ence in the business, internal auditors acquire —
and operate from — an intimate knowledge of an
organization’s culture, processes, risks, and con-
trols, and thereby obtain the ‘‘proprietary knowl-
edge’’ that ?gures prominently in giving competitive
management advantage to their client (Matusik &
Hill, 1998). The insight and expertise of internal
auditors, it was argued, enables them to provide
management with tailored services, especially in
the regulated areas of internal control risk analy-
sis. In short, the IIA’s position was that internal
auditing professionals know and understand the
organizations to a degree that such outsiders as
public accountants cannot, and their loyalty and
con?dentiality are ensured by the internal nature
of their function (Pelfrey & Peacock, 1995).
Moreover, consistent with the assertions of the
outsourcing literature (Bettis & Hitt, 1995; Davis-
Blake & Uzzi, 1993; Tsui et al., 1995), the IIA’s
position elaborated on the disadvantages of out-
sourcing which they de?ned as: the lack of inde-
pendence on part of external auditor violates
AICPA ethics it attempts to take away manage-
ment’s responsibility for internal control and
thereby contributes to an irrevocable diminish-
ment of the value of the external audit services in
?nancial markets high learning curve costs high
cost potential loss of direct management control
over and orchestration of internal audit function
possible loss of informal and potent communica-
tions disruption caused by a change in the locus of
who performs the services potential loss of com-
petitive advantage concerning proprietary infor-
mation and a loss of checks and balances.
The most forceful expression of the IIA’s position
against the outsourcing of internal audit services to
the external auditor came on 19 January 1996
when the IIA boldly presented its views at the
open session of the Professional Ethics Executive
Committee of the AICPA. This open session was
part of the protocol whereby the Committee soli-
cited input for its eventual 28 February exposure
draft (described earlier) and, in turn, resultant
May 1996 o?cial interpretation, Extended Audit
Services. At this 19th January meeting, the IIA
(1996a, p. 1) made its position clear:
The IIA is opposed to total outsourcing of
the internal audit function to a company’s
external auditor because it impairs the [CPA]
?rm’s independence. Internal auditing is a key
management function that con?icts with the
public accountants’’ responsibilities to be
independent of management. (1996a, p. 1)
In this open hearing, the IIA also made strong
reference to the frustration that the SEC was hav-
ing over the lack of guidance from the AICPA
regarding the implications of outsourcing on audit
independence. The IIA stressed that its representa-
tive to the SEC was going to take the o?cial posi-
tion on behalf of the IIA that ‘‘monitoring and
control activities’’ could not be assumed by exter-
nal auditors without impairment of independence.
The assertive position by the IIA to defend the
internal audit function against e?orts to outsource
these services can be exempli?ed by the strength of
the internal audit departments of two major cor-
porations in their e?orts to re-a?rm their primary
role in the provision of internal audit services. The
combined e?orts of the IIA, and the two compa-
nies as illustrations of these e?orts, illuminate the
issues raised in the second research proposition of
this study which argued that corporate internal
audit departments will attempt to re-a?rm the
boundaries of the external and internal audits in an
e?ort to retain their provision of internal audit ser-
vices. Furthermore, these corporate internal audit
departments will attempt to de?ne their provision of
the internal audit function in line with broader
organizational imperatives. A common theme in
these in-house e?orts to retain their provision of
internal audit services is the attempt to rea?rm
the boundaries of the external and internal audits,
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 631
thus claiming the exclusive right to control speci?c
work activities (Abbott, 1988; Reed, 1996).
Furthermore, both companies all seem to char-
acterize the internal audit function in terms of
private, architectural knowledge that is much too
valuable to the competitive position of the com-
pany to outsource (Matusik & Hill, 1998).
5.1. S. C. Johnson Wax
The Director of Corporate Audit suggested that
the internal audit function at S. C. Johnson Wax is
embedded within a commitment from the highest
levels of management to a strong business process
control environment within the company. This
commitment is expressed in a document that is
provided to all key managers. Here the CEO of
the company stated:
Wildly ?uctuating economies and competitive
situations, shifting customer demands and
priorities. . . the business environment con-
tinues to change at a breakneck pace. To
manage e?ectively, business must have solid
management and internal controls in place.
Furthermore, the CEO wrote:
I encourage you to read this brochure and
partner with Corporate Audit in achieving
our corporate objectives.
Essentially, the CEO’s message emphasized the
importance and value of controls in achieving
business objectives. The CEO referred to Corpo-
rate Audit in terms of helping the company remain
innovative by sharing ideas. Consistent with the
importance of nature of private, architectural
knowledge, the CEO perceived and advocated a
very broad and signi?cant mission for the internal
audit function.
Likewise, the internal audit department,
through its Corporate Audit Vision and Mission
Statement promoted this signi?cant role for itself
(see Fig. 3). Note the key issues in their statement:
This internal audit department provides ‘‘internal
consulting and audit services that align with the
company’s business directions and priorities.’’
Consistent with Reed’s (1996) notion of politics of
expertise, the knowledge base as espoused by this
internal audit department is indeed aligned with
critical bene?ts for its clients. Furthermore, this
department provides ‘‘value added’’ services that
redesign business processes, increase operational
e?ciencies, assess risk to assets and operations,
and provide solutions for improving controls, and
perhaps most importantly, and consistent with
Matusik and Hill (1998), this critical architectural
knowledge is provided by an internal audit
department that enjoys a ‘‘uniquely broad expo-
sure to all business activities at di?erent company
locations’’ with such exposure providing unique
‘‘insight into S. C. Johnson Wax’s methods, pro-
cedures and multinational operations.’’
The internal audit department has solidi?ed its
integration with the strong business process con-
trol environment within S. C. Johnson Wax. Here
Corporate Audit’s emphasis is essentially to iden-
tify the key core processes and the key control
processes. Rather than perform risk analysis by
Corporate Audit, they have moved to a model in
which the risk issues are ?lled out by business
managers (Simons, 1995). The internal audit
group helped write a corporate policy on controls
and have taken an active lead in facilitating con-
trol self assessment. The Director of Corporate
Audit, consistent with the CEO’s emphasis on
business controls, has stressed that control is an
integral part of the business and its importance
ought to be ingrained in the basic business func-
tions. From the risk issues, Corporate Audit
describes the risk into de?nable audits and objec-
tively determines priorities for the year. In their
reports, they provide feedback to management
and the auditee as to the progress made in dealing
with the risks during the year and whether or not
signi?cant risks may have overlooked. From the
risk analysis, Corporate Audit developed an audit
plan for the coming year and presents the plan to
the Audit Committee.
The Director of Corporate Audit is very cogni-
zant of the trend towards the outsourcing of
internal audit departments. As evidenced by the
Corporate Audit Vision and Mission Statement, he
has taken a strong position that the internal audit
departments that are likely to get outsourced are
632 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
those who do not add value to the organization
(Matusik & Hill, 1998). Here it is believed that
operational auditing is the key to the future of
internal audit departments. In this regard, S. C.
Johnson Wax benchmarks its audit function with
a group of 30 internal auditing departments in the
consumer product category which includes such
companies as RJR, ConAgra, Kraft, Procter &
Gamble, etc., to monitor the productivity of their
own internal audit department. Furthermore,
Fig. 3. S. C. Johnson Wax, Vision and Mission, Corporate Audit Services.
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 633
Corporate Audit at S. C. Johnson’s Wax has re-
de?ned its relationship with their external auditors.
Corporate Audit is now looking to re-claim into
operational audits all of what they had provided
as support services to the external audit, and, in
return, give all the ?nancial audit work back to
their external auditor. Such re-shu?ing of the
various audit responsibilities serves to delineate
and re a?rm traditional professional jurisdictions
(Abbott, 1983; Reed, 1996).
5.2. J. C. Penney
The second company examined was J. C. Pen-
ney where corporate culture and strong manage-
ment support is an integral part of the internal
audit structure. The seriousness of this manage-
ment support is evident in the auditor’s Bill of
Rights published by management. This Bill of
Rights clearly de?nes important aspects of the
corporate culture and internal audit’s role in that
culture. The Bill of Rights is published by man-
agement telling its internal auditors their rights,
including: right to full understanding of the cor-
porate policies they are expected to enforce right
to be problem solvers as well as problem identi-
?ers and, consistent with the notion of private,
architectural knowledge (Matusik & Hill, 1998), a
right to brought into the mainstream of the com-
pany. Furthermore, the Bill of Rights stresses that
the internal auditors have a right to complete
understanding of the company’s goals and aspira-
tions right to the total support of the company’s
top management and, most signi?cantly, the right
to feel important — indispensable, in fact — to
corporate management (Abbott, 1983; Freidson,
1986; Reed, 1996).
The Director of internal auditing at J. C. Penney
believes that the building and maintenance of this
architectural knowledge (‘‘the internal audit
department achieves a competitive advantage’’) is
done through (1) knowing the business and (2)
performing comparative analysis and benchmark-
ing within units. As an example of comparative
analysis, the audit team will compare catalog desk
operations with others in the company on
approximately 50 dimensions to identify opportu-
nities for improvement. Such benchmarking has
resulted in the company feeling that internal
auditing has developed a unique skill in perform-
ing exception analysis and turning exceptions into
constructive recommendations for improvement.
Essentially, the internal audit department at J. C.
Penney espouses that it is committed to ‘‘value-
added services.’’Internal auditing is being asked to
service on a number of study groups including
JIT, merchandising, and streamlining. The Direc-
tor points out that these are important, corporate-
wide study groups that enhance the contribution
of the internal audit department.
The Director viewed the future maintenance of
the architectural foundation of internal auditing at
J. C. Penney as one which the internal audit is to
be intertwined with management. Here the
emphasis is that the primary reporting is to man-
agement with a secondary reporting to the audit
committee. The Director feels that by making the
audit committee the primary user of internal audit
only sets up internal audit for outsourcing because
it can contribute to the audit committee wanting
something even more removed from management
such as outsourced internal audit services. The
Director wants to be involved with more cross
functionality diagnostic reviews and exception
analysis — all contributing to the internal audit
department retaining its competitive edge. The
Director of internal auditing feels that if the orga-
nization believes in the integrity of its management
and the commitment to the control environment,
and a long run perspective, then it makes the most
sense to report to management and to become
involved in identifying business opportunities as
does the internal audit department. Finally, the
Director sees the future of his internal auditing
group as being strongly tied to the use of the
external auditors. Here the intent is return the
work performed by internal auditing pertaining to
the ?nancial audit, such that the external auditors
can do the entire ?nancial audit. In turn, the
internal audit department can concentrate on
identifying business opportunities, thus clearly
delineating and re-a?rming traditional profes-
sional jurisdictions (Abbott, 1983; Reed, 1996).
In summary, the actions of J. C. Penney, like S.
C. Johnson Wax, are fully consistent with the tra-
ditional IIA (1978, 1994, 1996a, 1996b) position to
634 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
defend the internal audit function against e?orts
to outsource these services. These combined
e?orts to rea?rm the nature of internal audit
work are indicative of the macro forces which are
shaping the nature of the internal audit profession
(Kalbers & Fogarty, 1995). At stake are tradi-
tional lines drawn between the work of the public
accounting ?rms — the external ?nancial audit —
and the work of the internal audit profession —
the internal audit (Abbott, 1988; Freidson, 1994;
Reed, 1996). This line between respective jurisdic-
tional claims and the e?orts to rea?rm these lines
are at the core of Abbott’s (1983) contention as to
the signi?cance of claims for the exclusive right to
control speci?c work activities as being the critical,
distinguishing characteristic of professional occu-
pation. In this vein, we are interested in the man-
ner in which the work of internal auditing is
de?ned — here from the side of two internal audit
departments. According to Reed, the politics of
expertise, in turn, revolve around the knowledge
base with which professional stature is claimed,
the technical work and bene?ts for clients derived
from this knowledge, the political strategies used
to defend a jurisdiction, and the organizational
forms used to mobilize expertise. And, more spe-
ci?cally, the positions taken by these two in-house
internal audit departments ?rms support Matusik
and Hill’s (1998) hypothesis that these depart-
ments would characterize internal audit work as
being predominantly private, architectural knowl-
edge that is too valuable to the competitive posi-
tion of the company to outsource.
6. Beyond the public accounting ?rms and in-house
internal auditors: implications for future research
As suggested in Fig. 1, although the major focus
of this research has been to draw from the sociol-
ogy of professions and the outsourcing literature
to theoretically motivate the study of the tensions
between the public accounting and internal audit
professions over the internal audit function
(research propositions 1 and 2), additional social
actors were implicated in our analysis and need to
be subject to more systematic analysis in future
research for deeper understanding of their roles in
these battles between the professions. To some
extent, this comment is a re statement of Kalbers
and Fogarty’s (1995) critical observation that the
construct of professionalism in accounting and
internal auditing is much more complex, needing
recognition of the more macro-behavioral forces
which need to be considered as impacting the
professions. For example, the battle between the
public accounting ?rms and the in-house internal
auditors seemed to be also being played out at the
professional association level — between the
AICPA and the IIA. And, besides the AICPA and
the IIA, the SEC (who, while not directly con-
cerned with outsourcing, per se, becomes con-
cerned in terms of the implications for external
auditor independence) seemed to have more than
an insigni?cant role in our study a role that might
o?er fruitful insight from future research.
6.1. The changing position of the IIA
The strong position that IIA took against the
outsourcing of internal audit services to the exter-
nal auditor at the open session of the Professional
Ethics Executive Committee of the AICPA on 19
January, 1996 took a dramatic, immediate, and
almost inexplicable change. The IIA’s March/
April newsletter re?ected a more conciliatory
position with the public accounting profession
when they stated that as a result of a ‘‘meeting
with representatives of major accounting ?rms
that provide internal auditing services,’’ the IIA’s
leadership concluded that there is a need to chart a
new ‘‘enlightened’’ path for the future, which they
articulated as follows:
The IIA and its membership must refocus
energy spent in challenging the outsourcing
issue to improving the quality of internal
audit functions. The answer to ‘‘who does it
best’’ should be determined in the competitive
market place .. . . The door must be opened to
include internal audit professionals regardless
of employer. The trend toward outsourcing
will continue, and third-party providers are
an increasing segment of the IIA membership
[roughly 500 members].. . . The path to this
position has been a very di?cult one. Even
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 635
though we still have independence concerns and
preferences for internal operations, the trend
toward greater e?ciencies and involvement
by third-party providers is very evident. In
order to maintain a position of leadership and
authority, the IIA must begin to adapt our
thinking and processes so that we can help all
practitioners and ensure that the profession
of internal auditing is well understood by its
clients. Thus, the IIA intends to recognize
internal auditors as potential members based
on what they do rather than who employs
them (IIA, 1996a, p. 4).
In a fairly candid confession of its acquiescence
to the Big Five ?rms, the IIA newsletter acknowl-
edged that:
Outsourcing is increasingly used as part of re-
engineering and downsizing, and this trend is
much larger than the function of internal
auditing. All major public accounting ?rms
now seem to be pursuing these services with
some degree of enthusiasm. Given the growth
and possible success of these e?orts, the
question for the IIA is whether it is postured
to achieve its goals and objectives if it cannot
help increase the internal audit e?ciency and
e?ectiveness of the contract (outsourced)
providers (IIA, 1996a, p. 3).
The IIA newsletter also conceded that:
It is important for the IIA to reassess our
bedrock mission and chart a course that
identi?es common ground on which future
activity can take place. As more and more
contract providers enter the public and pri-
vate sectors, the IIA must address their pro-
fessional needs. Otherwise we may end up
trying to achieve objectives of leadership and
authority, only to ignore a large segment of
internal audit practitioners. At a minimum
this calls for another look at who we consider
to be internal auditors and how the IIA
relates to major providers, e.g., public
accounting ?rms that provide internal audit
services (IIA, 1996a, p. 3).
The closing comments in the IIA newsletter
provide a realistic perspective of: the needs of the
IIA taking precedence over those of internal audi-
tors the economic imperative of ‘‘clients’’ and
trends of public accounting ?rms, now reclassi?ed
from being ‘‘a?liates’’ to ‘‘fellow’’ — not
competing — practitioners, being in the relatively
lucrative domain of internal auditing:
The IIA is postured to work with public
accounting ?rms in all aspects of the profes-
sion and will not oppose the development of
this market. The door is open to cooperation
across the full range of IIA activities.. . . The
greatest risk to both external and internal
auditors is to be considered irrelevant to the
successful attainment of corporate objectives
(IIA, 1996a, p. 6).
The signi?cant shift in the IIA position that
took place in the Spring of 1996 came to be more
formally embodied in the Fall of 1996 with the
IIA’s (1996b) o?cial position being expressed in a
Exposure Draft of a Professional Issues Pamphlet
on Internal Auditing and Outsourcing. Thus, in
terms of Abbott’s (1988) notion of jurisdic-
tional claims and control of work activities
being at the core of the concept of profession,
the dramatic change in position by the IIA
seems to be recognizing the tensions inherent in
the e?orts to expand jurisdictional claims. As
Hopwood (1998, p. 516) stated, ‘‘Faced with
the stark commercialism of the new world of
audit and consultancy, there is an increasing
case for their analysis and appraisal.’’ Indeed,
the actions of the IIA do represent dramatic
disputes over jurisdictions which are still in
process of playing out as evidenced by the major
shift in position by the IIA (Freidson, 1986, 1994;
Reed, 1996). The turmoil in these professional
disputes is somewhat encapsulated in the follow-
ing petition:
At a growing number of companies, internal
auditors are no longer performing internal
auditing. Rather, such auditing is being
performed by public accounting ?rms — in
many instances by the same ?rm that does the
636 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
annual ?nancial statements. The IIA has taken
no e?ective action to stop the public accoun-
tants e?orts to displace internal auditors. To
the contrary, the IIA has e?ectively sup-
ported the public accounting ?rms in this
e?ort by changing the de?nition of internal
auditing to encompass work done by external
auditors.. . . and generally embracing as fel-
low internal auditors those public accoun-
tants who are working diligently to displace
internal auditing departments.
We the undersigned are aware that internal
auditing departments are being displaced by
public accounting ?rms and that the IIA,
rather than defending the profession, has
chosen to welcome the public accounting
?rms as fellow internal audit practitioners
and has taken various steps to accommodate
the public accountants, with the most well-
known being the revision of the de?nition of
internal auditing.. . . We are not pleased with
the IIA’s actions to date nor with the IIA’s
current course in response to the challenge of
our profession presented by the Big 5 public
accounting ?rms.. . . [W]e do not wish to see
any of the current [IIA Board] members re-
elected (Petition amongst IIA members, Jan-
uary 4) (IIA, 2000).
Thus, the combination of the battles that the
internal audit profession has with the public
accounting profession, along with their own bat-
tles internally as suggested by these serious char-
ges against the IIA leadership by a ‘‘few’’
disgruntled members of the professional, provides
a greater appreciation for the comments made by
Kalbers and Fogarty (1995) who stressed that the
construct of professionalism in internal auditing is
much more complex than typically presented in
accounting research.
6.2. Auditor independence, outsourcing, and the SEC.
The developments in terms of this debate as to
the boundaries of the internal and external audits,
as re?ected in the AICPA’s Ethics Rulings as well
as the movements by the individual ?rms, have
not gone un-noticed by the SEC. This is critical
because while the AICPA and the three ?rms
examined have argued that blurring of boundaries
in the re-de?nition of the external and internal
audits are a non-issue, important constituencies
such as the government may feel otherwise. At
issue is the public accounting profession’s claim of
neutrality and independence in the exercise of
their new expertise (Freidson, 1986; Reed, 1996).
As Reed (p. 588) observed, ‘‘Once they become
‘tainted’ through a much closer incorporation into
business practice, the disinterested claim to moral
and cultural authority is increasingly di?cult to
sustain.’’ Shaping the jurisdictional disputes of
these professional groups instigates the concerns
of an institutional environment that Reed (p. 586)
characterizes as being comprised of the ‘‘state,
political ideologies and policies highly suspicious
of, if not downright hostile to, professional
power.’’ Such an environment of regulation and
suspicion tends to further accentuate the dramatic
disputes over jurisdictions (Freidson, 1994). Signs
of such concern and suspicions are evident in
comments of Arthur Levitt, Chairman of the SEC
at the time, who raised questions about the
expansion of audit services in a speech given in the
Summer of 1996:
If I may digress for a moment: I’m deeply
concerned that ‘‘independence’’ and ‘‘objec-
tivity’’ are increasingly regarded by some as
quaint notions.. . . There are those who say
that increasing competition puts pressure on
accountants to branch out and try new ways
to generating pro?ts. I caution the industry, if
I may borrow a Biblical phrase, not to ‘‘gain
the whole world, and lose [its] own soul
(Levitt, 1996a).
Chairman Levitt (1996a, p. 5) noted the emer-
ging services o?ered by public accounting ?rms
and worries that the ‘‘traditional understanding of
the need for auditors to be absolutely and
unquestionably independent’’ may be slipping
away. Chairman Levitt (1996a, p. 6), implying
that the monopoly power granted external audi-
tors could to revoked, discussed the bene?ts and
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 637
costs to the profession for the special obligations
that where in a professional monopoly:
The price the profession pays for this special
role is to accept important limitations on its
activities.. . . To maintain both the fact and
appearance of independence — and thus the
con?dence of investors — auditors must
avoid all suggestions of mutuality of interests
with management of registrants for which an
auditor provides services.. . . [auditors] can’t
participate in management activities of audit
clients. Moreover, auditors can’t sell services
that leave them auditing their own work. (See
also Levitt, 1996b, 1998)
Extending this view, the SEC Chief Accountant
at the time, Michael Sutton (1996), took direct
aim at the AICPA’s (1996) o?cial position
approving of a CPA’s performance of internal
audits for external audit clients forti?ed by their
own self-policing of the independence issue:
The continuing concern about auditor inde-
pendence is an issue that has serious implica-
tions for the image and stature of the
profession — one that the leadership of the
profession, including its self-regulatory pro-
cesses, needs to address.. . . We have to avoid
seeking solutions that sound good, but that
are ‘fuzzy‘‘ and avoid taking meaningful
action and, thus, raise independence to a
higher level of concern.
Thus, in terms of Abbott’s (1988) notion of jur-
isdictional claims and control of work activities
being at the core of the concept of profession, the
SEC seems to be recognizing the tensions inherent
in the e?orts to expand jurisdictional claims as
they warn that such e?ort to ‘‘gain the whole
world’’ not be done at a price of ‘‘losing its soul’’. Re-
casting this point more bluntly and without the use
of Biblical metaphors, Hopwood (1998, p. 516) sta-
ted, ‘‘Faced with the stark commercialismof the new
world of audit and consultancy, there is an increas-
ing case for their analysis and appraisal.’’ Indeed, the
actions of the AICPA and public accounting ?rms
do represent dramatic disputes over jurisdictions
where the eventual impact of the government
(Freidson, 1986, 1994; Larson, 1977; Reed, 1996)
seems to be just starting to play itself out.
7. Closing discussion
Our paper has attempted to advance several
critical issues pertaining to the current turmoil
surrounding the trend toward the provision of
internal audit services on an outsourced basis to
the external ?nancial auditors. At the most general
level, this study attempted to provide some initial
e?ort towards Hopwood’s (1998) charge that if
auditing research ‘‘. . .is to be meaningful in the
modern era the world view of the research com-
munity must change.’’ Our study took serious the
various WSJ articles with their tongue-in-cheek
headlines (‘‘Who is Going to Audit the Auditor’’
and ‘‘In with Outsourcing, Out with the Audit’’)
that signaled that much is at stake here: for the
public accounting ?rms seeking revenue growth
for the internal auditors who are protecting their
work for the host organizations attempting to
assess the optimal manner in which to have these
services provided for the respective professional
associations and, obviously, for the SEC in the
form of their biblical metaphors which have
expressed broader social and economic concerns.
The di?erentiation between the external and
internal audit profession may be the possession of
a body of abstract knowledge on which the occu-
pation bases its claims for the exclusive right to
control speci?c work activities. Such claims to
work, from Abbott’s (1988) perspective, is the cri-
tical, distinguishing characteristic of professional
occupation. Abbott’s (1988, 1983) approach
emphasized that the analysis of the tasks or work
activities of occupations is the key to under-
standing changes in professionalization. In this
vein, we are interested in the manner in which the
work of internal auditing is de?ned–from both
sides of the competing professions. Our results
corroborate the theorizing found in the sociology
of professions area (Abbott, 1988; Freidson, 1994;
Reed, 1996), that the transformation of a jurisdic-
tion should be accompanied by not only con?ict,
but by modi?cation of codes of ethics, and the
638 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
respective professions’ abstract system of knowl-
edge. Indeed, we found that the profession of
knowledge work was highly abstract and reliant
on a series of societally prized, though vaporous,
even mythical (Alvesson, 1993) terms that have
become institutionalized in their own right as
demonstrating organizational/professional pro-
gressivism. The views from both sides of the pro-
fessional arguments implied that surely a
professional must be engaged (from an external
source per the public accounting profession, from
an internal source per the internal auditing pro-
fession) to assist the client survive in this new era
of global relations and rapidly changing condi-
tions (Abbott, 1988).
Here, the rhetoric used in establishing the jur-
isdictional claim of Big Five ?rms as to internal
auditing appeared to almost draw on as script
both the sociology of professions (e.g. Abbott,
1988; Reed, 1996) and outsourcing (e.g. Davis-
Blake & Uzzi, 1993; Matusik & Hill, 1998) litera-
tures in voicing, for example, their attributes of
being global knowledge professionals having
unparalleled access to public, albeit arcane infor-
mation. Likewise, the IIA (at least initially) and
the corporate internal audit departments drew
upon as script this same literature in voicing its
unique local knowledge and command of private
information. Combined, both professional groups
appeared to relegate the work of the external
?nancial audit to service public, non-core compo-
nent information leaving the disputable portion in
terms of the degree of ‘‘architectural-level’’ char-
acter and strategic sensitivity of internal audit
work (Matusik & Hill, 1998).
We anticipate that these public/private infor-
mation and non-core/architectural distinctions
raised by the outsourcing and sociology of pro-
fession’s literatures will degenerate with the per-
formance of internal audits by external auditors.
As the Big Five ?rms perform these services, they
will perform not only non-core component, but
also architectural level work (and hence must gain
access to private information), and this degenera-
tion of jurisdictional claims to work and related
implications of such degeneration is only begin-
ning to reveal itself as the full force of all the cri-
tical social actors: actors beyond the public
accounting ?rms themselves and the corporate
internal auditors.
Acknowledgements
The authors wish to thank two anonymous
reviewers, Anthony Hopwood, and participants at
the doctoral seminar at the University of Wiscon-
sin-Madison for their many thoughtful comments
on earlier versions of this paper.
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doc_228877639.pdf
This paper examines the recent trend towards the outsourcing of internal audit services to the public accounting
profession. Here we draw from two dominant literature perspectives (the sociology of professions literature and the
outsourcing literature) to examine this clash between the public accounting profession and the internal auditing profession
over the provision of internal audit services. Two major research propositions are postulated from which to
consider these issues. These propositions concern themselves with the efforts of both the public accounting profession
and the internal audit profession in this outsourcing debate. We examine these professions both in terms of volitional
professional behavior (as espoused in the sociology of professions literature) and organizational arguments (inherent
advantages and disadvantages of the externalization of work as typically espoused by the outsourcing literature).
Internalization versus externalization of the internal
audit function: an examination of professional and
organizational imperatives
Larry Rittenberg, Mark A. Covaleski*
School of Business, University of Wisconsin — Madison, 975 University Avenue, Madison, WI 53706, USA
Abstract
This paper examines the recent trend towards the outsourcing of internal audit services to the public accounting
profession. Here we draw from two dominant literature perspectives (the sociology of professions literature and the
outsourcing literature) to examine this clash between the public accounting profession and the internal auditing pro-
fession over the provision of internal audit services. Two major research propositions are postulated from which to
consider these issues. These propositions concern themselves with the e?orts of both the public accounting profession
and the internal audit profession in this outsourcing debate. We examine these professions both in terms of volitional
professional behavior (as espoused in the sociology of professions literature) and organizational arguments (inherent
advantages and disadvantages of the externalization of work as typically espoused by the outsourcing literature).
#2001 Elsevier Science Ltd. All rights reserved.
1. Introduction
A marketing brochure of Arthur Andersen
(1995) stated that the outsourcing of internal audit
services is a ‘‘strategic concept — a way to add
value to a business — that converts an in-house
cost center into a customer-focused service opera-
tion with you as the customer.’’ The ?rm appealed
to corporations to focus on the critical ‘‘core’’
areas of the business that create and sustain com-
petitive advantage and outsource non-core com-
petencies such as internal auditing. The alternative
view to these alleged advantages of the outsourcing
of internal audit services comes from, as might be
expected, in-house internal audit departments
such as the one at J. C. Penney. The internal audit
department at this company espoused its commit-
ment to ‘‘value-added services’’ and argued that
their internal audit department achieves a compe-
titive advantage through knowing the business
and performing comparative analysis and bench-
marking within units. In fact, J. C. Penney has an
Internal Auditor’s Bill of Rights which states that
its internal auditors have ‘‘the right to feel
important — indispensable, in fact — to corporate
management.’’
To some extent, these opposing views as to the
appropriate manner in which to have internal
audit services provided — to have such services
outsourced to a public accounting ?rm (as argued
by a public accounting ?rmproviding these services)
or to have such services maintained in-house (as
argued by an in-house internal audit department) —
are no surprise. Such self-serving expressions of
0361-3682/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved.
PI I : S0361- 3682( 01) 00015- 0
Accounting, Organizations and Society 26 (2001) 617–641
www.elsevier.com/locate/aos
* Corresponding author. Tel.: +1-608-262-4239; fax: +1-
608-263-0477.
E-mail address: [email protected] (M.A. Covaleski).
optimal internal audit practices are a re?ection of
Hopwood’s recent (1998, p. 515) observation as to
the changing nature of the audit industry:
. . .changes afoot are taking place in the audit
industry, including the audit itself. Ernst &
Young, for example, now claim that it ‘‘has
challenged all aspects of the traditional
audit’’. Professionalism has been replaced by
business acumen. Notions of independence
seem curiously antiquated in a world where
audit is conducted in the very same business
unit as the promotion of consultancy products
and services. Even ideas of ‘‘paper walls’’
between the professional and the commercial
are now remnants of the past in audit orga-
nizations that pro-actively structure their
operations to facilitate the commercial
potential of the joint operation of the two.
At a very general level, these contrasting views
as to the provision of internal audit services pro-
vide a meaningful arena for more research which
addresses some of the more macro behavioral
issues which are shaping the internal auditing
profession (Kalbers & Fogarty, 1995). At the
heart of the development of the internal auditing
profession are such issues as the battle for profes-
sional turf (Abbott, 1988; Freidson, 1986; Reed,
1996) in terms of e?orts towards self-motivated
market control, as well as changing organizational
structures and processes such as outsourcing (Bet-
tis & Hitt, 1995; Davis-Blake & Uzzi, 1993; Halal,
1994; Matusik & Hill, 1998; Wallace, 1995) within
which internal auditing is embedded.
The purpose of our paper is to draw from two
dominant literature perspectives to examine the
changing nature of the internal auditing profes-
sion. The next section of this paper presents these
theoretical arguments supporting the paper and
the resultant research propositions to be exam-
ined: the sociology of professions literature which
provides a theoretical basis from which the voli-
tional behavior of both the public accounting
?rms and the corporate internal audit departments
can be recognized and the outsourcing literature
which frames the organizational arguments
(changing organizational structures and processes)
which are challenging all internal support
services — not just internal auditing — in terms of
their inherent ‘‘value-added’’ relative to the out-
sourcing of such services.
The third section of the paper provides a dis-
cussion of the research methods used in this study.
Fig. 1. An overview of the research study.
618 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
The fourth section will be guided by the ?rst
research proposition which presents observations
related to the e?orts of the public accounting
profession to stake to claim internal auditing work
(see Fig. 1). Here we will consider both the voli-
tional professional behavior of the public
accounting profession (as espoused in the sociol-
ogy of professions literature) and organizational
arguments (inherent advantages of the externali-
zation of organizational processes as espoused by
the outsourcing literature). This public accounting
profession perspective will be grounded by obser-
vations from recent positions taken by the AICPA
and the active role of three public accounting ?rms
(Arthur Andersen, Ernst & Young, and KPMG)
which have taken aggressive positions in the e?ort
to market their delivery of internal audit services.
The second research proposition which pertains to
the internal audit profession perspective (see
Fig. 1) will then be presented in section ?ve both
in terms of the volitional professional behavior of
the internal audit profession as well as the organi-
zational arguments as to the inherent advantages
of the internalization of organizational processes.
This internal audit profession perspective will be
grounded by observations from: early IIA posi-
tions on this issue as well as the advocacy from
internal audit departments (S.C. Johnson Wax
and J. C. Penney) which have thus far successfully
defended their delivery of internal audit services.
The sixth section of the paper o?ers additional
observations and suggestions for future research
revolving around some of the dynamics identi?ed
in this research pertaining to other critical social
actors (the IIA and the SEC — see Fig. 1) who,
although not the major focus of the study, seemed
to be making a signi?cant impact on the changing
public accounting and internal audit professions.
The ?nal section of the paper provides a closing
discussion.
2. Two major forces: inter-professional competi-
tion and organizational imperatives
The tension that was apparent in the di?ering
views of Arthur Andersen versus J. C. Penney as
to the nature of the internal audit function can be
addressed from the sociology of professions lit-
erature which recognizes that both sides (the
internal and external auditors) are capable of
engaging in volitional professional behavior in the
protection and/or advancement of their respective
professional turf. These di?ering views can also be
addressed through the outsourcing literature
which recognizes that both sides can stake claim to
traditional organizational arguments regarding
the inherent advantages and disadvantages of
externalized work. This section of the paper will
provide a theoretical backdrop from the sociology
of professions literature and the outsourcing lit-
erature from which to consider these dramatic
changes in the internal audit profession.
2.1. Sociology of professions
Abbott’s (1988) work on the manner in which
occupations de?ne their jurisdiction in terms of
the right to control the provision of particular
services and activities becomes helpful to address
the increasing trend in outsourcing of professional
work. Abbott (1988) was concerned with the
manner in which the work content of a profession
may become routine and cast o?, while other parts
of work content may become elaborated and
de?ned as the core of the profession (Tolbert,
1990). Thus, as Abbott (1988) suggested, an occu-
pation’s ability to assume exclusive control of
work activities depends largely on inter-profes-
sional competition. This point is important
because it basically states that one professional
occupation such as internal auditing cannot be
studied in isolation from other occupations such
as the external audit profession. Similarly, Hop-
wood (1998, p. 516) stated, ‘‘Rather than taking
professional claims for granted, the ways in which
they are sustained must be investigated, as should
their consequences.’’
On this point, the sociology of professions lit-
erature has increasingly probed the dynamic pro-
cesses by which professions establish and defend
their jurisdictional domains. It focuses in parti-
cular on inter and intraprofessional competition in
socially constituting both jurisdiction and the right
to control the provision of services in that domain,
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 619
as well as the abstract system of knowledge that
undergirds these services. Abbott (1988, pp. 8–9)
reasoned that it is essential for an occupational
group to control its abstract system of knowledge
in order to claim professional stature it is through
this control that a profession can de?ne and rede-
?ne the societal problems it addresses, develop the
services and practical techniques to be performed
to address these problems (that Abbott de?nes as
the profession’s jurisdiction), and defend this resul-
tant jurisdiction against competing professions or
factions within the profession. With time and legal
sanction, this jurisdiction may eventually comprise
a monopoly over performing speci?ed activities.
This jurisdiction includes formal control over both
key de?nitions of professional service and the lan-
guage used in describing the techniques performed,
the practitioners that perform them and the actual
conduct of the work (Abbott, 1988, p. 62).
On this theme, Crozier (1964, p. 165) observed
that the expert’s success is constantly self defeat-
ing. The rationalization process provides a basis
for power, but the end results of rationalization
curtail this power. As soon as a ?eld is well cov-
ered, as soon as the ?rst institutions and innova-
tions can be translated into rules and programs,
the expert’s power disappears. This simulta-
neously enabling and disabling (Zubo?, 1988),
Janus-faced (Reed, 1996) e?ect of codi?ed knowl-
edge contributes to a profession’s downward
spiral unless it regenerates its abstract system of
knowledge and thereby extends its jurisdictional
domain to possibly encroach upon that of adja-
cent professions.
Subsequent work in the sociology of professions
area has sought to extend Abbott’s general thesis
of jurisdictional disputes. Key, once more, is a
profession’s command over an abstract body of
knowledge that is storable, controllable, inde-
terminable, and deployable to convince con-
stituents that the profession has expertise that is of
utility to them (Derber, Schwartz, and Magrass,
1990; Drazin, 1990; Larson, 1990). Such a body of
knowledge must be:
e?ectively protected from incursion by pre-
datory competitors if it is to remain the spe-
cialized preserve of a particular expert group.
The political strategies and tactics through
which such expert jurisdictional domains are
constructed and policed need to be supported
by ideological resources and moral prohibitions
that legitimate monopoly control for ‘us’’by
delegitimating predatory incursions by ‘them’
(Reed, 1996, p. 575)
Similar to Abbott’s (1988) concern for mapping
disturbances, such jurisdictional disputes give rise
to the ‘‘politics of expertise’’ that tend to be more
intense and unstable during periods of profes-
sional transformation. According to Reed (1996),
the politics of expertise, in turn, revolve around
the knowledge base with which professional sta-
ture is claimed, the technical work and bene?ts for
clients derived from this knowledge, the political
strategies used to defend a jurisdiction, and the
organizational forms used to mobilize expertise.
The basic power strategy and corresponding
legitimating discourse for the entrepreneurial pro-
fessions or knowledge workers, Reed (1996) theo-
rized, also begins with displaying appropriate,
though more general, credentials than organiza-
tional professionals [in our case, the Certi?ed
Public Accountant (CPA) is an older and more
widely recognized credential]. In contrast with the
speci?c and localized knowledge of organizational
professions, knowledge workers, rely on develop-
ing, deploying and displaying a highly esoteric,
intangible system of knowledge. This knowledge
entails a ‘‘sophisticated combination of theoretical
knowledge, analytical power and tacit or judg-
mental skills’’ (Reed, p. 588) that are re?ned, even
partially codi?able, but transferable to other set-
tings thus granting the knowledge worker a com-
petitive advantage. As Reed (p. 576) reasoned,
‘‘. . .it is the putative universality, codi?cability,
neutrality and mobility of modern, [entrepreneurial]
expertise that sets it apart from the localism, parti-
cularlism and stability characteristic of traditional
[organizational] expertise.’’ It is by virtue of this
very universality or generality of expertise, which
can be communicated relatively easily to external
constituents, that enables the client organization
to be more mobile as it extends it global reach in
that these constituents are comforted that appro-
priate expertise is being applied. Such globalization
620 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
‘‘o?ers to the entrepreneurial professions/knowl-
edge workers the opportunity to exploit the poten-
tial for cognitive expansion, material advancement
and socio-political enhancement that these develop-
ments present (Reed, 1996, p. 588).
The dark side of this universality and serving the
client organization is that the entrepreneurial pro-
fession could be seen as too closely aligned to the
vested interests of the client thereby undermining
the professional claim of neutrality and indepen-
dence in that the exercise of expertise is not
objecti?ed by a wholly codi?ed knowledge base
(see also Freidson, 1986). As Reed (p. 588)
observed, ‘‘Once they become ‘tainted’’ through a
much closer incorporation into business practice,
the disinterested claim to moral and cultural
authority is increasingly di?cult to sustain.’’
Shaping the jurisdictional disputes of, for exam-
ple, organizational and entrepreneurial profes-
sionals is an institutional environment that Reed
(1996, p. 586) characterizes as being comprised of
the ‘‘state, political ideologies and policies highly
suspicious of, if not downright hostile to, profes-
sional power.’’ Such an environment of regulation
and suspicion tends to lead to both a strong frag-
mentation among the forms of expertise being
mobilized, and more dramatic disputes over jur-
isdictions (Freidson, 1994).
This recognition of the importance of under-
standing professional claims is at the crux of Kal-
bers and Fogarty’s (1995) point that there are
more macro-behavioral forces which need to be
considered as impacting the internal auditing pro-
fession. In short, the di?erentiation between the
external and internal audit profession may be the
possession of a body of abstract knowledge on
which the occupation bases its claims for the
exclusive right to control speci?c work activities.
Such claims to work, from Abbott’s (1988) per-
spective, is the critical, distinguishing character-
istic of professional occupation. Abbott’s (1988)
approach emphasized that the analysis of the tasks
or work activities of occupations is the key to
understanding changes in professionalization. In
this vein, we are interested in the manner in which
the work of internal auditing is de?ned — from
both sides of the competing professions. Similarly,
Larson (1977) argued that professionalization is a
collective assertion of special social status and
upward social mobility where producers of special
services seek to constitute and control a market
for their expertise. Thus battles over marketable
expertise is a crucial element in the structure of
professionalism.
2.2. Outsourcing literature
Outsourcing is proving to be a growth industry,
with employment growing by 250 percent between
1982 and 1992 (compared with overall employ-
ment growth of 20 percent; Morrow, 1993), with
contingent workers comprising approximately 10
percent the US workforce (Cohany, 1996).
Growth in and reliance on technical experts has
been especially dramatic, with 43 percent of large
US companies outsourcing professional and tech-
nical functions, thus potentially having a sig-
ni?cant impact on the stock of knowledge
available to them (Matusik & Hill, 1998; Wysock,
1996). The rationale for outsourcing organiza-
tional functions is predominantly stated in eco-
nomic terms: within a ‘‘new competitive
landscape’’ demanding a reduction in costs, orga-
nizations can manage their capacity more e?-
ciently and enhance their ?exibility by focusing on
their ‘‘core activities’’ and outsourcing their ‘‘non-
core activities’’ to an external, contingent work-
force of independent contractors. The company
thus averts the high costs of recruiting, training
and paying an internal workforce, though it incurs
both a higher marginal cost of paying contingent
workers and a potential cost of giving up the
advantage of utilitizing unique ‘‘local knowledge’’
in advancing the ?rm. Moreover, organizations
may gain access to a wider range of publicly
available information, though it may also ‘‘leak’’
proprietary information to contingent workers
thus impacting the organization’s competitive
advantage (Bettis & Hitt, 1995; Davis-Blake &
Uzzi, 1993; Matusik & Hill, 1998; Roodhooft &
Warlop, 1999; Tsui, Pearce, Porter, & Hite, 1995).
The importance of understanding the manner in
which workers adapt within organizational work
settings was also recognized by Davis-Blake and
Uzzi (1993) who stated that most research on
internalization of work (traditional internal work
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 621
force) provides considerable agreement that inter-
nal workers increase workforce stability and give
the employing ?rm control over employees. These
traditional internal labor markets provide these
bene?ts by selecting workers capable of following
the rules, and by embedding jobs in hierarchical
structures that socialize workers, monitor beha-
vior, provide opportunities, etc. However, because
internal labor markets are designed to provide
stability and control, this traditional internal
approach may make it di?cult and expensive for
employers to adjust to changing internal and
external conditions. Thus, ?rms may derive the
bene?ts of a traditional internal labor force at a
cost of reduced organizational ?exibility.
In contrast to internalization, externalization
(outsourcing) may increase a ?rm’s ?exibility in
dealing with changing market conditions and
organizational requirements (Davis-Blake & Uzzi,
1993). Externalization reduces many types of
employment and administrative costs (bene?ts and
administration of such bene?ts). Externalized
workers are hired without the expectation of long
term employment and therefore can be let go
without tarnishing the ?rms image. Externaliza-
tion may o?er a ?rm a way to access highly spe-
cialized skills that are needed for only a short
period of time, such as engineering skills. Essen-
tially, Davis-Blake and Uzzi argued that inter-
nalization and externalization serve di?erent but
complementary purposes. Internalization enhan-
ces organizational control and stability, while
externalization increases organizational ?exibility.
When used together, these two arrangements give
a ?rm a mechanism for developing stable yet
adaptable work arrangements.
Halal (1994) characterized this rapid expansion
of the externalization of the work force as part of
a trend toward structuring modern organizations
as internal markets. Referring to several successful
?rms such as Hewlett Packard, Johnson & John-
son, and Clark as companies who have been novel
in their creation of internal markets, Halal argued
that just as the post-Communist bloc is adopting
markets, so too are corporations moving to mar-
ket systems. Halal drew from Tom Peters’ battle
cry to ‘‘Force the market into every nook and
cranny of the ?rms’’ to emphasize the importance
of today’s growing use of ‘‘intrapreneurs’’ ‘‘inter-
nal customers’’ and other equivalents of markets.
This ‘‘market test’’ on internal markets is con-
sistent with Davis-Blake and Uzzi’s (1993) broad
concept of the bene?ts of internalization of work
being stability and the bene?ts of externalization
being ?exibility, and that the tradeo?s need to be
considered within a corporation’s assessment of
costs pertaining to the respective alternatives this
is the internal market test.
Matusik and Hill (1998) also made similar
arguments regarding the tradeo?s in the inter-
nalization versus externalization debate when they
stated that contingent work is an increasingly
integral part of the world of work and that its use
a?ects ?rms’ abilities to accumulate knowledge,
create value, and establish competitive advantage.
The authors broadly de?ne contingent workforce
as consisting of several types of work groups,
including those workers on site whose services are
provided by contract ?rms such as outsourced
internal audit services. Consistent with Davis-
Blake and Uzzi (1993), Matusik and Hill
acknowledge the typical arguments that depict
contingent work use as an attempt by ?rms to
drive down their cost structure (bene?t, training,
recruitment, capacity) and increase their ability to
reduce or expand their workforce in order to
match rapidly changing market conditions and the
sta?ng demands of internal projects. However,
Matusik and Hill (p. 681) go beyond these issues
to further by stating that:
. . .the most signi?cant impact of contingent
work may be on the knowledge stock of the
?rm and, through that, on the ?rm’s long
term competitive position. Contingent work
can be an important vehicle for importing
valuable performance enhancing knowledge
into the ?rm. At the same time, the
unchecked use of contingent work can result
in the leakage of valuable private knowledge
into the public domain.
With this serious tradeo? in mind, Matusik and
Hill (1998, p. 694) go on to ‘‘call into the question
the one-size-?ts-all adage to protect core functions
and outsource liberally in non-core areas.’’ As the
622 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
authors argued, the internalization versus exter-
nalization decision is more complex. They
observed that sources of technical knowledge are
not necessarily contained within organizational
boundaries. And similar to Davis-Blake and Uzzi
(1993), Matusik and Hill stated that the e?ects of
changing boundary conditions such as through
outsourcing of organizational processes and out-
comes have yet to receive much attention.
On this point, Davis-Blake and Uzzi (1993), in
their analysis of trends in the outsourcing of cor-
porate work, argued that future research needs to
recognize that the majority of externalized work-
ers no longer perform unskilled clerical tasks
many are professionals such as nurses or accoun-
tants (see Ang & Cummings, 1997) The authors
stated that as the externalized workforce becomes
more numerous and diverse, it is important to
explore why ?rms internalize and/or externalize
these types of workers. This call for future work to
recognize outsourcing in terms of professional
work is particularly relevant to our work where
the outsourcing decision pertaining to the internal
audit involves professional work, i.e. internal
auditors if the work is internalized, or external
auditors if the work is externalized.
Matusik and Hill (1998) reasoned that com-
mand of knowledge is key in outsourcing work to
external professionals and experts, and identi?ed
two important dimensions of knowledge: (1) pri-
vate versus public knowledge, and (2) archi-
tectural versus component knowledge. Private or
localized knowledge is the proprietary knowledge
which an organization develops internally that
involves idiosyncratic procedures, processes, rou-
tines, documentation and trade secrets that grant
an organization its competitive advantage thus,
there is great concern as to its leakage. Public
knowledge resides in the external environment and
includes tools, techniques processes, even account-
ing and auditing practices, etc. found in a society,
economic sector, industry or professional group,
that are applicable across a number of social settings
and are often discussed using their acronyms —JIT,
MBO, TQM, etc. As a public good, such knowledge
cannot confer competitive advantage. The key
issue concerns the possession of su?cient expertise
to recognize its existence, understand it, tailor it to
?t the unique features of an organization, and
apply it. From a sociology of professions perspec-
tive, Reed (1996, p. 577), reasoned that it was
precisely in the area of public knowledge that jur-
isdictional disputes would >be sharpest, and the-
orized that the entrepreneurial professions would
eventually come to dominate because of their
‘‘putative universality, codi?ability, neutrality and
mobility’’ that set them apart from the ‘‘localism,
politicularism and stability’’ of organizational
professionals whose province is private knowledge.
Architectural knowledge, Matusik and Hill
(1998) stated, relates to organization-wide philo-
sophies, schemas and routines that are gleaned
from deep, long term emersion in an organiza-
tion’s culture su?cient to develop a collective,
tacit understanding of the overall system. Archi-
tectural knowledge is predominantly ‘‘private’’ in
nature and is essential to the organization’s com-
petitive advantage. In contrast, component
knowledge relates to the concrete operation of
organizational subsystems that consume speci?c
inputs and produce speci?c outputs. Such compo-
nents may be either ‘‘core’’ or ‘‘non-core’’ to the
organization, and either private or public in nat-
ure. Component knowledge is, in turn, embedded
within architectural knowledge which is used to
orchestrate subsystems.
Matusik and Hill (1998) hypothesized that
because of the very nature of the forms of knowl-
edge involved, organizations would most likely out-
source professional and expert work to external
contractors that predominantly concerned public
versus private knowledge, and non-core component
versus architectural knowledge. They reasoned that
this work would be outsourced because it would
allow the least leakage of proprietary knowledge of
strategic importance, while simultaneously engen-
dering the most importation of public knowledge
due to external contractors being exposed to the
discipline of market forces which would force them
to be more abreast of public knowledge concerning
such components as accounting, inventory, and
personnel management techniques (e.g. ABC, JIT,
and TQM) that are deemed generally necessary to
compete in the marketplace.
In summary, the ?ow of logic begins the recog-
nition by Davis-Blake and Uzzi (1993) that the
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 623
outsourcing of work increasingly pertains to pro-
fessional workers, including the internal audit
function as the nature of control is changing dra-
matically in contemporary organizations (Simons,
1995). Furthermore, Matusik and Hill’s (1998)
provided a taxonomy to suggest the impact of
outsourcing on the importing or exporting of
valuable knowledge into and out of the ?rm. It
appears that: the outsourcing of work such as
internal auditing can be characterized as merely
entailing public, non-core knowledge thus recep-
tive to market testing or entailing valuable private,
architectural knowledge too valuable to the com-
petitive advantage of companies to risk leakage.
Such characterizations and opposing views are rife
with con?ict and thus have the potential for
enriching our understanding of the outsourcing of
the internal audit function. Therefore, the follow-
ing propositions will be examined:
P1: The sociology of professions literature sug-
gests that public accounting ?rms will attempt
to re-de?ne the boundaries of the external and
internal audits in an e?ort to justify their
entrance into the provision of internal audit
services. Furthermore, as suggested by the
outsourcing literature, these public accounting
?rms will attempt to de?ne their provision of
internal audit in line with broader organiza-
tional imperatives — i.e. the internal audit
function containing public, non-core compo-
nent knowledge that should be exposed to the
discipline of market forces.
P2: The sociology of professions literature sug-
gests that corporate internal audit depart-
ments will attempt to re-a?rm the boundaries
of the external and internal audits in an e?ort
to retain their provision of internal audit ser-
vices. Furthermore, as suggested by the out-
sourcing literature, these corporate internal
audit departments will attempt to de?ne their
provision of the internal audit function in line
with broader organizational imperatives —
i.e. internal auditing function containing pri-
vate, architectural knowledge that is too
valuable to the competitive position of the
company to outsource.
3. Research methods
Consistent with our theoretical perspective that
professional jurisdiction is socially constituted
through the interactions of various constituent
groups, evidence was gathered through qualitative
analysis of archival material from both side of the
professional dispute. This evidence was supple-
mented with extensive interviews with key organi-
zational actors from the two professional sides to
elicit their views and their guidance on accessing
relevant material. Archival material took the form
of both public and private records (Denzin, 1978)
as well as business press coverage of the events
examined (Allison, 1971; Herman & Chomsky,
1988; Zelizer, 1992). Public material included: IIA
exposure drafts of proposed standards and de?ni-
tions of internal auditing AICPA audit guides,
speeches by Big Five ?rms members, and IIA o?-
cers and SEC o?cials. Private material included
interview comments from key social actors
pertaining to both the Big Five ?rms and the
corporate internal audit departments (see Lincoln
& Guba, 1985). These interviews were supple-
mented with internal memos, brochures, and
documents from these studied organizations.
Finally, IIA memoranda and correspondence ?les
of key social actors were important sources of
data. Press coverage includes minutes of CNBC
broadcasts, and articles, editorials, and advertise-
ments appearing in the Wall Street Journal, Public
Accounting Report, Internal Auditor, and Account-
ing Today.
Latent or qualitative content analysis, in which
the researcher serves as a research instrument in
interpreting archival material (Van Maanen, 1979,
1988), was deemed especially relevant in order to
place emphasis on the character of the archival
material rather than on quantitative procedures of
analysis. According to Berg (1989, p. 107), latent
content analysis represents an ‘‘interpretive read-
ing of the symbolism underlying the physically
presented data’’ and thus provides a very useful
approach in examining archival material complicit
in the exercise of power and exertion of in?uence
(Merton, 1968, pp. 366–370). Such exercise of
power and in?uence underlie the two major
research propositions of this study.
624 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
The primary groups of social actors examined
include the AICPA, the Big Five public account-
ing ?rms (increasingly relabeled as ‘‘profession
service ?rms’’), with a particular focus on Arthur
Andersen, Ernst & Young, and KPMG Peat
Marwick; two corporate internal audit depart-
ments (S. C. Johnson Wax and J. C. Penney) two
professional associations — the AICPA and the
IIA and the interests of the federal government in
the form of the SEC. The Big Five ?rms are
among the largest professional bureaucracies in
the world (Mintzberg, 1979; Whittington,
McNulty, & Whipp, 1994), are also the pre-
dominant form of under-researched, organization-
based profession that has emerged as a direct
consequence of commercial enterprise within
which expertise may ?rst be expected to become
commodi?ed to justify the expansion of CPA’s
jurisdictional domain (Abbott, 1988; Freidson,
1986).
4. Analysis: e?orts by the public accounting pro-
fession to re-de?ne the boundaries between the
external and internal audit function
The AICPA Professional Ethics Division
released an exposure draft in February 1996, pro-
posing several interpretations and guidelines for
the performance of extended audit services (such
as internal auditing) for external audit clients. The
1996 AICPA Professional Ethics Committee’s
Exposure Draft e?ectively codi?ed ‘‘best prac-
tices,’’ a?rming that extended audit services such
as the provision of internal audit services would
not impair independence with respect to attest cli-
ents. As the AICPA (1996) Exposure Draft con-
cluded:
A member’s performance of extended audit
services would not be considered to impair
independence with respect to a client for
which the member also performs a service
requiring independence, provided that the
member of his or her ?rm does not act or
does not appear to act in a capacity equiva-
lent to a member of client management or as
an employee.
In May of 1996, the Ethics Committee upgraded
the Exposure Draft to an o?cial interpretation,
Extended Audit Services, and speci?cally con-
cluded that outsourcing does not impair the
external auditor’s independence as long as some-
one from management remains in charge of the
internal audit function, and the internal audit
function does not perform ‘‘on-going’’ monitoring
activities. The consequence of this ‘‘green light’’
into extended audit services by the AICPA was a
dramatic growth in the performance of internal
audits services by the Big Five. According to a
Public Accounting Report (1997, p. 2) article, for
example, these ?rms’ ‘‘plotted annual growth rates
of 80 to 100% through the year 2000 for this
?edgling practice area.’’
As a speci?c example of the actual performance
of such services, a Wall Street Journal (WSJ)
(1996a) article described a situation where Arthur
Andersen reached an agreement with the Camp
Fire Boys and Girls to give up their external
?nancial audit role due to the client’s insistence
(and a related $50,000 per year audit fee) in order
to make possible an outsourcing agreement to
provide full-time, on-site accounting and systems
services at approximately $400,000 per year.
Arthur Andersen defended this newarrangement by
arguing that they could better serve their client
through this outsourcing arrangement than through
the attest arrangement. As the WSJ (1996a) sum-
marized, this recent expansion of services by pub-
lic accounting ?rms has also been characterized as
‘‘an outrageous con?ict of interest’’ and as a trend
which ‘‘could add to the accounting profession’s
credibility problems’’ (p. B8). It (WSJ, 1996a,
p. B8) warned that the internal auditing profession
as represented by the 60,000 member IIA, ‘‘wants
double duty auditing stopped entirely.’’
According to two other 1996 Wall Street Jour-
nal articles, this expansion of services is attribu-
table to a problematic external audit market. The
?rst (WSJ, 1996b, p. B1), whose title succinctly
captures the issues at hand (i.e. entitled ‘‘Who is
Going to Audit the Auditor’’) stated that Big Five
accounting ?rms, worried about slowing revenues,
have tripled the amount of ‘‘double duty work’’
they perform in the past ?ve years. The second
(WSJ, 1996c. p. B1), further argued that accounting
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 625
?rms are trying to broaden the scope of the audit
business. It noted that while the major public
accounting ?rms have almost doubled their con-
sulting business since 1990 (collectively they per-
form 23 percent of such services worldwide Public
Accounting Report, 1998, 1999a, 1999b), their
audit business has edged up only 16 percent. It
characterized the external ?nancial audit (’’the
plain vanilla audit’’) as having become ‘‘a stagnant
commodity,’’ where clients resist fee increases
because ‘‘they increasingly feel that traditional
audits don’t help their business and that one is as
good as another’’ (WSJ, 1996c, p. B1 see also SEC
Commissioner Norman Johnson, 1999, p. 3). Also,
the more lucrative outsourcing work does not sim-
ply consist of small engagements with camp ?re
boys and girls anymore: PWC just reported a $850
million outsourcing contract with a governmental
agency in New Zealand (WSJ, 2000).
The’’green light’’ provided into extended audit
services by the AICPA and the corresponding
movement by the major public accounting ?rms
can be illustrated by the posturing of three of the
Big Five ?rms in their e?orts to re-de?ne the
internal/external audit relationship. The combined
e?orts of the AICPA and the ?rms themselves
illuminate the issues raised in the ?rst research
proposition of this study which argued that public
accounting ?rms will attempt to re-de?ne the
boundaries of the external and internal audits in an
e?ort to justify their entrance into the provision of
internal audit services. Furthermore, these public
accounting ?rms will attempt to de?ne their provi-
sion of internal audit in line with broader organiza-
tional imperatives. A common theme in these ?rm-
speci?c e?orts is the attempt to unfreeze the body
of abstract knowledge on which the internal audit
profession bases its claims for the exclusive right
to control speci?c work activities — i.e. the inter-
nal audit function (Abbott, 1988; Reed, 1996).
Furthermore, the three ?rms all seem to char-
acterize the internal audit function in terms of
public, non-core work (Matusik & Hill, 1998) that
can best served by subjecting it to the discipline of
market forces which, of course, would be the ser-
vices o?ered by these ?rms (see also Cooper,
Scarborough & Chilton, 1995; Preston, et al.,
1995; Sikka & Willmott, 1995).
4.1. Arthur Andersen
The marketing brochure of Arthur Andersen
(1995), the most active ?rm in internal audit out-
sourcing (Public Accounting Report, 1997), stated
that outsourcing is a ‘‘strategic concept’’ — a way
to add value to a business — that ‘‘converts an in-
house cost center into a customer-focused service
operation with you as the customer.’’ The ?rm
appealed to corporations to focus on the critical
‘‘core’’ areas of the business that create and sus-
tain competitive advantage and outsource such
non-core competencies (Matusik & Hill, 1998)
such as internal auditing. Arthur Andersen (AA)
de?ned its outsourcing services wrapped around
internal auditing as including: assisting manage-
ment in the planning and execution of the internal
audit process identifying customer needs assessing
risks supervising audits and communicating
results and performing partial outsourcing services
for peak period needs, international locations,
regulatory compliance, and EDP audits on both
recurring and non-recurring bases. Arthur Ander-
sen’s pamphlet listed the bene?ts of outsourcing in
terms highly consistent with the traditional out-
sourcing literature: outsourcing eliminates the
tasks of recruiting, training and maintaining
employees helps manage costs engenders objectiv-
ity, expertise and consistent quality leverages
existing internal audit resources focus on more key
organizational needs o?ers technologies or geo-
graphical ?exibility reduces ?xed salary costs shifts
liability for attestation assignments frees manage-
ment to focus on core competencies opens internal
audit services to the discipline of market forces and
engenders a dynamic for continual improvement —
all in a competitively priced package.
The position of AA as articulated by their
Director of Contract Audit Services is that the
audit business is evolving to meet the clients’’
needs in terms of broad business assurance as to
their procedures, processes, systems, and risk
areas. This view sees, and advocates, the tradi-
tional audit as migrating from auditing ?nancial
statements to auditing the business (Abbott, 1988;
Reed, 1996). The historical focus of attestation
remains important, according to this perspective,
but is of less value today than the need to assure
626 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
that business processes are in place to compete in
a rapidly changing world. While the ?nancial
statement remains important in the integration of
?nancial markets, this view argues that it is not as
relevant in the management decision making pro-
cess. Here, it is argued that the move to providing
contract audit services is a natural move to pro-
viding greater relevance to clients in an area in
which the public accounting ?rms have a compe-
titive advantage. Essentially, AA is stating that
business organizations want more than ?nancial
statement audits they want broader attestation
service — business risk/internal audit/consulting
services. Here, AA is interested in providing these
broader assurances in terms of how the host
organization benchmarks relative to best practice
processes/operational e?ciencies. At this point,
the internal audit becomes the mechanism where
AA attempts to blend the knowledge base of the
client with the broad knowledge of the business
and best practices.
Furthermore, the ?rm’s views, as expressed by
their Head of Contract Services believes that the
line between internal and external auditing is not
relevant (Abbott, 1988; Reed, 1996). Here the
?rms argues that indepedence is not a major issue
when AA performs outsourcing as long as the cli-
ent accepts the responsibility for the function as
outlined in the AICPA position. Critical in this re-
de?nition of the nature of the audit is the distinc-
tion between auditing and attestation. This views
suggests that while attestation services requires an
assertion (e.g. management’s assertion that the
?nancial statements are fairly presented) to a third
party recipient, auditing and assurance services do
not necessarily require these components. For
example, an auditor can provide assurances to
management on the e?ciency of its practices or
the likely e?ectiveness of its control practices
without performing the attestation function. The
resultant model for AA is a depiction of broad
range of services provided by external auditors
along the following continuum:
ATTEST—AUDIT—ASSURANCE—CONSULTING
Here, AA sees the challenge for the auditor is to
provide relevance to management, including control
e?ectiveness and strategic decision making along this
continuum. In other words, their changing external
audit philosophy is to adapt to business needs or face
the risk of becoming irrelevant. The resultant audit
service that AA o?ers as the outsourcer of internal
audit services emphasizes working as partners with
the organization to control business risk. AA
emphasizes three things to its potential client: (1) a
standardized approach to address risk in the fra-
mework of strategic management and operational
control (2) its access to ‘‘best practices’’ and (3) a
one-step solution to risk management. This stan-
dardized,‘‘one-stop’’ solution (Matusik & Hill,
1998) advocated in the AA (Arthur Andersen,
1995) brochure is revealed in the following:
We work with many of the world’s leading
companies to provide rigorous internal audit
and risk management services. We have the
skills and tools to help you access risk, evaluate
the e?ectiveness of your business and ?nancial
controls, and use best practices to continually
improve them. We can help you anticipate, not
simply react to risk, and put you in control.
Once the boundaries between external and
internal auditing are re-de?ned in AA’s terms, this
allows AA to advocate the advantages that they
perceive that their ?rm has in being the provider
of internal audit services. The Head of Contract
Services believes that the competitive marketplace
drives the demands for services. AA is essentially
justifying their position in terms of companies
wanting broader attestation — i.e. business risk,
internal audit, consulting services. This, in their
view, is part of the natural migration a migration
that ‘‘converts an in-house cost center into a cus-
tomer focused service operations’’ and allows
companies to sustain competitive advantage
through outsourcing such non-core competencies
as internal auditing (Arthur Andersen, 1995).
4.2. Ernst & Young
Ernst & Young’s (E&Y) depiction of the chan-
ging nature of the internal audit function also
advocates a continuing change in the boundaries
between the external and internal audit processes
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 627
(Abbott, 1988; Reed, 1996). Essentially this per-
spective sees the job of internal auditing as moving
closer to a consulting role. In this view, the ‘‘big-
gest issue the internal auditor faces today is not
the perceived threat of outsourcing but the chal-
lenge from management to add value to the com-
pany’’ (Internal Audit Alert, 1996, p. 4). As to the
future, their view is:
Ten years from now, the internal auditor will
be a high level management person who
knows about a business, its products, and risk
management. The internal auditor depart-
ment will be smaller, more high-powered, and
more ?exible. It will be part of a broader risk
management area, probably part of the
CFO’s world. There will also be more inter-
action and collaboration between internal
and external auditors (Internal Audit Alert,
1996, p. 5).
E&Y’s Director of Outsourcing Services argues
that the idea of ?nancial statement audits, internal
audits, and consulting being able to operate as
independent functions is a thing of the past
(Abbott, 1988; Reed, 1996). E&Y feels that these
functions need to become more focused on the
business processes — thus, a potential blurring of
the services. In serving the organization, internal
auditing will be called upon to serve on task for-
ces, while managers take on more of the control
function by doing more self-assessment. In this
view, the blending of these services allows the
organization to focus on pro?tability, thus
appealing to a market-solution to the delineation
of the responsibilities of the internal audit func-
tion (Matusik & Hill, 1998). This view sees the
audit market as existing on one common con-
tinuum (not as two distinct markets) where the
continuum runs from exclusive internal auditing
(and no external auditing) to exclusive external
auditing (and no internal auditing), with any
combination of the provision of internal auditing
and external auditing services in between. Here,
the Director of Outsourcing Services at E&Y
argues that the extent of outsourcing of the internal
audit function can be anywhere on the continuum.
In their experience, they have started with a client
on exclusive external auditing side of the con-
tinuum and have helped the client move towards
engaging E&Y in more-and-more internal audit
services. The E&Y position concedes that both the
internal and external audit groups need indepen-
dence to determine the scope of activities. How-
ever, this independence often results in audit
duplication. Therefore, it is argued that value can
be added (Matusik & Hill) by ‘‘objectively’’
reconsidering the costs related to monitoring the
boundaries between the external and internal audit
groups (Abbott, 1988; Reed). E&Yis convinced that
quality could be improved by removing the bound-
aries between the external and internal audits,
while retaining the critical bene?ts of objectivity
and independence. The perspective is this:
A look at the businesses we audit suggests an
answer. Time after time, in area after area,
business mangers have been able to ?nd ways
to re-engineer redundant or layered work
processes while both improving product or
service quality and reducing all-in costs. Why
should auditors, either internal or external, be
held to a lesser performance standard? Why
should the business practices and processes
followed by auditors be any less innovative or
?exible than those of their most successful
clients? (Anderson, 1994, p. 13)
A more speci?c example of the changing nature
of the business of internal auditing comes from
E&Y’s development of the outsourcing function in
Great Britain. One of their selling points as to the
non-core, public nature of the internal audit func-
tion (Matusik & Hill, 1998) is that internal audit-
ing tends to be ?xed in nature, but the risks of the
company, or management’s needs to have the
audit function focus on particular risks, may vary
over time (see Fig. 2). The E&Y partner in Lon-
don then asks the question whether there should
be a role that the outsourcer should play in assisting
the internal audit function. The obvious answer, in
his view, is that an outsourcer provides ?exible
sta?ng and expertise that will allow the internal
audit department to best address unaddressed risks
when they arise. His view then is a traditional
economic argument (Davis-Blake & Uzzi, 1993) in
628 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
terms of the bene?ts of outsourcing; i.e. ?exible
sta?ng can provide better coverage of risks
throughout the year at no additional cost. E&Y
then presents additional economic arguments for
utilizing outsourcing much in the same manner as
AA: organizations tend to underestimate the cost
of the internal audit function employment, and
other costs, e.g. bene?ts, are usually double salary
costs specialists, in such areas as treasury, will
reach issues (de?ne, analyze, and suggest solu-
tions) more quickly than non-specialists and
implementation of modern audit methodologies
and technology leads to savings in audit time of
about 20 to 50%.
In summary, E&Y’s approach to auditing has
evolved to emphasize auditing and risk analysis as
a core competency an approach which, in their
view, ‘‘transcends’’ traditional external/internal
audit boundaries (Abbott, 1988; Reed, 1996).
E&Y particularly bases its new audit philosophy
around the issue of information technology as the
?rm accelerates its development of a worldwide
knowledge base to share information as key to the
organization’s future success with this audit phi-
losophy. They believe that as organizations
become more dependent on information systems,
?rms will be able to invest in the technology that
visualizes the organizational processes, develop
tools that will help management monitor controls,
and develop audit techniques concurrent with the
technology which can add value to the organization.
Again, their view is that the value-added from
such inter-related use of the new technology would
be strongly retarded by audit boundaries which
only results in a duplication of services (Matusik
& Hill, 1998).
4.3. KPMG
KPMG’s new ‘‘Business Measurement Proces-
s’’provides an excellent overview of their new
audit approach which, as with the previous two
?rms, is justi?ed as being a much broader and
more meaningful than traditional ?nancial state-
ment audits (Abbott, 1988; Reed, 1996). This
Business Measurement Process is an endorsement
of the integrated audit approach because, in their
view, part of this integration may be due to the
fairly dramatic change taking place in their exter-
nal audit philosophy. They describe their
approach as follows:
Our internal audit methodology is based on a
combined assurance approach. It provides a
model for your internal audit function to
work closely with management and your
external auditors, so as to maximize the
internal control assurance provided to your
Audit Committee and provide e?ciency by
avoiding duplication.
Furthermore, KPMG has restructured its audit
approach along ?ve industry lines that represent
distinct service areas such as manufacturing,
Fig. 2. Challenges for internal auditing.
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 629
?nance, retail, entertainment, health care, and
high technology to enhance their newly de?ned
audit approach as one that focuses on operational
and business risks.
KPMG described their audit approach as one
that focuses on operational and business risks.
This approach contains two other dimensions that
blur the distinction between internal and external
audit services (Abbott, 1988; Reed, 1996). First, it
emphasizes a willingness to assist an organization
in starting an internal audit function. The intent
may to eventually bring the function in-house or
retain it as an outsourcing function. Second, they
have developed a ‘‘Quality Assurance Review and
Re-engineering’’ service speci?cally for existing
internal audit departments. They describe this lat-
ter approach as ‘‘an e?ective means of assessing
the performance of the internal audit function
against management expectations and best prac-
tices.’’ The services emphasize the standardized,
public nature of the internal audit function by
including benchmarking against other organiza-
tions that are similar in industry and basic attri-
butes (Matusik & Hill, 1998).
The contrasts that KPMG makes between the
old traditional audit (where KPMG does the
external audit and the company’s internal audit
department does the internal audit) versus their
world-class audit (where KPMG does both the
external and internal audit function) reveals their
e?orts to re-characterize the nature of internal
audit work (Abbott, 1988; Reed, 1996). The tra-
ditional audit (and traditional boundaries) simply
involves detection whereas the new world-class
audit (which blurs and blends the boundaries)
means that the company hires a risk partner. The
traditional audit simply provides an audit focus
the world-class audit provides business focus.
Other contrasts are just as apparent in their e?orts
to re-de?ne the audit process: cost focus versus
customer focus functional focus versus process
focus hierarchical versus horizontal green pen
versus harnessing technology and fragmented
approach versus integrated approach.
In summary, the actions of KPMG, as with AA
and E&Y, are fully consistent with the recent
AICPA (1996) document on Extended Audit Ser-
vices. These combined e?orts to rede?ne the nature
of internal audit work are indicative of the macro
forces which are shaping the nature of the internal
audit profession (Kalbers & Fogarty, 1995). At
stake are traditional lines drawn between the work
of the public accounting ?rms — the external
?nancial audit — and the work of the internal
audit profession — the internal audit (Abbott,
1988; Freidson, 1994; Reed, 1996). This line
between respective jurisdictional claims and the
e?orts to blur these lines are at the core of Hop-
wood’s (1998) concern as to the commercialism of
the audit industry and, more speci?cally, support
Abbott’s (1983) contention as to the signi?cance
of claims for the exclusive right to control speci?c
work activities as being the critical, distinguishing
characteristic of professional occupation. In this
vein, we are interested in the manner in which the
work of internal auditing is de?ned — here from
the side of three of the ?rms in the public
accounting profession. According to Reed, the
politics of expertise, in turn, revolve around the
knowledge base with which professional stature is
claimed, the technical work and bene?ts for clients
derived from this knowledge, the political strate-
gies used to defend a jurisdiction, and the organi-
zational forms used to mobilize expertise. Also,
more speci?cally, the positions taken by these
three ?rms support Matusik and Hill’s (1998)
hypothesis that these ?rms would characterize
internal audit work as being predominantly pub-
lic, non-core knowledge that should be exposed to
the discipline of market forces (Halal, 1994).
5. Analysis: e?orts by the internal audit profes-
sion to re-a?rm the boundaries between the
external and internal audit function
The Institute of Internal Auditors (IIA) (1978)
developed a codi?ed set of Standards for the Pro-
fessional Practice of Internal Auditors that includes
the association’s de?nition of internal auditing.
Here, the IIA presented the case for internal audit
services remaining a strictly in-house function and
established the point that keeping the internal
auditing function as an integral part of the orga-
nization o?ers clear advantages. Extending this
view, the IIA’s (1994, p. 2) own white paper
630 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
emphatically stated that a ‘‘competent internal
audit department that is properly organized with
trained sta? can perform the internal audit func-
tion more e?ciently and e?ectively than [an
externally] contracted service.’’ Consistent with
the political advantage of organizational profes-
sionals being localized knowledge (Reed, 1996),
the primary rationale for this position was that
internal auditors are ‘‘intimately acquainted with
their organizations’’ policies, procedures, operat-
ing practices, and personnel’’ (IIA, 1994, p. 3).
The IIA argued that through day-to-day experi-
ence in the business, internal auditors acquire —
and operate from — an intimate knowledge of an
organization’s culture, processes, risks, and con-
trols, and thereby obtain the ‘‘proprietary knowl-
edge’’ that ?gures prominently in giving competitive
management advantage to their client (Matusik &
Hill, 1998). The insight and expertise of internal
auditors, it was argued, enables them to provide
management with tailored services, especially in
the regulated areas of internal control risk analy-
sis. In short, the IIA’s position was that internal
auditing professionals know and understand the
organizations to a degree that such outsiders as
public accountants cannot, and their loyalty and
con?dentiality are ensured by the internal nature
of their function (Pelfrey & Peacock, 1995).
Moreover, consistent with the assertions of the
outsourcing literature (Bettis & Hitt, 1995; Davis-
Blake & Uzzi, 1993; Tsui et al., 1995), the IIA’s
position elaborated on the disadvantages of out-
sourcing which they de?ned as: the lack of inde-
pendence on part of external auditor violates
AICPA ethics it attempts to take away manage-
ment’s responsibility for internal control and
thereby contributes to an irrevocable diminish-
ment of the value of the external audit services in
?nancial markets high learning curve costs high
cost potential loss of direct management control
over and orchestration of internal audit function
possible loss of informal and potent communica-
tions disruption caused by a change in the locus of
who performs the services potential loss of com-
petitive advantage concerning proprietary infor-
mation and a loss of checks and balances.
The most forceful expression of the IIA’s position
against the outsourcing of internal audit services to
the external auditor came on 19 January 1996
when the IIA boldly presented its views at the
open session of the Professional Ethics Executive
Committee of the AICPA. This open session was
part of the protocol whereby the Committee soli-
cited input for its eventual 28 February exposure
draft (described earlier) and, in turn, resultant
May 1996 o?cial interpretation, Extended Audit
Services. At this 19th January meeting, the IIA
(1996a, p. 1) made its position clear:
The IIA is opposed to total outsourcing of
the internal audit function to a company’s
external auditor because it impairs the [CPA]
?rm’s independence. Internal auditing is a key
management function that con?icts with the
public accountants’’ responsibilities to be
independent of management. (1996a, p. 1)
In this open hearing, the IIA also made strong
reference to the frustration that the SEC was hav-
ing over the lack of guidance from the AICPA
regarding the implications of outsourcing on audit
independence. The IIA stressed that its representa-
tive to the SEC was going to take the o?cial posi-
tion on behalf of the IIA that ‘‘monitoring and
control activities’’ could not be assumed by exter-
nal auditors without impairment of independence.
The assertive position by the IIA to defend the
internal audit function against e?orts to outsource
these services can be exempli?ed by the strength of
the internal audit departments of two major cor-
porations in their e?orts to re-a?rm their primary
role in the provision of internal audit services. The
combined e?orts of the IIA, and the two compa-
nies as illustrations of these e?orts, illuminate the
issues raised in the second research proposition of
this study which argued that corporate internal
audit departments will attempt to re-a?rm the
boundaries of the external and internal audits in an
e?ort to retain their provision of internal audit ser-
vices. Furthermore, these corporate internal audit
departments will attempt to de?ne their provision of
the internal audit function in line with broader
organizational imperatives. A common theme in
these in-house e?orts to retain their provision of
internal audit services is the attempt to rea?rm
the boundaries of the external and internal audits,
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 631
thus claiming the exclusive right to control speci?c
work activities (Abbott, 1988; Reed, 1996).
Furthermore, both companies all seem to char-
acterize the internal audit function in terms of
private, architectural knowledge that is much too
valuable to the competitive position of the com-
pany to outsource (Matusik & Hill, 1998).
5.1. S. C. Johnson Wax
The Director of Corporate Audit suggested that
the internal audit function at S. C. Johnson Wax is
embedded within a commitment from the highest
levels of management to a strong business process
control environment within the company. This
commitment is expressed in a document that is
provided to all key managers. Here the CEO of
the company stated:
Wildly ?uctuating economies and competitive
situations, shifting customer demands and
priorities. . . the business environment con-
tinues to change at a breakneck pace. To
manage e?ectively, business must have solid
management and internal controls in place.
Furthermore, the CEO wrote:
I encourage you to read this brochure and
partner with Corporate Audit in achieving
our corporate objectives.
Essentially, the CEO’s message emphasized the
importance and value of controls in achieving
business objectives. The CEO referred to Corpo-
rate Audit in terms of helping the company remain
innovative by sharing ideas. Consistent with the
importance of nature of private, architectural
knowledge, the CEO perceived and advocated a
very broad and signi?cant mission for the internal
audit function.
Likewise, the internal audit department,
through its Corporate Audit Vision and Mission
Statement promoted this signi?cant role for itself
(see Fig. 3). Note the key issues in their statement:
This internal audit department provides ‘‘internal
consulting and audit services that align with the
company’s business directions and priorities.’’
Consistent with Reed’s (1996) notion of politics of
expertise, the knowledge base as espoused by this
internal audit department is indeed aligned with
critical bene?ts for its clients. Furthermore, this
department provides ‘‘value added’’ services that
redesign business processes, increase operational
e?ciencies, assess risk to assets and operations,
and provide solutions for improving controls, and
perhaps most importantly, and consistent with
Matusik and Hill (1998), this critical architectural
knowledge is provided by an internal audit
department that enjoys a ‘‘uniquely broad expo-
sure to all business activities at di?erent company
locations’’ with such exposure providing unique
‘‘insight into S. C. Johnson Wax’s methods, pro-
cedures and multinational operations.’’
The internal audit department has solidi?ed its
integration with the strong business process con-
trol environment within S. C. Johnson Wax. Here
Corporate Audit’s emphasis is essentially to iden-
tify the key core processes and the key control
processes. Rather than perform risk analysis by
Corporate Audit, they have moved to a model in
which the risk issues are ?lled out by business
managers (Simons, 1995). The internal audit
group helped write a corporate policy on controls
and have taken an active lead in facilitating con-
trol self assessment. The Director of Corporate
Audit, consistent with the CEO’s emphasis on
business controls, has stressed that control is an
integral part of the business and its importance
ought to be ingrained in the basic business func-
tions. From the risk issues, Corporate Audit
describes the risk into de?nable audits and objec-
tively determines priorities for the year. In their
reports, they provide feedback to management
and the auditee as to the progress made in dealing
with the risks during the year and whether or not
signi?cant risks may have overlooked. From the
risk analysis, Corporate Audit developed an audit
plan for the coming year and presents the plan to
the Audit Committee.
The Director of Corporate Audit is very cogni-
zant of the trend towards the outsourcing of
internal audit departments. As evidenced by the
Corporate Audit Vision and Mission Statement, he
has taken a strong position that the internal audit
departments that are likely to get outsourced are
632 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
those who do not add value to the organization
(Matusik & Hill, 1998). Here it is believed that
operational auditing is the key to the future of
internal audit departments. In this regard, S. C.
Johnson Wax benchmarks its audit function with
a group of 30 internal auditing departments in the
consumer product category which includes such
companies as RJR, ConAgra, Kraft, Procter &
Gamble, etc., to monitor the productivity of their
own internal audit department. Furthermore,
Fig. 3. S. C. Johnson Wax, Vision and Mission, Corporate Audit Services.
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 633
Corporate Audit at S. C. Johnson’s Wax has re-
de?ned its relationship with their external auditors.
Corporate Audit is now looking to re-claim into
operational audits all of what they had provided
as support services to the external audit, and, in
return, give all the ?nancial audit work back to
their external auditor. Such re-shu?ing of the
various audit responsibilities serves to delineate
and re a?rm traditional professional jurisdictions
(Abbott, 1983; Reed, 1996).
5.2. J. C. Penney
The second company examined was J. C. Pen-
ney where corporate culture and strong manage-
ment support is an integral part of the internal
audit structure. The seriousness of this manage-
ment support is evident in the auditor’s Bill of
Rights published by management. This Bill of
Rights clearly de?nes important aspects of the
corporate culture and internal audit’s role in that
culture. The Bill of Rights is published by man-
agement telling its internal auditors their rights,
including: right to full understanding of the cor-
porate policies they are expected to enforce right
to be problem solvers as well as problem identi-
?ers and, consistent with the notion of private,
architectural knowledge (Matusik & Hill, 1998), a
right to brought into the mainstream of the com-
pany. Furthermore, the Bill of Rights stresses that
the internal auditors have a right to complete
understanding of the company’s goals and aspira-
tions right to the total support of the company’s
top management and, most signi?cantly, the right
to feel important — indispensable, in fact — to
corporate management (Abbott, 1983; Freidson,
1986; Reed, 1996).
The Director of internal auditing at J. C. Penney
believes that the building and maintenance of this
architectural knowledge (‘‘the internal audit
department achieves a competitive advantage’’) is
done through (1) knowing the business and (2)
performing comparative analysis and benchmark-
ing within units. As an example of comparative
analysis, the audit team will compare catalog desk
operations with others in the company on
approximately 50 dimensions to identify opportu-
nities for improvement. Such benchmarking has
resulted in the company feeling that internal
auditing has developed a unique skill in perform-
ing exception analysis and turning exceptions into
constructive recommendations for improvement.
Essentially, the internal audit department at J. C.
Penney espouses that it is committed to ‘‘value-
added services.’’Internal auditing is being asked to
service on a number of study groups including
JIT, merchandising, and streamlining. The Direc-
tor points out that these are important, corporate-
wide study groups that enhance the contribution
of the internal audit department.
The Director viewed the future maintenance of
the architectural foundation of internal auditing at
J. C. Penney as one which the internal audit is to
be intertwined with management. Here the
emphasis is that the primary reporting is to man-
agement with a secondary reporting to the audit
committee. The Director feels that by making the
audit committee the primary user of internal audit
only sets up internal audit for outsourcing because
it can contribute to the audit committee wanting
something even more removed from management
such as outsourced internal audit services. The
Director wants to be involved with more cross
functionality diagnostic reviews and exception
analysis — all contributing to the internal audit
department retaining its competitive edge. The
Director of internal auditing feels that if the orga-
nization believes in the integrity of its management
and the commitment to the control environment,
and a long run perspective, then it makes the most
sense to report to management and to become
involved in identifying business opportunities as
does the internal audit department. Finally, the
Director sees the future of his internal auditing
group as being strongly tied to the use of the
external auditors. Here the intent is return the
work performed by internal auditing pertaining to
the ?nancial audit, such that the external auditors
can do the entire ?nancial audit. In turn, the
internal audit department can concentrate on
identifying business opportunities, thus clearly
delineating and re-a?rming traditional profes-
sional jurisdictions (Abbott, 1983; Reed, 1996).
In summary, the actions of J. C. Penney, like S.
C. Johnson Wax, are fully consistent with the tra-
ditional IIA (1978, 1994, 1996a, 1996b) position to
634 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
defend the internal audit function against e?orts
to outsource these services. These combined
e?orts to rea?rm the nature of internal audit
work are indicative of the macro forces which are
shaping the nature of the internal audit profession
(Kalbers & Fogarty, 1995). At stake are tradi-
tional lines drawn between the work of the public
accounting ?rms — the external ?nancial audit —
and the work of the internal audit profession —
the internal audit (Abbott, 1988; Freidson, 1994;
Reed, 1996). This line between respective jurisdic-
tional claims and the e?orts to rea?rm these lines
are at the core of Abbott’s (1983) contention as to
the signi?cance of claims for the exclusive right to
control speci?c work activities as being the critical,
distinguishing characteristic of professional occu-
pation. In this vein, we are interested in the man-
ner in which the work of internal auditing is
de?ned — here from the side of two internal audit
departments. According to Reed, the politics of
expertise, in turn, revolve around the knowledge
base with which professional stature is claimed,
the technical work and bene?ts for clients derived
from this knowledge, the political strategies used
to defend a jurisdiction, and the organizational
forms used to mobilize expertise. And, more spe-
ci?cally, the positions taken by these two in-house
internal audit departments ?rms support Matusik
and Hill’s (1998) hypothesis that these depart-
ments would characterize internal audit work as
being predominantly private, architectural knowl-
edge that is too valuable to the competitive posi-
tion of the company to outsource.
6. Beyond the public accounting ?rms and in-house
internal auditors: implications for future research
As suggested in Fig. 1, although the major focus
of this research has been to draw from the sociol-
ogy of professions and the outsourcing literature
to theoretically motivate the study of the tensions
between the public accounting and internal audit
professions over the internal audit function
(research propositions 1 and 2), additional social
actors were implicated in our analysis and need to
be subject to more systematic analysis in future
research for deeper understanding of their roles in
these battles between the professions. To some
extent, this comment is a re statement of Kalbers
and Fogarty’s (1995) critical observation that the
construct of professionalism in accounting and
internal auditing is much more complex, needing
recognition of the more macro-behavioral forces
which need to be considered as impacting the
professions. For example, the battle between the
public accounting ?rms and the in-house internal
auditors seemed to be also being played out at the
professional association level — between the
AICPA and the IIA. And, besides the AICPA and
the IIA, the SEC (who, while not directly con-
cerned with outsourcing, per se, becomes con-
cerned in terms of the implications for external
auditor independence) seemed to have more than
an insigni?cant role in our study a role that might
o?er fruitful insight from future research.
6.1. The changing position of the IIA
The strong position that IIA took against the
outsourcing of internal audit services to the exter-
nal auditor at the open session of the Professional
Ethics Executive Committee of the AICPA on 19
January, 1996 took a dramatic, immediate, and
almost inexplicable change. The IIA’s March/
April newsletter re?ected a more conciliatory
position with the public accounting profession
when they stated that as a result of a ‘‘meeting
with representatives of major accounting ?rms
that provide internal auditing services,’’ the IIA’s
leadership concluded that there is a need to chart a
new ‘‘enlightened’’ path for the future, which they
articulated as follows:
The IIA and its membership must refocus
energy spent in challenging the outsourcing
issue to improving the quality of internal
audit functions. The answer to ‘‘who does it
best’’ should be determined in the competitive
market place .. . . The door must be opened to
include internal audit professionals regardless
of employer. The trend toward outsourcing
will continue, and third-party providers are
an increasing segment of the IIA membership
[roughly 500 members].. . . The path to this
position has been a very di?cult one. Even
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 635
though we still have independence concerns and
preferences for internal operations, the trend
toward greater e?ciencies and involvement
by third-party providers is very evident. In
order to maintain a position of leadership and
authority, the IIA must begin to adapt our
thinking and processes so that we can help all
practitioners and ensure that the profession
of internal auditing is well understood by its
clients. Thus, the IIA intends to recognize
internal auditors as potential members based
on what they do rather than who employs
them (IIA, 1996a, p. 4).
In a fairly candid confession of its acquiescence
to the Big Five ?rms, the IIA newsletter acknowl-
edged that:
Outsourcing is increasingly used as part of re-
engineering and downsizing, and this trend is
much larger than the function of internal
auditing. All major public accounting ?rms
now seem to be pursuing these services with
some degree of enthusiasm. Given the growth
and possible success of these e?orts, the
question for the IIA is whether it is postured
to achieve its goals and objectives if it cannot
help increase the internal audit e?ciency and
e?ectiveness of the contract (outsourced)
providers (IIA, 1996a, p. 3).
The IIA newsletter also conceded that:
It is important for the IIA to reassess our
bedrock mission and chart a course that
identi?es common ground on which future
activity can take place. As more and more
contract providers enter the public and pri-
vate sectors, the IIA must address their pro-
fessional needs. Otherwise we may end up
trying to achieve objectives of leadership and
authority, only to ignore a large segment of
internal audit practitioners. At a minimum
this calls for another look at who we consider
to be internal auditors and how the IIA
relates to major providers, e.g., public
accounting ?rms that provide internal audit
services (IIA, 1996a, p. 3).
The closing comments in the IIA newsletter
provide a realistic perspective of: the needs of the
IIA taking precedence over those of internal audi-
tors the economic imperative of ‘‘clients’’ and
trends of public accounting ?rms, now reclassi?ed
from being ‘‘a?liates’’ to ‘‘fellow’’ — not
competing — practitioners, being in the relatively
lucrative domain of internal auditing:
The IIA is postured to work with public
accounting ?rms in all aspects of the profes-
sion and will not oppose the development of
this market. The door is open to cooperation
across the full range of IIA activities.. . . The
greatest risk to both external and internal
auditors is to be considered irrelevant to the
successful attainment of corporate objectives
(IIA, 1996a, p. 6).
The signi?cant shift in the IIA position that
took place in the Spring of 1996 came to be more
formally embodied in the Fall of 1996 with the
IIA’s (1996b) o?cial position being expressed in a
Exposure Draft of a Professional Issues Pamphlet
on Internal Auditing and Outsourcing. Thus, in
terms of Abbott’s (1988) notion of jurisdic-
tional claims and control of work activities
being at the core of the concept of profession,
the dramatic change in position by the IIA
seems to be recognizing the tensions inherent in
the e?orts to expand jurisdictional claims. As
Hopwood (1998, p. 516) stated, ‘‘Faced with
the stark commercialism of the new world of
audit and consultancy, there is an increasing
case for their analysis and appraisal.’’ Indeed,
the actions of the IIA do represent dramatic
disputes over jurisdictions which are still in
process of playing out as evidenced by the major
shift in position by the IIA (Freidson, 1986, 1994;
Reed, 1996). The turmoil in these professional
disputes is somewhat encapsulated in the follow-
ing petition:
At a growing number of companies, internal
auditors are no longer performing internal
auditing. Rather, such auditing is being
performed by public accounting ?rms — in
many instances by the same ?rm that does the
636 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
annual ?nancial statements. The IIA has taken
no e?ective action to stop the public accoun-
tants e?orts to displace internal auditors. To
the contrary, the IIA has e?ectively sup-
ported the public accounting ?rms in this
e?ort by changing the de?nition of internal
auditing to encompass work done by external
auditors.. . . and generally embracing as fel-
low internal auditors those public accoun-
tants who are working diligently to displace
internal auditing departments.
We the undersigned are aware that internal
auditing departments are being displaced by
public accounting ?rms and that the IIA,
rather than defending the profession, has
chosen to welcome the public accounting
?rms as fellow internal audit practitioners
and has taken various steps to accommodate
the public accountants, with the most well-
known being the revision of the de?nition of
internal auditing.. . . We are not pleased with
the IIA’s actions to date nor with the IIA’s
current course in response to the challenge of
our profession presented by the Big 5 public
accounting ?rms.. . . [W]e do not wish to see
any of the current [IIA Board] members re-
elected (Petition amongst IIA members, Jan-
uary 4) (IIA, 2000).
Thus, the combination of the battles that the
internal audit profession has with the public
accounting profession, along with their own bat-
tles internally as suggested by these serious char-
ges against the IIA leadership by a ‘‘few’’
disgruntled members of the professional, provides
a greater appreciation for the comments made by
Kalbers and Fogarty (1995) who stressed that the
construct of professionalism in internal auditing is
much more complex than typically presented in
accounting research.
6.2. Auditor independence, outsourcing, and the SEC.
The developments in terms of this debate as to
the boundaries of the internal and external audits,
as re?ected in the AICPA’s Ethics Rulings as well
as the movements by the individual ?rms, have
not gone un-noticed by the SEC. This is critical
because while the AICPA and the three ?rms
examined have argued that blurring of boundaries
in the re-de?nition of the external and internal
audits are a non-issue, important constituencies
such as the government may feel otherwise. At
issue is the public accounting profession’s claim of
neutrality and independence in the exercise of
their new expertise (Freidson, 1986; Reed, 1996).
As Reed (p. 588) observed, ‘‘Once they become
‘tainted’ through a much closer incorporation into
business practice, the disinterested claim to moral
and cultural authority is increasingly di?cult to
sustain.’’ Shaping the jurisdictional disputes of
these professional groups instigates the concerns
of an institutional environment that Reed (p. 586)
characterizes as being comprised of the ‘‘state,
political ideologies and policies highly suspicious
of, if not downright hostile to, professional
power.’’ Such an environment of regulation and
suspicion tends to further accentuate the dramatic
disputes over jurisdictions (Freidson, 1994). Signs
of such concern and suspicions are evident in
comments of Arthur Levitt, Chairman of the SEC
at the time, who raised questions about the
expansion of audit services in a speech given in the
Summer of 1996:
If I may digress for a moment: I’m deeply
concerned that ‘‘independence’’ and ‘‘objec-
tivity’’ are increasingly regarded by some as
quaint notions.. . . There are those who say
that increasing competition puts pressure on
accountants to branch out and try new ways
to generating pro?ts. I caution the industry, if
I may borrow a Biblical phrase, not to ‘‘gain
the whole world, and lose [its] own soul
(Levitt, 1996a).
Chairman Levitt (1996a, p. 5) noted the emer-
ging services o?ered by public accounting ?rms
and worries that the ‘‘traditional understanding of
the need for auditors to be absolutely and
unquestionably independent’’ may be slipping
away. Chairman Levitt (1996a, p. 6), implying
that the monopoly power granted external audi-
tors could to revoked, discussed the bene?ts and
L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641 637
costs to the profession for the special obligations
that where in a professional monopoly:
The price the profession pays for this special
role is to accept important limitations on its
activities.. . . To maintain both the fact and
appearance of independence — and thus the
con?dence of investors — auditors must
avoid all suggestions of mutuality of interests
with management of registrants for which an
auditor provides services.. . . [auditors] can’t
participate in management activities of audit
clients. Moreover, auditors can’t sell services
that leave them auditing their own work. (See
also Levitt, 1996b, 1998)
Extending this view, the SEC Chief Accountant
at the time, Michael Sutton (1996), took direct
aim at the AICPA’s (1996) o?cial position
approving of a CPA’s performance of internal
audits for external audit clients forti?ed by their
own self-policing of the independence issue:
The continuing concern about auditor inde-
pendence is an issue that has serious implica-
tions for the image and stature of the
profession — one that the leadership of the
profession, including its self-regulatory pro-
cesses, needs to address.. . . We have to avoid
seeking solutions that sound good, but that
are ‘fuzzy‘‘ and avoid taking meaningful
action and, thus, raise independence to a
higher level of concern.
Thus, in terms of Abbott’s (1988) notion of jur-
isdictional claims and control of work activities
being at the core of the concept of profession, the
SEC seems to be recognizing the tensions inherent
in the e?orts to expand jurisdictional claims as
they warn that such e?ort to ‘‘gain the whole
world’’ not be done at a price of ‘‘losing its soul’’. Re-
casting this point more bluntly and without the use
of Biblical metaphors, Hopwood (1998, p. 516) sta-
ted, ‘‘Faced with the stark commercialismof the new
world of audit and consultancy, there is an increas-
ing case for their analysis and appraisal.’’ Indeed, the
actions of the AICPA and public accounting ?rms
do represent dramatic disputes over jurisdictions
where the eventual impact of the government
(Freidson, 1986, 1994; Larson, 1977; Reed, 1996)
seems to be just starting to play itself out.
7. Closing discussion
Our paper has attempted to advance several
critical issues pertaining to the current turmoil
surrounding the trend toward the provision of
internal audit services on an outsourced basis to
the external ?nancial auditors. At the most general
level, this study attempted to provide some initial
e?ort towards Hopwood’s (1998) charge that if
auditing research ‘‘. . .is to be meaningful in the
modern era the world view of the research com-
munity must change.’’ Our study took serious the
various WSJ articles with their tongue-in-cheek
headlines (‘‘Who is Going to Audit the Auditor’’
and ‘‘In with Outsourcing, Out with the Audit’’)
that signaled that much is at stake here: for the
public accounting ?rms seeking revenue growth
for the internal auditors who are protecting their
work for the host organizations attempting to
assess the optimal manner in which to have these
services provided for the respective professional
associations and, obviously, for the SEC in the
form of their biblical metaphors which have
expressed broader social and economic concerns.
The di?erentiation between the external and
internal audit profession may be the possession of
a body of abstract knowledge on which the occu-
pation bases its claims for the exclusive right to
control speci?c work activities. Such claims to
work, from Abbott’s (1988) perspective, is the cri-
tical, distinguishing characteristic of professional
occupation. Abbott’s (1988, 1983) approach
emphasized that the analysis of the tasks or work
activities of occupations is the key to under-
standing changes in professionalization. In this
vein, we are interested in the manner in which the
work of internal auditing is de?ned–from both
sides of the competing professions. Our results
corroborate the theorizing found in the sociology
of professions area (Abbott, 1988; Freidson, 1994;
Reed, 1996), that the transformation of a jurisdic-
tion should be accompanied by not only con?ict,
but by modi?cation of codes of ethics, and the
638 L. Rittenberg, M.A. Covaleski / Accounting, Organizations and Society 26 (2001) 617–641
respective professions’ abstract system of knowl-
edge. Indeed, we found that the profession of
knowledge work was highly abstract and reliant
on a series of societally prized, though vaporous,
even mythical (Alvesson, 1993) terms that have
become institutionalized in their own right as
demonstrating organizational/professional pro-
gressivism. The views from both sides of the pro-
fessional arguments implied that surely a
professional must be engaged (from an external
source per the public accounting profession, from
an internal source per the internal auditing pro-
fession) to assist the client survive in this new era
of global relations and rapidly changing condi-
tions (Abbott, 1988).
Here, the rhetoric used in establishing the jur-
isdictional claim of Big Five ?rms as to internal
auditing appeared to almost draw on as script
both the sociology of professions (e.g. Abbott,
1988; Reed, 1996) and outsourcing (e.g. Davis-
Blake & Uzzi, 1993; Matusik & Hill, 1998) litera-
tures in voicing, for example, their attributes of
being global knowledge professionals having
unparalleled access to public, albeit arcane infor-
mation. Likewise, the IIA (at least initially) and
the corporate internal audit departments drew
upon as script this same literature in voicing its
unique local knowledge and command of private
information. Combined, both professional groups
appeared to relegate the work of the external
?nancial audit to service public, non-core compo-
nent information leaving the disputable portion in
terms of the degree of ‘‘architectural-level’’ char-
acter and strategic sensitivity of internal audit
work (Matusik & Hill, 1998).
We anticipate that these public/private infor-
mation and non-core/architectural distinctions
raised by the outsourcing and sociology of pro-
fession’s literatures will degenerate with the per-
formance of internal audits by external auditors.
As the Big Five ?rms perform these services, they
will perform not only non-core component, but
also architectural level work (and hence must gain
access to private information), and this degenera-
tion of jurisdictional claims to work and related
implications of such degeneration is only begin-
ning to reveal itself as the full force of all the cri-
tical social actors: actors beyond the public
accounting ?rms themselves and the corporate
internal auditors.
Acknowledgements
The authors wish to thank two anonymous
reviewers, Anthony Hopwood, and participants at
the doctoral seminar at the University of Wiscon-
sin-Madison for their many thoughtful comments
on earlier versions of this paper.
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