The sourcing arrangements of internal audit function (IAF) under COVID-19 pandemic: empirical evidence from emerging market

Abstract

This study is purposed to analyse whether COVID-19 pandemic affects the sourcing arrangements IAF. This research uses the signaling theory framework and existing literature to establish hypotheses that are examined using probit regression. The analysis is conducted on a dataset comprising 141 company-year observations, all of which are publicly listed on the Muscat Stock Exchange during the 2019–2020 period. The result in the line with the study’s hypothesis, which refer to the significantly and negatively associated between the COVID-19 pandemic and the sourcing arrangements IAF. This study contributes to the theoretical and practical understanding of how the COVID-19 pandemic has influenced the sourcing arrangements of the Internal Audit Function (IAF) within an emerging Asian market, particularly in the context of Oman. It offers the initial empirical evidence of the relationship between the pandemic and IAF sourcing arrangements to the benefit of companies, auditors, shareholders, and regulatory bodies. The result offer contributions to the auditing and accounting literature as well as practice’s implications.

Keywords:

• IAF sourcing arrangements
• COVID-19 pandemic
• oman

REVIEWING EDITOR:

• Collins Ntim, University of Southampton, United Kingdom of Great Britainand Northern Ireland

Subjects:

• Accounting
• auditing
• corporate governance

JEL Classification:

• G10
• M42

1. Introduction

In March 2020, the World Health Organization (WHO) classified the COVID-19 coronavirus outbreak as a pandemic (WHO, 2020). This pandemic brutally compromised social and economic activities on a global scale (Al-Khresheh et al., 2022; Bajary et al., 2023; Boonlert-U-Thai & Suttipun, 2023; El-Chaarani & Beirut Arab University, 2021; Haddad et al., 2023; Rahman et al., 2023). Its far-reaching effects on every aspect of life makes it the most severe crisis of the twenty-first century. Worldwide economic and financial impacts of the COVID-19 pandemic have already been significant (Albitar et al., 2020; Goodell, 2020). Where it has caused the biggest economic downturn on a worldwide scale since the Great Depression (Haddad et al., 2023). Thence, companies need to consider the effects on their financial performance to avoid the financial distresses and in order to ensure reinforces investors’ confidence (Accountancy Europe, 2020; KPMG., 2020a).

Due to its highly varied and profound repercussions on businesses and economies, as highlighted by studies such as Al-Qadasi et al. (2023) and Hay et al. (2021), the COVID-19 pandemic is expected to significantly influence accounting and auditing functions, particularly in areas like financial reporting processes (Accountancy Europe, 2020). Therefore, as an in response to the COVID-19 pandemic the regulators and stakeholders seek to improve monitoring activities by increased the effectiveness of the corporate governance (CG) oversight mechanisms (Chen et al., 2022). Considering the significant role of the IAF in the framework of internal CG monitoring mechanisms, it is expected to be instrumental in addressing the potential initial impacts of the COVID-19 pandemic (Deloitte, 2020).

In this context, it is logical to assert that the substantial alterations undertaken by companies in their operational methodologies to adapt to the repercussions of COVID-19 have presented the IAF with numerous challenges in its operational domain (KPMG., 2020b). Therefore, the IAF was not impervious to the challenges and risks that emerged during the execution of its tasks amidst this pandemic (Jarva & Zeitler, 2023; Eulerich et al., 2022). Where the COVID-19 pandemic has brought several of the challenges and difficulties have encountered the practices of the IAF (KPMG., 2020b). Despite limited empirical evidence, the IAF is regarded as a crucial CG mechanism that aids companies in crisis situations (Bajary et al., 2023; KPMG., 2020a). The lack of knowledge regarding the impact of the COVID-19 pandemic on the IAF motivated and justified the researcher’s focus on this issue.

Therefore, it is essential to conduct further research on the quality of internal audit practices, which are influenced, in part, by the type of internal audit service provider. (Al-Qadasi et al., 2019; Nor & Ishak. 2019). Although the advantages and disadvantages associated with the sourcing arrangements of the IAF, it is there is no agreement concerning between researchers and regulators whether this function should be performed by an in-house or outsourced (internal-provider or external-provider) (Baatwah et al., 2019; Desai et al., 2011; Glover et al., 2008). In this respect, the study question is how the COVID-19 pandemic influenced the operations of the IAF, in order to assess its implications on decision-making processes related to the suitability of relying on sourcing arrangements for the IAF’s performance.

It is imperative to assess the impact of COVID-19 on the IAF, specifically focusing on the sourcing arrangements of the IAF as an indicator of companies’ CG responses to the pandemic. During this pandemic, companies may tend to make an amendment or change on its adoption decision on sourcing arrangements of the IAF, as an in response to the COVID-19 pandemic, which reflects how companies are adapting to the pandemic. The researcher soughed to investigate how the COVID-19 pandemic may impact the sourcing arrangements of the IAF. Consequently, the study aimed to investigate how the COVID-19 pandemic affected the decision to use the IAF’s sourcing arrangements.

Prior studies have offered academic evidence concerning the influence of the COVID-19 pandemic on various aspects, such as performance (Goodell, 2020; Nour & Tanbour, 2023; Pozzoli et al., 2022), financial reporting quality (Chen et al., 2022; Hsu & Yang, 2022; Rahman et al., 2023), and auditing quality (Albitar et al., 2020; Al-Qadasi et al., 2023). Nonetheless, academic literature lacks research on the pandemic’s impact on the IAF (Jarva & Zeitler, 2023). There is an unexplored research gap regarding the pandemic’s effect on the IAF’s operations and on its sourcing arrangements. This study aims to fill this gap by presenting empirical evidence on how the COVID-19 pandemic affects the IAF’s sourcing arrangements. In order to determine the most effective source of IAF (internal-providers vs external providers) to deals the adaptive strategies implemented by Omani companies in response to the challenges of the COVID-19 pandemic and mitigate its negative impact.

As the study’s motivation, this study has two main reasons. Firstly, there is a lack of prior research examining the link between the COVID-19 pandemic and the work of the IAF. Only a few studies, such as Jarva and Zeitler (2023), have addressed this relationship. None of these studies have specifically looked at how the pandemic affects the sourcing arrangements of the IAF. Secondly, this study aims to respond to the call made by Jarva and Zeitler (2023) to investigate the impact of the COVID-19 pandemic on the work of the IAF. By providing clearer evidence on the effects of the pandemic on the sourcing arrangements of the IAF, this study contributes to the existing academic literature on the subject.

This study makes important contributions to the auditing and accounting literature in two ways. Firstly, it is the first empirical investigation into the impact of COVID-19 on the sourcing arrangements of the IAF, which has been largely overlooked so far. Secondly, it examines how the sourcing arrangements of the IAF are affected by the COVID-19 pandemic in the context of an emerging market, specifically Oman. By doing so, this study provides valuable insights for companies, regulators, auditors, and researchers to understand and anticipate the effects of the pandemic on future IAF strategies. Overall, this study fills a research gap by examining the sourcing arrangements of the IAF in Oman during the COVID-19 pandemic, since the Omani regulators and companies have taken many measures to confront the COVID-19 pandemic to protect the business market.

The analysis of 141 company year-observations from the Muscat Stock Exchange during 2019–2020 confirms the hypothesis and shows a notable negative link between COVID-19 and IAFSU. This implies that Omani companies leaned towards using in-house providers for internal audits amid the COVID-19 crisis. Therefore, this study will enhance understanding of stakeholders, auditors, companies, regulators and researchers about this significant issue, through provide valuable insights on the crucial role of an in-house IAF in handling future crises.

This study is structured as follows: Section 2 presents the theory formulation and a review of previous studies. The paper’s third part explains the investigation’s design. Section 4 summarizes and presents the empirical results. The conclusion of the investigation’s findings is included in the closing part.

2. Testable hypothesis

The IAF faced significant operational challenges in the wake of the COVID-19 pandemic (KPMG., 2020b). It is widely recognized that the IAF can operate through either internal (in-house) or external (outsourced) providers (Baatwah et al., 2019; Desai et al., 2011; Glover et al., 2008). While there are certain similarities between in-house and outsourced IAF in terms of direct interaction with the company’s senior management, distinctions arise from factors like perceived expertise, technical skills, business acumen, cost, and independence of the internal audit provider (whether internal or external) (e.g. Burton et al., 2012; Desai et al., 2011; Seymore & Robertson, 2020). These differences are a significant major determinant of the IAF’s quality (Lenz & Hahn, 2015).

Companies have been actively striving to enhance the quality and effectiveness of their IAF in order to address the repercussions more efficiently in response to the challenges encountered by the IAF during the COVID-19 pandemic’s implications. Consequently, some companies may consider amending or altering their decisions regarding the sourcing arrangements of the IAF as a strategic response to the ongoing COVID-19 crisis. Applying a signaling theory perspective, the decision to modify the accreditation of companies based on their IAF sourcing arrangements has the potential to communicate a signal to stakeholders concerning the overall quality, including effectiveness and efficiency, of the IAF (Bhattacharya & Banerjee, 2020; Eichenseher et al., 1989; Nichols & Smith, 1983). Signaling theory suggest that the rely on the most appropriate on sourcing arrangements of the IAF offer signal to stakeholders about its performance’s effectiveness (Baatwah et al., 2021; Pooe et al., 2022), in dealing with challenges and risks that emerged as result of substantial alterations undertaken by companies in their operational practises to adapt to the repercussions of COVID-19. The effectiveness of the IAF will help in aligning the interests of managers and shareholders, which aligns with the standpoint of agency theory (Baatwah et al., 2021; Fama & Jensen, 1983; Pozzoli et al., 2022). In a study by Jarva and Zeitler (2023), the effects of the COVID-19 pandemic on the IAF’s operations were highlighted. The study found that the IAF has shifted to remote audits due to the pandemic, as demonstrated through interviews approach. Building upon this prior research, the current study seeks to investigate how the pandemic has affected the sourcing arrangements of the IAF using secondary data and a quantitative research approach. Building on the arguments presented above, the study hypothesis is formulated:

H1: There is a significant association between the COVID-19 pandemic and the sourcing arrangement of the IAF.

3. Research methods

3.1. Empirical model used to test hypotheses

This study’s question investigates how the COVID-19 pandemic has affected the sourcing arrangements of the IAF. Building upon previous research (Omer, 2022), the researcher tests their hypothesis using the probit regression model. To address potential issues of heteroskedasticity and autocorrelation, the researcher employs pooled probit regression with robust standard errors (Petersen, 2009). The researcher mitigates the influence of outliers by winsorizing the values of continuous variables at the 1st and 99th percentiles. Utilizing STATA 14 software, the researcher is implementing each of these statistics. The main model of the study is represented by the following equation: (1) $$\text{IAFSUit}={\beta }_0+{\beta }_1\mathit{\text{COVID}}19i_{t+}{\beta }_{2-11}\mathit{\text{CONTROLS}}+{\epsilon }_{\mathit{\text{it}}}$$(1)

Table 1 presents all the current study variables, this study anticipates that the sourcing arrangements of the IAF (IAFSU) will undergo substantial changes due to the impact of COVID-19 going by the challenges confronted by the IAF during the COVID-19 pandemic (KPMG., 2020b). The model uses IAFSU as the dependent variable to examine the impact of the COVID-19 pandemic on IAF sourcing. IAFSU is a dummy variable, where ‘Sourcing = 1’ indicates outsourcing of some or all of the IAF’s work to a third-party, and ‘Sourcing = 0’ indicates in-house work (e.g. Baatwah & AL-Qadasi., 2020; Carey et al., 2006; Glover et al., 2008; Wan-Hussin & Bamahros, 2013). COVID-19 is the independent variable of concern in the study. Previous literature (Ali et al., 2020; Al-Qadasi et al., 2023; Westhausen, 2022) has used a dichotomizing approach to measure COVID-19. This approach assigns a value of one to a company if its fiscal year ended on or after 11 March 2020, and zero otherwise. This measurement is based on the dates associated with the COVID-19 pandemic, which was declared a worldwide pandemic by the WHO on 11 March 2020 (WHO, 2020).

Table 1. Variables measured and summarized.

Variable	Definitions
IAFSU	The dummy variable indicates whether the work of the IAF is outsourced (1) or done in-house (0).
COVID19	The dummy variable takes a value of 1 if the fiscal year ended on or after March 11, 2020, and 0 otherwise.
ACIND	The percentage of directors serving on the AC who are independent.
ACAEXPRT	The percentage of AC’s directors with accounting expertise.
ACSIZE	The overall count of directors on the AC.
ACMT	The total number of meetings AC holds annually.
BIG4	If the audit firm conducting the external audit belongs to the big4, the dummy variable will be set to 1; otherwise, it will be set to 0.
SIZE	The natural logarithm of the sum of all assets.
LEV	The ratio of total liabilities to total assets.
INVREC	The total of inventory and receivables divided by total assets
PRO	The ratio of net income to total assets.
OWNER	Major shareholders’ percentage (> =10%) ownership of the shares.

Prior research (Baatwah & Adel AL-Qadasi, 2020) has identified a set of variables that affect IAF sourcing. This study builds on that research by including these variables in the model as control variables. These variables are classified into two sets. The first set is CG variables (e.g. ACIND, ACAEXPRT, ACSIZE, ACMT, BIG4, and OWNER). The second set is a set of company variables (e.g. Size, LEV, INVREC, and PRO). By doing so, it aims to reduce the influence of unaccounted variables and improve the accuracy of the model’s predictions. The definitions of all control variables used in the study can be found in Table 1.

3.2. Data and sample

This study seeks to explore the issue of influence of COVID-19 on the IAFSU in the Oman context as an emerging market. In line with some recent accounting studies that address the influences of COVID-19 (Ali et al., 2020; Al-Qadasi et al., 2023; Westhausen, 2022), this study considered the COVID-19 pandemic date as a basis to collect the study data. Therefore, the research data was collected for the period spanning from 2019 to 2020. The fiscal year that concluded on March 11, 2020 was designated as the COVID-19 crisis period. All other fiscal years were considered part of the pre-crisis period. This specific date was chosen as a cutoff because it marked the emergence of the COVID-19 pandemic and resulted in significant changes in the business environment and former accounting periods (before 11 March 2020) are different with the unset of COVID-19. The data used in this study was sourced from the annual reports of publicly listed Omani companies. These reports were readily available on the Muscat Stock Exchange (MSE) website. A total of 233 company-year observations were initially included in the sample, averaging around 116 companies for each year. However, discrepancies in regulatory frameworks, accounting systems, and operational procedures made 73 financial companies (year-observations) unsuitable for this study, hence they were excluded from the sample. Further, 19 observations with missing data were eliminated from the sample. This resulted in a final sample size of 141 company-year observations. It is this final sample that was used for testing the study’s model as illustrated in Table 2.

Table 2. Sample range.

Year-to-date observations for all publicly listed companies from 2019 to 2020	233
Minus year-observations of financial companies	(73)
Minus data delisted and missing of companies-years observations	(19)
Final sample	141

4. Results

4.1. Descriptive statistics and univariate analyses

Table 3 provides the descriptive statistics for the study’s model’s primary variables. The descriptive results reveal that the mean (median) of the IAF sourcing arrangement (IAFSU) during the COVID-19 pandemic crisis is 0.333 (0.000). This indicates that more than 33% of companies entrusted the IAF to external providers, while approximately 67% of the IAF work was performed in-house throughout the study period. Consequently, it can be inferred that the majority of Omani companies chose to conduct their IAF operations in-house during the COVID-19 period. This result contrasts with prior studies focusing on the IAF in the Omani context before the COVID-19. For instance, Baatwah et al. (2019) reported a mean IAFSU of 48% and an in-house IAF mean of 42%. Similarly, the findings differ from the results of Baatwah and Al-Qadasi (2020), who found a mean IAFSU of 55% and an in-house IAF mean of 45%.

Table 3. Summary statistics for the sampled period 2019–2020.

Variables	min	p25	Mean	Std. Dev	Median	p75	max
IAFSU	0.000	0.000	0.333	0.473	0.000	1.000	1.000
COVID19	0.000	0.000	0.528	0.501	1.000	1.000	1.000
ACID	0.000	0.667	0.722	0.227	0.667	1.000	1.000
ACEX	0.000	0.000	0.269	0.257	0.333	0.333	1.000
ACM	0.000	4.000	4.645	1.389	4.000	5.000	9.000
ACS	0.000	3.000	3.262	0.640	3.000	3.000	5.000
BIG4	0.000	0.000	0.348	0.478	0.000	1.000	1.000
SIZE	8.543	10.502	13.871	3.777	13.331	17.412	20.403
LEV	0.069	0.250	0.524	0.361	0.474	0.699	2.051
INVREC	0.005	0.100	0.265	0.197	0.221	0.413	0.747
ROA	−0.363	−0.017	0.002	0.095	0.023	0.045	0.252
OWNER	0.000	48.240	59.804	21.231	59.670	76.498	99.130

Table 1 shows definition of variables.

Regarding COVID-19, it shows that the mean (median) is 0.528 (1), that indicates to the around 53% of the companies in study’s sample have been influenced under the COVID-19 pandemic in Oman setting. This result is higher compared with 46% uncovered of Al-Qadasi et al. (2023) study in Oman context. The descriptive analysis results for control variables in Table 3 are considered adequate, even though they are not discussed in detail within the study’s context for the sake of brevity.

A univariate analysis was performed to investigate the presence of multicollinearity among the study model’s variables and explore potential correlations. The Pearson correlation matrix test was then utilized to confirm the absence of multicollinearity among the study model’s variables. None of the correlations were equal to or exceeded 0.90, which is consistent with prior research (Myers, 1990; Pozzoli et al., 2022).

Table 4 is demonstrations the highest correlation coefficient for IAF sourcing arrangements and INVREC (in terms of the dependent variable and the independent variables) is 0.35, which falls well below the threshold of 0.90 (Myers, 1990; Pozzoli et al., 2022). The highest correlation is observed between COVID19 and SIZE in terms of the independent variables, which stands at -0.86, which is less than 0.90, indicating no existence of multicollinearity of the study model’s variables (Myers, 1990; Pozzoli et al., 2022). Upon conducting the supplementary test, the tabulated results for the variance inflation factors (VIF) test, as displayed in Table 5, indicate that all the variables in the study model have VIF values lower than the rule-of-thumb threshold of 10 (Gujarati, 1995; James et al., 2013; Kennedy, 1998). This result confirms the absence of any multicollinearity issue.

Table 4. Correlations matrix.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
(1) IAFSU	1.00
(2) COVID19	−0.07	1.00
(3) ACID	0.02	−0.11	1.00
(4) ACEX	−0.08	−0.08	0.05	1.00
(5) ACM	−0.16*	−0.05	0.22***	−0.04	1.00
(6) ACS	0.06	−0.03	0.30***	−0.03	0.18**	1.00
(7) BIG4	−0.20**	−0.04	−0.06	0.31***	0.08	0.07	1.00
(8) SIZE	−0.17**	−0.86***	0.08	0.19**	0.15*	0.06	0.30***	1.00
(9) LEV	−0.03	0.02	−0.13	0.12	−0.01	−0.21**	0.09	0.02	1.00
(10) INVREC	0.35***	−0.11	0.08	−0.12	0.14*	0.08	−0.35***	0.00	0.11	1.00
(11) ROA	−0.17**	−0.14*	0.13	0.14*	−0.04	0.13	0.23***	0.27***	−0.25***	−0.02	1.00
(12) OWNER	0.12	0.04	−0.09	−0.06	−0.20**	−0.04	−0.03	−0.05	0.08	−0.19**	−0.05	1.00

*** p < 0.01, ** p < 0.05, * p < 0.1.

Table 1 shows definition of variables.

Table 5. Estimates for probit regression of IAF arrangement.

Variables	Sign	VIF	IAFSU
			Coefficient	T. statistic
COVID19		5.35	−4.716***	(–3.352)
ACID		1.20	0.097	(0.182)
ACEX		1.17	0.865	(1.531)
ACM		1.23	−0.251*	(–1.764)
ACS		1.19	0.331	(1.557)
BIG4		1.69	1.725***	(3.530)
SIZE		6.15	−0.681***	(–3.408)
LEV		1.23	−0.427	(–1.080)
INVREC		1.32	3.242***	(3.930)
ROA		1.31	−3.405**	(–2.334)
OWNER		1.11	0.019**	(2.364)
_cons			5.039	(1.385)
Wald chi2			495.76
Prob > chi2			0.0000
Observations			141
Pseudo R^2			0.501

t-values are in parentheses.

*** p<.01, ** p<.05, * p<.1.

Table 1 shows definition of variables.

4.2. Regression results

The data was analysed using Stata software to examine the study’s hypothesis and a probit regression analysis was conducted. The results of the study model, which explores the association between COVID-19 and the sourcing arrangementsof the IAF, are presented in Table 5. The model exhibits statistical significance (p < 0.000), suggesting a good fit. The pseudo R2 value of 0.501 indicates a strong connection between the dependent and independent variables. The model’s independent variables account for around 50.1% of the observed changes in the dependent variable, which indicates reasonable explanatory power. The results support the study’s hypothesis, revealing a significant negative relationship between COVID-19 and IAF sourcing arrangements.

The key variables of interest in this study are COVID-19 and IAF sourcing arrangements. The coefficient for COVID-19 shows a significant negative association with IAFSU (Coefficient -4.716 and T. statistic -3.352). This suggests that Omani companies tended to increase their reliance on in-house providers to perform their internal audit function during the COVID-19 period. Because that the effect of internal IAF providers as one of critical oversight mechanisms of internal CG have mitigated the COVID-19 pandemic’s negative influence. It would be prudent to conclude that most Omani companies shifted from outsourcing their IAF to performing it in-house in the period of COVID-19, as opposed to the period before the pandemic occurred. This finding underscores the adaptive strategies adopted by Omani companies in response to the challenges posed by the COVID-19-pandemic, which underlining the importance of resilient and flexible business models during times of crisis. Furthermore, Oman companies may suffer disruptions in their operations, which in turn limits their financial resources to pay the fees for external providers of IAF, which are in most cases more costly than insourcing providers (Baatwah et al., 2021). Another explanation may suggest that managers and shareholders in Oman believe that there is no difference in the quality of insourcing and outsourcing providers of IAF because both cannot conduct the regular audit activities for IAF. Thus, as most Omani companies are controlled by the largest shareholders and, in many cases, managers are owners or family members (Baatwah et al., 2021), managers and shareholders can manage and direct all operations during COVID-19 without the need for experts and are more independent, such as outsourced IAF providers.

The outcome of this study aligns with theories of signaling and agency, indicating that Omani companies have motivation to address the agency problem and signal to stakeholders the effectiveness of their internal audit function (IAF) during the COVID-19 period. This is achieved by relying on in-house providers for the IAF. In empirically, previous IAF studies in an emerging market have provided empirical evidence that supports the notion that internal providers of a company’s IAF are more effective in enhancing financial reporting quality compared to external sources (Ghaleb et al., 2020). Internal IAF providers have daily regular interaction into the company, possess a deeper understanding of managerial practices and its operations, as well as financial reporting procedures, unlike external providers (Lin et al., 2011; Coram et al., 2008).

In the meantime, that the control variables with a significantly positively association with IAFSU are BIG4, INVREC and OWNER, while ACM, SIZE and ROA are a significantly negatively associated. Nevertheless, this study finds insignificant association between ACID, ACEX, ACS and LEV with IAFSU.

5. Conclusion

The influence of the COVID-19-pandemic on auditing and accounting practices has garnered significant attention from both academics and practitioners (Albitar et al., 2020; Al-Qadasi et al., 2023; Baatwah et al., 2022; Hay et al., 2021; Hsu & Yang, 2022; Jarva & Zeitler, 2023; Pozzoli et al., 2022). However, there is no one empirical study that has specifically focused on the impact of the COVID-19 on the sourcing arrangementsof the IAF. This study sought to provide empirical evidence on the repercussions of the COVID-19 on the sourcing arrangementsof the IAF, with a specific focus on Oman as an emerging Asian market.

Based on the analyzing 141 company year-observations listed on the Muscat Stock Exchange for the period of 2019–2020, this study observes that the sourcing arrangementsof the IAF (IAFSU) is influenced under the COVID-19-pandemic. Specifically, the result of this study is uncovered a significant and negative associated between COVID-19 with IAFSU, indicating that the most Omani public listed companies throughout the COVID-19 period are increased reliance to perform its IAF on in-house provider compared to outsource provider. This result presents an intriguing theoretical contribution by uncovered that the increased reliance on in-house providers to perform the IAF of Omani companies offers a signal to stakeholders of its effectiveness in dealing with challenges and risks that emerged as a arising of the repercussions of COVID-19, consequently mitigate agency conflict.

Accordingly, this study will contribute in enhancing the knowledge of auditors, companies, shareholders and regulators about this significant issue, through determine how the companies adapting under crisis. At the time companies and regulators worldwide have taken many measures to confront the COVID-19-pandemic in order to protect the business market. The result of this study provides important empirical evidence regards an increased reliance to in-house provider under COVID-19-pandemic, which can support the efforts of stakeholders, auditors, companies, regulators and researchers to deal with crises. Consequently, this result adds to the ongoing discussion of the impact of COVID-19. Stakeholders as well as auditors will have evidence that the effectiveness of internal audits is crucial in addressing similar crises situations in the future. The companies will possess crucial evidence to justify the development for their internal audit department to ensure its effectiveness in handling similar situations in the future. In regard to regulators and policymakers, this outcome offers valuable information to them regarding how companies have adjusted to COVID-19 effects. It helps determine the monitoring role and other activities of the IAF and evaluate the effectiveness of current regulations in enabling the IAF to handle crises such as the pandemic. This aids regulators and policymakers in formulating future laws and regulations for the IAF in this context.

In practical, this study expands IAF research under COVID-19 pandemic such as study by Jarva and Zeitler (2023), by considering the effect of COVID-19 pandemic on the sourcing arrangements of the IAF that is ignored in previous studies. This study is expected to contribute valuable insights to the recent accounting and auditing literature, shedding light on the influence of COVID-19 on IAF practices during the pandemic. It offers substantial evidence regarding the effects of the COVID-19 pandemic on the SU of the IAF in response to the challenges faced by the IAF during the COVID-19 crisis (KPMG., 2020b). It has also heeded to the recent calls for research on the pandemic’s impact on the IAF. This is the first study to examine this relationship with the specific aim of addressing an academic gap on this issue. The results can serve as a foundation for future research endeavours to provide empirical evidence on the possible influence of COVID-19 on the field of auditing and accounting, both quantitatively and qualitatively.

Although of the important of evidence that provided of this study, it has several limitations. Specifically, the use of data from a sample of companies in an emerging market restricts the generalizability of the results to developed countries. Additionally, the study’s sample period is short, spanning only from 2019 to 2020, which restricts the generalizability of the findings. Therefore, caution is needed when applying the study’s results broadly. Future research could address this limitation by including data from years before and after COVID-19, enhancing the statistical power of the analysis. Besides, the study overlooked to consider other variables like investments in IAF providers that could mitigate the effect of COVID-19 on the work of the IAF. These limitations underscore a direct justification to need for further research in the future.

Author’s contribution

This article is contributed by Dr. Waddah Kamal Hassan Omer in all stages of writing and analysis, as well as reviewing it critically in order to intellectualize its content. As a corresponding author, I am accountable for every parts of this paper done, and I approve of publication in the Cogent Business & Management.

Acknowledgements

The author expresses gratitude to the editor and reviewers for their valuable feedback on earlier drafts.

Disclosure statement

I confirm no competing interests, whether financial or non-financial, are relevant to this article. ‘No potential competing interest was reported by the author’.

Data availability statement

The study’s supporting data can be obtained from the author. [Dr. Waddah Kamal Hassan Omer], upon reasonable request.

Additional information

Funding

No any funding I was received relevant this paper.

Notes on contributors

Waddah Kamal Hassan Omer

Dr. Waddah Kamal Hassan Omer is an Assistant Professor in Accounting in the Department of Accounting, Faculty of Administrative Science, University of Aden, Yemen. And currently, he is a contracted professor in the Department of Administration Science (Accounting and Tax Program), Applied College Northern Border University, Turaif, Saudi Arabia. His areas of research interests are auditing, corporate governance, and financial reporting.