International Journal of Auditing Int. J. Audit. 9: 117–127 (2005) ISSN 1090-6738 © Blackwell Publishing Ltd 2005. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. Blackwell Publishing Ltd.Oxford, UK and Malden, USAIJAUInternational Journal of Auditing1090-67382005 Blackwell Publishing Ltd.200592117127Original Articles Changes in Internal Auditing During the Time of the Major US Accounting ScandalsJ. V. Carcello et al. Correspondence to: Joseph V. Carcello, Stokely Distinguished Scholar and Professor, Department of Accounting and Information Management, Director of Research, Corporate Governance Center, University of Tennessee, USA. Changes in Internal Auditing During the Time of the Major US Accounting Scandals Joseph V. Carcello 1 , Dana R. Hermanson 2 and K. Raghunandan 3 1 University of Tennessee 2 Kennesaw State University 3 Florida International University We examine changes in internal auditing during the time of the Enron and WorldCom disasters and the related legislative and media focus on internal control and corporate governance. Data gathered from 271 mid-sized US public companies reveal that internal audit budgets, staffing levels, meetings with the audit committee, and meeting length increased markedly during this time. Regression analyses provide some evidence of (a) larger budget increases among smaller companies, (b) larger budget and staff increases in companies with greater financial resources (i.e., stronger operating cash flows) or with greater liquidity risk (i.e., lower current ratios), and (c) industry differences in the change in internal auditing. We encourage additional research on recent changes in internal auditing, including research in other countries. Key words: Accounting scandals, audit committee, audit committee meetings, corporate governance, Enron, internal auditing, internal audit budget, internal audit staff, internal control, WorldCom. SUMMARY Internal auditing is enjoying a level of prominence and attention unlike ever before. Accounting scandals at Enron, WorldCom, and other companies have led to an intense focus on corporate governance, effective oversight, and sound internal controls. The objectives of this article are to examine how internal auditing changed at the time of Enron, WorldCom, and other major failures and to explore organizational characteristics associated with these changes. In response to Enron’s bankruptcy, WorldCom’s massive fraud, and the failure of Andersen, the US Congress passed the Sarbanes- Oxley Act of 2002 (SOX, 2002). SOX significantly changed several elements of corporate governance and financial reporting for public companies, particularly in greatly enhancing the focus on internal controls. Given internal audit’s evaluation of internal controls, it is likely that companies