As the outsourced internal audit function (IAF) and real earnings management are attracting widespread attention among firms, it is vital for stakeholders to understand how these two practices affect the quality of financial reporting. This study examines how the expertise of an external IAF provider reduces real earnings management. Using a pooled panel data regression of 928 firm‐observations, we find that the external IAF provider's firm‐specific expertise is significantly associated with lower real earnings management. Conversely, we report no such association for external IAF providers with industry expertise. These findings are robust under a battery of sensitive analyses. The results of additional analyses show that the industry and firm‐specific expertise of external IAF provider interact with each other, resulting in a significant reduction in real earnings management. We also find significant differences in the IAF quality between big4 and second‐tier audit firms in which the latter are associated with lower real earnings management and the former with higher real earnings management. Finally, we observe low real earnings management for important clients and/or those with influential CEOs if the external IAF provider has firm‐specific expertise.

中文翻译：

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外包内部审计职能和实际盈余管理：行业和外部提供商的公司专业知识的作用

由于外包内部审计职能（IAF）和实际收益管理正在引起公司的广泛关注，因此对于利益相关者来说，了解这两种做法如何影响财务报告的质量至关重要。本研究研究了外部IAF提供商的专业知识如何降低实际收益管理。通过对928家公司的观察进行汇总的面板数据回归，我们发现外部IAF提供商的公司特定专业知识与较低的实际收益管理显着相关。相反，我们报告称没有与具有行业专业知识的外部IAF提供商建立这种关联。在一系列敏感分析下，这些发现是可靠的。附加分析的结果表明，外部IAF提供商的行业和公司专门知识相互影响，导致实际盈余管理显着减少。我们还发现，big4和二线审计公司在IAF质量上存在显着差异，后者与较低的实际收益管理相关，而与较高的实际收益管理相关。最后，如果外部IAF提供者具有公司特定的专业知识，我们发现重要客户和/或具有影响力CEO的客户的实际收益管理较低。