Audit Committees and Internal Control Quality: Evidence from Nonprofit Hospitals Subject to the Single Audit Act

This study examines the impact of audit committees on the internal control quality of nonprofit organizations. Based on resource dependency theory that stresses an entity's economic needs for internal control over administering federal funding, we select a sample of nonprofit hospitals subject to the Single Audit Act in the United States, from 2001 to 2008. Our results show that hospitals that had audit committees and also employed Big 4 auditors were associated with better internal control quality. In addition, we find that Big 4 auditors were negatively associated with reported deficiencies of internal control over administering major federal programs in the early years (2001–2004), but positively associated with reported deficiencies of the same kind in the later years (2005–2008), suggesting a possible effect of the Sarbanes‐Oxley Act.