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The research question we address in this paper is whether the effort invested by the internal auditor in the firm is associated with better firm performance. Our measure of effort is the number of audit hours invested in the firm, and firm performance is measured by the likelihood of a restatement of the firm's financial results. This study is the first to analyze this question, an endeavor made possible by a difference in disclosure requirements regarding internal audit effort between the US and Israel. Our analysis is conducted using hand-collected data on firms traded on Tel Aviv Stock Exchange (TASE) during the period 2010–2014. We expect that auditor effort is negatively associated with the likelihood of restatements of the firm's financial results. Indeed, our findings support this hypothesis. We also consider the association between restatements and two audit committee characteristics – the degree of independence and the degree of expertise of its members. However, these associations are not upheld by the data.

We investigate the association between attributes of the audit committee of a firm and the likelihood of negative events occurring in the firm’s life in Israel. The mandate of the audit committee in Israel is substantially different from its mandate in the US. The responsibilities of the committee in the US are divided between two committees in Israel, one of which deals with reviewing the financial statements and the other one, titled “audit committee,” is in charge of the remaining tasks of the US-type audit committee. This allows us a unique opportunity to focus on the roles of the audit committee other than reviewing the financial statements. Using hand-collected data on firms traded on Tel Aviv Stock Exchange in 2010–2014, we find that the larger the audit committee size, the larger the likelihood of negative events, consistent with the cumbersome workings and potential conflicts of interests characterizing a large committee. The percentage of directors with accounting and financial expertise on the audit committee is associated with a lower likelihood of negative events, in line with the value of such experts in tasks beyond reviewing the financial statements. The fraction of independent directors on the audit committee is not found to be significantly related to the likelihood of negative events. This is consistent with the notion that some independent directors are independent in form but not necessarily in substance, which is surprising in light of the comprehensive regulation regarding audit committee independence imposed by the Israeli regulator.