Internal audit functions, financial reporting quality and moderating effect of senior management support

Abstract

Purpose The purpose of this paper is to demonstrate the relationship between internal audit functions (IAF) and financial reporting quality (FRQ) and whether such a relationship is moderated by senior management support (SMS) in listed companies in Nigerian Stock Exchange (NSE). Design/methodology/approach This research is a cross-sectional study, using primary data in the form of a survey sent to 175 listed companies in NSE. A total of 149 questionnaires have been collected and analysed out of which 97 were found to be useful and used in the final analysis. Findings The findings indicate a positive and significant relationship between internal audit qualities of work performed, internal control activities, coordination between internal and external auditors and FRQ and this finding was also supported by SMS as a moderator. However, the results show a negative and insignificant relationship between internal audit competency, organisational status and FRQ. Research limitations/implications The findings support the assumption with regard to agency theory. The board should support the IAF to serve as an effective monitoring mechanism in minimising opportunistic management actions. Regulators should also ensure adequate structures that will strengthen the organisational status of the internal auditors to perform towards improving FRQ. Originality/value The study contributes to the existing literature by assessing the effect of IAF on FRQ as moderated by SMS.

Internal audit function, audit report lag and audit fee: evidence from the early stage of COVID-19 pandemic

“…One of the most significant role of the internal audit function is to prevent fraud and minimize the cost of unvaluable activities of the company (Church et al, 2001). Moreover, Madawaki et al (2022) found that internal audit qualities have a positive relationship with companies' work, internal control activities and higher coordination with the external auditor. Those findings are interpreted that a higher quality of internal audit function and stronger internal control of the company will achieve a better financial reporting quality.…”

“…Furthermore, The highlight of the critical role of the internal audit function inside of the company are found by several previous studies (Asare et al ., 2008; Azzam et al ., 2020; Church et al ., 2001; Madawaki et al ., 2022). One of the most significant role of the internal audit function is to prevent fraud and minimize the cost of unvaluable activities of the company (Church et al ., 2001).…”

“…One of the most significant role of the internal audit function is to prevent fraud and minimize the cost of unvaluable activities of the company (Church et al ., 2001). Moreover, Madawaki et al . (2022) found that internal audit qualities have a positive relationship with companies' work, internal control activities and higher coordination with the external auditor.…”

Risk Management and other Factors Preventing Fraudulent Financial Reporting by State-Owned Enterprises in Indonesia

“…The submission of audit findings and results of follow-up examinations, have the biggest role in fraud prevention through the creation of an honest culture, management's responsibility for evaluating risks and fraud, and supervision to eliminate opportunities for deception (Roszkowska & Melé, 2021). Improvements in internal auditing, such as independence, competence, scope of work and implementation of inspection activities, will increase fraud prevention in financial statements through reduced opportunities and reduced justification (Alleyne & Howard, 2005;Madawaki, Ahmi, & Ahmad, 2022).…”

CEO power, audit committee effectiveness and earnings quality

“…According to the agency theory, the division of ownership and authority forces the agent to advance his own interests (Jensen and Meckling, 1976). An effective audit committee is established to supervise the financial reporting process in order to minimize such interests, which improves the caliber of financial reports (Madawaki et al, 2021;Chen and Komal, 2018). Additionally, the stakeholder theory of salience and identity (Mitchell et al, 1997) identifies a CEO as a significant internal stakeholder with the ability to affect the results of financial reporting.…”