The association between firm characteristics and the quality characteristics of the internal audit function in the UK: an agency perspective

Ismael, Hazem Ramadan

doi:10.1504/ijaape.2019.10020400

Cited by 1 publication

(8 citation statements)

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“…Remarkably, all the studies above argued that the existence of an IAF might not be a guarantee for increasing the quality of the financial reporting process. The IAF’s ability to deter fraud, earnings management or irregularities will heavily depend on its quality characteristics rather than its only existence (Abbott et al , 2016; Ege, 2015; Ismael, 2019; Prawitt et al , 2009).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…The previous internal audit literature and the IIA standards highlight four main categories of quality characteristics that can affect the IAF’s ability and effectiveness in performing its governance-related roles and activities (Arena and Azzone, 2009; Hass et al , 2006; Ismael, 2019; Sarens, 2009; IIA, 2017). These four characteristics are the IAF’s size, independence, methodology and management and skills and knowledge.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…These four characteristics are the IAF’s size, independence, methodology and management and skills and knowledge. Firstly, the external auditors heavily use the IAF size to evaluate the IAF’s quality and whether they will rely on its work or not (Arena and Azzone, 2009; Ismael, 2019; Felix et al , 2001). Larg IAF is assumed to spend more auditing time, have different backgrounds and perform various audit activities.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…Also, to maintain its independence, the IAF should have unrestricted access to and private meetings with the board/AC and that the board/AC should also have the authority to hire and fire the chief audit executive (CAE) and to approve the IAF’s charter, budget and annual plan (Abbott et al , 2010; Arena and Azzone, 2009; Sarens, 2009; Goodwin and Yeo, 2001; IIA, 2017). Thirdly, Sarens (2009) and Ismael (2019) highlight that the IAF’s compliance with particular IIA standards concerning the methodology and management of the IAF will increase its perceived quality. These IIA standards include the requirement to maintain an internal audit charter, establish risk-based internal audit (RBIA) plans, establish guiding policies and procedures (manuals) and develop and maintain a quality assurance and improvement programme (IIA, 2017).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…Secondly, unlike the previous studies, this study uses a comprehensive composite measure to proxy for the IAF quality. This measure, consistent with Ismael (2019), is based on the comprehensive IIA standards and prior internal audit literature covering different aspects of IAF quality, namely, size, independence, methodology and skills and knowledge. The previous studies that investigated the association between IAF quality and earnings management have mainly relied upon IAF quality measures that are based on the external auditing standards (Prawitt et al , 2009) or relatively limited quality characteristics (Abbott et al , 2016) compared to the comprehensive IIA standards.…”

Section: Introductionmentioning

confidence: 99%

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Internal audit quality and earnings management: evidence from the UK

Ismael

Kamel

2021

MAJ

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Purpose This study aims to examine the association between internal audit quality and the involvement of UK companies in earnings management practices. Design/methodology/approach To measure the internal audit quality, this study uses 115 responses for a postal questionnaire that was addressed to the heads of internal audit departments in a sample of non-financial listed companies in the UK context. The other financial and governance data for the respondent companies were collected from the Datastream and the companies’ annual reports. The present study uses the signed abnormal accruals as a proxy for earnings management and uses both logistic and ordinary least squares regression models to test the research hypothesis. Findings This study finds a negative relationship between the internal audit quality and the abnormal accruals, implying the prominent role of internal audit in reducing the upwards earnings management. The study also finds a significant impact of the internal audit competence on reducing the engagement of UK companies in income-increasing earnings management compared to the internal audit independence. This remarkable result suggests the companies need to focus more on enhancing the internal audit competence to reduce the opportunistic management’s behaviour. Practical implications This study has important implications for the internal audit’s practice, regulation and research. Originality/value This is the first study that investigates the relationship between internal audit quality and earnings management in the UK context. Furthermore, it uses a comprehensive measure for the internal audit function (IAF) quality covering different aspects of IAF quality based on the global Institute of Internal Auditor standards and prior internal audit literature.

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