Influence of internal audit reporting line and implementing internal audit recommendations on financial reporting quality

Abdulaziz Alzeban

Meditari Accountancy Research, 2019, vol. 28, issue 1, 26-50

Abstract: Purpose - This study aims to explore the influence of internal audit (IA) reporting lines and the implementation of IA recommendations (IMPLEMENT) on financial reporting quality (FRQ). Design/methodology/approach - Data were obtained from the annual reports of 201 UK listed companies, and also from survey questionnaires completed by the chief audit executives working within those companies. Two measures are used as proxies of FRQ: abnormal accruals and accrual quality. Findings - Findings indicate that when IA reports directly to the audit committee (AC), there is a significant positive influence upon FRQ. Conversely, when IA reports to the chief executive officer (CEO) or chief financial officer (CFO), there is a negative impact on FRQ. It is further shown by the results that lower income-increasing accruals are evident when there is greater IMPLEMENT, thereby showing an accompanying positive influence on FRQ. Moreover, the results indicate that greater adoption of such recommendations is also associated with internal reporting lines, i.e. when IA reports directly to the AC, FRQ results improved. Originality/value - These findings contribute to the literature in the field of IA reporting, by introducing new insights regarding reporting lines and IMPLEMENT, and the influence of these on FRQ, and by establishing those insights through empirical work undertaken in the UK where little research on this issue has been reported.

Keywords: Internal audit; Internal audit report; Internal audit recommendations; Financial reporting quality; Audit committee; Audit quality; The UK (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:medarp:medar-12-2018-0409

DOI: 10.1108/MEDAR-12-2018-0409

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