Internal audit function quality and financial reporting: results of a survey on German listed companies

Marius Gros (), Sebastian Koch () and Christoph Wallek ()
Additional contact information
Marius Gros: University of Bremen
Sebastian Koch: Goethe University Frankfurt/Main
Christoph Wallek: PricewaterhouseCoopers AG

Journal of Management & Governance, 2017, vol. 21, issue 2, No 2, 329 pages

Abstract: Abstract Most prior studies on internal audit function (IAF) quality and financial reporting have focused on the US setting and have found a positive association between IAF quality proxies and both financial reporting quality and audit efficiency. In this study, we apply the German setting that is characterized by a two-tier board system of corporate governance and different prerequisites for the serving-two-masters problem. This might weaken the IAF’s ability to monitor financial reporting-related processes. To analyze this, we use survey data to measure IAF quality in the German setting and run multiple regressions to examine the association of several IAF quality characteristics and a self-developed IAF quality score with financial reporting quality and audit efficiency. The results show that also in a two-tier system, a high-quality IAF is able to contribute to both financial reporting quality and audit efficiency. Our findings support the notion that the IAF serves as an essential element of effective corporate governance and plays an important role in financial reporting. Moreover, as a practical implication of interest to regulators and managers, we identify that the external certification of the IAF and internal audit-related certifications of IAF employees may contribute to higher financial reporting quality and lower audit fees.

Keywords: Internal audit function; Internal controls; Financial reporting quality; Audit efficiency; Corporate governance (search for similar items in EconPapers)
JEL-codes: K22 M42 M48 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10997-016-9342-8

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