Shireenjit K. Johl, Satirenjit Kaur Johl, Nava Subramaniam and Barry Cooper
The purpose of this paper is to test the impact of the internal audit function (IAF), an increasingly common internal governance mechanism, on a firm's financial reporting…
Abstract
Purpose
The purpose of this paper is to test the impact of the internal audit function (IAF), an increasingly common internal governance mechanism, on a firm's financial reporting quality. Specifically, this paper investigates the association between the quality of the IAF and abnormal accruals (as a proxy for financial reporting quality) and whether the board of directors play a role in moderating the relationship.
Design/methodology/approach
This paper uses a unique dataset of survey responses and archival data. Regression analysis was used to test their hypotheses.
Findings
Although their initial findings show an unexpected positive relationship between internal audit quality and abnormal accruals, this relationship is contingent on whether firms outsource their internal audit activities and/or whether they are politically linked. In estimations excluding outsourcing and political connections observations, this paper shows that the association between internal audit quality and abnormal accruals is negative and in particular internal audit organisational independence, financial focus audit activities and investment are associated with lower income-increasing (opportunistic) abnormal accruals. Next, when this paper interact board quality with internal audit quality, this paper finds although the lower ordered variables board quality and internal audit quality coefficients are negatively related to abnormal accruals, the interaction variable between these two variables is positively associated with abnormal accruals, indicating the possibility of a substitution relationship between board quality and internal audit quality.
Research limitations/implications
Their findings show that certain internal audit attributes play an important role in the financial reporting process and thus these findings are expected to inform the Institute of Internal Auditors and other regulatory bodies on the role of internal audit (being an important internal governance mechanism) in financial reporting, which in turn can assist in market/regulatory reforms/changes and inform the revised Malaysian Code of Corporate Governance.
Originality/value
This paper extends prior internal auditing literature by examining the relationship between internal audit quality and financial reporting quality in the context of a developing country, namely Malaysia, and whether the board of directors moderate the examined association.
Details
Keywords
Shireenjit Johl, Christine A. Jubb and Keith A. Houghton
This study aims to examine auditor reporting behaviour in the presence of aggressive earnings management (EM) in the context of the Asian Economic Crisis as it affected Malaysia…
Abstract
Purpose
This study aims to examine auditor reporting behaviour in the presence of aggressive earnings management (EM) in the context of the Asian Economic Crisis as it affected Malaysia. In the vein of Bartov, Gul and Tsui, the interaction between discretionary or abnormal accruals and audit quality (AQ), as indicated by auditor size and auditor industry specialisation, is examined.
Design/methodology/approach
A logistic regression model adapted from various prior studies is utilised to test the hypotheses.
Findings
As per earlier findings using Western data, Big 5 auditors in Malaysia appear to qualify more frequently than their non‐Big 5 counterparts when high levels of abnormal accruals are present. However, the interaction between auditor industry specialisation and abnormal accruals is not significant in predicting the incidence of qualification.
Originality/value
This study extends the current literature on AQ differentiation and specifically it attempts to address the gaps in the literature with respect to auditor reporting behaviour in the presence of aggressive EM. In addition, this study provides additional evidence on Big 5/industry specialist quality differentiation in an emerging market (an under‐researched area), Malaysia, arguably with less transparent and weaker governance structures than the developed economies such as the USA, UK, and Australia.