The effects of internal audit role and reporting relationships on investor perceptions of disclosure credibility

Abstract

This study assesses whether internal audit role and reporting relationships affect investor judgment and decision-making. Specifically, the study examines whether investor perceptions of disclosure credibility of financial statement information are increased by the inclusion of an Internal Audit Report (IAR) that details an internal audit function whose role is primarily assurance-related (versus consulting-related) and who reports strategically to the audit committee and administratively to the CEO (versus strategically and administratively to the CFO). The study also tests whether the effects on investor perceptions of disclosure credibility are mediated by investor perceptions of the level of assurance provided by internal audit.The study is motivated by a lack of information about firms' internal audit functions given the function's key role in corporate governance and by the need to better understand the influence of various internal audit characteristics on investor judgment and decision-making. The lack of this governance information is costly to firms due to investors demanding a premium to bear the risks associated with the uncertainty.The experiment used a 2x2 design with internal audit role (i.e. primarily assurance vs.primarily consulting) and reporting relationship (i.e. reports strategically to the audit committee and administratively to the CEO vs. strategically and administratively to the CFO) randomly manipulated between subjects. The participants of the study were comprised of 84 MBA students serving as proxies for nonprofessional investors.

Nonfinancial reporting regulation and challenges in sustainability disclosure and corporate governance practices

“…The IA did not act as an inspector but added value through active support in management processes as described by Melville (2003). The IA aligns with traditional expectations stemming from the audit profession and academia (Ackers, 2015;Holt, 2012) because it contributed to the reliability of ESG information and contributed to anticorruption policies (Cardoni, Kiseleva, & Lombardi, 2020). However, it also had a supporting and teaching role, providing technical advice and favouring discussions within the company (Sarens & De Beelde, 2006).…”

“…Because 'certain companies may not necessarily be "responsible corporate citizens" but may instrumentally use "greenwash" to favourably influence stakeholder perceptions' (Ackers, 2015;Aras & Crowther, 2008), the credibility of corporate ESG disclosures is directly related to the level of assurance provided by IAs and other subjects that counter management information bias and possible errors (Holt, 2012;Soh & Martinov-Bennie, 2015). Therefore, the IA could be a key player in the company's change towards sustainability reporting.…”

إطار مقترح للتدقیق الداخلی القائم على القیمة وأثره على القیمة المضافة والفجوة المتوقعة للتدقیق الداخلی: (دراسة میدانیة فی مصر)(باللغة الإنجلیزیة)

“…First: The Financial Audit Stage: This stage represents the traditional concept of internal audit, whose role is limited to auditing financial operations, protecting the assets of the enterprise, examining and evaluating the internal control system, and therefore the responsibilities of internal audit during this phase were very limited, this narrow view of the scope of internal audit has led to a focus on the financial aspects of operations, resulting to a limited role in the field of internal control and compliance examination (Holt, 2012).…”

An examination of assurance practices on Turkish companies greenhouse gas emissions disclosures

“…This theory also indicates that information users tend to give much priority to information from trustworthy providers. Sources are supposed to be more credible and trustworthy if they have higher expertise or less bias and perceived trustworthiness of the information providers influences persuasion (Shum et.al, 2009;Pornpitakpan, 2004;Holt, 2012;Brink et.al, 2016).…”