الفهرس | Only 14 pages are availabe for public view |
Abstract Purpose – The purpose of this research is to test the impact of the internal audit function (IAF), an increasingly common internal governance mechanism, on firm’s fraudulent financial reporting practices. Specifically, this research investigates the relationship between the quality of the IAF and abnormal accruals (as a proxy of fraud risk in financial reports) and whether the audit committee and the board of directors play a role in enhancing this relationship. Design/methodology/approach – This research uses data from financial reports and survey responses. Regression analysis was used to test the hypotheses. Findings – The research findings show an expected negative/inverse relationship between internal audit quality and abnormal accruals, this research shows that the association between internal audit quality and abnormal accruals is negative and in particular “Risk-based audit plans”, “Engagement Planning and Performance of Audit Work” and “Reporting by IA Department” are negatively and significantly associated with abnormal accruals. Next, when this research investigates whether audit committee quality affects the relationship between internal audit quality and abnormal accruals, the results suggest that internal audit quality and audit committee quality when incorporated that leads to lower level of fraudulent financial reporting and a better effect in facing fraud risks. Also, when this research investigates whether board quality affects the relationship between internal audit quality and abnormal accruals, the results suggest that internal audit quality and board of directors’ quality when incorporated that leads to lower levels of fraudulent financial reporting. The researcher can conclude that, if firms already have other strong internal governance mechanisms as strong boards and strong audit committee, then having equally strong internal audit function will probably be more valuable in mitigating fraud risk in financial reporting. Research limitations/implications – The findings show that certain internal audit attributes play an important role in the financial reporting process and thus these findings are expected to inform regulatory bodies on the role of internal audit (being an important internal governance mechanism) in mitigating fraudulent financial reporting practices, which in turn can assist in market/regulatory reforms and inform the revised Egyptian Code of Corporate Governance. Originality/value – This paper extends prior internal auditing literature by examining the relationship between internal audit quality and fraudulent financial reporting in the context of a developing country, namely Egypt, and whether the audit committee and the board of directors moderate the examined association. |