Internal Audit Function Quality and Financial Reporting – Results of a Survey On German Listed Companies

Journal of Management and Governance. Vol. 21 (2017), p. 291-329.

39 Pages Posted: 26 Feb 2016 Last revised: 11 Jan 2019

See all articles by Marius Gros

Marius Gros

Niederrhein University of Applied Sciences; Goethe University Frankfurt - Department of Accounting and Auditing

Sebastian Koch

Goethe University Frankfurt - Department of Accounting and Auditing

Christoph Wallek

Goethe University Frankfurt - Department of Accounting and Auditing

Date Written: February 26, 2016

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 selfdeveloped 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

JEL Classification: K22, M42, M48

Suggested Citation

Gros, Marius F. and Koch, Sebastian and Wallek, Christoph, Internal Audit Function Quality and Financial Reporting – Results of a Survey On German Listed Companies (February 26, 2016). Journal of Management and Governance. Vol. 21 (2017), p. 291-329., Available at SSRN: https://ssrn.com/abstract=2737384

Marius F. Gros (Contact Author)

Niederrhein University of Applied Sciences ( email )

Germany

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Theodor-W.-Adorno-Platz 1
60323 Frankfurt
Germany

Sebastian Koch

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Theodor-W.-Adorno Platz 4
60323 Frankfurt
Germany

Christoph Wallek

Goethe University Frankfurt - Department of Accounting and Auditing ( email )

Mertonstr. 17-25
60325 Frankfurt
Germany

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