Effects of Internal Auditing on the Quality of Financial Reporting – A Critical Analysis

Jette Fabian, University of Hamburg (Master thesis)
Junior Management Science 7(5), 2022, 1242-1269

In order to uncover the weaknesses in corporate governance revealed by both accounting scandals and the financial crisis, one possible solution is for internal auditing, as a process-independent in-house auditing institution, to continuously monitor and improve the effectiveness of measures taken within the framework of governance and risk management. In addition to presenting both definitional basics and the normative and conceptual framework, this paper critically analyzes whether and to what extent internal auditing has an impact on the quality of financial reporting and how it should be designed in order to optimally fulfill its mandate to the respective company management. As a result, a high-quality internal audit, as one of the four pillars of corporate governance, can represent a significant success factor in reducing earnings management, uncovering accounting manipulation and, thus, avoiding accounting scandals. The decisive factor for positively influencing financial reporting is the consideration of the key drivers of internal audit quality as well as the alignment of audit procedures with predefined frameworks.

Keywords: Internal audit; Corporate governance; Financial reporting quality; Earnings quality.

DOI: https://doi.org/10.5282/jums/v7i5pp1242-1269