Signalling of internal audit effectiveness

Abstract

The internal audit function is increasingly recognised as an important internal governance mechanism and consequently factors that contribute to its effectiveness are now an area of great interest to researchers and practitioners. This study draws on signalling theory to fill a gap in the internal audit effectiveness (IAE) literature by investigating which IAE signals are sent by large South African companies in their company reports. Using a self-developed IAE signalling frame, a content analysis was performed on the integrated reports and other annual reports of the top 100 listed companies in South Africa over a five-year period. Thereafter a multiple correspondence analysis was used to extract IAE signals. The results revealed that IAE disclosure patterns of South African listed companies follow the normative dictates of the King Code and the Companies Act. The study also discovered a low average IAE disclosure rate linked to non-mandatory disclosure requirements. Disclosing more detail on IAE represents a missed opportunity to signal superiority through voluntary communication of the IAE signals especially on internal aspects such as management support for internal audit recommendations and the continuous professional development of internal auditors.

Keywords:

• internal audit effectiveness
• disclosure
• signalling
• multiple correspondence analysis
• content analysis

Acknowledgement

This article is based on the DCom study of the first author at the University of Pretoria under the supervision of the co-authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The data collection process was performed in line with generally accepted research ethics.

2 An MCA is similar to a factor analysis for categorical data making the method ideal for identifying IAE signalled factors.

Additional information

Funding

The study was made possible in part by the NRF PhD Completion Sabbatical grant.