Internal audit findings, audit committees, and firm performance evidence from UK

ABSTRACT

Although researchers have paid increasing attention to how corporate governance influences firm performance, there has been limited focus on how the internal audit function impacts firm performance. This study thus examines how the implementation of internal audit recommendations (IIAR) impacts firm performance and whether audit committee characteristics increase or decrease this impact. By using the proportion of implemented recommendations over the total number of internal audit findings to measure IIAR, the results indicate that IIAR drives higher firm performance. Further, certain audit committee characteristics increase the positive effect of IIAR on firm performance. Additional robustness tests support the main results.

KEYWORDS:

• Internal audit recommendations
• internal audit findings
• firm performance
• audit committee
• corporate governance
• audit fees

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. The author thanks the anonymous reviewers for the suggestion regarding the measure of IIAR.

2. The measures of these characteristics are highlighted in the extant IA literature (e.g. Christopher, Sarens, and Leung 2009).

3. The median is also used in testing the differences. In other words, the sample is divided into two subsamples: the first includes companies whose IIAR is below the full sample median and the second includes companies whose IIAR is above the median. Unreported results indicate that the significance of the differences is the same as those reported in Table 3, Panel A.

4. Here again, the median was used when testing the differences and the sample is divided into two subsamples: the first includes companies where IA reports a lower number of findings than the full sample median and the second includes companies with a higher number of findings than the full sample median. Unreported results indicate that the coefficients are almost the same as those reported in Table 3, Panel B.

5. The author thanks the anonymous reviewers for the suggestion to include audit fees in the additional analysis.

6. Further, loss is included in the model; it equals one if a firm reports loss, and zero otherwise. A positive and significant coefficient is observed between loss and audit fees.