Effects of a Governing Body on Internal Audit Quality: Empirical Evidence from Thailand
Keywords:Governing Body, Internal Audit Support, Internal Audit Quality, Corporate Governance
This study aims to examine the direct and indirect effects of a governing body on internal audit quality, using internal audit support as a mediator. Data were collected from both primary and secondary sources. The internal audit quality and internal audit support data were collected from questionnaires sent to the Chief Audit Executives of Thailand’s listed companies. The response rate was 17.7%, with 126 companies responding. Afterwards, the matching secondary data about the governing body were collected from the annual registration statement.
Using the covariance-based structural equation model (CB-SEM) method, the empirical analysis concludes that while the governing body has no direct effect, it has an indirect effect on internal audit quality through internal audit support. Therefore, to improve the quality of internal audit, the governing body - board of directors and audit committee - should provide adequate resources and competence to internal audit, as it is an integral part of effective corporate governance. This study contributes to the literature on determinants of internal audit quality in a developing country, Thailand. It also contributes practically by assisting regulators in determining the qualifications and competence of internal audit personnel. Last, it raises the board and audit committee awareness of the importance of allocating adequate resources to internal audit, especially in a volatile, uncertain, complex, and ambiguous (VUCA) world.
Anderson,J. C. & Gerbing, D. W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103, 411-423.
Abbott, L. J., Parker, S., & Peters, G. F. (2010). Serving two masters: The association between audit committee internal audit oversight and internal audit activities. Accounting Horizons, 24(1), 1-24.
Abbott, L. J., Daughtery, B., Parker, S. & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.
Abdullah, R., Ismail, Z., & Smith, M. (2018). Audit committees' involvement and the effects of quality in the internal audit function on corporate governance. International Journal of Auditing, 22(3), 385-403.
Alzeban, A. (2015). Influence of audit committees on internal audit conformance with internal audit standards. Managerial Auditing Journal, 30(6/7), 539-559.
Alzeban, A., & Sawan, N. (2015). The impact of audit committee characteristics on the implementation of internal audit recommendations. Journal of International Accounting, Auditing & Taxation, 24, 61–71.
Barua, A., Rama, D. V., & Sharma, V. (2010). Audit committee characteristics and investment in internal auditing. Journal of Accounting & Public Policy, 29(5), 503–513.
Bollen, K. A. (1989). Structural equations with latent variables. New York, NY: Wiley
Byrne, B. M. (2013). Structural equation modeling with Mplus: Basic concepts, applications, and programming. Routledge.
Chang, Y. T., Chen, H., Cheng, R. K., & Chi, W. (2019). The impact of internal audit attributes on the effectiveness of internal control over operations and compliance. Journal of Contemporary Accounting & Economics, 15(1), 1-19.
Comrey, A. L., & Lee, H. B. (2013). A First Course in Factor Analysis. New York, NY: Psychology Press.
Committee of Sponsoring Organizations of the Treadway Commission. (2015). Leveraging COSO across the three lines of defense. https://www.coso.org
Dellai, H., & Omri, M. A. B. (2016). Factors affecting the internal audit effectiveness in Tunisian organizations. Research Journal of Finance and Accounting, 7(16), 208-211.
Ege, M. (2015). Does internal audit function quality deter management misconduct?. The Accounting Review, 90(2), 495-527.
Eulerich, M., Henseler, J., & Köhler, A. G. (2017). The internal audit dilemma–the impact of executive directors versus audit committees on internal auditing work. Managerial Auditing Journal, 32(9), 854–878.
Eulerich, M., & Lenz, R. (2020). Defining, measuring, and communicating the value of internal audit. best practices for the profession. https://www.theiia.org
Fornell, C. & Larcker, D. F. (1981). Structural Equation Models with Unobservable Variables and Measurement Error: Algebra and Statistics. Journal of Marketing Research, 18, 382-388.
Ganesan, Y., Hwa, Y. W., Jaaffar, A. H., & Hashim, F. (2017). Corporate governance and sustainability reporting practices: the moderating role of internal audit function. Global Business and Management Research, 9(4s), 159-179.
Garven, S. A., & Scarlata, A. N. (2021). An examination of internal audit function size: Evidence from US Government and nonprofit sectors. Current Issues in Auditing, 15(1), A38-A56.
Gebrayel, E., Jarrar, H., Salloum, C., & Lefebvre, Q. (2018). Effective association between audit committees and the internal audit function and its impact on financial reporting quality: Empirical evidence from Omani listed firms. International Journal of Auditing, 22(2), 197-213.
Ghafran, C., & O'Sullivan, N. (2017). The impact of audit committee expertise on audit quality: Evidence from UK audit fees. The British Accounting Review, 49(6), 578-593.
Gordon, L. A., Loeb M. P., & Tseng C. Y. (2009). Enterprise risk management and firm performance: A contingency perspective. Journal of Accounting Public Policy, 28, 301-327.
Gros, M., Koch S., & Wallek, C. (2017). Internal audit function quality and financial reporting: Results of a survey on German listed companies. Journal of Management & Governance, 21(2), 291-329.
Guan, W. (2003). From the help desk: Bootstrapped standard errors. The Stata Journal, 3(1), 71-80.
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate Data Analysis, 7th ed. PEARSON Prentice Hall, USA.
Hair Jr, J. F., Sarstedt, M., Hopkins, L., & Kuppelwieser, V. G. (2014). Partial least squares structural equation modeling (PLS-SEM): An emerging tool in business research. European Business Review, 26(2), 106-121.
Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a reflection of its top managers. Academy of Management Review, 9, 193–206.
Hampton, C. (2015). Estimating and Reporting Structural Equation Models with Behavioral Accounting Data. Behavioral Research in Accounting, 27(2), 1–34.
Institute of Internal Auditors. (2017). Strong foundations: A pulse of internal audit supplemental report. https://www.iia.nl
Institute of Internal Auditors. (2020). The IIA’s Three lines model an update of the three lines of defense. https://na.theiia.org
Institute of Internal Auditors. (2022). How internal audit can master pervasive economic uncertainty.https://www.theiia.org/en/products/learning-solutions/webinar/how-internal -audit-can-master-pervasive-economic-uncertainty/
Ismajli, H., Guda Ferati, M., & Ferati, A. (2017). The role of internal audit in risk management–Evidence from private sector of Kosovo. Acta Universitatis Danubius. Œconomica, 13(5).
Jensen, M. C. & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.
Jiang, L. (2015). Determinants and consequences of internal audit function quality. [Ph.D. in Business Administration Thesis]. Business Administration. ESSEC Business School.
Johl, S. K., Johl, S. K., Subramaniam, N., & Cooper, B. (2013). Internal audit function, board quality and financial reporting quality: Evidence from Malaysia. Managerial Auditing Journal, 28(9), 780-814.
Kline, R. B. (2011). Principles and practice of structural equation modeling. 4th ed. New York: The Guilford Press
KPMG. (2016). Seeking value through Internal Audit. New York, UK: KPMG.
Lenz, R., Sarens, G., & D'Silva, K. (2014). Probing the discriminatory power of characteristics of internal audit functions: Sorting the wheat from the chaff. International Journal of Auditing, 18(2), 126-138.
Magee, S., Schilling, C., & Sheedy, E. (2019). Risk governance in the insurance sector—determinants and consequences in an international sample. Journal of Risk and Insurance, 86(2), 381-413.
Mat Zain, M., Zaman, M., & Mohamed, Z. (2015). The effect of internal audit function quality and internal audit contribution to external audit on audit fees. International journal of auditing, 19(3), 134-147.
McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. Academy of Management Review, 26(1), 117-127.
Mitrapanont, K. (2022). Relationships among risk governance mechanism, risk oversight mechanism, internal audit function quality, and enterprise risk management level in firms listed on the stock exchange of Thailand [Doctoral dissertation]. Kasetsart University.
Mitrapanont, K., & Laohavichien, T. (2019). Effect of corporate governance quality and the internal audit function quality on enterprise risk management effectiveness. Journal of Accounting Profession, 15(46), 5-26.
Mitrapanont, K. & Thirathon, U. (2022) Effects of risk governance mechanism and internal audit function quality on enterprise risk management: An empirical evidence from Thailand. Journal of Accounting Profession, 18(58), 5-28.
Mohamed, Z. (2011). The effects of audit committee and internal audit attributes on internal audit quality and audit fees [Doctor of Philosophy]. Multimedia University.
Moumen, N., Ben Othman, H., & Hussainey, K. (2016). Board structure and the informativeness of risk disclosure: Evidence from MENA emerging markets. Advances in Accounting, 35, 82-97.
Namsirikul, K. (2018). The role of audit committee on strategy of company in Thailand. Chulalongkorn Business Review, 40(4), 143 - 175.
Nunnally, J. C. (1975). Psychometric theory—25 years ago and now. Educational Researcher, 4(10), 7-21.
Onumah, J. M., & Krah, R. Y. (2012). Barriers and catalysts to effective internal audit in the Ghanaian public sector. In Accounting in Africa. Emerald Group Publishing Limited.
Regoliosi, C., & d’Eri, A. (2014). “Good” corporate governance and the quality of internal auditing departments in Italian listed firms. An exploratory investigation in Italian listed firms. Journal of Management & Governance, 18(3), 891-920.
Roussy, M. (2015). Welcome to the day-to-day of internal auditors: how do they cope with conflicts?. Auditing: A Journal of Practice & Theory, 34(2), 237-264.
Rovinelli, R. J., & Hambleton, R. K. (1977). On the use of content specialist in the assessment of criterion-referenced test item validity. Dutch Journal of Educational Research, 2, 49–60.
Sakhakorn, J., Henchockchaichana, N. & Sirchanpetch S., (2014). Internal Audit and Internal Control. Bangkok: TPN Press Limited Partnership.
Securities and Exchange Commission, Thailand. (2017). Corporate Governance Code for listed companies 2017. http://www.cgthailand.org/microsite/documents/CGCode.pdf
Straková, J., Korauš, A., Váchal, J., Pollák, F., Černák, F., Talíř, M., & Kollmann, J. (2021). Sustainable development economics of enterprises in the services sector based on effective management of value streams. Sustainability, 13(16), 8978.
Tai, V. W., Lai, Y. H., & Yang, T. H. (2020). The role of the board and the audit committee in corporate risk management. The North American Journal of Economics and Finance, 54, 100879.
Trotman, A. J., & Duncan, K. R. (2018). Internal audit quality: Insights from audit committee members, senior management, and internal auditors. Auditing: A Journal of Practice & Theory, 37(4), 235-259.
UKEssays. (2018). Corporate Governance in Different Countries. https://www.ukessays.com
World Economic Forum. (2020). The Global Risk Report 2020. http://www.weforum.org.
Yatim, P. (2010). Board structures and the establishment of a risk management committee by Malaysian listed firms. Journal of Management & Governance, 14(1), 17-36.
Zain, M. M., Subramaniam, N., & Stewart, J. (2006). Internal auditors’ assessment of their contribution to financial statement audits: The relation with audit committee and internal audit function characteristics. International Journal of Auditing, 10(1), 1-18.
How to Cite
Copyright (c) 2023 Creative Business and Sustainability Journal
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Opinions and discussions in papers published by the Creative Business and Sustainability Journal (CBSJ) are deemed as personal opinions and the responsibility of the writers. They are not the opinions or responsibility of the Chulalongkorn Business School of Chulalongkorn University.
Papers, content, information etc. appearing in the Journal are deemed to be the copyright property of the Chulalongkorn Business School of Chulalongkorn University. Anybody or any organization that wishes to publish any part of them or use them in any way must obtain written permission from the Chulalongkorn Business School, Chulalongkorn University.