Classifying internal audit quality using textual analysis: the case of auditor selection

2019 ◽  
Vol 34 (8) ◽  
pp. 924-950 ◽  
Author(s):  
Georgia Boskou ◽  
Efstathios Kirkos ◽  
Charalambos Spathis
Keyword(s):  
Text Mining ◽  
Textual Analysis ◽  
Audit Quality ◽  
Internal Audit ◽  
Annual Reports ◽  
Financial Indicators ◽  
Classification Models ◽  
Promising Alternative ◽  
Content Type ◽  
Auditor Selection

Purpose This paper aims to assess internal audit quality (IAQ) by using automated textual analysis of disclosures of internal audit mechanisms in annual reports. Design/methodology/approach This paper uses seven text mining techniques to construct classification models that predict whether companies listed on the Athens Stock Exchange are audited by a Big 4 firm, an auditor selection that prior research finds is associated with higher IAQ. The classification accuracy of the models is compared to predictions based on financial indicators. Findings The results show that classification models developed using text analysis can be a promising alternative proxy in assessing IAQ. Terms, N-Grams and financial indicators of a company, as they are presented in the annual reports, can provide information on the IAQ. Practical implications This study offers a novel approach to assessing the IAQ by applying textual analysis techniques. These findings are important for those who oversee internal audit activities, assess internal audit performance or want to improve or evaluate internal audit systems, such as managers or audit committees. Practitioners, regulators and investors may also extract useful information on internal audit and internal auditors by using textual analysis. The insights are also relevant for external auditors who are required to consider various aspects of corporate governance, including IAQ. Originality/value IAQ has been the subject of thorough examination. However, this study is the first attempt, to the authors’ knowledge, to introduce an innovative text mining approach utilizing unstructured textual disclosure from annual reports to develop a proxy for IAQ. It contributes to the internal audit field literature by further exploring concerns relevant to IAQ.

The impact of audit committee characteristics on internal audit professionalization: empirical evidence from Greece

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Christina Vadasi ◽  
Michalis Bekiaris ◽  
Andreas G. Koutoupis
Keyword(s):  
Empirical Evidence ◽  
Audit Committee ◽  
Audit Quality ◽  
Research Question ◽  
Internal Audit ◽  
Audit Committees ◽  
Annual Reports ◽  
Substantial Impact ◽  
Content Type ◽  
The Impact

Purpose This paper aims to provide empirical evidence of the association between audit committee characteristics and internal audit quality through internal audit professionalization. Design/methodology/approach The investigation of the research question was based on 45 usable responses that were received from a survey of chief audit executives from firms listed on the Athens Stock Exchange and combined with publicly available information from annual reports. Findings The results indicate that audit committee characteristics (independence, diligence through frequent meetings and interaction with internal audit through valuation) influence internal audit professionalization. In addition, they demonstrate that internal audit professionalization is also influenced by CEO duality and firm’s external auditor. Practical implications The findings of this study have implications for audit committees wishing to improve their overall effectiveness, by identifying areas with substantial impact on internal audit quality. Moreover, regulators of corporate governance bodies can also benefit from the results to strengthen audit committee’s efficiency regarding internal audit function oversight. Originality/value The results add to the literature on the discussion of internal audit professionalization and complement the work of other researchers in the field of audit committee’s impact on internal audit quality/effectiveness. This study attempts to fill a gap in the literature on the effect of audit committee characteristics on internal audit professionalization, an element introduced from an institutional theory perspective.

Assessing Internal Audit with Text Mining

2018 ◽  
Vol 17 (02) ◽  
pp. 1850020 ◽  
Author(s):  
Georgia Boskou ◽  
Efstathios Kirkos ◽  
Charalambos Spathis
Keyword(s):  
Text Mining ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Audit ◽  
Internal Controls ◽  
Annual Reports ◽  
Previous Attempt ◽  
Sarbanes Oxley ◽  
Audit Information

Recently internal controls, corporate governance and risk management have received a great deal of attention. Regarding internal control, several research studies address the issue of internal audit quality. Noteworthy, according to Sarbanes–Oxley (SOX) the internal controls over financial reporting are assessed by the auditors and the management. In the present study, we assess internal controls over financial reporting by employing Text Mining techniques. We analyse the annual reports of 133 publicly traded Greek Companies. The textual parts of the annual reports that refer to internal audit mechanism are extracted. We adopt a Vector Space model and the term-document matrix records the occurrence frequencies of the terms. By applying feature selection, a set of significant keywords, which are used as predictors, is extracted. The Linear Regression model developed explains the variance of the data and highlights significant predictors. The model manages to successfully assess the internal audit function. By performing PCA, major underlying procedures and concepts related to internal audit quality are revealed. Inspite of the undoubted importance of the assessment of internal audit, no previous attempt has been made to assess internal audit and to extract internal audit information from corporate disclosures by using Text Mining techniques. Our results can be useful to internal and external auditors, managers, company decision-makers, regulators and researchers.

Influence of internal audit reporting line and implementing internal audit recommendations on financial reporting quality

2019 ◽  
Vol 28 (1) ◽  
pp. 26-50 ◽  
Author(s):  
Abdulaziz Alzeban
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Negative Impact ◽  
Empirical Work ◽  
Internal Audit ◽  
Reporting Quality ◽  
Positive Influence ◽  
Financial Reporting Quality ◽  
Annual Reports ◽  
Content Type

Purpose This study aims to explore the influence of internal audit (IA) reporting lines and the implementation of IA recommendations (IMPLEMENT) on financial reporting quality (FRQ). Design/methodology/approach Data were obtained from the annual reports of 201 UK listed companies, and also from survey questionnaires completed by the chief audit executives working within those companies. Two measures are used as proxies of FRQ: abnormal accruals and accrual quality. Findings Findings indicate that when IA reports directly to the audit committee (AC), there is a significant positive influence upon FRQ. Conversely, when IA reports to the chief executive officer (CEO) or chief financial officer (CFO), there is a negative impact on FRQ. It is further shown by the results that lower income-increasing accruals are evident when there is greater IMPLEMENT, thereby showing an accompanying positive influence on FRQ. Moreover, the results indicate that greater adoption of such recommendations is also associated with internal reporting lines, i.e. when IA reports directly to the AC, FRQ results improved. Originality/value These findings contribute to the literature in the field of IA reporting, by introducing new insights regarding reporting lines and IMPLEMENT, and the influence of these on FRQ, and by establishing those insights through empirical work undertaken in the UK where little research on this issue has been reported.

The analysis of influencing factors on the going concern audit opinion – a study in manufacturing firms in Indonesia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Thomas Averio
Keyword(s):  
Audit Quality ◽  
Stock Exchange ◽  
Secondary Data ◽  
Sampling Technique ◽  
Manufacturing Firms ◽  
Annual Reports ◽  
Content Type ◽  
Audit Opinion ◽  
Going Concern ◽  
Going Concern Opinion

PurposeIt is argued that the going concern opinion is issued if auditors have a doubt about financial condition of a company. Provision of the going concern audit opinion may worsen the company in terms of gaining public trust and may even indicate bankruptcy. This study aims to determine the factors that affect the auditor's going concern opinion.Design/methodology/approachThis research used secondary data obtained from annual reports and independent audit reports published by the Indonesia Stock Exchange. The population of this research included manufacturing firms registered in the Indonesia Stock Exchange from 2015 to 2019. The sample after the purposive sampling technique being applied consisted of 33 companies. The data were analyzed using logistic regression performed in the statistical analysis software, SPSS 24.0.FindingsThe results indicated that leverage positively affected the going concern audit opinion, then the audit quality, profitability and liquidity negatively affected the going concern audit opinion, whereas firm size and audit lag did not affect the going concern audit opinion.Originality/valueThis study is in contrast to several existing studies on the determinants of the auditor's going concern opinion and provides knowledge on developing more factors affecting the auditor's going concern opinion.

Corporate governance and internal audit: an institutional theory perspective

2019 ◽  
Vol 20 (1) ◽  
pp. 175-190 ◽  
Author(s):  
Christina Vadasi ◽  
Michalis Bekiaris ◽  
Andreas Andrikopoulos
Keyword(s):  
Corporate Governance ◽  
Institutional Theory ◽  
Audit Committee ◽  
Internal Audit ◽  
Annual Reports ◽  
Substantial Impact ◽  
Content Type ◽  
Internal Auditors ◽  
The Impact ◽  
Audit Effectiveness

Purpose This paper aims to explore internal audit effectiveness through its contribution to corporate governance. Namely, the authors attempt to investigate the impact of internal audit professionalization on internal audit’s contribution to corporate governance. Design/methodology/approach Using a research framework informed by institutional theory, the authors predict that internal audit’s contribution to corporate governance is associated with factors related to internal audit professionalization. To investigate the arguments, the authors combine data from a survey of 49 listed companies in the Athens Stock Exchange with publicly available information from annual reports. Findings Empirical results indicate that internal audit professionalization affects internal audit effectiveness, as internal audit’s contribution to corporate governance is improved for organizations where internal audit function complies with internal auditing standards and internal auditors hold professional certifications. The findings also suggest that internal audit’s contribution to corporate governance is shaped by some company-specific characteristics, namely, CEO duality and audit committee quality. Practical implications The results have implications for internal auditors who wish to increase the efficiency of their work, corporate governance mechanisms such as the board of directors and the audit committee, which can use the findings of this study to better respond to their responsibilities concerning internal audit and regulators who can also benefit to strengthen areas with substantial impact on internal audit’s contribution to corporate governance. Originality/value This paper contributes to the academic discussion on the role of internal audit in corporate governance and complements the work of other researchers in the field of internal audit professionalization. This study tries to fill a gap in the literature on the effect of internal audit professionalization elements on internal audit’s contribution to corporate governance.

Company reputation and auditor choice: evidence from fortune 1000 companies

2018 ◽  
Vol 31 (2) ◽  
pp. 232-248 ◽  
Author(s):  
Xuan Huang ◽  
Fei Kang
Keyword(s):  
Financial Reporting ◽  
Audit Quality ◽  
Planning Process ◽  
Practical Implication ◽  
Least Square ◽  
Content Type ◽  
Auditor Choice ◽  
Company Reputation ◽  
Auditor Selection ◽  
The Impact

Purpose The purpose of this paper is to investigate how companies’ reputation affects their selection of auditors. Design/methodology/approach This paper measures company reputation using the reputation scores from Fortune’s “America’s Most Admired Companies” list. Multivariate analysis is performed to examine the impact of company reputation on public companies’ auditor choice. Robustness checks include conducting Heckman procedures and instrumental-variable two-stage least square regressions to control for self-selection bias and using alternative measures to proxy for company reputation and auditor industry expertise. Findings This paper finds that companies with higher reputations are more likely to hire industry-specialist auditors than their counterparts. The results suggest that because of reputation concerns, high-reputation companies have strong incentives to maintain and signal their financial reporting quality, which in turn increase their demand for audit quality. Practical implication This paper suggests that company reputation constitutes an important determinant of auditor selection and, therefore, has both policy and practical implications for the demand of audit services. The paper provides policy-makers and practitioners with insights into critical factors influencing companies’ complex decision process of auditor selection. Originality/value The findings of this paper on the empirical link between company reputation and auditor choice contribute to the auditing literature by enhancing the understanding of the effects of different company-level characteristics in financial reporting and audit planning process. This paper also adds to the growing literature on the influence of company reputation on corporate behavior by documenting the important role that company reputation plays in the managerial decision-making process.

The role of audit quality in preventing firm misreporting: empirical evidence from China

2019 ◽  
Vol 16 (1) ◽  
pp. 83-100 ◽  
Author(s):  
Loan Quynh Thi Nguyen ◽  
Duong Thuy Le ◽  
Hiep Ngoc Luu ◽  
Anh Huu Nguyen ◽  
Thinh Gia Hoang
Keyword(s):  
Audit Quality ◽  
Annual Reports ◽  
External Audit ◽  
Data Set ◽  
Content Type ◽  
Listed Firms ◽  
Empirical Results ◽  
Tangible Assets ◽  
Retained Earnings

Purpose The purpose of this paper is to explore the role of external audit quality in reducing firm misreporting practices. Design/methodology/approach Data are gathered from a number of sources including the Osiris database and firms’ annual reports to construct a comprehensive data set containing financial and non-financial information of over 3,100 publicly listed firms in China during the period 2009–2017. A number of rigorous empirical specifications are utilized with the use of probit, logit and conditional logit regressions, as well as panel pooled OLS and fixed-effect estimators. The IV-2SLS, 2-step system GMM and difference-in-differences techniques are also employed to deal with the potential endogeneity bias to ensure the robustness of the empirical results. Findings The empirical results reveal that larger firms and firms having more tangible assets and greater retained earnings are more likely to employ a better-quality external auditor. Subsequently, higher audit quality leads to a deterioration in corporate misreporting. However, these results are not homogenous across firms. While we document similar findings in the case of non-state-owned firms, state-owned enterprises (SOEs) appear to have less tendency to hire a higher-quality auditor, and higher-quality auditors in turn do not play a significant role in reducing misreporting practices in SOEs. Originality/value This paper contributes to a better understanding of the mechanism to mitigate corporate misreporting practices. It is one of the few to empirically investigate auditor selections and the association between external audit quality and corporate misreporting practices in China.

Attributes of the internal audit function and effectiveness of internal audit services: evidence from local government authorities in Tanzania

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Athuman Kalokola Mahyoro ◽  
Pendo Shukrani Kasoga
Keyword(s):  
Local Government ◽  
Audit Quality ◽  
Internal Audit ◽  
Principal Component ◽  
Positive Influence ◽  
Audit Committees ◽  
Future Research ◽  
Content Type ◽  
Internal Auditors ◽  
Internal Audit Function

Purpose The purpose of this study is to examine how the level of attributes of the internal audit function relates to the effectiveness of internal audit services in local government authorities (LGAs) in Tanzania. Design/methodology/approach Data have been collected through a survey whereby 510 respondents from LGAs in Tanzania through their Heads of Internal Audit Functions, Internal Auditors and Chairpersons of Audit Committees respond to the questionnaire. The data were subjected to principal component analysis and exploratory factor analysis to reduce the set of items and to provide continuous scores for use in multiple regression analyses. Findings The findings reveal that audit quality; organization setting and auditee attributes have a significant positive influence on the effectiveness of internal audit services in LGAs in Tanzania. Research limitations/implications The study covered only LGAs in Tanzania. Future research in this field should address the gaps identified in the study. Practical implications This paper highlights areas that need management attention on the improvement of the effectiveness of internal audit units. Originality/value This paper contributes to the literature of both internal auditing and management studies by linking the level of attributes of internal audit function which are audit quality, organization setting, auditee attributes and effectiveness of internal audit services in Tanzania.

CEO characteristics, management support for internal audit and corporate performance: an analysis of listed Malaysian companies

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Abdulaziz Alzeban
Keyword(s):  
Significant Relationship ◽  
Audit Committee ◽  
Corporate Performance ◽  
Internal Audit ◽  
Chief Executive ◽  
Annual Reports ◽  
Management Support ◽  
Content Type ◽  
The Relationship ◽  
Ceo Characteristics

Purpose This study aims to advance the discussion on internal audit (IA) findings by empirically investigating the relationship between chief executive officer (CEO) characteristics and the IA function, particularly IA findings and implementing IA recommendations and examining whether CEO and management support for IA moderate the effect of the recommendations on corporate performance. Design/methodology/approach Data were gathered from two sources. A survey was conducted, directed at 217 heads of internal audit (HIAs) in listed companies on the Bursa Malaysia, and the annual reports of these companies for the period of 2018–2019 were consulted. A second survey was directed at audit committee chairs to obtain a perspective from other parties. Findings The results indicate that although CEO characteristics are not significantly associated with the number of IA findings, only CEO experience has a significant relationship with the level of the implementation of IA recommendations. The study also demonstrates that management support for IA is positively associated with corporate performance. Further, CEO experience and management support for IA increase the effects of the level to which those recommendations are implemented on corporate performance. However, the effect of management support on corporate performance is eliminated when it interacts with the involvement of CEOs in the HIA appointment and when these HIAs report directly to CEOs. Practical implications These outcomes provide implications for policymakers, regulators and researchers. Malaysia’s regulatory authorities, as well as those in other countries, particularly emerging markets where the institutional and cultural environments have similar characteristics, could consider the evidence of the relationship between the CEO’s financial background, management support for IA and IA recommendations when guiding companies about the mechanisms for appointing HIAs. Simultaneously, the results obtained could be useful when auditors are involved in risk assessment and rely on IA recommendations. Originality/value This study adds to the literature on the significant relationship between CEO characteristics (particularly CEO experience) and the level of implementing IA recommendations. It advances the research efforts on management support for IA by providing empirical evidence of how such support fosters a greater role for IA in improving corporate performance, as well as moderates the effect of IA in that endeavour. Further, the present study contributes to the developing literature on determinants of corporate performance by considering how these variables perform in the Malaysian setting.

Voluntary audit committees, auditor selection and audit quality: evidence from Taiwan

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mao-Feng Kao ◽  
Min-Jeng Shiue ◽  
Chien-Hao Tseng
Keyword(s):  
Audit Committee ◽  
Audit Quality ◽  
Audit Committees ◽  
Firm Level ◽  
Content Type ◽  
Audit Firm ◽  
Empirical Results ◽  
Initial Stage ◽  
Auditor Selection ◽  
The Individual

Purpose This study aims to examine the Taiwan setting, where audit partners’ names are presented in the audit report and where audit committee formation is voluntary in the initial stage of audit committee reform. This paper investigates the effects of the formation of voluntary audit committees on the selection of individual audit partners, and, in turn, the audit quality. This contrasts with previous studies investigating the relationship between audit committees and auditor selection at the audit firm level. Design/methodology/approach This paper samples all of Taiwan’s publicly listed firms for the period 2007–2012 and uses Heckman’s (1979) two-stage estimation model to achieve our objectives. Findings Using different characteristics of individual engagement partners as proxies for a higher quality auditor, the main empirical results show that voluntary audit committee formation is positively related to an industry specialist lead partner and a lead partner that has a larger number of clients. In addition, this paper also finds that voluntary audit committee formation has a positive impact on audit quality (proxied by discretionary accruals). The results suggest that the voluntary formation of an audit committee contributes positively to both auditor selection and audit quality. Furthermore, an additional test shows that the main empirical results are robust to a validity threat that firms that have good corporate governance prior to the formation of voluntary audit committees tend to select high-quality audit partners. Originality/value The paper contributes to the audit committee literature in the following ways: this paper takes advantage of Taiwan’s unique setting, where forming an audit committee is not compulsory in the initial stage of audit committee reform, to investigate the voluntary audit committee, auditor selection and audit quality; this paper expands on Abbott and Parker’s (2000) study of audit committee characteristics and auditor selection at the audit firm level by examining this relationship at the individual audit partner level; this paper responds to the call by Church et al. (2008) and DeFond and Francis (2005) who propose more studies on audit quality at the individual engagement partner level.

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