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Internal Audit, Internal Control Effectiveness, Corporate Governance Structure and Financial Reporting Quality: Investigating the Internal Line of Defense of Manufacturing Firms in China

Year: 2024

Type: article

Abstract: The study aims to investigate the effectiveness of internal audit, internal control, and corporate governance towards the financial reporting quality among listed manufacturing firms in China Due to the waves of financial scandal outbreaks that disrupted the social and economic order in recent years, public scrutiny of the quality and credibility of financial reporting has escalated. In response to the upending circumstances, China has followed suit the US Sarbanes–Oxley Act (SOX) and introduced a quasi-SOX (C-SOX) practice to reinforce and substantiate the monitoring mechanism such as internal audit and corporate governance. The C-SOX specify that firms are to disclose the management and audit reports on internal control to encourage for high quality financial reporting. Although the effectiveness of SOX has been well supported by prior research, it is not applicable to be generalised to emerging markets such as China. The sample includes 200 manufacturing companies listed on the Shanghai Stock Exchange A-share from 2018 to 2020, making a total sample size of 600 firm-year observations. The findings indicates that the effectiveness of internal audit, internal control, and corporate governance influence the financial reporting quality positively. This research suggests that future studies can add control variables and refer to more research to investigate factors affecting the quality of financial reports, so as to avoid the impact of insufficient control variables on research results. This study contributes to the financial reporting quality literature by providing empirical evidence on the effectiveness of internal audit, internal control, and corporate governance towards an unqualified audit opinion that indicates a higher quality of financial reporting among Chinese listed manufacturing firms.

Source: International Journal of Academic Research in Accounting Finance and Management Sciences

DOI: 10.6007/ijarafms/v14-i4/23092

Authors: Aziatul Waznah Ghazali, Nur Aima Shafie, Chen Ranran, Zuraidah Mohd Sanusi

Institutions: Kingston University London, National University of Malaysia, Universiti Teknologi MARA, Universiti Teknologi MARA System

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: diamond

Funder: Northeast Normal University

OpenAlex ID: W4404051651