Companies are generally seen to have four primary governance mechanisms: management, board of directors/audit committee, external auditor and internal auditor. Reporting on the activities of the first three is mandatory. Yet, despite its critical prominence, virtually no listed firm gives any shrift to the internal auditor.
Too bad. A study published in the International Journal of Auditing suggests a descriptive internal audit report (IAR) detailing composition, responsibilities and activities could significantly affect investor confidence in financial reporting reliability and, ultimately, investment decision making.
Researchers at the University of Alabama asked 140 graduate business students to evaluate the investment worthiness of companies based on five sample reports included in the annual report and proxy statement: an IAR, an audit committee report, an external audit report, management discussion and analysis, and management report on internal controls.
‘Perceptions of financial reporting reliability and oversight effectiveness increased with the inclusion of an IAR, especially in the case of high-fraud-risk firms,’ says study co-author Travis Holt.
