Abstract:
Internal audit effectiveness (IAE) has been the subject of academic research for many
years. Extant IAE literature provides clues on IAE indicators or factors and ways to
measure them. However, the question still remains: Is signalling IAE associated with
higher company performance? Hence, this study set out to investigate the relationship
between signalled IAE factors and company performance of the top 100 companies
listed on the Johannesburg Stock Exchange in South Africa for the period 2012–2016.
Being located within the post-positivist worldview, the study draws on agency and
signalling theories and employs content analysis, multiple correspondence analysis
(MCA) and regression analysis for data collection and analysis.
Following the literature review, 54 IAE indicators or factors were identified and used to
construct the IAE signalling frame. The latter guided the content analysis of integrated
reports and other annual reports in which each IAE indicator was scored against the
frame. After this, MCA was employed to reduce the 54 IAE indicators to 19 signalled
IAE factors. Regression analysis was then used to determine the relationship between
the signalled IAE factors and company performance. The regression analysis results
showed a mix of positive and negative relationships between signalled IAE factors and
company performance.
The hypothesis was accepted for seven signalled IAE factors, rejected for three and
was not significant for nine. The positive relationship between signalled IAE factors
and company performance implies that disclosing IAE factors reduces information
asymmetry in the agency relationship, and such signals improve investor confidence
and company performance. The negative relationships were associated with
compliance with regulatory measures. From a signalling theory perspective where
disclosure addresses information asymmetry, the signalling of this information may not
be value-adding because such information may possibly be assumed to be in place
and may already have been factored in by internal and external stakeholders in their
performance evaluation. As one of the first attempts at exploring IAE disclosure using
a self-constructed IAE signalling frame and employing MCA as a factor extraction method, the study contributes to IAE discourse and research and could guide
managers on the areas of IAE signalling that bear a relationship to company
performance.
