Signalling internal audit effectiveness

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.