Can internal audit functions improve firm operational efficiency? Evidence from China
ISSN: 0268-6902
Article publication date: 12 September 2020
Issue publication date: 19 October 2020
Abstract
Purpose
The purpose of this study is to examine the effects of internal audit function (IAF) quality on the operational efficiency of Chinese firms.
Design/methodology/approach
The authors use regression models with a sample of Chinese listed companies to test their research hypotheses.
Findings
The authors find that IAF quality is positively associated with firm operational efficiency. The result is unchanged after correcting for endogeneity via the instrumental variable method and using an alternative measure of firm operational efficiency. The authors show that IAF competence improves firm operational efficiency, but the relationship between IAF independence and firm operational efficiency is insignificant. Additionally, they find that IAF quality can only significantly improve firm operational efficiency in the presence of effective corporate governance at the firm level and strong institutions at the province level. Using path analysis, the authors find that an IAF can improve firm operational efficiency directly or indirectly by promoting firm internal control quality.
Practical implications
The findings of this study suggest the need for a balance between IAF competence and independence to achieve the goals of IAF. Additionally, the authors study suggests that the effectiveness of IAF is contingent on corporate governance and market-based institutions.
Originality/value
The study’s findings contribute to the burgeoning literature on the relationship between IAF and firm operational performance and deepen the authors’ understanding of the role of IAF in an emerging economy whose government plays a major role in promoting and enforcing internal audits. The study also empirically support the Internal Audit Governance Maturity Model proposed by the Institute of Internal Auditors.
Keywords
Acknowledgements
The authors acknowledge financial supports from The National Natural Science Foundation of China under Grant #71802199 and 71332004, The National Social Science Fund of China under Grant #18VSJ082 and The Famous Accounting Training Project under Grant # [2016] No.15, the Ministry of Finance, China.
Citation
Chen, Y., Lin, B., Lu, L. and Zhou, G. (2020), "Can internal audit functions improve firm operational efficiency? Evidence from China", Managerial Auditing Journal, Vol. 35 No. 8, pp. 1167-1188. https://doi.org/10.1108/MAJ-01-2019-2136
Publisher
:Emerald Publishing Limited
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