Does internal audit function outsourcing policy matter for environmental, social and governance performance score? Evidence from Bursa Malaysia
Sustainability Accounting, Management and Policy Journal
ISSN: 2040-8021
Article publication date: 27 May 2024
Abstract
Purpose
Anecdotal evidence indicates the internal audit function may be crucial in supporting the implementation of ESG practices and reporting. However, thus far, no study has been empirically conducted to check how and why internal audit function might affect ESG performance. This study aims to address this gap by examining whether the internal audit budget is positively related to the ESG performance of Malaysian listed firms. It also explores whether the sourcing arrangement of the internal audit function can moderate the internal audit budget – ESG nexus.
Design/methodology/approach
The secondary data for the paper is extracted from two main sources, namely, the Thomson Reuters Eikon database and firms’ annual reports that were downloaded from the Bursa Malaysia website. The final sample consists of public firms listed on Bursa Malaysia over the period 2010 to 2019. Multivariate tests are used to examine the linkage between the variables.
Findings
The results show that the relationship between the annual internal audit budget and ESG performance is contingent on the sourcing arrangement of the internal audit function. Specifically, the results show that the annual internal audit budget has a positive impact on ESG performance for firms with an in-house internal audit function but not for firms outsourcing an internal audit function to external providers. Overall, the results suggest that the annual internal audit budget promotes ESG performance for firms performing their internal audit activities internally.
Practical implications
The findings of this paper provide a strong motivation for authorities in Malaysia to develop new policies and rules aiming at ensuring that internal audit departments are adequately resourced to function effectively, thereby promoting corporate ESG performance. Moreover, the findings may be useful in informing the board of directors and other policymakers that establishing an in-house internal audit department assists in advancing corporate sustainability performance.
Social implications
The findings of this paper suggest that investors, creditors and other stakeholders should link ESG reporting with the attributes of the internal audit function and outsourcing arrangement when evaluating firm performance. The total annual costs allocated to the internal audit function coupled with the outsourcing arrangement by an external provider should be considered for the overall assessment of the ESG performance and provide additional warranty towards corporate goals’ achievement and sustainability for the society.
Originality/value
This study extends previous studies on the determinants of ESG performance by focusing on two crucial aspects of the internal audit function: the annual budget and the outsourcing arrangement, a hitherto largely unexplored mechanism by the existing literature.
Keywords
Acknowledgements
Funding sources: The authors did not receive support from any organization for the submitted work.
Ethical approval: The authors declare that the work is original and is not submitted or under review elsewhere and plagiarism issues are checked. All used material and data are identified through the manuscript. Data for the paper are retrieved from Refinitiv IEKON database on: www.refinitiv.com
Consent to participate: All data sources are identified in the text are available and the participant’s consent to this research in not applicable.
Consent to publish: All the details/tables/figures in this manuscript will be freely available on the internet and may be seen by the general public and published in the current journal.
Authors contributions: All authors contributed to the study conception and design. Data collection and analysis were performed by Dr Al-Hiyari. The first draft of the manuscript was written by Dr Kolsi. Additional analyses were performed by Dr Kolsi. The final draft of the manuscript was deeply reviewed conjointly by Dr Kolsi and Dr Al-Hiyari. Both authors read and approved the final manuscript.
Competing interests: The authors have no relevant financial or non-financial interests or competing interests to disclose with any other party or person. All contributing authors were identified and listed.
Citation
Kolsi, M.C. and Al-Hiyari, A. (2024), "Does internal audit function outsourcing policy matter for environmental, social and governance performance score? Evidence from Bursa Malaysia", Sustainability Accounting, Management and Policy Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAMPJ-01-2024-0013
Publisher
:Emerald Publishing Limited
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