THE RELATIONSHIP BETWEEN INTERNAL AUDIT QUALITY AND REPORTING QUALITY: A STUDY OF QUOTED BANKS IN NIGERIA

Background of the Study

Corporate scandals around the world, such as that reported in respect of Enron, WorldCom, Global Crossing, and Rank Xerox, in the USA, Parmalat in Italy (Demaki, 2011; Norwani, Zam, & Chek, 2011), Allied Nationwide Finance in New Zealand (Lianne, 2011), and, Cadbury, Afribank, Intercontinental, Wema Bank, NAMPAK, Finbank, Springbank, in Nigeria, among others (Farouk & Hassan, 2014; Adeyemi & Fagbemi, 2010) have captured the attention of the public, and increased attention to internal audit as regard to its ability to contribute towards corporate governance processes, including promoting effective controls, risk management and mitigating fraud risk (Hermanson, Ivancevich, & Ivancevich, 2008). Internal audit is defined ‘as an independent, objective assurance and consulting activity designed to add and improve an organization’s operations’ (The Institute of Internal Auditors (IIA), 2001). It is considered an independent, objective assurance and consulting activity designed to add value (Komeleh & Garkaz, 2014), by measuring and evaluating the effectiveness of organizational controls (Carmichael, Willingham, & Schaller, 1996).

Internal auditing is an important managerial control device (Pinto, Pereira, Imoniana, & Peters, 2014) to improve firms’ operations, which is directly linked to the organizational structure and the general rules of the business (Cai, 1997). Internal audit aims to protect the company’s assets against frauds or intentional misstatements. Classified by Moyes, Young and Din (2013) as i) misstatements resulting from fraudulent financial reporting and ii) misstatement resulting from misappropriation of assets. It assists firms to accomplish their objectives by bringing a systematic, disciplined method to assess and to improve the effectiveness of risk management, control, and governance processes (Raghunandan, Rama, & Read, 2001; Fama & French, 1993).

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