Internal audit and financial reporting in the Spanish banking industry

Purpose - The purpose of this paper is to examine the relationship between a firm's internal audit function (IAF) and the quality of its financial reporting. Since regulations on corporate governance were introduced, numerous national and international bodies have emphasized the fundamental role of the IAF in the financial reporting process, especially since it generally leads to higher quality reporting. Design/methodology/approach - The paper uses questionnaires sent to internal audit directors of Spanish banks. Findings - Banks with high quality financial reporting have greater collaboration between internal and external auditors in the annual audit. Greater involvement of internal audit in reviewing financial reporting leads to improved quality financial reporting. Research limitations/implications - Besides the usual caveats of survey research, there are limitations to this study. First, the problem of response bias may exist. Second, the 66 per cent survey response rate may mean that respondents have larger or better-developed internal audit functions, affording them more opportunity or motivation to respond to the survey. Hence, the results obtained through the survey may not be generalizable to non-respondents. Practical implications - The findings are relevant for bank regulators, management, boards of directors, and investors. In the current discussion on transparency, integrity and quality of financial reporting, these findings help define the issues. Originality/value - Previous empirical studies analyse the quality of financial reporting with actors in the corporate governance mosaic (board of directors, audit committee and external audit), but they do not do so directly with the IAF. This paper extends prior banking literature that analyses quality financial reporting along with other variables, but not internal audit.