LinkedIn Insights: How Internal Audit Expertise Influences Financial Reporting Accuracy

The world of financial reporting has seen significant transformations in the past few decades, with evolving regulatory standards and changing business environments. Amid these changes, one area that has continually held significance is the internal audit function (IAF). Despite its importance, the IAF has remained an area with limited data availability, constraining further research and in-depth insights. However, a recent study published in the „AUDITING: A Journal of Practice & Theory“ offers a fresh perspective by tapping into a unique data source: LinkedIn.

The Power of LinkedIn Human Capital Data

Using Revelio Labs‘ LinkedIn data, researchers Melissa E. Renschler, Jaehan Ahn, Rani Hoitash, and Udi Hoitash embarked on an exploration of the internal audit function. By leveraging longitudinal data on individual IAF employees, the team was able to glean several insights on how the competence of IAF impacts financial reporting quality.

Key Takeaways from the Study

  1. Strong Link Between IAF Competency and Financial Reporting Quality: The research unveiled a robust association between IAF experience, education, and size, and higher financial reporting quality. Firms that invested in a competent internal audit team showed a reduced inclination towards material weaknesses and misstatements in financial reporting.
  2. Reactive Investments in IAF Post Adverse Reporting Events: In instances where companies experienced adverse reporting events, there was a subsequent focus on enhancing IAF competency. Specifically, these companies prioritized bettering IAF experience and increasing the size of the audit team.
  3. Remediation of Material Weaknesses with Enhanced IAF Competency: Companies that made strides in improving their IAF competency demonstrated positive outcomes in rectifying material weaknesses.

Find the new research paper here.

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