“Good” corporate governance and the quality of internal auditing departments in Italian listed firms. An exploratory investigation in Italian listed firms

Abstract

One of the most important issue relating to corporate governance reports refers to their ability to provide users with a complete set of information regarding the effective ability of an entity to achieve oversight objectives by the compliance to corporate governance practices required by a specific law or industry code. In addition, other features, such as the quality of the internal auditing function or the sensitivity of top management to issues relating to corporate internal controls and risk management, can also be taken into account when formulating a judgment on the quality of corporate governance practices. Is there an association between the compliance to codes and internal controls effectiveness? We propose to assess the quality of corporate governance through a proxy that considers several characteristics of internal audit departments and combines them to determine an Internal Audit Departments global quality index—IAD Index. To define IAD global quality we consider the effectiveness of an internal audit function analysing its operational aspects. The IAD Index is based on several signalling elements that previous literature assumed as proxies for quality of IADs which are grouped into four pillars: a formal quality index; a static quality index; an activity-related quality index; and a performance-linked quality index. We then test the IAD index on a sample of Italian listed firms and conclude that there are significant associations (positive and negative) between the degree of compliance to some corporate governance regulations for listed firms and the IAD Index for the sample being considered.