The mediation effect of audit committee quality and internal audit function quality on the firm size–financial reporting quality nexus

Abstract

PurposeThis study examines the effects of firm size on financial reporting quality (FRQ) through the mediating effects of audit committee (AC) quality and internal audit function (IAF) quality.Design/methodology/approachBased on data from a questionnaire survey and archival sources of non-financial companies listed on the Dhaka Stock Exchange (DSE), the authors perform both structural equational modeling and ordinary least squares (OLS) regression to test the developed hypotheses.FindingsResults show that the firm size is positively related to IAF quality. Firm size, AC quality and IAF quality are significantly associated with abnormal accruals (FRQ). Moreover, the authors find a mediation effect of the IAF quality on the relationship between firm size and FRQ, while no mediation effect is observed for AC quality. Thus, the study advocates companies focus on AC quality and IAF quality to enhance FRQ as it has a significant impact on corporate disclosure and investor decisions.Research limitations/implicationsFirst, the study is restricted to the survey questions that cover particular areas of the AC and IAF. Second, the sample selection focuses on relatively big industries in terms of the number of firms and excludes small sectors.Practical implicationsThe findings provide significant implications for professionals and policymakers in making regulatory reforms and revising existing policies to improve governance monitoring performance and FRQ.Originality/valueTo the best of the authors’ knowledge, this is the first study to explore the mediation effect of AC quality and IAF quality on firm size–FRQ nexus in a developing country.