Board Independence and Financial Reporting Quality: Unpacking the Governance–Audit Nexus in Financial Institutions
DOI:
https://doi.org/10.52131/irasd-jom.2025.v7i4.3159Keywords:
Board Independence, Internal Control, Internal Audit Quality, Financial Reporting Quality, Financial InstitutionsAbstract
Despite ongoing regulatory reforms, financial institutions of Pakistan continue to face significant governance challenges in aligning their board independence practices with internationally recognized standards of corporate governance. Therefore, this study investigates the relationship between board independence, internal control (ICL), internal audit quality (IAQ), and financial reporting quality (FRQ) in financial institutions of Pakistan. This idea was developed based on Principal-Agent Theory and the Stakeholder Theory to analyze how governance mechanisms affect how well organizations report and are ultimately held accountable for their actions, especially in areas of strict regulation. A survey of 392 audit professionals from financial institutions in southern Punjab was conducted and the data analyzed using structural equation modeling. Board independence is shown to significantly improve the effectiveness of ICL when providing oversight of corporate governance systems; therefore, the importance of independent boards in improving the effectiveness of governance systems cannot be overstated. ICL has a strong and positive impact on IAQ, as well as a direct impact on FRQ. IAQ has a significant positive impact on the FRQ and is critical to ensuring that financial statements are accurate, reliable and transparent. Both types of results provide support for the view that IAQ plays a partial mediating role in the relationship between ICL and FRQ. As a result, the mechanism of governance and the mechanism of control, through IAQ, both have a direct and indirect impact on the quality of financial reporting. Overall, the study demonstrates that independent boards, strong control systems, and high-quality internal audits substantially contribute to improving the quality of financial reporting.
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