Decoding Governance Effectiveness: How Board Expertise and Internal Audit Quality Shape Financial Reporting

Abstract

This study examines the interplay between board expertise, internal control (ICL), internal audit quality (IAQ), and financial reporting quality (FRQ) within financial institutions in Pakistan. The sample of the study was composed of 392 audit professionals from the Southern Punjab region, in the financial services sector; PLS-SEM was employed as statistical tool. The results of the study indicate that board expertise improves the effectiveness and efficiency of an organization’s ICL to improve IAQ, and subsequently, improves the reporting quality of the organization; IAQ significantly improves FRQ, therefore confirming the important role of IAQ as an assurance provider to the financial reporting process. The study, therefore, suggests that IAQ has a significant mediation effect on the relationship between ICL and FRQ; IAQ improves the quality of reporting through both an indirect and direct mechanism associated with the organization’s ICL. Overall, the results suggest that there is a need for organizations to develop integrated governance mechanisms to create an enhanced level of transparency, reliability and confidence in the reporting of an organization by its stakeholders.