Does the supervisory ability of internal audit executives affect the occurrence of corporate fraud? Evidence from small and medium-sized listed enterprises in China

What is it about?

Internal audit executives instruct the internal audit department to supervise corporate business management activities, evaluate internal controls and risks, and provide recommendations for operating, but it remains unclear whether and how the supervisory ability of the chief internal audit executive enhances the internal audit department’s function to prevent corporate fraud. In this study, we examined 922 small and medium-sized listed enterprises in China from 2010 to 2017 and empirically investigates the influence of the internal audit executive’s supervisory ability (IAESA) on the occurrence of corporate fraud. The results reveal that the IAESA is significantly negatively correlated with the occurrence of fraud. This suppression effect is more pronounced when the internal audit executive is also the company’s supervisor. However, if the internal audit executive is the chairman of the board of supervisors, the suppression effect no longer exists. This paper therefore confirms that the IAESA curbs corporate fraud via the improvement of the internal corporate control level. On the basis of these tests, this paper also confirmed that the internal audit executive’s supervisory ability curbed corporate fraud through improving corporate internal control level. This research not only expands the research perspective in the field of internal audit functions, but also provides a decision-making reference for the prevention of corporate fraud.

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