An influence of audit committee characteristics on the level of investment in internal audit function: an evidence from Malaysian public listed companies

The audit committee is viewed as an essential self-regulatory internal governance instrument and is expected to provide an overseeing role over the entire process of financial reporting, particularly the working of the internal control system and the work of the auditors. Researchers gathered evidence that the independency of audit committee members increases the reliability and accuracy of financial reports of a firm. Moreover, audit committee with financial expertise who possess high degree of accounting background and experience are likely to understand accounting numbers and monitor the self-interest behaviour of controlling managers while the Blue-Ribbon Committee (BRC) suggests an audit committee to meet frequently to effectively perform its oversight responsibilities. In addition, audit committee members with shorter tenure are less likely to acquiesce to top manager’s pressure and perform poor monitoring role. Regarding internal audit function (IAF), organizations still struggle to determine whether they make appropriate investment in the IAF or not. Many organizations usually benchmark the investment in IAF through industry peer group comparisons or Institute of Internal Auditors Global Audit Information Network (IIA GAIN) database to determine whether the investment in IAF is well appropriated. As such, this study set out to examine the relationship between audit committee’s characteristics of independence, expertise, meetings, tenure, and size investment in IAF. Previous studies have examined the relationship between audit committee characteristics and earnings management, earnings quality, audit report as well as financial reporting quality. This study extends the existing literature by examining the relationship between audit committee characteristics and investment in IAF from the lens of resource dependence theory. This study uses a secondary data whereby, data was extracted from the annual report of top 14 public companies listed in Bursa Malaysia and analysed using Stata Software version 13. This study applied panel data estimation. The study period is 5 years (2012 – 2016). The study finds significant association between audit committee independent, tenure, size and the level of investment in IAF. The study concludes that, high independence and long tenure of audit committee reduces the level of investment in IAF. Moreover, large size of the audit committee increases the level of investment in IAF. On the other hand, the study found no significant relationship between audit committee expertise, meetings, and investment in IAF. The result of this study has significant theoretical contribution in validating the theoretical perspective of resource dependence theory. Furthermore, this study offers valuable contribution to regulators on important factors that should be considered when making regulation concern on IAF investment.