Impact of Internal Audit Functions on Financial Reporting Quality of Pharmaceutical Firms in Nigeria

to Zenith Bank Plc, Nigeria. Data obtained from the audited annual reports of Zenith Bank Plc that covered a period of 2009 – 2016. The study utilised both descriptive and inferential statistics to analyse the data. Results indicated that there is a strong relationship between financial reporting quality and investment decision Suryana (2018) study within the Indonesian context investigated the role of the internal audits to the quality of financial reporting, with a focus on the listed banks. The study used descriptive and verification methods for data collection while the use of census approach by distributing questionnaires to 43 banks that listed on the Indonesia Stock Exchange for the period of 2014-2016 was the population and sampling size determination. The unit of analysis was the bank that listed on the Indonesia Stock Exchange with the audit committee, the internal audit manager, the finance and accounting managers as respondents. Primary data was used and gathered through the use of questionnaire respondents’ feedback and secondary data is obtained from the listed bank’s annual reports. Validity and reliability tests were conducted on the questionnaire’s feedback that was collected. Data were analyzed with the use of regression analysis. The result of the study indicated that there is significant role of internal audit to the quality of financial reporting. 2.3.1 Gap in literature The empirical reviews have shown the need for further research based on gaps identified. Most of the studies focused on audit quality and financial performance (Adeyemi et al., 2012; Ebere & Chukuma, 2016), others are on internal control and financial performance (Kinyua et al., 2015; Mohammed, 2016; Ibrahim et al., 2017; Salameh, 2019; Dashibuyah et al., 2019; Orche et al., 2018), thus creating a gap in scope and variable for which the study attempts to fill. Few studies in Nigerian context (Adeyemi&Olarewaju, 2019; Amosun&Owolabi, 2020) focused on internal control and financial reporting quality again creating a variable gap since internal controls is part of internal audit functions, thus creating a research gap. Therefore, this study attempts to fill the gap by investigating the audit function and financial reporting quality looking at the variables of financial audit, procedural audit, compliance audit (for audit functions dimensions) and fundamental characteristics of relevance, as well as the enhancing characteristics of timeliness and understandability for measures of financial reporting quality of pharmaceutical companies in Nigerian within the periods of 2009– 2019. Furthermore, while some studies have focused on insurance firms (Fariba&Mehran, 2016; Chukwu&Ordu, 2018; Unachukwu, 2019), however they did not investigate the relationship between audit function and reporting quality, rather looked at IFRS adoption and reporting quality again leaving the need for audit functions and financial reporting quality for the pharmaceutical companies. 3. Methodology Cross-sectional survey design was used in the study. The study population was based on Ten (10) listed Pharmaceutical companies in Nigeria as at 31st December, 2019, however using a census method the 10 listed companies were chosen as the sample. Using purposive sampling method, 150 employees were issued copies of questionnaire that were used for data gathering. Descriptive statistics was used for ascertaining the univariate distribution of the data while Pearson Product moment correlation was used for analyzing the research questions. The structured questionnaire was validated by experts and has a Cronbach Alpha test 0f 0.78, thus confirming its reliability. For hypothesis testing, the following models applies LV = b0+b1(FA) +e --------------------------(i) TML = b0+b1(FA) +e --------------------------(ii) UDY = b0+b1(FA) +e -------------------------- Where: bo1-b2 = are coefficient of regression parameters; e= error term. RLV = relevance of financial statements, TML=timeliness of financial statements & UDY is understandability of financial statements 4.1 Analysis and Results Table 4.1 Financial Reporting Quality Measures 18 With regular internal audit activities, financial information can be clearly presented in the annual statements for users understanding 36 80 116 19 Effective procedural audit could result in financial reports concisely classified and presented so that users could make easy decisions 15 51 50 116 20 Effective financial audit could result in financial reports presented characterized so that users could make easy decisions 56 60 116 21 With effective compliance audit, it could lead to financial statements presented that is minimized of technical Jargon for user understanding 89 27 116 Total 15 0 0 232 217 464 Weighting 0 0 0 696 868 1564 Percentage 0 0 0 44.5 55.5 100 Source (Survey Data, 2021) Table 4.2 Relevance 22 With regular internal audit activities annual statements produced by the company helps users identify, and understand similarities of financial performance indicators of the company and that of other companies 66 50 116 22 Effective procedural audit could result in providing information that are directly related and required for decision making 73 43 116 23 Compliance audit activities could result in annual statements produced that have information that are consistent and the same of a period of time 28 88 116 24 Effective compliance audit activities could result in financial statements produced and presented that helps users compare earnings, value relevance and financial reports of other 92 24 116 companies in the same sector Total 0 0 0 259 205 464 Weighting 0 0 0 777 820 1597 Percentage 0 0 0 48.7 51.3 100 Table 4.3 Descriptive Statistics of Relevance Measure N Minimum Maximum Mean Std. Deviation REL1 116 3 4 3.43 .497 REL2 116 3 4 3.37 .485 REL3 116 3 4 3.76 .430 REL4 116 3 4 3.21 .407 Valid N (listwise) 116 Similarly, from the tables 4.2 and 4.3 above, of the total weighting of 1597 scored by the 116 respondents, 51.3% of the respondents indicated strongly agreed to questions asked, while 48.7% indicated agreed on their responses as shown in their responses table. Looking at the mean values (3.43, 3.37, 3.76, and 3.21) as against the criterion mean, the respondents indicated that relevance can be enhanced through the use of internal audit functions. Table 4.4 Descriptive Statistics of understandability measure N Minimum Maximum Mean Std. Deviation UDY1 116 3 4 3.69 .465 UDY2 116 0 4 3.13 1.296 UDY3 116 3 4 3.52 .502 UDY4 116 3 4 3.22 .419 Valid N (listwise) 116 From the tables 4.12 and 4.4 above, of the total weighting of 1564 scored by the 116 respondents, 55.5% of the respondents indicated strongly agreed to the questions asked and 45.5% indicated agreed to the questions asked respectively as shown in their responses table. Again, the mean values (3.69, 3.13, 3.52, 3.22) are greater than the mean criteria indicating that the respondents as well considers understandability as key quality that can be enhanced through internal audit functions. Table 4.5 Timeliness 25 With internal audit activities, financial statement that has complete information (include all necessary information- description and explanations) can be produced timely for users decision making 98 18 116 26 Effective financial audit can result in financial statement that is free from material errors and does not paint a rosier financial picture of the entity than the true picture. 12 54 50 116 27 Effective procedural audit can result in annual reports that are neutral (free from bias and manipulations) and useful for decision making 40 76 116 28 Effective compliance audit could result in annual statements that are free from omissions and present what is intended for users for quick decision making 46 70 116 Total 12 0 0 238 214 464 Weighting 0 0 0 714 856 1570 Percentage 0 0 0 45.5 55.5 100 Table 4.6 Descriptive Statistics of Timeliness measure N Minimum Maximum Mean Std. Deviation TML1 116 3 4 3.1