EFFECTS OF INTERNAL AUDIT ON FIRM PROFITABILITY. EVIDENCE FROM CEE COUNTRIES

Abstract

The aim of the paper is to analyze if independent internal audit committee has effects on firm profitability. By analyzing the annual reports of companies in 11 countries from Central and Eastern Europe (CEE), we aim to highlight the implications and relationships of internal audit independence and the effects on company profitability expressed through return on assets (using pROA acronym in the paper) and return on equity ratios (pROE). The data used in our paper is from 2004 to 2013. We analyzed the listed companies from Central and Eastern Europe using company financial characteristics data collected from Orbis database and dummy variable manually collected by investigating the annual reports of the companies from our sample. Our results, using OLS regressions on panel data (fixed and random effects), suggest that our independent internal audit variable has a positive sign on firm`s profitability. Our findings suggest that independent internal auditors have an important role for the company`s profitability in Central and Eastern Europe (CEE). The analysis could be important for corporate practices, as an evidence for strengthening the role of the independent internal audit committee in companies. In this respect, it could be argued that independent internal audit committee enhance its importance in creating added value, respectively increase company profitability by providing independent and objective opinions, assurance and consulting services regarding the company’s activity.

Keywords

• Internal Audit; Firm Profitability; Central and Eastern Europe