Abstract

This research explores earnings quality as a quality measurement of optimism and trust in future returns, where the highly sustainable business has driven up obedience and compliance as a sign of prudent and consistent accounting policy. Manipulation activity is a widely open chance for opportunistic motives, associated with low certainty as a handicap to estimate high accuracy future returns. All observations in the Indonesia-listed manufacturing companies occurred from 2010 to 2022; this causal research uses moderated regression with the dummy variable in testing hypotheses and robust checks. This purposive sampling research has 154 companies with an unbalanced panel; two testing models on equity and earnings are used as sensitivity testing of positive perception. The high-prospected firm pointed out the persistent willingness to implement positive earnings management with this high consistency accounting treatment, which has been transformed into no violation. A positive correlation exists between high earnings quality and future returns, including concentration on real earnings as symbolized by a rational decision model. High-quality accounting information is valid information in predicting the going concerned, linked up to anticipating the peach-lemon effect, where business growth and dividends are used as a signaling effect. This centralized one-platform of the financial reporting system and going private is aimed to minimize the chance of misleading information and anticipate the low-prospected. The highly prospective has high consistency accounting treatment and proper tax management as the validated sustainability indicator, and the rationality modeling is modified from the simplex-linear programming as simulative modeling concerning the Decision Tree and Bayes Theorems.

Introduction

As proven by some empirical research last decade, high-quality financial reporting has been a crucial prerequisite for investors to monitor and check the capability of management to reach better prospects. The decision usefulness of accounting information is meaningful information because of the high obedience to the regulation (i.e., González-Sánchez et al., 2023; Jian et al., 2023). Structural knowledge of real earnings has recognized that consistency and prudent accounting have connected constructively with the market price movement; inevitably, this adverse signal pointed to a low probability of reaching a highly sustainable business model (i.e., Rezaee and Tuo, 2019; Park et al., 2021). Ping (2016) accentuated that low accruals positively impact investor perceptions with no chance of abnormal returns as a dysfunctional function. Therefore, earnings quality exists as a high–accuracy guideline of optimism and confidence as a decisive standpoint in calculating the expected returns when the volatile movement of agency cost has been a destructive consequence of sustainable performance; subsequently, this pragmatic evidence is reinforced by Akbari et al. (2019), Uzezi (2022), Beardsley et al., (2023), and Al-Asfour and Abu Saleem (2023)), underlining the proper tax management has been prioritized for keeping on the investor’s faith and belief.

The dividend is a “puzzle”, reflecting a myopia perspective of designing this payout policy as optimism of future growth opportunities (i.e., He et al., 2017; Alghazali et al., 2023; Sikalidis et al., 2023), Sidhu et al. (2023) found this payout policy measures the managerial capability of keeping on the business sustainability, particularly in anticipating the financial distress. The prominent role of the signaling effect is to smooth the unpredictable movement of market price, signifying the high risk; this research found a classic phenomenon of high-yielded dividend policy as a gap of research, where the annual average dividend payout ratio is higher than sales and earnings growth. In practice, the pattern of this payout policy has been explored in the Indonesia Capital Market, considering the magnificent performance as number 4 worldwide and the highest index growth in the Southeast Asia region area; accurately, the representative data distribution can be used to generalize the current circumstances of the signaling effect (see Appendix 1 Table 6). Concerning the manufacturing industry sector as an ultimate attractiveness in this capital market (see Appendix 1 Table 7), this sector had extraordinary growth during the Pandemic, representing an irrecusable occurrence. An annually detailed average comparison between the dividend payout and the business growth of sales and earnings is depicted in Fig. 1 below.

Conclusion

These results can be concluded; firstly, earnings quality had tested positively on investor perception when it covered up obedience and compliance. Manipulation activity and tax management are critical P(MAQ, H|DTAQ.Hi)x P(MAQ, H) P(MAQ, H|DTAQ, Hi)x P(MAQ, H) + P(MAQ, H |DTAQ, Lo).x P(DTAQ, Lo) M. Siladjaja and J. Jasman Journal of Open Innovation: Technology, Market, and Complexity 10 (2024) 100191 10 measurable factors in predicting high future certainty; the prudent accounting treatment reflects high consistency in publishing high earnings quality. Secondly, the dividend is used as the most effective signaling effect, which affects earnings quality differently; the positive contribution to earnings quality is a guideline for efficient contracting. Conversely, tax management and dividends have been connected to an exclusively mutual relationship aimed at smoothing the internal conflict intensity; nearly, the management is concerned with the dividend in obtaining a low cost of capital as an absolute comparative advantage. The high sales growth is an indicator of going concern, which is tested to drive up higher obedience and compliance; the high-prospected firm is assured of a highly sustainable business model, including high compliance with a minimum chance of agency costs and tax exposure. Finally, the high rationality perspective illustrated the conceivably interactive feedback between management and investors in predicting each party’s decision precisely as a comprehensive illustration of positive earnings management as optimism and confidence in the future.

The pattern of earnings management has various methods for calculating the residual error as a predictive signal of obedience and compliance because running fair value measurement is acknowledged internationally as a principal-ruled accounting standard. Commonly, the same perception of accounting treatment can be formed worldwide. The testing on the manufacturing-industry sector shows the practical implication for all regulators who must continuously monitor the business sustainability regarding the trust in this capital market. Implicitly, this calculation model can be implemented in other countries when earnings management has been tested as an open chance of discretionary behavior in reporting the actual performance; both consequences of efficient contracting and opportunity motives as a leading role of signaling effect have a critical influence on illustrating the real earnings management, covering up obedience to accounting standards and compliance with tax regulation. When the prospect theory pushes the positive contribution on the expected future returns, it is a challenge for this research to prove this theory; hence, this predictive simulation has been proposed with simplex-linear programming in calculating the maximum returns and minimum cost,

Abstract

To improve the usefulness of audit opinions, on 23 March 2021, the China Securities Regulatory Commission mandated that auditors disclose overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions. This paper selects Chinese A-share companies issued with modified audit opinions for the period of 2020–2022 as the research sample and analyzes the assessment of materiality in audit practice and the informativeness of audit materiality. Our findings are as follows. (1) The most commonly used bases for materiality by auditors are profit and income, with considerable differences in the percentages applied to the different bases and variations even within the same base. (2) The higher the materiality amount, the poorer the audit quality. This negative correlation is mainly observed in scenarios where the audited companies engage in downward earnings management and where the competency of audit firms or auditors is relatively low. (3) Companies that disclose quantitative materiality in the special explanations of modified audit opinions have a lower earnings response coefficient than companies that do not disclose audit materiality. This research sheds light on the “black box” of the audit process and verifies the information value of audit materiality. The conclusions are of significant value to auditing standard-setters, investors and regulators.

Introduction

Materiality is the magnitude of the impact of audit errors on the audit client’s decision making, which is one of the fundamental concepts of auditing and is utilized throughout the audit process ( Christensen et al., 2020 ). In planning and performing an audit, an auditor is required to make judgments about materiality to provide a basis for assessing the risks of material misstatement and preparing for further audit procedures. They must also apply materiality when evaluating the impacts of identified audit misstatements and uncorrected misstatements on financial statements. Therefore, materiality directly determines the quality of the audit. However, due to data limitations, how auditors in China establish materiality has remained a “black box.”

On 9 March 2021, the China Securities Regulatory Commission (CSRC) issued its “Guidelines for the Application of Supervisory Rules—Audit Category No. 1,” explicitly mandating that “an auditor should disclose the overall quantitative materiality of consolidated financial statements in special explanations of modified audit opinions, including materiality bases and percentages, calculation results (the amount) and the basis for selection.” This guideline took effect on 23 March 2021, following which auditors began to disclose the overall materiality of consolidated financial statements in special explanations of modified audit opinions. 1

Conclusions and implications

We take Chinese A-share listed companies issued with modified audit opinions during the period from 2020 to 2022 as a research sample to analyze materiality assessments in auditing practice, the relationship between materiality and audit quality and the impact of materiality disclosure on investor decision-making. We present four key results. First, the Big 10 audit firms are more likely to disclose audit materiality than peers. Second, the most common bases for materiality used by auditors are profit and income, the percentages applied to the different bases vary greatly and, even for the same base, the percentages vary to some extent. Third, the higher the materiality, the poorer is the quality of the audit. This negative correlation occurs mainly when the client firms engage in downward earnings management and among audit firms and auditors of lower competence than peers, indicating that materiality predicts the audit quality and has a certain level of informativeness. Fourth, disclosing audit materiality reduces investors’ perceptions of the reliability of financial reports.

The research in this paper assists in understanding how auditors establish materiality in auditing practice, thus opening the “black box” of the auditing process to an extent. In addition, our findings have important implications. First, for the auditing standard-setters, although the relevant rules emphasize that the bases and percentages contained in the questions and answers are examples, not regulations, auditors rely heavily on the examples in auditing standards, application guides and questions and answers in practice. Therefore, standard-setters should pay attention to this phenomenon and treat the examples provided with caution. Second, materiality itself is informative, and this enables investors, analysts and regulators to judge the quality of audits or audited financial statements based on materiality and make better investment decisions or enhance the efficiency of regulation.

Abstract

Making use of a unique administrative data set consisting of the universe of administrative filings in Rwanda, this paper investigates the impact of tax audits on businesses’ reporting behaviour. The evidence suggests that tax audits have a positive impact on corporate income and corporate tax liabilities reported for three years after the start of the audit process. The results also suggest that the type of audit matters. While ‘comprehensive’ tax audits have a significant positive effect on compliance, ‘narrow-scope’ tax audits exhibit both a positive and a negative effect during a three-year period after the audit, with the net impact being negative. The implication of this, from a tax compliance perspective, is that ‘narrow-scope’ audits are ineffective and that doing more of those and less of comprehensive ones might have a negative impact on tax compliance. Effective tax compliance strategy therefore requires the careful evaluation of all types of audits.

Introduction

Recent estimates have it that achieving the Millennium Development Goals requires increasing domestic revenues in low-income countries by around 15 percentage points of GDP, a target which requires the implementation of key policy reforms ( Gaspar et al., 2019 ). While the effort to boost domestic revenue mobilisation in developing countries continues, it is now even more challenging, and pressing, given the recent and much needed relief measures implemented to ease the impact of the COVID-19 pandemic. 1 Amongst the policy reforms for improving revenue mobilisation is strengthening tax administration capacity, an issue which has come to the fore for many countries around the world during the last two decades.

An integral part of tax compliance is operational audits, and the extent to which they are conducive to future compliance. There is a growing literature on audit assessment providing mixed evidence regarding the impact of tax audits on future compliance. 2 Surprisingly, however, little attention has been paid to the compliance impact of the types of audit, which are broadly categorised as ‘comprehensive’ and ‘narrow-scope’ (with the latter further categorised as desk-based or issue-oriented). Comprehensive audits are in-depth and in-person examinations conducted across different tax bases and fiscal years, whereas narrow-scope audits focus on a limited number of fields in a tax return. This distinction in audit types, and their impact on tax compliance, is at the heart of the contribution of this paper.

Results

This section presents the results, starting with the aggregate ATT, followed by the audit-type-specific aggregate ATT, and concludes with a back-of-the-envelope calculation of the return on investment (ROI) of audits. In Appendix B we present further sensitivity analysis which validates the results presented in the main text and the methodology used. 37

6.1. Aggregate ATT

A crucial assumption behind any DID analysis is the existence of a common previous trend in the outcome variable at the time of the treatment ( Meyer, 1995 ) which, in the present context, means that one should observe a similar pattern (trend) in reporting behaviour of audited and unaudited taxpayers before treatment. To test for this, as well as estimate the period-specific audit effects on the outcome variables, we rely on Weighted Fixed Effect regressions based on panel data from 2013 through 2018 and weights obtained from our CEM stratification. In the regressions we also include both individual and year fixed effects. The excluded category is the last year before the treatment is applied (2015). Fig. 5 , Fig. 6 present the results of this analysis for taxable income and tax liability, respectively, largely confirming that there is no statistically significant difference in trends between audited and matched controls before audits take place. After treatment, the estimates indicate a positive and increasing effect of audits on subsequent tax reporting behaviour of audited taxpayers for the three years after the treatment and the two outcome variables.

Abstract

We examine auditor responses to the voluntary resignation of independent directors. We show that auditors respond by increasing audit fees or rescinding engagement with their clients, but not by increasing their audit effort. Mechanism tests reveal that independent directors’ voluntary resignation leads to increased regulatory sanctions and negative media coverage, these relationships are more pronounced after the New Securities Law. Auditor response strategies follow an order of priority: at an acceptable level of perceived risk, auditors increase audit fees; when perceived risk exceeds this level, auditors will discontinue the client relationship. Auditors associate greater risk with firms that have (vs. have not) experienced consecutive voluntary resignations by independent directors. Mandatory resignation has no such effect.

Introduction

The board of directors plays a crucial role in corporate governance. The proportion of independent directors on the board is an important metric of the effectiveness of board supervision, which is emphasized by regulatory authorities (Zhu et al., 2016). The independent director system was initially established to mitigate agency problems between shareholders and management (Fama and Jensen, 1983, Dai et al., 2014). Independent directors also supervise, advise and provide support in the form of resources for listed companies (Fama and Jensen, 1983, Liu et al., 2018a, Liu et al., 2018b, Zhou et al., 2021). What signals are sent by the voluntary resignation events of independent directors? Can auditors identify the risks involved? How do auditors respond? We explore this series of questions.

Typically, the resignation events of independent directors are categorized as mandatory or voluntary. Mandatory resignation occurs when independent directors are required to step down from their roles under regulatory pressure; voluntary resignation occurs when independent directors proactively relinquish their positions, judging that the benefits of those positions do not compensate for the risks incurred. According to signaling theory, the voluntary resignation of independent directors signals company risk to external parties (Gupta and Fields, 2009, Lin et al., 2012, Bar-Hava et al., 2021, Cao et al., 2023), such as poor company performance (Arthaud-Day et al., 2006), high levels of earnings management (Zhi and Tong, 2005) or elevated legal risks (Yang and Huang, 2015). This paper focuses on the responses of auditors, as stakeholders in listed companies, to the voluntary resignation of independent directors.

Conclusion

This paper presents an in-depth exploration of auditors’ responses to the voluntary resignation of independent directors. The findings reveal that the voluntary resignation of independent directors of a listed company transmits risk signals to auditors that elevate their perception of the risk associated with that company. In response, auditors seek to mitigate this risk by charging higher audit fees or terminating their engagement with the client company. Interestingly, we find no evidence that auditors also increase their audit effort following the voluntary resignation of independent directors, indicating that the higher audit fees charged are due primarily to an increased risk premium, rather than to cost compensation. Mechanism analysis indicates that companies with voluntary resignations by independent directors face an increased risk of regulatory penalties in both the current and subsequent periods, and such companies also receive more negative media coverage.

Further analysis reveals that since the implementation of the New Securities Law, the positive relationship between the voluntary resignation of independent directors and abnormal audit fees has become more pronounced. This suggests that the new law has a deterrent effect on auditors, increasing their perception of risk and leading them to raise audit fees. Moreover, we discover that auditors follow an order of priority in responding to the risk signals conveyed by the voluntary resignation of independent directors: when they perceive the level of corporate risk to be acceptable, they prefer to increase audit fees, but when the risk exceeds their tolerance level, they are likely to terminate the engagement, leading to an auditor change.

Abstract

The purpose of this research is to examine the effect of voluntary integrated reporting on information asymmetry in European and Asian firms and investigate size as a moderator variable to this relationship. Using a final sample of 94 firms in Europe and Asia that published integrated reports in 2016, the Ordinary Least Square is then performed to analyze the data on quarterly basis. The quarterly analysis is used to look at the relevance of accounting information decline as the time lag increases. The results show that there is an insignificant relationship between integrated reporting quality and information asymmetry which is captured by spread. In addition, the insignificant effect of size to moderate this relationship is also found. These results are supported by additional analysis. This research contributes to the existing debate about whether integrated reporting affects the market, particularly information asymmetry. To the best of the authors’ knowledge, this is the first study to examine the effect of integrated reporting quality on the market on a quarterly basis.

Introduction

Integrated reporting (IR) in recent years has received great public attention particularly after the formation of the International Integrated Reporting Council (IIRC) and the issuance of IR iguidelines (Adams, 2017; Zhou et al., 2017). Despite the critique arising that IR could be yet the tool for corporate impression (Melloni et al., 2017), the IIRC (2013, p. 3) stated that IR can improve “the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.” Integrated reporting aims to reduce the clutter of sustainability report by disclosing aspects they consider to be material and useful about the value-creating activities in the short, medium, and long-term into a concise and coherent report (Zhou et al., 2017; IIRC, 2013). Integrated reporting offers a broader picture of the new firm by shifting away from standalone sustainability or social responsibility reports towards an integrated report that delivers a comprehensive picture of long-term performance from various perspectives, business model, and value creation (Burke and Clark, 2016). Hence, the voluntary information disclosure is a way to mitigate the information asymmetry problem and lead to better business transparency (Brammer and Pavelin, 2006).

Nevertheless, empirical evidence on the IR benefit is still sparse (De Villiers et al., 2014). Previous studies conducted by Zhou et al. (2017) and Vitolla et al. (2020) found an inverse relationship between alignment of integrated reports and information asymmetry, measured by analysts’ forecast errors, as well as cost of equity capital. Other studies conducted by Maria et al. (2017), Akker (2017), Martinez, 2016a, Martinez, 2016b, Lee and Yeo (2015) found that IR offers more relevant information. Thus the alignment of corporate reporting with the integrated report is negatively associated with the asymmetric information. Barth et al. (2001) also suggested the evidence that IR quality reduces information asymmetry as captured in a lower bid-ask spread. On the contrary, Stubbs and Higgins (2014) found evidence that IR did not affect a decrease of the level of information asymmetry. They argued that the information provided is not required by the capital providers to make the investment decisions. Accordingly, the limited evidence and inconsistent results found about the market responds to the information available in the integrated reports (Mervelskemper and Streit, 2016).

Conclusions

This research examined the existence of a negative relationship between voluntary integrated reporting and information asymmetry for 94 firms in Europe and Asia in 2017 with publishing an integrated report in 2016. The results show that there is an insignificant relationship between the integrated reporting quality and information asymmetry which is captured by the spread. There is no significant effect as well for size effect to moderate the relationship between the integrated reporting quality and information asymmetry. Those results are also supported by additional analyses.

These findings could be relevant for some aspects of the literature especially in the research design where this study used a continuous variable based on detailed content analysis instead of a dummy variable to measure the integrated reporting quality. Other innovations of this study are that it investigated the IR effect on a quarterly instead of an annual basis. From a practical perspective, as the significant effects are not yet observed, this result can provide the companies with insight on whether to implement the integrated reporting immediately or not. Investors who are interested in the integrated reporting also can consider this finding in their decision making. Finally, the IIRC as the regulator body can conduct some improvements to see how the integrated reporting is proceeding, particularly in the voluntary context. As the IR concept is relatively a new area for corporate reporting in the world, the governments are given the consideration and insight as well whether to encourage the companies in their countries to adopt this trend immediately or not.

Abstract

This study investigates how voluntary International Financial Reporting Standards (IFRS) adoption impacts information asymmetry in the stock market. We analyze data from firms in Japan, where local accounting standards have substantially converged with IFRS but are more rules-based than principles-based IFRS. These different implementation approaches allow us to investigate how increased accounting flexibility influences recognition and measurement practices, attenuating the effects of accounting standard differences on the level of accounting rule existence or non-existence. We find that information asymmetry increases after voluntary IFRS adoption, which is driven by small- and medium-sized IFRS adopters’ decrease in earnings quality after voluntary IFRS adoption. Additional analyses reveal that firms’ reporting incentives and accounting resources influence these changes. These results suggest that IFRS’s increased accounting flexibility in recognition and measurement practices worsens the information environments of firms with weak incentives to commit to transparent financial reporting or fewer accounting resources (i.e., small- and medium-sized firms).

Introduction

As International Financial Reporting Standards (IFRS) are intended to provide investors with information that enables them to make better investment decisions, information asymmetry in stock markets is a critical potential consequence of IFRS adoption. IFRS adoption worldwide is either voluntary or mandatory. Since the 2005 mandatory adoption for firms listed in EU countries, extensive research has been conducted on the effects of mandatory IFRS adoption. However, voluntary IFRS adoption effects are relatively under-researched, especially in recent years (De George et al., 2016, Leuz and Wysocki, 2016). Understanding the effects of voluntary adoption is also important because a non-trivial number of countries either allow voluntary IFRS adoption or prohibit IFRS adoption (Song and Trimble, 2022). As of 2019, 11 % (22) of 195 countries/territories permit IFRS adoption and 6 % (11) presently prohibit it, although the latter could permit voluntary adoption in the future. This study attempts to further our understanding of how voluntary IFRS adoption affects information asymmetry in stock markets.

Prior research provides mixed evidence on the stock market consequences of voluntary IFRS adoption. Early studies on this topic focus on Germany, where local accounting standards are substantially different from IFRS. These studies provide evidence suggesting that voluntary adopters exhibit lower information asymmetry in the stock market compared to non-adopters (Gassen and Sellhorn, 2006, Leuz and Verrecchia, 2000). However, in international comparisons, Daske et al. (2008) use two proxies for differences between local accounting standards and IFRS and report inconsistent liquidity effect results. Specifically, they observe no change in liquidity after voluntary IFRS adoption in countries with small differences between local generally accepted accounting principles (GAAP) and IFRS, but a decrease in liquidity in countries with IFRS convergence processes. Therefore, how voluntary IFRS adoption affects information asymmetry in stock markets in countries whose accounting standard differences from IFRS are relatively small remains unclear. This study aims to extend this line of research.

Conclusions

Prior research suggests that voluntary IFRS adoption positively affects information asymmetry in stock markets when local accounting standards significantly differ from IFRS and is viewed as a commitment to transparent financial reporting. However, other research obtains inconsistent results for voluntary IFRS adoption effects on information asymmetry in countries with small accounting differences between local standards and IFRS. We looked closer at Japan, where local accounting standards have been converged to IFRS but have a different implementation approach (i.e., small accounting rule differences but large implementation approach differences). We investigated the effect of voluntary IFRS adoption on the stock market (i.e., changes in information asymmetry in the stock market proxied by bid-ask spread) as well as its potential reason (i.e., changes in earnings quality proxied by the absolute value of discretionary accruals). We also examined whether this effect varies according to firm size, which represents firms’ reporting incentives and accounting resources. Our study’s findings and incremental contributions to the literature are as follows.

First, we find an increase in the bid-ask spread after voluntary IFRS adoption. This result suggests that, on average, voluntary IFRS adoption worsens information asymmetry in Japan’s stock markets. Second, we observe deterioration in bid-ask spread only for smalland medium-sized voluntary adopters. Third, we examine changes in IFRS adopters’ earnings quality before and after IFRS adoption to explore a reason for the increased bid-ask spread. We find that small- and medium-sized firms report larger discretionary accruals after voluntary IFRS adoption. These results suggest that the increase in information asymmetry in the stock market results, at least partially, from the decreased earnings quality of small- and medium-sized firms after voluntary IFRS adoption. Finally, we provide some evidence suggesting that firms’ reporting incentives and limited accounting resources deteriorate earnings quality and information asymmetry at the time of voluntary IFRS adoption.

Abstract

This article systematically reviews 94 accounting and finance studies that address the real effects of financial reporting. Whereas the effects of financial reporting on capital suppliers’ decisions traditionally have received much attention, recent research has generated important new insights into the feedback effects of financial reporting on the reporting firms’ real activities (e.g., investments or allocation and use of resources). We identify the consequences of financial reporting for (1) the reporting firm, (2) its peer firms, and (3) the input and output markets. We also highlight the effects of firms’ internal controls over financial reporting and consider how accounting and auditing regulations influence and contribute to real effects. The studies we review are consistent in their findings that high-quality financial reporting is positively associated with the efficiency of the reporting firm’s resource allocation. Many studies also suggest a positive association between high-quality financial reporting and an efficient allocation of resources in the real sector, which can also benefit other market participants like consumers or employees. The article concludes with an outlook on fruitful research opportunities.

Introduction

Most accounting research focuses on the capital market effects of financial reporting. Financial reporting informs investors, creditors, and the public about firms’ activities, net assets, financial position, and results of operations. It thus decreases information frictions when firms need to fund (new) projects and activities. A large portion of the literature on the effects of financial reporting addresses efficiency problems in the capital market by investigating the decisions taken by capital suppliers (e.g., Ball and Sadka, 2015, Ball et al., 2009, Botosan, 2006, Dye and Sridhar, 2002, Verrecchia, 2001). However, the relevance of financial reporting for the real sector, which includes firms’ decisions on investments and the production and consumption of goods and services, has received considerably less attention. Nevertheless, a small but fast-growing strand of the accounting and finance literature investigates the effects of financial reporting on the real sector. These effects are also referred to as real effects.

Most real effects studies investigate the economic effects of financial reporting on the investments and operations of the reporting firm (e.g., Biddle et al., 2009, García Lara et al., 2016, Kanodia and Sapra, 2016, McNichols and Stubben, 2008). An increasing number of studies also address the effects of a firm’s financial reporting on its peer firms. Examples of such studies are Badertscher et al., 2013, Beatty et al., 2013, Durnev and Mangen, 2009, and Li (2016), who find that misreporting can distort the peer firms’ investment and operational efficiency. The reason is that the peers seem to rely on misleading economic prospects. In contrast, peer firms might benefit from learning about market uncertainties from another firm’s financial report (Badertscher et al., 2013, Bernard et al., 2020, Durnev and Mangen, 2020). Finally, a few studies investigate the real effects of finanical reporting for the aggregate input or output market. These studies are consistent in their finding that financial reporting can facilitate the efficient allocation of resources across firms, for example, by reducing differences in productivity within an industry (Breuer, 2021, Francis et al., 2009, Hann et al., 2020). However, there is scarce research on the real consequences of financial reporting for other market participants in the input or output market. Yet real effects for consumers can exist in the output market, if, for example, firms change their pricing policies (Li, 2016, Sadka, 2006) or differentiate their products (Bernard et al., 2020) in response to their competitors’ financial reports. Furthermore, in the labor input market, financial reporting relates to firms’ labor investment efficiency (Choi, 2021, Jung et al., 2014, Kedia and Philippon, 2009), and this ultimately has implications for employees.

Conclusion

This review article summarizes 94 studies on the role of financial reporting for the real sector, focusing on (1) the reporting firm, (2) its peer firms, and (3) the input and output market. First, we find that most of the studies investigate real effects for the reporting firm. The findings of these studies suggest that high-quality financial reporting is positively associated with firms’ investments and operations efficiency. The reporting of (in)efficient internal controls can be interpreted as a moderating factor in firms’ efficiency in real decisions. Second, an increasing number of studies investigate the real effects of financial reporting for the reporting firm’s peers. These studies suggest that high-quality financial reporting can improve the efficiency of peer firms’ real decisions through learning. Low-quality reporting, on the other hand, can be misleading and result in inefficient real decisions by peer firms. Third, we find that only a few studies focus on the real consequences of financial reporting at the aggregate level. The findings suggest a positive association between industry- or country-level measures of financial reporting quality and the efficient allocation of resources across firms (e.g., by increasing product market competition). However, the economic implications of financial reporting for other market participants (e.g., consumers or employees) remain insufficiently explored. For example, consumers might benefit from an increase in product market competition resulting from high-quality financial reporting. Moreover, financial reporting quality positively relates to firms’ labor investment efficiency, which can affect employees. Finally, we observe that an increasing number of studies investigate the real effects of accounting and auditing regulations. These studies suggest that financial reporting regulations addressing the needs of capital market participants can have unintended economic consequences for firms and other market participants in the real sector.

Abstract

We test whether firm sustainability positively affects access to bank credit. We carry out a panel data analysis of 125 listed Italian SMEs across 14 regions over 2017–2021. A quantitative score comprising 20 items grouped into three areas, disclosure, processes, and governance, is computed to determine the level of implementation of sustainable practices of sampled SMEs. Results show that SMEs with more sustainable orientation have greater access to bank credit and better ability to pay the cost of bank debt. This, in turn, reinforces bank-SME relationships. We contribute to the literature on SMEs, highlighting the relationship between sustainability and the availability of bank loans.

Introduction

Starting from the notions of sustainable development in the Brundtland Report published by the World Commission on the Environment in 1987 (WCED, 1987), further attention on sustainability has increased, culminating in several important initiatives such as the Paris Climate Agreements (COP 21) and the 2030 Agenda of the United Nations for Sustainable Development, both adopted in 2015. More recently, specific activities and regulations implemented by the European Union, including the EU Taxonomy and the European Green Deal, provide additional support for the green transition and integration of sustainability into company business models (BIS 2021).

From the perspective of banks, financial regulators are strengthening regulations in an attempt to encourage these institutions to support and promote sustainability practices. Recently banking supervisors have launched important appeals and recommendations to raise awareness on the potential effects of environmental risk, improve the understanding of climate risk measurement issues facing banks and on transitioning to a low-carbon and more circular economy. Specifically, increasing pressure is being exerted on all EU banks to integrate sustainability factors into the lending decision-making processes. In turn, increased commitment to climate issues could lead banks to develop a more effective environmental management system and environmental credit risk management which mediates bank riskiness and improves overall financial stability (EBA – European Banking Authority, 2020a, EBA – European Banking Authority, 2020b).

Conclusions, implications and future research lines

The ‘sustainability challenge’ represents a global issue that affects all companies, whether financial or non-financial, especially following the Covid-19 pandemic. Falling behind in this process of adaptation not only means losing a competitive advantage but also risking being pushed out of the marketplace altogether. This is true for banks, which are now being asked by regulators to rearrange all their main business processes (e.g., strategies, risk management, capital allocation, loan origination and monitoring, disclosure), adapting them to comply with specific ESG sustainability criteria. It is even more true, however, for non-financial firms, especially SMEs. These firms are a pillar of the European economy and a central player in value chains and community dynamics (Beck, 2013; Gomes and Pinho, 2023; Angilella and Mazzù, 2015). Thus, involving them in the sustainability process is vital to ensuring the success of the transition to sustainability in Europe. In addition, for SMEs, being included in the sustainability agenda is paramount to accessing key resources and opportunities, obtaining better financial conditions and entering into important partnerships (European Investment Bank-EIB, 2023).

Scholars have revealed that an increasing number of banks are starting to include ESG factors in their lending decisions (Scholtens, 2009, Goss and Roberts, 2011). Many financial intermediaries, facing the threats generated by ESG risks, tend to prefer lending to businesses that are more sustainable and, therefore, less risky (Weber, 2012). Academic research shows that this strategy is virtuous because granting credit to more sustainable companies creates value for banks in terms of a higher net interest margin and a reduction in default risk (Mirza et al., 2023). For these reasons, banks are also increasing their share of green operations by offering capital at lower cost to firms more compliant with environment goals (Attig et al., 2013, El Ghoul et al., 2018, Wellalage and Kumar, 2021).

Abstract

Prior research concludes that tax-expert auditors facilitate tax aggressiveness. However, these studies examine auditors who also provide non-audit tax services to their clients, creating conflicting incentives. We predict that tax-expert auditors, who do not provide non-audit tax services, reduce tax aggressiveness, because tax aggressiveness imposes costs on them. We test our prediction using Chinese data, allowing us to identify Certified Tax Agents as tax-expert auditors. We find that companies are less tax aggressive when their signatory auditor is a tax-expert who does not provide non-audit tax services. Consistent with a causal relation, a decrease in tax rates, which reduces clients’ incentives to be tax aggressive, weakens the effect of tax-expertise on tax aggressiveness. Moreover, tax-expert auditors attenuate the type of tax aggressiveness that results in tax-related misstatements. Overall, by examining auditors who do not provide non-audit tax services, we find that tax-expert auditors curb tax aggressiveness, contrary to prior research.

Introduction

Prior research finds that some potential monitors of tax aggressiveness, including tax-expert auditors, facilitate aggressive tax avoidance ( Bianchi et al., 2019 ; McGuire et al., 2012 ). These studies, however, examine auditors who also provide non-audit tax services to their clients. Performing both audit and non-audit tax services creates conflicting incentives for auditors, making it difficult to interpret their results. As providers of assurance services, auditors have incentives to reduce clients’ tax aggressiveness, because tax aggressiveness increases the risk of adverse outcomes that impose costs on auditors. As providers of non-audit tax services, auditors have incentives to act as advocates for clients’ aggressive tax positions. The purpose of this study is to examine whether signatory auditors with tax expertise, who only perform audit services, curb tax aggressiveness.

Signatory auditors have incentives to curb tax aggressiveness because it is associated with adverse outcomes, including earnings management, fraud, scrutiny from regulators, poor earnings quality, audits by tax authorities, financial reporting opacity and misstatements, and higher crash risk. 1 These adverse outcomes can impose costs on signatory auditors through regulatory scrutiny, sanctions, litigation, reputational harm, reduced compensation, loss of clients, and impaired career advancement. 2 Consistent with tax aggressiveness imposing costs on auditors, prior studies find that tax aggressiveness is associated with a higher incidence of auditor resignations ( Goh et al., 2013 ) and higher audit fees ( Donohoe and Knechel, 2014 ).

While signatory auditors have incentives to curb tax aggressiveness, their ability to detect and prevent client tax aggressiveness is likely to vary. Auditors with tax expertise should have a greater ability to identify aggressive tax strategies that are likely to result in adverse outcomes, and thus are likely to be more effective at curbing aggressive tax planning than auditors without tax expertise. Therefore, we hypothesize that clients of signatory auditors with tax expertise are less tax-aggressive than clients of auditors who lack tax expertise.

Conclusions

We find that clients audited by tax-expert signatory auditors who only provide audit services are less tax aggressive than clients audited by non-tax experts. Consistent with a causal relation, we find that tax aggressiveness declines when mandatory auditor rotation results in switching to a tax-expert auditor. We also find that after an exogenous decrease in tax rates, which reduces clients’ incentives to engage in aggressive tax avoidance, the effect of tax expertise on tax aggressiveness weakens. In addition, while tax aggressiveness increases the incidence of tax-related restatements, tax-expert auditors attenuate this effect, consistent with tax-expert auditors mitigating the type of tax aggressiveness that increases misstatement risk. We also find that higher taxable income and a higher likelihood of tax-related audit adjustments are the channels through which tax-expert auditors constrain clients’ tax aggressiveness. Taken together, our findings fill a void in the literature and suggest that when signatory auditors only provide attestation services, their tax expertise reduces clients’ tax aggressiveness.

We note that our findings may not be directly generalizable to other settings. However, Lennox and Wu (2022) argue that “whether a study is likely to produce generalizable inferences hinges upon the nature of the theory being tested.” Because our theoretical prediction, which is that the engagement auditor’s tax expertise curbs tax aggressiveness, is not contingent upon the availability of the CTA-designation to capture auditors’ tax expertise, the generalizability concern is likely mitigated to some extent.

Abstract

Supply chain resilience and the ripple effect have been widely studied, mostly focusing on material flow-related practices. The financial flow adjustments to cope with supply chain disruptions have received much less attention. We contribute to the literature by examining the impact of adapting payment terms during and after disruptions. In particular, we perform a discrete event simulation analysis in anyLogistix for a complex supply chain network to investigate the impact of adjusting payment terms on supply chain cash flows. Our results suggest that collaboratively adjusting payment terms is an effective strategy for coping with disruptions. In contrast, ad hoc adjustments and immediate returns to pre-disruption payment schemes do not yield visible improvements. Positive effects on cash and loans are observed if an adjustment of payment terms occurs proactively and in a coordinated manner, especially when expediting payments downstream and payment slowing down upstream. The results from our sensitivity analysis on the impact of accelerating/decelerating cash conversion cycles favour shorter cycles when coping with disruptions. We deduce useful managerial insights and reveal some new theoretical tensions related to the impact of payment adjustments on cash flows in supply chains.

Introduction

Supply chain resilience and the ripple effect have been significantly visible research avenues ( Chervenkova and Ivanov, 2023 , Dolgui et al., 2023 , Sawik, 2023 , Ivanov, 2024a , Ivanov, 2024b ). The extant literature offers numerous strategies and practices for the preparedness and recovery of supply chains ( Hosseini et al., 2019 , Ivanov and Dolgui, 2021 , Ivanov et al., 2021 , Gruchmann et al., 2024 ). Most of these strategies and practices are related to material flows – e.g. backup suppliers, risk mitigation inventory, and capacity flexibility ( Lin et al., 2021 , Mitręga and Choi, 2021 , Brusset et al., 2023 , Hägele et al., 2023 , Aldrighetti et al., 2024 ). Some research examined the role of information flows in supply chain resilience, focusing on visibility, digital technology, and cybersecurity ( Ivanov, 2021 , Sawik, 2022 , Dubey et al., 2023 ). However, practices of financial flow adjustments to cope with supply chain disruptions have received much less attention ( Choi et al., 2023 ).

The role of financial flows in supply chain resilience is a distinct but underexplored topic of high practical relevance. Consider an example. In the fall of 2023, Ford’s supply chain experienced a series of disruptions caused by strikes ( Shepardson and White, 2023 ). Assembly plants stopped, leading to significant monetary losses at Ford ($1.7 billion in lost profits and about 100,000 units fewer wholesale vehicle sales from the strike) ( Gomes, 2023 ). Adversely, the ripple effect from the disruptions at the assembly plants could have resulted in setting Tier 2 suppliers at financial risk and danger of bankruptcy because of missing liquidity, higher interest rates, and difficulties to get loans from the banks ( Vicci, 2023 ).

Conclusion

In this study, we departed from the existing research gap about the role of cash flows in supply chain resilience and ripple effect analysis. The extant literature mostly focuses on strategies for preparedness and recovery related to material flows. Practices of financial flow adjustments to cope with supply chain disruptions have received much less attention. However, the practical and academic importance of this topic are unquestionable.

The main contribution of our study to the literature is an examination of the impacts of payment term adaptation during and after disruption responses, along with proposing useful coping strategies based on adjusting deferment periods and the role of coordination in this adaptation. The objective of our analysis was to investigate the impact of adjusting payment terms on supply chain cash flows.

Methodologically, we utilised a discrete event simulation analysis in anyLogistix applied to a complex supply chain network. We performed simulations with nominal (disruption-free) and disruption scenarios considering different response strategies. The computational results of this study have been translated into useful managerial insights on the importance of payment term adjustment during disruptions to avoid bankruptcies in the supply chain and improve its resilience.

Abstract

Audit practice is a team effort led by signing auditors. We examine the impact of the heterogeneity of signing auditors’ audit-firm serving experiences on the disclosure of key audit matters (KAMs). Auditors with more heterogeneous serving experiences demonstrate more adequate KAM disclosure, as evidenced by more KAMs, longer texts and clearer attributions in their disclosures. This effect is influenced by the quality of audit knowledge that auditors accumulate from different serving experiences and the team- and audit-firm-level knowledge integration environment. Furthermore, signing auditors with more diverse service experience tend to improve audit quality, reduce the incidence of restatement or misconduct and enhance the informativeness of financial reports. Our findings enrich the KAM disclosure research and provide insights into audit firms’ human resource allocation and internal management.

Introduction

In 2016, China’s Ministry of Finance mandated new audit report standards, introducing Key Audit Matters sections in listed companies’ audit reports to bolster transparency and highlight financial statement risks through auditors’ judgment ( Chen et al., 2021 ). Studying the disclosure of key audit matters (KAMs) is pivotal for enriching the content of audit report information and nurturing capital market health ( Reid et al., 2015 , Wang et al., 2018 , Li et al., 2019 ). Research predominantly examines the economic consequences of KAM disclosure ( Wang and Li, 2019 , Liu and Lei, 2020 , Zhou et al., 2020b ). Only a few studies investigate the determinants of KAM disclosure, with major focuses on client characteristics ( Pinto and Morais, 2019 ; Li et al., 2020; Qian et al., 2022 ), individual auditor attributes ( Cao, 2021 , Chen et al., 2021 ), client–auditor relationships ( Hu and Hu, 2021 ) and abnormal audit fees ( Chen et al., 2022 ). Audit practice is inherently team work, with the leading signing auditors critically influencing team efficiency ( Jiang and Tang, 2016 , Yan et al., 2017 ). In the context of integrated management within accounting firms, exploring effective personnel allocation for audit teams is important for promoting the integration of internal resources within organizations and driving the audit market toward intrinsic, high-quality development. We investigate how the heterogeneity of signing auditors’ audit-firm serving experience affects KAM disclosure from a team theory perspective. 1

Auditing is a profession characterized by a relatively high turnover rate, with auditors often transitioning between audit firms ( Hermanson et al., 2016 ). For instance, the Shanghai Institute of Certified Public Accountants announced that in September 2022, 122 certified public accountants in Shanghai handled issues related to transferring to other firms. The professional experiences gained in various firms have a profound impact on individual auditors’ knowledge acquisition and cognitive processes ( Che et al., 2020 , Tian et al., 2021 ). Furthermore, the diversity in the audit-firm serving experiences of signing auditor pairs may influence their knowledge integration, which has implications for their audit judgments ( Carpenter, 2007 , Bonner et al., 2022 ).

Conclusions

In this study, we provide novel empirical evidence on the factors influencing KAM disclosure. We find that signing auditors with more heterogeneous audit-firm serving experiences exhibit more adequate KAM disclosure. Mechanism analysis reveals that the quality of knowledge accumulated from heterogeneous serving experiences and the knowledge integration environment at both the team and firm levels significantly influence the impact of serving experience heterogeneity. Specifically, the increase in KAM disclosure adequacy is more salient when auditors accumulate higher-quality knowledge through heterogeneous serving experiences, when audit teams exhibit educational gaps between members, when review partners have heterogeneous experiences and when audit firms are smaller. Economic consequence tests indicate that signing auditors with greater serving experience heterogeneity can enhance audit quality through more audit input, significantly reduce the probability of restatements and financial misconducts and ultimately enhance the informativeness of accounting information. In other words, such audit teams can improve accounting information quality by thoroughly identifying and addressing potential risks in financial reporting.

We extend the literature on KAM disclosure through a novel investigation of how audit team composition affects the adequacy of such disclosure. Our findings offer valuable implications for practice. In the realm of integrated audit firm management, human resource management is pivotal for audit firms’ internal governance. Managers need to consider the proper allocation of human resources from the perspective of auditor team composition. By leveraging differentiated serving experiences within audit teams, they can adjust member configurations, enhance communication and cooperation among team members, better harness their teams’ collective intelligence and improve internal governance mechanisms and quality management systems. Regulatory bodies are encouraged to encourage audit teams to embrace diverse decision-making frameworks. This shift will aid audit firms in transitioning from a growth-centric to a strength-based approach and promote the healthy development of capital markets.

Abstract

This research contributes to understanding the spillover effect of customer digital transformation along the supply chain. We take a supply chain relationship perspective to explore the influence of customers’ digital transformation on suppliers’ audit fees and find a significant reduction in such fees when customers undergo digital transformation. An economic mechanism analysis reveals that this transformation reduces audit fees by lowering the risks and costs encountered by auditors. This is achieved by mitigating suppliers’ business risks and improving earnings quality. Heterogeneity analysis reveals that the impact of customers’ digital transformation on suppliers’ audit fees is more pronounced when the supply chain is geographically distant, suppliers with more specific investments and with high levels of market competition.

Introduction

Digital transformation involves shifting from a traditional “industrialized” management model to a digital management model ( Verhoef et al., 2021 ). This transition goes beyond simply applying digital technologies to technical aspects of a business and involves a complete restructuring of business models and operational management. Research on the economic consequences of digital transformation emphasizes its potential influence on the quality of corporate disclosures and business risks. For example, digital technologies can improve operational management, promote networked and flattened organizational structures ( Nambisan et al., 2019 ), increase corporate disclosure transparency and the quality of accounting information and enhance communication, production and operational efficiency ( Wu et al., 2021 , Chen et al., 2022a ). By digitally collecting and analyzing data, firms can effectively visualize information, enhance interdepartmental coordination, refine risk control processes, mitigate operational risks and reduce management fraud and decision-making errors that lead to losses, thereby enhancing their market reputation ( Manita et al., 2020 , Zhou and Li, 2023 ). Most studies focus on the direct effects of digital transformation on firms’ risk responses and information transfer capabilities, while its broader effects on the supply chain have not been sufficiently investigated ( Guo et al., 2023 ).

The production operations of suppliers and their financial decisions are influenced and informed by their customers, who therefore play a vital role in the supply chain ( Ak and Patatoukas, 2016 ). Investing in supply chain relationships promotes the economic interdependence of suppliers and customers. The value of such investment depends on customers’ growth prospects, and ensuring the stability of their businesses can lead to higher expected returns from supply chain collaboration. Conversely, if customers face business challenges or go bankrupt, they can jeopardize the value of the assets allocated by suppliers ( Raman and Shahrur, 2008 ). This increases suppliers’ cash flow and operational risk ( Itzkowitz, 2013 ). Thus, suppliers are highly sensitive to the operations and activities of their customers. The risks and information associated with customers can generate a spillover effect in the supply chain, which can then trigger cascading changes in suppliers’ operational risks and influence their investments and financial decisions ( Hertzel et al., 2008 , Jacobson and von Schedvin, 2015 , Chiu et al., 2019 ). By gaining access to more transparent customer information, suppliers can better forecast customer demand, reduce transaction costs, alleviate shortages and losses and enhance production efficiency and inventory management ( Yang et al., 2020 ). Digital transformation can have positive effects on business risks and disclosure quality, in addition to the supply chain, but does the digital transformation of customer businesses also lead to additional spillover effects on suppliers?

Conclusion and discussion

Amid increased economic uncertainty, businesses are increasingly turning to digital transformation to enhance their resilience and optimize their resource allocation. The supply chain is a critical component of business operations that integrates logistics, information flow and capital flow. Microenterprises aiming to gain a competitive advantage can enhance their collaborations within supply chains. We investigated the spillover effect of customer digital transformation on suppliers through assessing its impact on audit fees. This extends research on the economic consequences of digital transformation beyond the boundaries of supply chain relationships. Our empirical findings indicate that customers’ digital transformation can reduce suppliers’ audit fees. Our heterogeneity analysis shows that this effect is more evident when there is a greater geographic distance between suppliers and customers, higher levels of dedicated investment and increased competitiveness in the supplier market. Through the economic mechanism of mitigating supply chain risk and facilitating collaboration and information transfer in supply chains, customers’ digital transformation reduces suppliers’ audit risks and costs, thus leading to lower audit fees.

Based on previous research findings, we offer the following conclusions. First, the implementation of digital transformation by suppliers’ customers can potentially cause a spillover effect across the supply chain, thereby affecting the economic interests and decisions of suppliers. Consequently, when faced with fierce market competition, firms should fully realize the beneficial effects of digital transformation on information transfer efficiency and collaboration within the supply chain. Such transformation should therefore be actively promoted, because through it firms can facilitate a seamless connection of resources, information and knowledge within the supply chain, thus fostering sustainable economic growth through enhanced coordination and cooperation.

Abstract

This paper delves into the integration of Intelligent Process Automation within the domain of business continuity auditing, with a focus on the Portuguese banking sector. In an era marked by rapid technological advancement, organizations are increasingly leveraging automation to reinforce operational efficiency and realize substantial cost savings. Concurrently, auditors play a pivotal role in ensuring seamless transitions amid technological transformations to safeguard business continuity. This research endeavors to bridge the realms of business continuity and intelligent automation, culminating in a comprehensive application that streamlines the audit process. The implemented solution encompasses the automation of critical audit activities, including communication, information requests, and final report submissions, liberating auditors from the chains of repetitive tasks. The incorporation of business intelligence augments this automation framework, enabling a meticulous analysis of key performance indicators within the audit department. This ensures a continuous evaluation of the efficacy of the Annual Audit Plan. Empirical validation of this initiative was achieved through surveys conducted with audit teams from four prominent Portuguese banks. The results unequivocally affirm the potential benefits of this implementation, extending invaluable support to management in the decision-making process, while concurrently alleviating auditors of routine tasks inherent to the audit process. This study not only underscores the transformative potential of intelligent process automation in the audit domain but also offers a replicable framework for organizations seeking to fortify their business continuity efforts through technological integration. The findings hold implications for businesses navigating the dynamic intersection of technology and audit practices, providing a blueprint for harnessing automation for enhanced operational resilience.

Introduction

Technological advancements have greatly increased information accessibility and are continuously reshaping information systems to meet future demands This dynamic environment compels organizations to adopt open innovation strategies to streamline operations, enhance efficiencies, and fortify fraud prevention measures. The COVID-19 pandemic has accelerated the shift towards remote work, emphasizing the importance of process automation. In auditing, technology has become essential in ensuring compliance, assessing risks, and improving operational efficiencies, promoting transparency and accountability. The shift from manual to automated and continuous auditing is driven by emerging technologies like Artificial Intelligence (AI) and blockchain, significantly affecting the banking sector. Despite these advances, the transition to fully digital auditing practices remains gradual, with many institutions still reliant on traditional methods.

The auditing process has evolved from traditional manual audits of paper documentation to computer-based auditing, progressing towards a paperless, electronic, real-time continuous auditing environment ( Rezaee et al., 2002 ). The banking sector has faced numerous challenges in recent years, responding to incentives and imperatives related to technological advances, market volatility, and increasing regulatory and public scrutiny. Since the 2007 financial crisis, known as the subprime crisis, the audit function in banking institutions has become significantly more crucial. Its primary mission is to mitigate the risk of potential or actual losses, thereby enhancing the institution’s risk profile ( Zinca, 2016 ). Internal Audit (IA) departments are under increasing pressure to leverage technology for automating the identification of exceptions and/or anomalies and for control testing ( The Institute of Internal Auditors, 2019 ).

Conclusions

This study aimed to integrate automation within the audit process, thereby streamlining manual and repetitive tasks to enhance the efficacy of business continuity management. This goal was pursued through the identification of optimal automation solutions and the mitigation of associated risks.

A multi-stage methodological approach was utilized, beginning with an extensive literature review to identify the risks, benefits, and challenges linked with the automation of audit processes. This was followed by the application of the DSRM to precisely define the core problem and develop an appropriate solution. Subsequent phases involved the detailed design and development of the proposed solution, culminating in a survey conducted among bank auditors to evaluate how well the solution met their needs.

The findings from this study highlight the pivotal role of IPA in the audit process. Significant advantages were observed, including the implementation of an alert system that notifies auditors of upcoming audits and the use of KPIs to provide a detailed overview of the progress within the audit plan. These tools help identify areas that require refinement in audit management.