Internal audit quality and earnings management: the roles of competence, independence, and work performance

Purpose This study examines whether internal audit quality (IAQ) is associated with lower income-increasing discretionary accruals and improved financial reporting quality (FRQ) in an emerging market with uneven regulatory enforcement. Design/methodology/approach Survey-based measures of internal audit (IA) competence, independence and work performance are combined with archival data from non-financial firms listed on the Dhaka Stock Exchange. FRQ is proxied by signed discretionary accruals from the performance-adjusted modified Jones model (Kothari et al., 2005), and interaction models examine variation across reporting-pressure and governance conditions. Given the cross-sectional design, the findings are associational rather than causal. Findings Higher IAQ is associated with lower income-increasing discretionary accruals. Competence is the attribute primarily associated with this relationship, whereas independence and work performance show no separate association once modelled jointly. The association is stronger among loss-making firms but weaker where audit committee independence is high, a pattern consistent with substitution between IA and audit-committee monitoring, though the interaction is only marginally significant. Evidence on audit committee financial expertise is weaker and is treated as suggestive. Practical implications In emerging markets, the findings highlight the importance of IA expertise, certification and training, and suggest that formal structural arrangements alone may be insufficient for reporting quality. Originality/value The study provides emerging-market evidence consistent with IAQ acting as a substantive monitoring mechanism rather than symbolic compliance, with its disciplining association most evident under higher reporting pressure and weaker structural oversight.