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Current governance disclosure requirements include reports from management, the audit committee, and the external auditor. However, despite internal audit's prominence as a critical governance mechanism, external stakeholders lack information about the function. This study evaluates the extent that a descriptive Internal Audit Report (IAR) affects investor confidence and investment decisions. The results indicate that participants provided with an IAR had more confidence in financial reporting reliability and higher perceived company oversight effectiveness than participants without access to an IAR. The IAR effect on confidence in financial reporting reliability is particularly evident for high fraud risk companies. Tests for mediation reveal that the IAR effect on confidence is mediated by perceptions of oversight effectiveness. Furthermore, we find that confidence in financial reporting reliability and perceived oversight effectiveness mediate the IAR‐investment recommendation relation. Self‐insight results show that the IAR was perceived to be as useful as several currently required disclosures.
Holt et al. (Tue,) studied this question.