Unveiling the Financial Performance Impact: Internal Auditing's Role in Saudi Firms

Abstract

This study aims to investigate the direct impact of internal auditing (IA) on financial performance (FP) and its indirect effect mediated through an internal control system (ICS). The examination utilizes responses from 257 professionals in roles such as accountant, financial manager, financial controller, financial auditor, or head of an internal audit unit within a selected sample of firms in the Kingdom of Saudi Arabia (KSA). Utilizing PLS modeling for analysis, the study reveals a significant direct influence of IA on FP. Additionally, the study demonstrates that IA, through its impact on ICS, contributes to the enhancement of FP. The mediation of ICS between IA and FP in Saudi firms was tested and found to be partial. Notably, the indirect influence of IA on FP was observed to be more pronounced than its direct influence. Researchers have argued that independent IA plays a vital role in supporting firms’ ability to maintain and improve performance, and in this study the role of IA is tested in relation to mediating FP through improved ICS. The findings suggest that firms should emphasize the importance of IA in their strategic planning and resource allocation to enhance their overall financial health. Furthermore, the results highlight the necessity for continuous training and development for IA professionals to ensure they are equipped with the latest skills and knowledge to effectively improve ICS and, consequently, FP. Based on our findings and in support of the proposed model, we concluded that IA improved ICS, which, in turn improved FP. Hence, it is necessary for firms to solicit adequate independent IA to improve ICS, with the further goal of improving FP.