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 91 

                       FINANCE AND BANKING 

                                                                  IJFB VOL 13 NO 1 (2023) P-ISSN 2574-6081  E-ISSN 2574-609X 
                                                  

        Available online at https://www.cribfb.com 
                                                                                                                                           Journal homepage: https://www.cribfb.com/journal/index.php/ijfb 

                                                                                                                                                                                                   Published by CRIBFB, USA 

INTERNAL AUDITOR CHARACTERISTICS AND FINANCIAL 

REPORTING QUALITY: EVIDENCE FROM BANGLADESH  

 
 Md Gulam Sharoar Hossain Khan (a)1    

 

(a) Assistant Professor, Department of Business Administration, Stamford University Bangladesh, Dhaka, Bangladesh; E-mail: 

sharoar_08@yahoo.com 
 

 
A R T I C L E I N F O 
 

 

Article History: 
 

Received: 21st December 2022 

Revised: 30th January 2023 
Accepted: 20th February 2023   

Published: 28th February 2023   

 
Keywords: 
 

Financial Reporting Quality,  

Auditor Characteristics  
 

 
JEL Classification Codes: 

  

M40, M41, M42, H83, F65 
 

 

 
 

  

 
A B S T R A C T 
 
This study aims to examine the relationship between internal auditor characteristics and financial 

reporting quality in the context of the banking sector in Bangladesh. To achieve this objective, this study 

used a quantitative research methodology by using a questionnaire survey. Data were collected (495 
respondents from 45 banks) from the internal auditors of banking companies in Bangladesh which cover 

78% of the population. This study uses five important characteristics of internal auditors as exogenous 

variables such as auditors’ independence, auditor proficiency, professional qualification, auditors’ 

experiences, and the leadership style of the chief audit executive. SmartPls-4 is used as statistical 

software to determine the relationship between exogenous and endogenous constructs. Findings indicate 

that professional qualification has the highest positive significant impact on financial reporting quality. 

Results also revealed that other characteristics like au auditors’ independence, auditor proficiency, and 

auditors’ experiences has also positive significant effects on financial reporting quality. However, the 
leadership style of the chief audit executive has no positive significant impact on financial reporting 

quality. The findings of this study encourage the level of understanding of the internal auditors, 

regulators, top management, policy maker of the organization, investors, and other stakeholders 

regarding the quality of financial reporting of banking sectors in the perspective of an emerging 

economy.   

  
 

© 2023 by the authors. Licensee CRIBFB, USA. This article is an open-access article distributed 

under the terms and conditions of the Creative Commons Attribution (CC BY) license 

(http://creativecommons.org/licenses/by/4.0).                           

 

INTRODUCTION 

The revised conceptual framework of 2018 (effective from 1st January 2020) issued by ‘The International Accounting 

Standard Board’ (IASB) has clearly explained the purpose of financial reporting which is to provide relevant information 

to the users to make appropriate strategic decisions.  According to IASB, investors rely on accounting information to make 

appropriate decisions, for which that information must be a relevant, comparable, verifiable, timely, understandable, and 

faithful representation. Financial reporting quality (FRQ) helps to make appropriate strategic and investing decisions, 

especially related to resource allocation in any type of organization (IASB, 2013). It has been suggested that managing 

external sources of funds and ensuring the proper use of those funds by ensuring accountability depends solely on financial 

reporting quality (Lin et al., 2016). Users of accounting information typically make investment-related decisions based on 

the organization's cash flow (both inflow and outflow) and resource management capabilities (IFRS, 2020). And that’s 

why FRQ is so important to the stakeholders like lenders, suppliers, regulators, and shareholders. 

Frauds are becoming a permanent nature in business (Awolowo et al., 2018). In 2018, the global total cost of 

corporate fraud are valued at $4 trillion (ACFE, 2018) based on 125 countries all over the world. The value of corporate 

fraud increased to $4.5 trillion and $4.7 trillion in 2020 and 2022 respectively (ACFE, 2020, 2022). Asset 

misappropriation, corruption, and financial statement fraud have been identified as the most common categories of 

scandals. For example, GE (US) was founded in 1892. At the beginning of 2018, it was publicized that “aggressive 

accounting” performed by SEC, a review that in October 2018 its $22 billion non-cash charges connected to purchase and 

GE’s market value cut down by more than $200 billion during two years (Age, 2019). Wells Fargo is another renowned 

                                                      
1Corresponding Author: ORCID ID: 0000-0003-2333-5842 
© 2023 by the authors. Hosting by CRIBFB. Peer review under responsibility of CRIBFB, USA.  

https://doi.org/10.46281/ijfb.v13i1.2046 

 
To cite this article: Khan, M. G. S. H. (2023). INTERNAL AUDITOR CHARACTERISTICS AND FINANCIAL REPORTING QUALITY: EVIDENCE 

FROM BANGLADESH. Indian Journal of Finance and Banking, 13(1), 91-103. https://doi.org/10.46281/ijfb.v13i1.2046 

 

https://orcid.org/0000-0003-2333-5842
http://creativecommons.org/licenses/by/4.0/)
http://creativecommons.org/licenses/by/4.0/)
https://doi.org/10.46281/ijfb.v13i1.2046


Khan, Indian Journal of Finance and Banking 13(1) (2023), 91-103 

 

92 

largest financial institution in the USA. In 2016, this institution involved more than millions of fraudulent accounts that 

had been created against clients (EUROPEANCEO, 2018). Bismillah Group, one of the top garments in Bangladesh also 

performed fraudulence activities by taking a loan from the bank and taking BDT 1174.46 crore from the bank on behalf 

of his name and also its fake sister concern (CPD, 2018). Now financial scandals and frauds are considered one of the 

most challenging issues to ensure the shareholder’s interest (Connect, 2016). None of the above scandals are shown in 

financial reporting. Thus, the question always raises of which mechanism to follow will improve financial reporting 

quality. 

The best practice of corporate governance (CG) influences the FRQ (Nalukenge et al., 2018). There are four 

important instruments of corporate governance such as internal audit, external audit, audit committee, management, and 

among these internal audits are considered the cornerstone of the CG mechanism (Abbott et al., 2016). Past studies propose 

that organizations should use internal audit as effective instruments for controlling and monitoring organizational 

operations (Cohen et al., 2010; Nalukenge et al., 2018; Prawitt et al., 2009). Internal auditors can help improve financial 

reporting quality in several ways. Internal auditors may assist external auditors with financial statement audits, helps in 

the financial audit of subsidiary companies, and also significant in compliance audit and special audits so that the actual 

condition of the organization can be excluded (Abbott et al., 2016). Independent internal auditors follow specific 

procedures in assisting the organization's financial statements audit and its subsidiary. These comprise assessing the 

process of year-end transactions, closing entries, adjustment, specific accruals, valuation of closing accounts receivable 

and payable, valuation of inventory, contingent transactions, and fixed assets valuation (IIA, 2004). Compliances audit of 

internal auditors may test all events and transactions and posting of each transaction for compliance in accordance with 

financial reporting standards and companies reporting policy. In addition, in preparing financial reporting, competent 

internal auditors can give consulting services in specific cases like warranty reserves, write-off accounts receivable, 

impairment test of assets, and collectivity reserves (PricewaterhouseCoopers, 2009). Moreover, the Institute of Internal 

Auditors (IIA) recommended that skilled and competent internal auditors should review the process of financial reporting 

with ensuring full disclosure, review a risk management process, identify the complex and problematic transactions, assess 

the off-balance sheet items, and key transactions that are related to subsidiaries and joint ventures  (IIA, 2014). This study 

claims that auditors’ characteristics are required for ensuring the quality of financial reporting and this is supported by 

“International Standards for Professional Practice of Internal Auditing” (ISPPIA), which implements as attributes of 

individual auditors. 

However, the characteristics of internal auditors in the process of FRQ are not yet fully explained (Abbott et al., 

2016; Kaawaase et al., 2021). Moreover, internal audits and FRQ are rare in the emerging economy and most of the research 

has been done in developed economies (Kaawaase et al., 2021; Shireenjit, 2013). Therefore, the objective of this study is to 

explore the relationship between internal auditors’ characteristics and financial reporting quality in the context of banking 

sector in Bangladesh. Quantitative research method was conducted by using the survey questionnaire to explain this 

relationship. Data were evaluated using SmartPls-4 and Statistical Package for Social Sciences (SPSS). The Result specifies 

that internal auditors’ characteristics such as auditor’s independence, proficiency, auditors’ experiences, and professional 

qualifications have significant positive impacts on FRQ. The result also suggested that the leadership style of chief audit 

executive have not significant positive effects on FRQ. 

The rest of the work is organized as follows. The next section presented the literature review and identified the 

research gap based on previous literature. This section also includes the development of hypotheses based on previous 

studies. Then discuss the research methodology. The Methodology section covers the population, sample sizing, research 

tools, and operationalization of independent and dependent variables. Then the results afterwards the results are discussed. 

Finally, the last section contains a conclusion that includes significance, limitations and required further studies. 

 

LITERATURE REVIEW 

Financial Reporting Quality (FRQ) 

Stakeholder theory suggests that managers of an organization should make a variety of decisions based on internal 

information of the organization and should consider the interests of not only the management but also the interest of other 

parties like customers, investors, lenders, regulators, communities, society, and government as well (Freeman, 1984). From 

the perspective of stakeholder theory, the organization has to achieve many different goals, not only to see only the interest 

of the shareholders. Freeman (1984) believes that when taking any strategic decision in the organization, the interests of all 

the parties involved in the organization should be considered. In this theory it is treated as accountability which means “as 

the responsibility of one party to another in a relationship where one party entrusts another with the performance of certain 

duties and hence it can be argued that financial reporting quality could reduce information asymmetry between the 

organization and its stakeholders in a timelier manner and as a consequence improve the relationships between them” 

(Kaawaase et al., 2021). Quality financial reporting provides to various stakeholders how the organization is performing on 

governance-related issues. Based on stakeholder theory, organization firms with internal audit teams have some 

characteristics that can complete their functions are accomplished of meeting the different requirements of different 

stakeholders.  

Previous studies have discussed various factors of FRQ and mentioned a special factors like listing requirements, 

nature of the industry, nature of capital, company size, debt ratio, profitability, technology, internet, and ownership pattern   

(Desoky, 2015; Hindi & Rich, 2010; Kelton & Yang, 2008; Mitra & Bhuiyan, 2019). According to IASB, the basic principles 

of FRQ is qualitative characteristics like faithful representation, relevance, understandability, and timeliness that influence 



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the FRQ. Gajevszky (2015) conducted a study and stated that economic factor, political system, governance, international 

forces, and accounting standards influence the FRQ. Moreover, Gajevszky (2015) also demonstrated that earnings 

management, internal control, information technology, good corporate governance, process of internal reporting, accounting 

conservation, culture, age of the CEO, company reputation, and board size influence FRQ. Internal auditors assess whether 

all these factors are being ensured within the organization. That is why financial reporting quality also depends on internal 

audit quality. Passed studies argue that internal audit quality depends on the characteristics of the internal auditors.  

Bangladesh has a record of improvement in terms of growth and development even though global risk and 

uncertainty have increased (WorldBank, 2023). Bangladesh hopes to rise to the country of upper middle income by 2031. 

Bangladesh has a notable story in poverty reduction. When Bangladesh became independent in 1971, this country was one 

of the poorest countries. From there, in 2015, Bangladesh reached to country of lower middle income. In 1991 the poverty 

rate was 41% whereas in 2023 the poverty rate has come down to 18.7% (Kalerkontho, 2023). Moreover, the industrial 

sector has made a huge contribution to the economic development of Bangladesh (Dailysun, 2019). The banking industry is 

playing an important role in poverty alleviation and industrialization in Bangladesh (Dailystar, 2023). Bank provides 

investable funds for industrialization to the both private and public organization and helps international business with prompt 

payment which generates employment opportunities and hence strengthens the economy. Among other sectors, banking is 

the most regulated sector and that is why this sector is able to contribute to the economy which in turn encouraged me to 

examine the relationship between internal auditors’ characteristics and FRQ in the banking sector of Bangladesh. The 

findings of this study will what qualities should internal auditors possess and how can internal auditors use their attributes 

to help in preparing quality financial reporting. 

In addition, to the best of the author's knowledge, Bangladesh is a developing country with a very limited number 

of research on internal audit and FRQ. Masud (2022) examined the different drivers of FRQ in the listed companies in 

Bangladesh and found that firm size, firm age, ownership structure, sources of finance, liquidity, profitability, board size, 

board independence, board diligence, independence level of the audit committee, and quality of auditing has a significant 

impact of FRQ. Rashid (2020) investigate the relationship between the professional qualification of senior management and 

FRQ and stated that professional certification has a positive impact on FRQ. Karim et al. (2006) found a positive significant 

association between regulation and timeliness of financial reporting. Rouf et al. (2014) demonstrated that the independence 

of independent directors, audit committee independence, and board size influence the FRQ. Very recently, Khan (2023) 

reported that both assurance and consulting role of internal auditors influence the practice of sustainability reporting. 

Moreover, past studies have ignored quantitative research by using a survey questionnaire that gives more motivation to 

influence the practices of FRQ. To fill this gap, this study explored the relationship between internal auditors’ characteristics 

and FRQ using the evidence from Bangladesh’s banking sector.  

 

Internal Auditor Characteristics 

The International Standards of Professional Practice of Internal Audit (ISPPIA) has implemented internal auditors’ 

characteristics that must be implemented by individuals (IIA, 2012b). According to these standards, internal auditors should 

be completely independent in providing their services. “Independence is the freedom from conditions that threaten the ability 

of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. To achieve the degree of 

independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive 

has direct and unrestricted access to senior management and the board “ (IIA, 2012a). Roussy (2016) conducted a study 

about when external auditors consider internal audit reports and found that external auditors reduce their assignment when 

internal auditors are independent, this proves that when internet auditors are independent, the organization's financial 

reporting is prepared appropriately. Similarly, Shireenjit (2013) stated that when internal auditors are organizationally 

independent, the income of the organization will increase and this is the symbol of FRQ. Alzeban and Gwilliam (2014) 

reported that auditor’s independence leads a review of the accuracy and reliability of financial reporting. However, Alzeban 

and Gwilliam (2014) also reported that the lack of auditor’s independence is a barrier to internal audit performance.  

IIA (2012) suggested that “internal auditors must possess the knowledge, skills, and other competencies needed to 

perform their individual responsibilities. The internal audit activity collectively must possess or obtain the knowledge, skills, 

and other competencies needed to perform its responsibilities”. Roussy (2016) also found that external auditors are more 

rely on internal audit work when they are more competent. It’s also suggested that when internal auditors are more 

competent, problems in financial reporting can be easily identified and rectified, thereby improving reporting quality. 

Bananuka (2018) identify the function of internal auditors which includes assessing internal control, engaging in the risk 

management processes, and ensuring the applicable rules and regulations. It means that when the internal auditor assesses 

the level of internal control, justifies whether the risk management is in place, and whether the organization has complied 

with all the laws and regulations on the organization then the FRQ will automatically increase. Arena and Azzone (2009) 

reported that auditor’s competencies and proficiencies influence to implementation and communication of reports to the 

assigned authority so that they can make proper action if there is any mistake that also leads to the preparation of financial 

reporting. Soh Dominic (2011) stated that sufficient knowledge regarding information technology, financial feasibility, and 

business risk influences internal audit works. Alzeban and Gwilliam (2014) report that the competencies of internal auditors 

influence the reliability of financial reporting and improve the process of risk management.  

According to IIA (2012) “Internal auditors are encouraged to demonstrate their proficiency by obtaining 

appropriate professional certifications and qualifications, such as the Certified Internal Auditor designation and other 

designations offered by The Institute of Internal Auditors and other appropriate professional organizations”. Internal auditors 



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may face a lot of difficulties if they do not have professional qualifications. The professional qualification declares internal 

auditor owns sufficient theoretical, technical, and practical knowledge and to maintain this qualification, continuous 

professional training is required. IIA. (2012) also suggested that “Internal auditors must enhance their knowledge, skills, 

and other competencies through continuing professional development”. Being incapable to find the vital issues and risks 

that will affect their performance. Al-Matari et al. (2014) recommended that auditors’ qualification such as CIA, CGAP, 

CCSA, CRMA, and CFSA helps to give feedback on any mistakes and can make quick decisions in very less time. Moreover, 

highly qualified internet auditors help management to take strategic decisions regarding risk management that effect 

organizational performance, earnings management and improve audit quality, all are leads to the FRQ. Similarly, 

Hutchinson and Zain (2009) also found that the professional qualification of internal auditors influences organizational 

performance.  

Leadership style is affected to the performances of internal auditors (Nusran, 2021). According to Majid et al. 

(2016), the leadership style is an approach by which a leader influences his employees in a way that makes them willing to 

do what their leader suggests to achieve the organizational goals regardless of their preferences”. Lok and Crawford (2004) 

found that leadership style has significant positive impact on commitment and reasonable functions. Hughes et al. (2015) 

argue that transformational leadership is a managerial skill that allows strong emotions with their subordinates and believed 

to be more fruitful in leading the changes due to the willingness of subordinates to works that leads to overcoming leaders’ 

objectives. Pratiwi et al. (2020) conducted a study about the leadership style and capability level of internal auditors and 

found that transformational leadership style has a positive impact on the internal auditor’s work like prevention and detection 

of fraud which consequently influence the FRQ. Similarly, Dal Mas and Barac (2018) also examined a study about the 

leadership style of the head of internal audit and their function’s effectiveness and found that the transformational leadership 

nature of the head of an internal audit influences to achieve the organizational objectives.  

Moreover, experienced internal auditors may enjoy more encouragement than senior management in making 

strategic decisions (Van Peursem, 2004). They may have different views because of their experience. Chung and Monroe 

(2000) defined experience related to audit as “the auditor’s unique knowledge, competencies and capabilities that exist from 

job practices in the auditing profession which lead to the enhancement of auditor’s abilities to process relevant information, 

make a mental comparisons of the alternative way out, initiate subsequent actions and also provide decision making 

efficiency and effectiveness through a good memory of information necessary and an accurate judgment of audit works.” 

Zain et al. (2006, p. 2) stated that “experience in accounting and auditing, and interactions with the internal audit function 

(such as frequency of meetings and review of internal audit reports) are associated with internal audits propensity to 

contribute towards the external audit predict that the level of audit experience among internal audit staff will impact on the 

extent to which the internal audit function is able to contribute to financial statement audits” and that reflects the FRQ. 

Especially experiences in auditing and accounting help to influence the earnings quality (Gaballa & Ning, 2011). These 

studies also suggested that more experienced auditors gain more knowledge about clients’ activities and errors which could 

be helped in preparing good financial reporting. Past studies also specified that auditors’ experiences can expand auditor’s 

ability to judgment (Agoglia et al., 2007; Chung & Monroe, 2000; O'Donnell, 2002). Therefore, it can be hypothesized that 

 

H1: Auditor’s experiences are positively associated with FRQ. 

H2: Auditor’s independence is positively associated with FRQ. 

H3: Auditor’s proficiency is positively associated with FRQ. 

H4: The leadership style of the chief audit executive is positively associated with FRQ. 

H5: Professional qualification of internal auditors is positively associated with FRQ 

 

MATERIALS AND METHODS 
Research Method 
Quantitative research by using a survey questionnaire is conducted in this study to examine the relationship between 

exogenous and endogenous constructs. Creswell and Creswell (2017) defined quantitative research as “a type of research 

that is explaining phenomena by collecting numerical data that are analyzed using mathematically based methods (in 

particular statistics)”. Quantitative research is highly acceptable to users for six important characteristics such as using the 

number to measure data, using quantitative data, purpose to be objective, using statistical analysis, denoting composite 

problems through constructs, and generalizable and comparable findings (Goertzen, 2017). Moreover, quantitative research 

findings are based on a large number of data that represent a population. Random sampling technique is applied to collect 

data for this study which is required especially for quantitative research where each respondent has an equal probability of 

responding.  

 

Population, Sample, and Research Tool 

According to Sukamolson (2007) a total number of samples should be covered 57 percent of the population (+-3%). This 

study is used in the banking sector of Bangladesh. A total number of banks is 61 and all the banks work under Bangladesh 

Bank. It has sent 545 questions to the internal auditors in different branches of 45 banks (74% of the population). Out of 

these 425 survey questionnaires were received (response rate 78%) and 30 survey questionnaires were incomplete and were 

excluded from the research. Total usable data stood at 395. Out of the total response, 78% are male and the remaining 22% 

are female. Seven-point Likert scale is used to prepare a survey questionnaire with close-ended questions. Data collection 

was done from the beginning of January 2023 to the end of March 2023. SmartPls-4 is used as statistical software to 



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determine the research model. SmartPls-4 is variance-based software where there is no need for the data to be normally 

distributed (Ringle et al., 2015).  

 

Constructs Measurements 

By following the past studies, all measurement scale (dependent and independent variables) was developed (see table-1). 

Financial reporting quality (dependent variable) is measured based on the qualitative characteristics of accounting 

information such as relevance, reliability, understandability, comparability, and timelessness by following the study of 

Shireenjit (2013). Auditors independence was measured following by Alzeban and Gwilliam (2014) to measure about the 

free from conflict of interest, management interference, unrestricted access, not performing consulting services, and 

appointment and removal by the audit committee. Auditor’s proficiency is measured by the following of Kabuye (2017) to 

assess the sufficient knowledge about ISPPIA, documents-based work, sufficient training, and having interpersonal 

interaction. The leadership style of CAE is measured by the following of Dal Mas and Barac (2018) to measure the complete 

faith in his subordinate, looking at puzzle things of subordinates, implementing rethinking ideas, personal attention, and 

continuously developing their subordinates. Auditor’s professional qualification is measured by the following of  Al-Matari 

et al. (2014) to assess internal auditors with professional Certificate, certified internal auditors give quick feedback for any 

kind of errors and mistakes, and professional certified auditors are able to make instant appropriate strategic decisions and 

no need to consult with others. Auditor’s experiences is measured by following Gaballa and Ning (2011) and Intakhan and 

Ussahawanitchakit (2010) indicate the experiences mean auditors have more knowledge about fraud and errors, more an 

idea about occasional errors, idea about the reasons for errors and how to mitigate such errors.  

 

Table 1. Constructs Measurement 

 
Constructs  Sources  

Auditors Independent Alzeban and Gwilliam (2014) 

Auditors Proficiency Kabuye (2017) 

Professional Qualification Al-Matari et al. (2014) 

Leadership Style of CAE Dal Mas and Barac (2018) 

Auditors Experiences Gaballa and Ning (2011) & Intakhan and Ussahawanitchakit (2010) 

Financial Reporting Quality Shireenjit (2013) 

 

RESULTS 

The partial least square-structural equation model (PLS-SEM) contains two steps method. First, the measurement model 

“involves the evaluation of construct measures’ reliability and validity. This assessment draws on different measures, 

depending on whether a construct is measured reflectively or formatively” (Ali et al., 2018, p. 520). This study considered 

all the items are reflective in nature. Second the evaluation of the structural model. Table 2 indicated that data is normally 
distributed. For using the SEM-PLS, data does not need to be normally distributed, but this study indicated that all the 
values of skewness are within the range of (+/- 2).  
 

Table 2.  Mean, Median, SD, Skewness, and Kurtosis  

 
Name Mean Median Standard deviation Excess kurtosis Skewness 

AI1 4.329 5.000 1.894 -1.209 -0.244 

AI2 4.560 5.000 1.691 -1.189 -0.084 

AI3 4.663 5.000 1.283 -0.746 0.006 

AI4 4.766 5.000 1.142 -0.085 0.122 

AI5 4.591 5.000 1.329 -0.633 0.062 

AP1 4.477 5.000 1.718 -1.083 -0.126 

AP2 4.391 5.000 1.590 -0.966 -0.094 

AP3 4.477 5.000 1.741 -1.228 -0.074 

AP4 4.377 5.000 1.779 -1.147 -0.168 

AP5 4.334 5.000 1.781 -1.243 -0.147 

PQ1 4.314 5.000 1.814 -1.146 -0.226 

PQ2 4.214 4.000 1.603 -1.036 -0.077 

PQ3 4.680 5.000 1.458 -0.863 0.057 

PQ4 4.554 4.000 1.421 -0.855 -0.020 

LS1 4.417 5.000 1.642 -0.796 -0.135 

LS2 4.494 5.000 1.494 -0.832 0.029 

LS3 4.437 4.000 1.491 -0.800 -0.008 

LS4 4.369 4.000 1.737 -0.997 -0.164 

LS5 4.369 5.000 1.720 -0.922 -0.156 

AE1 4.926 5.000 1.131 -0.251 0.361 

AE2 4.857 5.000 1.203 -0.162 0.208 

AE3 4.874 5.000 1.134 0.018 0.072 

AE4 4.786 5.000 1.073 0.029 0.254 

FRQ1 4.366 5.000 1.762 -1.135 -0.152 

FRQ2 4.329 5.000 1.664 -1.135 -0.135 

FRQ3 4.477 5.000 1.523 -0.744 -0.200 



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FRQ4 4.403 4.000 1.582 -0.702 -0.269 

FRQ5 4.300 4.000 1.695 -0.940 -0.113 

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification; LS- Leadership Style;  

AE- Auditors Experience; FRQ- Financial Reporting Quality] 

 

Result of Measurement Model 

The measurement model (reflective in nature) involves the assessment of reliability and validity. Reliability includes items 

reliability and “internal consistency reliability”. To establish the item’s reliability, the loading of each item should be more 

than 0.70. to ensure the internal consistency reliability, the value of composite reliability and the value of Cronbach’s alpha 

should be more than 0.70 (Ali et al., 2018). To assess the convergent validity, the average variance extracted (AVE) value 

should be more than 0.50 (Hair Jr et al., 2013). Table 3 showed that all items loading exceeded the threshold limit (0.70) 

except AI4 (0.570). However, items should not be deleted if AVE is more than 0.50 (Hair et al., 2017). Table 3 showed that 

all AVE of each construct is more than 0.50 and hence item AI4 is retained. Moreover, the value of composite reliability 

and Cronbach’s alpha are more than the threshold limit, and hence reliability and convergent validity of each construct is 

established. For discriminant validity, crossed-loadings and the Fornell–Larcker criterion, and the heterotrait–monotrait 

(HTMT) criterion should be ensured. In the case of crosse loading, the respective items loading of each construct should be 

greater than other items. Table-4 indicated the crossed loading of each items and showed that each item of the particular 

construct are greater than others.  Table-5 showed that all square roots of AVE exceeded their corresponding column & row 

and ensured the criterion of Fornell–Larcker and table-7 also showed that the value of HTMT is close to 1 then considering 

a discriminant validity exists.  

 

Table 3. Items Loading, Cronbach's alpha, Composite reliability, and Average variance extracted 

 
Construct Items Loading Cronbach's alpha Composite reliability (CR) Average variance extracted (AVE) 

Auditors Experiences AE1 0.892 0.897 0.901 0.766 

AE2 0.904 

AE3 0.882 

AE4 0.818 

Auditors 

Independence 

AI1 0.922 0.888 0.918 0.703 

AI2 0.919 

AI3 0.884 

AI4 0.570 

AI5 0.846 

Auditors Proficiency AP1 0.918 0.955 0.956 0.848 

AP2 0.910 

AP3 0.915 

AP4 0.935 

AP5 0.926 

Financial Reporting 

Quality 

FRQ1 0.933 0.952 0.953 0.84 

FRQ2 0.926 

FRQ3 0.906 

FRQ4 0.909 

FRQ5 0.909 

Leadership Style of 

CAE 

LS1 0.915 0.946 0.948 0.824 

LS2 0.887 

LS3 0.890 

LS4 0.925 

LS5 0.920 

Professional 

Qualification 

PQ1 0.921 0.926 0.928 0.819 

PQ2 0.922 

PQ3 0.900 

PQ4 0.874 

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification; LS- Leadership Style; AE- Auditors Experience; FRQ- 

Financial Reporting Quality] 
 

Table 4. Crossed  Loading 
 

AE AI AP FRQ LS PQ 

AE1 0.892 0.639 0.479 0.646 0.406 0.655 

AE2 0.904 0.631 0.465 0.635 0.420 0.647 

AE3 0.882 0.618 0.416 0.568 0.358 0.576 

AE4 0.818 0.604 0.433 0.582 0.349 0.562 

AI1 0.627 0.922 0.712 0.767 0.613 0.752 

AI2 0.653 0.919 0.670 0.720 0.546 0.727 

AI3 0.630 0.884 0.606 0.691 0.540 0.703 

AI4 0.388 0.570 0.621 0.418 0.579 0.417 

AI5 0.651 0.846 0.538 0.644 0.473 0.679 

AP1 0.479 0.685 0.918 0.619 0.731 0.608 

AP2 0.448 0.647 0.910 0.607 0.735 0.587 

AP3 0.467 0.698 0.915 0.620 0.747 0.624 



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AP4 0.471 0.690 0.935 0.617 0.746 0.616 

AP5 0.498 0.701 0.926 0.651 0.744 0.648 

FRQ1 0.652 0.771 0.672 0.933 0.560 0.770 

FRQ2 0.612 0.732 0.640 0.926 0.574 0.753 

FRQ3 0.657 0.701 0.575 0.906 0.528 0.742 

FRQ4 0.633 0.698 0.582 0.909 0.524 0.725 

FRQ5 0.637 0.701 0.628 0.909 0.548 0.730 

LS1 0.380 0.577 0.745 0.513 0.915 0.511 

LS2 0.387 0.575 0.728 0.555 0.887 0.539 

LS3 0.388 0.542 0.698 0.518 0.890 0.529 

LS4 0.433 0.626 0.729 0.568 0.925 0.588 

LS5 0.404 0.606 0.748 0.551 0.920 0.548 

PQ1 0.645 0.764 0.658 0.772 0.596 0.921 

PQ2 0.652 0.739 0.639 0.737 0.567 0.922 

PQ3 0.651 0.697 0.584 0.736 0.509 0.900 

PQ4 0.581 0.676 0.539 0.690 0.492 0.874 

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification;  
LS- Leadership Style; AE- Auditors Experience; FRQ- Financial Reporting Quality] 

 
Table 5.  Fornell-Larcker’s criterion 

 

 AE AI AP FRQ LS PQ 

AE 0.875      
AI 0.712 0.838     
AP 0.514 0.743 0.921    
FRQ 0.696 0.787 0.677 0.916   
LS 0.440 0.646 0.804 0.597 0.908  
PQ 0.699 0.796 0.670 0.812 0.599 0.905 

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification;  

LS- Leadership Style; AE- Auditors Experience; FRQ- Financial Reporting Quality] 

 
Table 6. Heterotrait- Monotrait Ratio (HTMT) 

 

 AE AI AP FRQ LS PQ 

AE       
AI 0.796      
AP 0.553 0.823     
FRQ 0.752 0.848 0.708    
LS 0.475 0.722 0.846 0.628   
PQ 0.765 0.870 0.711 0.863 0.638  

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification;  

LS- Leadership Style; AE- Auditors Experience; FRQ- Financial Reporting Quality] 

 
Result of Structural Model 
According to Janadari et al. (2016) “the structural model and its latent variables represent the stable, theoretically and 

conceptually established contextual link between observed data on the input and output sides”. Hair et al. (2014) propose 5 

steps to assess the structural model. This study uses the first three steps to assess the structural model. First to assess the 

multicollinearity of different items of each construct. This study used the variance inflation factor (VIF) to assess the 

multicollinearity. According to Khan et al. (2019), if the value of VIF is greater than 5, it is assumed that there is 

multicollinearity exists. In this study, the VIF value is less than 5 and there are no issues of multicollinearity (see table 7).  

 

Table 7.  VIF 

Items VIF Items VIF 

AE1 2.886 FRQ1 3.334 

AE2 3.268 FRQ2 4.968 

AE3 2.749 FRQ3 3.836 

AE4 1.932 FRQ4 3.978 

AI1 4.633 FRQ5 3.835 

AI2 4.706 LS1 4.481 

AI3 3.064 LS2 3.274 

AI4 1.280 LS3 3.381 

AI5 2.475 LS4 4.987 

AP1 4.380 LS5 4.388 

AP2 3.952 PQ1 4.146 

AP3 4.176 PQ2 4.195 

AP4 4.321 PQ3 3.075 

AP5 4.530 PQ4 2.672 

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification;  

LS- Leadership Style; AE- Auditors Experience; FRQ- Financial Reporting Quality;  
VIF- Variance Inflated Factor] 



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98 

Second, evaluate the path coefficient. The bootstrapping technique is applied to test the significance of every path 

coefficient (Chin & Dibbern, 2010). “Bootstrapping is a non-parametric-sampling procedure that involves repeated random 

sampling with replacement from the original sample and it is a superior re-sampling method which attempts to approximate 

the sampling distribution of an estimator by resampling with replacement from the original sample” (Janadari et al., 2016, 

p. 191). This study used one tail test with 5000 subsamples at a 95% confidence level. The table-8 showed that AE is a 

positive statistically significant relationship with FRQ (β = 0.169, t = 3.444, p= 0.000). Similarly, AI, AP, and PQ are also  

a positive statistically significant relationship with FRQ respectively [(β = 0.232, t = 3.475, p= 0.000); (β = 0.113, t = 2.150, 

p= 0.016); (β = 0.412, t = 7.437, p= 0.000)]. However, LS is not having a positive statistically significant relationship with 

FRQ (β = 0.035, t = 0.796, p= 0.213). Figure 9 showed the graphical presentation of the structural model. 

 

Table 8. Path Co-efficient 

 
Hypothesis Original sample (O) Sample mean 

(M) 

Standard deviation  

(STDEV) 

T statistics  

(|O/STDEV|) 

P values R-square 

AE -> FRQ 0.169 0.170 0.049 3.444 0.000 0.732 

AI -> FRQ 0.232 0.233 0.067 3.475 0.000  

AP -> FRQ 0.113 0.113 0.052 2.150 0.016  

LS -> FRQ 0.035 0.036 0.044 0.796 0.213  

PQ -> FRQ 0.412 0.410 0.055 7.437 0.000  

[Note: AI- Auditors Independence; AP- Auditors Proficiency; PQ- Professional Qualification; LS- Leadership Style; AE- Auditors  

Experience; FRQ- Financial Reporting Quality] 

 
Third, to assess the predictive power and which is determined by the use of the R square. The value of R squire 

means the amount of variance in the construct that is explained by the model R-square indicates the amount of variance 

explained by the exogenous variable in its endogenous counterpart” (Janadari et al., 2016, p. 191). Moreover, it shows the 

quality of every construct (Hair Jr et al., 2014). The value R square is from zero to 1 where zero indicates that there is no 

predictive relevance and 1 indicates the perfect prediction relevance. According to Hair et al. (2011), the value of R square 

is 0.25, 0.50, 0.75 means weak, moderate, and substantial levels of predictive accuracy respectively. The R square value in 

this study is 0.732 which indicates that there is a moderate level of accuracy exists (see table 8). 

 

 
Figure 9. Graphical Presentation of the Structural Model 

 

DISCUSSIONS 

The findings of the study suggested that auditors’ experiences have a positive significant relationship with financial 

reporting quality and H1 is supported. This supported hypothesis revealed that when the auditor has enough experience, 

then the auditors can easily identify the fraud or error in the organization, and also understand the nature of the fraud and 

the reason for the fraud or error. Moreover, due to the auditor's experience, they can give the idea of how to manage those 

irregularities, and thus the management can control all these unexpected activities that reflect in the financial reporting 



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99 

quality. Previous research findings have supported this finding. For example, Zain et al. (2006) reported that due to the 

experience of internal auditors, they engage with external auditors to help financial statements audit, and hence external 

auditors rely on internal auditors in many cases, and based on this, when the external audit report is issued, users have a 

positive perception of the financial statements, which indicates reporting quality. Similarly, Gaballa and Ning (2011) 

recommended that internal auditors having accounting and financial experience that can assist by giving consulting services 

to those who prepare financial reporting with direction and advice to ensure financial reporting quality. The findings also 

revealed that auditor’s independence has a positive significant relationship with financial reporting quality and H2 is 

supported. It indicated that when the internal auditor is completely free from management pressure and free access to all 

departments and getting all types of relevant information at any time, then internal auditors provide appropriate consulting 

and assurance services that help to prepare financial reporting. When managers use these independent reports to analyze 

various data and include them in the financial statements then the relevancy of the financial statements is increased. Financial 

statement information is heightened when managers use these independent reports from internal auditors. Past studies 

supported this finding. For example, Shireenjit (2013) recommended that When internal auditors audit the financial 

statements independently, the organization decreases and the earnings quality would be increased and consequently earnings 

management would be reduced which indicates the quality of the financial statement. Similarly, Alzeban and Gwilliam 

(2014) found in Saudi Arabia that independence influences the review of financial reporting that will meet the stakeholder’s 

need.  

In addition to that auditor’s proficiency is have a positive significant relationship with financial reporting quality 

and H3 is supported. It indicated that when internal auditors gain proficiency through continuous development and training 

and through acquiring adequate organizational knowledge, it is easy to assess whether the rules and regulations of the 

organization are being complied, and whether their operations are effective operation. Moreover, organizational governance 

is ensured that influences financial reporting quality. If internal auditors do not have sufficient skills, they often do not 

understand the nature of the organization's transactions, which creates problems for giving assurance and consulting 

services. Furthermore, auditors have sufficient knowledge of rules and regulations that lead to identifying weaknesses in 

financial reporting. Previous studies have supported this finding. For example, Arena and Azzone (2009) stated that when 

the auditor is competent, management implements the internal audit report in the organization, thereby reducing many of 

the irregularities and bringing transparency to the financial statements. Similarly, Alzeban and Gwilliam (2014) supported 

that competent internal auditors influence the quality of financial statements. The findings of this study also stated that an 

auditor’s professional qualification has a positive significant relationship with financial reporting quality and H5 is 

supported. It indicated that professional qualification like CIA, CGAP, CCSA, CRMA, and CFSA increases the scope of 

work of internal auditors and because of this, any weakness can be identified in a very short period of time and suggestions 

can be made accordingly on how to solve this weakness and managers get the direction from this while preparing financial 

reports. Past studies also support this finding. For example, Al-Matari et al. (2014) stated that auditors who are professionally 

qualified can find out any mistake in the organization within a short period of time and give prompt suggestions accordingly 

so that the manager can employ that suggestions while making the financial report. Similarly, Hutchinson and Zain (2009) 

also stated that professionally qualified internal auditors influence organizational performance.  

However, the findings of this study showed that no positive significant relationship between the leadership style of 

CAE and financial reporting quality, and H4 is not supported. It means that transformational leadership where priority is 

given to subordinates does not affect financial reporting quality. Always giving priority to subordinates leads to many 

mistakes in work and in some cases neglect of work. This finding is consistent with other prior studies. For example, Hay 

(2006) stated that when subordinates wait for direction due to less competence and that time if they are allowed to work 

independently then the proper output is not obtained from them. Similarly, (Stone et al., 2004, p. 4) perceive that 

“transformational leaders can exert a very powerful influence over followers, who offer them trust and respect”.  

 

CONCLUSIONS  

The current study aims is to examine the relationship between internal auditor’s characteristics and financial reporting 

quality in the context of Bangladesh. Based on the literature review, this study used five important individual characteristics 

such as auditors’ independence, auditors’ proficiencies, professional qualification, the leadership style of chief audit 

executive, and auditor’s experiences. Findings revealed that professional qualification has the highest positive impact on 

financial reporting quality. In addition to that findings also showed that auditors proficiencies, auditors independence, and 

auditor experiences has also positive impact on financial reporting quality. However, the result indicated that there are no 

positive significant effects of the leadership style of CAE on the financial reporting quality.  

This study helps the internal auditor in many ways especially how the characteristics of internal auditors affect the 

outcome of their work particularly on the financial reporting quality. Chief audit executives can learn from this study that 

transformational leadership will not be effective when internal auditors rely too much on direction having their incapability. 

Top management and the audit committee can learn from this study what qualifications and qualities internal auditors should 

possess management appoints internal auditors by looking at those characteristics or ensuring those characteristics by proper 

training. Top management and regulators also learn from this finding when and how internal auditors can contribute to 

internal reporting quality. 

This study has some limitations. Firstly, this study considers only the banking sector which is a highly regulated 

sector in Bangladesh. Future research may consider non-banking like insurance, non-banking financial institution, and 

industrial sector even listed or non-listed to see if is there any variation in the results or not. Secondly, Bangladesh as a 



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100 

developing country has been considered in this study. In the future, developed countries can be considered to identify the 

characteristics of internal auditors that impact on financial reporting quality. Third and finally, the quantitative approach is 

used as a methodology in this study. In the future, qualitative study where interviews can be conducted to find out what 

other qualities auditors need to contribute to financial reporting quality. 

In summary, considering the contribution of the banking sector to the economy of Bangladesh, this study is to 

explore the positive significant relation between characteristics of internal auditors (auditor’s independence, auditor’s 

experiences, professional qualification, auditors’ proficiencies, and leadership style of CAE) that has an impact (except 

leadership style) on the financial reporting quality. Future studies can be considered in developed countries and non-banking 

companies may examine how internal auditor characteristics affect financial reporting quality. 

 

 
Author Contributions: Conceptualization, M.G.S.H.K.; Methodology, M.G.S.H.K.; Software, M.G.S.H.K.; Validation, M.G.S.H.K.; Formal Analysis, 

M.G.S.H.K.; Investigation, M.G.S.H.K.; Resources, M.G.S.H.K.; Data Curation, M.G.S.H.K.; Writing – Original Draft Preparation M.G.S.H.K.; Writing 

– Review & Editing, M.G.S.H.K.; Visualization, M.G.S.H.K.; Supervision, M.G.S.H.K.; Project Administration, M.G.S.H.K.; Funding Acquisition, 

M.G.S.H.K. Authors have read and agreed to the published version of the manuscript. 

Institutional Review Board Statement: Ethical review and approval were waived for this study, due to that the research does not deal with vulnerable 

groups or sensitive issues. 
Funding: The authors received no direct funding for this research. 

Acknowledgments: Not applicable. 

Informed Consent Statement: Informed consent was obtained from all subjects involved in the study. 
Data Availability Statement: The data presented in this study are available on request from the corresponding author. The data are not publicly available 

due to restrictions. 

Conflicts of Interest: The authors declare no conflict of interest.  

 

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