Does the supervisory ability of internal audit executives affect the occurrence of corporate fraud? Evidence from small and medium-sized listed enterprises in China

Purpose - Internal audit executives instruct the internal audit department to supervise corporate business management activities, evaluate internal controls and risks and provide recommendations for operating. Therefore, this paper aims to confirm whether and how the supervisory ability of the chief internal audit executive enhances the internal audit department’s function to prevent corporate fraud. Based on the results, this paper further researches the role of the supervisory board position in this relationship. Design/methodology/approach - This paper examines 922 small and medium-sized listed enterprises in China from 2010 to 2017 and empirically investigates the influence of the internal audit executive’s supervisory ability (IAESA) on the occurrence of corporate fraud. Findings - The results reveal that the IAESA is significantly negatively correlated with the occurrence of corporate fraud. This suppression effect is more pronounced when the internal audit executive is also the company’s supervisor. However, if the internal audit executive is the chairman of the board of supervisors, the suppression effect no longer exists. This paper therefore confirms that the IAESA curbs corporate fraud via the improvement of the internal corporate control level. Research limitations/implications - Because the sample data was limited by the information disclosure level of the included companies, the sample size was relatively small as compared with those of other studies. Practical implications - This study not only expands the research perspective in the field of internal audit functions but also provides a decision-making reference for the prevention of corporate fraud. Social implications - This paper extends an approach that might be able to curb corporate fraud. Originality/value - A comprehensive index was developed using data envelope analysis to quantify the supervisory ability of internal audit executives. Based on this, this research confirms that the internal audit department performs a “firewall function” to prevent corporate fraud.