Moderating Effect of Sustainable Innovation on Internal Audit Effectiveness and Sustainability Auditing Practices: Evidence from Libya’s Public Sector

This study aims to investigate how sustainable innovation (SI) influences the relationship between internal audit effectiveness (IAE) and sustainability auditing (SA) practices in Libya’s public sector, providing valuable insights into its implications for public finance governance and financial regulation. Additionally, it examines how audit standards and principles (ASPs) on SA practices emphasising their role in enhancing transparency, environmental, social, and governance (ESG) compliance, and overall financial oversight. A quantitative, cross-sectional survey design was employed, collecting 500 valid responses from financial and governmental institutions in Libya. Hierarchical regression and partial least squares structural equation modeling (PLS-SEM) were used to evaluate the relationships among IAE, SI, ASP, and SA practices, with robustness checks ensuring the reliability of findings. The findings demonstrate that IAE significantly reinforces SA practices, improving ESG accountability and reporting. SI positively moderates this relationship, indicating that innovative processes and tools strengthen the impact of effective internal audits on sustainability outcomes. Although ASP contributes to SA practices, its influence is more pronounced when combined with robust internal audit functions and sustainability initiatives. The results underscore the need to integrate innovation and transparent regulatory frameworks to optimise sustainability auditing and public finance management. While the study is confined to Libya’s public sector—potentially limiting broader generalizability—its insights may inform policy reforms and risk management strategies across diverse regulatory environments. Future research could include comparative analyses to investigate variations in other emerging or developed markets. This study adds to the literature by linking SI and ASP with internal audit frameworks, offering fresh perspectives on enhancing SA practices and ESG compliance in public finance settings.