Research On The Impact Of Internal Audit On Financial Performance Of Commercial Banks

In the recent years,business environment has become highly competitive and fraught with risks due to the complex and unsimplified regulatory framework that all parties must follow.However,every organization faces some level of risk in the daily operations,some others stand out from their competitors by strategic plans that address potential threats.Thus,internal audit is one of the main strategies for ensuring good governance and providing owners and stakeholders with accurate information about the institution’s status.Thus,internal audit ensures that institutions and companies are complying with laws,avoiding errors that could occur during external audits,and avoiding fines.Internal audit is vital in evaluating an organization’s internal controls,including accounting and corporate governance.These internal audits ensure legal and regulatory compliance,as well as accurate data collection and timely financial reporting.Internal audit can thus be viewed as a long-term investment for institutions and businesses.The Arab countries are expected to see significant development and organizational changes as a result of the significant growth of good governance principles in these countries.Moreover,in recent years,institutions have been asked to implement many modern regulatory and technological requirements to facilitate financial transactions.As a result of which,this thesis will examine how internal audit practices affect commercial banks’ financial performance.The study examines the impact of six factors on financial performance,including the application of international standards for internal auditing;independence and objectivity of internal audit members;quality and professionalism of internal audit members;gender diversity in the internal audit department;the existence of audit committees;and senior management support for internal audit.This study also looks into the role of internal audit performance in mediating the relationship between internal audit factors and financial performance.This thesis uses questionnaires to collect data from 34 commercial banks in five Arab countries: Saudi Arabia,Yemen,Sudan,Somalia,and Djibouti.The interview was also used to expand the process of verifying the results obtained from the questionnaire.Also,the thesis’ theoretical part was based on data from published reports,from the Institute of Internal Auditors and reports from countries under investigation.Descriptive,multiple regression and structural equation modeling(SEM)were performed using SPSS,AMOS and Smart PLS 3.3.3.The thesis results are as follows:Firstly,adopting international standards for internal auditing by commercial banks improves the performance of internal audits,which improves the financial performance of commercial banks.Which contributes to improving transparency,internal audit department independence,identifying risks quickly,applying the principle of accountability,strengthening control,and activating auditor functions as required.Secondly,internal auditors must be independent and objective,as this is the main point that can improve audit performance and thus financial performance in commercial banks.To summarize,having these characteristics means protecting banks’ funds from fraud,achieving high-quality performance,lowering debt costs,and thus enhancing performance.Finally,the independence of internal audit members ensures the value of internal audit functions.Thirdly,contrary to expectations,the SEM analysis revealed that internal audit members’ professional competence has no impact on commercial banks’ financial performance.Many reasons exist for this,including a lack of knowledge among stakeholders about the importance of internal audit function in enhancing and improving performance,as internal audit tasks are still believed to be limited to(detection of fraud)due to factors such as family ownership of commercial banks,and the majority of commercial bank employees(Accountant).Fourthly,the results of the analysis showed a positive impact on the financial performance of commercial banks,although the sample of the specialized study only included 24 percent females,there is an emphasis on the importance of females in the internal audit department and financial departments.The results confirmed that females have different psychological characteristics and leadership styles than males,enhancing control activities and contributing to better relationships and communication with various parties,including internal and external auditors and audit committees.The results also confirmed females’ high degree of autonomy.Fifthly,there is a positive relationship between audit committee existence and meeting frequency in commercial banks and financial performance.Additionally,the presence of a sufficient number in the audit committees with their enjoyment of financial and accounting expertise may contribute to directing the internal audit department in improving performance will contribute to improving the internal audit department’s performance and thus improving financial performance.Sixthly,the results revealed a positive and significant relationship between top management support of commercial banks,internal audit department,and financial performance.Supporting internal audit independence and providing all necessary needs by management with financial and accounting expertise has a significant and positive impact on commercial banks’ financial performance.It is confirmed that senior management must have extensive financial and accounting knowledge of all bank operations,as well as gender diversity to support the internal audit department’s performance,which is reflected in commercial banks’ financial performance.Seventhly,the SEM test was employed to explore the link between independent and dependent variables and the mediator indicated in audit performance.Despite the findings,the relationship between internal audit and financial performance is not mediated by audit performance.As a result,the variables used to assess internal audits and the dependent variable represented by financial performance have only a direct relationship.A significant contribution to the field of finance is made by this thesis,which is a first look in Arab countries using several factors at the current state of practice of internal auditing and the role it plays in improving financial performance.The findings of this thesis can be used by regulators,such as the Institute of Internal Auditors,bank owners and managers,government agencies in the countries studied,and central banks.