Internal audit function and the precision and accuracy of management forecasts

Management forecasts represent voluntary corporate disclosures, intended to communicate information about firms’ future performance and reduce information asymmetry between management and shareholders. While prior studies have explored factors that are likely to influence the quality of management forecasts, our study focuses on the role of the internal audit function (IAF) as a critical determinant of effective corporate governance. Specifically, we investigate the relationship between the quality of the internal audit function and the accuracy and precision of management earnings forecasts. Based on data drawn from a sample of firms surveyed by the Institute of Internal Auditors, our results indicate that firms with high quality IAFs are likely to report management forecasts that are not only more accurate but are also more precise, compared to firms with low quality IAFs. Our study provides empirical evidence that IAF quality is a good indicator of the effectiveness of corporate governance, and is associated with the quality of financial disclosure, measured in terms of the accuracy and precision of management forecasts. Our research contributes to the extant literature by highlighting the critical role of the IAF as an important management function to ensure greater precision and accuracy of earnings forecasts.