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Do Internal Auditors Improve Firms’ Working Capital Management?

This paper investigates the relationship between internal audit and the working capital management (WCM) of Malaysian public-listed firms. Good WCM is vital as it drives profitability. Anecdotal evidence suggests that the inventory conversion period is the most challenging part of WCM for Malaysia...

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Main Authors: Hari Haran Karnanidi,, Amirul Hafiz Mohd Nasir,
Format: Article
Language:English
Published: Penerbit Universiti Kebangsaan Malaysia 2022
Online Access:http://journalarticle.ukm.my/21481/1/AjA_12.pdf
http://journalarticle.ukm.my/21481/
https://ejournals.ukm.my/ajac/issue/view/1555
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spelling my-ukm.journal.214812023-04-17T01:29:05Z http://journalarticle.ukm.my/21481/ Do Internal Auditors Improve Firms’ Working Capital Management? Hari Haran Karnanidi, Amirul Hafiz Mohd Nasir, This paper investigates the relationship between internal audit and the working capital management (WCM) of Malaysian public-listed firms. Good WCM is vital as it drives profitability. Anecdotal evidence suggests that the inventory conversion period is the most challenging part of WCM for Malaysian firms. In 2017, around RM71 billion in cash was locked up in working capital and thus suggesting that Malaysian public-listed firms are struggling with WCM. Based on this issue, we are therefore motivated to examine the association between the role of internal audit and WCM in publicly listed firms in Malaysia. Specifically, we would like to examine whether internal audit cost relates to better firms’ WCM. We proxy WCM by the cash conversion cycle (CCC) ratio. With a sample of 309 firm-year observations, we observed a negative and significant relationship between internal audit cost and CCC. The findings suggest that an increase in internal audit cost improves firms’ operational efficiency and effectiveness, hence improving firms’ CCC ratios. Furthermore, we find consistent results on the influence of the internal auditor on two of three components of CCC, namely the inventory conversion and the receivables collection periods. Finally, our additional analysis demonstrates that CCC and internal auditing are critical components of firms’ performance. By adding the role of internal audit in WCM, this study contributes to a further understanding of the role of internal auditor in agency theory. This study contributes to senior management of publicly listed firms that the cost incurred internal auditing function is an investment that helps improve WCM efficiency. Penerbit Universiti Kebangsaan Malaysia 2022 Article PeerReviewed application/pdf en http://journalarticle.ukm.my/21481/1/AjA_12.pdf Hari Haran Karnanidi, and Amirul Hafiz Mohd Nasir, (2022) Do Internal Auditors Improve Firms’ Working Capital Management? Asian Journal of Accounting and Governance, 18 . pp. 165-175. ISSN 2180-3838 https://ejournals.ukm.my/ajac/issue/view/1555
institution Universiti Kebangsaan Malaysia
building Tun Sri Lanang Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Kebangsaan Malaysia
content_source UKM Journal Article Repository
url_provider http://journalarticle.ukm.my/
language English
description This paper investigates the relationship between internal audit and the working capital management (WCM) of Malaysian public-listed firms. Good WCM is vital as it drives profitability. Anecdotal evidence suggests that the inventory conversion period is the most challenging part of WCM for Malaysian firms. In 2017, around RM71 billion in cash was locked up in working capital and thus suggesting that Malaysian public-listed firms are struggling with WCM. Based on this issue, we are therefore motivated to examine the association between the role of internal audit and WCM in publicly listed firms in Malaysia. Specifically, we would like to examine whether internal audit cost relates to better firms’ WCM. We proxy WCM by the cash conversion cycle (CCC) ratio. With a sample of 309 firm-year observations, we observed a negative and significant relationship between internal audit cost and CCC. The findings suggest that an increase in internal audit cost improves firms’ operational efficiency and effectiveness, hence improving firms’ CCC ratios. Furthermore, we find consistent results on the influence of the internal auditor on two of three components of CCC, namely the inventory conversion and the receivables collection periods. Finally, our additional analysis demonstrates that CCC and internal auditing are critical components of firms’ performance. By adding the role of internal audit in WCM, this study contributes to a further understanding of the role of internal auditor in agency theory. This study contributes to senior management of publicly listed firms that the cost incurred internal auditing function is an investment that helps improve WCM efficiency.
format Article
author Hari Haran Karnanidi,
Amirul Hafiz Mohd Nasir,
spellingShingle Hari Haran Karnanidi,
Amirul Hafiz Mohd Nasir,
Do Internal Auditors Improve Firms’ Working Capital Management?
author_facet Hari Haran Karnanidi,
Amirul Hafiz Mohd Nasir,
author_sort Hari Haran Karnanidi,
title Do Internal Auditors Improve Firms’ Working Capital Management?
title_short Do Internal Auditors Improve Firms’ Working Capital Management?
title_full Do Internal Auditors Improve Firms’ Working Capital Management?
title_fullStr Do Internal Auditors Improve Firms’ Working Capital Management?
title_full_unstemmed Do Internal Auditors Improve Firms’ Working Capital Management?
title_sort do internal auditors improve firms’ working capital management?
publisher Penerbit Universiti Kebangsaan Malaysia
publishDate 2022
url http://journalarticle.ukm.my/21481/1/AjA_12.pdf
http://journalarticle.ukm.my/21481/
https://ejournals.ukm.my/ajac/issue/view/1555
_version_ 1765297863433125888
score 13.211869

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