Assessing the relationship between the level of disclosed internal control and audit fees of companies

Abstract

This study focused on assessing the relationship between the level of disclosed internal control and audit fees in companies. To guide the assessment of disclosed internal controls, an internal control disclosure index was developed and populated using information from websites and integrated reports of the JSE’s Top 40 companies, published between 2020 and 2022. Measuring the index enabled the study to assess the relationship between disclosed internal controls and audit fees.

The internal control disclosure index is based on the five components and 17 principles of the Committee of Sponsoring Organizations' guidance on internal control. This study expanded on the 17 principles by adding 37 elements to direct the measurement of the five components and define the index. A directed content analysis was used to populate the index by manually collecting information from the companies’ integrated reports and websites. The results were analysed using a multiple regression model as well as a panel analysis model to assess the relationship between the index and audit fees.

The index showed variable results, with the highest disclosure value being obtained in 2020, suggesting higher levels of signalling in the COVID-19 lockdown periods, and demonstrating agility in implementing internal controls during this global disaster. As predicted, the index showed a negative relation between internal controls and audit fees, but it was not significant. Only information and communication showed a significant negative relation to audit fees for the individual control component.

This study developed the first internal control index for listed companies in South Africa. The index’s value is that it can assist senior managers to refine the level of internal control disclosed by their company, and to improve stakeholder decisions. In addition, the index can assist institutional shareholders or other stakeholders in refining their assessment of internal controls used by companies over time, and between companies.