Beyond Independence: Auditor Competency, Audit Quality and Fraud Detection in Public Sector Internal Auditing

Abstract

Purpose This study aims to examine the influence of auditor competency, auditor independence and audit quality on internal audit effectiveness in detecting fraud within Malaysian public sector organisations. Design/methodology/approach The research design employed is quantitative research design using data collected from a sample of internal auditors from Malaysian public sector organisations. The data was collected by means of a questionnaire survey from a sample of internal auditors from various government ministries, departments, and statutory bodies. The total sample size for this research is 210. The data collected has been analyzed using various quantitative data analysis techniques such as descriptive statistics, reliability analysis, correlation analysis, and regression analysis. To ensure methodological rigor of the research, additional tests such as Harman’s single factor test for common method bias and VIF test for multicollinearity have also been conducted. Findings The results show that auditor competency and audit quality are significant determinants of internal audit effectiveness in the detection of fraud, while auditor independence does not show a statistically significant relationship with internal audit effectiveness in the detection of fraud. Audit quality is found to be the most significant predictor of fraud detection capability, which implies that audit procedures and processes of evaluation are very significant in enhancing the internal audit capability of detecting fraud in the processes of the organisation. Research limitations/implications The focus of the study is internal auditors who operate within public sector organisations in Malaysia, and as such, the results may not be universally applicable. Another limitation is that the study is based on perceptions and not direct observation of fraud detection practices. Practical implications In addition, the policymakers and government agencies should invest in specialized training programmes on fraud detection techniques. Moreover, strengthening the audit quality framework and implementing stringent audit procedures also contribute to fraud detection capabilities. Originality/value The study contributes to the internal auditing literature in that it provides empirical evidence on the factors that affect internal audit effectiveness in detecting fraud in the public sector in an emerging economy, thereby refuting the conventional wisdom that internal audit effectiveness depends on internal audit independence. It also provides empirical evidence that internal audit professional competency and audit quality are more critical success factors in improving internal audit effectiveness in detecting fraud.