Internal Audit Size and Financial Reporting Quality: The Moderating Role of Audit Committee Size

Abstract

Purpose – This study examines the association between internal audit size and an accrual-based financial reporting quality proxy and tests whether audit committee size moderates this association among financial-sector companies listed on the Indonesia Stock Exchange (IDX). Methods – Using annual reports and audited financial statements, the study analyzes 95 financial-sector companies listed on the IDX during 2021–2025, yielding 475 firm-year observations. Internal audit size is measured by the number of internal audit personnel and audit committee size by the number of committee members. The dependent variable is 1 − |DA|, where DA is discretionary accruals estimated using the Modified Jones Model. The analysis uses the Common Effect Model with mean-centered interaction terms and firm-clustered covariance. Findings – Internal audit size is positively associated with the accrual-based financial reporting quality proxy (β = 0.067829; p < 0.001), as is audit committee size (β = 0.059631; p < 0.001). Their interaction is negative and insignificant (β = −0.000508; p = 0.9351). Research Implications – The results concern numerical governance size and an accrual-based reporting measure and should not be interpreted as evidence of governance effectiveness or causality. Originality – The study provides context-specific evidence on separate size associations and the absence of detectable size-based moderation in Indonesian financial-sector companies.