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Audit committee effectiveness,
internal audit function and
sustainability reporting practices
Zainabu Tumwebaze, Juma Bananuka, Twaha Kigongo Kaawaase,
Caroline Tirisa Bonareri and Fred Mutesasira
Department of Accounting, Makerere University Business School,
Makerere University, Kampala, Uganda
Abstract
Purpose –The purpose of this study is to examine the association between audit committee effectiveness
(ACE), internal audit function (IAF) and sustainability reporting practices.
Design/methodology/approach –Using a cross-sectional and correlational design, useable questionnaires
were received from 48 financial services firms in Uganda. The data were analyzed using Statistical Package for
Social Sciences.
Findings –results indicate that ACE and IAF are positively and significantly associated with sustainability
reporting practices. ACE and IAF are more significantly associated with economic and social indicators than
environmental sustainability indicators.
Research limitations/implications –In terms of practice, it is no longer a matter of having internal
auditors and audit committees in place but rather those who are mindful of the welfare of society and the
natural environment. The effectiveness of the board audit committee and a functioning internal audit can be
assessed in terms of their recommendations and decisions regarding improvements in the welfare of society
and the natural environment in addition to the traditionally known performance benchmarks.
Practical implications –The study focuses on only financial services firms in Uganda, and this is a small
sample. Future studies may focus on larger samples to enable comparison of the results.
Originality/value –This study provides insights on the initial understanding of the association between
ACE, IAF and sustainability reporting practices using evidence from a developing African country –Uganda.
Keywords Sustainability reporting practices, Audit committee effectiveness, Internal audit function,
Legitimacy theory, Agency theory, Uganda
Paper type Research paper
1. Introduction
Over the years, there is growing interest in sustainability reporting practices among
academicians, practitioners and policy makers, though evidence from developing countries is
scant (Tauringana, 2021). Sustainability reporting provides a platform for provision of
information on economic, social and environmental performance to various stakeholders
unlike the traditional financial reporting which provides information on only financial
performance (De Villiers and Sharma, 2020). Sustainability reporting is one of the
mechanisms to promote accountability for the use of natural resources in provision of
Sustainability
reporting
practices
© Zainabu Tumwebaze, Juma Bananuka, Twaha Kigongo Kaawaase, Caroline Tirisa Bonareri and Fred
Mutesasira. Published by Emerald Publishing Limited. This article is published under the Creative
Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create
derivative works of this article (for both commercial and non-commercial purposes), subject to full
attribution to the original publication and authors. The full terms of this licence may be seen at http://
creativecommons.org/licences/by/4.0/legalcode
The authors are grateful for the financial support received from Government of Uganda through
Makerere University Business School under the Faculty of Commerce research funding. The authors
wish to thank the respondents for being cooperative. Thank you also to the Editors and anonymous
reviewers of Asian Journal of Accounting Research for the constructive comments and timely feedback.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2443-4175.htm
Received 15 March 2021
Revised 7 June 2021
23 August 2021
Accepted 11 September 2021
Asian Journal of Accounting
Research
Emerald Publishing Limited
2443-4175
DOI 10.1108/AJAR-03-2021-0036
products or services among firms, improves company image, motivates the workforce and
enables competitiveness (Journeault et al., 2021;Orazalin and Mahmood, 2018;Cho et al.,
2015). Sustainability reporting contributes to the achievement of sustainability and
sustainable development goals (SDGs). The achievement of SDGs in every country is
made possible through companies’reporting practices which are vital for enhancing decision-
making. One of such companies that should improve sustainability reporting practices are
financial services firms. Whereas manufacturing firms are known for polluting the
environment through release of gas emissions and wastes to the environment, financial
services firms are known for provision of funding to the manufacturing firms. This means
that if financial services firms such as banks can require sustainability reports for
manufacturing firms to access funding, then it is possible that all entities will prepare
sustainability reports.
The Global Reporting Initiative (GRI) is the most popular organization for provision of
guidelines for sustainability reporting. In 2016, GRI released the GRI standards and became
effective in 2018. This was because of the desire to have sustainability reports that not only
capture the good news but also the negative effects of company activities. Earlier scholars
such as Cho et al. (2015) indicated that there is a huge gap between sustainability talk and
actions which means that firms were preparing sustainability reports not fully following the
GRI guidelines/standards. With the emergence of the GRI standards 2016, there is a
likelihood of relief if companies can adopt such standards. Presently, there is a move by the
IFRS foundation to develop sustainability reporting standards which will be based on the
existing works of global organizations such as GRI. Unfortunately, the IFRS foundation move
on sustainability reporting practices is investor focused rather than society focused as it has
been. Such a move is likely to worsen the situation. The current GRI standards once fully
adopted by companies, it is likely that the planet (source of raw materials), people (market for
company products) and profits (share holders’wealth) will be fully accounted for by
respective organizations. Otherwise, there are still a number of climate-related challenges
such as prolonged droughts, high temperatures, increased pollution and diseases in most
parts of the world (World Meteorological Organization, 2021).
In Africa, there is some progress on sustainability reporting, especially in South Africa
where it has been made mandatory. In Uganda, sustainability reporting practices are still low
and voluntary. By December, 2019, there were only 10 companies in Uganda that had their
sustainability reports uploaded on GRI website (GRI, 2019) of which only two companies
prepared their sustainability reports in compliance with the GRI standards. The
sustainability reports of five companies are categorized as non GRI reports, and the other
companies’reports are categorized as GRI citing. Based on the GRI (2019), out of the 10
companies having their sustainability reports uploaded on the GRI website, only four (about
40%) companies are financial services firms. This means that of the 67 financial services
firms, only 6% prepare sustainability reports and upload them on the GRI website. However,
on checking individual websites of financial services firms, we found that more firms were
preparing sustainability reports but were not uploading them on the GRI website. Such firms
include Centenary Bank, DFCU bank and Kenya Commercial Bank among others. According
to Tauringana (2021), 80% of members of Uganda Manufacturers’Association (UMA)
prepare sustainability reports. This study believes that corporate governance mechanisms
such as the audit committee effectiveness (ACE) and the internal audit function (IAF) are
responsible for promoting sustainability reporting practices in financial services firms.
From literature, there are studies that focus on corporate governance mechanisms and
sustainability reporting (see, Amran et al., 2014;Shamil et al., 2014;Amidjaya and Widgdo,
2019;Karaman et al., 2020;Correa-Garcia et al., 2020). Amidjaya and Widagdo (2019) found
that sustainability reporting is influenced by corporate governance, foreign ownership and
family ownership using evidence from Indonesian banks. Further, Amran et al. (2014) found
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that governance structures, especially the board of directors and corporate social
responsibility strategies, are significant for sustainability reporting quality in the Asian
Pacific region. However, Amran et al. (2014) indicated that there is need to examine the
association between ACE and sustainability reporting quality. Earlier, the King III report of
South Africa (2009) had commended the audit committee to review issues of sustainability
disclosures and ensure credibility and reliability of the information disclosed in the
sustainability reports. Further, using evidence from 59-listed banks from the Gulf
Cooperation Countries (GCC), Buallay and Al-Ajmi (2019) found that audit committee size,
independence and meetings have significant and positive relationship with sustainability
reporting practices.
Studies that link ACE in terms of their role performance and IAF to sustainability
reporting practices are scarce on the African scene, especially Uganda. Whereas Dominic
and Martinov-Bennie (2015) documented that IAF is involved in sustainability reporting
by providing assurance on the economic, social and governance of a firm, their study was
conducted from Australia which is a developed country as compared to Uganda. Audit
committees are largely known for ensuring quality of the reports. However, an effective
audit committee reviews and makes recommendations on the financial and nonfinancial
information of the company. In countries such as Uganda, audit committees are expected
to participate in risk management processes and as such if there are risks associated with
lack or poor sustainability reporting practices, the audit committee is expected to report
suchtotheentireboard.IntheUganda’s Financial Institutions Act of 2004, the audit
committee is part of the board. The board is the overall governing body of the company
and as such any decisions made by the board are bound to the company. We therefore
argue that the audit committee is involved in making decisions regarding the adoption of
or improvement in sustainability reporting practices. For the IAF, one of the roles it plays
is to ensure that there is regulatory compliance and risk management. In executing its role
on regulatory compliance, the internal audit is expected to ensure that the organization
complies with the environmental laws. The environmental laws applicable in Uganda are
the National Environmental Act of 2019 which provides for several disclosure
requirements such as disclosure on the usage of hazardous materials and waste
management.
Uganda is one of those countries with a high population growth rate and somehow relaxed
policies on environmental protection. This means that the internal mechanisms such as the
IAF and the audit committees have to play a big role to ensure that environmental-related
issues are taken care of in the process of entity operations. Given that Uganda is an emerging
country and encouraging foreign investors to come into the country, the effect of such
investors’activities on the environment are handled gently, and as a result, it is expected that
in the next about 100 years from 2016, Uganda will have no wetland left if the current trend is
maintained.
In this study, we build on the existing literature such as Amran et al. (2014) by conducting
a study on the association between ACE, IAF and sustainability reporting practices using
evidence from Uganda. This is done through a questionnaire survey of Chief Finance Officers
and Internal audit managers of financial services firms in Uganda. Of the 62 financial services
firms in Uganda considered for this study, useable responses were received from 48 firms.
The composition of 48 financial services firms is 22 commercial banks, 23 insurance firms
(both life and nonlife assurance) and three micro deposit taking institutions. The study finds
that both ACE and IAF have a positive and significant association with sustainability
reporting practices in Uganda.
The reminder of the paper is structured as follows. The succeeding section discusses the
literature review, and this is followed by methodology. The penultimate section is results and
lastly, discussion and concluding remarks.
Sustainability
reporting
practices
2. Literature review
2.1 Theoretical foundation
We employ the agency and legitimacy theories in explaining the association between ACE,
IAF and sustainability reporting practices. The agency theory as proposed by Jensen and
Meckling (1976) assumes that human beings have selfish interests, and there are bound to be
conflicts between resource providers and managers. The resource providers appoint the
board to monitor the actions of management. The board of directors minimizes agency
problems through putting in place internal monitoring mechanisms such as the audit
committees and the IAF. The audit committees and the IAF are expected to monitor closely
the activities of management. This is done through promotion of improved reporting
practices such as sustainability reporting practices. With the improved sustainability
reporting practices, accountability for all the resources entrusted to the managers is fully
achieved. This resonates Bananuka et al. (2018), who suggested that for proper
accountability, there must be an effective audit committee and a functioning internal audit.
The foundation of the agency theory is shareholders’wealth maximization and as such,
managers are expected to make sufficient disclosures to the satisfaction of the shareholders.
The financial institutions have a number of stakeholders such as clients, regulators, civil
society organizations, among others, whose expectations go beyond those of the
shareholders. Where the activities of an organization do not meet the expectations of the
society in which it operates, then there is a legitimacy gap (Guthrie et al., 2007), and this must
always be closed by those charged with governance such as the board audit committee.
Legitimacy is described by Suchman (1995) as a generalized assumption that the
organization’s actions are desirable and appropriate within some socially constructed system
of norms, values, beliefs and definitions. Legitimacy theory assumes that organizations
continually seek to ensure that they operate within the bounds and norms of their respective
societies. Organizations voluntarily report on their overall activities if management considers
those activities to be expected by the communities in which they operate (Guthrie et al., 2007).
This can be made possible if there are effective audit committees and functioning internal
audit departments. Firms with effective audit committees and IAF are likely to prepare
sustainability reports that are unbiased. Firms whose audit committees and IAF are not
sensitive to the demands of the general society are more likely not to prepare sustainability
reports. The audit committees and the IAF need to ensure that firms prepare sustainability
reports where the contents of such reports are traceable or can be verified. The Financial
Institutions Act of 2004 requires every financial institution to have an audit committee and an
internal auditor who work together to ensure that the information disclosed by the financial
institution is generated by a reliable accounting and computer system. Therefore, both the
audit committee and the internal audit have a responsibility of ensuring that information
disclosed in the sustainability report is relevant and reliable. Otherwise, if management does
not report on all aspects of the entity operations, society may revoke its implicit license.
2.2 Hypothesis development
2.2.1 Audit committee effectiveness and sustainability reporting practices. Beasley et al. (2009)
describes the audit committee as a unit established amongst board of directors to monitor and
ensure accuracy in company disclosures. The audit committee is expected to review all the
information contained in the entity’s reports, especially those for external use. Such reports
include sustainability reports. In reviewing the nonfinancial information, sustainability
information is reviewed, and if such information is not included, the audit committee may
recommend so to the entire board. Because the audit committee is a technical committee of the
board on audit and reporting issues, its recommendations for adoption of better or enhanced
reporting practices such as sustainability reporting practices are given an upper hand. The
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focus of an effective audit committee has shifted from overseeing the traditional financial
reporting to dealing with emerging developments in reporting such as sustainability and
integrated reporting. There are two strands in the literature on the attributes of ACE. The
first strand views the effectiveness of audit committee based on their characteristics such as
independence, size, financial expertise, authority and diligence/frequency of meetings (Bually
and Al-Ajmi, 2019;Haji and Anifowose, 2016;Bananuka et al., 2019). Other scholars consider
an effective audit committee as that committee which executes its responsibilities of
reviewing corporate financial information, supervising the internal audit systems and
liaising with external auditors (Lin et al., 2008;Bananuka et al., 2018).
Studies on the association between ACE and sustainability reporting practices using
evidence from financial services firms in developing countries are few except for Bually and
Al-Ajmi (2019).Bually and Al-Ajmi (2019) found that audit committee independence and
meetings were positively significant, while financial expertise was negatively related to the
extent of sustainability reporting among banks in the Gulf Cooperation Council countries.
Further, Samaha et al. (2015) found that the audit committee has a positive and significant
impact on voluntary disclosures. Also, Haji and Anifowose (2016) conducted a study on audit
committee and integrated reporting practice and found that the audit committee function is
strongly and positively associated with integrated reporting. Agyei-Mensah (2019) indicated
that ACE has a positive and significant impact on corporate voluntary disclosure quality
using evidence from Ghana. Bananuka et al. (2018) noted that ACE significantly contributes
to accountability. This means that audit committee in executing their role of reviewing
financial and nonfinancial information, supervising internal audit systems/function and
liaising with external auditors improves the reporting practices of the financial institution.
Because banks are seen as the financiers of other companies such as manufacturing firms
whose activities have a direct negative impact on the natural environment and society, it is
incumbent upon the audit committees of such institutions to ensure that the respective
financial services firms disclose all their environmental, social and economic performances to
their stakeholders. By promoting such disclosures, their clients (manufacturing firms and
other companies) are likely to adopt similar practices. The audit committees may also initiate
and influence the board of directors to pass decisions aimed at improving the respective
financial institution’s reporting practices and including in the requirements for companies to
access financing from such entities a sustainability report. Our argument is such that
financial institutions that have an effective audit committee are likely to have improved
practices of sustainability reporting. The following hypothesis is thus stated:
H1. Audit committee effectiveness is positively associated with sustainability reporting
practices
2.2.2 Internal audit function and sustainability reporting practices. The agency theory requires
that an internal audit is in place to minimize agency problems. This fact is recognized in the
Uganda’sFinancial Institutions Act (2004), which requires financial institutions to have in
place a functioning internal audit that evaluates the reliability of the information produced by
accounting and computer systems, provide an independent appraisal function, evaluate the
effectiveness, efficiency and economy of operations, evaluate compliance with laws, policies
and operating instructions, provide investigative services to line management and also
certify returns submitted to the Central Bank by the financial institution. The International
Auditing and Assurance Standards Board (IAASB) (2013) describes an IAF as a function in
an organization which performs assurance and consulting activities designed to evaluate and
improve the effectiveness of risk management, internal controls and governance processes of
an entity. It is understood as a function in the organization responsible for reviewing and
evaluating the effectiveness of internal control systems, risk management and regulatory
compliance (Bananuka et al., 2018).
Sustainability
reporting
practices
With the current increase in demand for reporting on the entity’s nonfinancial
information, the role of the IAF involves providing assurance on the ESG (economic, social
and governance) issues (Dominic and Martinov-Bennie, 2015). The IAF, especially of financial
services firms, can improve sustainability reporting practices through the various
recommendations to management as a way of contributing to risk management. At any
one time, stakeholders may look at banks as culprits of environmental conservation and
possibly, hold them responsible for society suffering. This is because banks have the capacity
to require all their clients to produce sustainability reports. At this point, the IAF advises
management to require their clients to prepare sustainability reports if they are to access any
form of financing. Because, there are more disclosures in a sustainability report if prepared
based on GRI, the banks can have access to more information about the organization than
basing on merely financial statements. Studies that link IAF to sustainability reporting
practices are uncommon. However, there are studies that document positive and significant
associations with integrated reporting (e.g. Engelbrecht et al., 2018) and accountability (e.g.
Bananuka et al., 2018). The IAF is responsible for evaluating and improving risk
management, internal controls and compliance with applicable laws such as the Uganda
Environmental Act of 2019. This means that firms with the IAF are able to evaluate the
potential risks involved with not providing a report on economic, social and environmental
activities of a firm. The IAF also evaluates the reliability of corporate reports produced by the
accounting systems and thus can analyze and suggest information to be included in the
corporate sustainability reports. We therefore hypothesize that:
H2. Internal audit function is positively associated with sustainability reporting
practices.
3. Materials and methods
This study utilized a cross sectional and correlational research design. The study population
was 62 financial services firms. Useable questionnaires were received from 48 financial
services firms representing a response rate of 77%. The 48 financial services are the
commercial banks, insurance firms and micro deposit taking institutions (22 commercial
banks, 23 insurance firms (both life and nonlife assurance) and three micro deposit taking
institutions). These form the core of the financial service industry in Uganda. The other
financial services firms are the savings and credit cooperative societies and the foreign
exchange bureaus which largely are categorized in the small and medium enterprises and
were not considered for this study. Data collection started in June 2018 and ended in
December 2019. Responses were enlisted from both the Chief Finance Officers (CFO) and the
internal audit manager of the financial services firms. The CFOs were selected because they
are in charge of corporate reporting of a firm and they are knowledgeable in terms of firm
operations. The CFOs are the preparers of sustainability reports. Internal auditors are aware
of whatever takes place in the entity since they are responsible for evaluating the internal
controls, contributing to risk management processes and ensuring compliance with all the
existing laws. Section 59 sub-section 6a and b of the Uganda’s financial institutions’Act of
2004 requires all the officers responsible for internal audit and the officers in charge of
financial and treasury functions of an institution to attend all the meetings of the audit
committee. As such, this study believes that the CFO and the head of the IAF have vast
knowledge on the operations of the audit committees and can thus ably evaluate them on their
effectiveness. Thereafter, the CFO and internal audit manager responses were aggregated to
minimize bias on either side. The sample characteristics results are presented in Table 1.
We utilized a six-point Likert scale questionnaire ranging from completely disagree to
completely agree with closed-ended questions. The questionnaire was designed on the basis
of measurement scales from earlier research after a thorough review of the literature on IAF,
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ACE and sustainability reporting. We then tested for the content validity of the measurement
scales by giving it to four academicians and four practitioners, and their comments were
incorporated in revising the questionnaire before presenting it to the respondents. We further
tested the reliability of the instrument to find out if it consistently measured the study
variables. Reliability (internal consistency and stability) of the instruments was tested using
Cronbach’s alpha coefficient (Cronbach, 1951). The Cronbach’s alpha coefficients for the
study variables were as follows: ACE (0.958) and IAF (0.927). The instrument used for this
study was reliable given that all the Cronbach’s
α
coefficients were above 0.7 as recommended
by Cronbach (1951).
We conducted factor analysis to reduce data into a manageable size as suggested by Field
(2009). We suppressed all factors with loadings below 0.5 coefficients to eliminate factors with
weak loadings. The principal components for each variable were extracted by running
principal component analysis using varimax rotation method. We extracted the Kaiser–
Meyer–Olkin (KMO) and Bartlett tests of sphericity to assess the reliability of the measures.
The KMO values for ACE, and IAF were 0.905 and 0.848, respectively. According to Field
(2009), the KMO values of 0.5 and above are acceptable. The Bartlett tests of sphericity were
all statistically significant (p> 0.000) and the approximate chi square were as follows: ACE
(
χ
2
51399.118) and IAF (
χ
2
52287.159).
The dependent variable for this study is sustainability reporting practices which was
operationalized based on the GRI indicators (economic, social and environmental indicators).
This study followed the GRI standards 2016 as the disclosure index specifically the
comprehensive option for preparing sustainability reports. We opted for the comprehensive
option to gauge the extent of compliance on the aspects of the GRI 2016 standards by
financial services firms in Uganda. If an item from the GRI standards 2016 is disclosed in an
annual or sustainability or integrated report, a weight of 1 was given and if not, weight of
0 was given. After scoring, a percentage level of disclosure on any performance indicator was
computed, where number of items disclosed were divided by the total number of required
Background information Frequency Percentage
Gender Male 41 66.1
Female 21 33.9
Total 62 100
Age Less than 30 years 13 21.0
30 years and above 49 79.0
Total 62 100
Education Diploma 1 1.6
Bachelor’s degree 41 66.1
Master’s degree 16 25.8
PhD 1 1.6
Others 3 4.8
Total 62 100
Professional qualification CPA 35 56.5
ACCA 21 33.9
Others 6 9.6
Total 62 100
Length of service Less than 5 years 23 37.1
5–10 years 26 41.9
10–15 years 10 16.1
15 years and above 3 4.8
Total 62 100
Source(s): Primary data
Table 1.
Respondent profile
Sustainability
reporting
practices
disclosures. After obtaining the percentage level of disclosures on a given indicator, the
percentage was put on a Likert scale of 1–6 to match the scale of the predictor variables. In
this case 0–16.7% 51; 16.8%–33.4% 52; 33.5%–50.1% 53; 50.2%–66.8% 54; 66.9%–
83.5 55 and 83.4%–100% 56. This method has previously been used by accounting
scholars such as Nalukenge et al. (2018).
The measurement of the independent variables is indicated in Table 2. ACE was measured
based on the works of (Lin et al., 2008;Bananuka et al., 2018) as review of corporate
sustainability information, supervision of internal audit systems and liaison with external
auditors. However, supervision of internal audit systems loaded together with review of
sustainability information where 10 factors loaded (see Table A1). Also, five factors loaded on
to liaison with external auditors. IAF was measured in terms of review and evaluation of the
effectiveness of internal control systems, risk management and regulatory compliance
(Bananuka et al., 2018). On factor analysis, items on regulatory compliance and risk
management loaded on together. We finally document that IAF in financial services firms is a
function of review and evaluation of internal control systems and risk management practices.
Factor analysis results are presented in Table A1 and A2.
According to Bartov et al. (2000) when confounding variables are not controlled for, the
hypothesis which would have been accepted may be rejected and thus showing false results.
To remove the possibility of bias in our results, we controlled for the effect of firm age, firm
size and auditor type in examining the association between ACE and IAF on sustainability
reporting practices. Firm age and size have been previously found to be positively and
significantly associated with sustainability disclosures (see Shamil et al., 2014;Orazalin and
Mahmood, 2018). Orazalin and Mahmood (2018) also found that auditor type is positively
Variable Acronym Variable description
Dependent variable
Sustainability reporting
practices
SRP Measured based on the GRI standards 2016 on environmental, social
and economic indicators
Predictor variable
Audit committee
effectiveness
ACE Measured by average score of questions on a six-point Likert scale on
review of financial and nonfinancial information and liaison with
external auditors
Internal audit function IAF Measured by average score of questions on a six-point Likert scale on
review and evaluation of internal control systems and risk
management
Control variables
Firm age AGE A dummy variable coded as 0 if the firm has been in operation for at
least five years, 1 if the firm has been in operation for above five years
but not more than 10 years, 2 if the firm has been in operation for
more than 10 years but not more than 15 years and 3 if the firm has
been in operation for more than 15 years
Firm size SIZE A dummy variable coded as 0 if the firm employs 50 and below
employees and, 1 if the firm employs more than 50 employees
Auditor type AUD A dummy variable coded as 0 if the firm is audited by the big 4 audit
firms [such as PwC, Ernst and Young, KPMG, Delloite and Touche], 1
if the firm is audited by the small and medium audit practices [such
as Sejjaaka Kaawaase and company certified public accountants]
and 2 if the firm is always audited by both the big 4 audit firms and
the small and medium audit practices
β
0
Constant
Ej Error term
Table 2.
Measurement of
variables
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related to sustainability disclosures. We also introduce control variables into our model
because, failure to consider for endogeneity can lead to biased and inaccurate results hence
the risk of drawing incorrect conclusions about the effect of the hypothesized relationships
(Zaefarian et al., 2017).
According to Kennedy (2008), endogeneity problems occur if the independent variable
highly correlates with the structural error term. In our correlation analysis results (see
Table 4), there are no high correlations between the predictor variables and the outcome
variables. We also run the Durbin Watson test to check whether there are any serial
correlations among the independent variables and the standard errors. We find that there are
no serial correlations. The Durbin Watson test results are presented in Table 5. Prior to
further analyses, we checked for missing data because data unavailability may also lead to
endogeinity challenges.
We utilized a multiple regression model to examine the association between ACE, IAF and
sustainability reporting practices. We run the following regression models:
Model 1: SRP 5β
0
þβ
1
SIZE þβ
2
AGE þβ
3
AUD þ
ε
j
Model 2: SRP 5β
0
þβ
1
SIZE þβ
2
AGE þβ
3
AUD þβ
4
ACE þ
ε
j
Model 3: SRP 5β
0
þβ
1
SIZE þβ
2
AGE þβ
3
AUD þβ
4
IAF þ
ε
j
Model 4: SRP 5β
0
þβ
1
SIZE þβ
2
AGE þβ
3
AUD þβ
4
ACE þβ
5
IAF þ
ε
j
where SRP is sustainability reporting practices, ACE is audit committee effectiveness, IAF is
Internal audit function, AGE is firm age, SIZE is firm size, AUDT is auditor type, β
0
is a
constant and
ε
j
is the error term.
4. Results
4.1 Descriptive statistics
We performed descriptive statistics for the study variables. Table 3 presents the descriptive
statistics indicating the means and standard deviations of the study variables. The means
represent the summary of the data, while the standard deviation shows the extent to which
the means represent the data (Field, 2009). The mean and standard deviation scores for
sustainability reporting practices, ACE and IAF are 3.85 and 0.91, 4.09 and 0.43, 4.17 and 0.62,
respectively. On a Likert scale of 1–6, financial services firms agree that they disclose items of
the GRI 2016 standards up to 64% ((3.85/6) *100%). For the control variables, the means and
Variable N
Min Max Mean
Std.
Deviation Skewness Kurtosis
Statistic Statistic Statistic Statistic Statistic
Std.
Error Statistic
Std.
Error
SRP 48 1.56 5.51 3.85 0.91 0.52 0.34 1.03 0.67
ENI 48 2.39 6.00 4.57 1.00 0.76 0.34 0.41 0.67
SOI 48 1.00 5.53 3.57 0.86 0.60 0.34 1.06 0.67
ECI 48 1.00 5.60 3.42 0.88 0.38 0.34 1.16 0.67
IAF 48 1.00 6.00 4.09 0.43 1.01 0.34 0.25 0.67
RIC 48 1.00 6.00 4.48 0.53 1.18 0.34 0.01 0.67
RIM 48 1.00 6.00 3.69 0.58 0.49 0.34 1.27 0.67
ACE 48 1.00 5.80 4.17 0.62 1.06 0.34 0.42 0.67
RSI 48 1.00 5.80 4.37 0.57 1.32 0.34 0.31 0.67
LEX 48 1.00 6.00 3.98 0.76 0.81 0.34 0.95 0.67
SIZE 48 0.00 1.00 0.80 0.75 0.20 0.34 0.41 0.67
AGE 48 0.00 3.00 1.84 1.21 0.53 0.34 1.33 0.67
AUD 48 0.00 2.00 0.38 0.61 1.40 0.34 1.00 0.67
Note(s): ENI: Environmental indicators; SOI: Social indicators; ECI: Economic indicators
Source(s): Primary data
Table 3.
Descriptive statistics
Sustainability
reporting
practices
Variable SRP ENI SOI ECI IAF RIC RIM ACE RAS LEX SIZE AGE AUD
SRP 1
ENI 0.837
**
1
SOI 0.953
**
0.726
**
1
ECI 0.932
**
0.648
**
0.844
**
1
IAF 0.645
**
0.406
**
0.682
**
0.626
**
1
RIC 0.619
**
0.387
**
0.672
**
0.584
**
0.916
**
1
RIM 0.567
**
0.359
*
0.582
**
0.566
**
0.921
**
0.688
**
1
ACE 0.657
**
0.347
*
0.654
**
0.721
**
0.843
**
0.887
**
0.666
**
1
RAS 0.666
**
0.386
**
0.670
**
0.701
**
0.877
**
0.911
**
0.704
**
0.968
**
1
LEX 0.613
**
0.293
*
0.605
**
0.700
**
0.767
**
0.817
**
0.596
**
0.974
**
0.886
**
1
SIZE 0.180 0.333 0.205 0.095 0.068 0.203 –0.074 0.154 0.176 0.126 1
AGE –0.107 0.058 –0.104 –0.198 –0.114 –0.010 –0.197 –0.150 –0.111 –0.177 0.290
*
1
AUD 0.204 0.092 0.194 0.245 0.094 0.055 0.118 0.092 0.098 0.081 –0.090 –0.209 1
Note(s): **. Correlation is significant at the 0.01 level (2-tailed)
*. Correlation is significant at the 0.05 level (2-tailed)
Table 4.
Correlation analysis
results
AJAR
standard deviation for firm size, firm age and auditor type were 0.80 and 0.75, 1.84 and 1.21,
and 0.38 and 0.61, respectively.
We also checked for normality of the data. We ran skewness and kurtosis and found that
all values are within the range of 3.29 to 3.29 as recommended by Field (2009). This means
that our data was normal. We checked for the normality of the data because the Pearson
correlation requires data that is normal (Field, 2009).
4.2 Correlation results
We ran a Pearson correlation analysis to establish the association between IAF, ACE and
sustainability reporting practices as represented in Table 4. Results indicate that there is a
positive and significant correlation between IAF and sustainability reporting practices
(r50.645**, p< 0.01), and this means that a positive change in IAF brings about a positive
change in the sustainability reporting practices. Results further indicate a positive and
significant correlation between ACE and sustainability reporting practices (r50.657**,
p< 0.01), meaning that a positive change in the effectiveness of audit committee will lead to a
positive change in sustainability reporting practices. We found no significant associations
between the firm age, firm size, auditor type and sustainability reporting practices. This is an
indication that the associations between IAF, ACE and sustainability reporting practices are
not affected by the control variables.
4.3 Hierarchical regressions
To examine the association between ACE, IAF and sustainability reporting practices, we run a
hierarchical regression analysis which is presented in Table 5. The hierarchical regression
analysis enables the research to establish the extent of the association of each independent
variable in the model and the dependent variable (Field, 2009). The hierarchical regression
analysis also show the incremental explanatory power of each independent variable added on
the already existing variable in the model (Field, 2009). In model 1, we enter thecontrol variables
which are firm size, firm age and auditor type to examine their association with sustainability
reporting, and the results indicate no significant association. This is consistent with the
correlation analysis results. This means that the control variablesdo not explain any significant
variance in sustainability reporting practices, and therefore, our models are highly credible
Item Model 1 Model 2 Model 3 Model 4 Tolerance VIF
Constant 3.820 1.800 1.654 1.542 na na
ACE 0.611** 0.309 0.930 1.057
IAF 0.607** 0.352** 0.970 1.031
Control variables
SIZE 0.303 0.170 0.235 0.196
AGE 0.154 0.032 0.074 0.046 na na
AUD 0.199 0.157 0.153 0.151 na na
Model summary
Model F2.197 9.841** 10.211** 8.850** na na
R
2
0.130 0.478 0.487 0.513 na na
Adjusted R
2
0.107 0.429 0.439 0.455 na na
FChange 2.197 28.633 29.920 3.028 na na
R
2
change 0.130 0.348 0.357 0.035 na na
Durbin Watson 2.160
Note(s): **Significant at the 0.01 level
Source(s): Primary data
Table 5.
Hierarchical regression
analysis results
Sustainability
reporting
practices
since they are not sensitive to the confounding variables. However, among the control variables,
firm size has a higher standardized beta as compared to other control variables. In model 2, we
examine the association between ACE and sustainability reporting practices. Results indicate
that ACE (standardized β50.611) significantly predicts sustainability reporting practices.
Model 2 explains 42.9% (Adjusted R
2
50.429) of the variance in sustainability reporting
practices. In model 3, we test the extent of the association of IAF with sustainability reporting
practices. We found that IAF significantly associates with sustainability reporting practices.
IAF contributes 43.9% to variances in sustainability reporting practices. In model 2 and 3, we
test ACE and IAF separately to reduce the endogeinity problem. We also include control
variables which further reduce the endogeinity problem. In model 4, we combine both ACE and
IAF and find that ACE ceases to be a significant predictor, while IAF (standardized β50.352)
remains a significant predictor. Model 4 which is our final model predicts 45.5% of the variance
in sustainability reporting practices.
In addition to the above analyses, we performed further analyses. Given that we found a
significant association between ACE and IAF to sustainability reporting practices, we further
tested among the sustainability reporting indicators, which one is highly linked to either ACE
or IAF. These results are presented in Tables 6 and 7. We found that audit committees
Item Environmental indicators Social indicators Economic indicators
Constant 3.202 0.732 1.027
IAF 0.392** 0.648** 0.575**
Control variables
SIZE 0.197 0.207 0.235
AGE 0.063 0.061 0.164
AUD 0.085 0.139 0.177
Model summary
Model F2.975 11.678 10.127
R
2
0.217 0.521 0.485
Adjusted R
2
0.144 0.476 0.437
Durbin Watson 2.104 2.141 1.983
Note(s): **Significant at the 0.01 level
Source(s): Primary data
Item Environmental indicators Social indicators Economic indicators
Constant 3.478 1.074 0.849
ACE 0.323** 0.615** 0.655**
Control variables
SIZE 0.171 0.146 0.155
AGE 0.076 0.024 0.107
AUD 0.093 0.146 0.175
Model summary
Model F2.125 9.364 14.615
R
2
0.165 0.466 0.576
Adjusted R
2
0.087 0.416 0.537
Durbin Watson 2.021 2.091 2.169
Note(s): **Significant at the 0.01 level
Source(s): Primary data
Table 7.
Regression results of
Internal audit function
and sustainability
indicators
Table 6.
Regression results of
audit committee
effectiveness and
sustainability
indicators
AJAR
effectiveness is more linked to social and economic indicators as compared to environmental
indicators. We also found that IAF is more linked to social and economic indicators as
compared to environmental indicators.
We tested for multicolinearity among our study variables and found that there were
nonexistent since our tolerance values were above 0.2 while variance inflation factors were all
below 10 as recommended by Field (2009). We further obtained the Durbin Watson values
which were within 2 as recommended by Field (2009) to indicate that there were no serial
correlations.
5. Discussion
The present study results provide evidence on the association between IAF, ACE and
sustainability reporting practices in financial services firms using evidence from a
developing African country –Uganda. Both IAF and ACE contribute to positive variances
in sustainability reporting practices. The association of ACE to sustainability reporting
practices becomes insignificant in the presence of an IAF. This implies that the explanatory
power of ACE is subsumed in IAF. Based on the Uganda’s Financial Institutions Act of 2004,
the IAF performs among other duties the role of giving an assurance on risk management and
making recommendations on how best to manage the risks. In so doing, the internal audit
may make recommendations on managing risks, and one such recommendation is adoption
of sustainability reporting practices.
In performing their roles, internal auditors report to the audit committee of the board. In
the normal performance of internal audit roles, any challenges faced especially in regard to
failure of management to implement internal auditor’s recommendations may be reported to
the audit committees which in turn sanctions management to respond to such
recommendations. The audit committee is a committee of the board, and thus, those
internal audit recommendations that are strategic in nature are presented in the board for
appropriate decisions. The board may thus direct that the firm prepares sustainability report,
especially if it has been viewed as one of the sources of risk. In Uganda, there are financial
services firms that are listed on the Uganda Securities Exchange, and this increases on the
need for more information provision. In addition, financial services firms in Uganda are
required to publish their performance in a suitable media. This means that financial services
firms that prepare one stop report that entails the economic, social and environmental
performance are more less burdened by the various information needs of regulators such
Bank of Uganda (Regulator for banks and deposit taking institutions), Insurance Regulatory
Authority (regulator for insurance firms), National Environmental Management Authority
and the Capital Markets Authority. In addition to the regulatory authorities, there are
investors who may also have other information needs as provided for in the agency and
stakeholder theories.
We notice the high correlations between ACE and IAF. This is likely because the duties/
roles of the ACE and IAF are complementary. There is therefore close link between the two,
especially in the Ugandan context. Further, the audit committees link the IAF to the board
which makes strategic decisions such as sustainability reporting practices. If this is the case,
it means that behind a strong audit committee, there is a board. We also argue that large-sized
organizations are more likely to attract quality members of the audit committees and the staff
in the IAF than small-sized firms. This is evidenced by the high standardized beta of 0.303 for
firm size. Previous studies such as Shamil et al. (2014) document that firm size is the core
determinant of sustainability disclosures.
Our study findings confirm to the clause in the King IV report of corporate governance
which specifies that an audit committee oversees the work of the IAF. In Uganda, the
Financial Institutions Act (2004) requires the audit committee to review the internal controls,
Sustainability
reporting
practices
operating procedures, systems and management information systems of the financial
institution and review the internal audit report and programs of the financial institution. This
explains that in an organization, where the audit committee is very effective, it incorporates
the IAF. The present study results are in compliance with the findings of Agyei-Mensah
(2019), who found that ACE has a positive significant association with the quality of
corporate voluntary disclosures. Our results are also in line with the findings of Haji and
Anifowose (2016), whose findings indicated that effectiveness of the audit committee is a
significant factor in explaining integrated reporting.
The study results are in agreement with those of Bananuka et al. (2018), who investigated
the relationship between IAF and ACE with accountability in the Ugandan statutory
corporations and found that ACE is not significant for accountability in statutory corporations
where internal audit is present in such corporations. From Bananuka et al. (2018), the IAF is
more critical for improving accountability in the public sector as compared to the audit
committees. This can be explained by the emphasis put on the internal audit than the audit
committee. In the Uganda’s public sector, the internal auditor is functionally supervised by the
internal auditor general,who is appointed by the Uganda’s ministry of public service, while the
internal auditors in the statutory corporations are appointed by the respective board audit
committees. The board audit committees in those statutory corporations are also supervised by
the internal auditor general. In the presence of such regulations, this study confirms that the
IAF is critical for improving sustainability reporting practices.
ACE is better observed through reviews of sustainability information and liaison with the
institution’s external auditors. The results are in line with the views of Lin et al. (2008), who
documented that audit committees promote good practices of corporate governance through
coordinating internal and external auditors. In reviewing corporate financial information, the
audit committee effectively executes the responsibility of monitoring the corporate reporting
process as noted by Lin et al. (2008) and ensures accuracy of both financial and nonfinancial
disclosures (Beasley et al., 2009;Samaha et al., 2015). We also noted that supervision of
internal audit systems does not determine the effectiveness of audit committees in financial
institutions in Uganda, which was also noted by Bananuka et al. (2018) using evidence of
Ugandan statutory corporations.
IAF is better observed through their responsibility of reviewing the internal control
system and contribution to risk management processes. This present study noted that
regulatory compliance does not explain the IAF in Ugandan financial service firms. For
sustainability reporting practices, it is very crucial for the Ugandan financial institutions to
have in place proper internal control systems that are regularly reviewed by the internal
auditors. Our results are in support with Engelbrecht et al. (2018), who noted that internal
audit is equipped with comprehensive knowledge and has a wider view of the entity which
enables them to design the most appropriate processes and controls ensuring accuracy and
validity of an integrated report. In reviewing the effectiveness of internal controls and
contribution to risk management, internal auditors makes recommendations on how to
improve reporting practices. Given that sustainability reporting is still voluntary in Uganda,
the recommendations of the internal audit in an organization, especially in the area of
management of risks related to legitimacy are more likely to be taken on.
6. Concluding remarks
This paper examined the association between ACE, IAF and sustainability reporting
practices using evidence from Uganda’s financial services firms. After controlling for firm
age, firm size and auditor type, we found that both ACE and IAF to be independently
significantly associated with sustainability reporting practices. We further found that IAF is
positively and significantly associated with sustainability reporting practices with or without
AJAR
the ACE. The study finds that ACE is positively and significantly associated with
sustainability reporting practices in the absence of an IAF.
This study has important contributions. The study fills a gap in the extant literature on
the association between ACE, IAF and sustainability reporting practices using evidence from
an African developing country. The findings support the agency theory and legitimacy
theory, suggesting that an effective audit committee and IAF enhance corporate reporting
practices. With respect to policy makers, results highlight that ACE enhance sustainability
reporting practices, and hence, they should encourage board of financial institutions to insist
on audit committees that have people with financial and sustainability expertise to review the
corporate financial and other nonfinancial information, advise on application of accounting
policies and meeting regularly with their external auditors to ensure disclosure of
sustainability information. With respect to managers, findings from the study emphasize
the importance of an effective audit committee that monitors the IAF in particular reviewing
the internal audit report/programs of the financial institution and holding meetings that
coordinate the internal and external auditors.
Like any other study, this study has limitations, and we urge readers of this paper to
interpret our results with caution. Our study only focuses on financial services firms, which is
a small sample. Future studies may be conducted in other sectors or other national settings
with large samples. We also note that our independent variables only predict about 45.5%.
Also, the conceptualization of ACE only focuses on the role performance aspect of the audit
committees and therefore, does not consider the ACE as proxied by audit committee
independence, size, diligence and frequency of meetings which warrants further studies.
Future research may also consider replicating or expanding this study in other settings while
including more variables. In the presence of the above study limitations, we believe that this
study results provide an initial empirical evidence on the association between IAF, ACE and
sustainability reporting practices using evidence from an African developing country.
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pp. 154-189.
Sustainability
reporting
practices
Appendix
Statement
Component
Review of sustainability
information and supervision of
internal audit
Liaison with
external
auditors
Our audit committee develops an understanding of
the economic substance of unusual transactions
0.894
Our audit committee reviews the internal audit
report of this financial institution
0.868
Our audit committee reviews the internal audit
programs of this financial institution
0.866
Our audit committee reviews financial and other
non-financial information
0.854
Our audit committee advises on the application of
accounting policies
0.831
Our audit committee makes recommendations on
our sustainability information
0.824
Our audit committee ensures that the internal audit
function of this financial institution is adequately
staffed
0.822
Our audit committee reviews information on
corporate social responsibility
0.797
Our audit committee has the financial expertise to
review the corporate financial information
0.779
Our audit committee reviews any significant control
deficiencies identified by the internal auditor
0.766
Our audit committee holds meetings coordinating
the internal and external auditors
0.888
Our audit committees discusses with the external
auditor matters of quality reporting
0.866
Our audit committees form a forum to link the
directors with the external auditors
0.826
Our audit committee ensures that the internal audit
function of this financial institution is adequately
staffed
0.822
Our audit committees handles complaints of
external auditors
0.796
Our audit committees determines the nature of the
external audit
0.767
Eigen values 11.465 1.386
Cumulative percentage 45.085 40.587
Percentage of variance 45.085 85.672
Note(s): Kaiser –Meyer –Olkin Measure of Sampling Adequacy 50.936; Approx. Chi square 51399.118;
df 5105; Sig 50.000
Extraction Method: Principal Component Analysis
Rotation Method: Varimax with Kaiser Normalization
Source(s): Primary data
Table A1.
Rotated component
matrix for audit
committee
effectiveness
AJAR
Corresponding author
Zainabu Tumwebaze can be contacted at: ztumwebaze@mubs.ac.ug
For instructions on how to order reprints of this article, please visit our website:
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Statement
Component
Review and evaluation of
control processes
Risk management
practices
Our internal audit evaluates the effectiveness, efficiency and economy
of operations
0.909
Our internal audit verifies the existence of financial institution assets 0.905
Our internal audit reports on the system for generating financial
information
0.890
Our internal audit encourages the financial institution to maintain its
records with reasonable detail
0.889
Our internal audit safeguards this corporation’s tangible assets from
misuse
0.882
Our internal audit generates periodic reports regarding the
effectiveness of internal controls
0.867
Our internal audit confirms all the documentations of the various
transactions
0.863
Our internal audit always check the authorization of all expenditures 0.854
Our internal audit evaluates the reliability of the information produced
by accounting and computer systems
0.839
Our internal audit ensures that economic transactions of this financial
institution are supported by adequate documentation
0.767
Our internal audit ensures internal controls promotes proper
segregation of duties
0.754
Our internal audit provides an independent appraisal function of the
risks likely to affect our business
0.932
Our internal audit provides investigative services to line management
in terms of suspected fraud
0.923
Our internal audit reviews management arrangements for ensuring
that the sustainability objectives are being achieved
0.919
Our internal audit staff have the necessary expertise in identifying
risks
0.914
Our internal audit gives reasonable assurance on risk management
processes
0.906
Our internal audit contributes to the improvement of risk management 0.890
Our internal audit recommends on compliance with the Financial
Institutions Act
0.806
Our internal audit commends that sustainability reports are prepared
in accordance with global reporting initiative guidelines
0.790
Our internal audit updates staff on the changes in the applicable laws
and regulations
0.714
Our internal audit submits a report on the execution of the work plan
to the audit committee
0.704
Our internal audit identifies significant exposures to risk 0.689
Our internal audit reviews the management of key risks 0.671
Eigen values 15.182 3.504
Percentage of variance 41.435 39.810
Cumulative percentage 41.435 81.244
Note(s): Kaiser –Meyer –Olkin Measure of Sampling Adequacy 50.905; Approx. Chi square 52287.159;
df 5253; Sig 50.000
Extraction Method: Principal Component Analysis
Rotation Method: Varimax with Kaiser Normalization
Source(s): Primary data
Table A2.
Rotated component
matrix for internal
audit function
Sustainability
reporting
practices
