Uncovering Pandora's Box: Published Data on Corporate Governance and the Reality of Internal Audit Departments

One of the most important issues relating to corporate governance reports (e.g. the “Relazione sulla Corporate Governance” for Italian listed firms) refers to their ability to provide both professional and non-professional users with a complete set of information regarding the quality of an entity’s corporate governance practices.In fact, these reports generally provide disclosures about the compliance of an entity’s corporate governance system through the information set required by a specific law or industry code. These information are generally regarded as providing an indication of the quality of a given corporate governance system (CG quality). Is there a correlation between the degree of sensitivity to control themes and the quality of an entity’s corporate governance practices? To answer this question, we assess the quality of one of the main actors of corporate governance, the internal auditing function. We then test the IAD index on a sample of Italian listed firms and conclude that there is a significant association between full compliance to corporate governance regulations for listed firms (Borsa Italiana 2011) and an increasing sensibility to themes relating to control systems – as measured through the IAD Index – for the sample being considered.