The Role of Financial Reporting in Identifying Earnings Management in Internal Audit Approach

In the current economic environment, it is important that the financial reporting of economic entities is as transparent as possible. To this end, corporate governance has become increasingly important on the agenda of company management, with internal audit occupying a central place in verifying the effectiveness of this system. At the same time, internal audit is also a value consultant for management, focused on identifying risk factors that may impact business processes. The purpose of the study is to identify accounting distortions by internal audit caused by earnings management based on financial reporting, the empirical research being based on a fixed effects statistical modelling of 459 small and medium sized companies in South-Eastern Europe over a five-year period, operating in different industries. The results of the research highlight the different signals that the internal auditor can draw in relation to the risk of fraudulent financial reporting, which are useful both for the management to streamline its activity and for the financial auditor to support the audit opinion.