Examining and explaining the relationship between internal audit and profit management

The financial scandals that rocked stock markets around the world in the late 1990s and early 2000s severely undermined confidence in the financial reporting process, and thus the financial markets. The focus of internal audit, which was traditionally on operational controls and risks and assisting management in decision-making, brought to the improvement of the corporate governance process and detection of fraud in management and inappropriate accounting practices (including profit management). This study examines the issue that with the approval of the internal control directive and the requirement to establish an internal audit unit in business units in Iran since 2013, does internal audit lead to a decrease in profit management or not? The time of this research is between 2007 and 2016, which includes 2 periods, 5 years before the requirement of internal audit and 5 years after that for companies admitted to the Tehran Stock Exchange, which is done using the multivariate regression analysis method. It was tested using the F test of Limer and Hausman with the help of Eviews software. In this research, adapted from McNichols (2008), discretionary income used as a measure of earnings management. In addition, the data of 109 companies have been used to test the hypothesis. The results of the coefficients from the hypothesis test showed that the implementation of internal audit had a significant and negative effect on profit management.