The audit quality in the era of digital transformation: An empirical guidance for Iraqi banks, period 2012-2024.

Abstract

Digitally transforming businesses has become an increasing focus of study in relation to audit quality, although there is little empirical research on this topic across frontier banking markets. This research investigates the way digital transformation impacts the quality of internal auditing in Iraqi banks that are listed on the Iraq Stock Exchange (ISX) for the years of 2012 through 2024. We generated a Digital Transformation Index (DTI) using natural language processing of the Arabic-language annual reports of 310 banks. This index is based upon five distinct technology categories, which include: Core Banking Technology, Advanced Analytics and Artificial Intelligence Technology, Cybersecurity and Regulatory Compliance Technology, Digital Customer Service Technology, and Information Technology Infrastructure Technology. Furthermore, we used a composite index to evaluate internal audit quality, as well as four additional dimensions (I.e., audit opinion quality, audit committee independence, auditor professional qualifications and timeliness of audit reporting), that followed past literature on auditing. By using a fixed-effects model for panel data analysis of 187 bank-year observations (i.e., 20 banks), we found three main results. First, for every one-unit of increase in the lagged DTI, a bank will show a statistically significant increase of 0.025 in composite audit quality (p < 0.01). This provides evidence that digital transformation positively influences the overall governance of the internal audit process. Secondly, the influence of digitalization is significantly bigger for quality of audit opinion (β = 0.130, p < 0.05) compared to any kind of structure of governance so that digitalization effects principally occur through the auditor performance channel. Third, the relationship between digital and audit quality after 2018 due to the Central Bank of Iraq's digital reform agenda is approximately three times larger (β = 0.045, p < 0.001) than before it (β = 0.014, p < 0.01). Showing that a regulated environment acts as an important driver of improvement in the quality of digital driven audits. These results make contributions to the auditing literature by offering the first time ever archival evidence about the relationship between digital transformation and financial institution audit quality in Iraq, documenting the existence of a synergy effect with respect to regulation and providing a replicable framework for use of natural language processing-based measures to evaluate digital transformation in Arabic language financial statements.