Internal Audit Effectiveness in Reducing Greenwashing Risk Through ESG Internal Controls and Audit Committee Governance

Abstract

There have been rising concerns related to the risk of greenwashing that is likely due to environmental claims made by an organization exceeding its performance. Although previous studies have focused on sustainability disclosure and assurance practices, there has not been much literature on organizational factors that increase the credibility of ESG information and mitigate the risk of greenwashing. In this study, the impact of IAF effectiveness on greenwashing risk via the ESG internal control quality is explored, along with examining the moderating effect of the audit committee effectiveness. A cross-sectional research design was adopted for this study, with 420 valid responses collected from practitioners involved in internal auditing, finance, risk management, ESG, sustainability, and board activities. Reliability and validity analysis was performed on the constructs, and then conditional process analysis using HC3 robust standard errors with 5,000 bootstrap resamples was performed. Results indicate that IAF effectiveness significantly impacts ESG internal control quality (β = 0.499, p < 0.001) while ESG internal control quality has a significant negative impact on greenwashing risk (β = −0.437, p < 0.001). Similarly, IAF effectiveness has a significant negative direct impact on greenwashing risk (β = −0.111, p = 0.036). The mediating role of ESG internal control quality between IAF effectiveness and greenwashing risk is confirmed with the mediation analysis, with a significant indirect effect (β = −0.218, 95% CI [−0.286, −0.156]). Additionally, the role of audit committee effectiveness as a moderator in the relationship between IAF effectiveness and ESG internal control quality is supported by a moderated mediation effect (β = 0.101, p = 0.007).