The Impact of Romanian Internal Auditors in ESG Reporting and Sustainable Development Goals

Abstract

The purpose of this study is to determine the impact of an internal auditor’s activities in Romania, through their specific activities, on ESG reporting and sustainable development goals (SDGs). Environmental, social, and governance (ESG) are three criteria by which an organization’s operations are characterized as sustainable, responsible, or ethical. Even though, for business, the SDGs have been called “a 2030 purchase order for business and government action today”, the alignment between environmental, social, and governance performance and sustainable development goals helps practitioners in observing corporate contributions to sustainable growth. This research aims to identify whether internal auditors in Romania are able to contribute to ESG reporting and the achievement of the sustainable development goals through specific objective assurance and advisory activities. Using the questionnaire, the data were collected from professional accountants who carry out internal audit missions. The main findings confirm a strong and directly significant connection between the internal audit’s perception of the management’s view of the SDGs and how the entity can contribute to achieving the SDG objectives. The results also showed a direct and medium-intensity impact of the variables, capturing the important role of internal audits in ESG reporting. Our study showed that internal audits can help with reporting ESG and sustainable development objectives through their activity. However, according to our statistical results, the internal auditors do not offer at all (or rarely offer) objective assurance and counseling related to these subjects. Moreover, it is observed that, in these situations, the management does not have a clear vision and has not taken measures to achieve the sustainable development goals and ESG factors.

1. Introduction

Sustainability, sustainable development goals (SDGs), and sustainable business are extremely present concepts in today’s times that govern the current activity of companies and the state. In 2015, all United Nations member states adopted the 2030 Agenda for Sustainable Development, which includes 17 sustainable development goals (SDGs). The assumption of these objectives by the member countries was made through a global partnership, which seeks to eliminate poverty, improve education, reduce inequalities, and many others. It can be easily seen that, at the global level, there is pressure regarding the achievement of the SDGs, all the more so as governments, civil society, and businesses are responsible for the progress towards a more sustainable path [1]. However, it is still a developing field, with uncertainties and complexities [2]; where the private sector plays a key role is through corporate sustainability actions [3].

Environmental concerns, as well as sustainability requirements, have taken shape more and more and have developed in the economic and corporate spheres. A significant evolution of sustainability frameworks in the corporate sphere is represented by the appearance of the expression “triple bottom line” in 1994 by John Elkington. Triple bottom line (TBL) refers to ecological and social performance in addition to economic performance, practically broadening the conventional scope of reporting [4]. As a result, at the end of the 1990s, the concept began to be adopted by many companies, marking a first step in balancing social and environmental responsibilities with economic objectives.

The implementation of the EU Non-Financial Reporting Directive (NFRD), adopted by the European Union in 2014, into the national laws of EU member states has led to an increase in sustainability reporting at a higher level [5]. However, in 2021, the EU Commission adopted the Corporate Sustainability Reporting Directive (CSRD), which will impact approximately 50,000 companies, starting in 2023 [6]. Thus, according to the new directive, in order to meet ESG reporting requirements, companies need to adapt and make efforts to adapt their strategies and transformation in order to leverage ESG potential. Sustainable business involves more than financial, ecological, and social barriers: sustainability also denotes the ethical consequences of such actions. As such, many companies are working to adapt their management structures to the new requirements [7]. Management and other stakeholders of companies increasingly see sustainability as an important component of corporate governance [8], even if, for business, the SDGs have been referred to as ‘a purchase order from 2030 for business and government action today’ [9]. According to Radu et al. [10], the alignment between environmental, social, and governance (ESG) performance and sustainable development goals helps practitioners to observe corporate contributions to sustainable growth.

Studies and the specialized literature support the idea that an internal audit is an advanced form of control that emerged after the financial frauds of the last century [11]. They attest to its effectiveness in corporate governance [12,13] and its role in providing reasonable assurances and consultancy regarding the reliability of financial reports [14,15].

According to the Global Institute of Internal Auditors, an “internal audit can and should play a significant role in an organization’s ESG journey” [16] because it “provides independent, objective assurance and consulting services designed to add value and improve an organization’s operations” [17]. This means that strong ESG governance requires an internal audit to be well-positioned within the entity [16].

As HaoYue and Loang pointed out in 2023, internal auditors’ roles are to update management on operational and compliance issues and work with management to create a sustainability management system.

The problem that arises in practice is that the importance of ESG issues is generally accepted by management and the board, but sometimes ESG risks remain neglected in the day-to-day work of internal auditors [18]. Given this, Lenz and Hoos pointed out that the work of internal auditors does not have enough ESG aspects embedded in it, little attention is paid to assurance services, and advisory services are missing altogether.

Following a survey of internal auditors in Romania conducted by KPMG, the priority issues in the internal audit plan for 2019 are “operational efficiency and effectiveness of internal processes, alignment of operations with company objectives, and compliance with regulations and reporting” [5]. In 2021, PwC [19] conducted a survey among listed companies in Canada to find out if they are prepared, or how they have prepared, from an ESG perspective. The survey results show that, for ESG, only 30% of respondents have an implementation plan developed and 40% have ESG KPIs in place. In terms of assigned ESG responsibilities, 40% declare their existence and most respondents (72.22%) stated that they have non-financial reports reviewed by external auditors. In view of these, i.e., the increasing importance of environmental, social, and governance issues and the role of internal auditors in this area [18,20], it becomes necessary to analyze the perception of internal auditors on these issues. Studies conducted by professional bodies [16,21] or academic researchers generally focus on the role and maturity of the internal audit function in the ESG domain, as associated with ESG reporting [20,22,23].

Thus, this paper aims to identify whether internal auditors in Romania are able to contribute to ESG reporting and achieving the sustainable development goals through specific objective assurance and advisory activities. This approach has been used in the literature by Canestrari-Soh and Matinov-Bennie, who explored internal auditors’ perceptions of environmental, social, and governance assurance and consulting in Australia, as well as the adequacy of their skills and expertise to meet the challenges associated with engaging with these issues [24]. Also, we find arguments that support the need to involve the internal audit in ESG assurance and consulting [25,26,27,28,29], but, at the same time, one can observe the ambiguity of its role in added value [30,31,32]. Also, previous studies mainly focused on IAFs performing a role in this regard [24,33,34,35], ensuring ESG reporting [36,37,38,39], and focused less on the advisory component [20].

Our study is based on a survey-type analysis, applied to internal auditors in Romania, regarding their role in ESG reporting and sustainable development goals. In support of our research objective, we tried to identify the works published in the Web of Science databases that mention in the abstract the notions of internal audit, ESG, and SDG. The search generated only one paper [40] that examines the intermediate effect of earnings management in the governance mechanism and financial misrepresentation through the lens of SDG and ESG: a study of non-financial firms in Pakistan. The study considers the internal governance mechanisms of firms, ESG’s governance aspects, and SDG-17, without referring to the internal audit.

Given this, our research is motivated by the low number of studies that analyze the relationship between internal audit, ESG, and SDGs.

Thus, our study adds to internal audit research as it identifies its contributions in ESG and SDG reporting processes, and we believe it thus contributes to the literature in several ways. First of all, our study analyzes the role of the internal audit in companies’ ESG and SDG reporting. Thus, it responds to the demand for additional research on the assurance of ESG practices [38]. Second, we provide information regarding the level of the involvement of companies in ESG and SDG factors.

Our findings can help companies that report on ESG and SDGs, or are going to report on them, giving them the necessary arguments to involve the internal audit function in this process. Moreover, our study should also be of interest to internal auditors who can develop their assurance and consulting activities regarding ESG and SDG practices, in order to provide support to companies in this process.

Our work is organized as follows: prior research on the topic and hypotheses based on the analysis of similar studies; the sample selection process and methodology; the section of obtained results and the main findings; the limits of our study; and the potential for future works on the topic.

2. Literature Review and Hypothesis Development

2.1. Internal Audit’s Role and Function

According to the Chartered Institute of Internal Auditors, “the role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively” [41]. However, the role of internal audit has changed over the years because it has needed to adapt, especially in the business world, so that the importance of internal controls and the roles of both the audit committee and the internal audit function in monitoring control activities have grown in recent years [42].

In 1975, the IIA best described the broad role of internal auditing in the Statement of Responsibilities of Internal Auditing, as follows [43]:

• “Reviewing and appraising the soundness, adequacy and application of accounting, financial, and operational controls”.
• “Ascertaining the extent of compliance with established policies, plans, and procedures”.
• “Ascertaining the extent to which organizational assets are accounted for and safe-guarded from losses of all kinds”.
• “Ascertaining the reliability of accounting and other data developed within the organization”.
• “Appraising the quality of performance in carrying out assigned responsibilities”.

The IIA’s International Professional Practices Framework (IPPF) describes how internal audit adds value [16] as “… bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”. Sinha and Arena [44] investigated the manifold conceptions of the internal auditing of risk culture, and their results indicate that internal audit practices could include intangible objects such as risk culture and ethics. Regarding internal audit effectiveness, Lenz and Hahn [45] indicated a significant disconnect between the “demand-side perspective”, represented by the expectations and perceptions of the accounting information users, and the “supply-side perspective”, represented by internal auditors’ evaluations.

A survey, made by KPMG, of internal auditors in Romania highlights [46] “the need for a better alignment of the internal audit function to the objectives of the organization and a greater focus on increasing operational efficiency and effectiveness… The study reveals that organizations currently perceive these measures to optimize their internal audit function as “nice to have”, but it is important to point out that the increasingly demanding level of internal audit requirements and regulations requires rethinking the process and a clear repositioning of the role of the internal audit function in such a way that it responds better to the company’s objectives”.

In 2024, the IIA developed the Global Internal Audit Standards [47], which states that “Internal auditing strengthens the organization’s ability to create, protect, and sustain value by providing the board and management with independent, risk-based, and objective assurance, advice, insight, and foresight”.

Moreover, the profession is adapting and the new standards clearly state that “internal auditing contributes to an organization’s overall stability and sustainability by providing assurance on its operational efficiency, reliability of reporting, compliance with laws and/or regulations, safeguarding of assets, and ethical culture”.

In these conditions, a clear understanding of the issues is needed in an increasingly dynamic environment that is more inclined towards sustainability reporting activities. Management must pay more attention to internal control and governance activities. Internal control is designed to provide reasonable assurance about the achievement of the organization’s objectives, while governance requires appropriate structures and processes to enable the following [48]:

• “Accountability by a governing body to stakeholders for organizational oversight through integrity, leadership, and transparency”.
• “Actions (including managing risk) by management to achieve the objectives of the organization through risk-based decision-making and application of resources”.
• “Assurance and advice by an independent internal audit function to provide clarity and confidence and to promote and facilitate continuous improvement through rigorous inquiry and insightful communication”.

2.2. Internal Audit’s Role in ESG Reporting

Organizational well-being in the business sphere has gone beyond the area of strategies and financial values; now, more than ever, it must also reflect environmental, social, and governance aspects. Only in this way, by changing the attitude, can we talk about added value in the long term, and strong governance in the ESG sphere requires the alignment of key players, where “internal audit must be well positioned to support management with objective assurance, insights, and advice on ESG aspects” [16]. The new directive on non-financial disclosure (NFD) aims to strengthen the role of internal audit through the preliminary assurance it can offer in the integration of environmental, social, and governance aspects. The IIA mentions that “internal audit can and should play a significant role in an organization’s ESG journey” [16].

Following the international trend, also within Romania, the profession of internal audit has developed and undergone significant changes. Thus, according to art. 65 par. 7 from Law no. 162/2017, a businesses whose annual accounts are legally audited are obliged to organize and ensure the implementation of internal audit activities. At the same time, the law requires public welfare entities to organize audit committees. From an ESG perspective, following international trends, to support Romanian companies in addressing their ESG challenges, the Bucharest Stock Exchange recommends the establishment of internal audit analyses and procedures that incorporate environmental and social risks into the general risk management processes [49]. As a result, there is a growing recognition, both nationally and internationally, of the role that internal audits can play in improving ESG reporting.

The involvement of the internal audit in the ESG sphere seemed promising [50]; in 2010, the IIA conducted a Global Internal Audit Survey [51] and, according to the results, professionals expected to significantly increase interest in social, sustainability, corporate governance, or ethics audits, to the detriment of operational and compliance audits, as well as the involvement of internal audits in ESG areas such as health or safety at work [52,53], environment [34], or ESG reporting [54]. Ridley [55] stated that “all internal auditors should be contributing to the global achievement of the United Nations (UN’s) 2015 sustainable development goals. Auditors’ scope, assurance, consulting, and practices should all be working toward accomplishing each of the 17 U.N. goals for environmental, social, and governance (ESG).”

The proliferation of practice guidelines related to ESG by the Institute of Internal Auditors [24] confirms the body’s interest in involving professionals in specific ESG fields. Thus, the involvement of internal auditors in this sphere must correspond to its general nature, that is, to include assurance and independent and objective advice, which are fundamental in the missions of the internal audit.

Therefore, the growing demands in the ESG sphere [56] and, implicitly, the need for assurance [27,57] offer internal auditors the opportunity to provide support and incorporate sustainable development considerations in governance oversight [38,58].

Internal auditors can and should be valuable actors in the complex field of ESG [59]. The advantages identified in ESG assurance can be seen in their skills in reviewing and evaluating the processes and controls used to generate, collect, and disclose information [60]. Another significant advantage is the comprehensive understanding of company-specific processes and risks, which, together with existing controls, lead to the orientation of activities towards ESG-related objectives [61]. Further, the specialized literature supports the three-line model as a starting point for an IAF that adds value [62]. Internal audit supports governance actors, together with monitoring and surveillance activities, through independent and objective assurance and advice [63], thus casting its position as an essential element in the assurance of good corporate governance [20].

From the perspective of research on the relationship between internal audit and ESG, in the specialized literature [61,62,63,64], a lack of relationship can be observed; moreover, the conclusions highlight the ambiguity of its role in added value [30,31]. What can be observed in previous studies is that they focus mainly on the assurance side of ESG reporting [36,37] and very little on the advisory aspects [38,39]. Eulerich and other authors conducted a functional analysis to gain a holistic view of internal auditors who deliver value through assurance and ESG consulting functions. However, what are the techniques in the current practice of internal auditors? What is the attitude approached them regarding ESG, now, when the demands and pressures are increasing in this direction? In September 2020, the IIA published OnRisk 2021, and the key finding on sustainability (ESG) revealed that it was not yet seen as a significant area of risk by boards, management, or internal audit. Collectively sustainability was considered the least relevant of the 11 risks examined in the report [16].

In 2022, Chambers raised a ‘red flag’ for internal auditors, accusing them of not giving enough weight to ESG risks, concluding that “overall, ESG is one of the fastest-growing risks this year” [64]. For 2023 audits, one author conducted, among North American organizations, a survey of 188 CAEs and internal audit directors, where he concluded that ESG risks are at the bottom of the priority list. According to the research, ESG risks have a significantly lower priority than cyber and data security, regulatory changes, attracting and retaining talent, macroeconomic conditions, supply chain issues, etc. [64]. To extend the analysis to the European level, based on a survey conducted on 107 internal auditors, Eulerich et al. [20] repeated the results of the Chambers survey. Given the paucity of research on internal audits and ESG (Behrend and Eulerich, 2019; Christ et al., 2021, Nagy 2021) [65,66,67] and the ambiguity of their role in terms of added value [30,31], the aim of the authors was to conduct a holistic analysis of internal auditors that generates value through both assurance and consulting in the ESG field. Following the study, the authors obtained empirical evidence regarding the role of the internal audit in the commitment and assurance of environmental, social, and governance factors. The inconsistency identified by them consists in the disagreement between academics and practitioners regarding the responsibilities of internal auditors in matters related to ESG. Another result of the applied statistical regression highlights the association of ESG reporting with the level of the maturity of organizations regarding ESG and internal audit functions. Regarding the involvement of IAFs in ESG, the authors identify a significant association with an assurance of ESG reports. Moreover, the obtained results place the environmental pillar as the basic element of sustainability that bears the greatest risk, thus motivating the need for insurance. Consequently, due to this imbalance between assurance and consulting activities on the part of internal auditors, the IAF’s positioning regarding added value in a complementary relationship with external auditors is undermined and, in most situations, unaddressed [20]. Lenz and Hoos [18] identified an “ESG impotence syndrome” of internal auditors who do not play a decisive role in their capacity as assurance providers. From the perspective of advisory services, they are lacking. The authors use a metaphor and compare the internal audit function in the face of ESG factors with the animal world. According to the study, internal auditors freeze when it comes to ESG topics. Furthermore, the authors challenge the auditors’ professional demand for “objectivity” and “independence” in the context of ESG, as they believe that these could represent an obstacle to the development of the ESG agenda.

2.3. Internal Audit’s Role in Sustainable Development Goals (SDGs)

The United Nations’ sustainable development goals (SDGs) provide a global framework for achieving global development, and they progress beyond how economic, environmental, and social issues affect a company’s short- and long-term operations [68].

Although, when we talk about the SDGs, the first thought is paid to a country’s government, the objectives are addressed to all actors in society. Companies must be seen as agents of sustainable development [7] by viewing sustainability as an important component of corporate governance [8].

In this context, according to HaoYue and Loang, internal auditors are a component of good governance. They must update management regarding operational and compliance aspects, thus creating a sustainability management system that they can audit in the future. Moreover, the internal auditor can help the company by determining the extent to which the current processes are adequate and can also help the company to achieve its strategic objectives.

Hazaea et al. [68] conducted a study on sustainability assurance practices, as a result of which it was found that objective assurance is one of the factors present in the internal auditor’s practices that positively impacts sustainable development objectives. The conclusions of the study underline the fact that reporting based on objective assurance helps to strengthen the company’s sustainable development objectives that are currently established.

Coşkun and Akgül [66] carried out research, after which they identified the sustainability management model according to the risk management analysis. Following the analysis, it was found that risk management increases the objectives of sustainable development, which, in turn, allows companies to achieve these objectives, resulting in a positive relationship between the two variables.

HaoYue and Loang [7] examined internal audit’s impact on the adoption of SDGs in Chinese firms. They established objective assurance, risk management, compliance, compliance with standards, and control efficiency as the independent variables. Also, governance, assurance, and reporting were the control variables that remained constant throughout this study. The result reached by the researchers indicates that objective assurance and risk management are the only significant variables for SDG adoption.

Based on the literature review, we formulate the following research questions:

• What is the perception of the auditors regarding the management vision of the ESG factors and the sustainable development goals?;
• Does the internal audit have an important role in ESG reporting and the sustainable development goals?;
• Is the level of reporting regarding ESG or SDGs of companies influenced by the involvement of internal audits?

To answer the above questions, this study proposes the following research hypotheses:

H1. 

There is a significant relationship between the internal auditor’s activity and management’s vision of the ESG and SDGs;

H2. 

There is a significant relationship between the internal auditor’s activity and ESG and SDG reporting;

H3. 

A significant relationship exists between companies’ reporting on ESG and SDGs and the internal auditor’s activity.

3. Sample Selection Process and Research Methodology

3.1. Sample Description

At the national level, the internal audit activity in the private sector is regulated by the Chamber of Financial Auditors of Romania (CAFR) and is carried out in accordance with the mandatory norms of the International Professional Practices Framework (IPPF), issued by the Institute of Internal Auditors (IIA Global) and adopted by CAFR. Moreover, the Romanian Statutory Audit Law 162/2017 again emphasizes the importance of the internal audit and the existing requirements in the Commercial Companies Law 31/1990 and EO 75/1999, according to which internal audits are mandatory for the entities that are the subject of the statutory audit.

In Romania, the qualification requirements for an internal auditor require that he/she fulfill one of the following conditions:

-

To be a Certified Internal Auditor (CIA) member of the Association of Internal Auditors from Romania (A.A.I.R.). The association is affiliated with the international organization of internal auditors—The Institute of Internal Auditors;

-

To be a financial auditors as a member of the Chamber of Financial Auditors of Romania (CAFR). According to the national legislation GEO 75/1999 regarding the financial audit activity, republished, art. 23, “those responsible for organizing the internal audit activity, coordinating the works/commitments and signing the internal audit reports must have the quality of active financial auditor”.

In order to comply with the General Data Protection Regulation (GDPR) and to proceed as professionally as possible, the applied questionnaire was sent to the two organizations mentioned above (Association of Internal Auditors from Romania and Chamber of Financial Auditors of Romania) in order to be distributed to members. At the end of the period of administration, 93 valid questionnaires were received.

3.2. Research Methodology

According to a 2021 white paper from The Institute of Internal Auditors [16], ESG and sustainability-related engagements only made up about 1% of typical internal audit plans for North American companies in 2021. Starting from these data and the survey of Internal Auditors in Romania [46], which had as its central objective “to define the role of the internal audit function and to describe the way in which internal audit processes are currently being carried out”, we created a questionnaire that was addressed to internal auditors in Romania. Our study is among the studies based on the questionnaire, carried out by investigating internal auditors in Romania regarding their role in ESG reporting. The main objective of our study is to investigate the role of internal audits in ESG reporting and sustainability matters. From this perspective, the research instrument used was the questionnaire that was sent to internal auditors, members of the Association of Internal Auditors from Romania (AAIR), and the Chamber of Financial Auditors from Romania (CAFR).

The questionnaire contains 24 questions aimed at the following objectives:

The first 5 questions looked at the position held by the auditor within the company and their seniority in the field, the average number of employees, net turnover, and total assets of the companies;

Another series of 4 questions analyzed internal auditors’ perception of management’s attitude towards ESG factors and sustainable development objectives;

The last 15 questions in the series examined the role of internal audits in providing objective assurance and advice on ESG reporting and sustainability matters.

Following the application of the questionnaire and the data quality checking procedures, the final sample size employed in this analysis was 93.

To answer the research hypothesis presented above, we use a progressive approach. First, we use cluster analysis to look for common features among auditors. Then, to clearly accept or reject our working hypotheses, we move on and end with regression analysis, the most powerful tool for proving relationships between variables. Hereinafter, we describe the methodological progress.

The first step in analyzing the answers received was cluster analysis, performed to naturally group respondents into homogeneous clusters based on their answers to the different questions that address the behavior concerning the variables of interest. The analysis is based on the Two-Step clustering procedure, automatically selecting the number of clusters. By comparing the values of a model–choice criterion across different clustering solutions, the procedure can automatically determine the optimal number of clusters and provide some evidence of internal auditors’ characteristics. As variables are mostly ordinal, the log-likelihood approach was used to measure distances and construct clusters. The likelihood measure places a probability distribution on the variables. Continuous variables are assumed to be normally distributed, while categorical variables are assumed to be multinomial. All variables are assumed to be independent. We present the cluster size, cluster quality (based on the Silhouette coefficient of cohesion and separation), description of clusters, and predictor’s importance. For the present analysis, the Cluster option was employed, from the Direct Marketing menu, IBM SPSS 24. After the cluster analysis, we considered it appropriate to statistically test the correlations between the variables using nonparametric correlation analysis (Kendall) and directional measures, using Somers’ delta (Somers’d). Nonparametric methods are required, as (1) our variables are ordinal and (2) the sample size is regular and not large. Kendall’s T rank correlation coefficient (tau) is a correlation coefficient for non-parametric data in the case of variables that lie in a real mode at a purely ordinal level [69], with the formula given by Equation (1):

$${\mathsf{\tau }}_{\mathrm{b}}={\displaystyle \frac{\mathrm{P}-\mathrm{Q}}{\mathrm{P}+\mathrm{Q}}}$$

(1)

where P = coefficient of concordance, or the number of concordant pairs, and Q = coefficient of discordance, or the number of discordant pairs.

Somers’ delta (Somers’ d) is a nonparametric measure of the strength and direction of association that exists between an ordinal dependent variable and an ordinal independent variable, by trying to estimate the cause-and-effect relationship, starting from Kendall’s tau b:

$${\mathrm{D}}_{\mathrm{Y}\mathrm{X}}={\displaystyle \frac{{\mathsf{\tau }}_{\mathrm{b}}(\mathrm{X},\mathrm{Y})}{{\mathsf{\tau }}_{\mathrm{b}}(\mathrm{X},\mathrm{X})}}$$

(2)

We have decided that is appropriate to use Somers’ delta because our data fulfilled the assumptions that are required for a valid result [70]: (1) we have one dependent variable and one independent variable, and both are measured on an ordinal scale, and (2) we have a monotonic relationship between the dependent and independent variable.

But the nonparametric relationship assessment [71] is just like the correlation analysis for scale data—an intermediary step, meant to show us if it makes sense to model the relationships using the regression analysis. Consequently, the last step of the analysis consists of running ordinal regression to account for the factors’ impact on the company’s/management team’s visions related to ESG. Ordinal regressions were constructed using the Cauchit linkage function, as both dependent variables have the last group (highest sufficiency level—sufficient) with the highest frequency. Equation (3) gives the ordinal logit regression model, while Equation (4) presents the linkage function used:

$$\mathrm{L}\mathrm{o}\mathrm{g}\mathrm{i}\mathrm{t}\left[\mathrm{P}\left(\mathrm{Y}\le \mathrm{j}|\mathrm{X}\right)\right]={\mathsf{\alpha }}_{\mathrm{j}}+{\sum }_{\mathrm{k}}{\mathsf{\beta }}_{\mathrm{k}}{\mathrm{X}}_{\mathrm{k}}$$

(3)

$$\mathrm{f}\left(\mathrm{y}\right)=\mathrm{t}\mathrm{a}\mathrm{n}\left(\mathsf{\pi }\left(\mathrm{y}-0.5\right)\right)$$

(4)

where $\mathrm{j}=\overline{1,\mathrm{J}-1}$ and k = number of factor variables employed in the model, while all other symbols have the regular meaning.

The last group is set as the comparison basis.

All analyses were conducted in IBM SPSS 24.

3.3. Results and Discussions

The first part of the questionnaire focused on some questions to help us identify the auditor’s position within the company and seniority in the field. It can be seen that 59% of the respondents are internal auditors within the company and 41% are the coordinators of the internal audit function. From the point of view of the experience held within the profession, 55% of the respondents have an experience of more than 10 years, approximately 25% have an experience between 5 and 10 years, and 19% have an experience of less than 5 years.

The following questions concerned the average number of employees, net turnover, and total assets of the companies. Their purpose was to select entities that, according to national reporting legislation (mandatory or voluntary) or according to the Corporate Sustainability Reporting Directive (“CSRD”), are required (or not) to report on ESG. The national legal framework for ESG reporting is constantly evolving: the normative acts in force are aimed at the obligation of companies that either have on average more than 500 employees and have total assets greater than 20 million euros or have a turnover with a net value greater than 40 million euros to present, in their annual report, a series of information that falls within the scope of ESG factors. The Corporate Sustainability Reporting Directive (“CSRD”), which concerns the European regulatory framework, extends the scope of the reporting requirements under the Non-Financial Reporting Directive (“NFRD”) to all companies that have 250 employees or more and are listed companies. Given these conditions, our results show that over 25% of the companies have more than 250 employees, approximately 51% have between 50 and 250 employees, and the remaining 22% have fewer than 10 employees. From the point of view of the turnover, 52% of the companies have a turnover of up to 40 million euros and the remaining 48% exceed 40 million euros.

For the validation of the first hypothesis H1: There is a significant relationship between internal auditor’s activity and management vision of ESG and SDGs, the clustering procedure was chosen to determine how companies view sustainable development. Although there is no direct link between ESG scores and SDGs [72], previous studies [73] mention the possibility of determining the impact on SDGs in relation to ESG scores.

The first clustering procedure, based on variables, showed that the internal audit’s perception regarding the management’s attitude toward ESG factors (environment, social, and governance) and SDG has 2 depicted clusters, with shares of 63.4% and 36.6% of the sample. The procedure can be considered efficient, as the Silhouette coefficient is almost 0.3 (a fair quality level).

As can be seen from Figure 1, cluster 1 consists of 63.4% from respondents reporting in one form or another on governance (96.6%), environment (84.7%), and social issues (96.6%). Governance refers to variables such as business ethics (59.3% do not report anything), board and leadership (audits, internal controls—78% report), intellectual property protection (84.7% do not report anything), and shareholder rights and discrimination (86.4% don’t report anything). Environmental takes into account how an organization operates while taking into account nature, and our question about the reports included issues related to waste management (69.5% report), carbon emissions (67.8% do not report anything), supply of raw materials (67.8% report nothing), and water management and vulnerability to climate change (83.1% report nothing).

The variables that form the social group examine how entities manage relationships with employees, customers, and the community in general. From the perspective of the risks that fall into this category, we can include general security, corporate social responsibility, health, safety and well-being, data privacy (64.4% report), labor management, fraud, corruption, and money laundering (64.4% report).

Reporting on governance and the environment is the most important predictor, followed by waste management, then management structure and controls (audit, internal control), etc. These are respondents who consider that the management team has a sufficiently (30.5%) clear vision of the SDGs and a sufficiently (37.3%) clear vision of how the company can contribute to fulfilling the SDGs. The cell distribution regarding these answers is represented in Figure 2.

Cluster 2 is made up of observations related to companies that mostly do not report anything. It is interesting to see that, for the last two variables used in this clustering procedure (the ones related to the clarity of the vision about SDGs and how the company can contribute to fulfilling them), these respondents also mostly attach the highest level—sufficient (26.5% and 38.2%).

Based on the first hypothesis, there is a significant relationship between internal auditors and the ESG and SDG management vision. We used the Kendall T (tau) rank correlation coefficient to test the correlations between these variables. According to

Table 1. Kendall T rank correlation coefficient.

Does the Management Have a Clear Vision of Sustainable Development Goals and ESG?	Does the Management Have a Clear Vision of How the Entity Can Contribute to Achieving Sustainable Development Goals and ESG?	No	Insufficient	Insufficient but Developing	Little Bit	Sufficient	Total
No	Count	5	0	0	1	0	6
	% of Total	5.4%	0.0%	0.0%	1.1%	0.0%	6.5%
Insufficient	Count	2	15	2	3	0	22
	% of Total	2.2%	16.1%	2.2%	3.2%	0.0%	23.7%
Insufficient but developing	Count	0	3	14	1	3	21
	% of Total	0.0%	3.2%	15.1%	1.1%	3.2%	22.6%
Little bit	Count	2	0	0	9	2	13
	% of Total	2.2%	0.0%	0.0%	9.7%	2.2%	14.0%
Sufficient	Count	0	0	4	1	26	31
	% of Total	0.0%	0.0%	4.3%	1.1%	28.0%	33.3%
Total	Count	9	18	20	15	31	93
	% of Total	9.7%	19.4%	21.5%	16.1%	33.3%	100.0%

Source: authors’ calculations in SPSS 24.

, the analysis results show a strong and direct significant connection between the selected variables, p-value = 0.000 << 0.05, and Kendall’s correlation coefficient is 0.710.

Therefore, according to the perception of the internal auditors’ perception, management has both an appropriate SDG culture and a vision of how the entity can contribute to achieving the SDG objectives, but 36.56% of the respondents agree with the fact that the entities in which they operate do not report anything regarding ESG.

Regarding research hypothesis H2: There is a significant relationship between the internal auditor’s activity and ESG and SDG reporting, we used a Two-Step clustering procedure to identify the homogeneous groups of respondents regarding the internal audit role and function in ESG reporting. The optimal number of clusters identified was 3, as can be seen in Figure 3, for which the silhouette measure of cohesion and separation was 0.3 (a fair quality level).

Cluster 1 represents 31.2% of the sample, with 29 answers, and is made up of respondents that most frequently do not report aspects of assurance and advice on ESG issues, as can be seen in Figure 4. Cluster 2 is the largest one—51.6%—with 48 observations related to companies in which, with a relatively low frequency, the internal audit provided objective perspectives, assurance, and advice over ESG reporting and have scheduled one mission that also deals with aspects of ESG.

Cluster 3 (17.2% of the sample) is made up of 16 respondents who state that an internal audit is frequently involved in ESG issues like analysis of trends and main causes affecting sustainability (through the lens of the three groups of factors: environmental, social, and governance)—75%, predictive analytics on sustainability, using risk and performance indicators (81.2%), ESG risk management/mitigation advice (50%), and missions are scheduled to also deal with SDG and ESG issues (31.2%).

Relationships between variables that capture the internal audit’s role in ESG reporting were assessed not only from the classical correlation point of view, but we also added the direction by using Somers’ delta statistic. The dependent variable refers to the fact that an internal audit can help with sustainable development objectives and ESG reporting through its activity of objective assurance and advice. The factors that influence our dependence refer to the activities carried out by the internal audit of the analyzed entities to achieve sustainable development objectives and ESG reporting.

We thus demonstrate that, in all cases, the dependency is significantly impacted by the considered factors (p-value < 0.05 in all cases—see

Table 2. Linkage analysis—Kendall’s correlation coefficient.

	Kendall		Somers’ Test
Internal Audit Can Help with Sustainable Development Objectives and ESG Reporting through Its Objective Assurance and Advisory Work	Coef.	p-Value	Dependence	Factor
Have you yet reported to management and the Board on sustainability?	0.549 ***	0.000	0.563	0.536
Have you reviewed ESG reports for relevance, accuracy, and timeliness?	0.471 ***	0.000	0.486	0.456
Have you reviewed ESG reports for consistency with financial reporting?	0.449 ***	0.000	0.462	0.435
Have you conducted risk and materiality assessments on ESG reporting?	0.434 ***	0.000	0.444	0.424
Do you have scheduled missions that also deal with aspects of the Sustainable Development Goals?	0.387 ***	0.000	0.413	0.363
Do you provide ESG (Environmental, Social, and Governance) risk management/mitigation advice?	0.409 ***	0.000	0.422	0.398
Do you advise on the development of internal controls specific to ESG reporting?	0.557 ***	0.000	0.590	0.525
Do you provide recommendations on the type of data (quantitative and qualitative) that accurately reflects the organization’s relevant sustainability efforts?	0.514 ***	0.000	0.518	0.510
Do you provide recommendations/guidance on ESG governance?	0.303 ***	0.001	0.328	0.281
Have you performed predictive analytics on sustainability using risk and performance indicators?	0.572 ***	0.000	0.593	0.552
Have you analyzed the trends and main causes affecting sustainability (through the lens of the three factors: environmental, social, and governance) in the organization in which you work?	0.505 ***	0.000	0.516	0.495

***, Correlation is significant at the 0.01 level (2-tailed). Source: authors’ calculations in SPSS 24.

). Additionally, all correlation coefficients belong to the [0.3; 0.7] interval, emphasizing a direct and medium-intensity impact of these factors.

In the specific case of our survey, most of the answers lie in the negative part of the measurement scale. Consequently, respondents claim that an internal audit does not offer at all (9.7%), or it very rarely offers (14%), the objectives of assurance and counseling related to sustainable development objectives or ESG reporting. According to our results, research hypothesis H2 is not confirmed: internal audit reporting, examination, evaluation, advisory activities, or recommendations related to ESG or SDGs are missing or very rare.

The analysis of the last research hypothesis H3: There is a significant relationship between companies’ reporting on ESG and SDG and internal auditor’s activity, consists in running ordinal regression. We employ two dependent variables in these ordinal regression models: according to internal auditors, (1) the management has a clear vision of the sustainable development goals and ESG factors and (2) the management has a clear vision of how the entity can contribute to achieving the sustainable development goals and ESG factors. The two dependent variables are the ones that reflect the management team’s vision related to the sustainable development goals (SDGs) and ESG, along with how the entity can contribute to achieving them. The considered factors are variables that try to identify the internal audit’s implication level in ESG activities, as can be seen in

Table 3. Parameter estimates of the first dependent variable.

Parameters		Estimate	Std. Error	Wald	df	Sig.	95% Confidence Interval
							Lower Bound	Upper Bound
Threshold	[Man_SDG = 0]	−206.845	1.992	10,777.397	1	0.000	−210.750	−202.940
	[Man_SDG = 1]	−202.752	0.493	169,467.550	1	0.000	−203.717	−201.786
	[Man_SDG = 2]	−201.895	0.446	204,942.723	1	0.000	−202.769	−201.021
	[Man_SDG = 3]	−201.355	0.437	212,313.471	1	0.000	−202.211	−200.498
Location	[ESGreports_quality = 0]	−202.150	0.515	153,781.755	1	0.000	−203.161	−201.140
	[ESGreports_quality = 1]	−201.697	0.550	134,308.736	1	0.000	−202.776	−200.619
	[ESGreports_quality = 2]	−202.296	0.571	125,332.689	1	0.000	−203.416	−201.176
	[ESGreports_quality = 3]	−201.475	0.000		1		−201.475	−201.475
	[ESGreports_quality = 4]	0 a			0

Source: authors’ calculations in SPSS 24. Link function: Cauchit. a. This parameter is set to zero because it is redundant.

.

The first dependent variable (according to internal auditors, the management has a clear vision of the sustainable development goals and ESG factors) is significantly impacted by aspects related to ESG report examination, ESG reporting risk and materiality assessments, ESG risk management/mitigation advice, analyzed trends, and root causes affecting sustainability. In all cases, the independent variables’ coefficients are negative (Table 3). Respondents that did not evaluate each time the relevancy, accuracy, and promptitude of ESG reports have a higher probability of having a less clear vision and perspective. All other considered factors turned out to be insignificant.

In the case of the second dependent variable (according to internal auditors, the management has a clear vision of how the entity can contribute to achieving the sustainable development goals and ESG factors), once again, the coefficient of the significant variables is negative.

Table 4. Parameter estimates of the second dependent variable.

Parameters		Estimate	Std. Error	Wald	df	Sig.	95% Confidence Interval
							Lower Bound	Upper Bound
Threshold	[man_contribSDG = 0]	−429.721	1.019	177,909.909	1	0.000	−431.718	−427.725
	[man_contribSDG = 1]	−427.533	0.477	801,821.104	1	0.000	−428.469	−426.598
	[man_contribSDG = 2]	−426.596	0.404	1,117,591.862	1	0.000	−427.387	−425.806
	[man_contribSDG = 3]	−425.826	0.360	1,399,978.745	1	0.000	−426.531	−425.120
Location	[internalauditESG = 0]	−427.421	0.644	440,635.147	1	0.000	−428.683	−426.159
	[internalauditESG = 1]	−426.445	0.497	737,575.420	1	0.000	−427.419	−425.472
	[internalauditESG = 2]	−427.176	0.526	660,270.953	1	0.000	−428.206	−426.145
	[internalauditESG = 3]	−425.866	0.000		1	0.000	−425.866	−425.866
	[internalauditESG = 4]	0.000	6327.7	0.000	1	1.000	−12,402.080	12,402.080
	[internalauditESG = 5]	0 a			0

Source: authors’ calculations in SPSS 24. Link function: Cauchit. a. This parameter is set to zero because it is redundant.

shows the impact of internal audit work, which can provide objective assurance and advice on sustainable development objectives and ESG reporting.

The results obtained confirm H3: Companies’ reporting on ESG and SDG factors is influenced by the internal auditor’s activity. In organizations where internal auditors do not provide assurance and objective advice on commitments related to sustainability, the management does not have a clear vision and has not taken measures to achieve the sustainable development goals and ESG factors.

4. Conclusions, Limitations, and Further Research

Concepts such as sustainability, sustainable development, responsibility towards the environment, and others are not new concepts. They appeared and were defined a long time ago; however, the interest in these concepts has grown extremely rapidly lately. Governments, companies, regulatory institutions, non-profit organizations, and even educational institutions have emphasized the activities carried out from the notion of a sustainable development perspective. Thus, the number of problems related to sustainability, the risks that may arise in this process and the need to find the most effective solutions have also increased.

Our analyses lead us to a promising conclusion that audit can and should play a pivotal role in an organization’s ESG and SDG journey. It can contribute significantly through its advisory function, aiding in the identification and establishment of a robust ESG control environment. Simultaneously, it can provide assurance by conducting independent and objective analyses of the effectiveness of ESG risk assessments, responses, and controls. The discretion that comes with this function is a valuable asset. We concur with the findings of Sinha et al. [74] that “the ability of internal auditors to exercise their discretion is enhanced when the organizational embedding allows the coexistence of several institutional logics at the organizational level”. This potential for a more impactful role in ESG and SDG efforts should be a source of optimism for the future.

Internal auditors’ expertise in the field of internal control, risk, and corporate governance offers companies a chance to use these skills in their own activities. The support that internal auditors can provide in sustainability activities is indisputable. Through assurance and advisory activities, they can improve the transparency, responsibility, and credibility of reporting on ESG and SDGs.

Through this article, we explored the connection between the activities carried out by internal auditors at the level of companies in Romania and the reporting activity regarding ESG and the SDGs. The internal audit has the competence and authority to provide independent assurance and advice to company management, which can contribute to the reliability and integrity of sustainable development reporting practices. Companies must observe these skills of internal auditors and benefit from them.

The results of our study showed that internal audit can help with ESG and sustainable development objectives reporting through its activity (the factors that influence the dependent variable refer to the activities carried out by the internal audit of the analyzed entities), but, according to our statistical results, the internal auditors do not offer at all (9.7%) or very rarely offer (14%) objective assurance and counseling related to the subject.

Moreover, the obtained results confirm that, in organizations where internal auditors do not very often provide objective assurance and advice on the achievement of the SDGs and ESG, the management does not have a clear vision of the sustainable development goals and ESG factors. The ordinal regression confirms that respondents who did not rate the relevance, accuracy, and timeliness of ESG reports considered that the probability of management having a less clear vision and perspective on ESG and SDG issues is high.

Considering that SDGs and ESG work together to determine how a company can achieve sustainable development, following the application of the questionnaire, we obtained 63.44% of answers regarding reporting in this direction. From the perspective of the environmental factor, 69.5% reported on waste management, while the other variables remain unreported. The variable board and leadership are marked as reported, within the governance, with a percentage of 78%. The last component—social—marks 64.4% of reports on data privacy and fraud, corruption, and money laundering. The interesting aspect regarding these results is the fact that these respondents consider that the management team has a sufficiently (30.5%) clear vision of the SDGs and a sufficiently (37.3%) clear vision of how the company can contribute to fulfilling the sustainable development goals. Thus, as a conclusion, it can be stated that the internal auditors perceive the management of the entities where they operate as prepared to achieve sustainable development objectives, although the reports made do not confirm this.

While our study’s results are local, focusing on a small part of global activity, the increasing prevalence of ESG reporting demands that it be treated with the same level of care as financial reporting. Our findings can be extrapolated to other contexts, especially those where the IIA’s globally recognized standards can assist organizations in applying established, credible internal control frameworks to their ESG efforts. This study has some limitations. First, the limits of our study are found in the sampling process and survey questions formulation. The questions were addressed only to internal auditors, and the number of examined variables is reduced. Second, the research’s scope has been limited to Romania; therefore, the generalization of the results in this study must be carried out with caution.

Future analyses can focus on using the gaps identified from the results. They can extend the sample to the management level, in order to obtain their perspective on ESG and SDG factors. Also, other countries may be included in order to reach a global sample, extending the present case study applied only to Romania.

However, considering the field’s rapid developments and complexity, we believe that our results offer valuable perspectives and can be a benchmark for future studies.