Audit Quality and Corporate Governance: Evidence from the Microfinance Industry

Abstract

This study uses a unique, hand-collected sample of microfinance institutions from 73 countries that typically are not investigated in accounting research to analyze the relationships between audit quality and governance mechanisms. We examine two measures of audit quality, namely, the use of Big Four auditors and the presence of internal auditors who report to the boards of these institutions. The empirical analysis of this study reveals that these two quality metrics are highly related, although we also demonstrate that these metrics capture distinctive aspects of audit quality. In particular, the presence of internal auditors is related to other indicators of stricter governance, whereas the use of Big Four auditors is generally unrelated to other control mechanisms. This study illustrates that there is no single association between audit quality and governance; instead, the relationships between these two characteristics are dependent on the specific mechanism that is investigated. However, for situations in which a significant relationship between audit quality and governance does exist, the sign of this relationship is always positive. Thus, our data support the complementarity view of these two traits that is espoused by prior research. We find no support for the contention that these control mechanisms function as substitutes. CEB AbstractThis study uses a unique, hand-collected sample of microfinance institutions from 73 countries that typically are not investigated in accounting research to analyze the relationships between audit quality and governance mechanisms. We examine two measures of audit quality, namely, the use of Big Four auditors and the presence of internal auditors who report to the boards of these institutions. The empirical analysis of this study reveals that these two quality metrics are highly related, although we also demonstrate that these metrics capture distinctive aspects of audit quality. In particular, the presence of internal auditors is related to other indicators of stricter governance, whereas the use of Big Four auditors is generally unrelated to other control mechanisms. This study illustrates that there is no single association between audit quality and governance; instead, the relationships between these two characteristics are dependent on the specific mechanism that is investigated. However, for situations in which a significant relationship between audit quality and governance does exist, the sign of this relationship is always positive. Thus, our data support the complementarity view of these two traits that is espoused by prior research. We find no support for the contention that these control mechanisms function as substitutes.2

Impact of corporate governance mechanism on IFRS adoption: A comparative study of Saudi Arabia, Oman, and the United Arab Emirates

“…Auditor choice refers to the choice of (Big-Four) external auditors that a company may select among other auditors ( Beisland et al., 2015 ; Soliman and Elsalam, 2012 ). A firm audited by a Big-Four auditor attends to provide IFRS voluntary disclosures pre-IFRS adoption ( Tarca, 2004 ).…”

Is the type of outsourced internal audit function provider associated with audit efficiency? Empirical evidence from Oman

“…Third, in recent years, IAF practice has evolved and attracted a large number of stakeholders from emerging countries. Beisland, Mersland, and Strøm () observed that 45% of 70 sampled emerging countries have established an IAF and prefer to use it as a control mechanism over other corporate governance (CG) mechanisms. Sarens and Abdolmohammadi () reported that emerging countries prefer to apply US IAF best practices than those of other developed countries.…”

External audit quality and clients' corporate governance mechanisms in Nigeria: Any nexus?

“…Using 73 developing countries across Africa, Asia, Europe, South America (excluding China, East Timor, and Trinidad & Tobago), Beisland, Mersland, & Strøm (2015) investigates audit quality (proxied with big4 versus non-big4 binary and presence of internal control) and governance mechanisms (internal and external) among microfinance institutions (non-profit and otherwise). The probit model specified for the study was estimated using multivariate OLS for unequal/unbalanced 1,616 firms/year observations comprising 379 microfinance institutions for 9 years spanning from 2001 to 2009.…”