Does external auditing combat corruption? Evidence from private firms

Abstract

Purpose This paper aims to document whether firms with audited financial statements pay lower bribes to get contracts than firms without audited financial statements. In other words, this study assesses whether external auditing helps combat corruption. Design/methodology/approach The World Bank Enterprise Survey data covering the period between 2006 and 2014 is used. The total sample comprised more than 50,000 firms in 126 countries. Findings This paper finds that firms with audited financial statements pay significantly lower bribes compared to firms with unaudited financial statements. The results are robust across various estimation procedures, various proxies for bribery and various sub-samples. It is also found that the relationship between audited financial statements and bribery is more pronounced in environments where firms face higher pressure to engage in corrupt practices. Practical implications The results imply that auditing of financial statements can act as a disciplining device to curb bribery in environments that encourage corruption. Originality/value This paper is the first attempt, according to the authors’ knowledge, to examine the relationship between external auditing and corruption using firm-level data that cover 126 countries and is gathered over a 14-year period. Therefore, the results derived from this study are generalizable.

Public Financial Management and Corruption in Indonesia: A Panel Cointegration and Causality Analysis

“…The empirical evidence of the linkages between auditing and corruption are presented by several studies. Farooq and Shehata (2018) studied the ability of external auditing to combat corruption, their study of private firms found that the firms with audited financial statements paid significantly lower bribes compared to firms without an audit. Neu, Everett and Rahaman (2011) investigated auditing's role on corruption in the public sector for the case of the Canadian Sponsorship Program, and found that fraud and corruption could occur within the public sector, even in the presence of seemingly robust controls.…”

Accounting Educator’s Role in Preventing Corruption

“…Some study showed that firms with audited financial statement pay significantly lower amounts in bribes than non-audited firms (Farooq and Shehata, 2018). In public sector, it found that audit independence and audit professionalism reduce the level of country's corruption (Gustavson and Sundstrom, 2016).…”

Hubungan Verifikasi Laporan Keuangan Terhadap Tindakan Suap Pada Usaha Kecil dan Menengah

“…Ada banyak faktor yang mempengaruhi perusahaan untuk melakukan suap salah satunya karena kurangnya perhatiaan perusahaan terhadap laporan keuangan. Farooq & Shehata (2018) menyatakan bahwa suap lebih nyata dapat terjadi di lingkungan perusahaan yang tekanannya lebih tinggi untuk terlibat dalam praktik suap.…”

“…Kualitas informasi dalam laporan keuangan dapat dinilai melalui kegiatan verifikasi laporan keuangan. Farooq & Shehata (2018) menyatakan bahwa kegiatan verifikasi merupakan proses konfirmasi yang meyakinkan keberadaan aset dan liabilitas yang tertera di laporan keuangan. Kegiatan verifikasi laporan keuangan dilakukan untuk memastikan bahwa laporan keuangan perusahaan telah memenuhi karakteristik laporan keuangan yang meliputi handal, relevan, dapat dipahami dan dapat dibandingkan.…”

“…Namun masih banyak perusahaan yang tidak menyadari akan pentingnya verifikasi atas laporan keuangan, khususnya pada perusahan usaha kecil dan menegah (UKM). Farooq & Shehata (2018) menyatakan bahwa perusahaan UKM cenderung sering mengalami suap diakibatkan tidak pernah melakukan verifikasi laporan keuangan.…”