Multiple audit mechanism, audit quality and cost of debt: empirical evidence from a developing country

Abstract

This study focuses on the distinctive Egyptian setting, where firms could use multiple audit mechanism voluntarily or mandatory under certain circumstances. We investigate the effects on audit quality and cost of debt. A sample of 1699 firm-year observations of Egyptian listed firms for the 2009-2019 period is used. Abnormal accruals are employed as proxies of audit quality through abnormal working capital accruals and modified-Jones models. Results suggest that joint audits are not associated with both proxies of audit quality. In contrast, the dual audit is positively associated with abnormal accruals leading to conclude that dual audits are not providing a high level of audit quality. But this result holds only in companies with income decreasing discretionary accruals. These results are in line with litigation and reputational risk fears offering motivations for auditors to favour conservative accounting alternatives (i.e., income decreasing discretionary accruals). This implies that firms opting to employ dual audits have a higher level of earnings conservatism. Our evidence also indicates that the choice of multiple audit mechanisms especially joint audits is related to significant increases in the cost of debt, implying a higher perceived level of risk. Further, dual audits decrease the cost of debt only in companies with high earnings management. This study adds to the literature on whether the preference of income-increasing or income decreasing discretionary accruals is related to multiple audit mechanism and consequently affected the cost of debt. Together, our results support the view that voluntary joint audits are not related to audit quality in Egypt compared to mandatory dual audits, which consequently affect the pricing of debt. Our results have important implications for policymakers, audit firms and investors.

Audit(or) type and audit quality in emerging markets: evidence from explicit vs. implicit restatements

“…2017), the current study provides much conclusive evidence. The results regarding dual audits are partially consistent with prior research in Egypt (El-Dyasty and Elamer, 2022a).…”

“…The findings in this study are consistent with prior research that relied on analytical approach (Deng et al , 2014) and accruals models (Holm and Thinggaard, 2018; Velte and Azibi, 2015) regarding the association between joint audits and audit quality. Furthermore, albeit the outcome of the association between joint audits and audit quality is consistent with prior research in Egypt (El-Dyasty and Elamer, 2022a; El-Dyasty. 2017), the current study provides much conclusive evidence.…”

“…In fact, Abdallah (2018) reported an inverse association between big 4 audit firms and audit quality. El-Dyasty and Elamer (2022a) studied the relationship between joint audits and dual audits with accruals as proxies of audit quality. The results showed that dual audits were directly linked to abnormal accruals, whereas joint audits were not associated with audit quality.…”

Roles of board of directors and earnings management across SMEs life cycle: evidence from the UK

“…Yasar (2013) finds that the big four audit firms can provide more quality audited reports than nonbig four audit firms. Big audit firms spend more money on auditor training and education to improve their capabilities in detecting any problem (Ahmad et al , 2016; El-Dyasty and Elamer, 2020, 2021, 2022, 2023). Moreover, the big four audit firms are concerned about their reputation, hence trying to provide high-quality audit reports (Abdul Hamid et al , 2014; Lopes, 2018).…”

Exploring the mediating role of corporate social responsibility in the connection between board competence and corporate financial performance amidst global uncertainties

“…Garca‐Sánchez et al (2020) postulate that adept CEOs invest in socio‐environmental endeavors, yielding superior financial returns. Furthermore, corporate governance structures, epitomized by the board of directors, directly influence both financial and CSR performance (Eldaly et al, 2022; El‐Dyasty & Elamer, 2022; Jo & Harjoto, 2012; Radu & Smaili, 2021). García‐Sánchez & Martínez‐Ferrero (2019) underscore CEO capability in endorsing judicious investments, particularly in CSR, to amplify company performance.…”