Audit Quality and Firm Value: A Case of Pakistan

Abstract

The present study intends to explore the influence of audit committee characteristics on a firm’s financial performance. The corporate governance mechanisms are highly recognized in era of global financial crisis and current economic recession. Audit committee is one of the core mechanisms that ensure good corporate governance in the firms. Yet, very less evidence found on the impact of audit committee and its characteristics on firm’s performance in the context of Pakistani literature. For that reason, four audit committee characteristics were identified namely audit committee size, independence, activity and quality of external audit to study their impact on firm financial performance while using ROA as accounting measure and Tobin’s Q as market measure. The results of panel data showed that two audit committee characteristics namely audit committee size and external audit quality has strong and significant positive impact on ROA and Tobin’s Q. Another two variables namely audit committee independence and AC activity remains insignificant, which is consistent with mostly previous studies carried in different countries. In short, present study provides an insight to all the regulators, policy makers and stakeholders while adopting certain audit committee characteristics in Pakistan; overall firm’s financial performance can be improved. For further research audit committee expertise can be used to determine the improvement in corporate performance by getting data from the company’s management.