Board of director's effectiveness, audit quality and ownership structure: impact on audit risk-Tunisian evidence

Abstract

PurposeThe purpose of this paper is to investigate the potential influence of internal and external corporate governance mechanisms on audit risk in Tunisian companies.Design/methodology/approachBased on a sample of Tunisian non-financial firms listed on the Tunisian Stock Exchange (TSE) over the periods 2005 to 2010 (pre- 2011 revolution) and 2011 to 2017 (post −2011 revolution), consisting of 371 observations for the whole period, the authors apply the generalized least square (GLS) to test the research hypotheses and model.FindingsThe results are consistent with the agency theory suggesting that efficient corporate governance is able to control and reduce a company’s agency problem. Evidence reveals that the effectiveness of the director’s board/ownership structure and audit quality have the most influence on audit risk before than after the 2011 revolution, although governance mechanisms should play a more active role in encouraging companies to be more transparent in the post-revolution period. Moreover these findings are confirmed when identifying a composite measure of corporate governance.Practical implicationsSignificant implications are provided for analysts, investors, regulators and academics. First, findings can help Tunisian regulators determine corporate governance disclosure requirements. Second, this research will make investors and stakeholders aware of the fact that minimizing auditor risk will be effective in reducing agency problems in emerging markets like Tunisia. Then, this work can help researchers better understand and realize the corporate governance role in the quality of audit process and financial statements and encourage them to deeply and broadly investigate this issue on other emerging markets.Originality/valueThis study stands for an extension of the existing research on corporate governance and audit risk. It fills a research gap in the local context. In fact, the considered data are those of the pre- and post-revolution Tunisian market, mainly in periods of instability. Although emerging markets make up the vast majority of economic activity around the world, they have received limited attention in academic research.