Abstract
This study investigates how corporate boards of directors influence the quality of external audit in a sample of service firms listed on the Amman Stock Exchange (ASE). We contribute to the literature by providing empirical evidence on the efficacy of the corporate governance mechanisms through corporate boards to influence audit quality in an emerging country setting (i.e., Jordan). According to Chua (1986), this is mainstream “market-based” accounting research. We regress multiple dimensions that capture the quality of financial statements’ audit on a group of board of directors (BoD) characteristics for total observations of 225 firm-year obtained for 45 companies during the period (2014-2018). Specifically, the multidimensional analysis of the response variable, audit quality, includes audit firm’s internationalization, audit fees, auditor tenure, and the number of licensed practitioners at the audit firm. Using multiple linear (Panel Least Squares – PLS) and logistic regression models, we document empirical evidence that audit quality is positively affected by the independence and size of boards but negatively affected by CEOs duality, while no influence of the board’s expertise on any measures of the audit quality. The study provides implications for policymakers and investors regarding the signals that firms can send regarding the quality of financial statements audit when complying with the best practices of corporate governance
Highlights
The last three decades witnessed quite a few infamous business scandals associated with the collapse of notable international companies, for which it was believed that poor corporate governance and failure of external audit were among the main factors that paved the way towards fraudulent financial reports
This study investigates how corporate boards of directors influence the quality of external audit in a sample of service firms listed on the Amman Stock Exchange (ASE)
Based on the central limit theory (CLT), which assumes that large-sized samples greater than 30 fulfill the condition of normal distribution (Gujarati, 2004), and given the fact that the current study examines 225 observations (45 firms over 5 years), it is assumed that data of the study is normally distributed
Summary
The last three decades witnessed quite a few infamous business scandals associated with the collapse of notable international companies, for which it was believed that poor corporate governance and failure of external audit were among the main factors that paved the way towards fraudulent financial reports. Examples are many such as Parmalat, Xerox, Global Crossing, and Enron. One of the vital reform steps carried out under the SOX Act of 2002 is the establishment of the Public Company Accounting Oversight Board (PCAOB) to oversee the audit of public companies in order to protect the public and investors interest, who demand “informative, accurate and independent” audit reports (PCAOB, 2015). The PCAOB is responsible for setting up auditing standards in order to monitor and increase the quality of the audits themselves, and to ensure that the audit firms carry out their duties and tasks to the fullest in accordance with established auditing standards (Arens, Elder, Beasly, & Hogan, 2016)
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