Does audit firm governance matter to audit quality? Evidence from Turkey

Abstract

PurposeThis paper aims to examine the effect of audit firm governance on audit quality. Audit firm governance is broken down into two categories, namely, board ownership and engagement partner ownership.Design/methodology/approachAudit firms from Borsa Istanbul and their clients who are quoted there as well were used to test the hypotheses. The final sample covers 1,291 observations at the client level between 2013 and 2019. Ordinary least square was conducted to test the hypotheses. Heckman selection model and instrument variable regression with two-stage least square (IVREG with 2SLS) were also used to control the self-selection and endogeneity problems, respectively. To enhance the validity of the main results, alternative audit quality measures were used.FindingsThe empirical findings show that board ownership and engagement partner ownership have an impact on audit quality. The results indicate that engagement partners with high shares enhance audit quality only in Big4 audit firms. The positive effect of higher board ownership on audit quality is more prominent in non-Big4 firms. The Heckman two-stage procedure and IVREG with 2SLS were conducted, both of which were consistent with the main results. The results regarding alternative audit quality measures are in accordance with the main estimation results.Originality/valueTo the best of the author’s knowledge, this is the first study examining the impact of audit firm board ownership on audit quality. In addition, this paper further advances the literature by investigating the effects of ownership at engagement partner levels on audit quality in the context of an emerging market, Turkey.