Who should select the external auditor in emerging economies? Role of institutional ownership and family ownership

Abstract

Aim/purpose – This study reports the demand for Big 4 audits among institutional and family owners, the two dominant ownerships in the GCC countries. We conducted this in-depth study to gain an understanding of the type of firms, family-owned or institu- tional-owned firms that lead to choosing audit firms. Design/methodology/approach – This study employed a quantitative cross-country study by selecting a sample based on secondary data extracted from the Capital IQ data- -set from a panel of 1827 non-financial firms listed on the stock exchanges of the Gulf Cooperation Council (GCC) countries from 2010 to 2018. The hypothesized effects of institutional ownership (IO) and family ownership (FO) on the selection of external auditors in these countries were examined using logit, probit, and heteroskedastic probit analysis. Findings – The study finds that institutional investors play a crucial role in influencing firms’ choice of auditors in the GCC. Family-owned firms tend to hire non-Big 4 firms when the owners actively monitor the firms’ financial transactions. In addition, the study finds that both domestic and foreign institutional investors have a significant positive effect on auditor selection, with domestic institutional investors having priority. These findings support the efforts of market authorities in the GCC to highlight the critical role of IO over FO in improving audit quality. Research implications/limitations – The results are highly relevant for shareholders, executives, institutional investors, regulators, and academics. They help them improve the growth of capital and audit markets by developing best practices, thereby helping achieve an optimal framework for auditor choice that matches higher audit quality. This study focuses on only two types of ownership structures (institution and family) despite the many options because of the extensive debates and discussions on the association between the studied ownership types and auditor choice. Originality/value/contribution – Study highlighted the role of institutional investors in GCC countries as one of the most attractive emerging economies in the Middle East. Since no research has been conducted on the role of institutional and family investors in selecting external auditors in GCC countries, this study has made a significant contribu- tion to the accounting and auditing literature. It mitigates the gap in the literature on emerging markets. The findings can provide policymakers with guidelines for including institutional investors and FO in GCC countries to ensure high-quality audits. Keywords: institutional ownership (IO), family ownership (FO), auditor choice, Gulf Cooperation Council, emerging economies. JEL Classification: G23, G32, D10, M42.