Academic journal article IUP Journal of Corporate Governance

The Impact of Corporate Governance Mechanisms on Audit Quality: Evidence from Tunisia

Academic journal article IUP Journal of Corporate Governance

The Impact of Corporate Governance Mechanisms on Audit Quality: Evidence from Tunisia

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Recent corporate financial scandals have highlighted the role of corporate governance mechanisms and specifically that of external auditors who are considered a guarantor for the reliability of financial reporting. In fact, the external auditor, who is characterized by his independence and competence, plays a crucial role for investors and financial statement users in their decision making. The choice of a higher quality auditor seems to be very important and it is in most cases the responsibility of the shareholders. In fact, some companies require a certain level of quality for the certification of annual accounts and tend to choose a higher quality auditor, while other firms are not interested in such quality.

The assessment of audit quality has attracted considerable attention of the researchers because of the lack of consensus on this issue (Carcello et al., 1992; Dumontier et al., 2006; and Manita, 2008). Many features are used such as firm size, reputation, experience in audit, industry specialization and the extent to which Information and Communication Technologies (ICT). This differentiation of quality audit has established a strong desire to understand the phenomenon of selection of quality external auditor in the Tunisian context. Indeed, it is quite recognizable that the choice of a higher quality auditor is advantageous for companies; however it can be used in an opportunistic manner.

Studies related to the choice of external auditor have been conducted mainly in the US context (Chow, 1982; Copley and Douthett 2002; and Hudaib and Cooke, 2005). However, there are few empirical studies that examine the decisions of the external auditor choice in developing countries despite the critical impact of such decision on the credibility of firms' financial reporting.

The efforts of the Tunisian accounting and legal authorities to strengthen the role of the external auditor are expressed through the promulgation of Law No. 2005-96 of October 18, 2005 on strengthening financial relations securities.1 In addition, the scarcity of research concerning the impact of corporate governance mechanisms on the demand for higher audit quality in the Tunisian context led us to deal with this subject, although most of the Tunisian firms are considered as Small and Medium Firms (SMF), which in turn can affect the probability of choosing a reputed auditor. In our study, we deal with the following two questions: What are the attributes of audit quality? How do corporate governance mechanisms impact the demand for a reputed auditor?

First, our study contributes to the previous literature by addressing the problem of demand for higher quality auditor in the normal operating conditions. Second, our research adopts an original procedure PCA to assess audit quality by exploring the impact of some variables (size, reputation, and experience in audit, industry specialization and the degree to which ICT are used) on the assessment of audit quality rather than using the simple dichotomy (Big Four/Non- Big Four). Finally, it checks whether the customer governance mechanisms are likely to motivate the choice of a reputed auditor in the Tunisian context.

The paper is organized as follows: it discusses the theoretical background of the relationship between corporate governance mechanisms and the choice of higher quality auditor, followed by the presentation of the research methodology and empirical models. Subsequently, it discusses the results, and finally, the conclusion is offered with some limitations.

Institutional Background and Hypotheses Development

Corporate governance mechanisms are generally not limited to internal control. In fact, external auditor represents the most important external control mechanism. So, in our study, we focus on the impact of corporate governance mechanisms on the demand for higher quality auditor by firms. Two major variables are studied: ownership structure and the board composition. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.