Audit Quality and Firm Value: A Case of Pakistan

Abstract

The present study intends to explore the influence of audit committee characteristics on a firm's financial performance. The corporate governance mechanisms are highly recognized in era of global financial crisis and current economic recession. Audit committee is one of the core mechanisms that ensure good corporate governance in the firms. Yet, very less evidence found on the impact of audit committee and its characteristics on firm's performance in the context of Pakistani literature. For that reason, four audit committee characteristics were identified namely audit committee size, independence, activity and quality of external audit to study their impact on firm financial performance while using ROA as accounting measure and Tobin's Q as market measure. The results of panel data showed that two audit committee characteristics namely audit committee size and external audit quality has strong and significant positive impact on ROA and Tobin's Q. Another two variables namely audit committee independence and AC activity remains insignificant, which is consistent with mostly previous studies carried in different countries. In short, present study provides an insight to all the regulators, policy makers and stakeholders while adopting certain audit committee characteristics in Pakistan; overall firm's financial performance can be improved. For further research audit committee expertise can be used to determine the improvement in corporate performance by getting data from the company's management.

THE EFFECT OF BOARD OF DIRECTOR, AUDIT COMMITTEE, INSTITUTIONAL OWNERSHIP TO FIRM VALUE, WITH FIRM SIZE, FINANCIAL LEVERAGE AND INDUSTRIAL SECTOR AS CONTROL VARIABLES (Study on Listed Companies in Indonesian Stock Exchange Period 2011-2015)

“…The results of this study are in line with research conducted by Gill and Obradovich (2012), Fauzi and Locke (2012) and Afza and Nazir (2014) which found positive and significant results between audit committees and firm values.…”

“…Based on the premise of resource dependence theory, the company's performance will be better as the size of the audit committee (Al-Matar, et.al., 2014) increases. Can be explained as the number of audit committees increases then the market will see that more qualified resources and experts to solve accounting and financial problems are owned by the audit committee (Afza and Nazir, 2014). Similar research conducted by Gill and Obradovich (2012); Afza and Nasir (2014); Al Matar, et.al (2014) who found a positive influence between audit committee and firm value.…”

“…Corporate governance can be summed up as a mechanism on the relationship between principals and agents in maximizing corporate value. The alignment of management and principal interests with the goal of reducing the agency conflict is the goal of corporate governance mechanisms (Dharmastuti, 2013;Hill andJones, 2004 in Afza andNazir, 2014). Mechanisms that run well so as to reduce agency problems and is expected to increase the company's value can be achieved when adjusted to the principles of corporate governance.…”

Financial Performance and Audit Quality: Comparative Study of Investor Reaction

“…Based on the statistical results, only hypothesis 2 is accepted while other hypotheses are rejected. This result is in line with Afza & Nazir's [16] research which found that investors reacted positively to the high quality of audits in the preparation of financial statements, on the contrary that investors reacted negatively to the low quality of audits because they were related to the low quality of information published in financial statements including performance corporate finance.…”

“…Quality audits, especially those carried out by independent parties, make financial reports reliable, because they are free from the interests of Management [15]. The characteristics of the audit committee have a positive effect on firm value significantly [16]. In relation to the preparation of financial statements, auditors who are reliable in the audit process will carry out their audit functions properly so that opinions are generated objectively and can strengthen investor confidence in the company's financial statements.…”