How Audit Quality Affects the Firm Performance with the Moderating Role of the Product Market Competition: Empirical Evidence from Pakistani Manufacturing Firms

Abstract

Audit quality (AQ) is a crucial instrument for ensuring transparency and accountability in both the public and private sectors. If the AQ is responsible for the maximization or minimization of profit, then what are the circumstances that make these possible? In this study, we examined the role of the product market competition (PMC) in the relation between the AQ and firm performance (FP). The PMC on the manufacturing firms of Pakistan was divided into two categories—low product market competition (LPMC) and high product market competition (HPMC). This division was calculated using the Herfindahl–Hirschman index (HHI). Then, we used ordinary least squares (OLS), the fixed-effect model, and the generalized method of moment (GMM) to examine the role of PMC on the association between the AQ and FP. The results of the study revealed that the financial performance of firms was enhanced with the quality of the audit. Highly competitive firms demonstrated higher chances to capture the maximum profit and have a positive relationship with FP, while less competitive firms were negatively associated with FP. Furthermore, the HPMC played a vital role in boosting the profit of the firms. On one hand, the connection between the AQ and FP was positively affected by the HPMC. On the other hand, the connection between the AQ and FP was negatively affected by the LPMC. Thus, the findings of this investigation have various implications for owners, investors, shareholders, and governments. This study can help the governments of developing economies to enhance economic conditions by focusing on the industrial sector. This study also contributes to the literature by supporting the agency theory that PMC can mitigate the agency issue between owners and agents.

The Moderating Role of Corporate Social Responsibility in the Association of Internal Corporate Governance and Profitability; Evidence from Pakistan

“…Fourthly, the findings of this study reported that AQ and firm performance have a positive connection. In this context, Sattar, Javeed and Latief [44] discovered that the quality of audit is highly beneficial for firm performance in Pakistan. Bonazzi and Islam [140] discovered that agency cost can be minimized by appointing a quality auditor, which highlights every financial and non-financial aspect of a firm clearly and truly.…”

“…They established that audit quality is helpful to improve firm performance. Besides, Al Ani, et al [ 43 ] and Sattar, et al [ 44 ] also supported the role of auditing practices for the improvement of firm performance. By following theoretical and empirical analysis, this study has developed various hypotheses:…”

The impact of audit committee attributes on the quality and quantity of environmental, social and governance (ESG) disclosures

“…Recently, transparent sustainability reporting is becoming a prime responsibility of business organisations, compelling the ACs to supervise the sustainability reporting to promote stockholder confidence. The Cadbury code suggests forming an AC to follow the rules and regulations and examine the financial records to avoid misstatements or fraud (Sattar et al , 2020). Hąbek and Wolniak (2016) studied the quality of audit reports in a sample of six European countries and indicated the low quality of the sustainability reports.…”

“…The AC oversees the work of the internal auditors who work in association with the external auditor to complete the reporting process in a firm (Eluyela et al , 2018; Saibaba and Ansari, 2011). Similarly, the AC role has also been researched from various aspects to produce better quality non-financial statements (Sattar et al , 2020). Similarly, Appuhami and Tashakor (2017) examined the role of AC characteristics on the CSR disclosure of Australian firms.…”

Econometric Model for Readjusting Significance Threshold Levels through Quick Audit Tests Used on Sustainable Companies

“…The discretionary methods for measuring the quality of revenues were chosen as a proxy method in our study due to the fact that they capture the slight variations in audit quality that are relevant in terms of taking measures to readjust the significance threshold and in allowing or justifying the sample's fairly limited number. As suggested by the studied specialty literature, the number of clients [70], the size of the audit company [71] and the company's achievements and growth [72] have a significant impact on the audit quality itself. However, so far studies are limited in terms of the evaluation of the impact of financial crises on audit quality [73].…”