The effects of audit quality on the costs of capital of firms in Ghana

Abstract

Purpose This paper aims to investigate the effects of audit quality on the cost of capital in Ghana. Design/methodology/approach Non-financial firms listed on the Ghana Stock Exchange (GSE) as well as non-listed firms from the database of Ghana Club 100 were included in the sample. Series are yearly, covering a sample of 40 firms during the six-year period, 2008-2013. The study employed the positivist research paradigm to establish the relationship between audit quality and the cost of capital. Findings There is evidence to suggest that the cost of debt and the overall cost of capital of firms in Ghana can be explained by the quality of the external auditors. The results also show that the large size of the board is associated with low cost of debt. Research limitations/implications The fact that the choice of quality measure is based on firm size only and other measurements of audit quality could not be measured. Future research may examine how other approaches to measuring audit quality affect cost of capital. Practical implications The results significant for those charged with assurance and regulation, as well as lenders and managers of companies. Originality/value The authors investigate how external auditing quality affects the cost of capital of firms operating in Ghana.

Assessing Financial Reporting Quality of Listed Companies in Developing Countries: Evidence from Ghana

“…Verifiability is the extent to which the financial report is verifiable by a professional auditor. Since auditing affects FRQ (Coffie et al, 2018;Musah et al, 2018) an unqualified professional auditor"s report adds credibility value to financial reporting information by providing reasonable assurance about the degree to which the annual report represents economic phenomena faithfully (Willekens, 2008;Coffie et al, 2018;Musah et al, 2018).…”

“…They should also include comprehensive glossary, ratios, index, graphical and tabular displays to clarify information, include information on adjustment in past accounting figures for future decisions, and endeavor to make useful comparison of the current and previous accounting periods with the company and with those of other firms. Moreover, since auditing quality affects FRQ (Coffie et al, 2018;Musah et al, 2018), management should work harder to ensure that their financial reports are audited early enough to avoid long delays in auditing of the financial reports and to improve upon the timeliness quality of the reports for useful stakeholder decisions (Puasa et al, 2014).…”

“…In African countries that have adopted IFRS like Ghana, in spite of increasing research in the area of IFRS adoption and its attendant influence on FRQ, empirical research on FRQ of published annual reports of listed companies is very limited. In this regard, there has been research in African countries focusing on IFRS compliance and disclosures (Odia & Ogiedu, 2013;Zakari, 2014;Aboagye-Otchere & Agbeibor, 2012;Agyei-Mensah, 2012;Agyei-Mensah, 2013), the influence of firm characteristics and FRQ (Appiah, Awunyo-Vitor, Mireku, & Ahiagbah, 2016), financial reporting and tax compliance (Abedana, Omane-Antwi & Oppong, 2016;Amidu, Yorke & Harvey, 2016), audit and cost of capital (Coffie, Bedi, & Amidu, 2018), FRQ and audit fees (Musah, Anokye, & Gakpetor 2018), IFRS and financial reporting in banks and manufacturing firms (Abata, 2015;Okoye & Nwoye, 2018), financial reporting and economic growth (Temitope, Chibuzo, & Tolulope, 2019), and FRQ and corporate governance (Uwalomwa, Eluyela, Olubukola, Obarakpo, & Falola, 2018;Eyenubo, Mohamed, & Ali, 2017). However, it is surprising that no study as far as the researcher knows has been done to assess the extent to which published financial reports of listed firms truly reflect FRQ dimensions proposed by IFRS and IASB, especially in Ghana.…”

Users’ Perception of Financial Reporting Quality in Ghana

“…Verifiability is the extent to which the financial report is verifiable by a professional auditor. Therefore, to be verifiable, financial reports must include an unqualified professional auditor's report to increase its credibility and provide reasonable assurance about the degree to which the annual report represents economic phenomena faithfully (Coffie et al, 2018;Musah et al, 2018).…”

“…On the other hand, in developing countries that have adopted IFRS like Ghana, in spite of increasing research in the area of IFRS adoption and its attendant influence on FRQ, empirical research on user perception of the quality of published annual reports of companies is very limited. Much of the empirical research in African countries have focused on compliance and disclosures (Odia & Ogiedu, 2013;Zakari, 2014;Agyei-Mensah, 2013), the influence of firm characteristics and FRQ (Appiah, Awunyo-Vitor, Mireku, Ahiagbah, 2016), financial reporting and tax compliance (Abedana, Omane-Antwi & Oppong, 2016), audit and cost of capital (Coffie, Bedi & Amidu, 2018), FRQ and audit fees (Musah, Anokye & Gakpetor, 2018), financial reporting and corporate governance (Uwalomwa, Eluyela, Olubukola, Obarakpo & Falola, 2018). Despite the fact that the literature highlights the importance FRQ plays in influencing economic decision of stakeholders, there is dearth of empirical research on users' assessment of the qualitative characteristics of FRQ of companies developing countries in general, Ghana in particular.…”