Corruption’s Crossroads: Exploring Firm Performance and Auditors’ Role in Emerging Markets

Sheela Sundarasen (), Izani Ibrahim, Ahnaf Ali Alsmady and Tanaraj Krishna
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Sheela Sundarasen: Department of Accounting, Prince Sultan University, Riyadh 11586, Saudi Arabia
Izani Ibrahim: Department of Finance, Prince Sultan University, Riyadh 11586, Saudi Arabia
Ahnaf Ali Alsmady: Accounting Department, University of Tabuk, Tabuk 47512, Saudi Arabia
Tanaraj Krishna: School of Accounting and Finance, Quest International University, No. 227, Jalan Raja Permaisuri Bainun, Ipoh 30250, Malaysia

Economies, 2024, vol. 12, issue 9, 1-20

Abstract: This study examines the relationship between country-level corruption (proxied by the Corruption Perception Index, CPI) and firm performance (measured by Return on Assets, ROA) across 18,286 firms in the East Asia, South Asia, and Southeast Asia regions. Additionally, the moderating effects of audit quality (proxied by auditors’ reputation) on the relationship are examined. The findings of the study indicate a positive association between corruption and ROA in high-income nations, thus providing evidence in favor of the “greasing the wheel” theory. On the other hand, a negative association is documented in the upper middle- and low-income nations, which is consistent with the “sanding the wheel” notion. Notably, audit quality has a positive moderating influence on the relationship between corruption and ROA, especially in nations with low corruption levels, reaffirming the pivotal role of reputable auditors in enhancing firm performance within these economic contexts. The results of this study have important ramifications for forming policy suggestions and enhancing governance. The findings highlight the opportunity to improve governance practices and regulations to reduce corruption and increase transparency. Policymakers can develop ways to strengthen institutional frameworks by recognizing the complex link between corruption, corporate profitability, and the function of respected auditors.

Keywords: corruption; firm performance; auditors reputation; high-income countries; upper middle-income countries; low-income countries (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2024
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