Audit Quality and Corporate Governance: Evidence from the Microfinance Industry

Leif Atle Beisland, Roy Mersland and R. Oystein Strøm

No 12-034, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This study uses a unique, hand-collected sample of microfinance institutions from 73 countries that typically are not investigated in accounting research to analyze the relationships between audit quality and governance mechanisms. We examine two measures of audit quality, namely, the use of Big Four auditors and the presence of internal auditors who report to the boards of these institutions. The empirical analysis of this study reveals that these two quality metrics are highly related, although we also demonstrate that these metrics capture distinctive aspects of audit quality. In particular, the presence of internal auditors is related to other indicators of stricter governance, whereas the use of Big Four auditors is generally unrelated to other control mechanisms. This study illustrates that there is no single association between audit quality and governance; instead, the relationships between these two characteristics are dependent on the specific mechanism that is investigated. However, for situations in which a significant relationship between audit quality and governance does exist, the sign of this relationship is always positive. Thus, our data support the complementarity view of these two traits that is espoused by prior research. We find no support for the contention that these control mechanisms function as substitutes.

Pages: 60 p.
Date: 2012-12-06
New Economics Papers: this item is included in nep-mfd
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Working Paper: Audit Quality and Corporate Governance: Evidence from the Microfinance Industry (2013)
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