Financial Reporting Quality, Audit Quality, and Firm Performance: Evidence from Pakistani Listed Firms

Muhammed Umar Khan and Marc Audi

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines the impact of financial reporting quality on firm performance, with external audit quality serving as a mediating factor in an emerging market context. Although prior literature acknowledges the importance of financial reporting transparency and audit integrity, limited attention has been given to their combined influence, particularly in developing economies characterized by relatively weak governance structures and regulatory enforcement mechanisms. Grounded in Agency Theory and Signaling Theory, the study proposes that high-quality financial reporting reduces information asymmetry and agency costs, thereby improving firm performance. Furthermore, external audit quality strengthens the credibility of financial disclosures and enhances their positive effect on organizational outcomes. The study adopts a mixed-methods approach by combining a comprehensive literature review with empirical financial analysis. Data were collected from 11 publicly listed companies operating across different sectors in Pakistan over the period 2015–2025. Firm performance was measured using Return on Assets and Return on Equity. Financial reporting quality was proxied through total accruals, calculated as the difference between net income and operating cash flow. Audit quality was assessed through audit firm size, distinguishing between Big Four and non-Big Four audit firms, as well as audit fees. Firm size, leverage, and total sales were incorporated as control variables. The findings reveal a complex relationship among financial reporting quality, audit quality, and firm performance. Firms characterized by lower accruals, reflecting higher earnings quality, generally demonstrated stronger financial performance, particularly when audited by reputable audit firms. However, the results also indicate contextual variation, as some high-accrual firms reported favorable performance outcomes, suggesting that industry characteristics, corporate governance practices, and macroeconomic conditions may influence the relationship. The mediating role of audit quality was especially evident where high audit standards enhanced transparency, credibility, and stakeholder confidence.

Keywords: Financial Reporting Quality; Audit Quality; Firm Performance; Earnings Quality (search for similar items in EconPapers)
JEL-codes: G32 M41 M42 (search for similar items in EconPapers)
Date: 2026
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