An investigation into the effect of corporate governance on audit quality in developing markets: Evidence from Jordan

Abstract

ABSTRACT
The objective of this study is to provide comprehensive and up-to-date evidence of current corporate governance practices, and their impact on audit quality, in the developing economies (the case of Jordan). Given the importance of audit quality in increasing investors’ confidence and developing financial markets; the study has a motivation to examine the role played by boards of directors, audit committees and different ownership types in the Jordanian market in ensuring high audit quality. Mixed and inconsistent inferences from previous literature regarding the role played by corporate governance across the world provide a motivation to ask whether it is reasonable to expect to find a relationship between corporate governance mechanisms (e.g. boards of directors and audit committees) and audit quality in one of the developing countries where the legal liability and investors’ protection are weak and where overall regulations are still underdeveloped.
The study employs two different methodologies to obtain deep insight into the matter under investigation. By using 690 firm-year observations of public non-financial firms for the period 2009 to 2014, and by employing different statistical estimation methods; the first part of the study highlights the importance of boards of directors’ independence, audit committees’ independence and financial experience, family ownership, financial institution ownership, government ownership and foreign ownership in ensuring high audit quality. However, the results show that gender diversity and board size have a negative correlation with audit quality.
The questionnaire survey provides a clearer understanding of the impact of boards of directors, audit committees and different ownership identities on audit quality from perceptual viewpoints. This is by taking into consideration the perceptions of the important players in corporate governance who are members of boards, members of audit committees and external auditors. Analysing the views of the respondents supports the hypotheses and reveals that boards of directors’ attributes, audit committees’ attributes, and different ownership identities do, to a large extent, play a role in promoting audit quality. Furthermore, the respondents suggested some improvements/changes to the existing governance code, which could be a valuable input for any future governance reform.
The overall result offers useful feedback for the regulatory bodies to consider the current corporate governance practices, and to benefit other interested parties in gaining a better understanding of the role played by corporate governance mechanisms in audit quality. This feedback can also apply to other developing markets in countries that share similar economic, political, social and cultural environment to those in Jordan.