Authors:
Anila Devi,Muhammad Ayub Mehar Khan,DOI NO:
https://doi.org/10.26782/jmcms.spl.6/2020.01.00013Keywords:
Corporate Governance,Audit Quality,Audit Expectation Gap,Audit Committee,Mediation Analysis,Abstract
This research aims to identify the effect of the audit committee on the audit expectation gap and also consider the mediating effect of audit quality on corporate governance and Audit expectation Gap. The research samples of 194 non-financial companies have been selected from the Pakistan Stock Exchange for the period from 2009-2018. Corporate governance measured from ACind, ACsze, ACmeet, ACexp, audit quality measured from audit firm size and audit expectation gap measured by proxy i-e difference between market price and share price. The finding of this research corroborates with existing research that components of corporate governance have a significantly negative association with the audit expectation gap whereas, they have a positive relationship with the mediating variable, audit quality. Furthermore, findings show that audit quality has significantly negatively associated with the audit expectation gap and it has significantly mediated the relationship among governance-gap. The recommendation of this research could develop proper enlightenment to the public, investors, the regulators should employ potential investors about the audit procedures and auditor’s role concerning fraud prevention and detection, and professional accounting bodies and other stakeholders as this could help in reducing the Audit Expectation Gap in Pakistan.Refference:
I. Abbott, L. J., Parker, S., & Peters, G. F. (2004). “Audit committee
characteristics and restatements”. Auditing: Journal of Practice &Theory,
23(1), 69-89.
II. Abbott, L.J., & Parker, S. (2000). “The effect of audit committee activity and
independence on corporate fraud”. Managerial Finance, Vol. 26, pp. 55-67
III. Arnold, B. & De Lange, P. 2004. Enron: An examination of agency
problems. Critical Perspectives on Accounting, 15, 751–765.
IV. Beasley, M. S. (1996). “An empirical analysis of the relation between the
board of director composition and financial statement fraud”. The Accounting
Review, Vol. 71, pp. 443-65.
V. Beasley, M. S., &Salterio, S. E. (2001). “The Relationship Between Board
Characteristics and Voluntary Improvements in Audit Committee
Composition and Experience”. Contemporary Accounting Research, 18: 539–
570.
VI. Bedard, J., Marrakchi, S., & Chouteau, L., (2004). “The Effect of Audit
Committee Expertise, Independence, and Activity on Aggressive Earnings
Management”. Auditing: A Journal of Practice & Theory, Vol. 23 No.2.
Pp:13-36
VII. Bhagat, S. & Bolton, B. 2008. Corporate governance and firm performance.
Journal of Corporate Finance, 14, 257–273.
VIII. Blue Ribbon Committee (BRC) (1999). Report and recommendations of the
Blue-Ribbon Committee on improving the effectiveness of corporate audit
committees, New York Stock Exchange and National Association of
Securities Dealers: New York
IX. Bradley, M. & Chen, D. 2011. Corporate governance and the cost of debt:
Evidence from director limited liability and indemnification provisions.
Journal of Corporate Finance, 17, 83–107.
X. Carcello, J. and Neal, T. (2000). “Audit Committee Composition and Auditor
Reporting”. The Accounting Review, 75 (4), pp. 453-467.
XI. Choi, J., Jeon, K., & Park, J. (2004). “The role of audit committees in
decreasing earnings statement: Korean evidence”. International Journal of
Accounting, Auditing & Performance Evaluation, 1(1), 37–60.
XII. Cohen, J., Ding, Y., Lesage, C., &Stolowy, H. (2017). Media bias and the
persistence of the expectation gap: An analysis of press articles on corporate
fraud. Journal of Business Ethics, 144(3), 637-659.
XIII. Dang, H. N., Vu, V. T. T., Ngo, X. T., & Hoang, H. T. V. (2019). Study the
Impact of Growth, Firm Size, Capital Structure, and Profitability on
Enterprise Value: Evidence of Enterprises in Vietnam. Journal of Corporate
Accounting & Finance, 30(1), 144-160.
XIV. Deli, D.N., &Gillan, S.L. (2000). “On the demand for independent and active
audit committees”. Journal of Corporate Finance, Vol. 6, pp. 427-45.
XV. DeZoort, F.T., &Salterio, S.E. (2001). “The Effects of Corporate Governance
Experience and Financial Reporting and audit Knowledge on Audit
Committee Members’ Judgements”. Auditing: A Journal of Practice and
Theory, 20(2), 31-47.
XVI. Dickins, D. 2010. Compensation and governance. Internal Auditing, 35, 36–
38.
XVII. Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory:
CEO governance and shareholder returns. Australian Journal of
Management, 16(1), 49-64.
XVIII. Eisenhardt, K. M. (1989). Agency theory: An assessment and
review. Academy of management review, 14(1), 57-74.
XIX. Fan, J. P. H., Wei, K. C. J. & Xu, X. 2011. Corporate finance and governance
in emerging markets: A selective review and an agenda for future research.
Journal of Corporate Finance, 17, 207–214.
XX. Garcia-Meca, E., & Sanchez-Ballesta, J.P. (2009). “Corporate Governance
and Earnings Management: A Meta-Analysis”. Corporate Governance: An
International Review, 17(5): 594-610.
XXI. Hill, C. W. L. & Jones, T. M. 1992. Stakeholder-agency theory. Journal of
Management Studies, 29, 131–154.
XXII. Jensen, M. (1993). “The modern industrial revolution, exit, and the failure of
internal control systems”. The Journal of Finance, Vol. 48 No. 3, pp. 831-80.
XXIII. Jensen, M. C., &Meckling, W. H. (1976). Theory of the firm: Managerial
behavior, agency costs, and ownership structure. Journal of financial
economics, 3(4), 305- 360.
XXIV. Kassem, R., & Higson, A. W. (2016). External auditors and corporate
corruption: Implications for external audit regulators. Current Issues in
Auditing, 10(1), P1-P10.
XXV. Kiernan, M. (2005). “Corporate Social Responsibility–the investor’s
perspective.” J. Hancock.
XXVI. Klein, A. (2002). “Audit Committee, Board of Director Characteristics, and
Earnings Management”. Journal of Accounting and Economics, Vol. 33, No.
3. Pp: 375-401.
XXVII. Klein, A. (2002). “Economic Determinants of Audit Committee
Independence”. Accounting Review, Vol. 77, No. 2: pp. 435-453.
XXVIII. Krishnan, G. V., Patatoukas, P. N., & Wang, A. Y. (2018). Customer-base
concentration: Implications for audit pricing and quality. Journal of
Management Accounting Research, 31(1), 129-152.
XXIX. Lambright, K. T. (2009). Agency theory and beyond: Contracted providers’
motivations to properly use service monitoring tools. Journal of Public
Administration Research and Theory, 19(2), 207-227.
XXX. LaPorta, R., Lopez-De-Silanes, F. & Shleifer, A. 1999. Corporate ownership
around the world. The Journal of Finance, 54, 471–517.
XXXI. Lin, J. W., & Hwang, M. I. (2010). “Audit Quality, Corporate Governance,
and Earnings Management: A Meta-Analysis”. International Journal of
Auditing, 14 (1), pp. 57-77.
XXXII. Lin, J., Li, J. & Yang. J. (2006). “The effect of audit committee performance
on earnings quality”. Managerial Auditing Journal, 21, 9, 921-933.
XXXIII. Lopes, P. T., & Rodrigues, L. L. (2007). Accounting for financial
instruments: An analysis of the determinants of disclosure in the Portuguese
stock exchange. The International Journal of Accounting, 42(1), 25-56.
XXXIV. McDaniel, L., Martin, R.D., Maines, L.A., &Peecher, M.E. (2002).
“Evaluating Financial Reporting Quality: The Effect of Financial Expertise
vs. Financial literacy”. The Accounting Review, 77, 139-167.
XXXV. Onulaka PN. Effect of audit expectation gap in the Nigerian capital market.
International Journal of Accounting and Financial Reporting. 2014;4(2):294-
311.
XXXVI. Pincus, K., Rusbarsky, M. & Wong, J. (1989). “Voluntary Formation of
Corporate Audit Committees Among NASDAQ Firms”. Journal of
Accounting and Public Policy, Vol. 8, No. 4 (Winter), pp. 239–65.
XXXVII. Raghunandan, K., Read, W., & Rama, D. V. (2001). “Audit Committee
Composition, Gray Directors, and Interaction with Internal Auditing”.
Accounting Horizons, 15(2): 105-118.
XXXVIII. Shleifer, A. &Vishny, R. W. 1997. A survey of corporate governance. The
Journal of Finance, 52, 737–783.
XXXIX. Soliman, M. M., & Ragab, A. A. (2014). “Audit Committee Effectiveness,
Audit Quality and Earnings Management: An Empirical Study of the Listed
Companies in Egypt”. Research Journal of Finance and Accounting, 5(2),
155-166.
XL. Solomon, J. 2010. Corporate Governance and Accountability, 3rd Edition.
West Sussex: Wiley.
XLI. Tanko M, Dabo Z. Improving the content of auditor’s report as a means of
fathom to audit expectation gap in Nigeria. International Review of
Management and Business Research. 2013;2(2):580-598.
XLII. Vafeas, N. (1999). “Board meeting frequency and firm performance”. Journal
of Financial Economics, 53(113), 142.
XLIII. Vafeas, N., (2005). “Audit committees, boards, and the quality of reported
earnings”. Contemporary Accounting Research, Vol. 22 No.4, pp. 1093–
1122.
XLIV. Watts, R. & Zimmerman, J. L. 1976. Positive Accounting Theory. Upper
Saddle River, NJ: Prentice-Hall.
XLV. Whittington, G. (2008). Fair value and the IASB/FASB conceptual
framework project: an alternative view. Abacus, 44(2), 139-168.
XLVI. Wood, A., & Tenbensel, T. (2018). A Comparative Analysis of Drivers of
Collaborative Governance in Front-of-Pack Food Labelling Policy
Processes. Journal of Comparative Policy Analysis: Research and
Practice, 20(4), 404-419.
XLVII. Xie, B., Davidson III, W. N., &DaDalt, P. J. (2003). “Earnings Management
and Corporate Governance: the Role of Board and Audit Committee”.
Corporate Finance, Vol.9.