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Does external auditing combat corruption? Evidence from private firms

Author

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  • Omar Farooq
  • Nermeen F. Shehata

Abstract

Purpose - This paper aims to document whether firms with audited financial statements pay lower bribes to get contracts than firms without audited financial statements. In other words, this study assesses whether external auditing helps combat corruption. Design/methodology/approach - The World Bank Enterprise Survey data covering the period between 2006 and 2014 is used. The total sample comprised more than 50,000 firms in 126 countries. Findings - This paper finds that firms with audited financial statements pay significantly lower bribes compared to firms with unaudited financial statements. The results are robust across various estimation procedures, various proxies for bribery and various sub-samples. It is also found that the relationship between audited financial statements and bribery is more pronounced in environments where firms face higher pressure to engage in corrupt practices. Practical implications - The results imply that auditing of financial statements can act as a disciplining device to curb bribery in environments that encourage corruption. Originality/value - This paper is the first attempt, according to the authors’ knowledge, to examine the relationship between external auditing and corruption using firm-level data that cover 126 countries and is gathered over a 14-year period. Therefore, the results derived from this study are generalizable.

Suggested Citation

  • Omar Farooq & Nermeen F. Shehata, 2018. "Does external auditing combat corruption? Evidence from private firms," Managerial Auditing Journal, Emerald Group Publishing Limited, vol. 33(3), pages 267-287, March.
    • Handle: RePEc:eme:majpps:maj-08-2017-1634
    DOI: 10.1108/MAJ-08-2017-1634
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    Citations

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    Cited by:

    1. Johan Arifin, 2022. "Determinants of the effectiveness of audit procedures in revealing fraud: An attribution theory approach," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(6), pages 378-387, September.
    2. Oznur Ozdamar & Eleftherios Giovanis & Sahizer Samuk, 2020. "State business relations and the dynamics of job flows in Egypt and Turkey," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 519-558, December.
    3. Valentin-Marian Antohi & Monica Laura Zlati & Romeo Victor Ionescu & Mihaela Neculita & Raluca Rusu & Aurelian Constantin, 2020. "Attracting European Funds in the Romanian Economy and Leverage Points for Securing their Sustainable Management: A Critical Auditing Analysis," Sustainability, MDPI, vol. 12(13), pages 1-27, July.

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