Navigating governance and accounting reforms in Saudi Arabia's emerging market: impact of audit quality, board characteristics, and IFRS adoption on financial performance

This study examines the impact of audit quality, board of directors' characteristics, and the adoption of International Financial Reporting Standards (IFRS) on the financial performance of firms in the Kingdom of Saudi Arabia. The research is motivated by recent governance and accounting reforms in Saudi Arabia, aligned with Saudi Vision 2030, which aim to develop the financial sector and promote an advanced capital market. The study analyzes a sample of 135 companies listed on the Saudi Stock Exchange Tadawul over a four-year period, covering both pre- and post-2017. The period is significant as it coincides with the introduction of the Saudi Corporate Governance Regulations (SRCGs) and mandatory IFRS adoption in 2017. The study employs the generalized method of moments (GMM) system approach, along with ordinary least squares and fixed effects as robustness checks. The independent variables include market-based indicators (e.g., Tobin’s Q) and accounting-based performance indicators (e.g., Return on Assets, Return on Equity). The results from the robust GMM estimator indicate that the characteristics of audit committees, including size, experience, and meetings, do not significantly impact firm performance indicators. This suggests that audit committees in Saudi Arabia may not effectively serve as governance mechanisms. Compliance with the SRCGs appears to prioritize meeting regulatory requirements rather than enhancing the effectiveness of audit committees. The influence of the Big 4 auditing firms is found to have a positive and significant effect on Tobin’s Q. Regarding board of directors' characteristics, only independence and meetings show significant effects, but with conflicting impacts. Board meetings have a positive impact on Tobin’s Q but a negative influence on ROE. Board independence has a negative impact exclusively on Tobin’s Q. Additionally, the mandatory adoption of IFRS is found to have a substantial and negative relationship with all three firm performance measures (Tobin’s Q, ROA, ROE). This can be attributed to factors such as transition costs, changes in accounting methods, unique national practices, and a shortage of skilled Saudi accountants. This research contributes valuable insights into the influence of corporate governance and mandatory IFRS adoption on firm performance in an emerging and Islamic economy context, specifically Saudi Arabia. The study addresses a gap in the literature by employing a robust methodology, GMM system, to address endogeneity concerns in the corporate governance-performance relationship. By considering both market-based and accounting-based performance measures, the study offers a comprehensive analysis of the complex dynamics involved. The study suggests that adequate resources are needed to support the long-term implementation of IFRS in Saudi Arabia, such as education and training programs, consultative groups, and stakeholder involvement. The research findings can inform policymakers in designing appropriate governance mechanisms in the emerging market context of Saudi Arabia and the Gulf Corporation Council region, considering cultural and religious specificities.