Audit Quality and Corporate Governance: Evidence from the Microfinance Industry

This paper contributes to increasing the existing understanding of the relationships between different governance mechanisms. It investigates explanatory variables for audit quality in the microfinance industry. The paper uses a unique, hand-collected sample of MFIs from 73 developing countries to analyze the relationships between audit quality and governance mechanisms. It examines two measures of audit quality, namely, the use of Big Four auditors and the presence of internal auditors. Consistent with prior research, the study employs Big Four auditor as a proxy variable for high (external) audit quality. The empirical analysis of this study reveals that:

• These two quality metrics are highly related, although we also demonstrate that these metrics capture distinctive aspects of audit quality;
• Presence of internal auditors is related to other indicators of stricter governance, whereas the use of Big Four auditors is generally unrelated to other control mechanisms;
• For situations in which a significant relationship between audit quality and governance does exist, the sign of this relationship is always positive;
• For-profit objective affects internal audit quality but not external audit quality. In particular, board-reporting internal auditors are more likely to be present in for-profit MFIs than in their non-profit counterparts.