Omar Farooq, Harit Satt and Basma El Fadel
This paper documents the impact of political uncertainty on the decision of private firms to use external auditors to verify their financial statements.
Abstract
Purpose
This paper documents the impact of political uncertainty on the decision of private firms to use external auditors to verify their financial statements.
Design/methodology/approach
The authors use the data from 141 countries and the pooled logistic regression to test our arguments. The data is provided by the World Bank's Enterprise Surveys and is collected during the period between 2006 and 2019.
Findings
The results show that firms with high exposure to political uncertainty are more likely to use external auditors to verify their financial statements. The results are robust across various sub-samples and hold when we use alternate proxy for political uncertainty. The results are also robust after controlling for potential endogeneity concerns. The authors also find that the effect of political uncertainty on the choice of external audit is more pronounced for firms that are headquartered in countries with weak institutional environment. The authors document significant role of democracy, rule of law and accountability in determining the relationship between political uncertainty and the choice of external audit.
Originality/value
The authors believe that theirs is one of the initial attempts (if not the first) to investigate the effect of political uncertainty on the choice of external audit among the private firms in developing countries.