Does external auditing combat corruption? Evidence from private firms

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.

Citation

Farooq, O. and Shehata, N.F. (2018), "Does external auditing combat corruption? Evidence from private firms", Managerial Auditing Journal, Vol. 33 No. 3, pp. 267-287. https://doi.org/10.1108/MAJ-08-2017-1634