The Nexus between board of directors, audit committee attributes, and audit quality

Abstract

This paper examines the effect of corporate governance (CG) mechanisms, namely the board of directors (BOD) and audit committee’s (AC) on audit quality (AQ) in the Egyptian context. We used a sample of 57 non-financial Egyptian listed firms from 2016 to 2022 to analyze the effect of BOD and AC attributes on AQ using a two-step generalized method of moments (2SYS-GMM) estimator. Grounded in agency theory and resource dependence theory, the findings reveal both complementary and competing explanations for the observed relationships. A significant positive relationship between "audit fees" (AF), used as a proxy for audit quality (AQ), and attributes such as board size, board independence, audit committee size, and audit committee gender diversity. In contrast, a significant negative relationship is found between “auditor industry specialization” (AS)- the second proxy for AQ- and both the percentage of non-executive independent directors and the percentage of non-executive directors on the AC. Furthermore, the frequency of AC meetings negatively and significantly associated with the auditor’s industry specialization. The study has some caveats; it excluded listed firms that were audited by more than one auditor, public sector audit services, and other CG attributes like CEO duality and the financial knowledge of the AC. Our work adds to the body of knowledge in the fields of CG and audit. We apply agency and resource dependence theories to the Egyptian context. The study offers practical suggestions for governments, legislators, auditors, and audit service customers to enhance regulatory frameworks by promoting audit committee independence and board gender diversity. Our study is the first to provide empirical evidence regarding the combined effect of BOD and AC on different aspects of AQ (demand and supply) in an emerging market.