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Journal of Business Ethics

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08-03-2023 | Original Paper

Do Individual Auditors from More Religious Hometowns Enhance Audit Quality? Evidence from an Islamic Country

Authors: Murat Ocak, Bekir Emre Kurtulmuş, Emrah Arıoğlu

Published in: Journal of Business Ethics | Issue 2/2024

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Abstract

This study investigates the effect of individual auditors from more religious hometowns on audit quality, utilizing social identity and social norm theories via a sample of Turkish companies listed on the Borsa Istanbul and their associated individual auditors between the years 2010 and 2019. The sample includes a unique hand-collected dataset and secondary data gathered from various sources. The main findings demonstrate that individual auditors from more religious hometowns provide higher quality audit work in terms of the magnitudes of discretionary accruals, audit reporting aggressiveness, and the presence of small profits. In order to overcome potential endogeneity and selection problems, this study employs the Heckman two-stage estimation procedure, instrumental variables, system generalized methods of moments regressions, and propensity score matching-difference and differences method. The results of these additional tests also support the main results. When controlled for the religiosity levels of the province where clients operate and the religiosity levels of the province where individual auditors attended and graduated from universities, the results remain similar. The employment of alternative audit firm size and quality proxies also provides additional supportive evidence. The findings are robust when alternative variables of interest and alternative audit quality measures, such as sanction and restatement, are employed in the main models.

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“Company” or “companies” refer to “client” or “clients” in this paper.

These provinces are Istanbul, Ankara, Bursa, İzmir and Kayseri.

The province in which individual auditor is registered does not mean that it is individual auditor’s hometown.

Similarly, Rossi et al. (2019) employed the number of Churches per capita to measure the province’s level of Christian religiosity.

Please see Defond and Zhang (2014)’s study for more detailed information for discussion of why we used these variables.

We do not control ClientLoss in the small profit (SP) model. Because there is multicollinearity between the variable -SP- and the variable -ClientLoss-.

One example of such a potential problem is that clients with high financial reporting quality may be more likely to be audited by individual auditors from more religious hometowns.

Table 3 shows that the correlation coefficients of Alcohol and Residents are significantly and negatively related to AuditorReligiosity_Mosques, AuditorReligiosity_Quran, AuditorReligiosity_QuranSt., but the correlation coefficients of Alcohol and Residents are insignificantly associated with the dependent variables. Untabulated results show that the coefficients of the variables -Alcohol and Residents- in the first stages of IVREG and IVProbit are − 0.2262 and − 0.2334 respectively when AuditorReligiosity_Mosques is employed as the dependent variable of the first stages of IVREG and IVProbit regressions. Untabulated results show that the coefficients of the variables -Alcohol and Residents- in the first stages of IVREG and IVProbit regressions are − 0.1478 and − 0.0552, respectively, when AuditorReligiosity_Quran is employed as the dependent variable of the first stages of IVREG and IVProbit regressions. Untabulated results show that the coefficients of the variables -Alcohol and Residents- in the first stages of IVREG and IVProbit are -0.2005 and -0.0011, respectively, when AuditorReligiosity_QuranSt is employed as the dependent variable of the first stages of IVREG and IVProbit regressions.

Median value of AuditorReligiosity_Mosques is 0.00044.

Median value of AuditorReligiosity_Quran is 0.00010.

Median value of AuditorReligiosity_QuranSt is 0.00915.

The coefficients of ClientReligiosity_Mosques, ClientReligiosity_Quran and ClientReligiosity_QuranSt in the first stage of Heckman selection procedure are 0.387, 2.274 and 0.142 and are significant at 0.01 level).

For example, İbrahim Göçmen is one of the individual auditors in the sample. He is the partner of YKY Independent Audit Inc. İbrahim Göçmen’s hometown is Yozgat city. He graduated from Ege University located in Izmir city. According to our measurements, the religiosity level of Yozgat city (0.00217) is higher than the religiosity level of Izmir city (0.00045).

We employed the alternative proxies of audit firm size because individual auditors in big4 audit firms generally do not have government experience. On the other hand, individual auditors in nonbig4 audit firms generally do not have foreign experience. To increase the diversity regarding individual auditor experience, we employed the alternative proxies of audit firm size in the estimation models and presented the results.

The mean value of the variable -Sanction- is 0.0785.

The mean values of variables -Restate and RestateN- are 0.1381 and 0.2012, respectively.

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Title: Do Individual Auditors from More Religious Hometowns Enhance Audit Quality? Evidence from an Islamic Country
Authors: Murat Ocak
Bekir Emre Kurtulmuş
Emrah Arıoğlu
Publication date: 08-03-2023
Publisher: Springer Netherlands
Published in: Journal of Business Ethics / Issue 2/2024
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-023-05374-4

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