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

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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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Notes

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

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

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

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

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

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

  7. 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.

  8. Table 3 shows that the correlation coefficients of Alcohol and Residents are significantly and negatively related to AuditorReligiosityMosques, AuditorReligiosityQuran, AuditorReligiosityQuranSt., 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 AuditorReligiosityMosques 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 AuditorReligiosityQuran 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 AuditorReligiosityQuranSt is employed as the dependent variable of the first stages of IVREG and IVProbit regressions.

  9. Median value of AuditorReligiosityMosques is 0.00044.

  10. Median value of AuditorReligiosityQuran is 0.00010.

  11. Median value of AuditorReligiosityQuranSt is 0.00915.

  12. The coefficients of ClientReligiosityMosques, ClientReligiosityQuran and ClientReligiosityQuranSt in the first stage of Heckman selection procedure are 0.387, 2.274 and 0.142 and are significant at 0.01 level).

  13. 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).

  14. 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.

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

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

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Authors and Affiliations

  1. Uzunköprü School of Applied Sciences, Trakya University, Edirne, Turkey

    Murat Ocak

  2. Department of Business Management, Kuwait College of Science and Technology, Kuwait City, Kuwait

    Bekir Emre Kurtulmuş

  3. Paseka School of Business, Minnesota State University Moorhead, Minnesota, USA

    Emrah Arıoğlu

Authors
  1. Murat Ocak
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  2. Bekir Emre Kurtulmuş
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  3. Emrah Arıoğlu
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Correspondence to Murat Ocak.

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Table 13 Definitions of Variables
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13

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Ocak, M., Kurtulmuş, B.E. & Arıoğlu, E. Do Individual Auditors from More Religious Hometowns Enhance Audit Quality? Evidence from an Islamic Country. J Bus Ethics 190, 439–481 (2024). https://doi.org/10.1007/s10551-023-05374-4

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