2018 | Volume 14 | Issue 3 | 587-614
Article title

Board diversity, audit committee characteristics and audit quality: The moderating role of control-ownership wedge

Title variants
Languages of publication
This study illustrates how control-ownership wedge impacts the monitoring role of the corporate board through the quality of audit services in Turkey. Turkey has made essential amendments in the field of external audit in order to enhance the quality of the financial report and integrate its own capital market with that of the EU. It would be of interest to examine the influence of these changes on clients' demand for high quality audit. The agency theory is integrated with the resource dependence theory to show that boards possess distinct incentives and ability to demand high quality audit to monitor management activities. Logistic regression and feasible generalized least squares (FGLS) were used for regression estimations. The results indicate that board demographics, cognitive and structural diversity of board of directors, audit committee characteristics and audit quality are complementary and control-ownership wedge weakens the relationship between them which is an unfavorable outcome for minority shareholders. Thus, this study proposes that regulators should increase law enforcement to enhance good corporate governance in Turkey to accommodate the unique features of wedge firms and provide a protected environment for minority shareholders.
Physical description
  • Department of Tourism and Hotels, University of Duhok, Iraq
  • Department of Business Administration, Nawroz University, Visiting Lecturer
  • Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia
  • Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia
  • Abbott, L. J., & Parker, S. (2000). Auditor selection and audit committee characteristics. Auditing, 19(2), 46-66.
  • Abbott, L. J., & Parker, S. (2002). Audit committee characteristics and auditor switches. Research in Accounting Regulation, 15, 151-166.
  • Abbott, L. J., Parker, S., & Peters, G. F. (2004) Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory, 23(1), 69-87.
  • Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291-309.
  • Adams, R., Hermalin, B. E., & Weisbach, M. S. (2008). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 48(1), 58-107
  • Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48(2), 371-406.
  • Aguilera, R. V, Filatotchev, I., Gospel, H., & Jackson, G. (2008). Contingencies, complementarities, and costs in corporate governance models. Organization Science, 19(3), 475-492.
  • Anderson, D., Francis, J. R., & Stokes, D. J. (1994). Auditing, directorships and the demand for monitoring. Journal of Accounting and Public Policy, 12(4), 353-375.
  • Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of Accounting and Economics, 37(3), 315-342.
  • Ararat, M., Aksu, M. H., & Tansel Cetin, A. (2010). The impact of board diversity on boards' monitoring intensity and firm performance: Evidence from the Istanbul Stock Exchange. SSRN Electronic Journal, 90(216).
  • Ararat, M., Aksu, M., & Tansel Cetin, A. (2015). How board diversity affects firm performance in emerging markets: Evidence on channels in controlled firms. Corporate Governance (Oxford), 23(2), 83-103.
  • Ararat, M., Black, B. S., & Yurtoglu, B. B. (2014). Corporate governance, business groups, and market value: Time-series evidence from Turkey corporate governance, business groups, and market value: Time-series evidence from Turkey (Northwestern Law & Econ Research Paper No. 13-19). ECGI - Finance Working Paper.
  • Ararat, M., Orbay, H., & Yurtoglu, B. B. (2010). The effects of board independence in controlled firms: Evidence from Turkey.
  • Archambeault, D., & DeZoort, F. T. (2001). Auditor opinion shopping and the audit committee: An analysis of suspicious auditor switches. International Journal of Auditing, 5(1), 33-52.
  • Basiruddin, R. (2011). The relationship between governance practices, audit quality and earnings management: UK evidence. Durham University.
  • Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting Review, 71(4),443-465.
  • Beasley, M. S., Carcello, J. V, Hermanson, D. R., & Lapides, P. D. (2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons, 14(4), 441-454.
  • Ben‐Amar, W., Francoeur, C., Hafsi, T., & Labelle, R. (2013). What makes better boards? A closer look at diversity and ownership. British Journal of Management, 24(1), 85-101.
  • Bohinc, R., & Bainbridge, S. M. (2001). Corporate governance in post-privatized Slovenia. The American Journal of Comparative Law, 49(1), 49-77.
  • Cassell, C. A., Giroux, G. A., Myers, L. A., & Omer, T. C. (2012). The effect of corporate governance on auditor-client realignments. Auditing: A Journal of Practice & Theory, 31(2), 167-188.
  • Che-Ahmad, A. B., & Mustafa, A. S. (2017). Ownership patterns and control of top 100 Malaysian listed companies. In SHS Web of Conferences (Vol. 34). EDP Sciences.
  • Chen, K. Y., & Zhou, J. (2007). Audit Committee, Board Characteristics, and Auditor Switch Decisions by Andersen's Clients*. Contemporary Accounting Research, 24(4), 1085-1117.
  • Cheng, L. T. W., Chan, R. Y. K., & Leung, T. Y. (2010). Management demography and corporate performance: Evidence from China. International Business Review, 19(3), 261-275.
  • Cheng, L. T. W., & Leung, T. Y. (2012). The effects of management demography on auditor choice and earnings quality: Evidence from China. Review of Pacific Basin Financial Markets and Policies, 15(2),
  • Chien, C.-C., Chen, K. Y., & Wu, S.-Y. (2008). Corporate governance and auditor selection: evidence from Taiwan. Corporate Ownership & Control, 6(1), 492-503.
  • Cho, C.-C., & Wu, C.-H. (2014). Role of auditor in agency conflict and corporate governance. Chinese Management Studies, 8(3), 333-353.
  • Choi, J. (2007). The Association between audit fees and the ownership structure. Seoul Journal of Business, 13(2), 83-103.
  • Chow, C. W., & Rice, S. J. (1982). Qualified audit opinions and auditor switching. Accounting Review, 57(2), 326-335.
  • Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. The Journal of Finance, 57(6), 2741-2771.
  • Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit process. Contemporary Accounting Research, 19(4), 573-594.
  • Cottell, P.G., & Rankin, L. J. (1988). Do audit committees bias auditor selection? Akron Business and Economic Review, 19(4), 87-103.
  • Courtney, N. P., & Jubb, C. A. (2005). Attachments between directors and auditors: do they affect engagement tenure?. In Campbell, T., Houghton, K. (Eds.), Ethics and Auditing (pp. 129-158), ANUE Press, Canberra.
  • Craswell, A. T., Francis, J. R., & Taylor, S. L. (1995). Auditor brand name reputations and industry specializations. Journal of Accounting and Economics, 20(3), 297-322.
  • Dahya, J., Dimitrov, O., & McConnell, J. J. (2008). Dominant shareholders, corporate boards, and corporate value: A cross-country analysis. Journal of Financial Economics, 87(1), 73-100.
  • Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: A meta-analysis. Academy of Management Journal, 42(6), 674-686.
  • Darmadi, S. (2012). Ownership concentration, family control, and auditor choice: Evidence from an emerging market. Asian Review of Accounting, 24(1),19-42.
  • DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.
  • DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2-3), 275-326.
  • Desender, K. A., Aguilera, R. V, Crespi, R., & GarcÍa‐Cestona, M. (2013). When does ownership matter? Board characteristics and behavior. Strategic Management Journal, 34(7), 823-842.
  • Fama, E. F. (1980). Agency problems and the theory of the firm. The Journal of Political Economy, 88(2), 288-307.
  • Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325.
  • Fan, J. P. H., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics, 33(3), 401-425.
  • Forbes, D. P., & Milliken, F. J. (2016). Cognition and corporate governance : Understanding boards of directors as strategic decision-making groups. Academy of Management Review, 24(3), 489-505.
  • Gacar, A. (2016). Relationship between audit quality and corporate governance: An empirical research in Borsa Istanbul. IOSR Journal of Business and Management (IOSR-JBM), 18(11), 84-88.
  • Gajevszky, A. (2014). Audit quality and corporate governance: evidence from the bucharest stock exchange. Ekonomski I Socijalni Razvoj, 1(2), 1-12.
  • Gana, M., & Lajmi, A. (2011). Directors' board characteristics and audit quality: Evidence from Belgium. Journal of Modern Accounting & Auditing, 7(7), 668-679. Retrieved from
  • Goodstein, J., Gautam, K., & Boeker, W. (1994). The effects of board size and diversity on strategic change. Strategic Management Journal, 15(March 1993), 241-250. http://doi. org/10.1002/smj.4250150305
  • Hacimahmutoglu, S. (2007). The problems of minority protection and their solutions within the legal framework in Turkish corporate governance. Journal of Banking Regulation, 8(2), 131-158.
  • Hair, J. F., Anderson, R. E., Babin, B. J., & Black, W. C. (2010). Multivariate data analysis: A global perspective (Vol. 7). NJ: Pearson Upper Saddle River.
  • Hayes, R., Mehran, H., & Schaefer, S. (2005). Board committee structures, ownership, and firm performance. Working paper. Federal Reserve Bank of New York and University of Chicago.
  • Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrated agency and resource dependence perspectives. Academy of Management Review, 28(3), 383-396.
  • Hogan, C. E. (1997). Costs and benefits of audit quality in the IPO market: A self-selection analysis. Accounting Review, 72(1), 67-86.
  • Ho, W. K., Hock, Y., & Kueng, K. C. (2017). Corporate governance quality and audit quality in Malaysia. SHS Web of Conferences, 34, 1-10. DOI: 10.1051/shsconf/20173404003
  • Hsu, W.-Y., & Petchsakulwong, P. (2010). The impact of corporate governance on the efficiency performance of the Thai non-life insurance industry. The Geneva Papers on Risk and Insurance-Issues and Practice, S28-S49.
  • Hudaib, M., & Cooke, T. E. (2005). The impact of managing director changes and financial distress on audit qualification and auditor switching. Journal of Business Finance & Accounting, 32(9‐10), 1703-1739.
  • Hunton, J. E., & Rose, J. M. (2008). Can directors' self-interests influence accounting choices? Accounting, Organizations and Society, 33(7), 783-800.
  • Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831-880.
  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
  • Jones, K., Krishnan, G. V., & Melendrez, K. (2008). Do models of discretionary accruals detect actual cases of fraudulent and restated earnings? An empirical evaluation. Contemporary Accounting Research, 25(2), 499-531.
  • Kang, F. (2014). Founding family ownership and the selection of industry specialist auditors. Accounting Horizons, 28(2), 261-276.
  • Kaplan, S. N., & Minton, B. A. (1994). Appointments of outsiders to Japanese boards: Determinants and implications for managers. Journal of Financial Economics, 36(2), 225-258.
  • Karaibrahimoglu, Y. Z. (2013). Kurumsal Yönetim Denetçi Seçiminde Belirleyici Midir? [Is corporate governance a determinant of auditor choice? Evidence from Turkey]. Türkiye'den Bulgular [Findings from Turkey], 13(2), 273-284. In Turkish.
  • Kim, J., & Yi, C. H. (2006). Ownership structure, business group affiliation, listing status, and earnings management: Evidence from Korea. Contemporary Accounting Research, 23(2), 427-464.
  • Klein, A. (2002a). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400.
  • Klein, A. (2002b). Economic determinants of audit committee independence. The Accounting Review, 77(2), 435-452.
  • Knapp, M. C. (1991). Factors that audit committee members use as surrogates for audit quality. Auditing: A Journal Of Practice & Theory, 10(1), 35-52.
  • Lee, H. Y., Mande, V., & Ortman, R. (2004). The effect of audit committee and board of director independence on auditor resignation. Auditing: A Journal of Practice & Theory, 23(2), 131-146.
  • Makni, I., Kolsi, M. C., & Affes, H. (2012). The impact of corporate governance mechanisms on audit quality: evidence from Tunisia. IUP Journal of Corporate Governance, 11(3), 48-70.
  • Mustafa, A., Che-Ahmad, A., & Chandren, S. (2017). Board diversity and audit quality: Evidence from Turkey. Journal of Advanced Research in Business and Management Studies, 6(1), 50-60.
  • Mustafa, A. S., & Che-Ahmad, A. (2017). Ownership patterns and control of top 100 Turkish listed companies. Asian Journal of Finance & Accounting, 9(1), 192-209.
  • OECD. (2004). OECD principles of corporate governance. Corporate Governance in Japan: From the Viewpoints of Management, Accounting, and the Market.
  • Pearce, J. A., & Zahra, S. A. (1992). Board composition from a strategic contingency perspective. Journal of Management Studies, 29(4), 411-438.
  • Peasnell, K. V, Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: Do outside directors influence abnormal accruals? Journal of Business Finance & Accounting, 32(7‐8), 1311-1346.
  • Pfeffer, J. (1972). Size and composition of corporate boards of directors: The organization and its environment. Administrative Science Quarterly, 17(2), 218-228.
  • Pfeffer, J. (1973). Size, composition, and function of hospital boards of directors: A study of organization-environment linkage. Administrative Science Quarterly, 18(3), 349-364.
  • Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Harper and Row.
  • Ronen, J., & Yaari, V. (2008). Earnings management. New York: Springer US.
  • Shan, Y. G. (2014). The impact of internal governance mechanisms on audit quality: a study of large listed companies in China. International Journal of Accounting, Auditing and Performance Evaluation, 10(1), 68-90.
  • Shivdasani, A., & Yermack, D. (1999). CEO involvement in the selection of new board members: An empirical analysis. The Journal of Finance, 54(5), 1829-1853.
  • Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783.
  • Simunic, D. A. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 18(1),161-190.
  • Stearns, L. B., & Mizruchi, M. S. (1986). Broken-tie reconstitution and the functions of interorganizational interlocks: A reexamination. Administrative Science Quarterly, 31(4), 522-538.
  • Thompson, J. D. (2011). Organizations in action: Social science bases of administrative theory (Vol. 1). Transaction Publishers.
  • Tuggle, C. S., Sirmon, D. G., Reutzel, C. R., & Bierman, L. (2010). Commanding board of director attention: investigating how organizational performance and CEO duality affect board members' attention to monitoring. Strategic Management Journal, 31(9), 946-968.
  • Vafeas, N. (1999). Board meeting frequency and firm performance. Journal of Financial Economics, 53(1), 113-142.
  • Velury, U., Reisch, J. T., & O'reilly, D. M. (2003). Institutional ownership and the selection of industry specialist auditors. Review of Quantitative Finance and Accounting, 21(1), 35-48.
  • Walt, N., & Ingley, C. (2003). Board dynamics and the influence of professional background, gender and ethnic diversity of directors. Corporate Governance: An International Review, 11(3), 218-234.
  • Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: a ten year perspective. Accounting Review, 131-156.
  • Williamson, O. E. (1983). Organization form, residual claimants, and corporate control. Journal of Law and Economics, 26(2, Corporations and Private Property: A Conference Sponsored by the Hoover Institution), 351-366.
  • Wu, S., Chen, C.-M., & Lee, P.-C. (2016). Independent directors and earnings management: The moderating effects of controlling shareholders and the divergence of cash-flow and control rights. The North American Journal of Economics and Finance, 35, 153-165.
  • Xie, B., Davidson, W. N., & Dadalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295-316.
  • Yang, J. S., & Krishnan, J. (2005). Audit committees and quarterly earnings management. International Journal of Auditing, 9(3), 201-219.
  • Yeoh, E., & Jubb, C. (2001). Governance and audit quality: is there an association? University of Melbourne, Department of Accounting.
  • Yurtoglu, B. B. (2003a). Corporate governance and implications for minority shareholders in Turkey. Corporate Ownership and Control (Vol. 1). Discussion Paper, Turkish Economic Association.
  • Yurtoglu, B. B. (2003b). Corporate governance and implications for minority shareholders in Turkey. Corporate Ownership and Control, 1(1), 72-86.
  • Zander, A. F. (1982). Making groups effective (1st ed). San Francisco: Jossey-Bass.
  • Zulkarnain Muhamad. (2009). Audit market competition: Causes and consequences. ICFAI Journal of Audit Practice, 6(1), 36-61.
Document Type
Publication order reference
YADDA identifier
JavaScript is turned off in your web browser. Turn it on to take full advantage of this site, then refresh the page.