The effect of audit objections on performance measures and market indicators of audited organisations – evidence from textile manufacturing sector of Pakistan
Abstract
The purpose of this research was to investigate if the auditees respond effectively to
modified audit opinions. The study is important to judge the in-time response to audit
opinion for financial transparency, audit policy formation and remedial measures. The
population consisted of all listed textile manufacturing companies of Pakistan. The textile
sector is the largest indigenous sector with a large number of audit objections. To judge
the effectiveness of the audit opinion on audit response, various performance indicators
of the auditee are used. Three subsequent years after the audit opinion are considered to
judge the audit responses. Other influencing variables like size and age of the company,
cotton prices, yarn production, exchange rates and the export value of textiles were taken
as control variables. Additionally, any difference in audit responses between the two
textile policy regimes (2009-2013 & 2014-2017) in Pakistan was investigated. Data was
manually collected for the period 2009-2017 from the archival records of all relevant
stakeholders. Giving rise to a data set with more than one thousand observations, audit
responses were classified into three ordinal categories of good, negligible and bad
responses. A positivist research paradigm was followed to explore the research question.
Multinomial logistic regression in SPSS was applied to model the associations
statistically between the audit opinions and audit responses. The main outcomes of this
study were (1) time is needed to allow good responses effectively (2) severity of audit
opinions is associated with better audit response and (3) mixed results for two textile
policies in terms of audit responses. The research has several limitations, most notably
that financial performance measures lack precision and that no account has been made of
the variation in the performance of individual audit firms. Nevertheless, the research is a
substantial contribution to knowledge and applied practices. The outcome of this study
supports the value of the audit and the need for appropriate managerial interventions to
address the issues raised. The research has demonstrated that how effective response to
audit opinion can positively impact performance. The insights are useful for regulators to
improve decision-making for the credibility of the audit process. Textile companies may
enhance their financial transparency and sustainability through effective and in-time audit
responses.