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.