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JAEE
13,5 Institutional structures and
strength of auditing and financial
reporting standards in Africa
1000 Vincent Adela
Department of Accounting, School of Business, University of Cape Coast,
Received 23 February 2022
Revised 7 July 2022
Cape Coast, Ghana
7 November 2022
Accepted 11 November 2022
Mac Junior Abeka
Department of Finance, School of Business, University of Cape Coast,
Cape Coast, Ghana, and
George Tackie, Comfort Ama Akorfa Anipa,
Deborah Esi Gyanba Mbir and Cornelius Adorm-Takyi
Department of Accounting, School of Business, University of Cape Coast,
Cape Coast, Ghana

Abstract
Purpose – The purpose of this paper is to investigate the effect of institutional structures on the strength of
auditing and financial reporting standards.
Design/methodology/approach – This paper employs a panel data of 36 African countries over the period
2000–2018. System generalised method of moments (SGMM) was employed to estimate the relationship
between institutional structures and the strength of auditing and financial reporting standards in Africa.
Findings – The findings of this paper indicate a positive and statistically significant relationship between
institutional structures and the strength of auditing and financial reporting standards. As a further analysis,
the study finds that the relationship between institutional structures and the strength of auditing and financial
reporting standards is stronger for economies with common-law accounting traditions than those with civil-
law origin.
Practical implications – The paper has important implications for countries striving to adopt and
implement auditing and financial reporting standards fully. Such efforts must begin with establishing strong
institutional structures in those countries.
Originality/value – This study presents the first empirical panel data evidence on the effect of institutional
structures on the strength of auditing and financial reporting standards in Africa. Further, the methodology
employed in this study can be regarded as effective in testing the phenomenon in other regions, or it can be
employed as a guiding model for future research in the area.
Keywords Institutional structures, Auditing, Financial reporting, Standards, Accounting, IFRS, Africa
Paper type Research paper

Journal of Accounting in Emerging
Economies
Vol. 13 No. 5, 2023
pp. 1000-1024
© Emerald Publishing Limited
2042-1168
DOI 10.1108/JAEE-02-2022-0066
1. Introduction
This study seeks to contribute to the extant literature on the antecedents of auditing and
reporting standards by examining how institutional structures and accounting traditions
separately affect the strength of auditing and reporting standards (hereafter SARS). It is vital
to consider the combination of political, legal and cultural factors when drawing inspiration
from the institutional theory to provide reasons for the increased worldwide adoption of
international auditing and reporting standards (Elmghaamez and Elmagrhi, 2021). This is
because the global disparities in the implementation of international financial reporting
standards (IFRS) and international auditing standards (IAS) are due to factors such as
economic, legislative, educational and cultural (Avram et al., 2015).
Although some recent studies have attempted to examine the association between
institutional factors and the adoption or implementation of auditing and reporting standards,
a careful examination of these studies depicts some limitations that this study seeks to Institutional
address. First, by employing data on 132 countries, Avram et al. (2015) found that good structures and
governance is vital to the SARS but largely ignored the role of accounting tradition in the
relationship. Accounting traditions, to some extent, serve as the bedrock of the efficacy of
SARS
regulations (including the framework for financial reporting and auditing) of most emerging
economies (Agyei-Boapeah et al., 2020). La Porta et al. (2002) contend that common law
countries have the advantage of a more effective and protective regulatory framework than
civil law countries. By addressing the limitation of Avram et al. (2015), we assume that 1001
economies with common law origin are more likely to observe a stronger relationship
between institutional structures and the SARS as compared to those with civil law origin, and
therefore, we examine the role of accounting traditions in the relationship between
institutional structures and SARS.
Second, Agbloyor et al. (2016) and Abeka et al. (2022) demonstrate that even though there
are variations in perception of governance quality across several countries, the perception of
governance quality in sub-Saharan African countries is similar and seems to be improving
over the past few years. Thus, we argue that examination of the impact of governance quality
on SARS by putting together data on advanced economies and emerging economies
(see Avram et al., 2015) may yield results that may be misleading for policy. Thus, we focus on
the unique setting of SSA but account for possible variations in accounting traditions. This is
because even though there are similarities in governance perceptions of SSA economies,
Anglo-Saxon SSA economies are characterised by equity-based markets form of corporate
governance as against concentrated ownership structures in francophone SSA economies
(Elghuweel, 2015). The differences in these forms of corporate governance structures could
also account for the variations in SARS, and therefore, we examine the direct impact of
accounting tradition on SARS in this regard.
Third, the extant literature has primarily focused on factors within the traditional
accounting literature that could influence the effectiveness of accounting and auditing
standards whilst abstracting from factors that transcend the accounting literature. So far, few
studies (like La Porta et al., 1997; Armijo, 2001; Perry and N€olke, 2006; Srinidhi et al., 2009) that
have attempted to employ factors from law and political sciences tend to argue that
institutional structures could enhance the effectiveness of accounting and auditing
standards. However, these studies have ignored how perceptions of governance could
affect the opportunistic behaviour of standard setters and implementors and eventually
influence the strength of auditing and reporting standards. From the philosophical sense,
governance perceptions could influence economic agents’ behaviour (i.e. the standard setters
and implementers) and could go a long way to affect the SARS.
Indeed, there is overarching literature on the benefits of accounting and auditing
standards. Some researchers have hinted that the introduction, implementation and
subsequent revisions of the IFRS and the International Standards on Auditing (ISA) have
made huge strides in enhancing the uniformity and quality in the preparation and the
presentation of annual reports (see Carneiro et al., 2017; Coram, 2018; Binh et al., 2018; Vidal-
Garcıa and Vidal, 2020). Also, the introduction of IFRS and ISAs has brought about deceases
in agency problems, increases in capital inflows and increases in reporting quality (see Meeks
and Swann, 2009; Agyei-Mensah, 2013; Amidu et al., 2016; Strouhal et al., 2017; Alsharairi
et al., 2019; Odoemelam et al., 2019).
Meanwhile, some studies have expunged these benefits of IFRS and ISAs and have argued
that these standards compound the agency problem and deteriorate the quality of accounting
and auditing (see Jeanjean and Stolowy, 2008; Lin et al., 2012; Ahmed et al., 2013). Certainly, if
there could be any consensus in the literature concerning the usefulness of IFRS and ISAs,
their usefulness differs across the jurisdictions that have adopted them (Boţa-Avram, 2014).
Some studies have attributed these differences to disparities in the various jurisdictions’
JAEE economic, cultural, social and institutional settings (see Alsharairi et al., 2019). By focussing
13,5 on the institutional setting, literature studies have shown that the effectiveness of accounting
and auditing standards is dependent on the strength of some governance structures
(see Richardson, 2009; Srinidhi et al., 2009; Nobes, 2010).
By taking a similar approach, this study takes cues from the neo-institutional theory as
well as empirical studies such as Judge et al. (2010), Hassan et al. (2014) and Alon and Dwyer
(2014) to examine how some institutional structures affect the SARS. From the neo-
1002 institutionalist perspective, various jurisdictions could be deemed as social actors that pursue
social acceptability and legitimacy and therefore are likely to be influenced by national and
international forces. These forces will pressure various jurisdictions to strengthen their
governance rules to welcome the adoption and implementation of similar international best
practices (Alon and Dwyer, 2014; Hopper et al., 2017).
To this end, Richardson (2009) demonstrated that the SARS is indirectly influenced by a
set of regulatory bodies and other organisations that have the right to appoint (or approve the
appointment of) members of the standard-setting committee. Srinidhi et al. (2009) found that
higher auditor fees and audit specialist premiums (both were employed as proxies for audit
quality) are predominant in countries characterised by strong institutions. Nobes (2010)
provided evidence that the regulatory environment of economies strongly influences the
successful implementation of international audit and accounting standards. Thus, our
argument here is that a gamut of institutional structures is required to reduce incentives for
opportunistic behaviour of both standard setters and implementors and rather to ensure
more extensive and high-quality audit and financial reports in a reporting jurisdiction. Our
argument stems from the premise that the SARS clusters around sound institutional
structures and that even if this impact might be felt differently, it will depend nature of the
accounting traditions of the economies.
Consequently, this study aims to contribute to the extant literature in several ways. First,
by focussing on Africa, we offer new insights on the relationship between institutional
structures and the SARS for developing economies that are gradually strengthening their
institutional structures and the level of compliance to auditing and reporting standards.
Second, given the growing relevance of institutional structures in the development of
financial systems, our study sheds light on how standard setters and implementers in
developing economies could be empowered to strengthen auditing and reporting standards.
Thus, this study deviates from existing studies that offer insights into advanced economies.
Third, aside from the context of advanced economies, existing studies have largely ignored
the role of accounting traditions in the relationship between institutional structures and
SARS. We also focus on this blind spot by assessing the direct effect of accounting
traditions on SARS and how accounting traditions moderate the relationship between
institutional structures and SARS. Fourth, this study differentiates itself from Elmghaamez
and Elmagrhi (2022) and that of Boolaky and Omoteso (2016) which focus on ISA adoption
but largely ignores the strength of auditing and reporting standards. Our study provides a
nuanced understanding because mere adoption of auditing standards does not necessarily
imply the strength of auditing and reporting standard. In this regard, this study also
distinguishes itself from Boolaky and Soobaroyen (2017). Fifth, our study differentiates
itself from Haapam€aki (2022) that only provides only a review of studies which employ
neo-institutional theory in accounting and auditing regulation, but does not provide
empirical evidence. Finally, our study employs estimations techniques that control for
likely endogeneity due to the persistence of institutional structures. To address such
limitations in previous studies, our study employs the system generalised method of
moment estimator.
 The rest of the study is organised as follows: 1. Introduction, 2. Background, 3. Theoretical Institutional
framework, 4. Empirical literature review and hypothesis development; 5. Research design; 6. structures and
Empirical findings and discussion; and 7. Summary and conclusion.
SARS

2. SARS and institutional setting in Africa

Accounting has evolved along two main concepts across the world. Specifically for Africa,
these concepts mirror the previous colonial empires in Africa. On the one hand, accounting 1003
rules in Anglophone Africa were formed by autonomous groups known as chartered
accountants. This arose from Common Law countries, where the goal was to offer openness
and information to shareholders who were not directly involved in the entity’s operations. On
the other hand, accounting laws were regulated by legislation in Francophone Africa. This
evolved from nations with Code Laws, when investors, like banks, had a more direct
relationship with the corporation and laws were created to establish government needs and
tax computations.
The Pan African Federation of Accountants was founded in May 2011 and has 54
members from 43 nations, totalling 11,000 accountants (Wise, 2021). The federation seeks to
“promote sound financial management practices, accountability, openness and good
governance across public and private enterprises,” according to (Wise, 2021). This is
certainly a good sign that African countries are making efforts to improve the SARS.
As at 2018, about 95% of the 38 IFRS jurisdictions in Africa had made it a requirement for
a publicly listed corporation to present their audited financial reports in IFRS (IFRS
Foundation, 2018; Tawiah and Boolaky, 2019). Some of the OHADA [1] countries in Africa
that did not previously apply the IFRS have now adopted the IFRS as at 2019 (Tawiah and
Boolaky, 2019; Elad, 2015). Also, African economies that claim to own their unique set of
accounting and auditing standards have only adjusted these standards to follow the
principles of the International Accounting Standards (Assenso-Okofo et al., 2011), and this
again shows significant commitment by the continent towards the strengthening of sound
auditing and reporting standards.
Due to its distinct socioeconomic, cultural and business structures, Africa offers a unique
and fascinating background to examine the antecedents of SARS (Tawiah and Boolaky,
2019). Furthermore, in many African nations, the shift to democratic administration gives an
opportunity for accounting and public policy study. Companies in emerging economies,
notably in Africa, operate in a distinct institutional setting compared to those in developed
economies (Gordon et al., 2012; Nnadi and Soobaroyen, 2015; Tawiah and Boolaky, 2019).
Even though relatively weaker institutions characterise the continent, it has gradually
improved over the past few years (Abeka et al., 2022). Tawiah and Boolaky (2019) thus
contend that cross-continental research that includes African nations as part of a full sample
does not accurately reflect the African context, resulting in contradictory conclusions.
Therefore, sub-Saharan Africa presents a unique context for examining the relationship
between institutional structures and SARS.

3. Theoretical framework
Institutional theory has been used to explain why different nations have different good
governance laws. This is because the institutional theory framework has been expanded to
encompass not only how the legal system mitigates agency conflicts but also other
socioeconomic elements that influence the diversity of corporate governance rules between
nations (Aguilera and Jackson, 2010). Thus, there is some consensus by institutionalists in
economics, finance and political science that institutional structures of political stability, the
rule of law, voice and accountability, control of corruption and others play a key role in the
JAEE governance of economic agents. Such an argument stems from the new institutional theory,
13,5 which postulates that strong institutional structures are vital for economic activities. More
specifically, institutional arrangements are designed to shape incentives of economic agents
such as individuals, households, firms and government (Amenta and Ramsey, 2010).
According to institutional theory, adopting excellent governance norms necessitates
changing a country’s institutional elements to meet its stakeholders’ demands (Elmghaamez
et al., 2020). Both burgeoning empirical and theoretical literature emphasises a positive
1004 relationship between institutional structures and several economic and business outcomes.
For instance, Cule and Fulton (2013) argue that an economy characterised by a low level of
bureaucracy places a premium on low corruption levels and ensures a high level of adherence
to law usually presents a conducive environment for business to thrive. In their theoretical
framework, La Porta et al. (1998) suggested that institutional structures that ensure investor
protection are very relevant in attracting capital. In explaining this, La Porta et al. (1998)
highlighted the role of institutional structures in ensuring adequate firm disclosures.
As a result, to attract more foreign investors, governments must match their
socioeconomic cultures with the requirements of their investors (Daniel et al., 2012). One of
foreign investors’ key interests is gaining access to high-quality financial information
through audited financial reports that are prepared based on international reporting
standards. Ngobo and Fouda (2012) also point out that a strong institutional setting should
ensure transparency in business and economic environment and simultaneously promote
free-market policies. Therefore, a high level of institutional quality is vital to business
activities because it ensures a fair, accountable and transparent framework for all aspects of
the economy.
Despite these theoretical and empirical discussions, Arnold (2009) states that
“mainstream accounting research has not developed the theoretical capability to
analyse and interpret the relationship between accounting and the macro-political and
economic environment in which it operates”. Thus, drawing from the state theory in
capital societies’ context and the new institutional theory (see Arnold and Sikka, 2001;
Tinker, 1984), the legal and macro-political frameworks could influence market and
business outcomes through accounting. This means that auditing and financial reporting
play a pseudo regulatory role to investors by providing some form of guarantee that there
is a minimal information asymmetry. Houqe et al. (2012) find that governance quality
positively influences auditor choice and IFRS adoption, increasing the demand for timely,
comparable, verifiable, understandable and relevant information in an economy. Corollary
to this, institutional quality plays an important role in auditing and financial reporting
because countries characterised by high government quality have a high propensity to
enforce accounting and auditing standards (Avram et al., 2015).
Although some literature has emphasised the need to look beyond the traditional
accounting literature to investigate the social and political factors that could influence the
SARS, the empirical evidence is quite limited (Samaha, K., & Khlif, 2016). By analysing the
regulatory developments for accounting systems, some authors (see Nobes, 2010) find that
rule of law and regulatory quality are important to the accounting practices of private firms in
Europe. A seminal study by Boolaky et al. (2012) provided empirical evidence that ethical
behaviour of firms, corporate board efficiency, legal framework efficiency and judicial
independence affects the SARS. Boolaky et al. (2012) provide further evidence that financial
market development, higher education and institutional infrastructure influence a
country’s SARS.
In sum, the new institutional theory provides several cues that institutional structures
matter to the development, adoption and compliance with auditing and reporting standards.
In this regard, we employ the new institutional theoretical perspective to develop and test our
hypotheses.
4. Empirical literature review and hypotheses development Institutional
In the next six subsections, the paper presents a literature review and develops hypotheses on structures and
how six institutional structures could be related to the strength of auditing and reporting
standards.
SARS

4.1 Control of corruption and strength of auditing and reporting standards

We begin the review on the relationship between corruption and the strength of auditing and 1005
reporting standards by operationalising the definition of corruption. Generally, corruption
refers to the act of using entrusted power for private gains by high-level officials (Lourenço
et al., 2018). In this study, we go beyond the misuse of power by high-level officials to include
the abuse of power by mid and low-level officials. Depending on their levels, standard setters
and implementers are mid-and low-level officials (Duh et al., 2020) charged with a duty to
enhance the quality of financial reports. Sarhan and Ntim (2018) provided evidence that
adopting and implementing accounting standards create accuracy and transparency in
financial transactions. Given this, we argue that adopting and implementing these standards
may not be in the best interest of corrupt officials. El-Helaly et al. (2020) recognise that
corruption may undermine the strength of accounting standards in two ways. First, corrupt
officials and national authorities who are directly in charge of implementing accounting
standards in a jurisdiction may face some form of influence from connected and powerful
multinational corporations and their senior executives to outrightly reject in pursuit of the
outright rejection of adopting IFRS. Second, even if there is no outright rejection, these
powerful multinational companies and their executives will seek to impair its effectiveness by
advocating voluntary (partial) rather than mandatory (full) IFRS adoption. Mazzi et al. (2018)
found similar evidence that low level of IFRS compliance is associated with high corruption
perception. This could probably be a reason for the low level of mandatory IFRS adoption in
Africa. In addition to undermining the effectiveness of accounting standards, perceived
corruption could also affect the strength of auditing standards. Duh et al. (2020) found that
corruption perception increases audit market concentration and eventually hurts audit
quality. This is probably because, in a corrupt institutional setting, there is a likelihood that
firms will share a common auditor, which undermines the effective implementation of
auditing standards. Given this, Houqe et al. (2019) found that corruption perception hurts the
whole system of an audit because auditors charge higher auditing fees, although that may not
guarantee quality audit. From the ongoing discourse, this study hypothesises that
H1. Jurisdictions that are characterised by a low level of perceived corruption will have a
stronger audit and financial reporting standards

4.2 Government effectiveness and strength of auditing and reporting standards

Government effectiveness captures perceptions of the quality of public services, the quality of
the civil service and the degree of its independence from political pressures, the quality of
policy formulation and implementation and the credibility of the government’s commitment
to such policies (Kaufmann et al., 2010). This means in an environment where the government
is effective, there is always the possibility of firm scrutiny and imposition of fines on firms
who misreport to avoid taxes (Zeng, 2019). Besides, in economies where the government is
effective with low bureaucracy, misreporting is quite minimal (Picur and Riahi-Belkaoui,
2006). In a theoretical framework proposed by Hillman and Keim (1995), the operations of
governments and businesses intersect and thus the formal roles and legal constraints within
a country by the government cannot be overlooked. Corollary to this, an effective government
can institute, formulate and commit to policies aimed at ensuring a safe business
environment. As part of this, studies such as Irvine (2008), Stainbank (2014) and Pricope
JAEE (2016) have highlighted the role of governments in formulating policies to embrace the
13,5 adoption and implementation of reporting standards. Shema and Rimmel (2018) find that
government effectiveness is expressed in a set of policy decisions regarding adopting and
implementing international accounting standards. Therefore, in discussing the institutional
determinants of the strength of auditing and financial reporting standards, it would be worth
mentioning the role of effective governments. Thus, drawing on these discussions, the study
hypothesises that
1006
H2. Government effectiveness positively impacts the strength of auditing and financial
reporting standards

4.3 Political stability and strength of auditing and financial reporting standards
Political systems play an important role in shaping the behaviour of economic agents. For
instance, political systems could determine the extent to which managers are punished for
financial misconduct, the proper implementation of auditing standards and the timeliness
and quality of financial reports (Francis and Ofori, 2015). This phenomenon is usually
prevalent in developing economies where government confederates are likely to serve on
several corporate board members. Also, political instability reduces the certainty of cash
flows and thus firm’s insiders would want to keep financial information from outsiders as
much as possible to reduce incidences of failure predictions or increased demand for cash
holdings by firm’s outsiders (Çolak et al., 2017; Julio and Yook, 2012). Increased demand for
cash holdings will, therefore, incentivise managers to engage in earnings management.
Besides, politically unstable environments negatively influence the culture of transparency in
a country and undermine the extent of pressure on firms that engage in earnings
management (Lemma et al., 2020). By engaging in earnings management, the levels of
adoption and implementation of ISAs and IFRS are likely to be impeded. Finally, political
stability plays a crucial role in the transparency and enforcement of financial contracts (Roe
and Siegel, 2011). Politically unstable environments are likely to be characterised by
opaqueness in financial contracts because there may be weak enforcement in ISA and IFRS.
Based on the ongoing discussion, it is expedient to include political stability as a variable that
could potentially explain the heterogeneity in the strength of auditing and financial reporting
standards across economies. Thus, drawing on the ongoing discussions, this study
hypothesises that
H3. Economies characterised by a stable political environment will have stronger
auditing and financial reporting standards

4.4 Regulatory quality and strength of auditing and reporting standards

In the wake of the recent financial crises, various jurisdictions have heightened the regulation
of financial and audit reporting. Indeed, one of the primary purposes of financial reporting is
to lessen the information asymmetry problems among a company’s wide range of
stakeholders. Thus, some countries have resorted to full adoption and implementation of
accounting and auditing standards while others have done so partially. Further, a wide range
of regulatory efforts has been made to enhance the efficacy of these standards in Africa. For
instance, according to IFRS (2018), “companies listed on a stock exchange and other publicly
accountable companies in the 17 West and Central African jurisdictions will begin using IFRS
Standards in their consolidated financial statements from 1 January 2019”. Although this is
not mandatory for non-listed companies, they could still use the standards. A closely related
issue that must be given consideration is the level at which reporting regulation takes place.
According to Leuz (2010), a strong regulatory framework for audit and financial reporting
would require coordinated efforts of the reporting regimes’ regulatory authorities, the state
and the entire country. For instance, a country’s law could mandate the adoption of Institutional
accounting and auditing standards and create a public regulator like the security and structures and
exchanges commission for oversight and enforcement. In an earlier exposition, Minnis and
Shroff (2017) show that regulatory setting in various countries affects audit and financial
SARS
reporting. This is because strong regulatory quality empowers enforcement bodies to review
financial statements, implement programs to monitor financial reporting and take some
courses of action where necessary. Drawing insights from these empirical studies, a poorly
conceived regulatory environment would undermine the successful adoption and 1007
implementation of accounting and auditing standards. Thus, this study hypothesises that
H4. Economies characterised by a strong regulatory environment will strengthen the
efficacy of auditing and financial reporting standards

4.5 Rule of law and strength of auditing and reporting standards

Our analysis of the relationship between the rule of law and the strength of auditing and
financial reporting standards draws on two very important characteristics of a legal system.
First, the regulation of audit quality has traditionally reflected the strength of a country’s
business environment and legal system (Simunic et al., 2017). Also, a strong legal system that
ensures transparency in financial transactions and contracts supports the adoption of IFRS
(Judge et al., 2010). The extant literature documents that the implementation of accounting
standards and internal control practices are affected by the rule of law within the home
country (Wilford, 2016). In essence, if the rule of law in the home country is weak, firms are
likely to engage in material misstatements and have weak internal control practices. The rule
of law captures perceptions of the extent to which agents have confidence in and abide by the
rules of society (Kaufmann et al., 2010). Based on this landscape, we argue that if
multinational and influential companies perceive that investors lack confidence in accounting
and auditing rules, they may attempt to impair the effectiveness of auditing and reporting
standards. Drawing on the ongoing discourse, this paper specifies its second hypothesis as
follows:
H5. Countries with stronger rule of law augment the strength of auditing and reporting
standards.

4.6 Voice and accountability and strength of auditing and reporting standards
Voice and accountability capture perceptions of the extent to which a country’s citizens can
participate in selecting their government, as well as freedom of expression, freedom of
association and free media (Kaufmann et al., 2010). Some studies have emphasised the role of
voice and accountability as an alternative monitoring mechanism to monitor opportunistic
managerial behaviour. Specifically, these studies have suggested media as an external corporate
governance structure that reduces information asymmetry between firm insiders and outsiders
(see Armstrong et al., 2012; Jansson, 2013; Ahern and Sosyura, 2014). Thus, the lack of voice and
accountability presents a major risk to the successful adoption and implementation of
accounting and auditing standards. This is because in an environment where there is an
adequate presence of media and other accountability institutions, there will be close monitoring
of companies (Lemma et al., 2020), and this will undermine the companies’ activities that could
potentially weaken the successful adoption and implementation of accounting and auditing
standards. Comiran et al. (2018) show that a high public media coverage environment can play a
watchdog role in impeding earnings management. Also, the media plays a key role in enhancing
the disclosure of accounting information (Pe na-Martel et al., 2018). In light of the insights
provided by the extant literature, the media could pose threats of reputational capital loss and
the danger of inviting legal and regulatory scrutiny in firms that practice earnings management.
JAEE Therefore, to maintain and enhance their reputation, firms will take steps to adopt and
13,5 implement auditing and reporting standards effectively. The thinking here is that auditing
and reporting standards will thrive in economies characterised by a high level of voice and
accountability. This paper hypothesises that
H6. Economies characterised by a high level of voice and accountability will positively
impact the strength of auditing and financial reporting standards
1008

5. Research design
5.1 Data and sample
As indicated in our introduction, the empirical context for this research in Africa, which is an
ideal “laboratory” to realise the purpose of our paper. The data are mainly drawn from the
worldwide governance indicator data set and the World economic forum’s global
competitiveness report. Due to data availability for the key variables of interest, the
sample comprised 36 African countries from 2007 to 2018.
The dependent variable of interest in this paper is the strength of auditing and reporting
standards while the independent variables of interest are institutional structures of control of
corruption, government effectiveness, political stability and absence of violence, regulatory
quality and rule of law. It has been argued in the literature that other factors aside from
institutional structures could influence the strength of auditing and reporting standards.
Thus, the omission of these variables would lead to biased estimations. This study controls
for some important variables, namely, the ethical behaviour of firms, regulation of security
exchanges, the efficacy of corporate boards, legal origin, import penetration, inflation and
economic growth (see Boolaky et al., 2020, 2012; Chu et al., 2019; La Porta et al., 1998).
Firms with strong ethical standards are likely to welcome auditing and reporting
standards. Also, most regulators of security exchanges worldwide have made huge strides in
making the adoption of auditing and reporting standards a requirement before getting listed.
Corporate boards have been highlighted in empirical literature as a factor that could weaken
or strengthen the adoption of auditing and reporting standards (see Chu et al., 2019). Given the
heterogeneity in African countries’ legal origins, the strength of auditing and reporting
standards is likely to differ across countries. La Porta et al. (1998) gave earlier evidence by
explaining that the quality of accounting is likely to be high in common-law countries,
followed by German-civil-law countries, while the French-civic-law countries’ families have
the poorest quality of accounting.
We employ three macroeconomic controls: import penetration, inflation and economic
growth. We control for import penetration because an economy is more likely to be exposed to
and emulate multinational corporations’ auditing and reporting standards (Judge et al., 2010).
Also, Zeghal and Mhedhbi (2006) point out that economic growth incentivises the adoption of
IFRS. Finally, since accounting reports are prepared based on historical costs, frequent
inflation changes can reduce the efficacy of accounting and reporting standards.
Table 1 below provides the various descriptions of the institutional structures, the proxy
for the strength of auditing and reporting standards, the control variable and how they are
measured.

5.2 Econometric methodology

Following recent literature in panel data studies (such as Gossel and Beard, 2019; Agyemang
et al., 2018; Agbloyor et al., 2016) to account for the possibility of endogeneity in the empirical
model due to time persistence and reverse causality, this paper adopts the system generalised
method of moments (SGMM) estimator. Law and Azman-Saini (2012) explained that
Variable Definition Measurement Data source

Strength of Auditing and In your country, how strong are financial auditing and [1 5 extremely weak; 7 5 extremely World Bank’s GovData360 dataset on
Financial Reporting reporting standards? strong] the World Economic Forum Global
Standards Competitiveness Index
Composite Institutional An average of the six institutional indicators Estimates ranging from Worldwide Governance Indicators
Structures Variable approximately
2.5 to 2.5 Dataset
Control of Corruption captures perceptions of the extent to which public power Estimates ranging from Worldwide Governance Indicators
is exercised for private gain, including both petty and approximately
2.5 to 2.5 Dataset
grand forms of corruption, as well as “capture” of the
state by elites and private interests
Government captures perceptions of the quality of public services, the Estimates ranging from Worldwide Governance Indicators
effectiveness quality of the civil service and the degree of its approximately
2.5 to 2.5 Dataset
independence from political pressures, the quality of
policy formulation and implementation and the
credibility of the government’s commitment to such
policies
Political Stability and measures perceptions of the likelihood of political Estimates ranging from Worldwide Governance Indicators
Absence of violence instability and/or politically-motivated violence, approximately
2.5 to 2.5 Dataset
including terrorism
Regulatory Quality captures perceptions of the ability of the government to Estimates ranging from Worldwide Governance Indicators
formulate and implement sound policies and regulations approximately
2.5 to 2.5 Dataset
that permit and promote private sector development
Rule of law captures perceptions of the extent to which agents have Estimates ranging from Worldwide Governance Indicators
confidence in and abide by the rules of society, and in approximately
2.5 to 2.5 Dataset
particular, the quality of contract enforcement, property
rights, the police and the courts, as well as the likelihood
of crime and violence
Voice and accountability captures perceptions of the extent to which a country’s Estimates ranging from Worldwide Governance Indicators
citizens can participate in selecting their government, as approximately
2.5 to 2.5 Dataset
well as freedom of expression, freedom of association
and free media
Institutional Quality A simple Average of the six institutional indicators Estimates ranging from Worldwide Governance Indicators
approximately
2.5 to 2.5 Dataset

(continued )
Institutional
structures and

1009

Description of
SARS

measurement and
Table 1.

sources of data
variables,
 13,5
JAEE

1010

Table 1.
Variable Definition Measurement Data source

Ethical Behaviour of In your country, how do you rate the corporate ethics of
firms companies (ethical behaviour in interactions with public
officials, politicians and other firms)?
Efficacy of corporate In your country, to what extent is management
boards accountable to investors and boards of directors?
Regulation of security In your country, to what extent do regulators ensure the
exchanges stability of the financial market?
Legal Origin countries whose legal systems are based mainly on
common law or civil law
Import Penetration Shows the extent to which imports penetrates an
economy
Inflation Reflects the annual percentage change in the cost to the
average consumer of acquiring a basket of goods and
services that may be fixed or changed at specified
intervals, such as yearly
Economic development Defined as the creation of wealth from which all
economic agents’ benefits are realised
[1 5 extremely poor—among the
worst in the world; 7 5 excellent—
among the best in the world]
[1 5 not at all; 7 5 to a great extent]
[1 5 not at all; 7 5 to a great extent]
Dummy Variable. 1 for common law
origin and 0 for civil law origin
Total imports (% GDP)
Changes in consumer price index
Measured by real GDP per capita, that
is, the gross domestic product divided
by midyear population
World Bank’s GovData360 dataset on
the World Economic Forum Global
Competitiveness Index
World Bank’s GovData360 dataset on
the World Economic Forum Global
Competitiveness Index
World Bank’s GovData360 dataset on
the World Economic Forum Global
Competitiveness Index
The University of Ottawa, Faculty of
Law, at www.uottawa.ca/world-legal-
systems
World development indicators dataset
World development indicators dataset
World development indicators dataset
institutional structures are persistent and thus could cause problems of endogeneity in an Institutional
empirical model. There could also be reverse causality in the model because the strength of structures and
auditing and reporting quality is likely to affect some independent variables like the efficacy
of corporate boards and voice and accountability (see Marra et al., 2011; Luthan and Satria,
SARS
2016; Edeigba and Amenkhienan, 2017; Zaiyol et al., 2017). The paper, therefore, employs the
SGMM estimator because it addresses issues of reverse causality and time persistence of
variables. To assess the adequacy of the SGMM results, this study employs two most
important diagnostic tests, the Hansen-J test statistic, to assess the validity of instruments 1011
and the Arellano and Bond serial correlation test (AR2) for autocorrelation. For the model to
be adequate, we must fail to reject the null hypotheses of these tests.
To test the hypotheses whether institutional structures affect the strength of auditing and
reporting standards, the following dynamic panel model is proposed
SARSit ¼ β0 þ β1 SARSit−1 þ β2 INSTit þ β3 Zit þ ηi þ μt þ εit (1)

where SARS represents the SARS score, INST represents a vector of the institutional
structures, Z represents a vector of control variables, ηi and μt represent the full set of
unobserved country-specific effects and time-specific effects, respectively, εit is the error
term. i is the country index whereas t is the time index.

6. Empirical findings and discussions

The paper presents and discusses the results obtained from our empirical analysis in this
section. First, the paper presents descriptive statistics, allowing us to gain a summary view of
the data at a glance. Second, the paper presents a correlation matrix, which enables us to
examine the degree and direction of the association between the variables. Lastly, the paper
presents the regression analysis to determine the effect of institutional structures on the
strength of auditing and reporting standards.

6.1 Descriptive statistics

Table 2 presents the summary statistics of the variables employed in this study.
On average, the strength of auditing and reporting standards is 4.2 out of a scale of 1–7.
This indicates that the strength of auditing and reporting standards in our sampled African
economies is somewhat above average. Over 2007–2018, the composite institutional quality
averages about 0.496, with all the individual institutional indicators having a negative
average. This result indicates that there is a poor perception of institutional structures in
African countries because the institutional structures in Africa are generally weak (see
Agyemang et al., 2018; Agbloyor et al., 2016). More so, the data indicate that the firms in our
sampled African countries are characterised by moderately ethical behaviour. The regulation
of security exchanges and the efficacy of corporate boards averaged 3.765 and 4.43,
respectively. Finally, about 50% of the sample of African economies have common law origin
whilst the other half have civil-law origin.

6.2 Correlation analysis

Table 3 presents the pairwise correlation matrix of the variables employed for the regression
analysis. The six institutional indicators indicate a high correlation among each other and
exhibit a high pairwise correlation with the composite institutional structure variable. This is
because the six indicators measure a similar concept of governance. The composite
institutional structure variable was computed by finding a simple average of the six
institutional indicators. This does not raise a multicollinearity concern because they do not
enter the same model. Also, the correlation between the lag of SARS and SARS itself exhibits
JAEE Variable Obs Mean Std. Dev Min Max
13,5
SARS 388 4.2 0.835 2.134 6.727
COC 432
0.503 0.606
1.627 1.039
GE 432
0.559 0.556
1.892 1.057
PSAV 432
0.462 0.814
2.441 1.2
RQ 432
0.5 0.56
2.279 1.127
1012 ROL 432
0.5 0.575
1.852 0.996
VA 432
0.451 0.703
1.951 0.998
INST 432
0.496 0.56
1.904 0.854
LO 432 0.528 0.5 0 1
EBF 355 3.784 0.557 2.378 5.283
ECB 355 4.427 0.598 2.337 6.122
RESE 329 3.765 0.957 1.172 6.558
IMPORT 416 40.215 17.154 10.666 114.135
INF 424 6.689 5.88
8.975 44.391
GDPPC 432 2234.06 2083.215 281.97 10335.849
Note(s): SARS represents the strength of auditing and reporting standards, INST represents the composite
institutional structures variable, COC represents control of corruption, PSAV represents political stability and
absence of violence, RQ represents regulatory quality, ROL represents rule of law, VA represents voice and
Table 2. accountability, EBF represents ethical behavior of firms, RESE represents regulation of securities and
Descriptive statistics of exchanges, EOCB represents the efficacy of corporate boards and LO represents legal origin. IMPORT
the variables represents import penetration, INF represents and GDPPC represents real GDP per capital

a correlation greater than 0.80, indicating a high level of persistence. Further, a close
examination of the correlation matrix reveals no issues of multicollinearity in the empirical
specification because the other independent variables do not exhibit correlation coefficients
more than 0.80 among themselves (Kennedy, 2003).

6.3 Regression results

In this section, the regression results are presented and discussed. Table 4 highlights the
results of the relationship between the institutional structures and the strength of auditing
and reporting standards (see columns 1–6). The last column, column 7, reports the regression
estimate of the composite institutional structure variable.
As indicated earlier, two vital assumptions underlying SGMM regression models are the
validity instruments and the assumption of the absence of autocorrelation. The probability
values of the Hansen-J test statistic failed to reject the assumption of the validity of instruments,
which means that all the instruments employed in the SGMM are valid. Again, the probability
value of the AR (2) test failed to reject the null hypothesis of no autocorrelation, and this means
that there is an absence of autocorrelation in the regression results.
The results in all the columns show that the lag of the SARS is statistically significant,
which indicates that the SGMM is an appropriate estimator. Therefore, the empirical results
can serve as a basis for statistical inferences. The coefficient of the lag of SARS in all the
columns averaged about 70%, indicating a high persistence in the SARS variable. In column 7
of Table 4, we find a significant positive (β 5 0.068) relationship between the composite
institutional structures’ variable and the strength of auditing and reporting standards. In line
with the new institutional theory, this result indicates that institutional structures are critical
in strengthening auditing and reporting standards in the sampled African countries. With
this, any attempt to strengthen auditing and reporting standards in the sampled African
economies must begin with strengthening institutional structures. This is in line with the new
institutional theory, which argues that institutional structures have become increasingly
blatant in ironing out the inefficiencies in the interaction among economic agents.
Variables (SARS) L.SARS (COC) (GE) (PSAV) (RQ) (ROL) (VA) (INST) (LO) (EBF) (ECB) (RESE) (lnIMP) (lnINFCP) (lnGDPPC)

SARS 1.000
L.SARS 0.952*** 1.000
COC 0.496*** 0.511*** 1.000
GE 0.630*** 0.638*** 0.854*** 1.000
PSAV 0.457*** 0.474*** 0.698*** 0.646*** 1.000
RQ 0.518*** 0.528*** 0.759*** 0.862*** 0.628*** 1.000
ROL 0.549*** 0.565*** 0.896*** 0.923*** 0.717*** 0.873*** 1.000
VA 0.371*** 0.402*** 0.657*** 0.644*** 0.595*** 0.681*** 0.729*** 1.000
INST 0.561*** 0.579*** 0.909*** 0.913*** 0.828*** 0.891*** 0.958*** 0.818*** 1.000
LO 0.529*** 0.533*** 0.206*** 0.284*** 0.237*** 0.232*** 0.256*** 0.159*** 0.257*** 1.000
EBF 0.706*** 0.676*** 0.668*** 0.694*** 0.532*** 0.611*** 0.674*** 0.337*** 0.651*** 0.325*** 1.000
ECB 0.781*** 0.746*** 0.356*** 0.482*** 0.343*** 0.486*** 0.400*** 0.351*** 0.449*** 0.494*** 0.602*** 1.000
RESE 0.864*** 0.858*** 0.497*** 0.660*** 0.418*** 0.596*** 0.591*** 0.459*** 0.596*** 0.487*** 0.686*** 0.772*** 1.000
lnIMP 0.029 0.049 0.393*** 0.251*** 0.426*** 0.142*** 0.304*** 0.276*** 0.348***
0.075 0.103*
0.179***
0.069 1.000
lnINFCP 0.074 0.076
0.136***
0.093*
0.077
0.134***
0.081*
0.132***
0.124** 0.327***
0.016 0.019 0.033
0.080 1.000
*** *** *** *** *** *** *** *** *** *** ** ***
lnGDPPC 0.414 0.428 0.344 0.467 0.254 0.290 0.379 0.220 0.360 0.003 0.380 0.105 0.425 0.200***
0.115** 1.000
Note(s): ***p < 0.01, **p < 0.05, *p < 0.1. SARS represents the strength of auditing and reporting standards, INST represents the composite institutional structures variable, COC represents
control of corruption, PSAV represents political stability and absence of violence, RQ represents regulatory quality, ROL represents rule of law, VA represents voice and accountability, EBF
represents ethical behavior of firms, RESE represents regulation of securities and exchanges, EOCB represents the efficacy of corporate boards and LO represents legal origin, lnIMP represents
the natural log of imports, lnINF represents the natural log of inflation, lnGDPPC represents the natural log of GDP per capita
Institutional
structures and

1013
SARS

Table 3.
Pairwise correlations
 13,5
JAEE

1014

Table 4.
The effect of

on SARS in Africa
institutional structures
(1) (2) (3) (4) (5) (6) (7)
SARS SARS SARS SARS SARS SARS SARS

L.SARS 0.783*** 0.678*** 0.733*** 0.788*** 0.704*** 0.837*** 0.802***

(0.0721) (0.114) (0.0606) (0.0802) (0.0707) (0.0746) (0.0423)
COC 0.108*
(0.0585)
GE 0.264*
(0.143)
PSAV 0.0686**
(0.0336)
RQ 0.100*
(0.0542)
ROL 0.128**
(0.0627)
VA 0.0892**
(0.0437)
INST 0.2676***
(0.0331)
LO 0.251** 0.187*** 0.397*** 0.298* 0.0429 0.239*** 0.158***
(0.0778) (0.028) (0.0981) (0.120) (0.453) (0.0612) (0.014)
EBF 0.175*** 0.187*** 0.179*** 0.155*** 0.197*** 0.180*** 0.178***
(0.0375) (0.0389) (0.0290) (0.0488) (0.0380) (0.0464) (0.0317)
ECB 0.0892
0.124*
0.0619
0.121**
0.0747
0.0666
0.0654
(0.0602) (0.0680) (0.0587) (0.0553) (0.0493) (0.0633) (0.0626)
RESE 0.0846** 0.101** 0.124*** 0.0845** 0.135*** 0.0941* 0.126***
(0.0371) (0.0431) (0.0353) (0.0411) (0.0452) (0.0464) (0.0348)
lnIMP 0.1201** 0.140** 0.0910*** 0.1212** 0.1321** 0.1342** 0.1112**
(0.0526) (0.0597) (0.0259) (0.0576) (0.0629) (0.0639) (0.0553)
lnINF
0.0458**
0.0321
0.0497***
0.0543**
0.0456***
0.0619***
0.0453**
(0.0175) (0.0190) (0.0149) (0.0201) (0.0141) (0.0207) (0.0174)
lnGDPPC 0.0930** 0.0847* 0.1022* 0.0640** 0.0860** 0.0902*** 0.109***
(0.0327) (0.0458) (0.0552) (0.0288) (0.0363) (0.0272) (0.0213)

(continued )
 (1) (2) (3) (4) (5) (6) (7)
SARS SARS SARS SARS SARS SARS SARS

Constant
0.869
0.0660
0.783
0.827
0.768
0.848
0.983

(0.697) (1.016) (0.593) (0.567) (0.966) (0.802) (0.960)
Observations 285 285 285 285 285 285 285
No. of groups 35 35 35 35 35 35 35
No. of instru 30 30 30 30 30 30 30
AR1 (p-value) 0.0239 0.108 0.0261 0.0367 0.0447 0.0243 0.0127
AR2 (p-value) 0.3927 0.2646 0.2738 0.2859 0.3641 0.2921 0.2742
Hansen-J (p-value) 0.331 0.379 0.351 0.397 0.394 0.386 0.317
Note(s): Standard errors in parentheses * p < 0.10, **p < 0.05, ***p < 0.010. All the variables are previously defined
Institutional
structures and

1015
SARS

Table 4.
JAEE Corollary to this, the study examined the effect of each of the six institutional indicators on the
13,5 strength of auditing and reporting standards. First, there is evidence of a significant positive
relationship (β 5 0.108) between control of corruption and the strength of auditing and reporting
standards in column 1 of Table 4, and therefore, we fail to reject the first hypothesis. In line with the
findings of Mazzi et al. (2018), this result implies that strong auditing and reporting standards are
often associated with low corruption perception. Again, the finding confirms the first hypothesis
that jurisdictions characterised by a low level of perceived corruption will have stronger audit and
1016 reporting standards. The result also corroborates El-Helaly et al. (2020) and Houqe et al. (2019). The
finding in column 2 of Table 4 shows a significant positive effect (β 5 0.264) of government
effectiveness on the strength of auditing and reporting standards. Thus, this finding supports the
second hypothesis that ceteris paribus, government effectiveness positively impacts the strength of
auditing and reporting standards. In line with the arguments of Stainbank (2014) and Pricope
(2016, this result could imply that governments in the sampled African countries are restructuring
policies to embrace the adoption and implementation of auditing and reporting standards. This
finding corroborates that of Picur and Riahi-Belkaoui (2006).
In column 4 of Table 4, predictably, regulatory quality attained a significant positive
coefficient (β 5 0.100). This is probably because the outcome of regulatory quality in Africa is the
extent to which corruption can be detected and prosecuted (Gossel and Beard, 2019). This finding
supports the fourth hypothesis that economies characterised by a strong regulatory environment
will strengthen the efficacy of their auditing and reporting standards. In sync with the argument
of Minnis and Shroff (2017) that regulatory setting in various countries affects their financial and
auditing reporting, this result suggests the regulatory environment of the sampled African
economies strengthens the efficacy of auditing and reporting standards. Further, in column 5 of
Table 4, the rule of law exhibited a significant positive effect (β 5 0.128) of the strength of
auditing and reporting standards. This finding also supports the fifth hypothesis that countries
with a stronger rule of law augment the strength of auditing and reporting standards.
Compared to the other institutional indicators, in column 6 of Table 4, voice and
accountability appear to have a lower significant positive coefficient (β 5 0.0892). This could
mean that although voice and accountability enhance the strength of auditing and reporting
standards, its impact is weak because the continent is bedevilled with weak civil liberties
(Gossel and Beard, 2019; Gossel, 2017). However, the evidence supports the sixth hypothesis.
This is because a high level of voice and accountability play a key role in enhancing the
disclosure of accounting information (see Pe na-Martel et al., 2018). Apart from voice and
accountability, political stability and absence of violence appear also to have the lowest
significant effect (β 5 0.0686) on the strength of auditing and reporting standards. This
means that although political stability could strengthen auditing and reporting standards in
Africa, its impact is low due to the politically unstable nature of the sampled African
countries. This confirms the third hypothesis that economies characterised by a stable
political environment will have stronger auditing and reporting standards.
Regarding the control variables employed in the study, in all the columns (see columns 1–7),
the ethical behaviour of firms exhibits a significant positive coefficient. This adheres to our
argument that countries with firms that have strong ethical standards are likely to welcome
auditing and reporting standards. Also, the regulation of securities and exchanges attained a
positive coefficient in all the columns. This again shows that most regulators of security
exchanges in Africa have made huge strides in adopting auditing and reporting standards a
requirement before getting listed. Meanwhile, the efficacy of corporate boards mostly attained a
significant negative coefficient in all the columns. From the definition that efficacy of corporate
boards refers to the extent to which management is accountable to investors and boards of
directors, this result could imply that adoption and implementation of auditing and reporting
standards could reduce opportunistic behaviour of managers, and thus they may want to stifle
the progress of auditing and reporting standards. Legal origin positively affects the strength of
auditing and reporting standards in all the regression results. This supports the argument that Institutional
accounting quality is likely higher in common-law countries than in civil-law countries (see La structures and
Porta et al., 1998). Next, import penetration appears to be positively associated with SARS across
all the columns of Table 4, which implies that import penetration incentivises the adoption and
SARS
implementation of sound accounting standards and is in line with Judge et al. (2010). As argued
earlier, the results confirm that inflation diminishes the SARS. Finally, we find that economic
growth is positively associated with SARS, which corroborates Zeghal and Mhedhbi (2006).
1017
6.4 Robustness check
The paper conducted a sensitivity analysis to ensure the results obtained from the GMM
estimation are robust by employing the basic panel data estimation strategy. According to
Wooldridge (2006), the fixed or random effect is the basic panel data estimation strategy.
Thus, based on the Hausman test, this study employed the random effect estimator to
estimate the baseline results presented in Table 5. The robustness results (as presented in
Table 5) from the sensitivity analysis are quite similar to the baseline results in Table 5.

(1) (2) (3) (4) (5) (6) (7)

COC 0.356***
(0.0767)
GE 0.326***
(0.0865)
PSAV 0.177***
(0.0402)
RQ 0.247**
(0.0807)
ROL 0.199*
(0.0793)
VA 0.0644
(0.0556)
INST 0.531***
(0.0872)
EBF 0.246*** 0.241*** 0.253*** 0.245*** 0.258*** 0.300*** 0.240***
(0.0541) (0.0541) (0.0535) (0.0554) (0.0545) (0.0531) (0.0538)
RESE 0.381*** 0.369*** 0.379*** 0.382*** 0.385*** 0.401*** 0.365***
(0.0415) (0.0420) (0.0415) (0.0419) (0.0419) (0.0417) (0.0419)
ECB
0.040
0.0412
0.0512
0.04
0.04
0.04
0.050**
(0.020) (0.0222) (0.02) (0.02) (0.02) (0.03) (0.020)
*** *** *** *** *** ***
LO 0.385 0.367 0.397 0.390 0.382 0.395 0.371***
(0.111) (0.111) (0.110) (0.109) (0.110) (0.109) (0.111)
lnIMP 0.237*** 0.199*** 0.344*** 0.266*** 0.211*** 0.201*** 0.223***
(0.014) (0.012) (0.056) (0.013) (0.014) (0.013) (0.012)
lnINF
0.0765
0.0891***
0.0562
0.0456**
0.0775**
0.0667***
0.077**
(0.056) (0.0245) (0.0421) (0.022) (0.0221) (0.013) (0.031)
lnGDPPC 0.564*** 0.887*** 0.656*** 0.438*** 0.786*** 0.865*** 0.556***
(0.045) (0.0345) (0.0234) (0.023) (0.0345) (0.024) (0.013)
_cons 1.766*** 1.882*** 1.678*** 1.746*** 1.678*** 1.389*** 1.891***
(0.229) (0.244) (0.215) (0.240) (0.234) (0.199) (0.238)
R square 0.7587 0.7697 0.7712 0.7589 0.7654 0.7731 0.7553
Wald χ 2
297.47 302.22 300.23 298.35 295.53 291.30 301.37
Prob.Wald 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
N 329 329 329 329 329 329 329
Note(s): Standard errors in parentheses. Standard errors in parentheses * p < 0.10, **p < 0.05, ***p < 0.010. All Table 5.
the variables are previously defined Robustness check
JAEE 6.5 The role of accounting traditions in the relationship between institutional structures
13,5 and SARS
As a further analysis, the paper examined how accounting traditions shapes the relationship
between institutional structures and the SARS. Thus, we introduce an interaction term of
each institutional structure variable and legal origin into the baseline model. The results in
Table 6 reveal a significant positive effect of each of the interaction terms on SARS. Also, the
1018 introduction of the interaction term causes each institutional structure to attain a higher
coefficient in Table 6 than the results in Table 4. These results imply that the relationship
between institutional structures and SARS is stronger for common law origin countries than
civil law countries. This finding corroborates the argument of La Porta et al. (2002) who
contend that common law countries have the advantage of a more effective and protective
regulatory frameworks than civil law countries.

(1) (2) (3) (4) (5) (6) (7)

*** *** *** *** *** ***
L.SARS 0.731 0.624 0.708 0.728 0.699 0.793 0.695***
(0.0759) (0.0778) (0.0661) (0.0771) (0.0747) (0.0798) (0.0719)
COC 0.112***
(0.023)
COC*LO 0.00564
(0.266)
GE 0.329**
(0.1631)
GE*LO 0.260**
(0.104)
PSAV 0.0884***
(0.0147)
PSAV*LO 0.336**
(0.138)
RQ 0.346**
(0.157)
RQ*LO 0.320*
(0.183)
ROL 0.204*
(0.188)
ROL*LO 0.245
(0.242)
VA 0.135*
(0.077)
VA*LO 0.149
(0.208)
INST 0.238***
(0.0321)
INST*LO 0.302**
(0.132)
LO 0.245 0.322* 0.329* 0.0446 0.0376 0.246 0.385***
(0.179) (0.188) (0.168) (0.133) (0.181) (0.207) (0.133)
EBF 0.211*** 0.208*** 0.208*** 0.163*** 0.203*** 0.209*** 0.203***
(0.0339) (0.0431) (0.0408) (0.0403) (0.0304) (0.0405) (0.0417)
Table 6. ECB
0.122*
0.136*
0.123* 0.108** 0.0908 0.0919
0.158**
The role of accounting (0.0663) (0.0670) (0.0701) (0.0513) (0.0594) (0.0680) (0.0719)
tradition in the RESE 0.0315 0.0790 0.110
0.0222 0.0460 0.0775 0.0998*
relationship between (0.0389) (0.0521) (0.0691) (0.0627) (0.0568) (0.0516) (0.0538)
institutional structures
and SARS in Africa (continued )
 (1) (2) (3) (4) (5) (6) (7)
Institutional
structures and
lnIMP 0.170 0.278*
0.0409 0.300** 0.223** 0.167 0.157 SARS
(0.117) (0.147) (0.142) (0.130) (0.107) (0.129) (0.100)
lnINFCP
0.0273
0.0217
0.0552**
0.0597***
0.0653***
0.0519**
0.0286**
(0.0177) (0.0165) (0.0206) (0.0176) (0.0169) (0.0199) (0.0135)
lnGDPPC 0.0331 0.0175 0.0481 0.0626 0.154 0.0702 0.0137
(0.114) (0.106) (0.146) (0.0697) (0.109) (0.0953) (0.111) 1019
Constant
0.831
1.382
0.982
1.450*
2.095**
0.873
1.310
(0.832) (1.011) (1.226) (0.714) (0.837) (0.740) (0.983)
Observations 285 285 285 285 285 285 285
No of groups 35 35 35 35 35 35 35
No. of inst 32 32 32 32 32 32 32
AR1 (p-value) 0.0303 0.0417 0.0275 0.0336 0.0305 0.0292 0.0319
AR2 (p-value) 0.519 0.414 0.482 0.5611 0.4643 0.4548 0.3712
Hansen-J (p-value) 0.357 0.438 0.406 0.552 0.429 0.403 0.245
Note(s): Standard errors in parentheses * p < 0.10, **p < 0.05, ***p < 0.010. All the variables are previously defined Table 6.

7. Summary and conclusions

This study presents the first empirical panel data evidence on the effect of institutional
structures on the strength of auditing and reporting standards in Africa. This research
thoroughly investigates the relationship between six institutional indicators and the strength of
auditing and reporting standards in Africa. Employing the new institutional theory perspective,
the study hypothesises that countries with strong institutional structures may iron out
inefficiencies in the adoption and implementation of auditing and reporting standards. Using a
unique sample of 36 African countries for the period 2007 and 2018, the study finds that the
presence of institutional structures enhances the strength of auditing and reporting standards in
the sampled African economies. This finding supports the law and finance theory perspective
that institutional structures play a key role in ensuring adequate firm disclosures.
As the summary statistics suggest, there is a low level of institutional quality in Africa. Thus,
as a continent that is yet to embrace auditing and reporting standards fully, the establishment of
strong institutional structures is key, as this will probably not only assist in strengthening
auditing and reporting standards but may help the continent in boosting the level of economic
activities. In this regard, attempts by African governments to enhance the level of institutional
quality must be accompanied by (1) institution of a strong civil and public service that is
independent in formulating policies, (2) minimisation of corruption (3) ensuring strict adherence
to the rule of law (4) institution of regulations that will embrace the adoption and implementation
of accounting standards and (5) empowerment of civil society groups and the media.
Notwithstanding these contributions, our study is associated with some limitations. First, the
study did not cover all the African countries, and thus generalising the results to all countries in
Africa may be quite puzzling. However, most African countries have a similar institutional setting,
and thus via inductive reasoning, the results could be generalised to countries excluded from the
sample. Second, the study focused only on African countries, ignoring other regions. Nonetheless,
the methodology employed in this study can be regarded as effective to test other regions, or it can
be employed as a guiding model for future research. In sum, the paper makes the following
contributions to policy, practice and research:
(1) Based on our study findings, accounting and auditing regulation bodies of African
countries and stock markets should pay attention to institutional structures in the
adoption and compliance of audit and reporting standards. This may lead to increased
quality of financial reports, and in addition, the market participants would take sound
financial and investment decisions, and eventually, society’s welfare is boosted
JAEE (2) In terms of societal significance, the study findings can be incorporated in the
13,5 academic curriculum in the area of finance and audit.
(3) The methodology and the type of data sets employed in this study and the underlying
theoretical framework can be further investigated to extend the literature by
capturing more factors that may affect the SARS other developing countries.

1020
Note
1. “Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA)”

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Corresponding author
Mac Junior Abeka can be contacted at: mac.abeka2@ucc.edu.gh

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