The Jordanian Corporate Governance Code: A study of institutional investors' perception of the reliability of the audit report and the audit expectation gap

This thesis examines, from the perspective of Jordanian financial analysts, the impact of selected components of the Jordanian Corporate Governance Code (JCGC) on the reliability of audit reports and the extent to which the JCGC contributes in narrowing the audit expectations gap. Thus this study focuses on those elements of the JCGC that relate to auditing and seeks to fill a gap in the existing literature regarding the determinants of changes in the audit expectation gap and the perceived reliability of the audit report, in the context of Jordan. Previous research in this area either considered a smaller range of variables or considered codes other than the JCGC. Moreover, Jordanian research has focused on studying the relative main effects of the independent variables on the dependent variables, and thus less attention has been placed on identifying interactive or configural relationships. Also the research methods used were incapable of identifying cause and effect relationships. Furthermore, given that the JCGC was only relatively recently implemented, on a “comply or explain” basis, the full impact of the code has, perhaps, not been fully reflected in prior research. This thesis investigates, experimentally, the main and interactive effects of four independent variables on two dependent variables. The independent variables are: (1) the external auditor’s independence, (2) the internal auditor’s effectiveness, (3) disclosure and transparency, and (4) corporate accountability. The dependent variables are (1) the perceived reliability of the audit report and (2) the perceived level of the audit expectation gap. In addition, this thesis investigates the extent to which Jordanian financial analysts possess self-insight as to the weight they place on the decision cues when evaluating the reliability of audit reports and when assessing the size of the audit expectation gap. By comparing financial analyst stated beliefs about the weights they placed on various factors, on one hand, to the weights revealed by the experiment, on the other, it is possible to gauge the accuracy of self-insight of the group. The study design is based on the agency theory and uses a mixed method approach. The study uses semi-structured interviews, concentrating on ‘how’ and ‘why’ questions, aiming to investigate how institutional investors assess the selected elements of the JCGC in terms of their effect on the perceived reliability of the audit report and the level of the audit expectation gap. The study also uses a fully crossed 2 level factorial experiment based on the repeated measures technique, thus forming 16 possible combinations of the four independent variables (i.e. 16 scenarios). In the survey, each subject was requested to provide their assessment of the two dependent variables in each of the 16 scenarios. The interviews deliver an in-depth understanding of the investors’ perceptions regarding the selected elements of the JCGC and facilitate the interpretation of the study’s experimental results. It was predicted that the sophisticated investors may make decisions regarding the assessment of audits and auditors differently from unsophisticated investors. Therefore this study focused on financial analysts as an important type of sophisticated investor from the following types of institutional investors: banks, insurance companies, brokerage houses, investment companies and funds. An analysis of 47 completed surveys and ten interviews suggested that external auditors’ independence had the greatest effect on the perceived reliability of the audit report while, contrary to the existing literature, corporate accountability had the greatest influence on the perceived level of the audit expectation gap. Several other significant interactions have been identified between the study variables. One-third of the overall effect size in relation to the perceived reliability of the audit report is attributed to interaction between the independent variables, whilst approximately one-quarter of the overall effect size in relation to the level of the audit expectation gap is attributed to interaction between the independent variables. This indicates that institutional investors configurally process decision making information when considering the influence of the selected elements of the Jordanian corporate governance code. This has policy implications for the Jordanian regulating bodies.