Strategic responses of the clients of multinational audit firms to corporate governance audit regulation

Purpose
We investigate how existing investment in strong external corporate governance mechanism—use of Big 4 audit firms—affect compliance with corporate governance audit (CGA) regulation in Nigeria and Kenya. While both countries are characterized by weak enforcement, they differ in their corporate governance audit regulatory strategies.

Design/methodology/approach
The study adopts neo-institutional theory as a theoretical framework and uses logit and probit models and generalized estimating equations as empirical models to test the hypotheses developed.

Findings
The study finds that persuasive coercive isomorphism provides reputational benefits to clients of multinational audit firms in Kenya and encourages them to conduct and report their CGA. In Nigeria, clients of multinational audit firms are less likely to conduct CGA as there is no persuasive coercive isomorphism in place. We also find many internal corporate governance variables to positively influence CGA.

Practical implications
The success of any regulation is dependent on the level of compliance by regulated entities. As clients of multinational audit firms usually have the motivation and resources to employ such high quality audit firms, it is expected that if they are well motivated, they will commit similar level of resources to conducting CGA. In Nigeria, the Financial Reporting Council should develop some persuasive measures to encourage clients of multinational audit firms to conduct CGA. In both Nigeria and Kenya, enforcement of internal corporate governance frameworks should be strengthened.

Originality/value
This is the first study to explore how regulatory strategies affect strategic responses of regulated entities to CGA regulation, introducing a new dimension to the ESG literature.