Independent Audit and Corporate Governance in Russian Companies

The agency conflict that emerges between controlling owners and minority shareholders due to a wedge between cash flow and control rights can be difficult to alleviate through conventional corporate tools. The purpose of this study is to investigate whether external auditors can contribute to a mitigation of the agency problems in firms and, accordingly, perform a corporate governance role. Besides, the study controls for government affiliation of the largest shareholders in order to account for the specifics of companies with state ownership in the auditors' selection process. Based on a sample of 231 publicly listed Russian companies for the period between 2015 and 2018, pooled cross-sectional regressions analysis and dynamic modelling are implemented to address the issue. The paper reveals that an introduction of external auditors as a corporate governance mechanism is observed within the framework of financial reporting under Russian Accounting Standards. Specifically, a firm’s decision to choose a Big 4 audit company is positively connected with the degree of the agency problem embedded in its ownership structure. Moreover, audit premium associated with the agency conflict is higher for Big 4 clients rather than companies served by non-Big 4 audit firms. Finally, a voluntarily appointment of high qualified auditors restrains a share price discount which is induced by external investors owing to a complex ownership structure. Regarding the patterns of auditors' selection for companies exhibiting state ownership, the effect is observed within International Financial Reporting Standards framework for firms with the largest shareholders being indirectly affiliated to government. In particular, this type of ownership composition induces lower propensity to name-brand auditors relative to companies with the largest shareholder being represented by private entity. Moreover, indirect state ownership translates into lower audit price. Concerning the stock estimation effect, apart from a share price premium impelled by indirect government affiliation, the appointment of Big 4 auditors tends to increase firms' valuation.