Board Independence, Audit Quality and Financial Performance with the Mediating Role of Technological Innovation in China

Abstract

This study explored the relationship among corporate governance, audit quality, technological innovation, and financial performance in the accounting firms of China, focusing on the mediating role of technological innovation. Based on agency theory and the resource-based view (RBV), the study develops an integrated analytical framework to explain how governance mechanisms translate into performance outcomes in a technologically evolving professional services environment. The current study tests the proposed hypotheses using fixed-effects regression estimates and bootstrapped mediation analysis on panel data of 420 firm-year observations of accounting firms in China. The measurement of financial performance is return on assets (ROA), little or no corporate governance can be proxied by board independence, audit quality by firm-level audit characteristics and technological innovation is proxied by R&D intensity and digit investment indicator. The findings from the study established the positive relationship between corporate governance and audit quality on financial performance. An empirical analysis in the study assesses the impact of governance structures and audit quality on the profitability of Malaysian listed firms. The analysis reveals firms with stronger governance structures and higher audit quality are more profitable. This finding supports the assertion governance mechanisms remain effective performance drivers in emerging market contexts.  This study further analyzes the data and find that corporate governance and audit quality also positively affect technological innovation. A better governed firm undertakes more technological adoption and investments. Most importantly, the mediation results indicated that the impact of corporate governance, audit quality on financial performance is partially mediated by technological innovation. The existence of substantial indirect effects – along with still significant direct effects – shows that governance mechanisms influence performance directly, as well as through the technological capabilities of firms. The results of this study should add to the corporate governance and accounting literature, which considers technological innovation as a means of enabling effectiveness. By combining governance and innovation perspectives, the study offers a more complete account of performances in accounting firms operating in a digitally transforming environment. In practical terms, this finding suggested the need for governance reform and audit quality improvement to digitally transform and improve the performance and long-term competitiveness of firms in emerging economies like China.