Macroeconomic Context and Earnings Quality in Social Enterprises: Does Audit Quality Matter?

There is limited empirical evidence on the impact of audit quality on earnings quality in social enterprises, especially among microfinance institutions (MFIs). To address this research gap, we frame our analysis using agency theory and examine a sample of 5284 MFIs from 115 emerging countries between 2007 and 2014. We define earnings quality as the extent to which reported earnings are less affected by earnings management. Our findings suggest that Big 4 auditors enhance earnings quality in MFIs. However, we also observe that MFIs are more likely to misreport during economic downturns and that Big 4 auditors are less effective in curbing this discretionary behaviour under such conditions.