This paper aims to document whether firms with audited financial statements pay lower bribes to get contracts than firms without audited financial statements. In other words, this study assesses whether external auditing helps combat corruption.
Design/methodology/approach: The World Bank Enterprise Survey data covering the period between 2006 and 2014 is used. The total sample comprised more than 50,000 firms in 126 countries.
Findings: This paper finds that firms with audited financial statements pay significantly lower bribes compared to firms with unaudited financial statements. The results are robust across various estimation procedures, various proxies for bribery and various sub-samples. It is also found that the relationship between audited financial statements and bribery is more pronounced in environments where firms face higher pressure to engage in corrupt practices.
Practical implications: The results imply that auditing of financial statements can act as a disciplining device to curb bribery in environments that encourage corruption.