The Impact of Audit Quality on Financial Performance: The Moderating Role of the Audit Committee Quality in Companies Listed on the Palestine Exchange رسالة ماجستير

Abstract

This study aims to examine the relationship between audit quality and the financial performance of companies listed on the Palestine Exchange (PEX), with particular emphasis on the moderating role of audit committee characteristics. The study focuses on firms operating in the financial, financial services, and investment sectors from 2019 to 2024. Using panel data analysis and a fixed-effects regression model, the study investigates the impact of external audit quality and internal governance mechanisms on firm performance in an emerging market context. Financial performance is primarily measured using return on assets (ROA), while audit quality and audit committee characteristics are proxied using commonly applied measures in the corporate governance literature. The empirical results reveal that audit quality has a statistically significant and positive effect on financial performance, supporting the view that high-quality auditing enhances the credibility of financial reporting, reduces information asymmetry, strengthens investor confidence, and contributes to long-term firm performance. Regarding audit committee characteristics, the findings indicate that audit committee independence significantly strengthens the relationship between audit quality and financial performance. More independent audit committees are better positioned to oversee the audit process, safeguard auditor independence, and hold management accountable. In addition, the results highlight the critical role of audit committee members’ financial expertise, as financially knowledgeable members are more capable of interpreting com-plex audit reports and engaging effectively with external auditors, thereby enhancing the benefits of audit quality. The study also finds that audit committee size and meeting frequency influence the strength of the relationship vi between audit quality and firm performance, emphasizing the importance of both committee structure and active involvement. Overall, the findings suggest that audit quality is a key driver of financial performance among Palestinian financial institutions, and that strong, independent, and financially competent audit committees significantly enhance its effectiveness. The study provides valuable implications for regulators, policymakers, and corporate stakeholders in Palestine and similar emerging markets by highlighting the importance of reinforcing audit quality and audit committee effectiveness to improve corporate governance and firm performance.