IMPACT OF AUDIT CHARACTERISTICS ON EFFICIENCY OF BANKING SECTOR IN PAKISTAN

Abstract

Purpose: This study aims to empirically investigate the impact of audit characteristics specifically audit quality and audit committee independence on the efficiency of the banking sector in Pakistan. The research seeks to determine whether robust auditing mechanisms translate into tangible improvements in bank performance within the unique regulatory and economic context of Pakistan. Design/Methodology: The study employs a balanced panel dataset of 27 commercial banks listed on the Pakistan Stock Exchange (PSX) over the period from 2015 to 2024, resulting in 4,700 bank-year observations. Bank efficiency is measured by Return on Assets (ROA). The core methodology involves a fixed effects panel regression model. To ensure robustness, a Generalized Least Squares (GLS) estimator is used, and potential endogeneity is addressed through a Two-Stage Least Squares (2SLS) approach with instrumental variables. Findings: The results from the baseline regression indicate a positive and statistically significant relationship between the composite Audit Characteristics Index and bank efficiency (ROA). This finding is resilient across several estimate methods (GLS) and remains significant after addressing endogeneity (2SLS), substantiating the substantial correlation between enhanced audit quality, increased audit committee independence, and improved bank profitability in Pakistan.  Implication: The results have important effects for investors, regulators, and bank management. They give empirical support for the corporate governance regulations of the State Bank of Pakistan, indicating that strict implementation of requirements for audit quality and committee independence can improve stability and performance across the board. The report shows that for bank boards, investing in better audit methods is a strategic necessity for increasing efficiency, not just a cost of compliance.