Rule of Law, Corruption Control, and External Audit Demand across Countries

Abstract

This study examines the effects of Rule of Law and Control of Corruption on the demand for external audit services across countries, drawing jointly on institutional theory and agency theory. Using secondary data from the World Bank Enterprise Surveys and the Worldwide Governance Indicators for a purposive sample of 23 countries, the study applies multiple linear regression following classical assumption tests for normality, multicollinearity, heteroscedasticity, and autocorrelation. Rule of Law has a significant positive effect on external audit demand (B = 38.438, p = 0.021), supporting the view that stronger legal institutions encourage firms to adopt independent audits as a credible governance mechanism. Control of Corruption shows a negative but only marginally significant partial effect (B = -35.633, p = 0.067), attributable to the high correlation between the two governance indicators (r = 0.894) rather than the absence of a genuine relationship. Together, the two variables explain approximately 25 percent of the variation in audit demand, confirming institutional quality as an important, though partial, determinant of audit adoption. These findings extend institutional and agency theory by showing that legal enforcement exerts a stronger, more direct influence on audit demand than corruption control when both are modeled jointly, and they suggest that regulators and policymakers should prioritize legal enforcement infrastructure in weaker-governance countries. The novelty lies in integrating two World Bank databases rarely combined in accounting research and in transparently addressing the multicollinearity between the two governance indicators, an issue seldom discussed explicitly in prior cross-country governance studies.